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And. 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, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date. An investor field guide, dotcom.

Patrick O'Shaughnessy is the CEO of O'Shannassy Asset Management, all opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shannassy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shannassy Asset Management may maintain positions and the securities discussed in this podcast. My guest today is Mario Cheverly, Mario is the managing partner of Marathon Partners Equity Management along Via's concentrated investment firm that he's run for over 20 years.

In our conversation, we discussed how his firm figured out Blockbuster's DVD volume and told Reed Hastings and Netflix about their numbers why visiting a company's distribution center can be an edge for investors. Marketers. Interesting foray into the world of tequila and how a few cornerstone investing insights have led to many of marathons long positions. I hope you enjoy my great conversation with Mario.

So, Mario, you and I discussed a place to begin this conversation a couple of days ago. And I think it's hard to pick something better than an amazing story that you were a part of that's been written about publicly and in the book Netflix. And I think you've never told the full story from your perspective in a setting like that. So I just think it's an amazing wedge into a conversation about doing extremely deep dives on companies. And I'll just leave it there.

I'll let you begin with the Netflix DC story. You tell us how this started and walk us through it.

I haven't fully told it. I haven't told it at all. Good. I love being first for a while. I kind of considered it proprietary. This is a good time for a great reveal. We had an investment in Netflix. We've been fortunate enough to have a number of really good companies in the portfolio over the years and Netflix is one of them. We got in there at a time when the company wasn't particularly in favor on Wall Street. So we can get a fair amount of access.

I tweeted one point about a visit to a distribution center on Long Island. It was one of the most interesting DC visits I've ever had in my career. We do a lot of thinking, a lot of deep work details, concentrated portfolio like we run. They're very, very important. So one of the things I came up with, let's track how these services run in comparison, Netflix had its service subscription DVD by the Mail, read on the OK, everyone knows that stuff.

Blockbuster had something called total access that they were competing with against Netflix. And even Wal-Mart jumped into the fray at one point. We subscribe to every service and we said, let's start putting them through the paces. One of the things we look at is what percentage of the time did you get what was at the top of your queue, how many days that it take to turn around? So you selected them. When did they come? When you sent them back.

When did the next one come? When did they receive it? All of that stuff. Unsurprisingly, Netflix outperformed everyone. That was interesting. One of the ways that we kept track of everything we had all these envelopes we'd keep our data on. And when it was shipped, when it came back and we had eventually entered into a spreadsheet, we had DVD envelopes all over the place in the office from all three services. You stare at something for long enough.

Sometimes certain patterns reveal themselves and a guy in our office works with me. To this day, I noticed that on the envelope, the blockbuster envelope, there were certain sets of numbers that kind of would repeat and in other states that wouldn't. And we started looking into this more closely. And what we discovered was, is that on the blockbuster envelope that you received, your DVD and Blockbuster was telling you how many customers there were and how many DVDs they were sending out.

And we started tracking that on the quarterly conference call. Blockbuster would say this is how many subscribers that we had and then you could kind of triangulate what was the beginning subscribers, what was the ending subscribers and then how many subscribers they kind of had throughout the quarter. Essentially, we could see that their churn was astronomically high, absurdly high, maybe three to five weeks. The churn that Netflix had, we saw that. We spotted that we were tracking it, but it was pretty labor intensive.

Maybe you might argue with somewhat limited benefit. It told us what we wanted to know, that the blockbuster service was to us was unsustainable and didn't perform nearly as well as Netflix service. So what we decided to do was let Netflix know about what we had discovered. We had a couple of calls of them. I think they initially didn't even believe at this that we were able to do this. And then we showed it to them. They took it over.

The reason I was in the book, Netflix, was because we were the ones that kind of cracked the code on envelope game. And it was very helpful to Netflix for a period of time when it wasn't also clear that they were going to emerge victorious. I kept in touch with Reed for a number of years. I still consider him one of the very best leaders, CEOs that I've ever had the pleasure invested in my career. He would no doubt remember us and remember that whole incident.

So literally on the envelopes, the serial number was like counting up or something. Is that where you found.

That's right. Not getting too specific.

Yes, it's incredible. I mean, talk about a good example of doing insane detail oriented work on a business. What about Reed was so impressive or is so impressive.

