Robert Hagstrom (1:47)

We're probably getting near the peak of the capex cycle and some of these things and then it'll plateau for a little bit and then it'll start to decline and then it'll be interesting to see how the returns are foreign.

Matt Ziegler (2:01)

You're watching Excess Returns. I'm Matt Zigler. Bogomil Baranowski of Talking Billions is co hosting with me. This is the Hundred Year Thinkers. I've got Robert Hagstrom in one corner of the Warren Buffett Way and CIO at Equity Compass and Chris Mayer, Mr. 100, Bagger himself, Co founder Woodlock House, Family Capital. All live in the flesh. Today we are talking about Michael Maubouson, all sorts of things. I have a feeling this is going to stretch out into more than one episode, but that's for the better. Straight into the deep end. Let's start by talking about base rates where they're kind of the starting point I think for everything. So a base rate, if you haven't encountered the term, the distribution of past outcomes for a reference class of similar situations. Chris, we're leading off with you. The whole hundred bagger research fundamentally, is that just an updated base rate study?

Chris Mayer (2:54)

No, it's not really a base rate study. It's a, it's a study of the extreme outcomes. So sometimes, you know, every once in a while I hear somebody say, oh, it's survivorship bias. It's not survivorship bias because I'm not saying, I'm not looking at the study and saying, you know, how that these statistical profile or whatever is going to predict the next hundred bagger. I'm looking at the ones who've made it. And you know what, what we can learn from that is studying our businesses and what, what conditions maybe are not, you know, sufficient alone, but which otherwise seem to be necessary. I, I sometimes use analogies from sports. It's like if you wanted to study, like if you were studying great golfers, let's say you were studying Tiger Wood swing, you wouldn't say, oh, it's survivorship bias because you didn't look at all the people who swung like that and didn't make it. He wouldn't say that. You know, you're looking at Tiger woods, they're looking at a guy who has made it, who's very successful and you're looking at traits and things that he has or other pros have in common that then you can apply and your own successes. It would be different if I was saying if I looked at a whole population of people that swung like Tiger woods, then that's when you start, you know, we start thinking about survivorship bias. I don't know if that makes makes sense, but there is a difference between taking a statistical study and using it to make a prediction versus just studying certain extreme outcomes and you know, learning from what sort of traits you can pull out from that.

Matt Ziegler (4:20)

I wanted to start here because I wanted the anti definition. So thank you for getting appropriately riled up by this. Literally. I think this is so important to understand parse survivorship bias base rates and untangle those why you reacted the way you did to my provocative question.

Chris Mayer (4:42)

Me?

Matt Ziegler (4:43)

Yeah, you.

Chris Mayer (4:44)

Yeah, I mean I think I Mean, I think, I don't know if what, what I can say more than I already said in a way. I mean I know because I've had people say that before and say like well it's you know, survivorship bias. But I think they're misunderstanding the intent of the study because again it's not that I am looking at all these trying to come up with a profile that then we're going to apply to existing population of companies and predict which ones are 100 baggers. So it's, you know, it's, I think also another way I think about it is markets are extremes, power laws prevail. And you know, it's interesting because Bessembinder just updated his study a couple days ago. I don't know if you all saw it but you know, again I think it shows you the extreme outcomes of markets and that's where people are interested in that or look interested in looking at great businesses and seeing, you know, what ones may have similar traits as these other extreme outliers. That's, that's really the usefulness of the study. It's not, it's not, you know, meant to be a statistical analysis of predicting the next hundred bagger.

Bogomil Baranowski (5:53)

I was thinking of Bessembinder, how very few companies actually represent all the gains in the stock market. Right. You're looking for the extremes the hundred.

Chris Mayer (6:01)

Yeah. Study actually now I have it here. If it's, he looked at 29,000 stocks listed from 26,1926 to 2025 and the median return was negative 6.9 despite an enormous amount of wealth creation. So yeah, yeah, it comes down to he said after including outcomes from most recent nine years, just 46 firms account for half of the net wealth creation over a full century. So it's, I'm hearing dreams. Yeah.

Bogomil Baranowski (6:34)

A need for a concentrated portfolio. But we'll come back to that. Robert, I want to ask you, Buffett seems to spend enormous time looking at long historical records, multi year profitability margins roes across decades. What is he doing? Is he anchoring to the base rates before he lets any story take over? What, what, what is he up to?

Robert Hagstrom (6:55)

I, I'm not, I don't know if he's anchoring to, to, to base rates. Bogomil what I think he's doing is he's, he likes companies, you know we wrote, wrote this in the Warren Buffett way under the tenants. He likes companies that have had consistent operating histories regardless of the vagaries of the economy, interest rates, inflation, et cetera and so he's looking, you know, can you motor through and still provide good economic returns for your owners despite, you know, all of the things that you've had to endure over the last, you know, 10 years, 20 years, whatever the case may be? So he believes by looking backwards and seeing how you endured during these challenging periods, if you had endured in those challenging periods, the likelihood was that perhaps you will endure in the, you know, in the future when the period gets difficult. So I think he's looking for consistency over time, believing that consistency might prevail going forward.

Chris Mayer (7:57)

I also say I would throw in, too, with Buffett. I think he's, like, intuitively thinking about base rates, although he doesn't explicitly ever say that, as far as I know. But that's part of the reason, I think, why he has historically avoided tech stocks, because he knows that the diverse, you know, the disparity of outcomes there is much wider than he's comfortable with. So I think he, you know, sticking with the companies, like Robert said, the base rate outcome of those companies is generally there's a narrower spread of outcomes than with some of the things he's avoided.

Matt Ziegler (8:30)

Keep pulling that back.

Robert Hagstrom (8:32)

When Mobison wrote the base rates paper, Chris, I don't know how you interpreted. I think he was cautioning people that you ought to be looking at base rates, because to diverge away from base rates is very rare, I should say, to diverge away from base rates over the long term, to do something quite differently than your base rate that's going to endure and sustain is really highly unusual. And so you really need to sharpen your pencil or sharpen your thinking. When you have a company that is, that has moved past its base rate because it's so rare, it doesn't happen that often. Now, I would, I would suspect that Besseminder's report, if we looked at those 46 companies, pretty much every one of them probably diverged from base rate over time because that's the source of the excess return. But Michael was just saying it's so very rare. So start with the base rate. And then if you have a strong. If you have a strong conviction that they're going to do something other than the base rate, then you better be very, very good in making that assumption or calculation, whatever the case may be. So I think it was almost kind of a Graham thing, like, you know, start with the base rate, and how is this thing valued on its base rate? And if you're going to buy it because it's going to do something other than its Base rate. You better be really thoughtful about that.

Chris Mayer (9:55)

Yeah, I think it's not like it's an either or question. It's like base rates or this, the base rates. To know that in the back of your head that the odds are against you in this particular business because you're betting on some outlier, that's. Yeah. So just, you just know the odds are against you. It doesn't mean that you're, you know, not going to do it. So that's a part of what we do is portfolio management. We want those extreme outcomes. That's why we have a portfolio. So hopefully, you know, you have 20 names, 15 names, whatever it is. And so that gives you lots of shots at possibly getting one of these extreme outcomes.

Matt Ziegler (10:34)

Tack that on to today for a second, Chris, like including the stuff that you're probably not going to go out and invest in. I'm thinking about how do you think about base rates with all the talk of AI stuff, How do you think base rates when you talk about the giant run up in the last couple of weeks or months and I don't know, gold or energy or something else, how do you use that understanding to help sort of filter how you're seeing the world?

