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Excess Returns
The Hidden Fingerprints of 100 Baggers | Chris Mayer and Robert Hagstrom on Finding the Perfect Business
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- [00:00]
Matt Ziegler
We are excited to announce the launch of a new podcast, the 100 Year Thinkers. In a world where most investors think in quarters, this new show offers insights from investors who think in decades. Hosted by Matt Ziegler and Bogumil Baranowski and featuring Chris Mayer and Robert Hagstrom, this monthly roundtable will tackle many of the issues that all of us face as investors, but look at them through the lens of investors who operate over very long time frames. We have included this episode in the Excess Returns Feedback, but if you want to keep receiving new episodes, you can subscribe to the 100 Year Thinkers on all major podcast platforms or our YouTube channel using the links in this episode. Description thank you for listening. We hope you enjoy the new show.
- [00:38]
Robert Hagstrom
Perfect Business is one that, that generates cash up and beyond its capital intent. You know, its capital needs, whatever it needs to run the business. We got excess cash, we're earning above the cost of capital and we have decent sales growth. And that then is perfect. If it's going to last for a long time.
- [00:58]
Chris Mayer
You build up that, that confidence of knowing your business really well. And the reason you do that is then when these times happen, when you do suffer those drawdowns, you can kind of separate, you know, does it really matter for the business or not?
- [01:11]
Robert Hagstrom
The ones that really bothered me a lot are, are the omissions. It's kind of like it was right there in front of you. You didn't pull the trigger, you know, you, you passed. And boy, in hindsight you look and go, that was in my sweet spot. Why didn't I do that?
- [01:25]
Chris Mayer
The main advantage as a, and as far as behavioral advantage goes is that you do take that long view. And there's lots of people who say they're long term investors. There's lots of funds who say they're long term investors, but they're really not. You know, they are until they get kind of punched in the mouth and then they aren't anymore.
- [01:42]
Matt Ziegler
You're watching Excess Returns. This is our second gathering of the 100 Year Thinkers. Bunch of Ninja Turtles, really. Clearly. I'm Michelangelo. I'll let you guess who the others are in the comments. Bogomil Baranowski, talking billions in blue Infinitas Capital. Robert Hagstrom of the Warren Buffett Way and CIO at Equity Compass. And Chris Mayer, my favorite fellow Time Binder, Mr. Hundred Bagger, Co founder of Woodlock House Family Capital. We have a great show for you. Straight into the hundred foot deep 100 year thinking deep end. We're talking about the perfect Stock, I assume, hard on the outside, soft in the middle, enjoy long walks on the beach, things like this. Let's go with definitions. Robert, I'm kicking it to you first.
- [02:28]
Robert Hagstrom
Good. Because I said to Bogomill I had no idea what the perfect stock was and I was going to wait to hear Chris's answer. So now I guess if I think about a stock as a business, I would think, you know, if I. What would be the perfect business for me, that would be the perfect stock. Perfect, perfect business is one that generates cash up and beyond its capital intent, you know, its capital needs, whatever it needs to run the business. We got excess cash, we're earning above the cost of capital, and we have decent sales growth. And that then is perfect. If it's going to last for a long time, it's going to last for a long time with those economic attributes. That would be a perfect business. That would make for a perfect stock. Stock. Let's see what Chris says.
- [03:15]
Matt Ziegler
What do you got, Chris? Do better.
- [03:17]
Chris Mayer
Well, my, my first thought was to say there is no, you know, perfect stock or perfect business. I remember what Marty Whitman always used to say. He said is, you know, every business has something wrong with it. It's your job to find out what that is. So, you know, that's one, one answer. But I'll play along with say, you know, what's the perfect, perfect stock would be, you know, one that goes up all the time. So, but that, but what makes the stock go up all the time and then you start to reverse engineer it a little bit like Charlie Munger would do. And you know, what creates value over time? We know it's for a business, it's generating returns on capital well in excess of their cost of capital, creating value that way. So it would have to be a business that can do that, as Robert said, for a very, very, very long time. That would really be perfect.