His ability to just see things as they were going to be was just absolutely incredible. And you can boil the. Kind of a very big problem to super simple language, a little bit like, I mean, Warren Buffett. So you can distill a very complicated thing into a handful of sentences that kind of would make sense. Absolute, tremendous vision. He would believe the direction that you need to go and would get there before anyone else and have a strong belief in it, pulling a lot of people along for the ride included in that as motivation as well, how to organize a lot of individuals, lot of smart individuals to get behind you and push in the same direction.

I'd say first and foremost, just tremendous, tremendous visionary.

We're going to talk at some length about why it's valuable and interesting to visit distribution centers of companies, which is certainly a topic I've never talked about on the show before. Seems sort of like almost mundane, but my guess is that they're a treasure trove of information. What was interesting about the visit to Netflix's distribution center early on, this is a part of the business I've always loved.

Lots of people analyze companies without visiting them. Some people have a bias. Management teams are marketing to you. Of course, they're going to tell you what you want to hear. I've always had the belief that I can potentially learn more and get an edge by visiting companies. And I may see something. I may spot a detail or something that either changes my mind or reaffirms kind of what my existing belief is. I would say if by zoomed out a little bit on Netflix, we visited three days since we visited Long Island, DC, which was the first one we visited DC and San Jose, which a lot of people visited, and we also visited one in Atlanta.

So we started mixing and matching and seeing certain patterns repeat about with the disease. But the one in New York was the most epic one. They sent us there without any representatives from the company. So it was just us and the manager of the office. I think what we saw essentially was an operation that was very, very hard to replicate, that had years and years of finding and bumping into bottlenecks and eliminating them and getting more and more and more efficient.

That would range from how labor was used, the lack of storage of DVDs. They actually didn't store them anywhere. They always remained. The desk manager explained to us how the DVDs were always looking for a home. They weren't trying to find the DVD that the home wanted. They were had the DVD in hand and say, hey, which home with this wants this to a bunch of machines that they bought. That's sort of the material that didn't work, that destroyed a number of DVDs and that they had to customize it.

Just tremendous amount of things. And you get the sense that this is not going to be easy to do. Blockbuster can't go from running stores to running a DVD by mail subscription service without a tremendous amount of work, with a lot of brilliant people running around and trying to fix it. I think that's ultimately what we figured out there, that it's not going to be easy to replicate. And that's a continuing theme. The market gets validated, competitors are coming.

Some of them are going to be bigger and more well capitalized. Is that business defensible? And I do believe that you can get insights into that in a distribution center, of course, talking to management team and whatnot. But it's great to get out in the field and see what really makes an operation tick. Not all investments obviously lend themselves to that. There's no factory to sit for Facebook for people, but on a lot of other services there are.

How many distribution center visits do you think you've done across your entire career?

A lot less since it happened. I've done one since then. I did one trip. I got in the airplane two months ago to visit a distribution center in Dallas for Stitch Fix. Across my career, I mean ushe, I mean eight to 12 times twenty three and a half years.

Using Stitch Fix are another example. Just give some more examples of things that you have learned. What are some of the most interesting lessons you've learned, spending that many days and trips to visit these places?

My guess is you're in the top percentile or something by that that kind of experience walking through these places that are sort of the unseen force behind a lot of physical businesses. What are some other examples of things that you've seen you said, huh? That's funny or that's interesting or or that's impressive.

The Stitch Fix DC visit that we did recently. I'll say this. That was like a kid in the candy shop down in Dallas. That was the most interesting DC that I have seen since my early days on Netflix. It was super, super interesting, some of the different dynamics that were going on there. So we got two hours there, which was super nice. And then to allocate that much time, we spent time with the head of US operations, absolutely brilliant, dynamic guy that explained the flow of product throughout the facility there.

And I walked out so many questions. I mean, I could have just spent 12 hours. There really could have. I walked out saying this is not an e commerce business that we just saw. This is a whole different kind of service. And I don't think anyone, anyone in the world potentially is trying to do what they do at scale. And it's going to be a very complicated thing to get right, but if they get it right and I think they've gotten a lot right so far, it could really be something special.

There's a number of different things that we saw there that I think very dramatically versus traditional e-commerce.

I've spent exactly zero time in a distribution center. When you say they're not a traditional e-commerce company, like what is that gap?

The way I would the traditional e-commerce and potentially even Amazon is that they're sending out finished goods. And generally speaking, they're hoping that they don't come back, that the customer customers satisfied. I think there's been a tremendous amount of volume of that type of e-commerce. For starters, to fix has built a tremendous expectation of returns that most e-commerce operations don't kind of have to think of and returns or margin killers for that model. There were some really interesting labor bottlenecks present that stitch fix that.

