Cliff Sosin - Investing in Carvana - [Invest Like the Best, EP.421]

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. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts at joincolossis.com. Patrick O'Shaughnessy is the CEO of Positive Sum.

1:03 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. To learn more, visit psum.vc. Mm.

1:29 My guest today is Cliff Soson. Cliff is the founder of CAS Investment Partners, a fund he started with$5 million in 2012, that's now$1.7 billion. This conversation is different from our typical episodes. We start by talking about Cliff's investment philosophy, but the bulk of this long discussion is a case study into his remarkable investment in Carvana. Cliff is one of the biggest investors in the business, which had a market cap of over sixty billion dollars in two thousand twenty one. Then fell ninety nine percent, survived, and now has a market cap approaching fifty billion dollars. Again. Well, I hosted Carvana's CEO Ernie Garcia last year to get the inside perspective on managing through such turbulence. Today we hear the investor side of this extraordinary story.

2:09 It is a singular episode and a rare opportunity to hear a major investor describe his decision making process at every stage of a volatile journey. Please enjoy my great conversation with Cliff Soson. Cliff, I'm so excited to be able to do this with you. This I I've been asking you to do this for at least three to four years, something like that. Um I don't know what made you capitulate. Um, but but it's an excuse to talk to you about investing in general and some very interesting specific episodes that you've been involved with specifically. And I think we gotta start broad, because I wanna set the context for everyone that doesn't know who you are or or what your setup has been. Maybe just give us like a history of

2:46 How you started the firm. What was it, twenty twelve, something like that. Um why you started the firm and kind of what it's been since. If you'd gone all the way back to when I was in high school, I w I thought I would have been an inventor. uh I sort of modeled myself as uh you know an an Edison in my mind or something.

3:02 But when I went to school and I studied engineering, you know, a lot of inventing is kind of obsessively debugging like real things and n nature's pretty unforgiving. And so what I learned about myself was that I didn't love that process. Just wasn't as fun for me. Um

3:16 And so I was sort of casting up for what I wanted to do and I and ended up doing an internship at a big private equity firm. And and I just thought it was really neat that I could use and I discovered I could use a lot of these Things I'd been learning in school like game theory. apply them to these situations and that That brought novel insights that these people who've done this for so long weren't using. And I was hooked. Like the idea of like you know being able to do that. From there, I was trying to.

3:41 kind of get into investing. I thought I was gonna do private equity. I knew the path into private equity was through a banking analyst program, but I didn't want to do a traditional sell side analyst program. So I ended up um going into uh financial restructuring. Because I didn't want to do as much marketing. So I worked at uh a place called Houlian Loki, which is a leader in financial restructuring, and I did that for a time. Uh I still wanted to get to the buy side, so I went to for places called Silver Point for a year.

4:05 And then from there I went to um UBS, where I spent five years before I s I started my business. And while I was there, that was really where I think I did a lot of my my maturing and I th I thought a lot about I'd come from a lending and and finance background, and at UBS I was involved in trading, um, in investing in stocks, trading in stocks. UBS at the time. It was it was the fund it was their proprietary investing business. It was the bank's own capital. Think of it as a hedge fund with one LP. And it did a lot of the sort of traditional things that I think a lot of hedge funds do. They There was a lot of focus on on short term performance. There was a sort of desire to have yes, we want things to sort of be

4:40 misvalued, but we want to have a bunch of catalysts that are gonna cause the price to go up. Um there was a lot of trading around events, there was a lot of hedging And Um As I was involved in that there was sort of an effort to Teach me.

4:55 How to do it. And it I I didn't like it. I I sort of discovered that you know they would sort of say, Well, we should we should do this and we do this and and I'd sort of say, Well, why? And that doesn't make sense. And you know, I don't know why this stock has a the three beta. Why do I have to uh why do I need to short three dollars of S P for every dollar, you know, of stock that we're gonna buy here that doesn't make any sense. And this led to like a really vigorous debate between me and And To their credit, I mean I was young and um incredibly difficult to have as a as a report as someone working for you. Uh um and and

5:29 I just hounded them about it and eventually this debate went on and on. And it became pretty clear to me that like I was right. Like You know, and and I was naive enough to think I would just explain to them that I was right and they would just do it differently. Further occurred to me that they couldn't change. And they couldn't change be because they had a principal agent problem. The problem was that they had to deliver steady profits to the bank. And if they had big drawdowns that they would lose their money.

5:53 And So, you know, I started poking around quietly looking for another place to work and I realized that so did all the other firms. in the industry have the same problem. In fact, it's it's in it's endemic. Basically, one might naively think that it that the investing business is about maximizing performance, which but it's not. It's about maximizing Um marketability. And performance is a component of marketability, but really what you're trying to do is s signal talent and the way you do that.

6:16 is by finding things with um short feedback loops with low amounts of noise, so that you can sort of show people, look, we did this and it worked, and we did this and it worked, and we did this and it didn't work, but on average, you know, we we win. And the type of investing I was thinking about, basically buying a piece of a company through the stock market and owning it for a long time. You know these are multi year three five ten year you know, feedback loops that are incredibly noisy.

6:40 And they just don't lend themselves to it. And You know, if you think about it practically Let's say that um I c meet with someone from an institution And you know, first of all

6:52 Yeah, and I convinced them that like I've got that. They're gonna say, like, how do you pick stocks? I'm gonna say, Well, I think really hard. And you know, and they're gonna be like, Okay, cool. Like I I'm convinced Cliff thinks really hard. He's good at this, but then they have to go back to their committee. And the committee's gonna be like, Well, how does Cliff pick stocks? And he's saying, Well, he thinks really hard and like, Well, you know, that's not very credible. And and then even if they do make the investment now you know, they're gonna own it. And so invariably we're up, we're down, we're up, we're down, I look smart, I look dumb. And and along the way, they're gonna be like, why did we do this? Like and and by the way, we have a board that we're reporting to. And like we're down this quarter because Cliff thinks really hard. Apparently. This is just a really challenging setup. What this means is that

7:30 You know, when I started this, I wasn't fully aware of quite how challenging it would be, but the premise was that I would start a business, you know, based on really focusing on long term compounding, finding a relatively small number of stocks. treating it like owning a piece of a business, dealing with the volatility that comes with it. And I figured would be maximum up maximally optimized around returns and minimally optimized around Marketability and I think certainly on the on the on the on the marketability side we nailed it. Uh And so um so that that that's that's where we are. But I wouldn't I wouldn't change a thing. It's it's how it's how I'm built. So uh that that's how I So what what did you tell your original investors

8:08 'Cause they s some people gave you money, including some, you know, well known institutions. What did you tell them and why were their decision making processes different? And how much did you start with? So I launched with five point two million dollars. The old fashioned way. Uhhuh. It was two million from me because I'd been successful at UBS and they'd they'd paid me I like to joke. It was a lot for post crisis, not a lot pre-crisis. Um And um I I also got two million from my mom.

8:37 Um she was a sympathetic audience. Um, I had one million from a friend and it was uh you know uh at the end you always ask people who who they're most um grateful to. He's I had two in mind and he's one of them. He it I'd known him for years and we talked and he's he's a very successful person and and um I had this meeting, it was like my third mark second marketing meeting ever, and I I sit down and he basically is like I'm absolutely gonna be my doctor, No problem. And and I was like wow, this is gonna go great. The next time I saw a check like that, uh you know, it was years. Um And and um and then it was a couple hundred thousand from some other people that I that I knew. Started with that and um, you know, over the years was sort of able to kind of

9:14 Steadily bring in a little bit of money here and there and compound and was fortunate, you know, I've had up years, I'd have down years. If you changed the order of the years. But I definitely wouldn't have raised any money. So there's also a meaningful component of luck. And where does that bring us today? So how many investors do you have? What's the kind of the capital base? Like how do you think about the firm today? So I don't remember exactly how many investors we have. It's sort of between one and two hundred.

9:38 across a few different vehicles. Um And the firm's What is your view of investing in markets? Like describe how you think it is supposed to be done in some detail. The the premise was always You know, let's find a handful of businesses. That are publicly trade.

9:57 Where I can buy a piece of that business in the markets. And own them. Own it for for you know, with the premise of owning it forever. Um, and and then own it until basically I find something that I can upgrade.

10:10 That I think is even better. Um Or I discover that I've mis misunderstood the business in the first place. And So there's two ways out of the portfolio. One is that the gap between what I think yeah, I find something better so I can, you know, upgrade, or the other one is that

10:26 I have some view as to what makes a business successful. You can think about like a a mental model of kind of how the business is competing and winning in the in the ecosystem. And that makes predictions about the world and and then you get real world data and you can compare the real world data to Um to to to what your predictions of your mental models are and if you discover that

10:46 your predictions aren't lining up, then you need to um update your old model and it might be that you need to throw it out. And at some point you should have realized you don't know which way's up anymore and and then and then that would be a an an investment that you would Uh Jettison because you just no longer know. Over time We've sort of had kind of between like f we'll call it four and eight. I may might have been as many as ten at one point, but that that's kind of the number uh of investments. We tend to over the l course of time I've been investing, I think

11:12 on average I've sort of bought and or sold one thing a year. Um it's a it's a pretty s sort of lethargic, um Pace of turnover. businesses compete and win in certain ways. There's sort of a minority of Businesses that You know, once you sort of figure them out, like

11:29 You can just tell, like they're going to be very successful. relative to um Other similarly priced businesses. And so

11:38 Um and we can talk there's a lot of like mental models and stuff, like ways that I think businesses can be sort of a taxonomy of businesses that I've sort of think about. But Those are just, you know, my ways of understanding a really complicated world and sort of fight trying to find a few things that work. Yeah. So I I guess like the the obvious and very simple but very big question is like what is a good business? Like what is that taxonomy? Maybe this is the time to talk about one of my favorite ideas of yours that you like businesses you described as contained. Um, but I I I've always liked that description when we've talked about companies. Yeah, give it give us your kind of view on what makes a good business. If you think about it, in most markets, you shouldn't have a lot of profits, right? Like profits are kind of a fluke of some sort of Um something about the setup that c makes it so that some reason why

12:21 you know, competitive forces can't drive, you know, economic profits to zero. And those reasons I mean there's sort of a lot of them. And in terms of how to think about them, I gather different examples from sort of microeconomics, from psychology, from um business history, um, to try to understand different ways that companies have carved out a a piece of the world that where they are advantaged. Um and then they can m you know you can think about companies Profitability over time is kind of its market opportunity times its advantage. And

12:50 Um So The Um what you know. I mean, I don't think there's anything particularly exciting about like what makes a great business. It's it's you generally want to have

12:59 um, you know, multi-threaded advantages, a lot of things working for you that are very hard for your competitors to Replicate, um you know, br you wanna bring a lot of value to your consumers, you wanna, you know, um You want the things that are working for you to be generally invariant. um with time as tech as society evolves and changes.

13:19 Um and when you kind of have all those things lined up. Um you should be able to you know, have high returns on capital, reasonably good margins, you know, all those things that grow, all those things people look for. Um You know, of course.

13:32 Everyone. knows everything I just said. And so, you know, the the whole game is to identify the ones that other people, you know, have missed for one reason or another. Um and and you know it's it's it's It's really um It's the emperor. I I think investing is the emperor of

13:48 uh activities, i in the sense that uh of intellectual activities, in the sense that You know, in academia people write papers. They're wrong, they're right, eventually they die with a bunch of ideas. Most of them wrong. Right. Like in politics, people have views and like they're definitely wrong. Unlike you know a lot of them. Right. Um and in business, people they have this narrow world and they kinda have to be really good about executing in their narrow world, but they don't necessarily need like a deep understanding. Like you can run a deli. without necessarily having like a deep understanding of like why meat prices are what they are. But in investing, you you know, it is wildly accountable. You you're making predictions about which businesses are gonna win and which are gonna lose.

14:25 Um which, you know, to understand businesses are sort of complex social structures embedded in our society, which is a complex social structure. So what do you need to understand how b a business's success or failure over time? It's like you kinda need to know everything. So it's It's and and unlike all these other pursuits, this one's like highly accountable. So I think it's it's the emperor of like intellectual pursuits. I I think that No there's no arena to train people better about understanding the world. And I think if you're just curious about the world, like there's nothing more interesting than study business. Say why you like this idea, what a contained business means means and and what an uncontained business is and why you like to avoid them. I generally think of a contained business as one where when you're trying to understand Um a company.

15:08 If you find that It's just The problem starts to feel intractable in the sense that Um, it's very hard to think about how Um

15:18 changes in s there's many things that could change in society that are changing. that could cause your view of what the business could be. to change over time. That is a just a tough problem to live with. Um

15:31 You know, if uh because it's it's just, you know, it's very susceptible, like as the world evolves, like you don't know where the company's gonna gonna go. Whereas a business where The thing that makes it work. or things that make it work are relatively Narrow.

