You're listening to Teip in this episode, I speak to three favorites of the Masters podcast, John Huber from SABR Capital Management, Tobi's Kylah Quires Fund, and Dr. West Gray from Alpha Architecture, all three of them a highly successful banjo's. We discuss value investing concepts that all investors should know, ranging from a deep understanding of risk to psychology position sizing, and much more so without further delay. Here's our discussion with John Huber, Tobias Carlyle and West Gray.

And you are listening to the Investor's podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the podcast, I'm your host, it brought us and I'm not here today with any of my co-hosts, however, I'm here with no less than three guests, and it's safe to say that we have a superior lineup for you. We have John Huber, Tobias and West Gray with us.

Gents, thank you so much for taking time to join the group here today.

I can't wait. Thank you. Say. So I was speaking with John the other day and he suggested that we tried out a different format here for the show, so instead of a typical interview style episode, we would invite a group and talk about value investing concepts. And I absolutely loved the idea. So you guys can think of is a bit more like a Mosman Group meeting, but we won't be pitching particular stocks or find the intrinsic value of a stock.

Rather, we'll be talking about our successes and failures and most importantly, what we learn all the years in the market. And we have four main topics for today, and they are knowing what you don't know, cyclicality, risk and advice to your younger self. I wanted to start off the first topic, knowing what you don't know with a few quotes.

The first is from John Kenneth Galbraith, who said, we have two classes of forecasters, those who don't know and those who don't know that don't know. The next quote is from Henry Kaufman. He's saying that there are two kinds of people who lose money, those who know nothing and those who know everything. So with that bleak kind of kick off, I wanted to kick it over to you guys. Perhaps you could start out.

It's a really interesting topic, Steg. I think the way I think I would think about that question is to, I guess, first accept the reality that the world is uncertain. So I think the implicit logic in your comment is that we we don't know the future. Right. So the way to the best defense against ignorance, I guess, or not not knowing the future is to when when you're thinking about investments is to position your portfolio in companies and least that type of investing that that I do position your portfolio and companies that are, I think, best adaptable to change.

So for me, I think the world and I've talked about this, I think Toby and I talked about this on a podcast one time, but I've been thinking about this concept for a few years. I think the world is changing to a degree where the rate of change is much faster than it used to be in previous decades. And so companies what that means is companies are changing much faster. And so I don't think you have companies that will be able to exist on these static, competitive advantages that they enjoyed for decades.

Companies like Procter and Gamble had shelf space advantage that they lived off of for for years and years and years. And the nature of business now is that barriers to entry are so much lower. And so you have upstart companies in all different industries that are able to take on incumbents. That would have been unthinkable 20 years ago. So I think you have a situation where the rate of change is faster. Incumbent advantages are no longer in many. There are some exceptions, but incumbent advantages I don't think are as strong as they used to to be.

And so you have to just come to grips with reality. That change is a constant. And so I think the best way to defend against that is to invest in companies that have the ability to change. And and that means thinking about management teams that are adaptable companies that can quickly shift. And I think those are the investments. Those are the companies that will be best positioned to to fight against the unknown, which is the future. So that's that's kind of my thought on that.

That's very interesting, John, thank you for for sharing that and you have the the issue I had one of those quotes, those two kinds of people lose money. You don't know nothing. And those who know everything. Whenever I think about guys who know everything, I think of a few guys, I could say, hey, talk to me about really, really smart guy and talk to us if anyone who would know his stuff and not trying to paint you into a corner here.

So how do you not know everything? I guess that's my question going into this.

Well, I think the more you know, the more you kind of realize you don't know anything else. And so I kind of boil this question down to what do I actually think I know and just assume I don't know anything else. That's a much easier question to ask than how do you know what you don't know? I'm just going to invert it and say, what do I think I know for me? I wrote down three notes here. The first one is that incentives matter.

And to John's point, markets are competitive. So I do think no pain, no gain is a is a pretty good mantra to live by and investing. And if you can't identify where there's pain to get your gains, you're probably wrong or you don't know something that you don't know. So that's a good rule of thumb. And then the other one is I got another note here. It says, humans matter. So sentiment matters. Fear and greed do affect prices.

And so that's just to say the market probably isn't perfectly efficient. And there are maniacs out there. I know that. The problem is I don't know how to time these, so got to be ready for be patient. And then the third one, which is kind of living too close to Vanguard, is it fees and taxes matter a lot because I can identify perfectly how much those are going to cost me. And so to the extent I can minimize those, that's really important, especially on the tax side where I think a lot of people forget that 50 percent Uncle Sam carried interest is the biggest feel ever pay.

So those are the things I know. Incentives matter, humans matter, and we should avoid fees and taxes. I don't know anything else beyond that. I think it was that was a good way of responding to that question. So actually, let me follow up on the third part of your set there about fees. You know, we are in a new environment right now. I don't know if I could say new normal. It's going to be such a cliche if I said that it's just crazy what we're seeing right now and we all paying taxes on nominal gains.