I don't think other companies and traditional e-commerce think about. You might say that labor bottleneck is negative. And I would say, yeah, it potentially is. It's a level of complication there and difficulty that makes it harder to get right. So the way to fix presents its units. Generally speaking, all the pieces are out, the plastics gone, everything is taken apart. They're picked, they're folded, they're stacked the raft. They're put in a box and they're sent out.

And the quality control quality checks go on. At this point, that was a tremendous part of the human labor that was present in the DC was in that area when the boxes opened. You could try everything on inside of six or seven minutes because it's already to be tried on. That's an interesting way to present units versus another e-commerce operation that will send you some shirts. The college days are in. There's pins in them. They're folded nicely, the plastic on top of them.

If you had four or five things sent you from a traditional e-commerce company, want to try Mollen and might take you seven or eight minutes just to get everything set so you actually could try them on. They put great effort into ensuring that when the box is open that it's very presentable. That's an expensive, labor intensive thing to do for a very small win. So that labor bottleneck is, I think, very different than traditional e-commerce. Another thing that's just absolutely fascinating is that if you go into onto their site now and you want to get a fix sent to you, they show here's the first available date.

That first available date could be seven days in the future, 14 days in the future. When they're busy, there's some range effects. Things just think about from an operating point of view what it means to know that shipments, what they're going to be like in two weeks. It's very different to traditional e-commerce. There's no seasonality in the business, really. It has grown over time, but they have a very, very predictable production schedule. So if they're sending out a thousand fixes today, they may send one thousand and ten tomorrow and one thousand ten plus another five the next day, like it's very kind of predictable.

So when you introduce that level of predictability into a facility, what allows a tremendous amount of efficiency and planning and whatnot that would reverberate throughout the whole distribution center, that just simply unavailable to a traditional e-commerce operation that might have a peak to trough Delta of, I don't know, three X to eight X. It just is a whole different way of planning your business. I mean, how nice. It's an apparel retailer. They have a set schedule of production.

We're like next week, sold out the week after that sold out. It's absolutely fascinating to me. You start getting into the whole personalization of inventory and how they use data and all that. So they're keep rates on what they're sending out should be better than someone that would would hope to compete with them. We actually need to do more work on the data side and everything we've heard about that, it makes sense to me. But what we saw in that distribution center to me is that is not traditional e-commerce by any stretch.

It was hard to do. They have years of mistakes and bottlenecks kind of being solved. And the copycat companies, they'll come they're going to have to make all those mistakes and stitch fix will continue to innovate and keep that delta between them. And there would be competitors, and that could be mine for years and years and years. So, look, if they're doing a good job, they're going to continue to innovate very rapidly, put more and more distance between them and would be competitors.

They kind of want to make it look hopeless for those that are coming in after them. And I think a store operator like J.Crew or Urban Outfitters, I think is attempting a service like this that operates stores. Good luck. It's going to be tough. It's going to be tough to do subscription apparel. It's not going to be easy. My interest, by the way, I would say it's not entirely clear that stitch fix is going to succeed.

I think they will. The level of success, how far they take it, I don't know. But I'm not saying this is easy. I'm actually saying. It's really, really hard. That's the whole point that's going to allow them to potentially escape Earth's gravitational pull in a big way. I think there's a chance that they could really be big and successful. And 10 years from now, I'll be talking about that D.C. visit Dallas, just like I am about the clicks that we did in the early 2000s.

You said something there which is fascinating to me. Good luck. Which it's kind of an interesting way to think about competitive advantage that you want. The businesses you're investing in to have some version of that word to would be competitors. You would be saying good luck for some reason or another. That strikes me as a good example of the kind of seven powers or some of these traditional methods for thinking about edX as sort of process power. There's no way to learn how to do it.

But by doing it and they've made so many mistakes that there's just this compounding separation between the best and the second best that's trying to catch up. What are other things that you've seen? Perhaps, like you said, Facebook doesn't have factories. What are other things that you've seen that feel like that good luck concept? And is that basically what you're always looking for when doing one of these deep dives on a company on the Challenger company side of disruptive business model side?

Absolutely. We'd be looking for that. We had a great investment, a company we really loved called Zoome that I think right now would be valued in the billions and billions that it happened to be taken over by PayPal a couple of years. And they were looking to disrupt traditional international remittances. So the Western Unions of the world, we did a tremendous amount of work with that company, not unlike Stitch Fix and unlike some other ones, you know, there weren't a lot of profits necessarily the near term to kind of justify the interest rate from an outside investment.

