Chuck Akre - The Three Legged Stool - [Invest Like the Best, REPLAY]

0:00 I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridge line offers a better way forward, one unified platform that automates away the complexity across portfolio accounting. Reconciliation, reporting, trading, compliance, and more, all at scale. Ridge line is revolutionizing investment management, helping ambitious firms scale faster.

0:25 Operate smarter and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossis.com.

1:00 Mm. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Some. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast.

1:23 To learn more, visit psum.vc. Mm. My guest today is Chuck Akri, a now widely famous investor who founded Akri Capital Management in 1989, which now manages approximately$10 billion. We discuss his investing style and his three legged stool for evaluating companies. Please enjoy this great conversation. So given that Chuck that this is my first time here in Middleburg, I thought it would be a fun place to start with the place where we're sitting. You've talked a lot about the one traffic light town as maybe an advantage, something very different from the typical investor. Talk about Middleburg, why you're here and what you love about it. We're here because of in effect quality of life issues and I happen to be a person

2:05 who works well without a lot of commotion around and I know lots of people in the business Who love commotion and I've worked with some of'em. But the low level of activity around here is just helpful for us being able to

2:19 Sit there with our doors open and not be disturbed by outside events. And then as it relates to let's say Middleburg versus Central Park South. If my office were there, I'd have a thousand friends who are very bright and very interesting, and I would be distracted I've become curious and engage in their thought process and it would distract me from what it is that I do well.

2:42 So investing on an island, so to speak, in a a very bucolic beautiful spot. Yes, indeed. We live on a farm and that sort of stuff, so it's all All fits together. We're gonna talk a lot about sort of the ideas of Nirvana investing, the three legged stool, the c the components of that, et cetera. But I'd love to begin with, given that you've created this sort of interesting isolation for yourself, what a day looks like for you. So At this stage of your investing process, what are you literally spending your time on day to day? Is it looking through businesses? Is it checking in on existing businesses? How's that sort of allocated? My participation in the business has evolves and continues to evolve and so on. And so I'm personally doing less pure fundamental research today than I did years ago? There are others here who do that?

3:24 And we talk about ideas and stuff all day long. And I And that's how I That's how ideas. bubble up in my

3:34 Universe. And others here use screens. But mostly where it is a um serendipitous inefficient, let's just say non quantitative approach. You mentioned before this idea that imagination is as are more important than knowledge. Can you talk about that concept a little bit? Well it's very simple. Um I have in my career run across literally thousands of people who were very, very bright, who are not necessarily good investors. And so pure knowledge is in and of itself not a uh ticket to being a good investor. Imagination and curiosity are what's hugely important, and we've discovered things over the years purely by being curious and continuing to uh keep involved in the search process to find these exceptional businesses.

4:18 Can you distinguish it all between curiosity and imagination? One sounds like a search and another sounds like more of a creative force. Well, they're both creative. My older son was a tenured college professor for a while and he used to say that he worked at a university that as he said didn't have the luxury of being highly selective in its student body, and he said the thing that disappointed him the most was that Even his best students, his students who got A's typically only wanted to know what they needed to know to get an A rather than have curiosity.

4:48 And I find that curiosity has been useful to me in search for investing in In relating real life experiences to allowing me to pursue lines of thought whether it's Trying to figure out why a stock card track might be interesting or Something else, that sort of stuff. So I guess I'm probably not very articulate in explaining the difference between curiosity and imagination, but they go hand in hand in in being creative and and identifying businesses. I'd love to hear the beginnings of that.

5:24 obviously talk about what those three legs are in the stool. And then I'm always interested also in in rates of change. Yeah, we literally have the stools here in the room that we're in, which is awesome. So talk about the origins of those three simple ideas. The one on the far left over there is a milking stool from Frederick County, Maryland that belonged to the senior partner of my father's law firm and used as a milking stool and y if you could see it from this angle The one leg there in the back is it at more of an angle than the other two and the farmer would who would sit down and milk an individual cow one at a time would take that long handle and stick it up

6:00 under his behind as he sat down to milk a cow. Got close to the ground where he could work. And If you observe that it's actually the three legs are sturdier than four legs. It can adjust to uneven ground easily. Four legs cannot do. I liked that notion and it

6:16 It had come to me from my father and it was just sitting on a table in my office one time and I sort of began to adopt that as the what I call the visual construct for what we choose to describe as the principal components of what makes a great investment. And that's something that I came to because I had no background whatsoever in the business world and I was an English major and I'd been a pre med student. Before I was an English major and I had no

6:44 courses in business whatsoever. So I had a clean canvas and a willingness and a desire and a curiosity to learn and so My voy was What makes a good investment, what makes a good investor in trying to put all this together, there is a quantitative aspect to it, but we end up

7:01 describing what makes a good investment is each of those three legs Well, I'll back up again a little bit and say that our investment goal has always been from the outset To try to produce an outcome that's above average. But Stepping back even a step farther.