We all like to look at nominal numbers, not real numbers. So knowing that, how do you think about fees and taxes now? What has changed, giving the low interest rate environment that we're in? The problem with being an asset manager in a world where expected returns on everything are really low is it's one thing to charge one percent when you have fixed income or just braindead money paying you five, six percent now that you literally have incentive to put your money in a pillow, because if you have a bond that a 10 year bond that pays one percent, well, half of that goes to taxes, you're down to 50 bets.

Then you pay 50 bits and you've got zero with a lot of brain damage. Why did I even hire this person to do anything with my money? So that obviously extends a little bit into people that do more risk, like Toby, myself and John. But even for us. Right, because we had a high expected return of 15, 20 percent. Now, that all got chopped in half. Our fees are our infrastructure costs as a percentage of your potential gains are still relevant.

But I feel really bad. And it's going to be very interesting to see how advisers, fixed income managers, a lot of other people deal with this reality of why am I paying anyone in financial services, anything right now, because they're not going to deliver anything after all their cost and lack of transparency, liquidity constraints, etc.. It's going to be a tough business going forward, I would say. Toby, you're looking at me right now like, oh, my God, I feel the same pain as well.

It's a tough world to be in and say, I do know more than the market or what do you know?

I know it sounds a bit provocative, but we're friends. So I guess I can I can throw it all to you like that. The first time you confront the market, none of it makes any sense. And then you find some guys who succeeded in the way that I did it as I found Buffett and I found Graham. And so they value guys. So what their idea is, there's a quantity that you can calculate that's different from the market price.

And if you put together you look at the yield, you look at the rate of reinvestment in a stock that gives you a value for that stock and you can reverse that process and get some expectations about it. So rather than working on what I think it's worth, just look at what the market thinks it's worth. And then I can ask, is that reasonable? And where there are instances where I think the market is so far wrong that it's worth sort of betting on the market being wrong.

And I can take this advice and say, well, are they wrong? Because there's there's a lot of pain here. Are they wrong because the market just doesn't understand is that there are many events where in option pricing, for example, there are many events where there's some binary event going to occur and the option is priced as if it's like Sholes, which is assuming that all possible outcomes close to the central tendency are more likely further away or less likely.

I think that there are very small pockets of miscalculation in the market, and I do think that if you know a little bit, you can get comfortable with the risk that you run into in every single one of those is that is something that the market knows more than you do. And so the way around that is just to diversify across enough positions so that if you're wrong in any given one and you would hope that over time you would generate a little bit more return potentially than the market, or at least your process is a little bit more sensible than the markets, which is just sizing into flight adjusted market cap, which really doesn't make a great deal of sense to me.

As competitive as it is as an index to be, it really doesn't make a great deal of sense to sort of allocate money. So that's how I do it. I just kind of think about it. If I was a business guy sticking money into the market and I only regard to the stock market sort of, incidentally, stock market investing that gave me these opportunities, how would I approach the problem or approach it like a business guy? I wouldn't really care what the index does.

I try and come up with a valuation. I know that I'm probably going to be missing some stuff and wrong and some stuff. So just size down my positions and try and hold a basket of them. I still think that over the very long term, that's a pretty good approach.

So let's talk about having the right sizing in our portfolio. So right now I'm going through this amazing CNBC resource with Warren Buffett and Charlie Munger and this all of the old Berkshire Hathaway annual shareholders meeting back to nineteen ninety four. And in the 2008 morning session, this gentleman asked Buffett in Munger, how aggressive can you build your positions in your portfolio, given that you have a maximum conviction? And Bob talked about how he multiple times had 70 to 75 percent of his net worth in one investment.

Now, Genz, what are your thoughts on that? Can we do that and should we do that, knowing that we're not Warren Buffett, is that a correct statement for Warren Buffett?

That probably is a correct statement for Warren Buffett. Is that a correct statement for me? No. Where in the world is that correct? For me, I would never say something like that. There's a point where I don't have enough interest to keep on digging in. And I think that Buffett, clearly, when you listen to Buffet talk, he's on a different level. There's no point in my timeline of development as an investor where I get to where Buffett has been at any stage.

So I'm never going to size like Buffett those I'm just going to keep them smaller. I think they're really the hardest thing about investing is just working out who you are. And as soon as you figure out who you are and you stop trying to do it like everybody else does, and just do it in a way that the only thing you have to do really to succeed is to stick with your conviction when something goes against you. And if you can do that, you're going to be okay.

If you can't do that, then you're doing the wrong thing. It's too big. You've got the wrong method. Don't like where this goes. Some momentum does it quantitatively, but he's got some momentum. Just doesn't appeal to me as an investment style. So I just can't do it. If it goes against me, I just wouldn't be able to hold the position. And that's exactly what you need to be holding it true value when it goes against you.