The way they did remittances was so difficult to get right and was fraught with risk and fraud. And no, your KYC rules, then all these rules that are required for financial intermediaries, it was so terribly difficult to get right. We came to the conclusion that if this company's growth rate kind of falls off a cliff, the platform is extremely valuable. And we were right. People recognized that they had a multi-year head start. So I guess that's a yes to your question.

That was a small example. Another example of a company that just puts so much distance between it and its competition.

Can we talk about tequila and everything you've learned about why it's an interesting beverage and perhaps a specific company that's interesting in that arena.

I'll tell you, it's been a lot of fun to do research on this. When I wasn't a fan of tequila, I'm not even a big drinker, but I now have an appreciation for tequila and I have a small little tequila collection. But it was on the basis of an investment opportunity, their biggest tequila producer in the world. No surprise, it's headquartered in Mexico. The name of the company is back in. A couple of years ago, it went through an IPO.

The story of Beckley is really the story of tequila. Story of tequila is really about a plant that grows and primarily in central Mexico called Blue Weber Garbett Blue Ribbon. Gabbay takes anywhere from five to nine years to mature, different than a lot of other spirit companies. The input is not an annual crop. So there have been in the past, we found three of them more recently. We're in one of the price spikes now. There've been three epic price spikes of blue.

Albergotti Weber gave a couple of years ago traded hands for five pesos a kilo. The current price is in the high 20s per kilo. That is the main input in tequila. Tequila producers have had to absorb a massive price spike in their main import that caused shares to trade down to levels that we thought were absolutely absurd for about coming up on two years now, we've been buying shares of Beckley from its absolute lows until the current price. And we think that that company is a very unique opportunity.

One of the other certain sectors that can talk about that later, that we tend to find a lot of our investments in both I consider as a generalist. But going back to my old days of selling research to hedge funds, we're always turned on by inefficient sectors of the marketplace. And that was a super interesting company. You essentially had a really old company with absolutely tremendous brands that were driving most of its profitability as a US company, but decided to list equity on the Mexican bourse and sold a relatively small sliver to the public.

Fifteen percent. Those questions are why they do that. What was the motivation behind that? The company was practically debt free. It didn't really need to raise any capital to us. That was a perfect recipe for potentially mispriced security. Essentially, what we saw actually call this one the the second best risk reward trade I've ever seen in my career ever. I don't think I can lose money here. I got really good upside. I got three calls all over the place.

That's a super interesting equity back. It was trading at a discount. To pierce in the spirits business, but its margins had been compressed in fairly dramatic fashion because the price of Bloomberg had spiked. So here they were trading at a cyclically lower than pure multiple with cyclically depressed margins growing faster than peers because their tequila exposure is way higher than peers with very little debt. And I was like, this just doesn't make sense outside of malfeasance or something, or the numbers weren't real, that there was no way that we really could lose money.

And that was the initial appeal. Now we've gotten to know the company better and become more familiar with the story of tequila. It's gotten really interesting. And I do think it's one of these kinds of things, you know, 10 years from now is just going to be a bigger, more valuable company. I guess I think what we've really done is we've figured out a back door cheap way to buy into the spirits. Business spirits business is hard to justify for value type investors because they're always well before.

Why are they always well before? Because they survive inflation, deflation, feast, famine, war. They're always around. They don't go away. Not going to get disrupted. The zero interest rate world. The other opportunity for real earnings growth, that's infinitely valuable. I think what we've done is we found kind of an interesting way to buy into a spirits company that hasn't been fully recognize that it belongs with its set valuation wise. What we believe we're at the beginning stages of a very likely collapse in Agaba pricing of a blue ever gave a.

Farmers in Mexico have been planting multiples of the harvest for the past three years and we think there's a windfall of that margin event in the future of blackleg. We kind of believe backlog's trading at 12 to 13 times EBITDA on twenty twenty two numbers versus peers today like Brown-Forman and deju that are trading kind of in the high teens multiples of twenty, twenty two numbers. And we think when we get to that period of time, there'd be no reason for Beckler to trade at a discount to the group based on the earnings that we think that they'll have a God pricing does not have to collapse for us to make a positive return on Backway.

But if it does, we're really going to have a charge reach. And we think it's very likely that it will. But that's the downside protection. That's the interesting part. It doesn't have to happen for us to get pretty positive returns for our investors. Oh, by the way, what's also interesting is that Becklin has been insourcing more and more of its production of agave, and that takes time to build up your agave fields because they take multiple years to mature.