Chris Mayer (10:57)

Well, I mean it's not only, I would say, not only base rates, but it's also kind of where your own circle of competence is and lies. So you know, the run up in say, I don't know, oil stocks or something like that is, I think we can say is that going to be a long term, you know, outperformance or is it just a result of temporary macro conditions? And same with, the same with the other side. We have had things that have sold off because, you know, energy costs are going to be higher for them or whatever. But again, you have to think about full cycle. Does it really matter? So it's a little bit different than per se, a base rate analysis. It's more of just a factor of where your own circle of comps lies and whether these factors are long lasting or if they're just something that's going to happen for some number of months and then go away. I mean there's a lot of flows in the market and Robert knows full well that are just there to take advantage of these short term trends and money flows in and out. And I mean people like us don't really invest around those sorts of things.

Robert Hagstrom (12:01)

Yeah, I think Matt, you'd have to separate commodity base rate changes from business base rate changes. Right. So you know, commodity base rate changes are changing all the time based upon supply and demand and interruption of supply like we're seeing in the oil market. But those are almost always temporarily. I can't think of anyone, Chris, in the commodity space that had a, you know, that changed its base rate and it, and that base rate was changed for five to 10 years. I mean, you know, they're typically imbalances in the market, but those imbalances are corrected pretty quickly because the commodity is not hard to dig out of the ground or grow or whatever the case. But you can solve that imbalance which generated the excess return. You can solve that pretty quickly. But businesses, you know, that's a different game that, you know, businesses as you know your sales and earnings. And if you're going to diverge from your historical base rate or the market's base rate, you know that that's where you, that's where you have to do the really good thinking.

Chris Mayer (13:00)

And I don't know, Matt, if you were kind of trying to get us to go in this direction, but in some ways you could argue that AI scrambles to base rates. Right? Because you're based on some sort of historical outcome. And now you could argue the AI is a brand new technology, that you have to throw that out.

Matt Ziegler (13:17)

Right. Spend a minute on that though, because I think that that's, that's a very compelling marketing message to tell potential shareholders, throw out the base rate books. Forget all that stuff. What's, what's. Why? I mean.

Chris Mayer (13:31)

Well, I mean, it depends from the perspective. Yeah, I mean, it depends from the angle, right. So let's say you're an investor in a software company and you've had this long track record, maybe a 20 year track record of success. And now AI comes along and the market is basically saying, throw out that base rate in the last 20 years track record or whatever it is, because this new technology has now changed the landscape completely. So that makes it a little tougher if you flip it around as the AI investor, the guy who's investing in the AI natives and say, okay, well this is new technology. Throw out the base rates because this is going to be the next best thing. Yeah, you're on the other side of the table. But I think both of them are, they're not easy to handicap in general.

Robert Hagstrom (14:15)

Yeah, every innovation, you know, business. Yeah, I think Chris is spot on. When, when we had the, you know, the damage done to the software space, we had sold those, you know, many of the software companies sold all our software companies, except for Microsoft, you know, back 2024 only because I couldn't figure out what the new base rate was going to be with AI and the software companies. Right. I mean if you think about the sell off in software, it really was a debate about the terminal value. So when you run the DDMs, you know, 80% of the value of your DDM is in year 11 on out to perpetuity. 20% of the value is that, you know, if you're running a two stage 10 year model, you know, 20% of the value is that 10 year stream of cash. But you know, best reminder will tell you, you know, that the residual value was, was what created those 46 companies. Right. So I think the market struggled with what's going to be the residual value. And that's based upon what's the future base rate. Right. What are these things actually going to grow now? Are they still going to be around? Yes, I think, you know, that's the argument. But the question is nobody has an idea exactly what's going to be your revenue, what's going to be your revenue base rate growth from here? Because AI is going to take part of it, but you might have other opportunities that you can jump in that can offset that. We just don't know. And the market, when the market can't figure that out, that's when you're going to get these big swings in prices. Now I find it very, very interesting. Everybody wants to jump back into the oversold, what they perceive to be the oversold price of the software companies. And I get, you know, here's reversion to the main, and Ben Graham and all that. I get that. But they still haven't answered the question what is the residual, what's, what's the base rate of this thing going forward? Nobody knows because of AI. So that, that, that's a tricky bet to make. A reversion to the main bet is a trade. A reversion to the main bet that you want to hold long term is that you've got a firm handle on what that residual growth rate will be. And for me, Chris, I, you know, I struggle with trying to figure out, you know, what salesforce going to look like five years from now. What's service now going to look like five years from now. I can't get that into my mind. And so therefore we don't play the game.

Bogomil Baranowski (16:28)

With every innovation, it looks like the rules that applied so far no longer apply. But every single time, even with AI, I feel like we're going to be surprised in how big it is. And then we realize it takes Longer, and it's a bit disappointing in many places. But we'll come back to that. I'm curious about the inside view, outside view concepts. So inside view being the blend of deep, specific knowledge. Inside view. And then you have statistical base rates. Outside view. Chris, when you research a stock, you have your thesis, you're convinced you're right. How do you compare that to your inside view? You know the business very well, and then the outside tells you this business will likely be average, like most of them are. Like, how do you reconcile that? You're. You're right.

Chris Mayer (17:10)

Yeah.

Bogomil Baranowski (17:11)

Yeah.

Chris Mayer (17:11)

Well, I mean, that, that's a good, good question. And, and you know, I think that gets down to really doing your research on your competitive advantage and those sorts of things that allow the high returns on capital to sustain themselves over a high period of time. So, I mean, a lot of that deep research is spent just on that. Like, what makes this. There's something that makes the business special today which is reason why I'm investing in. Or I like it. But what will, you know, what sort of moats and so forth does it have that will allow the business to continue to earn those returns five years from now, ten years from now? And you spend a lot of time on that. And sometimes, I mean, a lot of times it's difficult, so you can't really say, you know, why one company is so much better than others, or, you know, maybe it's a slight advantage or maybe it's one that you're not really convinced. So there's lots of those kinds of instances. But sometimes you'll find something where, yeah, you know, it's, it's pretty clear and you have a real idea of why it's hard to replicate what they're doing. And in those ones you can be more confident about. About. And that's ideally what I tried to find is those examples.

Bogomil Baranowski (18:21)

I remember one of the exercises we did in research with a bunch of analysts was somebody was taking the other side, devil's advocate. And now with AI, you can have a very powerful, very competent devil's advocate. And I put in some of my stocks, and I have to tell you, the other side sounds as convincing as my case sometimes.

Chris Mayer (18:42)

Well, the other, the other difficult thing about this is like, you know, it's hard to prove a negative. So sometimes, like with AI, when, you know, Robert was saying, you know, you can't, you can't really get at terminal value five years from now, because the proposition that we're being told about AI is it's this Godlike thing that's going to be able to do pretty much everything. And so if you are an investor in the software stock, it makes it very hard to prove that's not the case. Right. You can't really, it's, you can't prove what's going to, it's going to look like five years from now. So it just, it puts you in a difficult spot. And I think that's, again, that's why the multiples have come down.

Matt Ziegler (19:21)

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Robert Hagstrom (20:05)

cola meets Smooth cream.

Matt Ziegler (20:10)

The treat you deserve.

Bogomil Baranowski (20:13)

Pepsi Wild Cherry and cream.

Robert Hagstrom (20:15)

Treat yourself.

Matt Ziegler (20:17)

Outside view. Yeah.