- [04:05]
Bogumil Baranowski
I like to own stocks I can forget about. Yeah. If I don't check on them for a year and I feel absolutely fine about it, that's a good stock to hold and then you can work your way from it. Chris, you like the coffee can portfolio approach Buy forget for a decade. Robert, you talk about Buffett's buy to hold forever mentality. How do you develop the conviction to hold over a long period of time with market volatility, negative headlines and other surprises on the way?
- [04:34]
Robert Hagstrom
Well, yeah, I, you know, clearly, and I don't know how Chris feels about this, but clearly it feels to me. And we haven't quantified it although I pushed on people to try to. It just seems like the structure of markets has changed in a meaningful way over the last five to ten years, of which, you know, we're seeing changes in stock prices, changes in market volatility, in speed and magnitude that I just can't. You know, Chris and I have been doing this a long time. I just can't remember that things change this fast of this magnitude. And it really is. I feel sorry for Mr. And Mrs. Jones because it must be just nerve rattling to have to watch this, you know, week after week, month after month after month. So the way in which I do it is basically realizing that not everybody that is in there buying and selling stocks is a business owner, you know, like Chris and I or Buffett and anybody else there. There are lots of different games being played by lots of different people. Most of them are short term games. There are not that many long term games being played. It looks like the short term games are being done with leverage and algorithms and stuff like that, and sometimes the liquidity is not there for them. So when you kind of think about the jungle that way, what I have to do is just basically follow the economics of what I own. And so, you know, as Buffett says, you know, I kind of pretend like there isn't a stock market. And basically I'm just looking at how my companies are doing, how the competitors to my companies are doing, how industries are doing. I just basically am acting as if there is no stock market. I have an ownership in this business and how would I feel about it absent a stock market trying to tell me whether it's a good idea or a bad idea? So I'm looking at the economic returns of my companies first and foremost, and that keeps me reasonably stable during all of this volatility.
- [06:31]
Chris Mayer
Yeah, I mean, I absolutely agree with him when he says, you know, the speed, speed of it and that that would be interesting. There's probably. There might be some research on there that, you know, that's kind of an empirical question. You think about it. But it does feel like when you, you know, a company slows down for whatever reason, even a little bit or, you know, Mrs. Even for a little bit, or it just seems like the speed of the reactions, it is just so fast, you know, big, profitable, growing companies falling, you know, a third in months. So that's true. But I would say, you know, I often say, like, that's why we do all this research on, on these companies that we own is the. It's not that we're Going to necessarily find something that the market doesn't know about. You know, it's not like the. Look what I found buried in footnote eight. You know, that probably doesn't go on as much as it used to long ago, old days. But, you know, you build up that, that confidence of knowing your business really well. And the reason you do that is then when these times happen, when you do suffer those drawdowns, you can kind of separate, you know, does it really matter for the business or not? You know, because the market, it may be worried about something. Stocks usually don't fall for 30% for no reason. It's worried about something. And you can kind of separate. Well, is that a real, you know, is that a real impairment for the business or is it just kind of a temporary, A temporary thing that will work itself out over, you know, over a short amount of time or over a year or whatever it is. So that's, that's really the way you get that conviction, I think.
- [08:00]
Robert Hagstrom
Yeah, I think, you know, I'll tag on that. What Chris said. Remind me. Bill Miller used to say there's three sources of inefficiencies. One is informational. And I kind of agree with Chris. I'm not sure that there's much, you know, with reg FD and everything, you know, the information is there. I'm not sure there's inefficiencies there. Then it's analytical. Are you actually doing the work? It's not just price earnings ratio, sell high PEs, buy low PE. So you're doing the analytical work. So there's an analytical inefficiency. And then the third one is behavioral. And I think that's where we, we troll the best. You know, we can see behavioral mistakes in the market. And maybe they're not so much psychological mistakes, behavioral mistakes in the classic sense of behavioral finance. But I can tell when the robots are running the market. I can tell when the pod shots are. You know, if it's 9:30 and not even 9:31 and the market's down 1%, that tells me that the machines are in control today. Okay, so, all right, so that's what today is going to be. Now, it doesn't happen every day, but a lot of times those different players are moving prices around and that can give me opportunity to optimize the portfolio.