More and more of their production will come from in-house. We think the a price decline will be the catalyst that people would identify and see to ultimately bid up shares of equate to probably where they are a more appropriate valuation over time. But because they're insourcing more and more of their production with their costs probably five to seven pesos per kilo, it almost doesn't matter. Agave prices don't correct because they're producing more and more in house and their scale at their size.

Not everyone will be able to produce internally like they do.

What else have you learned that's interesting about the spirits business in general and tequila, just as a thing relative to other spirits, it seems like there's been a surge in its popularity. I love the features you ticked off about sort of the cockroach qualities of the industry in general, which is why the trade at large multiples. Anything else interesting from the story of tequila that you uncovered?

It's hard sometimes in the spirits and beverage businesses to create a trend. But once that trend starts, it's also hard to turn it off. I think there is a wonderful trend going on in tequila right now in the US and Canada that we can't see how it turns off, at least for an extended period of time. And that trend is presented. The idea to a group of people not too long ago brought a bottle with me and a lot of people that I didn't want to try it because it's like, oh, I had shots when I was in college and got sick.

Whatever the negative experience for is to try it anyway, try it anyway. And I brought a nice expensive bottle. They ended up loving it. I think a lot of people have figured out that it's a great drink, Latin heritage in the internationalization of our country. I think it's kind of played a role into that. And essentially there's a lot of different variations of it. So it can range from pretty crappy to absolutely amazing. That range would exceed say something for a vodka.

I do think vodka and a couple other spirits will be caregivers to tequila for an extended period of time. Look, there's no parties right now, but the party five years ago there was one tequila drinker party. Three years ago there were four. Next year we're going to get past the coronavirus. It'll be eight. It's kind of playing out like that. So it's absolutely growing to share domestically. And of course, we border Mexico so that a lot of people travel to Mexico and you know that.

Translates into the US and Canada more easily absolute Hohman will be is that it catches on internationally. The market share for tequila is something and nine 10 percent range in the US, but internationally it's much lower than that, maybe on the order of three or four percent, which would include, of course, a big contribution from the US, which is the biggest spirits market in the world. If tequila starts catching on internationally lookout, it could be an absolutely epic run for Beckler.

It has the potential to be the fastest organically growing spirits company outside of China globally over the next 10 years. Absolutely may happen for them.

In each of the companies we've discussed so far, there's an example of what I would call cornerstone insight, the serial numbers, the bidirectional nature of stitch fixes, shipping, expecting lots of returns, and the sort of optimization and intelligent labor use around making the presentation of that and the experience of that. Great the five to nine year cycle of whoever Agaba. That's just kind of a unique feature versus other spirits business. Do you find that those cornerstone insights that you have, and I'm sure we'll talk about a few more tend to come first in your diligence of something and that kind of open the door?

Or rather, is it just that you do lots of deep dives and a lot of businesses and with some of them, you arrive at the cornerstone invites, like what's the chicken and what's the egg here?

I would say they happen in a variety of ways. How do you find these interesting companies? You pay attention, you read a lot of these ones, try new things, try new apps. You're just trying to suck up information everywhere that you can. You sometimes I would say, well, gee, I had an instant reaction. This is maybe ten plus years ago when I heard about it. Rich Baaden mentioned it to me on the beach once.

And I was like, oh, that just sounds like an awesome idea. And instant reaction to that. You know, how many years later we had the opportunity to buy it all this summer and during the coronavirus pandemic at prices that we thought were pretty attractive. And so I guess on that one, we had the observation first, this is pretty good. Can come down to the price where it's attractive. The other ones, I would say that we dig in, we keep thinking, we ask questions, we ask detailed questions.

We do a lot of work. And then the nuggets of gold may reveal themselves after a lot of digging. So probably both ways.

I'm really interested right now in the topic of media and character creation and media personalities and all this sort of thing, which makes me think of WWE business. I have no idea how it works, especially because it seems like maybe there's a pay per view and there's in-person events. I'm not a wrestling fan myself. I never really have been, but it strikes me as probably a really interesting business to understand the mechanics of. Can you walk us through how business like that works and what you've learned about this sort of personality driven media phenomenon?

Because that seems like something that's going to be important in the next several decades with social media and beyond.