Robert Hagstrom (20:18)

Yeah. Well, we'll swing back to Buffett. I'm gonna go back to, to Moby. The way that I thought about Inside Outside Views is that he always had these clever analogies. He would do horse racing. He would do, he would. And I, I apologize to Michael in the audience that, you know, there would always be some favorite quote horse that's, you know, a long shot that came out. And, and it was gonna, you know, it was gonna upset the odds. And Outside View would glamour onto that. They would just get all hyped about that like this was the second coming. This is the horse, you know, that nobody ever expected. And, and all this drama builds in, in the narrative in sports media. People are talking about it, cab drivers, you know, do you think the horse is going to win the Kentucky Derby? You know, so the outside view gets really blown up. The inside view is, you know, go to the track, talk to the jockeys, talk to the trainers. You know, what are the conditions of the track? Is it muddy? Is it dry? You know, who else is it? The inside view is what Chris does, right? And he gets into the guts. And so the inside view can really parse away when the outside view has gotten exaggerated. So I think what Michael was trying to do was say, you know, we probably spend too much time just defaulting to the outside view because it's popular, it's easy it's the conventional insight. That's the outside view. Well, what's the inside view? Right. And that's what Chris was talking about now with Buffett. The one thing that, you know, I think Buffett likes it. Nobody really, I think, understands really, just how conservatively. Conservatively minded he is. He wants certainties at discounts. I mean, that is his sweet spot, you know, certain. Like I am one, you know, when he bought Coca Cola, put a third of his bet in Coca Cola. It went up 10 times over 10 years. The S&P went up three times over 10 years. That was a certainty at a discount for him. Right. He didn't have to do outside, inside. He didn't have to do. You know, he just basically said, I've got a high degree of certainty that this thing will be much bigger in 10 years. He said something like, you know, it was the only investment that I could make if I bought it and went away for 10 years and couldn't change anything about it. I couldn't make a buy or sell. I was highly convinced when I came back in 10 years, it was going to be worth a lot more. That's a certainty at a discount. That's what he's looking for. You know, as Chris points out, you know, AI does not give you certainties at discounts because nobody knows. Nobody knows what the certainties are. So you don't even know if it's at a discount. So it's a little trickier, I think, you know.

Chris Mayer (22:52)

Yeah, I love that example Robert gave with the sports analogies. And it reminds me, you know, I'm on. On the board of a publicly traded company, have been for last. I think this is my third year coming up. But one of the things that's really interesting is you get to see this gulf between, you know, the inside and the outside view. So sometimes, like, I'll read an analyst's view on the company and I'll be like, you know, this is so off on certain points, but because I'm on the inside and I know what's really happening there. But then I sit from the outside and I think, well, you know what? What he says is reasonable for what he knows at that point, you know, so there have been times where I'm like, wow, the gulf between the outside and the inside view is sometimes really, really wide. And it makes me very humble about everything else I own that I think.

Robert Hagstrom (23:41)

I think I understand. And you wonder which.

Matt Ziegler (23:45)

I think that's one of the most.

Robert Hagstrom (23:46)

Let me ask you this, you know, with. Let me Just ask Chris's quick question to that point, which is, you know, Demodoran, you know as well Demodrin, I can't even remember is it Demodrian or Demidorn. I can't ever get it right. But he, he talks about stories and numbers, right. And, and, and the bridge to investing is getting the stories and numbers right. Well, the stories are the outside view, the numbers are the inside view. And he says, you know, people spend too much time on the stories and not enough time on the numbers. People spend too much time on the outside view and they don't spend enough time on the numbers. The numbers are the inside view. And I, and I think that's, that was what Michael was trying to drive at when he talked about understanding the market's outside opinion and what its inside opinion. The same thing Chris said about being on a board. You know, he's in the guts of the inside numbers. Right. And he can tell very quickly when the outside view is way off base. And then of course it's up to management to try to bring them back to reality by disclosing and communicating the reality of it. But I think it's a good exercise, no doubt about it.

Bogomil Baranowski (24:56)

It's very humbling to realize that as public investors we only know that much. We're not on the inside. Right. So I think it's, I take a moment and I know that I only know that much time and time again we talked about. So go ahead.

Robert Hagstrom (25:09)

Wait, wait. At that point, what do you think about the SEC saying that, that a company doesn't have to report except twice a year? What do you think about that, Chris?

Chris Mayer (25:19)

Well, you know, they already have that in the uk. I think I'm okay with it. I mean I don't think it would matter very much to the extent that it cuts down all these wasted time with, you know, quarterly calls and all that. It's probably maybe a good thing. It'll be interesting to see because I think the proposal is, it's not going to be required. Right. So some companies may still continue to do it. Some companies may go to the semiannual. So it might go to just, you know, a mid year update and a year end. So it'll be interesting to see if there's any difference in the way those stocks trade or, you know, any of that kind of stuff. But I mean I, I mean, you know, I'm kind of a long term guy so I'm biased on this already. I'm, I'm perfectly fine getting a one, one update in the Middle of the year and one at the end, you know. What about you, Robert?

Robert Hagstrom (26:12)

Well, you know, my, my, my. I'd like to ask Warren. I wouldn't say, you know, like, Warren. Yeah. You do this twice a year. Are you going to do it twice a year? Or you're gonna, Are you gonna send the data four times a year? Now, what's interesting about Berkshire is he sends the data four times a year, but he doesn't do calls.

Bogomil Baranowski (26:30)

Right.

Robert Hagstrom (26:31)

You know, talk to analysts and stuff like that. So he would say, I think he would say, my guess, he'd like to have as much data as possible. You know, send it.

Chris Mayer (26:39)

Yeah.

Robert Hagstrom (26:40)

You know, I want to know what's going on now to the degree that the company feels obligated to hold calls and, you know, and have these cocktail conversations with analysts and then analysts. Did you beat it? Yes. No. He thinks that's a waste of time. That's just, you know, a bunch of crap. But I think he would side with I want data, I want information. I don't know anybody who would say, I don't want information, I want information. And the question is, you know, I don't need it every day, every week, but, you know, 90 days wouldn't be bad for me. But I think companies spend way too much time, you know, hand holding analysts and, you know, and kind of pledging with them. Do you like me? Do you like me? Do you like me? I think that's where the waste of time is.

Chris Mayer (27:24)

I think you can correct me if I'm wrong, Robert, but I think the Buffett partnership, he originally only gave an annual update and then his partners complained. And one of them, I remember the line he used, he said, one year is too long between drinks. And so Buffett sort of agreed and went to twice, once to a mid year. And so, yeah,

Bogomil Baranowski (27:47)

you know what? You inspired a question as I'm listening to you. I have friends that own private businesses and I talk to them and I'll mention in a second how they think about it. Assume your portfolio are all private businesses. There's no price for it. You don't know where the price is. How often would you honestly like to hear from the management, how are things going? They don't have to give you all the numbers, a report, just a phone call. How are things going? How often would you call your private companies?

Chris Mayer (28:12)

That's a great question.

Robert Hagstrom (28:14)

I'd probably do a monthly call. I think Warren does monthly tabs. I mean, when he gets the data in from. I could be wrong. Someone might correct me when the independent operating businesses send the data to, you know, Mark Hamburg, whoever. The case may. Mark's retiring, but when he sends it in, I think it's monthly that they're sending sales, revenues and earnings. I think he's seeing that monthly. Now. That doesn't mean that he's taking action or calling them and saying what happened? This, that and another. But I'm under the impression Warren loves data. I think he loves information. Chris, do you disagree?

Chris Mayer (28:49)

No, you're probably right on that. Sure. I was just thinking about myself. What would I really do? I'm not sure. I'm really not sure. I remember I did work for a family office for a while. We had some private investments. And, yeah, I wouldn't check in quarterly, come to think of it. So it probably would be maybe once sometime during the year, and I'm not sure. It's an interesting question, though. It might depend somewhat on the business, too. Some businesses are just. Just kind of plot along and there's not a lot going on. Some are maybe earlier and there's, you know, there's deals or there's something else where you might want to get more touches and updates as to what's going on, so. Good question, though.