You need to hold it. If you're confident in the underlying and you can hold it, you're going to do it because that's when you get the sense when you get the better performance. So I always like that, but I think it's appropriate for Buffett to do it. I would still say 70 percent, pretty big Buffett if you're Buffett. But then again, he would probably say, well, I've got like nine percent of my money, Berkshire, and that's one stock.

When you think about slugging percentage to use a baseball term, I think regardless of the type of investment approach you use, you can have a busy like George Soros has this quote where he says something to the effect of or maybe Druckenmiller, which is obviously a completely different investment approach than I think any of us use, but said something like, Soros is right thirty percent of the time, but he just wins so much more on the ones on those thirty percent hits is winning.

I guess the size of his wins are so much. Larger than the size of his losses, so he can compensate for that, and that's really the same with Buffett, Buffett had a much higher batting average. But if you look at Buffett's performance over the last 50 years, you'll see that a large percentage of his gains, even even after the partnership years into Berkshire, I mean, some of the biggest gains in Berkshire's book value have come from a relatively few successful big investments like Geico is one.

Washington Post is one. Coca-Cola is one. So some of them were public securities. Some some of them are wholly owned businesses. But that slugging percentage, it's the same. I think Buffett is the same. Soros, the voices in Silicon Valley, that that that is, I think, a common denominator to a lot of successful approaches. And then in terms of sizing, I was just I was thinking about what was said in taxes, in the frictional costs that go along with investment management.

And you have to think of it like a barbell. You have to have one of two extremes. You either have to be extremely diversified and do what I think was and Toby do more of which is a quantitative approach. And you're looking for almost like an insurance style bet where you have you're taking advantage of the law of large numbers. You have a large sample space and value investing works over time. And so if you have a large enough sample space, you can gain a small edge and you can replicate that over and over, knowing that on average, low price to earnings, low price to book maybe, although that maybe isn't as relevant anymore, but a basket of value stocks will outperform over time.

And then at the other extreme, it's more of the concentrated approach, which is just the approach that I feel more comfortable with because I'm picking stocks. I think you have to be very selective and very patient and then you just have to wait for something that makes sense to you. And to Toby's point, you I've discovered this long ago, you can invest like Buffett, you can invest like Peter Lynch. You have to figure out your own style, your own circle of competence, and then you just have to wait for things that you understand.

And once in a while, for me, it's very rarely. But once in a while I understand something and then I can take a swing at it. And so I think you can improve you can improve your hit rate by by being overly patient and and just waiting for something that that shows up that makes sense to you. But I think it has to be one of those extremes. You there have to be very concentrated and very selective or you have to run some sort of a diverse, diversified approach that has a proven edge over a large sample space.

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All right, back to the show. So guys, let's move to the second topic here today and talk about cyclicality. We did have the pleasure of speaking with Howard Marks about his book Mastering Market Cycle.

He on the show and he emphasized the two rules of technology. Rule number one, most things will prove to be technical. And rule number two, some great opportunities for gains and losses come when other people forget about rule number one. So starting with you, have you made or lost money in the market because of neglecting them or perhaps from having a deep understanding of cyclicality? Our first question, the premise a little bit in a sense, that you're going to have a lot of survivor bias and claim in their cycles because that implies something came back.

But what about like all the other things that literally went to zero and blew up and you don't read about anymore? So Cycos clearly didn't work there. But if you're a survivor, cycle's always going to be amazing because just keep buying the US equity market. Your genius, you get earn the seven eight percent equity return premium, but go as all the other countries where on average earn like two percent and you get your face ripped off most of the time.

So I would say I just question the premise of that in the first place. And then obviously all my wins go exactly in line with what he's talking about in the value realm where you buy something that's totally out of favor, total piece of junk and it makes money. But who cares about that? I would say the cycles that I screwed up the most are actually the opposite of that momentum cycles where I can think of three examples in recent memory.

One is in real estate. So my my brother lives in Eagle, Colorado, where I grew up in the mountains. And probably 20, 2012, we had all these opportunities by different real estate properties out there. But of course, being value cheap bastard like, nah, it's too high. I don't want to get in. Of course, we didn't realize that's a momentum trade and it's only quadrupled with leverage and we'd be millionaires right now. And of course, most recently here, Marcelo's 20, me being a genius, I'm like, this is the greatest time ever to buy value.

I'm going to do that. And yeah, that kind of work. But guess what about momentum? Because it would have worked ten times better. Right? So for me, all the cycles that I look back that I missed, everyone always value guys always talk about cycles and point to value wins, but they don't highlight that big wins or the momentum cycles that we all miss. I think that's an important thing for kind of value people to think about is momentum cycles, not mean reversion cycles.

What do you guys think? Yeah, I mean, I think that's a great point was when you think about that real estate example used in Colorado, you know that local market might have been at some inflection point where the true value was dramatically understated for whatever reason. And whether it's people moving to the area or home prices appreciating or whatever, whatever it was.