7:17 I examine early and on and continue to rates return in all different asset categories and made the observation that the rates of return in common stocks over a long period of time was higher than anything else on an unleverage basis on a consistent long term basis. The rates of return is on common stocks in the United States in let's say roughly the last hundred years is in the neighborhood of nine to ten percent. And in fact we don't care what it is precisely. We want to know what it is generally. We made a quantitative observation about why that's so and that

7:50 observation is that in our judgment it Corresponds Correlates. to what the real r return on the owner's capital is in those businesses and We can

8:02 have done many times a quick little show and tell about why that's so and and conclude that our return in an asset will approximate the ROE. In our case we usually use free cash flow return on the owner's capital. given a constant valuation and given the absence of any distributions. You get that from your quantitative background completely. And then then You would wisely say well Chuck

8:25 Everybody knows you don't have constant valuation in the market, so we say we understand that too. So we work hard to have a modest starting valuation if we're to just simply to to try to reduce that risk. And so understanding that if our goal is to have above average outcomes, we need to have businesses that have above average returns. That's the first leg. We try to identify businesses that have had high returns on the owner's capital for a long time. And we've spent a lot of time trying to figure out why that's so and what's caused that, and then is there what's the runway ahead of them look like? Is it broad and long? Do they still have the opportunity to earn higher above these above average returns?

9:04 on capital and so on. And then we want those businesses to be run by people who've demonstrated they're clearly great at running the business because they've achieved this, but also who by our observation treat us as partners even though they don't know us. You've read it enough times, I'm sure, about I have an expression where I say that our experience is once a guy sticks his hand in your pocket, you'll do it again. And so we just have no reason to go there. I mean it's human behavior. We're constantly find people

9:31 whose behavior is antithetical to our interest and and so leg one is the quality the business enterprise number two is the quality in the integrity of the people who run the business. And then the third leg is what is their record of reinvestment and what is their opportunity for reinvestment. And so we have all those things that we say, once we have those in place, then we're just not willing to pay very much for these businesses. Those are the three legs of the stool People remember that, but they get confused by this say, Oh yeah, you're the three stools, aren't you? or something like that. It was just a shorthanded way for us to sort of visually say, one, two, three, this is what's important to us and

10:08 And our experience is that if we own exceptional businesses One of the hardest things in the world is to not sell them. All businesses have hiccups in their business operations and all businesses have things that occur that's unplanned for or thought about, but not necessarily expected, and that's life. I mean Nothing is perfect.

10:30 Jack Welsh's twenty percent a year take it to the bank. Long after he's left, we found out that much of that was a house of cards. And so we just had our thirtieth anniversary for Aqua Capital Management and did some presentations and and one of our partners did one. It was entitled The Art of Not Selling and it's truly very hard to do. In effect it may be one of our great assets is our ability to not sell. I'm a quant, but I recognize the art in each of those three legs of the stool and I'd love to spend a few minutes on each. So I came across a really interesting story in preparing for our conversation about a company called Bandad, and I'd love to hear that as an example of trying to identify the essence of an underlying business's value creation and why its ROE can be above nine or ten for the long period of time.

11:16 So This was actually in the days when I was at a firm called Johnston Lemon in Washington, D C and it was a brokerage firm and I was a principal in the firm and we had some interns around and I Took a Inbox.

11:30 It was full of things I tear out of magazines and papers and put in a box and gave them to this intern. Said, look through there and see if you find anything interesting. And a week later he came back and he said, Well, here's a really interesting company called Bandag, and and why is it interesting? Well, it had very high returns on capital and then done well for a long period of time. And I said, Well great.

11:51 What business is it? And he said, It's the entire business and I looked at the returns and the Capital and so well it's clearly not in the tire business. What do you mean? I said, Well take a look at the returns and then take a look at the returns of all the other tire businesses you find and see how they relate to each other. And Bandags was three or four times what they were. I mean it's I said, obviously it's not in the tire business. It's in another business, our goal is to figure out what business it's in. So we went out to see them and a fellow by the name of Marty Carver

12:18 was running the business that had been founded by his father. He was in Muscatine, Iowa. And I got the the meeting in Marty had his feet up on the desk and was eating an apple. During our interview.

12:30 And so is But you got a different feel right off the bat. And their business was retreading truck and bus tires. It's something I really knew nothing about before then. And we had been through the oil embargo in the United States in the early seventies Where prices of gasoline went through the roof.