15:48 And in a sort of part of our of our lives that isn't evolving that much. Um that would be, you know, very contained. Once you sort of understand everything o immediately around that other changes outside the that they're sort of happening feel less relevant. Would like software tooling be a a good example? Yeah, that'd be a great example, right? So you know I I

16:09 I you know, who knows how how people are gonna write software in ten years. Like for what? For quantum computers? For y you know, and and It's just like a like you might have a business today. It's like building a castle on sand, right? Like it it's just very, very hard to make predictions. But on the other hand, You know, like The cigarette business, right? Like people the nicotine's habit forming. There there's this phenomenon called secondary reinforcers, which is a psychological phenomenon that you can

16:39 Um you know, put into chat GPT it'll explain it to you. Um and and you know, but basically it makes people incredibly brand loyal to things that like s stimulate the reward systems. Um And and then there's also distribution economics and But like w that is just not a an area where there's a lot of dynamic change happening.

16:58 It's also not an area where I need to think about 15 different moving parts to sort of have a general sense as to what's gonna happen. Of course, the problem with these contained things is that. If they're easy if everyone under if they're easy to understand, then everyone understands and and and so Again, investing is this It's this incredibly challenging endeavor where you're

17:16 You're looking for these things that Yeah. Like on the one hand they're They're they're simple to understand, so you can understand them. On the other hand, they're challenging to understand, so everyone else misses it. Give us an example of the process you go through to explore a contained system. You're coming across a a new company for the first time. you want to start to learn everything.

17:37 What is your method for doing that? And and I I recognize that like to some degree this is like an obvious answer. You talk to people, you read stuff, you like you think about it. I always love these moments. Where you get like some new click of understanding. And maybe you could tell the story of one of those clicks of understanding or something from the from the investing history. I have in my head A number of different frameworks for how a company

17:59 Um can make money. over time in a competitive world. Um And

18:05 A simple example. From microeconomics. Would be That of a corno oligopoly. And

18:14 Um Just For those who Maybe forgot their game theory from College.

18:20 There are Um Two Broad types. of oligopoly.

18:26 in the economics literature. One is Cournot, the other is Bertrand. The the key difference between them is that in a Corneaux oligopoly, The Competitors. Choose the quantity.

18:38 Of things they're gonna sell first. And The price. Falls out. It's the it's the thing that moves. Um in a Bertrand oligopoly.

18:47 the competitors choose the price that they're gonna sell at. And then the quantity. falls out. And it's the thing that moves. And this seems like a subtle uh change. But it results in a pretty big

18:59 uh difference in the competitive equilibrium. So In Um a Bertrand oligopoly.

19:07 That's non cooperative. That is to say that people aren't Figuring out a way to signal and to to sort of to cooperate. Um Then What happens typically if you imagine like let's say I'm selling cookies at the state fair.

19:19 And there's me and there's another competitor and there's two spots to sell cookies and we both can manufacture all the cookies we want in a truck next to the s next to the fair. Um, and let's say people only buy cookies based on price and they're right next to each other in perfect competition, all the rest. So what happens is you know, uh let's say my each cookie costs a dollar to make. Well I start out maybe I started selling them for two dollars, I want to make a dollar a cookie. But

19:40 my competitor realizes that if they charge a dollar ninety nine, they can get all the sales. And so they charge a dollar ninety nine and then I charge a dollar ninety eight. And pr before we know it, we're both down to a dollar and we're making no money. And uh that's the equilibrium. That's the co op that that's the non-cooperative equilibrium. We make no money. But now Let's imagine instead that I had to bring a tray with a fixed number of cookies and I can't make more. Well What happens is that morning I'm trying to figure out how many cookies I'm gonna make.

20:06 And I asked myself the question, should I make one more cookie? And If I make One more cookie. It'll have two effects. One is I'll get to send an extra cookie and I'll make whatever the profit on the cookies are times that cookie.

20:18 But the other is it will increase the number of cookies in the market. Which will drive down the price of cookies. And This will cause me to sell uh all of my cookies at a slightly lower price. And so as I'm making this decision, you can see how there would be a natural maximization point where I maximize profits. Now, in this case, there's two competitors.

20:36 So when I add an extra cookie to the market, I lower the price for me, I also lower the price for my competitor. I don't internalize the effect on my competitor. So I end up behaving like an like an oligarch, like a monopolist, but a monopolist who only absorbs half of their price impact in the marketplace. In other words, one who faces more elastic demand. But I still behave l like a monopolist, just with one facing more elastic demand. So there's still monopoly profits to be had. So the equilibrium gets work, we we both solve our differential equations at the same time. We get to an equilibrium and lo and behold, we we we end up um we both end up making profits. Okay, this is all very theoretical. So you start studying the cruise line industry.

21:14 Okay. Just to pick an example of an industry I'm not that. I'm not I've never owned a cruise line business, but it's been you know, I've been around it. It turns out that if they want more cruise ships They can't just snap their fingers and have more cruise ships. The number of cruise ships for a good long while is essentially fixed. And

21:30 And so what they do is they the th this is a perfect example of corno oligopoly. The number of cruise ships is fixed. Um and in the short to medium term. Uh so they maximize yield. Uh, which basically means they're adjusting price.

21:43 that leads you d down a path of say, Okay, this is a business where Just from that perspective, there's lots of other things to think about. There's brand, there's distribution, there's million things. Um From that perspective, now you have a sense as to how this is a business where there should be some monopoly profits. But you know, what will mediate how much economic profits there are is how many competitors there are.

22:01 Right. And also um you know, how much elasticity of demand there is. And And then of course other factors. Um and then of course there's also the question of Are you in equilibrium or did people accidentally bring too few Let's say let's say you show up at the at the fair and Well, you brought your tray of cookies and it rains. Well now cookies price of cookies plunges and you lose money, right? Or let's say you show up and then for whatever reason a famous singer shows up and there's a gazillion people and now you sell the cookies at the premium. So you know, the are you at equilibrium is another, you know, good question. But It turns out that like a lot of travel businesses are, you know, corner allegopolies. Um

22:33 you know, rental cars, um air air air travel. um cruises. So this is an example of using a a mental model that allows you to understand like certain types of businesses in a somewhat systematic um way. One of the investments I sort of cut my teeth the most on where I sort of first had a lot of success was was in the construction equipment rental business. And that is also Um it is a corno oligopoly. Um you know, in any market there's a sort of fixed number of rental companies and Yeah.

23:02 they own a certain amount of equipment and their ability to change that in the short term is constrained and and therefore, um, you know, uh it's a corner of the gobily. And Uh It's also a particular good one because elasticity demand is demand is very inelastic. Turns out n nobody said like

23:18 You know, I see the price of man lifts is down a hundred bucks this week. I'm gonna rent one. Uh and at the same time, nobody ever said, like, I'm I'm not gonna build my building because the price of man lifts is up a hundred bucks this month. I hope that got your question, but basically it it you can think about there being many of these things, like these concepts that I that you can then kind of follow to their conclusions. And of course life is complicated and every company has like often a whole confluence of these things. And what you're really looking for Is a business where you have a sort of a bunch of these things that are working together. With the cruise ship industry, like the idea that it takes a long time to build a cruise ship and you can't just snap your fingers have another cruise ship. is pr fairly invariant. to technological change in society. I guess maybe there's some future state where we can like, you know print them out. Print'em out. But like for now and for the foreseeable future, this is gonna be fixed. And and so

24:03 Um, you're looking for, you know, relatively sort of technological change invariant. advantages and you I did and layered and and and interwoven. um that kinda give you the business and then And then from there, you know, I I've I have a friend who who jokes that

24:18 a good value investors, you know, memo. is like twenty pages about the business and one page on the valuation. So like from then from there, it's like I don't know, like is it cheap? Uh does it make a lot of money relative to the price? Is it gonna grow a lot relative to the price? You know, these are Pretty trivial calculations. If I was thinking about how you would spend your time. It would seem to be incredibly valuable to collect models like this over time. Do you find your way to most of them through a specific business? Which comes first, the business or the the the mental model? Oh so you're asking how how do you find the gold on the ground? Um the answer is yes. It's hard. Like in there's nothing I keep going back to that, but there's nothing about investing that's not hard. Um

24:54 We we look for, you know, I I've I hired a Stanford professor to assemble all of the the economics um models in all of the courses in Stanford and then just like walk me through all of them to make sure I hadn't missed any. And I picked up a few that I'd like, you know, missed or forgotten about. I would try to read broadly, like, you know, um then of course you study companies one after the other and for in in various companies it'll sort of like click for you that something, you know, that something is happening. To drive home the point, can you do one more like the corno oligopoly, just to give us an a like a uh flavored sense of like another thing that that you've used in the past? Secondary reinforcers. So this just a s a different place. This is out of psychology. It turns out that there's like a meaningful psychology literature that's been built up in animal studies and and uh people and all the rest.

25:41 Um Which basically says this idea that when you give You know, mammals. Uh something that stimulates their reward systems. Um

25:51 Your brain. For lack of a better term. sort of captures the context in which it was received. And then You know, if it likes it.

25:59 Tries to replicate that context. And you can these sort of evolutionary reason why this makes sense is Self evident. Um And

26:09 W what makes that interesting is that it turns out that the strength of these secondary reinforcers is proportionate to Um Power of the stimulus. Um as well as it's proportionate to

26:22 Um The Uh inversely proportionate to the time lag between when the stimulus comes and when you the pleasure sensors get Stimulate.

26:32 You know, if y if if something makes you feel good three hours after you got it, your brain kinda doesn't know. where it came from. If something makes you feel good. you know, within a moment of when you got it, then Your brain knows um exactly. And

26:44 What's interesting about that is is this called secondary reinforcers because Um You can so you create these associations. Between Um the stimulus

26:55 and other things that are in the context that it was received. So you can make Rats. Um Prefer

27:02 Uh cocaine that's given to them with a certain color light. Hm. They'll continue to seek out that light. Even when you deprive them of the cocaine. Okay, cool.

27:13 That's a neat thing to know about hum the human brain. Um Where do I see that applied? Well, If I were to rank By margins.

27:20 The consumer packaged goods industries. I think the ranking might look something like this. You'd have the nicotine cigarettes at the top. And then you'd have like dip. And then you'd probably have, you know

27:33 Coca-Cola. And then you'd probably have Coffee. And then you'd probably somewhere have like Candy. And then

27:43 You'd have like Sugary sweets like um Um You know, co cookies and stuff like that. And then you'd have like

27:51 tomato sauce and bread and and then you'd have I don't know, water. Right? Something like that. But it's probably a rough Like ranking. Well it turns out. That If you go down that same list and you ask what is stimulating the pleasure peop people's like, you know, pleasure systems?

28:06 Well, in the case of nicotine, you know, inhaled Through a cigarette or a vaping product. Um, nicotine's incredibly powerful. And the the respiratory system is a very fast delivery mechanism. So you get this very rapid. stimulation of people's pleasure sensors. And lo and behold, it creates these very strong secondary reinforcers, which make people very brand blue. Um

28:27 Not only but I mean if you ever watch smokers, they're not only smoking the same brand, they're smoking at the same time in the same place, like every day. Um It also helps the nicotine is addictive, which creates a trigger for a habit, which is a whole nother brain function piece where you're kind of making and following habits. Um

28:45 You know, if you go down the list Um Caffeine. Is A good a good stimulator, but

28:51 You know. It's not as potent necessarily as nicotine. More importantly, you're taking it through your stomach. Um, and by the way, dip goes through your lips. So it's pretty fast, but not as fast as cigarettes. Caffeine. You know, soda has w sugar and caffeine. It goes through your stomach so it's slower, but it still creates a fair bit of um

29:09 uh you know the association isn't that far isn't that far apart. As you work, you know, then you get to things like cookies. There you're the cookies mix with fat and stuff, so it slows it down the the sugar's mix with fat and stuff, so it slows it down even more, but it's still pretty potent. It's a it's obviously a sweet Um, you work your way farther down, you get to your savories or whatever here. you know, yes, these are things people really like, but like the the sort of stimulation is much weaker, uh it's more time lagged, um, and as a consequence, you know, people like they have a preferred tomato sauce, but like, you know, in the end, it's you know it's much less brand loyalty than say like a cigarette. Um, obviously water other than if you think about brands that are more status. Focused. But like if you think about just sort of like a bottle of water.

29:47 I don't think in the end anyone's that uh picky. And I guess the valuable thing in markets would then be that markets don't properly value that insight. Like if you look at Philip Morris At one point it was the best performing stock in US history or something like that for like decades and decades. So it would like corroborate this idea that it's probably like a valuable insight. But at some point it gets priced. Like Like the insights all get priced.

30:09 And so maybe that's what you're talking about earlier, which is you need A confluence of these things. In an area that's been neglected to find an interesting opportunity, something like that. Yeah, you need something that scares people away. Um You know, I think the the you know, the example of uh I gave like I don't think it's a mystery to most people that like Coca Cola is a good business, right? I'm not

30:31 Totally convinced that like What I just laid out is like gonna make you a lot of money in the public markets anymore, because I think it's priced in. I'm not totally convinced that the people who own these things understand it. They just have observed that In practice, these are very brand little businesses. Um

30:47 However Oh. You know, sometimes things come up and You know, there w there were um I was involved in um

30:55 In a nicotine vaping company. Um Which was reasonably successful and ultimately acquired by a large Um

31:04 Tobacco company. In the early days. you didn't have necessarily all this evidence that Um, these were gonna be Really great.