But I think about Google as an example in the stock market, you could you could look back and and I think Google did 20 billion in revenue in thousand eight when the last real lengthy recession occurred before this past one. But the advertising market that year contracted 10 percent. Google's revenue slowed. It was growing at 50 percent before the recession. It still grew through that period. I think their revenue grew eight or 10 percent in 2009, which was a significant advertising downturn.

And it was just the fact that Google was such a small piece of the advertising pie. At that point, they had twenty one billion in revenue or something. The advertising market was four hundred billion. So they had a five percent share of a of a big market and they had a value proposition that was very clear cut and it was clear that they were going to be much, much bigger. And so those are those are businesses that are able to withstand the cyclical nature of the economy.

And I think all businesses are cyclical to a certain extent, some some more than others. But the other way to think about cyclical businesses or the risks that you're talking about, the risk of investing in something that's cyclical is to think about how you think about the business itself within that industry. So I'll use homebuilding as an example. Most homebuilders, all homebuilders are cyclical because the nature of real estate is cyclical. And so that implies some some sort of risk to a typical homebuilder because most homebuilders have an enormous amount of inventory on their books.

And what happens in a downturn is home price, home sales, slow land prices often decline. And so homebuilders are left with a huge amount of inventory out there on their balance sheets that have to be marked down. And a lot of that inventory financed with debt. And so the balance sheets are often very risky. But within that industry, there's a company called MVR. And I've spoken about this company before. And it's a it's a stock that my fund owns.

But it's it's a it's a very cyclical business, just like all the other homebuilders, but with one key difference. And that's that's that the balance sheet is much lighter and they carry far less inventory than most of the other homebuilders. And so what that means is their inventory turnover is much faster. They have about one point five billion in inventory and they turn that inventory about every two and a half months. Layna is the biggest builder in the country.

They did about twenty two billion in revenue last year. They have 18 billion in inventory and they turn that inventory about once every year. So investors turning its inventory five times faster. Llanera did about three billion profits and 18 billion in inventory and and NPR did a billion in profits on three one point five billion inventory. So basically what that's telling you is Anvers return on capital is about five times higher. And so it's just a better business is another way of saying it.

But it's it's got a variable cost structure and it's much less risky when the downturn comes. They they tie up their land using options, which is how that's how they're able to do it. They don't put as much capital into the ground. They put a down payment on the on the land. And if trouble comes and they're able to walk away and just lose the option premium, just like a just like a call option on a stock. John just pushed back because I was talking about more like sentiment cycles.

I mean, arguably these guys are positioned extremely poorly for a sentiment cycle. They may be missing, right. Because when you want to own the like the super operating leverage maxed out, put on homebuilder versus the nimble low inventory one, because if you can borrow for negative rates and there's a sentiment cycle like outargue, you actually take a huge cycle risk betting against sentiment, the sentiment cycle by not buying the other one you mentioned that's the problem. Yeah, exactly, and so the problem for most builders is they can't get away from exactly the situation you're talking about.

So it's two things. One is the inflation in land prices that happens over time. So in theory, you're much better off owning land if land prices are appreciating at two percent a year because the nature of your slow turnover. One benefit of slow turnover is that land as it's on your books, is going to be worth more when it leaves your books than than the price that you paid for it a year ago. So that is true. The problem is and again, this is why builders can't seem to replicate Ember's model.

The problem is one of it is incentives. All the builders, if you read the proxy statements, they're almost all the management teams are incentivized to produce absolute profits. And so the best way to produce absolute profits, not necessarily return on capital, just make more money. The easiest way to do that, just like Buffett says, the easiest way to make a savings account, earn more money, is just add more money to the savings account. So builders are incentivized to just go out and buy more land regardless of the returns that they can generate on that land, because they'll know that if they can, even if they earn 15 percent gross margins set at 20, they're going to be compensated for that at the end of the year because they can use other people's money, the bank's money, to go out and buy more land.

So it's the inflation aspect of it. And the incentive structure makes it very difficult for any other builder to copy MVR. But you're exactly right. That number is on the losing end of it in an inflationary environment or in a big boom. And we're sort of experiencing that right now in housing, which housing is in a boom right now. Part of its covid fueled in part of the housing market's, been in a bull market for a number of years now.

But yes, NBER earns smaller profits relative to what it could if it put the land on its balance sheet. But the benefit is when the next downturn comes and it's inevitable in housing, nobody is going to be much safer. They're much better positioned to survive any sort of downturn. And most of these builders are going to be fine. They're going to survive fine. A lot of the builders have tried to slowly try to work towards a more asset light model.

But again, they none of them have been able to replicate what MVR has in terms in terms of returns on capital. But they're all trying to go that direction to risk their balance sheets. It's just a slight philosophical difference. Is this one approach to investing where you say, I'm going to try and maximize the amount of return that I can take per unit of risk? The downside, which I think is a sensible way of doing this, I'm going to maximize the amount of return I can put, amount of risk that I can take, or I'm going to try to not take any risk at all.