12:48 And one of the principal components of Entire moulding and recapping is of course petroleum based. And so it had caused all of their dealers to have a huge increase in the cost of doing business. And when prices began to come back down, Bandag took those savings and distributed them to dealers.

13:09 on the basis that they had to use the money in the business. They couldn't go buy new catalacs, but they could build a new store. And so their principal competition was the major tire companies, all of whom had company owned stores. All the Bandang stores were franchised. So they were dealing with independent dealers who, as they say, got there at six in the morning and closed at nine at night, as opposed to the employee dealers who got there at nine in the morning and and left at six at night. And these people were motivated by their own profits and whatnot. And so Bandag Very wisely share the wealth as it were with their dealers, instead of passing it all on to their

13:48 shareholders at that time. And created A huge dealer loyalty. And the dealers were able to They did very sophisticated things about identifying the

13:59 cost of fuel to a trucking operation. if they had a bandag tread on their tire as opposed to some other kind of tread and and truck tires and bus tires are built and designed to be re treaded two or three times. Most people don't know that. Automobile tires are not Truck and bus tires are constructed that way. At any rate. So they had built this huge loyalty network of independent dealers.

14:23 who continued to use the brandag name and product in their business instead of national tire companies and as a result of that The company had much higher returns on capital than other tire companies. And so that was an issue of curiosity. And observation and imagination and doing that sort of stuff and Making the mark of Marty Carver and As I say, his father had founded the business and his father had sort of gone off the deep ends before this. He

14:49 bought an enormous yacht, an hundred foot yacht, and started going out with Las Vegas show girls and all kinds of things like this. Because the business has been very successful and It was an interesting experience. You have to be curious and open to those things that have them work out. And in the day The business really ran into trouble expanding in some Western European countries where they land into Labor issues and so on. And so we moved on after a while. We owned it for a long time though.

15:15 One of the major trends these days is enormous value creation by fairly young companies. That's happened very quickly, the big technology companies. In this period, you've managed to do quite well. Most I guess I wouldn't classify you as a value investor, but value investing as a style has done very poorly. I'm curious how your assessment of underlying business value in that first leg of the stool has evolved, say over the last ten to fifteen years. Are there major differences in what you're looking for in defining a great thing. So the first difference is that in the last ten or fifteen years the overall returns of all businesses have gone down. And they've gone down in my mind, in our judgment here Because the lower level of interest rates the pervasive lower level of interest rates and while it doesn't You don't necessarily

15:56 A equals B plus C It is a pervasive effect and it's caused the returns in all businesses to be lower, in our judgment. The second thing is that the way Some of these businesses have earned their returns or ways that were new to us and we didn't catch on to them. So

16:13 Our returns in the last few years, which have been continue to be well above average, have been done entirely without any of the Fangs or any of those businesses, without any of them. And it's just because we weren't How you think about that moving forward? Um are truly attractive and are not subject to rapid changes in technology or

16:41 governmental intervention or Retaliatory Issues relating to different countries and different parts of the world and that sort of stuff. Maybe an interesting way to dive in deeper on that would be to talk about recent businesses that either you've bought. I know you hold for a very long time, so some of the recent ones might be seven years old or something. But talk about something industries, companies, whatever that you find Most interesting and recently. So we try not to talk very much about the companies in our portfolio and we certainly never talk about ones that are building coming in or going out. So the issues are all the same. I mean, this is two thousand and nineteen in March of two thousand and ten. We added our first position to MasterCard and it was

17:19 During the time of Dod Frank. and issues at Congress. And then more specifically about what became known as the Durban Amendment. And MasterCard and Visa We're selling it ten or eleven times. And When you dove into the numbers, we discovered that the operating margins returns on capital were there's not a word in the English language that's superlative enough.

17:41 to talk about them. I would just say that you could cut the margins of MasterCard and Visa. In half. Twice. And you'd still be above average for an American business.

17:52 So clearly something extraordinary is going on there. What does it mean I asked this question rhetorically around the office, what does that tell you? Well it tells A there's a big target on their back. Everybody wants some of that. Me tells you that

18:05 They're probably jamming every expense they can think of into the income statement. to try to reduce how good the margin is that they're showing. And then three, we spent time trying to figure out What's causing that? We think we know and we've quit talking about it. So I'm not gonna talk to you about it. But I mean If you read any Research

18:26 From Wall Street and we read very little. There is no one who talks about that. Who talks about rates of return that they're earning on their capital. I mean no one does. Because Wall Street in general

18:38 has a completely different business model than we have. Our business model is to compound our capital. Wall Street's business model generically is to create transactions. Logically.