31:13 Businesses. Um but the theoretical construct that I just laid out to you. Was an important sort of guiding factor in giving me confidence that Um

31:24 this was a business. There's a lot of other factors, but this is a business that you know, would ultimately be successful. Or You know, I have friends who Um I didn't do it'cause I I thought I thought they were right, but I thought I had other things that were better. Um

31:36 and there's opportunity cost to consider, but I have friends who were successful investors in Philip Morris. Um international. uh they w they they were observing uh Zinn. And um You know, a lot of this

31:49 Um Like intellectual construct gave them a sense that like that Zinn was going to have uh a lot of brand loyalty. Um You know, where at that time, you know, it was sort of unproven. Um

32:02 And Zin of course is Quite a big one. It's been has proliferated and and and and it's there's a lot of brand loyalty. Um but that wasn't obvious. You know, at least it wasn't in the historic historical data. Um until you know, so so These were the so the the you know all of these tricks, uh they're they're not useful until they are, I guess would be kinda the way to think about it. finding edge in markets, it would be informational, which seems kinda gone.

32:28 analytical, which is a lot of what we're talking about, and then I'll call the last bucket like structural or behavioral or something like that. What do you think about ESG? Like and it uh it comes to mind because of the nicotine examples where there's just a class of investor that's not allowed to own it, which creates like a weird impact on markets, especially if those Asset owners are very large. W what do you think about

32:51 Yeah, I think that if you manage money for other people You're deeply arrogant. If you are gonna apply your ethical framework. On to

33:00 the way that you invest. Society in aggregate comes to a collective view. Of what's allowed and what's not allowed. And we call that the law. And If A business.

33:11 Is violating the law. You know that's a often a bad investment because, you know, obvious. If society's evolving and the law is likely to change, that is a risk that one needs to factor into an investment. And you'd be sort of silly not to think about that. But If

33:26 Something is just disliked by a group of people. But they haven't built up the critical mass necessary to change the law in this country and You don't think the risk of that happening is particularly high. But you decide that you're gonna apply some moral framework

33:39 And not make them money to do it. Ma not make money for your partners to do it. That's a really fraught thing because like What? You know.

33:49 Sort of what gives you this deep wisdom about what's right and what's wrong. that is uh better than like the collective will And it's unjudgment of society. And by the way, maybe you'd say, Okay, fine, I'm not gonna use my judgment. I'm gonna use my investors judgment, but

34:02 Then the question becomes, okay, well but but which investor? And how do you weight them? Like do equally? Is it by by AUM? What what if it's an institution? Do you like do you poll the underlying like people at the institution? Like this is a wild thing. I think I think it a much better approach is to just say that the goal is to maximize Returns. And

34:24 Um obviously in doing that you you know you have to companies have to comply by the law, you have to comply by the law and you have to take the change in norms into account. Um But Laying any sort of further ethics onto that.

34:36 And and if and then of course you maximize returns, people can of course take that money and give it to whatever charity you know, they they feel that they want to. And And I think that that's that's sort of the only solution. It's like a The only solution that I think um kind of resolves this problem that isn't fraught. I've noticed in my career that, you know, people in investing circles they talk a lot about like panics. Right, this idea that you want to buy when things are bad. I have noticed that there are certainly economic panics that have happened in my career. I've also noticed there's sort of moral panics that have happened.

35:05 And Um You know you can buy into moral panics much of the way you can buy into economic Panics.

35:13 And You can do well. Now economic panics bring with them the risk that things could get worse and the business might not survive the challenges that lay ahead. Moral panics bring with them the risk that

35:24 Um you you know, you could bring about legislative or regulatory or rule making change that can that can hurt the company. Um And and so you need to take these things into account. But Um I think that

35:37 you know, it's reasonable as as an investor to look to areas where that are viewed as a sort of um bad, but are not illegal. And Um and for what it's worth, when I've dug into most things like this, I've always discovered that Th these things are far more complicated than the

35:54 sort of naive, you know, coal is bad. Okay, well sure, but you know, electricity's pretty good. Um you know, so it's complicated. Um I'll add one other thing, which is this idea that you I think you mentioned, which is funds that can't invest or whatever. You know, that there there's an implicit point that you're sort of saying which is an sort of elasticity of price concept. And I'm not That can I think the literature on this kind of agrees with me, but I don't think that like groups of investors deciding to forgo certain asset classes like oil companies necessarily cause them to be like super cheap. Um

36:26 I do think that there can be sort of more broad based things where people kind of don't want to own something for some reason and that can you know and if it's really broad it can have some effect. Um, but I think mostly what happens is people just kinda get ski it's more of a panic, like people get scared, like oh no You know, this company's gonna get shut down because, you know, p this group this group of people view it as terrible and they're gonna try to kill it. I think now's a great time to tell

36:50 devote a long block of time to your investment in Carvana. I I think people that know you and your firm's history will certainly associate you with the position. It's been an enormous position for you over time. You're one of the biggest investors in the business. And for me One of the reasons I've I've asked you so many times to do this.

37:08 is that let's say dating back Five or six years now. I've had the chance to talk to you about this company. Through its many ups and downs. And it's been one of the most interesting

37:19 educations that I've received from another investor on investing. just talking to you every so often about this company and what you're thinking about it. And so I've been lucky to enjoy that. You know, the audience have won. And I thought it would be a an amazing opportunity to hear you tell the story, which is very complicated. It's it's a complicated business story, it's a complicated investment story, your own story about how you were going through it all is interesting and complicated. There's all sorts of dimensionality to it. You were joking that it's like five rivers coming together, and you kinda have to explain each river. But we have the luxury of time here. So I I don't know how best to

37:54 Start with which river. Uh maybe you can pick. But I wanna devote like a lot of time and I'll have lots of follow up questions because I just think like You you can go look at the Curvana price chart, you can go listen to my two conversations with Ernie, like there's lots of There's lots of stuff out there about Carvana, but the thing that I find interesting is the investor's perspective as the person that

38:13 probably had the biggest position, held on to it, bought more Um has been with it the longest. you you sort of have the most holistic perspective on it, and I want everyone to benefit from what it's like to own and live through one of those episodes. Sure. And and Part of the reason I actually the bat almost all the reason I said yes. More than all the reason. I said yes to coming on.

38:34 Um It has been such an a wild Episode in business history. And I sort of worry that if I didn't

38:44 Try to memorialize it to some extent. Um that it would get forgotten. And It is such a cre it is such an interesting story. Um, I think it deserves to be memorialized. I also think it's sort of wildly misunderstood and it um in terms of like what happened to Carvana in twenty twenty two and

38:59 Um and twenty and twenty three and beyond. So Um, yeah, I guess maybe a place to start just to level set. for people who don't know it so well, Carvana is an online retailer of uh used cars. Um it was founded in in twenty thirteen. You know, the by Ernie Garcia, who you've had on.

39:16 And if you were to broadly describe the company's history from twenty thirteen to twenty twenty one. It was Up into the right. the the business grew every year, its margins improved every year. Um

39:27 And uh it grew really fast. It was it was doubling often every year. Um Slowed a little bit, but that was kinda roughly the pa the pace. You know, if you'd spoken to me uh in twenty twenty one, I uh but roughly would have expected a continuation of that trend and course what happened was was the business um

39:45 Slowed. Um it lost tons of money. The stock went down ninety nine percent. Um which is more than pretty bad. Which is pretty bad. Uh and and and and and then and then, you know, to to ruin the the story, which I think most people know it turns out that was all a mistake. It turns fine. Uh it's it's right back it's it's a little behind where I sort of thought it would be, but it's it's actually more profitable and it's back on track and the stock's mostly recovered and all the rest. So that's kind of the the broad arc. Especially now that we've laid the groundwork for how you sort of apply ways of thinking to understanding a new company. Sure. And and so maybe even make it specific to you? Like how how did you encounter it? What were some of the models that you know

40:23 felt relevant to you as you tried to learn about the business and use that as a way to introduce like how the business works. I first encountered Carvana in twenty eighteen. And Uh, they used to have a video up on their site. They might still. That's

40:37 kinda describes the business. It was a pre IPO video, one of these things he put up. And I remember sort of watching that video. basically realizing this is an amazing business that's gonna do great and uh it's incredibly underpriced and Um, I'm gonna own a lot of this, provided like everything they just said is true. But

40:55 Obviously that's not how reality works in the sense that the reason why I felt like that was years and years and years of context. And so to go further back over the prior years for you know Like when you're when you're in my business, you you're waiting for your stocks to go up. In the meantime, you're sort of looking at other things.

41:11 And so I had spent time studying Carmacs and I had spent time studying e car dealerships. So I was sort of reasonably fluent in kind of how the auto retailing business works. I'd also been involved in the auto lending business. Uh I'd you know, I'd been uh involved in credit acceptance, which is a One on auto lender. I'd also, you know, looked obviously who hasn't like studied Amazon and like read the Everything Store and I'd also study logistics companies, um and I'd also looked at um uh, you know, manufacturing companies and all the rest, and and software companies. And so it turns out that Carvana is

41:47 Like uh all of these things. As they were explaining The business It was clear to me that the the economic advantages that allow someone to build a a successful distribution company or a successful um retailer or a successful lender. All of them have

42:04 you know, economies of scale, skill and trust. And Carvana had in or what Carvana was building was gonna in involve all of the advantages from all of these different businesses that they're effectively in at the same time. And this is called economies of scope. And by being great at all of these things, it was gonna produce this very it could it could produce this very big

42:24 um mode. What I didn't believe Unnecessarily. Um until I saw that video. Was that anyone wanna buy a car on the internet?

42:32 Uh, because that was just common wisdom and at the time this is you know, this is a while ago. This is before It was obvious, but they just they just had some cohort curves and I was like, Well, I people clearly love this. Um and so um At that point, like it was kinda like love at first sight. Maybe to to sort of Explain a bit about the business and why I it's I think it's so Um

42:53 The the things I identified. turned into the tremendous advantages it ha it has today. And Are kind of the mode. So let me just spend a few minutes. So at the core, the way the Carvana system works, it will follow a car. Carvana buy cars mostly from the public. You take a picture of your license plate and you enter a few things. And it's like four questions.

43:10 And they'll give you a price. You can exercise it or not, you have seven days. Once you do that. You can arrange that someone pick up the car, or you can d for a s for a small fee, or you can drop it off at one of their uh Hubs.

43:22 And um you know, get your money. And the transaction takes no time. Everyone gives them five stars. Doing that's hard. Right. Like what I just said, it sounds so simple, but actually being able to take a license plate. to map it to a VIN, to map all the features of the carves VIN, to then be able to figure out

43:38 Like what you think you're gonna be able to sell that car for, how much it's gonna cost to ship it, how much it's gonna cost to recondition it. and be able to work out from all that therefore what you think you're gonna be able to make on the car and then to

43:52 figure out what you want to offer in order to maximize pr the profits like from this lead. Um You know, and to do it all. Like you know, for every car on the road, like all the time across the country, right? It's like what then

44:06 Carvana onza. Real estate footprint. The real estate footprint consists of Larger inspection reconditioning centers, these are very think very big facilities that can recondition up to you know forty thousand cars a year with you know six thousand, seven thousand, eight thousand cars in the parking lot, which is a lot of cars. Then there's local points of presence like what they call hubs. And those hubs would be you know, there's one in um in Fairfield, Connecticut. Um

44:27 Small. um facilities that Originally were sort of purely Um uh non consumer facing. Now they've modified them to be somewhat consumer facing, but they're you know, they're

44:38 Not very big. Um And And so y the cars at the hub. The hub is connected to the IRC Let's see you have the car picked up. It will

44:50 They'll pick the car up. They'll bring it back to the to the hub. From there, that hub is connected to the IRC. Via logistics on a nine car hauler. those IRCs are then connected to each other. via um logistics um

45:04 on nine car haulers and What that does. is it's built a hub and spoke logistics system. Ex it's it's like FedEx or something. The sort of insight there, which Ernie had Was i if you wanted historically if you wanted to ship cars It was very slow and expensive.

45:19 And the reason is that sort of the amount of car shipping happening between Fairfield, Connecticut and uh you know, uh Alabama and someplace in Alabama. Um I don't know. Mobile. Mobile element. It's just no volume. And so the car your point to point system doesn't work. So what they've done in their in their in their hub and spoke system is they've collapsed down um all this volume onto like relatively narrow routes. Most of the shipping is happening between IRCs. It's relatively

45:47 small number of them and they're sort of sparsely connected. And what that allows them to do is to move trucks continuously back and forth. loaded with cars between these IRCs and you can think about them as train tracks where the the vehicles are moving, um can move continuously between these spots. And what that does is, you know, if a truck travels, you know, forty miles an hour on average

46:06 And you know, costs like, you know, s three dollars a mile to travel, then you can work out what the cost on a nine car hauler, how fast cars can travel and what the cost is actually not that high. Um And so Um But running a hub and spoke logistics n network like this, one, it's hard. Right? Like logistic like

46:23 Building a logistics system requires a lot of density, requires a lot of scale. Um, there's also a lot of technology to it, recruiting drivers, you know, there's there's a lot. Um but that's the next piece of the system. With that the the car come to an IRC. And at that IRC it'll get reconditioned. And reconditioning a car.