I've been following WWE for two decades. They know it quite well. I think it's a really unique US media asset. I have to say, actually, first and foremost, I forwarded one of your podcasts to some of the people I know there. I think you had this guy, Matt Ballan, and you were talking about the metaverse and all that kind of stuff. And it just struck me that WWE, the difficulty in developing such a good IP and having three generations of people in the household where fans at one point and it's terribly hard to develop some of these things, some of these personalities are larger than life.

And it just struck me I was like, why WWE going to license Facebook on their Oculus or some VR platform? Why shouldn't you be able to put the headset on and be right on the stage all around you, the match going on? And but I think it doesn't get taken as seriously as it potentially should. It's generally speaking, it's men and women clad in bikinis and tights kind of throwing each other around. It's scripted, but the engagement they get is just phenomenal.

Now, if you measure engagement only by ratings, their engagement over time has fluctuated. And I'd say opportunities that we see in the share is this, I think the third major opportunity since nineteen ninety nine to buy the shares at the prices that we consider to be very attractive. Those have been good times to consider buying the equity when Wall Street investors were worried about engagement and there are certainly some things to be worried about. It gets a bad rap.

It's misunderstood. They hold events in New York City, but I wouldn't say like New York City is their core market used to be that Nashville, Tennessee, would get the highest ratings share, I think, for wrestling, if I recall, or you might say it's kind of a NASCAR crew, but I do think that they are exceptionally good at what they do. They've been around forever. To me. I'd say there's no chance that the fans disengage with the company over time.

And there's a lot of really interesting upsides that are built into the model. And I haven't talked about the model so, so much. You can think about it like a circus. They traveled around and they put their show on. They charge. For events that sell you stuff at the events, they would televise it and be on TV and people would pay for those rights. But a couple of years ago, the company went through a massive transformation.

And all that really happened was Fox woke up one day and said, we want to own Smackdown. So two main shows are raw and Smackdown. Raw is broadcast Monday Night Smackdown is broadcast Friday night. Comcast previously had those rights. Fox decided that it wanted to play in those rights. And so now those rights are split between Fox, Comcast and the value of the US. Media rights went up by a factor of, I think, almost four times on the last go around.

So that really transformed the company into a different beast and a different animal where the touring side of the business absolutely shrunk relative to the overall profit pool. I think the debate on Wall Street is what happens to those meteorites in twenty twenty four when they come up for renewal. And when you're in a covered crisis, you don't have an audience in their audience. Participation is way more important than football and baseball and maybe something like that. The performers feed off the audience.

So the loss of the audience here has been way more difficult than kind of any other event. They will come back from that. But I do think that has created a perception that the next renewal for the US media rights will not go well. I don't think that's going to be the case. I think that they have plenty of time to re-engage the audience. I'm assuming sometime between now on twenty twenty four, we're doing live eventually again and that will re-engage the audience and help with the storyline and get them back on their feet.

In the meantime, Wall Street investors, we're not just talking about the business in the vacuum you've got what's priced in. My belief is that with reasonable assumptions that the market is pricing in a down round there meteorites. And I think that's wrong. You just saw Major League Baseball kind of read up their rights. It was a 60 percent premium to the last round. And there was some additional games that were add an additional things thrown in. So you might not say 60 percent is the new market.

And each of these properties is unique renewal, negotiation. But I don't think the market is down on US media rights for an important property that does a very specific thing. Well, and the specific thing that WWE does well is it delivers a highly engaged, relatively large audience on Monday night and Friday night, and it's been doing it for twenty five years.

Anything you've learned about how the revenue shakes out? I wouldn't be able to guess, first of all, what the revenue is, how much comes from events traditionally, how much comes from contracts, how much comes from merchandise? Is there anything interesting that you think? If I wanted to start a media company today that involved the creation of IP playing a twenty five year game, what are the lessons I learned from the way that we does it? The mixing and matching of the different business lines?

It's a unique thing that happened to him on the last renewal rates. The media, which I think are fast approaching a billion dollars of revenue, now dominate the P&L. So the trinkets they sell online and t shirts they sell when the events come back, those are smaller items. So those are all kind of optimizing. But it's really going to be about US meteorites and the rest of the world meteorites going forward. So that dominates the mail now. So it kind of makes everything else not matter.

The last time that we bought shares and bought them in size was when the company went through a very interesting transition. It was possible business that was paying a nice dividend. Vince McMahon had a vision that he wanted to have a direct path to his fans, and that was a network and the Internet and the explosion of infrastructure designed to create all the services that we now love and enjoy, like Netflix. What not allowed him to do that? And that's the WWE Network.