18:48 What's the best way to create a transaction? create what we call false expectations. And what are false expectations? Well earning estimates. O'Shaughnessy's gonna earn a dollar seventy three next quarter. And it comes in at a dollar seventy two, and the remark is they missed.

19:05 By one. So we call it beat by a penny, miss by a penny. That's the syndrome. And that gives us opportunities periodically. Because the markets behave

19:15 In ways that we happen to think are irrational. relating to something like that. And so a name that's been in the news for four years now and had some controversy around it is Dollar Tree where we own a big stake. the dollar store business was really in an oligopoly in the United States with three major players, Family Dollar, Dollar Tree and Dollar General. Dollar General had gone through a been taken private and brought back public by KKR. Dollar Tree had not been

19:40 Headquartered in Chesapeake, Virginia. now on their basically their third CEO in their history. And There's a business that we Through experience learned we're terrific retailers and terrific at logistics.

19:53 uh building and managing seven thousand stores where they sell everything for a dollar. Dollar tree nothing was more than a dollar. The two competitors, Dollar General and Family Dollar, and Family Dollar still run by the f founding family, basically made itself available for sale and and Dollar General had had lots of private conversations with him over a period of years and then And then it sort of became an auction and And Dollar Tree had a lower bid, but one the bid

20:19 Family Dollars selected them. Both companies, Dollar Tree and Dollar General simply had to bid on that. If it's a three company oligopoly going to two. They had to bid on it. It was gonna cause Dollar Tree basically the double number of stores. How many opportunities you get to that once. I'm curious if there are other markers that you've used heuristics over the years in addition to this simple idea of really high ROEs or ROICs or something above the market. to

20:46 Sort of be the lead generation for new curiosities. Yes. Yeah, what does it say? Everything should be made as simple as possible, but no simpler. There you go. So lots of very bright people can build really intriguing, complicated Ways to figure out why something is Cheap or expensive. And we try to keep things as simple as possible. If you read the one right behind you

21:07 Sure, the bottom line of all investing is the rate of return. And so we use that as That's the tool. As our key tool for everything. And we try to look at everything from a Top down basis. So we were talking about the fangs and modern technology. We say that as a generalization All of that is about changes in distribution. Of all kinds.

21:28 Whether it's information or cars or Amazon starting with books and then to selling everything in the world and then to selling cloud services. It's all about distribution. Distribution of saving information that sort of stuff. And so that's Looking at things in a simple fashion. Let's try to make it as simple as we can and understand the big context what's going on, because we're all at risk of

21:50 Of getting caught in the weeds of what's going on, and that's misleading. Innovation in models of distribution. Bandag was a kind of fun and interesting example of that. Do you tend to separate things into product innovation and Distribution innovation evaluating a business. No. We're not that smart. Not that smart. Seems to be working okay now being that smart. That's important. That's an important observation. It's working okay. Let's talk about the second leg of the stool, which is the people involved in these businesses. So what are the I love the feet on the table with eating an apple. What would you say are the most common characteristics of

22:24 managers of the businesses that you've ended up owning those stocks for a long period of time. Well they don't have a screen in their office showing them the price of the stock. And there are lots who do. And sometimes you find it in the lobby of a company and sometimes you find it on the CEO's desk. That doesn't interest us. We've had instances where Principals and companies have called us up and said, Why are you selling our stock?

22:45 Once we recover from that. A fronting question. If in fact we have been selling the stock. Which may be the case. Or we may have sold it all.

22:55 We say, Well actually that was clearly the right decision because we don't want to be partners with people who are concerned about those things running their business. Their focuses on the wrong thing in our judgment. And so this is an interesting exercise. One of the questions that we Like to ask is I was CEO particularly, is how do you measure whether or not you've been a success at running this business.

23:17 And as you might expect. Some of them say, well the price of the stock goes up. Or we hit our earnings target or We delivered on all the things that the board asked of us and so on. It's a rare occasion.

23:30 Or the CEO. articulates an idea that shows that he understands the idea of compounding the economic value per share. So you stand back and say, Well Why is that so?

23:43 And the answer is that they're not trained to do that. They're trained to run businesses. They're not trained to think about compounding the intrinsic value per the economic value per share. is really the single most important thing. That sounds like a capital allocation story. I know you're a huge fan of business biographies and some of my favorites have always been

24:03 The Henry Singleton types of the world who are sort of master capital allocators and often very flexible. Talk about the role of capital allocation amongst the CEOs in this second leg of the stool. We own a company called O'Reilly Automotive. And It's also part of an oligopoly, and the oligopoly really basically includes O'Reilly auto zone. And

24:26 O'Reilly acquired A company called C S K Auto Parts. I'll say Close to ten years ago.