- [09:12]
Chris Mayer
Yeah, I mean, I think Bill Miller and he also want to always just say, talk about time arbitrage. That's kind of your. The main advantage and as far as behavioral advantage goes, is that you do Take that long view. And there's lots of people who say they're long term investors. There's lots of funds who say they're long term investors, but they're really not. You know, they are until they get kind of punched in the mouth and then they aren't anymore. You know, you see, see a lot of turnover and, and so on and so forth. So I, I do think there's still an edge for being really patient, taking the long view, which is what this podcast is all about, right?
- [09:45]
Robert Hagstrom
Yeah.
- [09:45]
Bogumil Baranowski
Yeah.
- [09:45]
Matt Ziegler
Okay. So humanize, humanize this. I need you to humanize. We all look at portfolios, we all look at stuff that goes up and unfortunately sometimes down. But that's part of the game. It's part of the magic. Have you, Robert, behavioral mistakes, you made a few in your day? Can, can you cop to, I'm not asking you for torture, but like humanize this because that behavioral part's really friggin hard and it's a really big deal.
- [10:11]
Robert Hagstrom
Yeah. So, you know, Warren said the mistakes that he makes very rarely are not analytical mistakes. He knows how to figure out, you know, cash flows and, you know, kind of do the discount model in his head. He doesn't use spreadsheets much anymore. And you have a pretty good read on management. You know, you, Warren's been doing this for long enough that, that he feels like, you know, he's got a pretty good read on people. And so the mistakes that he has made and admitted publicly is that what she thought was going to last longer at high rates of return on capital. So I think this company is going to generate a lot of cash, it's going to earn a lot of cash, returns on capital, high returns on capital. It's going to last a long time. There's the mistake, right? And he said the mistakes I've made is those things that I thought were going to last long, have a long term favorable outlook didn't last long. And so there's my rub, which is I'm looking at companies trying to understand if you have a bad quarter, I don't expect every quarter to be perfect. I don't expect everything to be linear and upward to the right. But when things are starting to go trip through the night and you begin to wonder, you're second guessing yourself, is this thing going to last as long as I think it's going to last? Am I missing something? I say to people, I spend 90% of my time today just thinking about how long these companies can do it. I don't need to be running models after models after models after models. I'm just trying to figure out, does Nvidia have competitive advantage here? How long can Google do this? You know, and I'm trying to think about who's going to take that business away or who's going to do it better at a lower price. And the mistakes that I've made probably is where I think I thought, you know, I think this, I thought this was going to last longer. It's not behaving like I thought it would be, economically speaking, it's time to move on. And then a quarter or two later, you know, the stock is above where I sold it, you know, and so you wonder what, what was that decision making process? Was it 1, 2, 3/4 and it wasn't behaving properly? Should management have been saying something to reinforce it? Just because they're missing numbers, they're going to be okay? I'm not sure. But for me my mistakes have been. I'm very aware that nothing is going to be perfectly long term economic returns. For me, they're going to be mistakes. But I'm always trying to figure out where those mistakes, who's messing up in my portfolio. And sometimes I'll pull the trigger and say I'll move on, only to look over my shoulder and go, well that was dumb, I should have left it alone.
- [12:50]
Chris Mayer
Yeah, well, that's it. I mean, I think with the fascinating thing about investment mistakes is sometimes it's hard to know when they're really a mistake. For the companies we're dealing with, we're dealing with generally good businesses which are generally going to be worth more in the future than not. So sometimes you might sell something and look at it a year later and it's down 30% and what you bought up and you think, yeah, I made a good decision. And then you look at it three years later and it's flipped and you're like, well now it doesn't look so smart. Then you look at it again, five years later it's flipped again and now you're ahead again. So when does it really become a mistake? You know, sometimes, okay, it's obvious you made a mistake and a business you thought was great just is impaired and you sold it and it's probably never going to get that height again. But yeah, it's really interesting to be philosophical about the mistakes. They're not so easy always to identify what's a mistake and what isn't. But the mistakes I've made, I would, I mean this is common. Investors will always Talk about their mistakes of omission. Right. The thing that they looked at and decided not to buy and just kept going and then they kick themselves. And yeah, those can be huge mistakes when they look on paper, because then you look back and you think all that went up. Not that if you actually bought it, would you have held it the whole time? That's another thing. People just assume they would have, but that's a common thing to say. I, I think stylistically, earlier in my career, the kind of mistake I made was more along the lines of adhering to the old, like Ben Graham, you know, buying really cheap stocks and. And you'd make a profit and then you'd sell it and. And yeah, I've told the story before 2008, when I was buying companies that were trading for net cash and I was getting very excited, but two years later, I didn't own any of those. I sold them for profits or whatever. And I look back and I wish I had bought Visa or MasterCard when I think they both came public in 2008, that would probably still own those. And they're great, great businesses. So that's a mistake that I made earlier in my career and took some time to get. Get out of that.