Bogomil Baranowski (29:31)

I think the fact that we operate in the public market and we have a daily price, it kind of dictates a whole different experience for us. Right. So the quarterly earnings and between quarters, you know, I see stocks, like, drift down sometimes 10, 15%, and then they report and the stock is up 15. So it's almost like the market is waiting, like, what's going on? What's going on? And then there's a release. And we. We all adjust how much we think this business is worth. So I think if you take the price away, we can actually check in on how the business is doing. And I think to Robert's point, that's what Buffett is doing. He's asking, how is the business doing? Right. And he doesn't have a price quote for a lot of those businesses.

Chris Mayer (30:08)

Right.

Bogomil Baranowski (30:09)

Food for fun.

Chris Mayer (30:10)

Yeah. I mean, it'd be different. Imagine if you got, you know, your price of price of your security is only once a week. Monday morning, you got it, and that was it. Or even less than that. What if it was only monthly? You only got a monthly price quote on what you own. I mean, it would change. I think it would change the way people behave. Yeah.

Bogomil Baranowski (30:28)

Yeah.

Matt Ziegler (30:29)

So let's talk about mean reversion, specifically in return on invested capital or return returns on anything. And this is the idea that A company or an industry or whatever basically has some return on capital, return on equity, return on assets that goes on. Sometimes they do a little bit better, sometimes you do a little bit less. But it tends to mean revert over time. First, where, Chris, where does that idea even land with you? How you think about it, how you understand it from Mobison, but then also where you see it, where it's useful, where it's not in your own work.

Chris Mayer (31:01)

Yeah, I mean it's definitely, there's definitely, it's true. Like some things mean revert, you know, return on capital for one. But yeah, my first reaction, I mean, version is I kind of want to resist it and push back on it somehow because for one thing, the mean itself is always changing, you know, around. So there's that because, you know, there's a lot, a lot of times people use mean reversion for valuation and I think it's misused that way because you'll look at a business and a business may be substantially better now than it was 10 years ago or even five years ago, but people are still anchoring on those valuations and using some sort of mean reversion. When, you know, the return on equity was, you know, 2/3 what it is today or something, it's a better business today, so you wouldn't do that. But obviously it is a powerful force in finance. People talk about it for a reason. So it is for the roic, for example, it's very difficult to have a return that's consistently above your industry. But I mean it's, it can be done. I mean, there I, I think about, like, I remember when I first doing research on Old Dominion freight lines a while ago, you know, trucking industry and it was consistently so far above everyone else. So. But when you dig into it, you start to find, well, there's, there's reasons right there. They own their own distribution networks, so that's like a, it's a real estate strategy. So they own that and they have non union workforce and they have all these other things, you know, bells and whistles that get into it. It's like a structural thing that they have an advantage over other companies in their space that they can't compete. And in that case you wouldn't want to, you know, anchor on the industry's ROIC and therefore keep you out of Old Dominion because you think it's just going to revert over time, you know, when it's persistently done. So. So it can be good, but it can also be kind of dangerous.

Robert Hagstrom (32:54)

Yeah, I'M not a big fan of the reversion to the main. I think it can lead you astray. Buffett said polling does not replace thinking. I think and once again reversion to the mean is a very simple minded thing to think that which has gone up comes down and that which has gone down goes up. It's a very Newtonian physics based concept and we know the market is not Newtonian, it's Darwinian, it's biological. I love what Chris said, that the mean is never, never stable. The mean changes because the landscape changes, the environment changes, the competition changes, the companies change. So there are things that are going up that are supposed to go up. You know, we've got increasing returns economics and information technology database businesses and we never knew what increasing returns economics were before that. I mean before you got into information technology companies it was a diminishing returns world. But now we have increasing returns world. And so, you know, increasing returns economics does not fit very neatly into Newtonian framework of reversion to the main. So I, you know, I, I get it, it's, it's, it's a contrarian notion and you know, value investing is built on a contrarian kind of ideal. But that should be your first pass of how to think about the stock, not your final conclusion.

Matt Ziegler (34:14)

Right.

Robert Hagstrom (34:14)

Reversion to the mean is not immutable. There, there are going to be exceptions to the rule. And, and, and so just to let that be your last focal point, that okay, it's gone up, so it's going to go down. I'm not going to buy it, it's down and so I will buy it. Well, that's just not immutable. There's going to be problems with that very simple minded way in which to think about things,

Bogomil Baranowski (34:40)

Robert, Tying it back to returns on invested capital. Studies show that over time companies with high returns on invested capital, they do drift down, competition comes, maybe something changes. Right. And Buffett talks about moats and we're obviously looking for warning signs. Can you talk about that? How the companies are protecting that moat and what are some of the warning signs that you look out for? That the returns looking back are not the same as the one looking ahead.

Robert Hagstrom (35:07)

Yeah, I mean the, the fact of the matter is, as we all know and Chris experience and stuff like that is that, you know, Schumpeter lives, you know, he, Schumpetter's creative destruction. You know, the whole basis of the capitalist system is somebody has a margin. And that margin, I think I can do it. That's my profit Your mar. You know, somebody said Amazon looks around and goes, those margins out there, those are my future profit. I'm going to go in and figure out how to do that cheaper, better, easier, which case. And so that targets return on invested capital is going to go down as more competition comes into the space to take away the high margins. Right. That's the whole basis of capitalism in some way. Not the whole basis, but it's a big part of the capitalist system which is trying to figure out where I can do it better, cheaper, so I can get the profit and that returns on invested capital. What I'm interested in is, you know, the moes that are sustainable, people that are coming after you and you keep beating them off. You know, that's where Warren says, you know, I want to moat with alligators in there and big walls and deep water. You know, I, I want a business so good that nobody can take it away. Okay, that's an, that's, you know, we're back to Hendrick Besseminder, right? What was, what was it about those 46 companies? You know, they must have had a hell of a moat, right? I mean, you know, they, they went at it a long time and you know, and my guess is that they were probably, you know, high return on invested capital businesses. They might not have been 50 to 100%, but they were much higher than the cost of capital and they were able to maintain it for a long period of time. That for me, I'm a growth investor. I, I think that's where the market misprices now. It's a brutal, brutal lifestyle being a growth investor because, you know, you're, you're in a market with a bunch of crazy people that aren't thinking about investing in growth stocks. They're trading them based upon betas and technicals and things like that. But I'm, I'm fascinated that, you know, Coca Cola went up 10 times in 10 years. You know, how to figure that out. And Chris, you know, Chris made a career on figuring out 100 baggers. I mean, you know, that, that's, to me, that's the holy grail. You know, I, that, that to me is the fun part and it's also the most difficult part or everybody would be doing it. So, you know, I, you know, returns on capital are not sustainable. I am fascinated though, about the whole concept of increasing returns business. It's. Buffett said, if I gave you, I don't know, back in the day, he said, if I gave you, you know, $5 billion and I said, go take out Coca Cola. You couldn't do it. He just, he said, nobody can do that. If I did, I said, I'll give you $50 billion, go take out Amazon online retail. Just take out the retailing business. There's nobody that can do that. Right. Okay, that's a pretty good moat. You know, if you say that, I don't think anybody can unsee Amazon's online retail business. Largest selection, cheapest price, best service, overnight delivery. How are you going to go and take that business away? Even if I give you $50 billion, are you going to be able to do it cheaper? You're going to be able to do it faster? You know what are you going to be able to do that? That to me is a pretty interesting moat. And that's how I think about it.