24:34 It was, in fact it was zero seven oh eight. CSK had a huge presence on the West Coast where O'Reilly had none. presence in the middle part of the states, southern part of the states. Very little exposure in the middle Atlantic and North East. But it gave them a much greater national footprint. And after that and they did a superb job in the logistics of integrating all of the C S K stores into the O'Reilly network.

24:59 remerchandising him's whole business. And O'Reilly's business also was was about fifty percent to the do it for me people, the independent garage business. As well as the do it yourselfers.

25:12 Autosone and and It's competitor. Yeah, competitor. And a much, m larger exposure to the do it yourselfers. When you're serving the Do It For Me group, the independent garage is Time is money, and they had a car on their lift. They needed the part.

25:29 right away because the lift was out of commission if they had a car on it waiting for a part. So the timeliness of the delivery parts. was critical. And that means that they had to have a denser distribution network and so on. That was pretty interesting. And you've seen the others sort of trying to move into that direction. After they did that It was company O'Reilly had Very little debt. They'd taken on

25:50 Actually in two thousand and eight because of the recession they were unable to borrow all the money they'd anticipated for that acquisition and end up having to issue stock. And we owned ten percent of C S K at the time. And so We got a reasonable share of O'Reilly's stock, which we still own and it's

26:08 twelve or thirteen times what we paid for O'Reilly as a result of that. At any rate, in the terms of capital allocation after they paid off that short debt they'd use'cause they were generating a lot of cash. They said, Well we're not going to be able to make any other major acquisition that won't be a Hart Scott Rodino problem. And therefore they changed their capital allocation and they began to lever up the company and buy in shares, which they had never done. They've now m since that period of time bought in forty percent of their shares. And are reasonably leveraged now.

26:37 It was a really intelligent capital allocation decision By the management and the board. at that time, which is highly unusual. We've all seen boards that were rushing out to buy in their shares when they're at peak valuations and all kinds of that's not what they were doing. So that was a A really interesting

26:57 Capital allocation. The other side of that goes back to the Late eighties. I got involved in it. Company called International Speedway.

27:06 And It's a long story, as you've probably read about it, uh how I got involved, but at any rate. At the time the company had two and a half million shares outstanding. the family that had founded that was called the France family and Bill France Junior led the company. He was a strong and dynamic

27:23 Leader And they went through a period of time in the seventies or eighties where They hired a CFO where they'd never had one before. Bill France's wife Anne had always just her handled the books and so on. And there's an apocryphal story

27:40 It says that once they'd hired the CFO and they had him in the office and they were walking him through the stuff Anne or Bill said So shall we tell him about the cash?

27:52 New CFO. Cash. What cash? Well the cash that's in the safe. What cash is in the state? Well the the money we've got for the Daytona tickets that we've sold in advance of the race. We put'em in there because we don't earn the race is run. Interesting then, if you looked at the annual report. The ground balance sheet.

28:13 There's no debt. But when you read the notes they describe the equity as being Seventy three percent of capital. What's the rest of it? Preferred revenue.

28:24 What's deferred revenue? It was cash in the safe. Now, I mean, you talk about people running a conservative balance sheet in a conservative business, that's about as conservative as you can get. Discovering that about the behavior of the people. Those experiences stick with you. I love that story. What have been some of your favorite biographies specifically and who are the people that they are about?

28:51 Editor at Barron's magazine and I think he'd written for the journal as well, who became a an investment counselor. in Boston and his name was Thomas Phelps. And he wrote the book called A hundred to One in the Market in nineteen seventy two. And that was a book that to this day remains. Inspirational to me.

29:10 fundamental to me in terms of thinking about The issue of compound return. He didn't ever explicitly talk about compound return. But clearly what his message was to

29:21 He outlined In round numbers, three hundred and fifty public companies that between nineteen thirty five and nineteen seventy one you could have bought And made a hundred times your investment by nineteen seventy two. And so what you infer from that is that

29:36 Well, the only difference is really the rate of return. the rate at which it was compounding. That's the only difference. So that meant That if you wanted to have higher rates more quickly, you needed to have businesses that were compounding their capital. And so We talked earlier about MasterCard and Visa.