No, I'm not. There's no way in the world you're investing in the markets at all, not taking any risk for situations where there is some returns still available. And I'm going to try and only shoot on those things. I think I'm sort of more in the they just rather than any of the known risks. And if there's a way that you can lose money, it's just not going to do it. You have to be careful, because like we said at the top of this call, knowing what you don't know, there's there's all kinds of uncertainty out there.

But I do believe that when you think about surprises, it just seems in my this is just an empirical observation. I don't have data on this, but good surprises tend to happen more often to good companies and bad surprises just tend to happen more often to bad companies. And so I'm not in the game of trying to predict these cycles. I understand that business is cyclical. And so for me, I just kind of I think Charlie Munger has this quote.

Sometimes it ties with you, sometimes it's against you. And we just focused on trying to keep swimming forward. And that's kind of my view on it, is sometimes when is going to be at my back and sometimes it's going to be a headwind. But I'm going to try to focus on investing in companies for the long run that I think have staying power and that are good businesses that I I have a feeling that earning power is going to be higher in five years than it is now.

For example, I want to invest in those types of companies versus the the real cyclical companies that have a huge amount of risk and much more volatility to their business. So I tend to avoid those those types of companies. It's not that you're not taking risk because all companies have to have certain amounts of risk and things can change. Which goes to my point earlier on. You want to invest in companies that are adaptable to change. And I talk about Facebook once.

I mean, that's a company that I think has proven its ability to adapt to changing environments. That's a business that's very difficult to predict 10 years out. It's hard to know what that world is going to look like in 10 years. But the management team to this point, and this is not guaranteed. There's no guarantee that this will be the case forever. But to this point, I think they've done a good job at shifting and recognizing business risks that they faced as opposed to just putting their head in the sand and ignoring it.

I think they've been very genuine about their desire to fix issues. I think they've been they've had a lot of foresight and risk that their businesses face and maybe is facing right now. And they've they've adapted to those changes. So that's the other thing to think about is you want to again, for my style of stock taking, I want to invest in companies that I think can adapt to those changes and can have some sort of staying power through these cycles that will inevitably occur from time to time.

So I think that's a great Segway into the third topic of today, which is all about risk. So typically, whatever value investors talk about risk, they often refer to Warren Buffett's comments on risk being a permanent loss of capital. That's one. And the second one would be opportunity cost of not being invested in the best investment at the time and how it mocks next. The obvious but yet profound observation that viewing risk as higher risk implies high return is just wrong by default.

I mean, if a return is certain, it's by definition not risky. So kicking it back over to you, Toby, how do you define risk and and how is that reflected in your own portfolio and investment strategy? I subscribe to the definition of risk that you've got, the risk is that you lose such a material amount of money that you can't recover from it. That's the risk of ruin and not so much the volatility on the path to getting there.

You didn't answer the last question, but I would have just said the big cycle that has hurt me in particular was partly to by virtue of the fact that he's got some 30 funds at the. It's just been this has been an extraordinarily long, bad run for value. And there's Mikhail Siminoff. He runs two centuries. He's got that research stitched together, three data sets, including the KAOS Commission and the other French data with with this other sort of crazy thing where they've gone and looked at annual reports from like eighteen, twenty five onwards looking at dividend yields.

Plus Calce Commission, which was priced was French data, which is price to book and other things. It's the longest, worst down cycle for value in two hundred years. So that's that's been difficult to sort of invest through, particularly because it would have been so much easier just to go and pick a sexy tech company and let it run. And I can see which ones are like they're very good businesses there. I just think they're very expensive in many instances.

And if I didn't care about risk now, I was only trying to capture that return by just going up on those things. And I would make me feel good for several years until it gets to the end of the cycle. And then it would feel terrible and it would be like a betrayal of my own code. So I couldn't possibly do it, but it would take away the pain in the interim. So the risk that's the way I define risk.

I just don't want to get there's two things. One of them is I don't want to invest in something I think is massively overvalued because I think that at some point it's going to make its value. And I also don't want to I want to follow the rules that I've established because I know that those rules will keep me safe. So part of it is the sort of intellectual psychological like I if I keep on following the rules, then I haven't betrayed the code.

And at some point when it comes back, then assuming that it does, if it doesn't, then I won't be in the next one of these next to somebody else. I think you bring up a good point, Toby, I mean, you have to be true to yourself and you probably couldn't sleep at night if you loaded up on those tech companies. And then there are all the investors that probably can't sleep at night if they don't have tech companies in the portfolio.