Chris Mayer (38:16)

I mean, that's, that's. I, I was just thinking while Robert was talking about how some of these moes also shift and change over time, right? So moats that we used to think were insurmountable suddenly are not so intermountable. I mean, Coca Cola is an interesting example because, yeah, take out Coca Cola. I mean if you're going to replicate them today, yeah, that would be difficult. But there's lots and lots of like small little, you know, soda brands that crop up and then, you know, monster beverages and all these other things that have been built around that. So yeah, I mean, so that one, that's an example, maybe it's not so great now, Amazon, yeah, that looks like a really just crazy moat today. But maybe 10 years from now, somehow it won't be, won't look so crazy. I don't know, maybe people will be drop shipping by drones and who knows? But yeah, so it's interesting to think about how these moats change over time. And that's something as an investor you have to stay on top of as well.

Bogomil Baranowski (39:10)

You know what I'm hearing is a winner take all mindset. And I'm thinking just for a second, do you think that with AI, more people trying more things and trying new projects, even people that can't write software, developing different solutions, there will be more winners, more fragmented winners instead of one company that owns all of, I don't know, operating systems for all of laptops, like we've had for so many, for so many years, do you think that's where we're going?

Chris Mayer (39:38)

I don't know. But the point about winner take all markets, I think that's again, Robert says he's a growth investor. I mean that's kind of what you want. You're looking for those kind of situations. You like winner take all markets as long as you have the winner. And so that's a good dynamic to have. But you know, AI, I don't know. I mean I could see it going a lot of different ways. I certainly think there'll probably be an explosion of new businesses and new services and. Yeah, but once it settles down,

Robert Hagstrom (40:12)

I

Chris Mayer (40:12)

don't know, it may just revert to the same as like a lot of other businesses. Eventually someone will. There'll be. People are really, really good at it and. And you know, we may get the same old as before.

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Robert Hagstrom (41:25)

Yeah, AI is definitely going to give you more competition. There's going to be more people nipping at your heels because of AI. The question is, can they make a business out of it? Can you take my business away? Are you doing it better than I'm doing it? Are you doing it cheaper than I'm doing it? In which case some of my customers are going to leave and go somewhere else. So that, that'll be that. That's what we have and that's what we want to look at in software. You know, how many people are going to leave Salesforce to adapt or adopt a new customer retention, you know, a new CRM model? That's not Salesforce. And we thought about it in the firm, you know, we thought, well, okay, you know, now we're not a big Fortune 5000 company. I don't I don't expect that JP Morgan or anybody else is going to turn over their Salesforce CRM to, to a new entrant that doesn't have a track record. But if you're a little shot, you got 15 people, 20 people and they've got a new, you know, a new database that can help you manage your customer relationships. And it costs 10% of what Salesforce does, which is very expensive. You know, would you give it a shot? And you know, the answer is you probably would. Now, does it work? Is it better? You know, we'll find out. But there's, there's going to be tons of competition because of AI. The number of winners though, I think Chris will be probably the same. There'll be few. There'll be, you know, a few that, that will capture the best part of it and there'll probably be 97% that are going to go to the dust bin.

Chris Mayer (42:54)

So that's kind of what I think. You said it better than I did. But that, that, that, that is. And it makes me think too remember, the Internet's the same way. When the Internet first came along, of course there's an explosion of dot coms, but now it's fairly mature thing I think we can say, yeah, there's a handful of kind of dominant.com businesses or retailers and things and it's not. So, I don't know. I think I probably have a similar

Matt Ziegler (43:19)

trajectory and stuff gets repurposed, stuff gets reused. I mean the Bible did okay with the story of the Holy Grail. Like the Bible sold a couple of copies. But lest we forget, you know, Indiana Jones, Monty Python, like the list of ancillary businesses, the monster beverages of different industries are going to exist. They're going to have new rails to ride on. All right, so in, in inside of that and Chris, I'm bringing this back to you. The idea of incremental returns on capital. And I'm extra curious because Mosen's written about this. Not just your ability to earn that floating average, to earn those capital returns, but then to be able to reinvest at those returns. My brain goes to your twin engines idea. Could you tee up that idea and then just explain how you think about this?

Chris Mayer (44:07)

Yeah, I mean the twin, twin engines idea was just that looking at this 100 bagger study, there were some times where you could get the double effect of starting with a relatively low multiple of earnings, let's say. But then you had this, so you had this double effect where the, where the multiple expands and also you have this earnings expanding. So then, you know, the math suddenly becomes a lot more compelling if you can have something, you know, double in five years, earnings wise, but also double the multiple that, you know, does a lot of extra work for you rather than just getting the double off earnings and the multiple stays the same. So that was the basis of the, of the twin engines idea. So what leads to those expanding multiples? I mean, lots of things. Sometimes it's just a cyclical thing, right? You happen to buy in 2008, you're going to get the, you're going to get a 2008, 2009, you're going to get the benefit of multiple expansion most of the time. But sometimes the ones that I think were more interesting as far as studying were those businesses where they actually had increasing return on capital as they go along. So in other words, they become kind of better businesses as they mature, as they scale or whatever it is. And those ones are, those are really interesting places to fish.

Robert Hagstrom (45:26)

It'd be fascinating to take Besseminder's 46 stocks and go back 20 years as a T1 and see what the return on incremental capital was for the 46. Right. And my guess is they either maintained at a high level, maybe increased it, but it probably wasn't a, you know, they didn't fall off the cliff. Right. That cap, you know, in competition, a lot of those returns on capital do come down. But my guess is those 46 stocks, if you, if you, if you put a graph up, up of their turn on incremental capital, which is probably the. I don't know, Chris. It's probably the only statistical accounting factor that I can think of that would give you a good sense. Is the, is the competitive advantage period, you know, being extended, is it going to endure? Is look at return on incremental capital. The problem is you've got to do it for 2, 3, 4, 5 years to get any sensible idea of where the numbers are going. If you try to do it, you know, quarterly, it'll drive you crazy. But then after three or four or five years, my guess is the wisdom of the markets crowd is going to probably have already figured it out by the time you finish doing your graph right, the market's going to say, we figured that out a long time ago. Robert, chart this thing. But we've already figured it out. But return on incremental capital is very, very powerful. And, and if you, if you've got some foresight about that, that's going to stay high, you pretty much Know your return on capital is going to stay high. And if you know your return on capital is going to stay high, it's a great way. This is a great way to, great way to make money.

Chris Mayer (46:58)

What's challenging about it too, Robert has alluded to it. I mean, in any given year, your return on incremental capital can be all over the place. I mean, it's just, it's a very volatile number. So it almost, it requires you to have at least some kind of. Either you're looking back and using some sort of average, or like Robert just said, you have some sort of foresight about why it's going to be higher in the future than the past. So it's just, it's not, not that easy, but it's definitely worth thinking about, trying to find.

Bogomil Baranowski (47:26)

And it's not always the case that the returns come the year that you invest the capital. Right. Like you, it can take 2, 3, 5, sometimes 10 years to see the actual benefit from a billion dollars that you invested today. And I think that's. That gets even trickier. Robert, a quick follow up to you. You know, Buffett has this simple discipline. He basically says only retain earnings if you can deploy them at better rates than the shareholder could earn elsewhere. Right. When you watch management teams in their discipline, how many actually follow through on it and how many are, you know, empire builders?