29:52 And they're enormous returns. There's no way That they can reinvest that cash. Um those kinds of returns than anything else. And so they buy in stock and they pay cash dividends and it grows and that sort of stuff. But it's a less efficient way for us to compound our capital than if they were able to reinvest it all and get those same kind of rates of return. So you've got some great examples in the portfolio that you've talked a lot about, companies like American, where the reinvestment story is fascinating, and that's the third leg of the stool. So let's talk about that. You can use that or any other example. Well, they made another acquisition last week in Africa and bought

30:27 one of the players in the oligopoly of independent tower companies in the African continent. And so while each New Tower is itself a succinct individual asset. The collection of fifty five thousand towers around the world now. They all look

30:43 Similar. And My notion about the tower companies Is that they find themselves in a position that I describe as being

30:52 Much like Microsoft in the days of the growth of personal computer. If you wanted to have a personal computer, you ended up having to go through Microsoft because they owned the operating system. And it was a toll booth. And If you want growth in wireless communication and as we've gone from one G to two G to three G to four G to five G and by the way, five G is very much of a mirage, people are talking about it and being out there on the table today, it's not gonna be here for years, really and truly. Each of those and demands

31:22 a denser network of towers to increase the reliability of lack of drops and so on. And the tower companies which are host to antennas become that same toll booth. If you want to growth In wireless communications, they go through antennas and which are mostly on towers, sometimes they're in buildings and that sort of stuff, but the tower companies are in in that business as well.

31:45 And so they act as the toll booth in the growth of wireless communication. It's staggering. I'm curious, so the in an idea like that, take something like retail data centers, maybe a similar Take on that. Like if this thing's gonna keep growing, this is sort of a toll. I don't know if you own retail data centers, but How often do you think about diversifying across that sort of bet. with a big technology trend like

32:06 the increase in communication, digital communication? Well so we're not smart enough to dance with all the dances. We've been involved in data centers in the past. We're not in'em now. I wouldn't say that that was Necessarily the correct decision. But we explore and we learn and we observe and Sometimes we

32:23 For example, we think a lot about the businesses that we've sold and was that the right decision. And we've concluded in a number of cases that it was not. But Who does it perfectly? You talk about being a quan and so on, and I'm saying If this business were susceptible to purely quantitative

32:40 Approach. They wouldn't need me, but And you just would punch it by the buttons. And it wouldn't solve for all your problem. That has not happened. And the really brilliant mathematician like James

32:54 Simon is building a Renaissance capital. I don't have any idea how many inputs they have, but my guess is it's probably in the tens of thousands of inputs. Which is a staggering way, and they've clearly been able to do something that's Truly exceptional and perhaps

33:10 Ray Dalio. falls in that category with a little different approach and so on. We don't have any of that skill. We don't think in those terms. We think about it in in this very old fashioned concept about businesses. How do you tell if a business has been successful?

33:26 You've seen in my talks about that or You ask the audience that and they raise their hand and they say, Well the price goes up, fair enough. Suppose it's not a public company and you have no price discovery, how do you tell? And I say on the back of the envelope or you go to your Your accountant and he said well This is what the owner's capital is today and this is what it was a year ago and it's higher than that by X percent and so on. It's a good indicator. And that's how you tell.

33:49 Right, and so that's why rate of return is what drives us. Did I understand that? implicitly thirty years ago or fifty years ago? No. Stuff that is Right in front of your face sometimes doesn't

34:01 reveal itself in terms of its importance. For a long time. Coin in my pocket that says I'm a charter member of the slow learners. And that's in fact the case. I'm not a teenager. You've mentioned this idea. We haven't talked a ton about price, about great businesses wrapped in a bad balance sheet as well. Yeah, good example.

34:20 We still own stock. Some of our separate accounts and in our partnership. that cost us eighty cents or seventy nine cents, two hundred and nine dollars a share today. It was a great business. I mean the incremental margin on a tower Once it's it

34:34 Let's just say two tenants, it might be one point eight or might be two point one. But Two tenants. The incremental margin on that business is north of ninety percent. And everything telephony in the eighty's.

34:47 Ten to twenty times. And American Tower was leveraged sixteen times. Fully vertically integrated, they add steel companies, they had tower directors, they RF engineers they had everything. And when everything telephony started to fall off The cliff in March of two thousand that's when they started falling off cliff.

35:05 American Tower had to scramble to deleverage itself. It had In two thousand and two it had come down to five bucks a share and we own stock we had owned stock

35:19 when it had been spun out of American radio. In October of Ninety nine. And Yeah.

35:26 Come out at fifteen or sixteen dollars spun out to its shareholders. And got as high as sixty. And then by March of two thousand and two

35:36 It was five. And then by September two thousand two was two. And on their balance sheet they had about six billion dollars of debt. But they had I think it was two hundred million It was coming due in

35:49 November of two thousand and three. This is fall of two thousand and two. And they couldn't use their bank lines to pay that off,'cause taking money from bank line to pay off Funded debt. That wasn't possible. And they were scrambling to sell assets to continue to raise money relatively small amount of money, but it was coming due.