- [14:58]
Robert Hagstrom
Yeah, I, you know, I don't know about you, Chris, but the ones that really bothered me a lot are, Are the omissions. It's kind of like it was right there in front of you. You didn't pull the trigger, you know, you, you passed. And, boy, in hindsight, you look and go, that was in my sweet spot. Why didn't I do that? You know, that was just a knucklehead move. So, you know, you're going to have those mistakes. Nobody's going to be perfect. But the errors of omission, I think were the ones that really gnaw at.
- [15:25]
Chris Mayer
Yeah, I mean, for me, the most painful error. I don't know why I even want to talk about this, but, yeah, most painful ever omission for me was Apple and Warren Buffett bought it. Why didn't I buy that? I mean, I used the products, I knew the company. And when you look at it like I look at it now, it was right there. It was kind of obvious. It was right in my. You know, the returns on capital were great. Yeah, it had a down revenue year. I think it was 2016 when he bought it, and it was actually had slight sales decrease, but you're looking at a great balance sheet. There were phenomenal returns. The valuation was good. I mean, it was normal I mean, yeah, that one really killed me because I and I fact what made it more interesting, my mother in law bought Apple at that time because I was talking about Buffett buying and she bought it and I said, yeah, it's a great business. And I started telling her about it. So she bought it and she held it for, yeah, for a long, long time. It did really, really well. So that just added further to the mistake.
- [16:27]
Robert Hagstrom
I rarely ever beat Warren to the punch, but I did get Apple in 2014 when we started the portfolio. And it wasn't because I had any great insight about the handset business, which looked, to Chris's point, looked like it was on its ass. It wasn't going anywhere. But you could look at that app store and the service side was just growing like a weed. And that was only, I think at that time 10 to 20% of the company. Today I think it's closer to 40% of the company. But you just had to believe in the app Store, you know, to pull the trigger on Apple. And at that time, you know, it was discounting, no growth. Apple was discounting 0% growth. So I said, well, I don't know if the handsets are going to grow, but this app store looks pretty cool. And we bought it and you know, it was huge, obviously. And when Warren piled on it, it was great, even though I think it was Ted Wexler that had bought it first and then he had it in the portfolio and then Warren was sniffing around, but Warren was the one that spent $35 billion on it. So that was a big boy bet for sure. When Warren did it, my biggest mistake, Chris, I don't know if you own it or not, but I just totally miss Netflix. I, you know, it was in my wheelhouse. It was right there in front of me. You know, it was 160 bucks in 2002 when we bought other growth stocks during the big growth market sell off. And all I could think about was Warren. When Warren sold Disney and you know, he got out of the TV business, you know, he had ESPN and ABC and all that stuff. And he was at the cocktail party when he had sold Cap Cities, had sold off into Disney, and somebody said to him, warren, this is great. Look at all these television stations, you're going to be rich. And he goes, I liked it a lot better when it's black and white and there were three choices. So that was the best business. And then when I looked at the streaming business of Netflix and Prime and Apple and you just go down the list it looked like that big wall at that party that Warren was at. I'm going to. How do I make a living out of, you know, 50 streaming services? And I said, I, you know, this, this smells like Cap cities. Disney, Warren Buffet. I'm gonna pass. And there's, there's Chris's 10 bagger today. Netflix is a 10 bagger and it was right there and I missed it. Yeah, I still lose sleep over that one.