46:41 In an IRC. is a challenging thing. Which dents do you repair? How do you repair it? Um And you can think about a reconditioning center. Has a bunch of different stations.

46:51 that do a bunch of different work that's relatively homogenous. So Changing tires. Inspecting. Um

46:58 Paintless tent repair. Painting, whatever the thing may be. A car. Starts out with a mix of work that has to be done to it. That has to be ascertained in an inspection and then the car is gonna be routed.

47:09 through the IRC to different stations. And then come out. and be imaged and put on the website. Some time later, it sells. They take the car. Nine car hauler to the hub. Now you'll see this is beautifully balanced.

47:21 Cards are coming back from the hub. They're also going out to the hub. Sure. Right. So the car will go from the IRC it's at to the IRC closest to the customer along basically the rails. And then it will go from the IRC to the hub and then from the hub it'll be delivered on the single car hauler or picked up. um by the consumer. That's in physical system. There's also um

47:39 Finance. If you go on their site and you enter information Um Instead of searching by price, you can search every car by payment. So you can adjust the number of the months. Your down payment.

47:52 Um And you can see each payment for each car to the penny. Based on your individual credit score. And this isn't an estimate, this is this is exactly what it is. In order to do this Carvana has a fully vertigrated v vertically integrated financing stack.

48:05 Um, so they're essentially underwriting you for every loan combination for every car in real time, and then they're Taking that. Uh and they're making it available to you through this like cool widget. Um To this day.

48:18 As far as I'm aware, no one's Like replicated. This capability. Um, in order to do it you need to be vertically integrated into Prime lending. Subprime lending. It just turns out that like no one else is and

48:30 It's also very hard to get into the you know, to do these businesses well. There's title and registration, obviously you've got customer service. The thing about this business is you have to remember that like this is all great, but things go wrong. Then you have to deal with like all the corn many, many corner cases that can come up. Um if you want to entertain yourself. Like go read the one star reviews at Carvana. It's like, well, I was moving and I ordered the car when I lived in Florida, but I needed it delivered to North Carolina. And you know, then like there was a hurricane and as a consequence it was late, but then like there's problems with a title and you're like Oh my God. That's kinda the the s how the system works. Now in in in that whole system, like let's identify some economies of like scale.

49:08 Inventory. Turns out selection matters. Matters a lot. And There's if you think about all the makes, models, trims, years of cars uh as well as mileage, like the selection space is massive. Massive. And Carbana's coverage, even at its size, is is still relatively small.

49:24 And so as a consequence Um Conversions go up as selection goes up and Um so selection's like big economy scale. Everything store. Yeah. Um logistics.

49:34 The Cost of running logistics system. Um You know, you can think about moving these trucks like a fixed cost. And if you wanna provide complete connectivity, move cars quickly, it turns out conversion speeds matter a lot. And by the way, when you think about the inventory space, inventory nearer to customers increases conversion because you can get to them faster. Then you can think about these IRCs. These are very large facilities. It turns out that

49:54 um run well, you can recondition cars for a lot less. Money. and time because cars are depreciating assets. If you have like a big facility. So like if I have

50:05 Oh a traditional Dealership. The car comes in and like one guy does all the one guy or gal does all the repairs. But the problem is that person isn't necessarily the right level of like they're they're overqualified for a lot of the things they're gonna do on the car.

50:19 Um, and they have to change tasks. And th that slows you down. If you're a Carvana You can have people who are very entry level to do the cleaning and the oil changes and the tire changes, and you can have advanced mechanics do just like a very narrow subset of stuff. And you can have people at like specialized stations where like this is what they're doing. And so they can be more efficient. Now to do that though, you have to efficiently route the cars through the system and all the rest. Um also the dealership is in like an expensive place and so you have less overhead. So like these are just examples of places, but there's economies of scale to doing that as well as enormous like process power, like economies of scale.

50:53 Underwriting. uh loans is, you know, uh obviously a a uh a you know an endeavor where you you learn the way to do this over time. You connect all these data sources, you you learn how to predict defaults, you then get data over years that you cycles back into it. Title registration, like there's software that's built to run all this. So this is this is like there's enormous economies of of scale. Um

51:15 and skill in terms of like being able to do all these things. And then you know, I I I I would be really remiss if I didn't mention trust. Um consumers when they buy a car, it's an act of uh side once in the year it's act of trust. Um we can talk about how Carvana grows. Um And it was one of the things that kind of went wrong in two thousand twenty two, but like getting Carvana

51:34 Is able to get people to buy cars. because there's been an enormous amount of word of mouth built up over many years of delivering great experiences. And You know, you can't buy that. You have to build it up over time. That's trust on the on the buying side. There's also trust on the selling side, although less. Um there's also trust uh in the financing business, right? You make these loans then you sell them. And the people who buy these loans have to trust that you're making these loans to spec and that the loans are gonna perform kind of as advertised. Subject to economic conditions. The other thing about this business is if you think about a car transaction, it's a

52:06 It's a whole series of things that have to go right. And Um if you get any one of them wrong. you you're gonna lose money on the transaction and your customers gonna be miserable. And this is the economies of scope, right? So this is the idea that you have to put this whole portfolio of things together and you have to get'em all right. And you have to get'em all right every time. And

52:22 Um you know, this is w it's this combination of things. And If i if if an anything I've said sounds easy, uh it's because I haven't described it right. Like it's so hard. Um And And so that's why everyone who's tried to build this business besides Carvana has failed, and that's why it's taken Carvana, you know, over 10 years and 10 billion dollars. Um

52:41 to get, you know, where it is and You know, outside the U outside the US there were other people trying to copy Carvana in other markets and You know, some of them are doing okay. A lot of them have failed, um, but none of them are doing really great. And and it's just the bottom line is that it i it is so hard. Just to pause on the on just like the concept of combining Skill, scope trust. you know, sc traditional economies of scale.

53:04 Yeah. Is there another business that comes to mind? Maybe it's Amazon. That you think captures all these same things that has interested you through time just to like draw a comparative point for people. I actually love the comparison Amazon, but you know there's a famous there's a b video I saw once I don't famous is but I love it. Where Jeff Bezos is describing why books is the first best place t for an internet business. And he talks about how the selection matters so much, and then he talks about how you can get the books and you can ship the books and and um

53:32 You know, um And you can pay for the people can pay for the books. Well Imagine if I I actually think that from a consumer's perspective Used cars.

53:41 is just as great as books. The selection space is infinite, selection matters an enormous amount. Um, also what I described with Carvana system is a lower cost operate system than the traditional dealership system. It's a better experience. But the thing about books. is it's really easy to do. Imagine if you had to start Amazon.

53:59 But You couldn't just call it the manufacturer. and get books. You had to Manufacturing.

54:05 And Uh imagine if, you know, you couldn't just Call FedEx and have them ship the books. You had to build basically FedEx. And imagine if you couldn't just like accept MasterCard.

54:17 Right. You had to build a financing platform. And Lord knows you can't just sell the person the book. You have to do title and registration, right, and all that. And you know, with books, the stakes really just aren't that high.

54:31 Um and so people are wanting to try it. And if it doesn't go so well. You know, they're disappointed, but it's okay. Car second largest purchase of your life. And and so

54:39 Uh, you can imagine how like that is also really uh challenging. Um And And so in the sort of fulfillment sense of it.

54:49 Uh I think, you know, used vehicles are probably the hardest. Uh thing. um to build. And uh but the analogy to to to Amazon actually I think is uh is apt. I've interviewed Ernie a few times. I'll you know, my bias is that I I I think very highly of Ernie and he's a much maligned figure because of everything that's gone on with Carvana, and it's just it it's so fascinating to me to hear all the different like Rashimon style parts of the story. So

55:14 Yeah, I'll I'll put out there that I think very highly of Ernie. Based on what I've known, I haven't studied the business like you at all. I don't own Carvana, like I don't have a dog in this hunt financially. But I think it's important to say a little bit about management. And maybe it's also an excuse, since I haven't asked you yet, to talk about how you think about management as it relates to certain businesses. And where you fall on the spectrum of like leadership is everything to like the Buffett ham sandwich, you know, concept of a business that's so good that a ham sandwich could run it'cause someday someone will or one will.

55:44 Um, so talk about Ernie, the management team behind Car the team behind Carvana and kind of your philosophy on management and investing. If you'd asked me five years ago. I would have put myself firmly in the Let's focus on the business. I don't think I bring much advantage. It's been an exciting five years.

56:02 Uh And in that time, one of the things that's come out is the businesses where if you'd ask me, Okay, Cliff, I get it, you don't care. But like rank them anyway. And I'd ranked them. the teams that I was involved with. I would like my that ranking would have perfectly predicted. how how like things did relative to my expectations at the time.

56:21 So what I learned there was two things. One, it mattered. I knew it mattered, but more importantly I think I can judge it. Okay. And so now I fall.

56:29 Into the obviously I care predominantly about the business and the price. Like that is in the end the right thing. A great team with a terrible business is is gonna be a channel, it's gonna be a slog. There's just no two ways about it. Um By the way, just to go back to your contained versus uncontained point, like that's another idea. There are businesses where There's a new problem to solve.

56:48 Every six to twelve months. And it through up a never ending series of hard problems. You know, so you want businesses so a contained one would be one where like Once it's it's a said it and forget it's the wrong term, but there's like an obvious like Would you like to sell more cars?

57:01 Yes, yes, I'd like to um Okay, so now going back to management. So so I don't necessarily think I'm gonna ever get to a point where like these this team is great. I don't care that this is a business that will throw up perpetually throw up bad pr hard problems. I'll buy it anyway. Um but I do think that I've now come to understand that like that I can judge it and that um there that management matters a lot, so it gets weighted into my thinking in a way it wasn't before.

57:25 For it's worth, I'll add to you how I judge it. I meeting with a management team is great. It turns out all the C people who become CEOs Figure out how to sound great. Um You know, I learn a little bit, but uh and I certainly listen to them talk in public and you can definitely

57:39 pick up over time who kind of is mm making what seem like sound business judgments and giving good reasons for them and people who, you know, aren't. That being said The really good way to do it I find is I talk talk to former employees. And I'm certainly interested I'm using that to learn about the company, learn about how it works, how do you buy things, how do you sell things, blah, blah, blah.

57:58 Um but I'm also just assessing them. And You know, a company which spits off People who worked there for ten years, left on good terms, who you just said like, I don't get it. Like this guy's an idiot. Um

58:10 That says something about, you know, the caliber of people in the organization. And the human capital exhaust. is kind of indicative of what's inside. Um And conversely, you know, when you when you find it talk to

58:22 Yeah, go talk to ten former employees who spend at least five years at Capital One. They'll blow your mind. That tells you something about what's going on in Capital One. Um And and so um

58:34 I find that that's really the best approach. Um Asked Ernie. I think Um You know at the risk of

58:42 Um Inflating his ego. I I think that um Some day people will con compare Jeff Bezos Ernie Garcia.

58:50 Not the other way around. Um he's extraordinary, right? This business is incredibly difficult, as I've tried to emphasize so many times. There's a reason why They've succeeded. Where

59:05 you know, nobody else in the world. has been able to Um Yeah, succeed. And I'll also add that like I I'm aware obviously of

59:15 His dad's history, you know, with the savings and loan crisis and um You know, this is um Yeah, I think it was either a twenty or fifty dollar fine that he paid as like a late twenties something, and this is, by the way, his dad, not him, and You know, this is um fifty years ago or forty years ago, it's just Uh you know, it it is um it is wild to me that people then take What his dad. Yeah, people take that fact, they're like, Therefore this company, you know, is a fraud. And it's like, Oh my god, like this is the you know, the guy was a billionaire. What was his plan to like be make a few billion more but send everyone he loves to prison? Like this makes no sense to me. If you just

59:52 Spend any time dealing with talking to people who've dealt with The Garcias over The thirty five years that You know, since Yeah.

1:00:01 Yeah. Guy. you know, m made a mistake. Which You know, if you actually go through the details of it, it's not obvious he did anything super wrong but like whatever, he got m caught up in stuff. Everyone speaks incredibly highly of them. They've done nothing but behave totally ethically. If you go through the experience that the company had in twenty twenty two or whatever, like there there were plenty of opportunities for them to hurt us.

1:00:21 as third party shareholders and they haven't and you know So I I I mean, Ernie does a great job of just tuning all that nonsense out. As to like what he does well, he's incredibly smart. Uh he's assembled the team around him that are incredibly smart. And Um he does a great job of thinking about things.

1:00:39 in a variety of perspectives that are very um w you know, why. So on the one hand, he'll analytically explain to you how As an outside investor you could look at Carmax and try to make a sensible guess at what Carvana sees as it's price, elasticity demand. Which is a fairly analytical thing.