Robert Hagstrom (48:00)

This is where, where Chris and I wish we had Will Thorndyke, you know, you know, Will, will study this a lot. What was called the outsider, right? And you know, it's a rarefied few that, that get it and it then and have the support of the board, you know, because you need the board support to be able to do what is right in the long term versus what could be achieved in the short run to appease Wall street and the analyst and the stock price. It's a rarefied few. But when you go back and think about Tom Murphy at Cap Cities, who I think Warren today still thinks that's probably the best manager he's ever seen in his life. Those guys built businesses over multiple, multiple, multiple years. You know, I'm not sure the market affords that kind of patience anymore. And if you, maybe, maybe it would be this, Chris, those, and you've written about this too, those had, that have high inside ownership, you know, and if you're a management company and you own 20, 25%, maybe you then have the defensible capabilities to say, I'm going to do it this way. I don't care if the street likes it. Yes, or no. And you have the board support, you don't have a lot of stock. And you know, and the board is kind of like living day to day on their stock price. It's, it's, it's very, very, very hard. But, but Buffet also, I think at the end of the day, given the choice between having a Tom Murphy and having a great business, he'll take the great business every time. Right. You know, he said even Tom Murphy couldn't figure out how to do a buggy whip business, you know, you know, wasn't going to make a lot of money, even though he's one of the greatest managers in the weir. You know, at the end of the day, the first thing I want is a great business. As he said, I want a business so great that even an idiot can't make, can't mess it up. Right. That's the holy grail, right? Finding a business that it's almost on autopilot. It's so great that even a mediocre manager can't mess it up. That's a pretty good place to be.

Matt Ziegler (49:57)

Chris, talk to me for a minute about intangible heavy, like R D. Part of this might just be outside of my circle of competence. I don't think about this. But how do we think about return on capital in this intangible era that we've been living in, Especially as some tangible stuff is starting to both come back into vogue because people care about it again and also because we've got some giant companies that are moving from intangible to tangible, which messes up the way we study roics over time.

Chris Mayer (50:27)

Yeah, I mean, this, I mean this is a tough thing. Like sometimes, you know, I look at companies, one company is more acquisitive, so they have all this goodwill and stuff on their balance sheet. And so their return on capital looks lower than a number, than a company that otherwise, you know, spent a lot of similar money or. But they invested internally so they don't have that. And your return on capital is higher. So you, you do have to make sometimes those adjustments. But, you know, most, I think Robert, probably agree, most of the value nowadays is, yeah, it's an intangible stuff. It's in, it's in things that's hard to measure. It's not physical. And the economy's been like that for a long time. So I don't know that that creates any special, you know, special adjustments unless you're, I mean, I'm not investing in a lot of things that are very capital intensive either. So I, I think that would probably change if you did, but I don't know. Robert, you have any thoughts on that?

Robert Hagstrom (51:21)

Yeah, I think, you know, and we go back to Maubous and Mauboussin is, is drilling down on this whole idea of intangibles. You know, how much should be expensed and how much should be capitalized and things of that nature. I mean, it's very clear as you move up health, you move up technology, more of the capital investment is intangibles. But as Michael would say, as you expense it right through this, the, you know, you put it right through the, you know, the income statement and expensive. But it does have value past that. So you, you took an expense on that investment and by accounting standard, it's a zero. But it's in the company. It's, it's adding value. So that intangible is adding value. How long does that last? How much is that worth? Is what they're trying to figure out. And typically, you know, the general accepted accounting principles, you know, are going to be decades behind. You know, they're the last to figure it out. Right. As Bill Miller used to say, they're called generally accepted accounting principles. Not divinely inspired, never ahead of the curve. Right. But, but as Chris says, you know, when we move into, you know, healthcare and, and services and technology, most of the capital investment going on is it's intangibles. Now, in this AI world with energy and data centers and chips and stuff like that, there's a, there's more tangible investing going on than there has been in the past. But there's no doubt in my mind that gap accounting can't, has not done a good job of helping you understand the value of your intangibles. And I think Moby's working on that. But it's hard to wrap your hands around. It's a hard one.

Bogomil Baranowski (53:02)

Well, you brought up something that's been on my mind. And among the 46 vessel miners, 46 or among the top companies you can think of, a lot of them were started in a basement in a dorm room with very limited capital. Handful of guys. And now you would think that they're at a stage that we asked you some questions around it before, but you would think at this stage their Capex would be dwindling down, maybe some maintenance. Capex, massive return of capital to shareholders at this stage. Speaking of Professor Damodaran's life cycle of a business. Right. And here we have those massive investments. You know, we're talking about 100x companies, but these companies have a 5x10x of their capex in the last five years. What's happening and how do we think about returns here?

Robert Hagstrom (53:44)

Well, you know, if we go back, Amazon's a perfect example. Emma, you know, when we followed Amazon a long time, we're involved in the IPO and I can remember in 2001, 2002, Amazon survived and got to the other side. But there was an analyst, unnamed that still wanted to short the stock. I think the stock was nine bucks, you know, and it was because he took their previous year's capex, which was pretty big as, as Jeff was building out the, the, the distribution center. So if you look at Amazon, they always get ahead of the capex. They want to go ahead and get it done and then they won't have to do as much in year two, three and four. So they're not chintzy on the front end. They want to get it done. And his view, the analyst view, was, well, if you linearly extrapolate that that CapEx line is going to continue like this for the next five to 10 years, they're going to go out of business because there's no way they can afford to do that. Well, that was just very poor thinking. Right. They didn't really spend any time with Jeff and the rest of the team to say, look, we have to get ahead of this capital investment to have the capacity to grow the business. And what they found out is in 2002, 3 and 4 and 5, the CapEx budget went down as they had solved that. Now the question that I have is we're probably going to reach that in the data centers. I mean, everybody and their mother is building a data center. And we're probably going to get to a point where Amazon doesn't have to spend as much on AWS or data centers or Google or anybody else. We're going to have it, you know, around the world and then it's going to be, you know, how many new chips do you have in replacing, you know, servers and stuff like that? But we'll get to a point where you don't have to continue to spend hundreds and hundreds of billions of dollars a year on data centers. Now, I don't know when that's going to happen, but we won't be doing that, know, 10 and 20 years from now building these many data centers with this much money. We won't need it. It will be able to reach the efficiencies that we need. So there'll be a time then that they'll Manu, you know, everybody was in love with them when they were asset light and they had no capex. Now they hate them because they're asset heavy and they have a lot of capex. Well, that's not going to last forever. And the market will get that figured out. The trick will be, you know, when they stop building data centers, what do you not want to own? That's what we're going to have to figure out because when that pivot happens, you know, there's going to be some stocks that you thought were going to be selling into data centers for a long period of time and their, their products are not going to be needed anywhere near what they were in the previous five years. So we'll see when that happens.

Chris Mayer (56:19)

Yeah, one of my favorites with Amazon was early on, if you, I remember they were very aggressive about expensing everything. So it was one of these things where if you pack out some of that and treat it as Capex and amortize it or they would had a consistent like 10 profit margin throughout the, throughout that period. So sometimes the other thing that was,

Robert Hagstrom (56:39)

you know, Bill, I think it was around that 2001 period and everybody, he goes, he would ask an audience of analysts and institutional investors, he goes, how many of you do you think that Amazon is profitable? And you know, barely half a dozen hands would go up and he would say, well, how many of you think that Amazon made $300 million in cash over the last, you know, year or two? No hands would, went up and then he would walk you through it. And sure enough, Amazon in the early years was 200 million, $300 million worth of profits. What he did though, what Jeff did, which is what he was supposed to do, is he took every bit of those profits and sunk it back into the company in the CapEx budget. So the outside view was it's not a profitable company. The inside view was this is massively profitable. And that was Bill's view. But he's just putting in the money as he should back into the company because it earns high rates of return on invested capital. So you've got to parse, you know, you've got to get that part figured out. But I don't think that the CapEx cycle, you know, we may, I don't know if we're at the peak, but we're probably getting near the peak of the capex cycle and some of these things, and then it'll plateau for a little bit and then it'll start to decline and then it'll be Interesting to see how the returns are

Matt Ziegler (57:57)

such an interesting thing. I remembered, I think it was the guy who used to do stuff with Ben Thompson, the strategy guy, James Alworth, maybe financial crisis era or in the footprint of that he went through all the Amazon numbers again. It was like just to reset this, you think nobody's making money here. But let's talk about what's happened in the last decade to all that money. That was not really an expense because they got something really wild going under the hood. So yeah, we got not even halfway through this list, which makes me joyful. Not because enough to prepare more notes for next time, next month. A little bit. A little bit that and I really want to make a. Like Hagstrom and mothers like data center builders like construction T shirt. See if we get those, we'll sell some merch. But this is, this is just exceptional stuff. Robert, People to find you online, bug you on the Internet. Feel free to. I know it's early still. If you want to mention the upcoming book anniversary in the new edition, feel free.