36:07 And we were in the middle of this two to year downturn and three year downturn of the market that it from top to bottom have fallen more than fifty? And we went and saw Steve Dodge, who was the CEO, founder and CEO in September and Stock was two and He bought more stock on the way down at eleven, that sort of stuff. And we understood from him, he told us as well as he told anybody who d you talked to him that he could manage that problem through

36:31 private equity world it would be expensive. But he can manage it. And so the shareholders risk. was not a risk of the company collapsing, it was a risk of massive deluction because he could pay that off in cash or in shares, at their option. So it could be taken care of. But the risk of it to the shareholders was massive delusions.

36:49 And the stock got as low as sixty cents. On October third or whatever it was of two thousand and Two And we bought s stock at seventy nine cents and stuff. We still own some in partnership. My wife and I still own some. And there's a great example of Thomas Phelps. Here's a really important notion.

37:07 You only need to Be right in your investment decisions, Once or twice in a career, once or twice. in a career. And so the challenge is How do you identify that?

37:20 And so that's why In this whole Issue of the three legged stool. And the reason we have four stools up there is they're all very different. They come in different sizes and shapes. It's an important notion. Visual construct. How do you figure out

37:33 Which ones are gonna still be doing that? ten or twenty or thirty years down the road. Which ones today have high returns and so Typically you want something that's small, so the market cap of American Tower in October of two thousand and two was two hundred million dollars or something like that today, as opposed to a hundred billion dollars today. And did I properly guess that

37:54 That eighty cent stock, twelve seventy nine cent stock was gonna be Worth two hundred and nine or ten dollars in eleven years? No. I had no idea. But We've continued to buy it along the way and accordingly our Clients shareholders, partners have prospered as a result of that. And as we say

38:13 They've done well, so we've done well. You mentioned earlier this idea of not selling as an asset of the firm. This is a great example. What are the things that would cause you to sell? So Just as we describe the business model, the people model, and the reinvestment model When something goes wrong with one of those, it causes us to re examine. And

38:33 We're just like everybody else. We're just human and we're fallible and we don't always get that right. We had a case where we sold the Our holdings in raw stores. Four or five years ago. And

38:45 They had gone through a change in the CEO. The new CEO was not a madevailable to the investing community. There were some other issues going wrong in the time. And we felt uncomfortable. We moved on and took a profit and so on. It turns out that was a mistake and it was a mistake where We didn't have that is, it was a mistake in that the companies continued to do well and we weren't part of it. They had an interesting and a good business model. Retailers are hard as a generalization, and we've done

39:14 Well in several retailers, but We conclude now and the partner here who was doing the work on it. As we'll tell you pretty clearly, he's concluded. That It was a mistake to have sold it at the time, but we didn't know that at the time. And it was a reasonable thing that we did based on what we knew that happens.

39:32 You mentioned you were an English and pre med major, unencumbered by bias, maybe when you came into the business. What do you look for? a pre med major, a person involved in the investment management business, they're all the same. And people what do you mean? I said, Well they're about collecting data points and forming judgments around them. It's all the same. So Reading business biography, you learn about people's behavior. And Sometimes you see it through the eyes of a biographer that

40:02 Maybe has a little Rose tint to the glasses and Sometimes you see it through just pure actions and sometimes you experience it and so I told you that back in the seventies and eighties we had this experience with international speedway. And we were investors in that business for over ten years. We haven't been in a long time for a number of reasons. In the summers, I had gone up and spent some time in Maine in the summers.

40:26 And I'd gone in the weekends into a little dirt track watched the stock car raising. And I noticed the dirt track over a period of years got better and it got paved and it got boxes and got better equipment and the race cars are better. I said, Well, that's pretty interesting, you know, and I've drawn to the idea of entertainment businesses and unconstrained possibilities. And so on so I came back to the office and I was a stockbroker at the time and went through the standard porch corporate records and found all the companies that were involved in horse racing and dog racing and car racing and All of that sort of stuff to try to see if I could

40:58 figure out if there were some interesting businesses there. And there are three companies involved in automobile racing tracks and stock car tracks, not Formula One or anything like that. And those are a company called Charlotte Motor Speedway, International Speedway, and Atlanta Raceway. And I invested in Atlanta and Charlotte. didn't invest in international speedway. A long complicated story, but Charlotte Motor Speedway, there was a man who owned seventy percent of it and he made

41:21 Take it private after I've started buying the stock in the market. And it was a North Carolina based company and And I thought that his going private price was Insufficient. And in North Carolina law.