Now, to do that, they had to put at risk their pay per view model where they were getting ten or twelve pay per view this year. They had to risk pissing off their partners in distribution. And so they went from a moneymaking business to a money losing business, cut the dividend to make that transition. And Wall Street absolutely hated that because it created a high level of uncertainty and it wasn't certain that they would emerge victorious from that. That goes back to some of the sectors that we like.

Essentially, when it launched its network, was investing to create its network, became a completely different company, and it is a completely different company, became a completely different company. And it is a completely different company today that tends to make Wall Street very uncomfortable. And they were. And that also created an absolutely amazing six and seven dollar price to people that had the vision or shared vision that the network would actually be valuable. Interestingly enough, and this is a great opportunity right now relative to the share price, is that the company announced that it's looking at alternatives, quote unquote, alternatives for the network and went that.

Means is that they are now looking at their direct path pilot to their fans. It's just another licensing opportunity. The product is the product. It's the performers. It's the on stage athletics. It's the story that they create. It's years and years of IP. And I think they're going to be looking at their network as just another potential thing to license out. Now, who steps up for that? This is where it gets really interesting. It all makes sense to by the way, the streaming wars are in full swing.

My opinion is the bundle is in the process of being reassembled in an environment, in a digital environment, and that's likely to happen again. It makes sense that one of the big players could do more with the WWE Network as part of a portfolio of properties than they could do alone with Disney potentially being interested in the WWE Network to help drive more subscribers to ESPN. This is what they did a deal like this with the UFC. That's very interesting with other big tech companies to be interested in the audience, the engagement that.

Yes, absolutely. One of the knocks is intelligent. People are worried about how the US media rights renew for the pay TV, the traditional pay TV ecosystem, linear TV. Again, I don't think the market for that is going to be down. It's not going to be a down round for we believe that it is. That means they're streaming rights are more valuable. There's another transition going on. The main thing is, is that they just get highly, highly engaged fans and they've done it forever.

And yes, there's ebbs and flows and how the performers relate to the fans, but they always find another one when the rock retires, gets out of wrestling, and he still wrestles. By the way, it has an effect on engagement and ratings. But time and time again, been able to find the next one. That's the brilliance of the company. And Vince McMahon, I mean, I consider him a visionary, nothing but respect for what he's built and for the family.

It's wildly impressive, actually.

What have you learned through your history in having to fight around businesses? I think especially early on, you were involved maybe a little bit more of like activist style investing and probably against some formidable opponents that the unique feature of public markets, that this sort of thing can happen where you don't get to choose your shareholders as much as you might as a private company or do as a private company. So interesting things tend to happen in the activist world. Talk me through your experience there and what you've learned.

It's kind of funny. Look, I came into the business pretty naively. I'm like, well, I expect to be treated fairly. If someone didn't treat me fairly, I got pretty upset. And then a couple of times I said, well, I'm actually gonna do something about it. I learned we got into a spat with Ron Perlman many, many years ago, own a company called MF Worldwide. And I learned an awful lot about how to fight and an awful lot about boards and dynamics and all that kind of stuff, how to justify transactions that are not justifiable.

That was a very, very interesting experience. I don't want to go over the whole story, but if you Google my name and a company called MF Worldwide, some stories would pop up. We help reverse the decision and kind of play to create wealth for Ron Perlman at the expense of shareholders. And I learned a lot doing that. I was kind of a corporate gadfly complainer with the company in Chicago called John Nuveen that was paying its executives very, very generously early on.

And then I went to the annual meeting and started asking questions again, super naively, just like, this isn't fair. Why are we doing this? I kind of learned a lot from some early interactions trying to stand up for shareholders. John Levine was another one that I remember got down to. I went there. I flew there meeting with him in the co CEOs, the CFO and the investor relations person. They brought me to this boardroom and they're like, how can I help you?

I must have been twenty five or twenty six years old them. And that roof got real hot suddenly. But I said, you know, I think your compensation plan is unfair. I would just kind of say these things to people so that I guess that naive assumption that I should be treated fairly by a management team combined with another naive assumption. Maybe there's something I can do about this. We've always been active shareholders. We're active. I don't consider activists necessarily that we have to play the activist role from time to time.

It's labor intensive. It's not necessarily fun. It's a tool in our toolbox. Generally speaking, we try to find companies like Stitch, fix something else, or we could help line up the management team and watch them go for the next decade and not have to do a lot of work. We love working with management teams. I still remember that story. Go back to Netflix a little bit. I don't know exactly what happened because I was in the room, but people at one point thought that Carl Icahn was going to make a run at Netflix.