Robert Hagstrom (58:57)

Yeah, well, you know, I'm. We're CIO at Equity Compass and portfolio manager, the global leaders portfolio. The easiest way to track us is just Equity Compass, all1word.com equity. I feel somewhat shameless in that we're going to be releasing another Buffett book, but we've written the Warren Buffett Portfolio. Wiley wanted to go back and we're going to have the 25th anniversary. It's 25 years ago that it came out and it's a testament to Charlie Munger because it was one of Charlie's favorite books. He didn't like the Warren Buffett way. It was really kind of comical. He was sitting there and when people used to ask him, charlie, what are you reading? And he said, well, I didn't think very much of Hagstrom's book on Warren Buffett Way. I didn't think it was that good. You know, nothing original. My entire writing career is over, you know. But he liked the Warren Buffett Portfolio, which was the first book on concentrated low turnover portfolio management. And, and so we're doing the 25th anniversary because in Charlie's book, Charlie's Almanac, it was the only investment book that he had on his reading list. So it got some legs for doing that. So we'll, we'll bring that out. But I'm more interested in talking about Chris's new book

Matt Ziegler (60:12)

that's gonna get an episode. So Chris, same question. People want to find you on the Internet, bug you, please.

Chris Mayer (60:17)

Yeah, I mean, you know, just Google. Yeah, no, you can Google, you know, Woodlock House and you'll find me, find me there. You can contact me and then. Yeah, I have a new book coming out, will be out in April. It's called the Investor's Odyssey. So I'm sure we'll talk more about that as time goes. But yeah, it's pretty exciting.

Matt Ziegler (60:35)

Well, Chris and Robert, thank you so much for joining us. Bogomil, you're hanging out with me for a couple of more minutes. You're watching Excess Returns. Make sure you look up Chris Mayer and Robert Hagfrom, respectively. We'll talk to you guys soon.

Robert Hagstrom (60:47)

This episode is brought to you by State Farm. Listening to this podcast Smart move. Being financially savvy. Smart move. Another smart move having State Farm help you create a competitive price when you choose to bundle home and auto bundling. Just another way to save with a personal price plan like a good neighbor. State Farm is there. Prices are based on rating plans that vary by state. Coverage options are selected by the customer. Availability, amount of discounts and savings and eligibility vary by state.

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Valid through four. A while supplies last.

Robert Hagstrom (61:42)

Selection varies by location.

Chris Mayer (61:43)

Soil offer excludes Alaska and Hawaii.

Bogomil Baranowski (61:49)

And then there were two.

Matt Ziegler (61:51)

And then there were two.

Bogomil Baranowski (61:53)

What do you think?

Matt Ziegler (61:54)

Let's dive in. I got a couple of notes here. So, I mean, first and foremost, yeah, Michael Mobison. Moby. Like, I didn't see that coming. I didn't know.

Bogomil Baranowski (62:03)

I didn't see. I didn't know from.

Matt Ziegler (62:04)

From one. You know, Bogey B. I'm trying to remember what Tony Greer called you from one Bogey. Did you know Mobison had a nickname? Did you know you could call him

Bogomil Baranowski (62:12)

Bogey if you got close? I didn't. I've read all his stuff and I'm very impressed. And he kind of creates a framework for our thinking, many people's thinking, and he goes really deep. I loved how we explored those concepts and I loved what happened today. Just interacting with the research and maybe giving us an idea of how to interpret what's happening now. What did you think about this idea? And you know, when Chris was talking, I was thinking about Bessembinder and the study that many of the people listening probably know about the very few companies are responsible for most of the gains in the stock market. We know it. What do we do about it? What were your thoughts? How did they react to it in your mind?

Matt Ziegler (62:50)

So what I think is so interesting about these two in particular reacting to it is they both putting their money where their mouth is in the sense like both of them reject the idea about the way that you overcome this is with diversification and you just buy a broad index.

Bogomil Baranowski (63:06)

Yeah.

Matt Ziegler (63:07)

And I don't think either of them would argue against that as like a logical solution for the average person to reach. But they both believe fundamentally that you could do this work and you could, you can do better than average over time because of the outcome of research like this, which I know you believe it too. I'm sort of mixed. I'm mixed in the sense of I think some people should pursue this, but I think most people shouldn't and you have to self discover inside of yourself what you're wired to accept. But I thought it was really interesting to hear both of them sort of dance around the edge of this and saying you want to know all this so that you can understand it from both directions. Like the opening question was designed to make Chris reject the premise.

Bogomil Baranowski (63:55)

You got that one? Yes.

Matt Ziegler (63:56)

Yeah. We wanted to deliberately provoke him on this. But they both reject these premises. But without the Mobison language in the middle, I don't think you can reject those premises and say here's why I fall on this other side. And that was this is part of why I wanted to do the Mauboussin research with them in particular. Because here's why it's important to know it. And then oh, by the way, here's where I fall on this thing. And it's probably outside of the average index investors take on why this makes sense. What about you?

Bogomil Baranowski (64:28)

And they thought about it for a long time, especially Robert. I could tell. So it was fun to see. I want to challenge the best of binders study here if I can. Maybe I'm from. So the idea is very few stocks are responsible for all the gains in the market, but there are a lot of 10x15x20x50x100x companies that never reach the scale of being the top five top 50 company. Right, right.

Matt Ziegler (64:55)

And either because they surge and they die off the survivorship bias or they

Bogomil Baranowski (64:59)

get fired on the positive side, but on a positive side, like they they SC a much smaller company to a much bigger company, but they're never a trillion dollar company. And in that universe. And I'm not talking about micro small caps. There are even decent sized $5 billion companies that became in my lifetime, me watching and seeing it, $50 billion or $150 billion company. These days, $150 billion company doesn't even get noticed. I mean, it's not that big compared to the trillion dollar companies and multi trillion dollar companies that we have. So I want to caveat here that when people look at best and binder thing, people have all kinds of reactions to it. But one of them would be, how in the world am I going to pick the 40 stocks? Think of the other 200 stocks that you could have picked and you would make 5x10x50x because they do exist in those studies. So I kind of want to flip it so that when people throw that study at me, I say, I hear you, but you don't have to own the top five companies. Fortunately, many of us maybe ended up owning some of them even long before, you know, Buffett with Apple. But there are many, many ones that are much, much smaller. But they, they grew substantially and they don't have to be in the top five. I just want to mention it out there because I feel like it gets lost.

Matt Ziegler (66:15)

I feel like it gets lost and I feel like. So number one, this is some of the incentives on people who go out and start their own businesses.

Bogomil Baranowski (66:23)

Sure.