- [18:47]
Chris Mayer
Oh yeah. I mean, I mean we could talk about this all day, but I mean in the 100 Bagger book I did a case study on Monster Beverage. So that, oh yeah, in 2015 for I just bought Monster Beverage. I mean I think that you know phenomenally well I, that that's even worse. I wrote about it, it's right there and I buy it. So yeah. Painful, painful.
- [19:06]
Matt Ziegler
I feel like I need to remind you guys this is the 100 year thinkers and we're talking about perfect stocks and this is like the 100 year knuckleheads for them. The whiffs Bogoville. Take, take us. Let's, let's steer this back towards perfection and some long term successes here.
- [19:25]
Bogumil Baranowski
You know, I'm, I'm listening to you and I'm thinking how we all had the experience of buying stocks that are too cheap at the beginning of our careers. I think we learned a lesson. It's fascinating how much time we spent today talking about the areas of a mission, you know, things we wish we bought or things we wish we haven't sold. I think there's a lesson there, especially when you think about a hundred beggar. I want to talk about management. You know, we're talking about the business, we're talking about the stock. You both talk quite a bit about the founder led companies. Chris, and certain level of insider ownership. Robert, you pay attention to how they communicate and how they're focused on shareholder value. Can you tell us what are you looking for and if there are any red flags on the management side that we should be paying attention to?
- [20:05]
Chris Mayer
That's, it's, it's a more intangible. So sometimes, you know, red flags would be obvious. Things like self dealing and you know, excessive compensation can sometimes be a red flag, but not always. I mean There are some CEOs that are very well paid, but still nonetheless they're among the top performers. So that's why I say it's sort of situational. I mean I love sometimes when you find a company like Jay Adair, the CEO of Copart, who pays himself a dollar because he Owns a bunch of stock and those are unique situations. You love that. Or you read Mark Leonard's letters at Constellation Software and he's talking about how he flies, you know, he pays business class, he pays the upgrade himself because he doesn't charge shareholders for that. Little things like that, you know. And when you visit companies, you know, if they have these extravagant headquarters or whether they're more modest, I always like to tell, you know, the story when I first met a pair at Lyftco, a company in Sweden, you know, I go to their office and knock on a door and he entered the door, there's no secretary and he's making me coffee before the meeting. I mean, it's just different. Right. So those little things can sometimes give you clues that if you're dealing with someone who's genuinely, you know, interested in creating value for the business and is cost conscious and that then translates into bigger decisions, you know, down the road. So. Yeah, but it's not so easy to suss those out all the time.
- [21:31]
Robert Hagstrom
Yeah, well, I guess ever since reg fd, I guess I kind of lowered my expectations about am I going to distill any great information from management. I mean, we all did the road, you know, as Chris, you know, we all banged on doors, we all went to see people. I remember being with Tom Russo, you know, great investor and we went to see Kahn at the Wall Street Journal. The stock just done nothing forever. And we were in his office and sitting down and Tom, in the most diplomatic way whatsoever, opened up the annual report and it was a 10 year look back and had a capex line of all the money that Wall Street Journal had spent over the last 10 years or whatever it was. And it was a significant amount of money. And Tom simply added up that line and said over the last 10 years you spent X billions of dollars and your market value is lower today than it was 10 years ago. Can you help me understand your thinking on the Capex line? You can't ask those questions anymore. You, you know, you're never going to get a chance to do that, you know, and the fact is, I don't know, Chris, unless it's a smaller company, because I'm with the big boys, you know, I can look on the website, I can get everything, you know, every, you know, because anything that they say publicly to one person, they got to say it to everybody. So I don't think I can do well with management like we could in the old days. But to Chris's point, you know, I love management that owns A lot of stock, you know, founding family, you know, stuff like that, People that actually started the business and stuff like that. The one, though, that Warren turned me on to and I like and I don't see it as much, I'd like to hear what Chris has to say about it is the willingness for management to admit mistakes and to put it boldly in the annual report. As Warren says, when you admit your mistakes publicly, the tendency is that you'll go out and correct them. When you don't admit them publicly, you're misleading yourself in private, and the nonsense can continue on and on. I don't know, though, if management does that as much as they'd like to, because I think they're afraid to get sued. Right.