So, yeah, that's right. I'm not talking about Facebook, by the way. I don't want to be that to sound like I just came straight on John's heels criticism because I think that those big old Sanjit like the Fang or whatever the whatever the current things like, funnily enough, I think that reasonably they're not egregious. Those companies, which I can see how people are buying them. It's the it's the the other stuff in the middle of it's not yet proven that has the big hockey stick in the revenue line and then the hockey stick magnified in the Priceline that are the ones that I'm kind of talking about here.

If you're a mom, I guess you might be you might be writing this.

You might not want to get Officer Critical. Yeah, that's a really good point, Chubbie. And we're talking about risk. I would say the personally, with the amount of money printing that we see right now, I found it very risky to hold cash, partly due to opportunity cost, due to asset classes competing with each other, but also partly due to inflation concerns.

But let me throw it over to us. How do you define risk and how is that reflected in your portfolio?

I think Toby did a good job saying that basically the main risk to any portfolio is really behavioral in some sense, because obviously there's always fundamental risk or if you buy something that has a high chance of cashflow destruction, well, that's kind of more well understood, I think. But it's just behavioral stuff that kills people. So it's like either foamer, like you're saying, like got to have cash and I should have bought Tesla and then you may go take an action that put me in the wrong place.

Then there's chasing returns. And so the solution to that risk is to form a religion. But the problem with the religion is now you get a lot of conviction. So I'm now of the stance that we should believe in multiple religions and be religious about that, because that seems to be the only reasonable solution of a behavioral problem that's got on my my latest stance and theory on the situation. Yes, well said was you know, I remember once thinking it's definitely my religion that I should always have bonce and and to be fair, you would have made a killing in long term bonds for this cycle.

That's not what I'm saying. But I don't know how many good arguments I can find for buying you a 30 year bond, giving me a negative interest rate or whatnot or close to at least here in Europe. John, let me throw it over to you. How do you see risk? Yeah, I think, first of all, I agree with Wes's point that I don't think you can be dogmatic about anything in investing. And so my view on risk is really simple.

It's just the risk of losing money is how I think about it. And it's I don't think about volatility. I don't worry about volatility. I define risk as the chance that I make a wrong decision or or that you can think about risk in a portfolio or you can think about business risk. And we talked about some specific companies that I was talking about before. I think I I look at risk when I'm thinking about investments by trying to analyze the risks of change or the risk that the business I'm looking at might suffer some catastrophic change to their future free cash flow and therefore the intrinsic value of that asset would be significantly changed.

So, yeah, that's how I think about risk. I think most investors would benefit from worrying less about sentiment shifts, less about volatility, less about what's working right now or what's not working right now. And just think about individual companies and think about the risk to those businesses and and just think more. Just like Buffett says. I think thinking like a businessman, taking like a part owner of whatever company that you're going to buy stock in is the best way to think about investing.

And then that will lead you to think critically about the business itself, not just the price you're going to pay, but the risk, like I said, the risk to the business, what might cause it, what might cause a change in that business, what other companies could attack this business's competitive advantage if it has won things like that?

I'll just add one thing, because just because I understand what John saying explicitly is there is a risk that the market doesn't agree with you. Some level, like any, unfortunately, is value investor. There's an assumption that gravity matters and the fundamentals wag the market. But it could be the case that actually that doesn't. And what drives fundamentals is actually prices go talk to sound like great, fundamental, amazing business with huge return on capital. But the guy has been running or gal for 30 years and his cost capital is going to probably be ten times more than Tesla.

So you tell me what matters, the momentum or the metals, and it gets confusing when you start really thinking about it too much, which is what I have been doing. So I like I said, I like value great religion, but I also like momentum as a great religion too, and I just believe in both of them. Now, let's take a quick break and hear from today.

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I've spent a little bit of time because this works so badly for so long. I spent a lot of time thinking about, like, what are the drivers of value? And I think that the more I've sort of spent time thinking about it, the more I think that Buffet is right, that when you buy something, you lock in a return and you get the yield and you get the underlying growth. And it really then doesn't matter how the market troops in the interim, I mean, that's not entirely true.

If you're managing money, you've got other considerations, then you've got this sort of asset liability issue where you do have to perform. Otherwise you lose, you lose your assets. So it's not not necessarily applicable to professional investors. This is more for individual investors. You really have locked in the returns that you get in the market. And one of the risks to that is that you have a competitor who's not economically rational or who the market treats and are not economically rational.

And so this is a specific test. The point cost of capital is virtually zero and he's competing with guys who have expensive cost of capital. And so that makes that a different dynamic. But I think that's an unusual dynamic to most of the time. What it is, is the business is those kind of businesses that you want to find are the ones that us competitively advantaged that are going to sort of chug along regardless of what everybody else does. And then if you buy those and you get the purchase price right, it doesn't matter if they spend the next five years trading at a discount.

If anything, that's the best thing that can possibly happen. See if you're right and be confident that you got the valuation right. You just keep on buying and then unagi to the son of the guy who the sun is a little bit older than me. So the father who did this buying, he worked in not a particularly well paying job, but he worked at that. There was this brewery in Australia. It was just perpetually cheap and it was a safe investment that was going to be around forever.