Matt Ziegler (66:23)

Like you might, you don't have to become the next Amazon. Like there's a whole range of wildly successful outcomes without starting a company in the most opposite way. You could go work for a company, for example. But even if you're a start one, and inside of that data you have companies that like work out for periods of time really well and then taper off for long periods. You have the ges of the world and the companies like this, you also have a million examples of the small companies who don't really matter in the small way, but that can get acquired. Like, especially when we're talking about like you can't make another Coke. It's like, well, how many brands is Coke, Pepsi in particular, how many brands has Pepsi rolled up over the years?

Bogomil Baranowski (67:01)

Many.

Matt Ziegler (67:01)

And that's contributed to.

Bogomil Baranowski (67:04)

Yeah.

Matt Ziegler (67:04)

Like, are you, you know, like If I started Dr. Pepper, are you telling me my return isn't like outlandish? And, and this is where it's, it's almost too broad of a brushstroke. It's super informative as a reminder of where to cruise at the largest scales. But it's too broad of a brushstroke. To extract all the lessons from. That's kind of where I fall with this.

Bogomil Baranowski (67:27)

I agree. You know, Coca Cola is not just Coca Cola today, you know, it's many brands. Half of it is not carbonated even. And on and on and on. Some of them they developed on their own. I want to bring up the concept that was halfway through the conversation, the winner take all. And I wish we explored it more, maybe we'll come back to it. But I would flip it on its head the way we talked about it. And it dawned on me down the road when I was listening to them. In some industries you eventually have to become number one not to even thrive, but to even survive. And you have to be Amazon to do okay in at scale in online retail. You have to. And actually Amazon brought in a lot of competitors on the platform to leverage their size. But I don't know what the future holds. But one of my reactions to AI and it's still so new, so fresh is that first of all there's a lot more innovation. Just in my little space investment world, software being developed that helps me for many, many years I was using a handful of incumbents that basically refused to change much.

Matt Ziegler (68:31)

Right.

Bogomil Baranowski (68:31)

It works, man, it works for everybody. Why would you tell us? And I mentioned it to you, every single week somebody sends me something to test and they're changing it as we're talking. They say how about this? How about this? The plus sign goes here. Anyways, I'm thinking bottom line, are we going to see a lot of pockets of profitability that can coexist at the same time? As a public investor, I might never see those companies. They will never be listed. But they might be $20,050,000,000 companies and happily operated by three people out of a small office or maybe out of a co working space. And that's all they will ever have. But they're so specialized, so focused and nobody wants to be in that space. It's too little to roll it up and they will exist. I don't know, I want to throw it out there that I'm not entirely convinced that the future will be all winner, winner take all mindset. I'm not so sure.

Matt Ziegler (69:27)

I think at the highest level we continue to see winner take all. I think winner take all becomes or continues to be the giant justification. I think that's part of the hyperscaler in the data center build out is these companies are, they're not dumb. They're aware like we have to get to this certain size because someone's going to have pole position and a few more others may fall in in line behind them. But somebody gets to be the dominant player. So overspend. Believe in your core that you're not going to be the one who doesn't make it. But also know in your core that you're trying to get pole position because a few aren't going to make it and they're going to get laughed at for the rest of for the next 20 or 30 years as like the malinvestment that went in.

Bogomil Baranowski (70:09)

It's a very unusual cycle, the Capex cycle. Very mature businesses basically trying all over again to invest so heavily. I think it's fun to watch. We'll see what happens. Before we wrap up, I want to ask you about this that Robert brought up. You know, SEC may be changing rules. How often publicly traded companies talk to us. I don't want to miss that. And the way I framed it as if you own private companies, how would you feel about it if there was no price quote? What are your thoughts? I kind of, I was very intrigued how they tackled it.

Matt Ziegler (70:39)

You know I love that you brought this up and I loved, I was curious about this too, especially from Robert and especially from the Buffett read through of it. So excellent framing. First off by saying, talking to somebody who owns the private businesses.

Bogomil Baranowski (70:55)

Yeah.

Matt Ziegler (70:56)

It's a different relationship when you own a private business like checking in, how's this going? Is there anything I can help? Is there anything that's a concern that I should be aware of? That's a different conversation than reading, you know, the K's and the Q's. Right.

Bogomil Baranowski (71:11)

We are looking into the price action as a feedback mechanism.

Matt Ziegler (71:16)

Right.

Bogomil Baranowski (71:17)

And kind of a signaling mechanism to tell us pay attention. So if you held the stock for a year and now it's down 10, 15% the prices. Right. It on your screen, you look at it and it's basically a red flag dummy. Look at it again. Right. But if there was no price and you spoke to the management two months ago, you wouldn't even think about it. Right. So the price sometimes really gets in the way of what you're trying to do. Is the price more correct or is my work more correct? Which we talked about the outside and inside view. But the market is constantly telling you think about it. Are you wrong? Are you sure? It's like that professor, you told him, you answer the question, you say aristotle and professor says are you sure? And you're like not as sure as I was a second ago.

Matt Ziegler (72:06)

So what I think is most. I'm going to say intriguing, not even just interesting in this is. And one or both of them brought this up too. Even if this gets passed, it just means companies have the choice.

Bogomil Baranowski (72:19)

Sure.

Matt Ziegler (72:19)

And I also think we've been trained especially by a lot of these tech companies where that quarterly earnings is a really important part of solidifying to some of the shareholder base or the community. These are the ways we run our companies. These are the expectations. This is the future we're focused on and we believe we're investing in that helps organize a shareholder report. I don't see a bunch of the companies that communicate that way being like, oh, we're going to drop to six months because they're going to look at this as almost an advantage with their share base to communicate in these ways. However, I think there's a whole host of other companies that could not only go to six months, could probably go to annually if they would even let them. Or like they're going to get much lighter in the analyst engagement because it's what good are they serving the shareholder base because they're explaining these results in some grandiose method. I'm not against this, this method or this proposal. I think it'll be really interesting that there will be new games invented by CEOs and CFOs and CIOs in the next several years to game whatever these changes are as they try to like win over shareholder support. And I think to me that's the more interesting part about what does this create in a change in communication that arguably isn't that valuable anyway because people get stuck conflating it with price.

Bogomil Baranowski (73:39)

To your point, one last thought. I think more businesses are subject to more change than ever before. I think it's true. Right. So for me, any check in, whether it's quarterly, I mean if it was a private business, I wouldn't be surprised if I actually called the management even for five minutes. Talk you through it. Like don't even show me numbers, just let me know what's going on.

Matt Ziegler (73:58)

We both work with people with private businesses. Like this is like a regular business owner review where someone sits a two minute call and other months we need an hour to go through stuff like that's exactly. Yes.

Bogomil Baranowski (74:10)

Very quickly I want to bring up Vitaly that we had on the show a week or two ago for people to, to explore. But Vitaly told us something that really stayed with me. He said, I'm not as convinced my conviction is not as strong as it used to be. There's just too much change and it's very humbling to accept that. And in his case, he says, I'm going to hold more stocks. Just a thought. Like listening to somebody that has been doing this for 30 years. And I have a lot of respect for Vitaly. He writes incredible letters, and you can kind of have a sneak peek of how he thinks when he says that. I pay attention because I can't disagree. And it's very hard to hold very strong convictions when the world is subject to a lot more change than I have seen in my lifetime.

Matt Ziegler (74:51)

It's an amazing thing. Makes me want to go crack open one of those fever trees. Make sure you watch that interview. Avid I'm Matt Zigler. That's Bogomil Baranowski. If you're not checking out Talking Billions, what are you even doing with your life? Go watch Talking Billions. Get on the substack. Get on all the places. This is Excess Returns. Like Comment subscribe all the things below. Thanks for watching 100 Year Thinkers and we're out.

Chris Mayer (75:16)

Thank you for tuning in to this episode.

Matt Ziegler (75:18)

If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excess returnspodmail.com no information on this podcast podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.