- [23:37]
Chris Mayer
That's the unfortunate thing. I mean, I'd like to have the CEO actually write his own letter, which sometimes you can tell it's just more of a marketing piece that they put in the annual rather than a candid discussion to fellow shareholders. Right.
- [23:49]
Robert Hagstrom
And the attorneys are all over it because they don't want to get sold. I mean, you know, know, compliance is whether you're managing money or running a company, compliance is trying to keep you out of court and, you know, you're not getting the communications, you know, from it. So it's really hard. It's really hard to get those insights and management that we had available before Reg FD 20 and 30 years ago. I think today nobody wants to admit any problems because somebody will take them to court and say, that was a problem 10 years ago, you didn't fix it, it's cost me money, and you're going to be tied up in court. So I think, you know, I don't want to be a Debbie Downer, but I'm just not sure what we get from management anymore that could say, you know, this is great or this is awful, because other than owning a lot of stock and to Chris's point, being thrifty about how you spend money or allocate capital would be a plus. You know, I don't know what the negatives are because I don't think they let us see any of the negatives.
- [24:49]
Chris Mayer
Yeah, another thing that occurs to me, listening to you talk remind me that sometimes just the actual presentation of the financial data itself can be a clue. So if you have an annual report where they're willing to spread out 10 years of financial numbers before you, and they have some relevant KPIs that they actually track when they talk about per share, or they have some return metric that they look at and they talk and think long term. Then those can be clues as well that you have a quality management team.
- [25:21]
Bogumil Baranowski
It sounds like it's actions over words because words can get you in trouble. But actions tell you the truth.
- [25:27]
Robert Hagstrom
Yeah, I think the other one that I would probably sell a stock immediately if management went out and bought some unrelated company that had nothing to do with the core business and they were just flush with cash and they had a chance to go and grab something that, that was more of a diversifier for their business than really reinvesting back into the core competencies of the core business. Right then and there, that's my red. You know that sirens are going off which means you can't put it back into the company that's making us all this money that's earning all these high returns. You've decided to take this money off into a new venture with something you have no experience doing. We don't have any track record with. That would be almost an instantaneous selling for me. I, I just move on. I, I can't come to grips with that.
- [26:16]
Matt Ziegler
Let's shift into some of the more qualitative quantitative metrics here, Chris. I know you've said 20% returns on.
- [26:24]
Robert Hagstrom
Capital.
- [26:27]
Matt Ziegler
Gross margins or. Yeah, yeah, gross margins over 50% small market share relative to TAM. Robert, you've written about 15% plus on the ROE side. These like pre screening tools. A why do you use them just in the screens? Are you looking for them to carry over time? How do you think about those quantitative metrics, Chris?
- [26:50]
Chris Mayer
Well, I mean the reason to prefer the 50% gross margin is only because there's empirical research that shows that gross margins are sort of sticky. And so we think about, we want to own businesses for a long period of time. You have to put up with competition and all the things that erode profit margins over time. And so to know that a high gross profit is at least you're fishing in a good pool, it tends to be sticky. That's why you kind of want that. And the TAM is kind of self explanatory. I mean if you're again, you're going to hold something for a long time that's going to grow. You want it to have a big pond which could grow and deploy capital. And so that's important. I think that's more important than even market cap considerations. And I think we talked about this last time and the show where you know, it's not so much the market cap per se as it is market cap relative to the addressable market you can have, you can have small market caps that are relatively constrained because they're in small markets or whatever. So yeah, those are important. You know, the return is, I said 20% may be a little arbitrary. I mean it, because it's kind of a sliding scale. I mean if you're going to, usually you go for the high return, you're going to pay more. The market's not entirely dumb, but as you get higher up there too, you get, you know, somewhat riskier and more competition and you can, you know, something that compounds at 18% or 16% or 15% could be great, you know, and you're paying a reasonable price for it and it can do it for a long time and it's steady. So, you know, those are some of the things that I think about what, you know, those inputs might be important.