1:00:55 Um And then, you know, if we were to ask him a question about Yeah, once upon a time I s you Adjust your pricing to kind of like compete more aggressively with room. And he basically sort of described how

1:01:06 If he made competing with Room something that mattered, then suddenly instead of focusing on the customer Everyone in the organization would be sort of when Vroom wins, we lose. When Vroom loses, we win. We're not focused on the cluster anymore. And he was thinking about the second and third order like social effects on his Culture um And he's very deliberate about things like that. All right. Now we get to talk about the tough part of the whole story and experience.

1:01:29 What went wrong with the business. Just tell us the whole story. Like what what it was like to be one of the larger investors in the business as this was going wrong. What did you do How did you second guess yourself? What was the psychology like? Like I'm interested in all aspects of it. It's worth pointing out where the company is today because Through most of the company's history.

1:01:49 It was obvious that Carvana could grow. Margins, however, were improving, but there was always debate around the economics of the business. And I po I said earlier that this is a more efficient system. Um, and for a long time that was a matter of conjecture. I could sort of work out unit economics and how much does it cost to ship a car a mile and blah blah blah, but like It didn't You know, we couldn't see it like on the

1:02:09 Press release. Um As of now. uh the company's margins Ebada margins and they have very little Stock based comp and relatively little capex.

1:02:20 Um are ten and a half you know, percentage and and rising. Um And they'll probably get to the

1:02:28 Thirteen, fourteen. Ish percent range. Um, based on what they've said. And there's nothing no reason to doubt it. Um And

1:02:36 the average car dealerships about four and a half. So they make of the order of two and a half to three acts. the margins of their competitors. And we Track every car.

1:02:47 That they sell and we compare it. To similar cars sold by Carmax, but compare it to other market indices. And we believe that they sell cars. Um of the order of sort of five, six hundred dollars.

1:02:58 Cheaper doing that. Um now in fairness they charge a bit more on financing, but Um they st it's still cheaper overall. Um And they offer

1:03:08 obviously far superior. um experience Far spirit selection and they're growing. Um yeah, there's high frequency data that's published and so recently they've been sort of growing forty five to fifty percent um year over year. And so the idea that they're putting

1:03:24 All these things together. At this point you no longer need to Um So speculate. About the

1:03:31 power of the model. It's also a model that gets better as it gets bigger, right? So as Time goes on, the selection gets Better. And so I should make a note here. a traditional car dealership's a monolithic unit, certain number of cars. Even if you think about like car gurus, it's a certain number of dealerships in your area that collectively have some number of cars. Carvana's pooled national inventory.

1:03:50 is m like there are more cars available on Carvana's website right now than there are for us right now sitting here in the entire state of Connecticut from all the other dealerships. Right. Right. And that's only gonna improve brand, also process efficiency. They still have a long way to go. Um in terms of um Yeah. Uh fixed cost leverage is a long way to go. Um so it this is a business that gets better.

1:04:11 As it gets bigger and it's already so much better. than its rivals. And its rivals, of course, is very challenging. um to meaningfully update the processes in a car dealership. It's just not a very scaled organization, how much technology can they really bring to pair, all the rest. I thought I'd just final finish finish that that that story. The company grows the company had enormous amounts of demand in twenty twenty one. Just Put a car on the side. Car disappeared.

1:04:34 And they were trying in o to overcome the challenges of the pandemic. To build a Supply. to grow to grow tremendously into twenty twenty two. Um

1:04:44 They sold something on the order of four hundred twenty five thousand cars in twenty twenty one. they had ambitions of doubling or more. In twenty twenty two. To do that over the course of all twenty one they were

1:04:54 Hiring and hiring. As it would work out. Demand collapsed. And Um they discovered all manner of operational problems that they were having. And it made twenty twenty two really challenging. Again, when you tell a story like this, you have the benefit of everything you learn during the whole period and everything you learn after, and all the time to synthesize it and sit calmly later on and figure it all out. All of this happened in a cloud of dust with incomplete data. So it's all gonna sound so neat and put together and understood. And there were definitely pieces of this that I had nailed and there were pieces of it that I learned later.

1:05:26 But I just wanna Yeah, yeah. Yeah, this was real life. What happened was um at least my understanding of it now was a few things. One is they had a bunch of latent operational issues we can walk through. Another was that There was a just a very unusual used vehicle market, which led to the used vehicle market being significantly smaller than normal. In twenty two, and it still hasn't fully recovered. It's only partially recovered. In particular, it was bad for independence, and we'll talk about that. Another was the vehicle financing market.

1:05:53 Um did totally strange things, which made life absolutely miserable, um, for them. And then of course, because because things had to be the way they were, they bought Odessa, they added a bunch of debt, the capital markets were close to them, all the rest, which is another set of external facts. So let's Just in terms of Um Let's just do uh uh internal operational stuff. It's it's interesting.

1:06:13 The company Had been growing. Year after year. Um Circa hundred percent.

1:06:19 And when you're doing something as complicated as what Carvana is doing, growing as fast as Carvana is growing. Things were always going wrong. And I would always hear kind of some horror story or another. out of some part of the organization. But you know, you look at the overall rate star ratings, they had great reviews. It was like well You know.

1:06:34 It's big organization, they're growing really fast. But think about it, like if you're doubling every year, less than half of your employees on average have been with you for like less than a year. Right. This is wow. They also had prior deliberately prioritized speed and growth. over necessarily slowing down and like really hardening their processes. And the reason for this, uh, was that they viewed, you know, this is a scale business.

1:06:54 And there was risk that if they weren't first to scale, that they would be disadvantaged over time. And at the time, their competitors hadn't failed yet. They grew a lot of their um operations were more mediated by like what I call it said tribal knowledge and culture. And so Silly example, but but a real one. There's a role at the IRC Inspection of reconditioning center for receiving

1:07:14 Trucks? Taking the cars off. The trucks. putting different cars on the trucks. And sending the trucks on their merry way.

1:07:22 Sounds simple enough, but it's a lot of trucks. It's a lot of cars. And there's this you know, question of like where do you put the cars and uh what order do you put them on the trucks in and Um by the way, if one of them doesn't start, what do you do? And um how do you staff this operation? Because it turns out Fetching a car is you know, in a six thousand car car parking lot is like

1:07:42 It's not like walking down the street and getting a car, right? And You know, all of these Things and you know, it's if someone's done it well and sort of smart and they can kind of figure it out and they can do a pretty decent job. Um

1:07:54 But As you scale. You know, putting people into roles who you know, may not n be as good at this and Um

1:08:03 In twenty twenty one, in retrospect. For the first time, the business kind of in part because of Covid, in part because of the growth, the businesses kind of reach outstripped its grasp from a process maturity perspective. Now There's a software system.

1:08:17 And the software system tells you like this is how many people you need at these times of the day. And this is where you're gonna put the cars. And this here are your here's your protocols. You're gonna have a starter, like a jumper. You're gonna keep it here, right? And like this is how you do this. And it turns out that that this pro set of protocols locally and globally optimizes better than even the best people, but also make sure that everybody so it takes the best people makes them better, and then takes everyone else and makes them almost as good as the best. Right. That software had never been written. Right,'cause this was just not a s a function that someone had ever bought because think about how hard that's in and of itself what I just described is a fairly meaningful like project, right? Before twenty eighteen

1:08:55 Before twenty nineteen, I should say, the company But almost all of its cars at auction. So the flow of cars was auction to IRC. To customers. Starting in twenty nineteen, the company began buying cars in the public, and this has been a wild successful thing, they make a lot more money doing this.

1:09:09 But Turns out that when you do that You create the potential that if you buy more cars than your s if you have a node in your system, an IRC. It's possible, unless you you've thought about this, for cars to accumulate at a node. You can be buying more cars than you're than are leaving that system. Or the more cars may be transiting in than are leaving.

1:09:27 And if you have finite amounts of parking. Um this can create Congestion. And what had happened what interestingly what happened for the first time in twenty twenty one or so. was the buying cars pro process

1:09:39 became really successful and they were buying more cars. For the first time they were buying and so now suddenly they had this shift in this in the logistics system, sort of re reduce the flip the direction of debt flow. This is fine. You just you just need to build a bunch of things to change it, but like this is an example of the sort of thing that was happening all the same time. A lot of this was covered up in twenty one because they were hiring to beat the band. And so when you have excess staffing it kinda covers up a lot of blemishes. As you get into the end of twenty one, the first indication that something was wrong.

1:10:06 was you know slightly weak November. And then I'm a crime happy. their whole system became a disaster. And the reason is that if you think about Pro a car is like a series of events that have to happen one after the other.

1:10:19 If in let's say you have a truck and the truck goes out to two hundred fifty miles, switches with the driver and comes back. Well if that driver calls in sick, Like how does that truck route continue? Okay, so now you have nine cars that just got stranded somewhere. Right, how do you get those cars? moving again. And now this happens w all the time. But like if this happens a lot.

1:10:38 You overwhelm your ability to like clear these things, and now you have cars piling up. in basically giant traffic gyms throughout their whole system. And then your delivery times that you're promising on your website have to get way extended because you just can't so your sales come way down. Which if you haven't had a system before where you could accidentally buy more cars and you're selling because that's never come up, now suddenly you have a problem where like you're buying cars, you're accumulating the system, you know and and you don't have your your flows to your logistics system are haven't been optimized for this. So the cars are piling up everywhere. You're sort of shuttle you're shuttling cars. This is what the system looked like. in you know January of twenty twenty two.

1:11:14 It was Total wreck. Um And They were trying to fix it and, you know, it took'em

1:11:22 Like took him th three, six months or whatever to fix this. But the important fact Is that it obscured. Demand, which was falling off a cliff. Underlying demand was falling off a cliff. And it meant that

1:11:35 they were still behaving in February. like demand was as it had been in September. Even though By that point. In retrospect.

1:11:45 Demand had materially declined. Um They bought Odessa using tech. Sure. So Edessa Um is a is an is a traditional auction business. So Um

1:11:59 Take a large lot. People bring Um car dealerships, fleets, they bring cars. And they hold in person auctions you drive down the line, people bit. The in person auction business will have a long tail to it, but it's a eventually a decaying business over time.

1:12:13 But what they got with Edessa. Is Fifty four, I believe. very large centrally located properties. on which they can build an uh IRCs and store facilities. One of the challenges in their business

1:12:26 had been that you it turns out they they worked out that they need that they it is better for them to have large IRCs located relatively close to the customer because high fast delivery speeds are good, access to labor pools is good. And those are m more important than kind of the benefits of being far away.

1:12:42 Um But it turns out that build it getting two hundred acres, you know, a d like zoned for um, you know, auto industrial in like, you know, within ten miles of downtown Boston. is difficult, to say the least. Turns out this is the sort of property that Edessa had.

1:12:58 And so they basically was it they bought it for the commercial real estate. It came with the auction business, which has a lot of benefits to them as well. Um And Uh makes all the sense in the world. It's been it i in retrospect, it's been a huge hum run. Um but you know, they bought it with all that, they bought it in February of twenty two. After if you read the proxy or whatever, they've been talking for years.

1:13:19 Um It just to happen the timing. Was bad. So what happens is you get to March and they sort of realize Daddy They have a demand problem.

1:13:28 And I'll I haven't really addressed what was going on the cause of the member. So There were as far as I as mine my best understanding is there were three things. Although at the time I pretty much only sort of knew about Two of them and it's worth pointing out that all of these things, they kind of got worse and worse and worse and worse and worse over time. So you thought you'd identified it and then like six months later it was like worse. So the first there were chip shortages.

1:13:51 During twenty twenty and twenty one. Which caused manufacturing shortages and caused used car prices to rise. You think about the used car business as facilitating people swapping cars. But what happens oftentimes when people are swapping cars is they're is they're upgrading. And so if prices are higher

1:14:06 Um The cost of upgrading is greater. And that tends to reduce people's propensity to swap cars. As a consequence of that, the used car industry, which is typically about forty to forty two million cars a year. Um

1:14:17 It was about thirty nine and change in twenty twenty one. Felt it about thirty Six million cars um Uh, or thirty four million cars. I think it got us low thirty four annualized and so uh thirty six for the year or something like that. I'm I met at my stats tell it off. But it fell.

1:14:32 And this doesn't seem like a huge negative effect, but it was bigger than you might realize because What happened was franchise dealerships, I think you're for the Toyota dealership. When a lease vehicles returned. Unless the customer exercises their buyout.

1:14:47 the landing dealership, the one you return it to. gets the car at the at a price that's been set at the time the lease was created. And so when car prices rise. If the least returning person, of course dealership has no incentive to tell them that they have the right to buy the car.

1:15:02 Um doesn't know this, which many people haven't read the five print of their leases. And they return the car. The dealership gets basically a really cheap car. What this turns into is a big subsidy for franchise dealerships. And

1:15:14 There was s dealerships would then turn around and sell this car would look to them like a big profit. But was actually really cheap relative to wholesale prices. But what that's doing is putting enormous pressure on non franchise dealerships who don't have access to the super cheap Inventor. Oh, by the way, that's us. We're a non franchise dealership. Um

1:15:31 And and so the best example to understand the magnitude of this is Carmax. So if Carmax in the great recession. Carmax. briefly saw Nearly a twenty percent decline.