And I think I read some stories, something just environment said. Let me tell you about our business, a really talented management team that's working hard for the shareholders. They have nothing to fear from an activist. A lot of times it's the management teams that. I have a situation that's too attractive, compensation has been too good, the board's overpaid for underperformance, that kind of thing, or there's a very big delta between the company's intrinsic value, strategic value and market value.

And it's persisted for a long time. And maybe the company has been unwilling to say repurchase shares or do something that might make the situation better for shareholders. Those are the kinds of situations where a good activist could add a lot of value and not all activists are good. Some of them do kind of hit and run activism. That's not us. People that are thoughtful take a long term point of view and are really trying to help the company. They should be welcomed by management teams and boards.

Sometimes they are, but oftentimes they're not.

If you think about the sort of rate of return on the house to frame this on deep work, the type of which you've described on something like blockbuster serial numbers or something like this, that I'm sure is still quite rare because deep work is just always rare everywhere. How do you think that's changed across the last twenty five or thirty years from when you first started doing it to today? Do you think that that's more valuable work to do today?

Less how would you describe the change in the opportunity set for that kind of work?

I think it's just as valuable now. When I first started the fund in nineteen ninety seven, kind of go back to the 90s, things have changed, things haven't changed. I'd say it's probably tougher and more competitive to get differentiated information. Today, access to information has been democratized. Information moved more slowly in the 90s. When I first started in the investment business, I remember I still sound funny. I like telling little stories every now and then.

I do that on Twitter to remind people of what the business has changed and how it hasn't. But I remember in the 90s you could short spin offs and the one issued market and then everyone get their shares and then they would trade down. Then you could cover them and even go long enough to a reasonable business. It was like 80 percent of them we could do. I remember if there was a high short interest ratio in a company, it was a red flag in of itself.

Companies weren't highly shorted. Would it meant much of the time is that a sophisticated short seller had found out that something aggressive was going on in the account. It's like, oh, you look think, oh, it's a high short interest rate. You look at something else. So the information moved more slowly. All that being said, I don't think the game change that much. It wasn't a piece of cake to figure things out back then. It was labor intensive to get information.

You had to call it the companies and ask them to send the quarterly reports and annual reports and all that kind of stuff. It was a slow, painful process. If you really wanted something fast, you'd go fish it out on microfiche or pay for service and they deliver the papers to you the next day or something like that. Pick the participants were also different. There weren't as many hedge funds and certainly with some Twitter or the Internet or anything like that, kind of talking about things on very specific kind of companies.

But the job was the same. It was challenging then. It's challenging now. It hasn't changed as much as maybe others might say, at least in my mind.

I have to turn now to my traditional closing question that I ask everybody. This has been such a cool, different episode, diving into random different companies, done a lot of rhyme or reason other than something really interesting going on. My traditional question for everybody is to ask what the kindest thing that anyone's ever done for you is.

There's a lot of things that I could say or or anyone could say. One that comes to mind goes back to when I graduated college, a good friend of mine, guy by the name of Richard Jaffe, his parents were Stan and Myron Jaffe, and they lived in Pleasantville, New York. My parents were up in Canada after I graduated. I went to Binghamton and I had a job and my first job was Mario Gabelli, still around today picking stocks.

And I had this gaff or like I didn't have any money. I had a job. I was two weeks after I graduated, I had to show up for work. I was like, where am I going to live? I can have any money. I couldn't afford rent. Now, my friend was doing an internship. He wasn't even in town. He was like, I can live with my parents. So pleasant bills in the Westchester. So Stan and Myra Jaffe open their house to me with their son.

Not even there. I moved in. I lived in the basement with my parents and my friends. And I don't want to get choked up here that I'll never forget that that was super nice for them to have done that for me. They passed on. So it's a worthy thing to mention is the nicest thing that someone's ever done for me. Wow, fantastic.

What a great, wonderful story. Always my favorite question. There's always something remarkable in there and it's cool to hear that one. I love it. All right. Thanks so much for the time today. I learned a lot, as I do always when talking to you.

Appreciate your time. Yeah. Thanks so much. If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the Episode. Each week I condensed that week's episode to my favorite big ideas, quotations and more. I've been recommending books to members of this email us for years and will keep doing so. In this weekly email, you can sign up at Investor Field Guide dot com forward slash book club.