He just put all of his money at this brewery in there, an incredibly wealthy family by virtue of the fact they bought one stock and kept on buying it. And it was mostly pretty cheap for most of his life. So it can work and it's not necessarily going to really get the great stock price performance. If anything, you've benefited from the low prices, from the discount. Yeah, because in the end, if you believe intrinsic value, if you believe stock prices correspond to intrinsic value over the long run, then which which I believe and sometimes that can take quite some time longer than we might like.

But over the long run, I do think those two things converge. So so the price will meet the intrinsic value. Either intrinsic value will come down to the price or the price will come up to the intrinsic value. If you're truly trying to estimate Tesla's intrinsic value, you would spend a lot of time thinking about how likely it is that Elon Musk's salesmanship is going to continue to allow him to keep that cost of capital long enough to where Tesla can actually start producing free cash flow.

And so I think the bear, the bearish arguments on Tesla for so long have been, well, that's not going to happen. The business is not profitable. It's going to run out of cash. They won't be able to access the capital markets in a downturn. And that probably would have been true if if that would have happened, if if they wouldn't have been able to access cash at certain periods of time, they they might not have made it, but they were able to make it.

So I think in that case, it's such a unique situation. It's Thomas Edison in 1880, I think at JP Morgan to finance his operation. And J.P. Morgan had his house wired his his own primary residence and the thing burned to the ground or didn't burn to the ground, but it started on fire. And he didn't even lose faith after after the electrician came out. I guess the electrician was so, so scared, J.P. Morgan, because he was such an intimidating figure.

He stayed up all night the night before he was going to go back and meet with them. And and he thought he was going to get fired, lose his job and who knows what else. And Morgan told them, hey, do it again, rewire it. And so he rewired it. And Edison kept his access to Morgan's capital. And the rest is history. So it's a different type of investing again. But sometimes you have to factor in those types of reflex.

I guess I call them reflexive components to the intrinsic value, because those can, in fact, influence the future of free cash flow generation. But for me, in the end, the value of any asset is the amount of future cash that it will produce. And that end can be a long time into the future. But at some point, the market will come around to the price.

All right, guys, I think it's time to go to the fourth and last point here of today's discussion. And the topic is advice to younger self and the three of you, all accomplished investors you've paid your dues making. I want to say plenty of mistakes. I don't know if I'm getting ahead of myself whenever I say that, but most investors with a long track also make mistakes. And you also calibrated your strategy accordingly. So knowing that, which type of advice would you give to your younger self when forming your investment strategy?

And I was just about to say something goofy about not buying value stocks. And because I said that going into it, I think that we should have the first go. Yeah, I think that's a fair. Look, I haven't had any success yet, so I won't I don't really feel like I could go back and say give the yourself. Some of the advice that I would give to my younger self is figure out how to value growth properly. And then I think you'll do a little bit better rather than being so wedded to value.

I think that the mistake that I have made has been trying to not pay for growth, trying to get growth for free. But I think that there are instances where being better able to value growth would have led to better returns and probably does work out for the best over the very long run, if you. So I think that that would be the advice that I would give to my younger self and actually to try to take that advice as my younger self now, because I hopefully I still got another several, four or five decades left on the planet.

I can still correct that error. I was kind of echo Toby's point, I have a note here, if I was going to give advice to my younger self, I would just experiment heavily in hopes that you have a wide bell curve of outcomes and mainly so you can get humility and stop being so conviction oriented in your decision making. But it seems to me like overconfidence is the number one driver of great results, but more often results that you don't understand why you got them.

John, I guess for me, yeah, getting kind of focus on getting better every day, so trying to learn something new every day has been some of the best advice that I've received over the years. And so that's something that I'm not just telling my younger self. I'm trying to do that now, always trying to improve at this game and always trying to be open minded. I think investing in this goes to West Point was made a few minutes ago, but not being dogmatic about something.

I don't think I don't think you can clone another investor. I don't think you can be like I said before, no one is going to be Warren Buffett. You can't be Peter Lynch. Every every investor has their own unique set of understanding, their own lens through which they view the world. And I think I think just the way we're wired as humans, we're going to all view things slightly differently. And so we're all going to be we're all going to have to find our own way in business or in life in general, but certainly in investing, there's no one way to skin the cat.

And so I think that's really helpful to keep in mind is to to be open minded and to be willing to learn new things and to to not get sort of get stuck or to be dogmatic about certain certain things when it comes to investing. Because I think there's a lot of that for some reason. There's a lot of that in the investing world. And then for me, I think that the most critical thing that I've learned and and again, this is still consider this to be quite early, hopefully in my career, just like Toby said, hopefully there's a long runway ahead for all of us.