- [28:23]
Matt Ziegler
What about you, Robert?
- [28:24]
Robert Hagstrom
Yeah, I mean, to me, cash being critical is that return on invested capital is what drives the compounding over time. The higher the return on capital, the more compounding we're going to get after. And so I mean, I think I've said 15% return on, I mean today, Chris, correct me, but I don't. I think that, you know, 80% of the market is probably a 10% return on capital business.
- [28:46]
Matt Ziegler
Right?
- [28:47]
Bogumil Baranowski
Yeah.
- [28:47]
Robert Hagstrom
And that's the long term rate of return of the market. And it's as Charlie Munger would say, that's your opportunity if you want to invest in the market. You know, Your opportunity is 10%. That's your cost account. You're lending money to the market for 10% returns. Okay, I get that. But, but I want things that are 15, 20, 25, 30%. I mean, once you've tasted Apple at 100 or Nvidia at 100, you know, 15, you turn your nose up. What's so great about that? Right? But you know, Nvidia will do 200 billion in revenues next year with a 110% return on. They'll have 200 billion in free cash flow next year to do something. Right. And so I really do think about right now. Our portfolio generates. Where's my number? We're right now at a 30% return on invested capital weighted average. Okay. That's really important to me. And when I, Charlie used to say the best thing that you own or the best thing you can invest in is what you own, you should own that. So then the question is it better than what you own? So I know what my free cash flow yield, it's 4.4%. I know what my return on capital is 30%. I have an idea of what my forward sales growth is. When I add a company to the portfolio, it's got to raise the economic benchmark. If it doesn't, unless it's a huge discount to the margin of safety or a natural diversifier, why would I add anything that was a 15% return on capital that had a lower cash flow yield and a lower sales growth than what my conglomerate has? Right. So Charlie does, you know, point out, rightfully so, that when you play that game it really narrows the number of companies that you're going to own because you'd have to find out over time you're buying the best of the best, you're getting the highest cash flow yields, the highest returns on capital, you're getting double digit sales growth and then everything that you compare it to. There are not that many things that can over time start to raise that economic benchmark, which is a challenge. But it also might be where the return is. Right? I mean, if you really concentrate, Chris does this, you know, you really concentrate on the best of the best and you don't dilute it with mediocrity. There's return, right? There's the return. So, Chris, one question I wanted to ask you before I forget. Why doesn't the market adjust the price earnings multiples for the differences of return on capital? I don't know why we don't do that as an industry. Why would something say each company has a dollar's worth of earnings, they're both going to grow at 10% per year, but one of them earns 50 return on capital. Why should they be trading at the same voltage?
- [31:23]
Chris Mayer
Yeah, you never see that in like any, you know, research people, they talk about PE ratios, they compare stocks, they talk about P ratios, but forgetting entirely the roic, you know, how much capital.
- [31:34]
Robert Hagstrom
You know, they just say it's, it's a higher multiple, so it's more expensive than this multiple. Without looking at the return on capital. I mean, it makes no sense. That's not a very smart thing that most commentators, you know, do.
- [31:46]
Chris Mayer
I would say another interesting thing about ROIC is, you know, it's not always, sometimes directionally, if you find a company that, you know, if you could find one that starts at 15 and then winds up at, you know, 30 or let's say a five or six year, seven, eight, even 10 year period, those can be wonderful because then you've got massive tailwinds of, you know, valuation and rising returns. And, and sometimes you can find those, you know, they as as they scale. Some businesses obviously are better at scale than others.
- [32:12]
Robert Hagstrom
And, well, so Warren would say too, is that, you know, if a company, you know, the market's growing, a 10% return on capital, and you're growing at 20% return on capital, you can actually overpay for that. And in 20 years, you're gonna be just fine. Right. So when you get that kind of compounding effect, you don't. The margin of safety is always important, don't get me wrong. But if you're combining at 20%, you can pay fair value, reasonable prices. You don't need big discounts. As long as it's going to last, it has to last. But if you're pretty confident it's going to last, you can pay fair value for something like that and still beat the hell out of the market.