1:15:42 in in comp store sales. for like a few months and then it was sort of down like back up to like low level there. Carmax's comp store sales were down twenty percent for the whole year. in twenty twenty two. And they by the way, like Still haven't recovered. Um I think they've sort of clawed half that back. The reason was in part because cars are more expensive and that and interest rates also made the cars more expensive.

1:16:01 And the other thing was this weird effect where Franchise dealerships. were being unusuative. Um Because they have access to this unusual.

1:16:10 uh access source of cheap supply. So as a starting point, you had the biggest decline Since the Great Recession, including the Great Recession. Bigger than the Great Recession. um in the number of used transactions at a independent dealership, which is a rough place to start.

1:16:25 To make matters worse. Um So that was the the used vehicle market, Carvana was facing that. The second thing that happened, when interest rates rose. The sort of naive thing you would think, which certainly what I thought.

1:16:37 was it wouldn't matter all that much to Carvana, right? Okay, so interest rates will rise, that could affect the overall market a little bit, it it it'll probably affect car prices a bit, so does the depreciation curve of a car But in the end, people's propensity to sort of swap cars shouldn't change that much. And yes, to Carvana's financing business, you know, that they just finance the spread off of rates. So whether rates are, you know, one or or four, sort of shouldn't really matter that much. And that's totally correct. And that's exactly where we got to. But there was a catch. You see what I did now? What

1:17:11 This is where the ninety nine percent part comes from. Um You see what I didn't know was that when rates would go up Okay. The so the auto finance market's made up of a bunch of credit unions and small banks and then a bunch of larger banks who compete and then independents like Car like Carvana um who compete. The credit unions.

1:17:29 price their loans I mean it depends on the credit union, but like off of deposit rates, or off of Fed funds, or Off of a You know a Napkin. The two year went up. And Fed funds were low and deposit rates were low.

1:17:42 And the credit unions and and and when I say the two year it's worth pointing out the average duration of a pool of auto loans, including prepayments and defaults, is about is about two years. So it's a two year is a reasonable proxy for the appropriate kind of risk free benchmark. So in tw in late twenty one as the two year goes racing up as people expect Fed funds to rise. All these competitors. Just

1:18:04 didn't raise rates. Because because they didn't. Uh you know, there's no there's no like academic reason why they shouldn't have. They just sort of didn't. Um and then even as the Fed f as Fed funds began to rise, they were super slow and you know, I I remember there was a long period of time where like Navy Federal was offering Carlons.

1:18:22 at a discount to Fed funds to to the treasury of the comparable duration. And uh this is a big problem for us. Like this is funny Except for the fact that we have to compete with this every day. Industry wide. Autolone spreads. By late twenty twenty two. We're at the lowest levels.

1:18:39 in the whole time series I have going back to before the crisis before the the financial crisis in two thousand and and eight And Was a wild time for that to be the case because every other consumer credit spread was wide for a whole bunch of really good reasons. And the underlying autocollateral was the most kind of overpriced it would ever be. So the auto loans should have been really expensive. um on a spread basis, but instead they were at their all time tights. And the reason was that they were just all these dumb competitors. And then you'd call these you know, you you like we did research into what was going on. Um and it you know, be like well

1:19:11 Our asset liability management committee meets like once a quarter. And then we try not to raise rates more than like twenty-five BIPs at a time. And you just like all the and then it takes us th 60 days to like implement the rate changes because our systems, blah, blah, blah. And you're just like, but guys, like It's kinda like when oil goes negative. Like this is not supposed to happen. Right. Um This is definitely not in the textbook. But so the problem so Carmax, they just ate it. They just originated at low spreads, and then the next year, uh and even to somewhat it's getting better now, but it if you look at their financials, you could see they paid for it a year or two later, but they they ate it at the time. They they they sacrificed a bit of the future for the present. Carvana was not in that position, right? Like we you know, the company needed the money. Um so Carvana had to price to to reality. And um

1:19:57 that meant the Carvana was in the market with loans that were like meaningfully more expensive to competitors. Which Did not help. Um and to just put this in context, Capital One also priced to reality because they're smart, they saw their auto originations fall fifty five zero. Percent.

1:20:13 Um so Carvana's dealing with both of those things. The other thing which I think is more subtle, but I also think is true. Um has to do with with early adopters and To explain this, I need to go back and explain a little about how Carvana grows. Um, and this is one of these this is the part that I was least aware of at the time, but I've done more work on and I've I've

1:20:31 I've come to understand a lot better. Carvana, you know, if you think about a a market like Connecticut, Carvana has I don't know exactly how big Connecticut's, you know, us the fleet total used vehicle inventory is, but let's say that Carvana has something like Three quarters of all the inventory, including Carvana's inventory, in the state of Connecticut, just to make up a number. One might ask why we don't have like three quarters of the sales. Um 'Cause they probably have I don't I don't know, can I can I guess I have my head with like one percent. Something like that. And so, you know, the first thing you might do is throw out

1:21:00 Okay, well there's some cars they have there in California, there's shipping fees, there's delays, like let's only look at cars that are nearby and so you cut that inventory and Down. And then you might say, Well, let's throw out people who haven't heard of Carvana. Turns out they have like eighty percent awareness, but we'll throw out some people. Okay, let's reduce some half of people say they don't want to buy a car online right now, although the number's gradually falling, but like let's throw out, you know, that half. you're still left with a number that's way higher than where they are. So like where are the sales? And also weird is okay, you go into a market

1:21:28 You have all this huge inventory, this great this great product. Why does it take all you know, why does why do sales kind of ramp like this as opposed to just like step function? Like what like what is what is delaying people adopting this? I didn't have a great answer for that for a long time, but I I kinda thought it was word of mouth. I was kinda like, you know, I think it just takes time, word of mouth. And but I and and my evidence for that was that if you surveyed um people who bought from Carvon Mass and if they recommended it to people, I think it's something like four they would recommend it to four people on average, which is an enormous like Yeah. No viral thing.

1:21:57 Yeah. And so that's where I'd left it. Um but as you know In the sort of wreckage of sort of trying to figure all this stuff out, you know. I started thinking harder about this.

1:22:07 And it occurred to me that I'd I'd never done two sort of two things which seem obvious in retrospect. One one was I'd never asked people how important this word of mouth was to their decision to buy from Carvana. So we added to the survey something to the effect of um Uh you know. Um Like d did you get a recommendation from a friend or family member, how important was it? And we found that seventy percent of people said that it was either somewhat or very important in their choice to buy from Carvana, therefore only a third of people

1:22:32 We're buying from Carvana without um the recommendation of a friend or family member. And You know, once I saw that, that got me thinking as I like I I wonder what's going on with this third of people. You know who are buying without the recommendation. So that convinced me there's virality, right? Like, you know

1:22:46 But what's going on with these people who are who are buying without the recommendation of a friend and family member. And my theory was well they're early adopters. So we We survey people who bought from Carvana, we ask them questions like Do you have a Robin Hood account?

1:22:58 Have you ever owned like Bitcoin? Um, you know, do you do online grocery shopping? And the answer is like, of course I do all these things. Like, you know the all yes, yes, yes. The way higher than non-carvana buyers. So now I can say, look, just Many people won't do it. Unless someone says, Okay, some people will just give it a plunge. Right. And those p and in general, the more early adopterish you are, the less nudging you need from

1:23:18 relations to do it. And that's what drives the the the cur growth curve. It also ra gets us back to twenty twenty two. You see Back in twenty one. Let's say that you were the sort of person who had a Robinhood account and you might have speculated in some spacs and some cryptocurrencies. You might have had a windfall. And you might have thought, you know, look, this isn't like billions of dollars. This is

1:23:40 Thousands of dollars, tens of thousands of dollars maybe, you might have thought that given your windfall, you were gonna go buy a car. And you might have thought to yourself Um since you're the sort of person who owns like spacs and cryptocurrencies and shops online.

1:23:53 Obviously the place you were gonna buy a car was Carvana. Now you may or may not have actually bought that car at Carvana, because you know Carvana was sold out and you might not get what you wanted, you might have gone somewhere else. But here's the deal. You pulled your demand forward. So from Carvana's perspective, even if this is like Carvana in tw tw twenty Um twenty one had like one percent share.

1:24:10 So even if this is point three percent of the market, this is does not have to be a lot of the market for Carvana to feel this enormous demand pull, which they definitely saw. And It also means that You roll forward, you're and all these people are in the exact opposite position. They've just s ha had the opposite of a windfall. Uh whatever you

1:24:27 call that a sort of unexpected little destination. Yes. And the year before they all just bought a car. So turns out From Carvana's perspective, although none of us sort of realized it at the time, this isn't great. So I think that was a third contributor that was unique to Carvana. So you have these three you've got the overall market is down. More than the great recession. You've got

1:24:47 the tightest auto credit spreads ever and you can't match. And you have this unique thing where you kind of all of your sort of bleeding edge customers. Bought last year. And you just bought this big asset with a bunch of debt. And you just bought this big asset with a bunch of debt.

1:25:01 And it turns out that you're learning that like a bunch of your processes. Like eventually I I always sort of thought that Carvana would have bumps in the road operationally, like I sort of but you turns out they're all now. Yeah. And That None of that was totally obvious at the time. There were like bits and pieces. You're kind of learning as you go. The rate stuff was pretty clear. The market stuff was pretty clear. Um the stuff I described, you know, w like but But

1:25:25 All this data comes at a lag, like there's just a bunch of like it was all in a cloud of of uncertainty. And then W you do what Carvana has to do. Right, which is you start cutting. And this is a bit one of the things that's glorious about this business is that as it gets bigger, it gets better.

1:25:41 And size begets size it's just a virtuous cycle. But here's the thing. Yeah. What When you cut that. A lot.

1:25:50 Because of all this like stuff. Um that all runs against you. So you slash advertising, you slash slash inventory, and then out over uh external demand gets even worse and you've reduced things that drive down demand further and they were like chasing a ball down a hill. all all all year long. And

1:26:09 You know, Ernie told you the story on your podcast about kind of how they got better organizationally at being and focusing on efficiency and how they kind of learn their way into it and You know, look. The reality is is like The sort of

1:26:23 ten thousand foot telling of the story was They were okay at getting more efficient between March and November of 2022, and they got really amazing at it after November of 22. Took them six months to figure it out. That's fine. So I lived for there six months. It did not feel like I just described it. Um it felt like a very long time. Every context is by far your biggest position. By far it's my biggest position and you know didn't help that nothing else I don't seem to be doing well at the time either.

1:26:54 You know, by the time you get to the fall. Of Twenty two. Um Demand just just keeps going away.

1:27:02 And they hadn't by that point caught up on costs to like Fix it. So everyone at this point, but the There was a narrative out there that looked the problem is it doesn't work. The problem is they're trying to get the profitability, but there isn't they can't do it. If they keep cutting costs, they can't They said, Okay, in Mar in Maid it is operating operational plans. Okay, so I'm gonna re underwrite everything and say I I think they can do this. This makes sense to me.

1:27:23 And they have a lot of liquidity to make this work. fast forward six months, they've burned a lot of liquidity. They're way behind. Right. And now at that point you're like well If next year looks like this year. we're gonna run out of money kind of in thirteen, fourteen months. You'd ask

1:27:40 Well, is that gonna happen? Well No, I don't think so. I you know, like I don't think so. I think they're gonna fix it. I think the Union Economics work, and by the way, this crazy thing with the credit markets is gonna end at some point and like I'm sure Navy Federal isn't gonna give away free money forever and But then you'd say, Yeah, but of course I never thought Navy Federal would be giving away free money for like, you know, nine months. Like I thought it was gonna be like a few weeks, right, before they noticed that interest rates had changed. I never thought it'd take this long, you know, that they'd have so much trouble chasing demand that this far down. And so At that point, that was when it was the most challenging like part of the uh of the investment. Because at that point, like you did have to put on the table. Like Ernie would say, like We're we're cutting costs.

1:28:19 And we're burning cash. Um And this you know, as our costs go down, like eventually we'll be profitable. But like as to

1:28:28 the pace of that versus the cash burn. Like reasonable people could disagree as to whether like we'll get there in time. Um, which is like, you know, super reassuring. Um and then what happened was they got much faster at cutting costs. the banking system kind of Um and that really helped.

1:28:50 And sometime instead of January, February, um of twenty three Uh instead of chasing demand, uh it looked like they were um restraining it. And and we you can sort of see that'cause If you think about delivery late lead times on the website as uh as like a line.