41:34 Minority shareholders had a right of descent. I had a lawyer in North Carolina who was a Brother in law of a lawyer in Alexandria and then he ended up getting me into a class action suit that formed and and we went all the way through discovery. And found that this man

41:50 who was the chairman of the company taking it private, had failed to include all the corporate assets in there, had not had independent outside appraisals. All kinds of things. We caught him with his pants down. He was a thief. We have the goods on him. And so he settled with us for I think probably three times something he's going pride privacy and a sealed settlement that was not to be disclosed. And so

42:09 That was the example of a guy putting his hand in your pocket. That company got reconstituted, it was a successful business, is today. There's another public company that he was involved in principal sheriff are in. Successful public company. But I've never invested in any of'em. 'Cause I knew that man's behavior. And my experience was

42:26 He'll do it again. In ways that I don't anticipate. And we've had that happen in a private investment where the people behave in ways which we never expect and we think that are both incompetent and dishonest and that happens periodically. You mentioned earlier Bill France and him being an exceptional leader, maybe in contrast to this guy. What was it that made him an exceptional leader well first of all early on he wasn't taken with Wall Street and he did things that he thought made sense for his business. And for example in chatting with him one time They had races like the Daytona five hundred which would sell out.

42:59 But he knew that his customers were is he would call'em blue collar workers. And so there was sensitivity to pricing of the tickets. And so he would raise the price of the seats maybe once every four or five years, and he would raise them quite modestly. But he had that pricing power and it actually related

43:17 the old days like the Washington Post, which kept the price of the paper at a buck or fifty cents or something like that, when everybody else was raising price. They had a lot in their pricing power that they could exercise but didn't because they thought it made a difference. At any rate, he would do things like that and he would add seats in a very

43:36 Advanced all season. And that changed that the company towards the end of his life and then after he died when they got enamored of Wall Street and they started listening to the analysts and the bankers about how they needed to raise the prices for everything and had way more seats and they've gone through all that, had the downside that experience in the last recession. have taken seats out and that sort of stuff. So

43:58 He was way more customer oriented in that business then His successor who happened to be his daughter and and that's it. Your interest in land conservation. So talk to me about the background there, what interests you and how you're involved. We're just great believers in open space in the beauty of open space and its value to our populations. So the primary way that we've been involved are

44:28 putting conservation easements on our farms and land. In that That's a function of the tax code, actually. The tax code permits you to make donations of an easement on land which restrict its future use? the language in the tax code, federal tax code says that these restrictions are in perpetuity.

44:47 As I say to people I don't for a minute believe that that will occur. Times will change and people will figure out ways to move around those. So that means you just have to do the best you can while you're here. But that's true in all things. And then in addition to that, I'm

45:01 I sit on the board of the main chapter of the Nature Conservancy. Which does land conservation in a very large scale. And all of the things that come from that which have to do with in Maine as well as other states in the United States and around the world restoring fish to their native rivers and that sort of stuff by taking out dams or

45:20 putting massive amounts of force into a hydrocarbon exchange market and that sort of stuff. Oh those things of that nature, which improve the quality of life for everybody around. I love it. In terms of advice for young people, we talked earlier already about imagination and curiosity, and I think No, those are precursors. You need to have those things. Any other advice that you would give younger investors or would be investors out there in terms of what might make them more successful if that's what they want to do with their career? Yeah. Follow your passion.

45:49 That's the most important thing. And read like crazy and be curious. About everything. I make the joke about the fact that back in the Clinton administration there was a guy who lived at the Jefferson Hotel who

46:02 end up being caught by uh a relationship with the Dominatrix. And so I used to joke about the Dominatrix's business model. She could price however she wanted to price and all that sort of stuff. So it's relating real life experiences. I say my example of pricing power. Is as follows. It's a holiday weekend, a big holiday weekend.

46:22 Your wife is having a hundred people to a party in two hours. And the toilets are stopped. You will pay that plumber. Whatever he asked. As long as he can get there before the party.

46:35 That's pricing power. So I'm always looking for ways to understand pricing power'cause pricing power is key. So Think about that as it relates to MasterCard and Visa and all of these things. What's the source of their pricing power? They say we have our notions and we don't talk about it anymore. And you'll notice that the company never talks about it. Yeah, I love it. My closing question for everybody is for the kindest thing that anyone's ever done for you.

46:58 Wow. Well, that's probably personal, so I won't share that. Sure. But The willingness of people to

47:07 make themselves available. Whether it's me or somebody acting towards me or my family. of its value to you as a human being. So I spend a fair amount of my week every week trying to figure out what I can do to be useful to other people. Well this hour's been a good example of that, so I appreciate it. Appreciate your time. Thank you very much. If you enjoyed this episode, check out Join Colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning.

47:38 You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

What you see above is a preview of the first minutes. One unlock costs 10 credits and covers this episode forever: full segment and word-level timestamps on this page, plus .txt, .srt, .vtt and word-level JSON downloads, as many times as you like.