But I think my empirical observation has been that the best investments in the stock market over time come from the best companies. And so if you're trying to be a long term investor, if you're truly thinking of yourself as a part owner in a business, you want to own quality businesses that can can compound value over the long run, especially when you factor in things like taxes and other frictional costs that go along with turnover. If you're a long term investor, you want to own good companies.

I get an intern this summer who put together a list of the top performing stocks over the last 15 years and I chose two thousand five because I wanted to see sort of the middle of the last cycle. You see a lot of things like what? What's the best performing stocks in this bull market? And that will, as we were talking about earlier, that's going to catch a lot of these survivors that just didn't barely hung on, did not go bankrupt, but survived.

And you're going to see a bunch of those types of winners if you start in 2009 or 2010. But in two thousand five is sort of like the middle of the last cycle. And when you look at that list of the top one hundred performers, they're all really high quality companies that have survived over now to different recessionary periods. And so your long term investor, if you're thinking of sort of the coffee can approach to investing, which is sort of how I think about investing, then you want to own quality companies.

And so my mistakes have always come from when I've when I when I purchased a stock that looked very cheap on the surface. But in reality, it might have been 10 times earnings, but it might have only been worth seven times earnings. So I've made that mistake numerous times. And conversely, some of the some of the best investments I've made and this is something that is not just twenty, twenty, twenty twenty is sort of in vogue when it comes to this because there's so much momentum.

But where I was very convicted on the business, but other investors questioned, I guess, the valuation at that time. And so some of those some of those investments have turned out to work very well. And so I think a business is not worth what it earned last year. It's what it's going to earn over the course of the life of that business. And so I think that's that's something to keep in mind as well. So just by good businesses, obviously, you have to pay a price that is discounted in order to to achieve alpha in the stock market.

But I think focusing on quality companies is, in my experience, the better approach. I think far more investment mistakes are made from picking the wrong business than paying too much for a great business. You can make mistakes in both those categories, but I think the more catastrophic mistakes are from selecting the wrong business. Yeah, that's definitely true, I mean, if I could give advice to to a younger self, it would be listen to Toby. I always take up the two example of of buying GameStop and Bed Bath Beyond.

We have the record. And both times Toby said, don't do it. And he all the reasons why. And and both times it didn't listen and look at it. They work out and they work really well.

No, no, they really they really didn't. I definitely called it at the wrong time. So we had you on there with Jesse Felder and he made a fortune and best Bath Beyond because he's much smarter than me. So I bought it on the way down. Apparently, I misunderstood this momentum strategy, so I bought it on the way down, bought on the way up, low and behold. So he absolutely made a killing in that. So I just wanted to to say that if I can give my two cents to really a younger self and not just a few years back and listen to Toby, if I could give myself another advice, it would probably be to Buffett set that he bought his first dog at the age of 11 and that up to that age, he was just wasting his time.

I kind of like that quote, because your Buffett talks about being a learning machine. And that's definitely something that I haven't practiced definite nuts since 11, that's for sure. But I always understood the intention of compound interest. And you know why when you accumulate capital investing that. But I never really understood the concept of compounding knowledge before I got into my mid or late twenties. And I think that's one of the things I would like to change. And the other thing, this is just something I'd like to convey to our listeners, too, is really to to read more.

I think one of the mistakes that that I've made as an investor, as I speak to people and they're smart people, they're not going to sell this to you. But whenever you, Premal, speak to people, especially if you're not too selective, they tell you things you already know or they talk to you about things you don't you're not interested then or you don't understand. You're speaking too fast. They're speaking to slow reading. It's just you get it in just the right tempo and you get just what you're interested in.

And it's a lifetime of knowledge put into two hundred pages or whatnot that I haven't done that before is just I don't know. I definitely wasted my time until then. Guys, it's been unbelievable talking to you about, you know, not just these topics, but really having the chance to have the conversation going in type of of direction that we want. Before we let you go, we would definitely like to give you the opportunity to tell the audience where they can learn more about you and your companies.

Company's West Coast out with you. Architect Dotcom, and just follow the blog and you can hit us on Twitter as well at Alphatech. Yeah, my firm is called Sabre Capital, and you can find the website at Sabre Capital MGT dot com and I have a lot of the archives up there, publish a number of blog posts and so you can follow me there and you can find me on Twitter as well, Toby.

Yeah, I've got acquirers, funds, dot com acquirers, multiple dot com. We've got the interview. John is up at the moment because it's one of the most popular podcasts of the year. What name recognition he got from how did that happen? Well, that's that's the best way to get in contact with me or through Twitter greenbacks. It's a funny spelling and back idea. I spent too much time on the. Amazing, guys, thank you so much for taking time out of your busy schedule to join the Masters podcast yesterday.

I really hope we can do it again. Thank you so much. Thanks, David. All right.

That was all that I had for you for this week's episode of the Masters podcast. Traini will be back next weekend with our interview with Lawrence Cunningham.

Thank you for listening to IP to access our show.

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