1:29:06 you can sort of see how long the line is to get a car. And And you could see that like The units were steady, but the lines were longer. If that makes any sense. Yeah. Um And

1:29:18 And and so and then rates. You know fix themselves and the industry's seen, you know, as car prices, manufacturing improved car prices ground lower in in over time. you know, unit volumes have improved, you know, industry right a bit, although they're still pretty low. They succeeded in cutting a lot of costs and

1:29:34 You know, and and and uh got to the place they are today, which is you know, that everything um worked. Uh oh I should I forgot to mention'cause everyone thinks the whole story is they got this deal with Apollo. Um Yeah, so so basically uh

1:29:48 Along the way, one of the levers they had to pull was was putting their deb their lenders in a prisoner's dilemma. So you have multiple you have bond holders and you basically say, Look, we we might not be able to pay any of you. But like the first person who accepts less gets paid first. Um and if your documents are written, you can do that the right way. You can w written you can the right way, you can do that, and they were. Um And so they ended up negotiating this new secured

1:30:10 loan structure and people Just converted their debt into New debt, which is m safer. Uh more higher priority at a discount. Um

1:30:19 And that whole exchange happened in the in the summer of twenty three. And a lot of sort of the retelling of the story is in by virtue of that exchange, they like save the business. By that point The data I was looking at said that everything was great. Um, that was just kind of like You know, the the cherry on top'cause That saved them a ton of money in terms of interest expense and debt. Um but

1:30:39 Um It it was not by any stretch the The thing that turned the business. Can you talk about your investing decisions because I during that period, like every day is kind of a decision. Like not selling is a big decision as the information comes online. Wha what did you do? What like did you buy more? Were there constraints on how much you could buy? Would you have done anything different in hindsight? Like what were the frictions that obviously you wouldn't bought more night?

1:31:03 There are stupid questions. I would have sold all of it at the peak and bought all of it at the time. Very stupid question. I think you know what I mean. Like what were what were like the real Walk us through like the psychology, the the barriers, the like Yeah. You know, so the real hard stuff. I knew the the issues they were having Logistically in Q one. Like I could I could see it.

1:31:27 And when I say I could see it, like we look at a lot of data on the website. So I knew that Omicron was an issue. And so the The disappointing surprise was that as Omicron kind of cleared up You know, it was like I was waiting for like Some units to come out of the system. It's like why Why are they not selling any units?

1:31:41 It was kinda clear there was a problem, but then the stock had thirded. Uh and it went down the first sort of Most of that thirding. was'cause things were really bad during Omicron. But until you realize that there was a deep demand problem, that seemed like the sort of thing that happens in markets when you have a like short term operational hiccup.

1:31:58 And it was only once. Demand didn't. kind of recover that you're like, uh oh, something's wrong. But by then prices go down so much you're kinda like, Well Yeah. I didn't actually buy any the whole way down to there. Uh and the reason was just um was a big position and and I generally don't buy more of things that are over a certain amount and

1:32:17 um of the fund and I was sort of waiting, you know, like was kinda like, Well, if it gets below that I'll buy more. If it doesn't, it's fine. Um And then I bought a bit more Um after that, but by then I was s something was off, so I kinda didn't buy a lot.

1:32:32 And then they came out uh with this like operational plan and this issue in at eighty. Um and I thought, okay, like This this is this is the fix. This is it. So I bought a bunch more. And then the stock went

1:32:45 All the way down to Uh then I the the twenty. Uh and in that intervening period. Um I'd gone out to visit them again and I'd gone through the whole operational plan with them and like

1:32:56 tried to read basically do a blank sheet of paper like underwriting. And I convinced myself that this would work. Um no, Clifford, you weren't a moron, yes, the stock was down ninety five percent. But like the but like this was this was, you know, okay and and they'll be fine and it's just it's just you know, they'll be the they're gonna sort it out. Um

1:33:17 And and so Um but I realized that that point that Um There were more kind of deep operational fixes.

1:33:26 in the business. Um than I'd realized. And so my thinking at the time was like they they should be fine. I'll buy half now. And I'll buy half. when I can see it turn, and in order to see it turn

1:33:38 What I'm gonna do is is we work with a Um third party A consulting firm that Basically, um does like analytics, like you know, web scraping and uh database, you know, go get credit card data and match it and blah blah blah. And

1:33:53 Um And so we're like, Okay, we're gonna just go, like we're gonna instrument the the heck out of this in a way. Like we already were instrumenting it somewhat, but like we're really gonna turn our attention, like to focusing on instrumenting this. And we're gonna we're gonna focus on the things we think we're gonna see first when we see the turn. And when we see the turn you know, we're gonna know and maybe we'll have to pay a little more, but we're gonna get that's when we buy the second half of the stock. And that was May. So about the first half. And I think

1:34:15 Um sort of in the mid twenties was where I ended up getting kinda most of it. And So I bought some mid eighties, some in the mid twenties. Um And uh smash like hundred and eighty and mid twenties and then

1:34:26 Um And then we we start instrumenting and we start waiting. And like things just get worse and worse and worse. It's like every marginal data point was like worse. Um, I remember I uh you know things the week after Thanksgiving sales always fall off in Thanksgiving and then they always come back The week after it's always a little lower'cause of seasonality. And it was like sales fell off during Thanksgiving and then they they like just didn't

1:34:48 Just like what the heck Ha ha ha. Um, you know, you're living this in real time, right? You're just like, what the heck? Um and so I was really glad I hadn't bought the second half. But I we're at this point we have things pretty well instrumented and um

1:35:06 You know, we had all this rate data, which I hadn't had at the be in the beginning of this process. We had um Just a lot of like a lot of ways to capture Alkar's movie the just there's just a lot. So then, you know, the year ends. They put out this Poison Pell. And

1:35:20 The poison pill basically Said that Anyone who owns over five percent, which was like me and like two other people, can't buy more stock. Uh and they had very good reason to do this. The reason is they had big uh N O Ls. Uh and um

1:35:34 there's IRS rules having to do with turnover and if there'd be much too too much turnover amongst the five percent holders, then they would have destroyed the value of those NOLs'cause the Um the way they repriced the if a certain amount of turnover happens, they reprice the NOLs based on your market cap. So the market cap was super low and the NOLs could turn over and there'd been a bunch of turnovers, so there was a risk they were gonna cross some threshold. And so they put this poison pill in, which made all the sense in the world for them, but it was not particularly helpful for me. But you know, to be honest, my initial reaction was like, well that's annoying. But I wasn't planning to buy any right now anyway. Right. Um, but then as h as Faye would have it, you know, six weeks, eight weeks later, I'm looking at all of my data and like it's all green shoots. And I'm like Darn. Um, that wasn't what I said, it was a different word.

1:36:16 And Um so I'm g I I tried to reach out to see if they could make an exception, but of course, you know, they can't, all that stuff. So we ended up not being able to buy anymore. Now I should say when I made the decision to buy half now and half later. I promised myself. Then I wouldn't.

1:36:31 Beat myself up. If I say I sort of said, listen, Cliff, you're you will be a happy, successful person if you're right about this, whether you buy this other half or not. So it's all good. Um And so I'm still telling myself that. Uh So so say a little bit about the

1:36:50 the range of psychology and Maybe like how close you got to Thinking. You know. Just really qu deeply questioning yourself, like

1:36:59 You're one of these investors that typically knows when I've talked to you about companies, you've known more about the company than anyone else I've talked to about that same company. And that's always been the case with Carvana. I think that was true prior to the ninety nine decline. It's probably true today. But even despite that, even though you you knew so much, it's sort of like the Navy Federal Credit Union X factor thing, like how are you wired? Like how distraught did you get? I'll talk about how how it was super miserable and like it's pretty easy to imagine how it was super miserable.

1:37:29 Um But it is worth just making a point. Like we were not fighting the Japanese in the Pacific. Like, it sucked. You know, but right, in the realm of human experience I've lived a blessed life. I would say one way to think about it is

1:37:44 There were two versions of me. There was the me Who You spoke to. Who I think would sort of Cogently say, Well,

1:37:53 Yeah. There's this weird thing going on with rates, and it can't last forever and when it gets better, I think. This will get better. And there was the me who was laying awake at night at one AM who was just kind of like y you know, my inner voice was not being kind to me. Um

1:38:11 And I've I've always thought of myself as a person I think I am sort of naturally one of these people who has pretty good control over m his inner monologue and Um It was the first and only time in my life where I I like lost control of my my inner monologue. Like I you know, would lay awake at night, I'd never lose sleep over

1:38:29 Things like sleep. And I would lay awake at night and I would, you know fret and berate myself and It's Super hard.

1:38:38 Um to live like that, but You know, like again, like it didn't have terminal cancer, I wasn't fighting the Japanese in the Pacific. Like it was, you know, within the wrong experience. But like And You know, you've you've partners that you've let down, right? And I mean I I say you've let them down as though you've let them down. Like have you let them down? Like your view of the world is that maybe you haven't let them down. It's just like this is you know, just a very big wave.

1:39:02 Um but Like then your partners would you know, some some like you get different responses. Uh you know, some smaller partners who are no longer partners who, you know But like I had other you know

1:39:15 partners who would very sensibly and totally appropriately like want to Grill me about it, but you But that grilling didn't wasn't like mean, it was totally reasonable, but like it didn't it didn't come from a place of confidence, right? Um that you know we'll eventually get to people I'm grateful for, but there was one partner who Drove.

1:39:31 You know, a a long distance. Hunch with me. And Turns out that was the only reason they drove this long distance. And we got to lunch and This is not gonna go crazy. You know, I these meetings are haven't been going my way recently. And we sit down and he goes, Cliff

1:39:50 I'm I'm just here to express my and everyone I work with's view that you're awesome. And you know, you're going through a lot and we're just I'm just here to say, like, you're great, we support you Let us know if we can be helpful, but like we're, you know, we're toward Team Cliff. And like I didn't cry, but I was like, wow.

1:40:08 Like what a thing. And he's like, look, we're we're here for lunch. I drove here just to meet with you. Um we can talk about investing. Yeah, we can talk about everything. I don't really care. But like this is what we're and it was just like it was like wow. And so that would be the other thing. Like I was the that I still to that day, and I think it makes me a better person because I remember How that affected me. Like the other day there there's a CEO in a company I'm involved in, he's

1:40:30 Wrongly getting a lot of crap. from really dumb investors. So I wrote him like a I sent him like a hug. Like I send him like a nice like a really nice email, I think. As nice as I could write it. But it m I think it makes me a better person to rem to be on that side and to hear it and remember. So in terms of other things I'm grateful for, that would be another one. But you've you've let people down and you internalize that and There's also this weird thing that happens.

1:40:52 Where like When you own a stock this down thirty percent, you know, okay, here's what's wrong, here's the we're gonna fix it. Right, blah, blah, blah. When it's down ninety nine percent like so so you know, someone meets you and says, What's up with Carvana? And you're like, Well I'm aware.

1:41:06 that last year I thought they were gonna sell eight hundred thousand cars and they're on track to sell three hundred. And I'm also aware that last year I thought they'd make positive UBA this year and they're on track to lose uh two billion dollars. And I'm also aware that the stock is down uh ninety-nine percent. But what I'm about to say is I think things are gonna be okay. And you can see how

1:41:28 Um That makes you seem like you've lost the plot. Yeah. And there isn't a good way to like say that that doesn't make you seem Totally nuts. Cause basically The w you say all that and they're like oh you've

1:41:41 Yeah. Denial bull market baby like a you know, you know, and and so I um That was another real tricky thing was like I did there was no good way And and and there was it you know, there was

1:41:53 At some level, deep uncertainty because things had gotten bad enough where I couldn't be like, look, I'm a hunter, like this is like I couldn't be like, yes, yes, we're fine. I was like, well, you know. Look, things are way off course, right? And for reasons I never would have predicted. Um, and so so how you know, so so how do you have that meeting? Right. How do you have the 30th?

1:42:13 version of that meeting, right?'Cause you do these over and over, right? And and then of course you get you leave that meeting and you've sort of done it and then like you You drive and the stock's down another eight percent, right? And You know, you're like going to the gym and you're like, you know, particularly you know, whatever. Like you you sort of try to manage yourself and then you can't sleep. It's just It's really it was really hard. Um I'd rather not go through it again. It it's it's such an inc I'm so glad we did the like the long version of the story because

1:42:42 um whether or not people care about this specific stock. I just think like as an investing and business story, it is Very singular. Um I I said this on the early episode. We looked. 'Cause he gave me that stat about going down ninety percent is like going down twenty percent twenty times or something like that.

1:42:58 Um and each one's painful. Th there really is not another example of a company that was that big by market cap or something that went down ninety nine percent that survived and like wasn't a fraud. Like it it it like it does that's an N of one. It doesn't exist in the record. And so it's so cool to hear

1:43:16 its major investor talk through the entire thing from soup to nuts. And I guess in in conclusion, I'm curious How you think you will most approach future investment opportunities differently. As a result.

1:43:29 of having had this specific experience personally. One thing I mentioned earlier was the importance of management teams. Like the by rank things and sort of how they ultimately turned out over the full span. the management teams were wildly predictive v of my of outcomes versus my expectations. So That that's like a practical learning. Another is that in general

1:43:49 I have a new and deeper appreciation for How much harder it is. in reality to go from profitable from unprofitable to profitable? than it is on Paper.

1:44:02 And like I that you know, I I everyone like I I feel like that's kinda try, but like The the thing is you do this analysis, you're like, okay, this is you know the margins and the blah blah blah, and like it all makes sense. But like now I've seen this like play out like up close over and it's hard. Like it's so hard. It's so much harder than it looks. And so I think My

1:44:21 It's not that I won't invest in loss making companies, but like my willingness to underwrite to that is just adjusted. There's like a base rate adjustment that I'm that's more salient for me than it was before. I have like less of an interest, I should say, in investing in businesses that have narrower

1:44:40 It vanishes. Um Because like Life will throw massive curveballs at you and and like you know, there's sort of an interesting point, which is like If you'd asked me why I owned so much Carvana back when it traded for like 300 back in 2021, I would have said this is an incredibly stout business. People do not appreciate how stout this business is.

1:44:57 And In retrospect I was right. Right, like the world threw like three like once in a generation curve balls at these guys at the same time, while they were having all kinds of internal problems that won't don't happen that often. And they added debt and like, you know, whatever at the same time. And they did it.

1:45:16 Like they got through it. So it turns out it really was that stout. But it it's a but had it not been that stout, had there had these sort of advantages been You know, if if this business all grown up and super great was a five percent margin business and not a not a like a thirteen or fourteen percent margin business. I'm not sure they'd have had the wherewithal to make it. Um

1:45:35 So I so I have a greater Like my sort of just my reaction to companies where Yeah, like it works, but they're just consumer surplus isn't that much and the the vanity isn't that big, but like I if it pencils it's just kinda like Move on. Has it made you think any differently about your appetite for concentration.

1:45:53 Just just like I think of that old quote, like the only rational deployment of our ignorance is diversification. Yeah. And and that like so It's not ignorance so much as just like The Navy Federal Credit Union factor, like that stuff happens in the world and a simple way to protect against that. you know, the idiosyncratic math of like, whatever, I have fifteen positions, the idiorisk's all gone and like why not have fifteen positions instead of five? Like ha has it made you re question that stuff? Obviously th th th your portfolio is the answer to this question, so maybe the answer's no. Um but

1:46:26 It's made me re question. That. Well, I think on the on the one hand You know, it uh one of the things that I I've said to people who've asked me about this is sort of like

1:46:36 The lessons from this period are Important, but it's a teaspoon of medicine, not the whole bottle. So on the margin, I'm less interested in loss making companies. But I'm not excluding them. Yeah. On the margin, I think there's probably room to be a little more diversified. But You know, like we've had a lot of success over

1:46:56 The whole history of the finding. Up to through and including it, you know, th this period. That success was in Because of how we did things. And if I were to Have thrown out

1:47:06 the concentration over the whole life, I think we come out in a worse place. Albeit maybe with less Volatility? Um And and so

1:47:15 the lesson is yeah, like on the margin, there's room to be more diversified. Probably especially If you factor in the idea that you might have some companies that are less Like Stout.

1:47:25 Um But Uh the teaspoon of medicine, not the whole bottle. Well it's an incredible story. Um I'd love to take our remaining time and talk about the world and the future and investing kind of writ more large.

1:47:37 One of the things I think we're allowed to talk about IQ again, um, which is why I'll frame the question this way. If you think about like the world's stock of processing power in human brains. you know, some measure of the number of people with a certain amount of processing power plus like how efficiently they use that or if they use it productively or if they just play video games or something.

1:47:59 And then we think about the introduction. There's a question about the introduction of artificial intelligence into the world, which I'm curious for your take on generally. But I'm also more specifically for curio curious for your take on The introduction of intelligence. And processing power.

1:48:14 into the job of investing of like ingesting information looking for stuff that overlaps, training on past pattern recognition and what's worked in businesses historically. And if we fast forward ten years or something. Um What it's gonna be like for even a very smart

1:48:31 Human. to invest. In a world that is full. of artificial intelligence. And I'm just curious, I don't I haven't talked to you about this before.

1:48:40 Uh in in such specific terms. I'm just curious for your take on the whole thing and how you've processed watching it unfold in the last couple of years and how you think it'll affect this job. Yeah, you should you should ask someone really smart about that. And here we are. I'll tell you a few thoughts on artificial intelligence. They're super narrow, uh because I I you know, Someworld is big and complicated and you know I think maybe one of the lessons of twenty twenty two is that you don't know a lot. I find the tools to be super helpful. I I I I use

1:49:08 various AIs every day, um, you know, I i I in particular for for businesses where there's a like a lot of information on the internet, right? So if you're studying Medicare Advantage or Medicaid managed care companies, You know, let's take Medicaid managed care. There's think tanks and government reports and RFPs and you could fill a room with the materials that are on the internet and you can't possibly read all of it and most of it's kinda boring anyway. Um

1:49:32 But you know, the the the the these things can and so then you can ask it questions like okay, like who who won you know, the RFPs, uh the did the incumbent win or did did the entrant win for Medicaid RFPs in the last fifty RFPs by state? And like what were the major qualitative factors identified in the, you know, decision that like drove each one, make me a table, right? And that's a ton of work and you know, it takes two seconds with it with a with an AI. So The the I have I think that it in the in the playing field of life it advantages Someone like me who works um

1:50:03 you know, fairly independently. I don't have like a giant team in investing. Um you know, as to whether these like right now an enormous amount of information is not in the internet. Right. So If you have a Um an AI about

1:50:19 all things like Medicare, advan Medicaid, uh managed care, and it was a lot. Um if I grill it about Carvana, we pretty quickly run out of m stuff. Like this interview will get in there, but Um You know, most of what I know about Um Carvana

1:50:34 I've learned from, you know, a lot of thinking, a lot of talking to people who used to work there, a lot of data scraping and other things that just aren't in um the internet yet. And so the tools, th you know, these like if you spent a bunch of time trying to learn about Carvana from an AI, I don't think you'd get very far.

1:50:51 Um That being said, you know, over time, maybe they have agents that are able to gather information put into the internet. Maybe the internet this bulk corpus information on the internet gets bigger because more stuff is put in there in other ways. And Um and of course these tools are only gonna get better. Um You know, when when AIs get to the point where they can make

1:51:10 Uh investing decisions. There's probably not a lot. That's pretty far down the spectrum, I think, of things they can that they would require doing. Um, it gets it's kinda like asking about the singularity. It's like uh you know. I sometimes am grateful that I've had a chance to sort of do well, you know, before um before all this happened because Um You know.

1:51:28 It it it might be hard to do well after all this happens. If I reflect on Um The future. So Big picture.

1:51:36 I mean I uh people used to ask me what my macro opinion was and they always meant like interest rates and G D P growth and I always always give them some version of it something like look I I am fully confident that my great grandchildren will marvel at my poverty. Um And Unless they're all dead. But hopefully they won't be. I I I I think these tools make it all the m clearer how we're gonna get there, you know. Especially if quantum computing happens, right?'Cause'cause

1:52:00 The ability to create synthetic data with real world simulations using quantum simulators and then to train the AIs on that. Um I don't know if it's entirely, but it's been historically mostly US companies. If I think about the US, you've got all these incredible advantages. We're the we're the home of innovation. We've got this incredible geographic, you know, isolation and abundance here domestically.

1:52:25 our currency's been the reserve currency of the world. We sort of control the m or you know control our own destiny in those ways. Any observations just about like the US as the what historically has been the most fertile soil for finding great investment opportunities in kind of the modern era and whether or not Got It's changing one way or the other.

1:52:47 I think. There's a lot of reasons for that. I mean I I tend to think about the idea that um there was meaningful selection effects in the people who chose to migrate to the US. Um Versus the people who chose to stay behind and

1:52:59 That probably led to us having you know, the US having a a gene pool that, you know, an aggregate is selected for people, the sorts of people who will create businesses and be sort of independent minded and you know get on a ship and travel to an unland across the other side of the sea for a better life. I don't see that, you know, changing in any in any deep way. But I don't necessarily think I've invested in the US because it's such a great place per se. I think I've mostly invest in the US because um You know, I always use the following example. Um, talk to some investor.

1:53:27 And they're telling you about their like British, you know, restaurant investment or something. You say that's so cool. Sounds like you really know England really well. Um, why don't you tell me three places you could buy a power drill in the UK? And they sort of like Realize that they don't know. Right. And there's just an enormous amount that you learn about a place by being there.

1:53:45 And so it's not that I could never invest outside the US, it's just that like I'm keenly aware that like overcoming a certain degree of naivete is very, very hard, even for some place that's seemingly close. as like the UK. Mm-hmm. Um And

1:53:59 And and so I I just think that like the US is an enormous market. There's lots of interesting things to do. And you know, someone will pitch me some like, you know, Chinese stock and I say, That's fascinating. I'm sure it's gonna be great and I put it on the bottom of my list right after all the American stock. That served me well. I'm sure I missed all kinds of stuff, but we gotta pick our lines. I think it's so interesting and And funny that Lots of the big investors out there have gotten to the position they're in owning Microsoft and Amazon and these exciting big like no one gets faulted for this. And we're talking about

1:54:28 Use cars and subprime lending and you know, things like this. I used to own multi-level marketers, too. Right, of course. Um And it's just so interesting that how many different ways there are to do really well. In investing. And and maybe a the last question I'll ask before my traditional closing one. It's just how you process

1:54:47 The the really big like I'm sure you think Microsoft is a great business, like objectively it's just a great business. How do you process those ones that are s that are so dominant in the market that are such a huge percent of the market's market cap or whatever? Um How do you think about

1:55:02 For your own money, I know you're a huge investor in your own funds. You know, fund. Do you want exposure to those things? Like how you know the market exposure. What do you think about market exposure for the average person? It seems like a very sensible thing for the average investor. Like Yeah. Do you ever feel strange that there are these like

1:55:21 massive, incredible What seem like enduring businesses that you have nothing to do with? I have a fairly boring view like everyone else, I think. Yeah, for the average investor, you know, an S B five hundred East ETF's a great way to go. Maybe an all market ETF or whatever. But um I've certainly looked at all these b big companies. They are great for a reason. Um you know, I've certainly thought at times that they represented like good to even superior, you know, returns. It's just never they've never kind of

1:55:48 I mean one of the hardest parts about my job is like I sit around and I study all these things and I find plenty of things where You know, I said a joke in the hundred billion dollar portfolio, there's definitely room for that. Um, but we don't, you know, we're not managing hundred billion dollars and as it is uh, you know, I I the opportunity cost of selling A to buy B doesn't work. So the the hardest part about this in my one of the harder parts about my business about my day to day is like spending a lot of time on something, getting to know it really well, concluding that it's a great investment, but just not quite as great as the other thing. Yeah, that's frustrating. Um And there have been times I remember, you know, back in two thousand ten, like Google but my friend of mine put it really well, there's Google sitting there, looking all cheap. Right. And you know

1:56:26 He was right. Uh but thank goodness I didn't buy it,'cause I think the things I owned, you know, d did better. But um not all of them. So you know, I wish I could have picked the worst thing I had and but like that's not how life works. These are great businesses, um if I ever, you know, retire, um, I imagine I'll d I'll stop thinking about stocks and diversify and I'd own them and if I had a someone who wasn't you know, if my mother wasn't invested in my fund, I'd you know tell her to you know, buy bu buy that. But um you know, there's a lot of businesses I don't own. The the key isn't to understand everything or to pick the even to pick the very best one, the key is to pick Bunch of things, a handful of things that you know well and you know are gonna do well and uh watch them closely and Don't worry too much about all the other stuff. Whenever we talk, time flies by. Uh there's twenty things I could ask you about. Maybe I'll convince you to do this in another five years. We could talk about those then.

1:57:11 But for now I have to ask my traditional closing question. What's the kindest thing that anyone's ever done for you? So I had the two that I mentioned earlier. Um one was um the guy uh who, you know, right when I was starting my fund Um Invested, uh, you know, in it and um you know, I d I didn't quite appreciate at the moment just how rare that was and um but it turned out to be a major kind of um

1:57:35 event uh that played a big role in in me ultimately having some success. Um, and then the other one was um, you know, in twenty twenty two that partner who Went out of his way. um to just come and, you know, basically

1:57:49 Buck me up uh over lunch. Um You know, w didn't have to do it. What a kind thing to do. I mean and you think about how I mean I'd lost the guide for you. Right. At least on paper, right? And and And and and it it not only did it make me feel better at the time, but I think it it's made me

1:58:05 a better person'cause I can reflect on that now and Try to make sure that Yeah. You got a management team. Things are not going well.

1:58:14 You know. Like what are you gonna do? On the one hand you have an obligation to understand, so you have to ask questions, but on the other hand, like they're trying, right? Even if they're idiots, they're trying, right? And so, you know, it's important to sort of remember how I felt then and how I was treated by different people and like how I want to treat people. Um And so maybe a better person. It's great. Beautiful stories. Cliff, thanks for finally doing this with me. Thanks for your time. Mm. If you enjoyed this episode, visit joincolossis.com where you'll find every episode of this podcast complete with hand edited transcripts. You can also subscribe to Colossus Review, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most.

1:58:55 Learn more at join colossus dot com slash subscribe.

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