- [32:48]
Chris Mayer
Sure. Yep. I mean, there's all those interesting examples where you could pull back and say, well, you know, what you could have paid for whatever stock in 2015 and still made 10% return. And it's always, you know, very high number. That. Well, you know, seems crazy, but that's, that's again, gets kind of the time arbitrage. If you have that long view and you're right, you really can get paid big time.
- [33:11]
Robert Hagstrom
Big time.
- [33:11]
Chris Mayer
Big time. Yeah.
- [33:12]
Bogumil Baranowski
When I'm listening to you, I'm thinking there are so many bad businesses not worth owning. That's one side. There are very few businesses.
- [33:18]
Chris Mayer
There's just a lot of mediocre businesses. And that's, that's kind of the way it should be. If you think of most things that are like, most things are a bell curve. And so the same thing with businesses. Most businesses are just kind of in the middle and they're, they're fine. They do something that's worthwhile. They. People have jobs, pay executives, and they provide some meager return on capital. But we are interested in those more in the outliers.
- [33:40]
Robert Hagstrom
Well, you know, it's, you know, Hendrik Besseminder really did the work on this and just said, you know, there's, you know, there's maybe 100, 150, 200 stocks, you know, is about all you should have been fishing in the pond for, for the last 20, 30 years. That's all you needed. You didn't need the 3,000 that are out there. You just needed the good 200 to figure that out. And then whittle 200 down to 20 and you're home free. It's easy game, right, Chris?
- [34:04]
Chris Mayer
Yeah, sure.
- [34:05]
Bogumil Baranowski
You make it sound easy. I want to zoom in on a certain metric, different metrics that you both look at, but they rhyme. Robert, you look at owner earnings, not the reported earnings. And Chris, you emphasize free cash flow. Can you walk us through why these metrics work better for you than GAAP earnings and how they help you avoid trouble?
- [34:25]
Robert Hagstrom
Well, Warren is the one that coined the term owner earnings. And basically what he was saying is GAAP earnings don't tell you what the cash is because you're not taking into account what the capital reinvestment needs are. And he said he was like as the owner of the company, the dollar bills that I can get my hands on, that's owner earnings. So you take gaap, you subtract what capex, normalized capex is from the earnings, any changes in working capital, which typically aren't that big of a deal. And then you add back the non cash charges, you add back amortization and depreciation, and that gets you to cash. And that's basically what we do. And there's so many terms of free cash flow. I don't know if that's yours, Chris, but we're very simple. It's just how much do I have to put back in to keep going? I'll add back the non cash charges and because that's not really money out of my pocket and that's the cash I have to work with. That's how we do it.
- [35:24]
Chris Mayer
Yeah, I mean it's the same, same idea, different words for the same thing. I mean, he said it. I mean, the real reason is because Gap earnings don't take into account those other factors, how much capital you need to reinvest in the business. And that includes things like working capital drags and so on and so forth. And, and it can also help you kind of suss out quality companies that can convert companies that convert a high percentage of their net income to free cash flow, generally higher quality companies than those that only earn 50% of their net profits in cash for whatever reason. So that can help you sort of filter out these great businesses that we're talking about too. And every once in a while you get businesses that actually convert more than their. And then profits.
- [36:09]
Robert Hagstrom
Yeah, and the other piece that and Mobisen and some other guys. And those guys are working on it is this whole idea of intangible investing, which becomes a very big deal in information technology businesses like pharmaceuticals and everything like that, is that gap accounting basically allows brick and mortar and trucks and equipment to be depreciated over the life of the investment. But in intangible investing, which would be things like models and software, certain pharmaceuticals and stuff like that. You've got to expense that right through the income statement. Well, that doesn't seem fair to me. I mean Gap was born of the brick and mortar world. But a lot of people are looking at, I think Microsoft last year almost 80% of its capex was intangibles and they expensed it like an income. Right. They could have capitalized that. It wouldn't have been a 20 year life. Right. So software may be 10 years and you know, modeling and stuff like, you know, you come down but it wouldn't have been a straight expense item. In which case the multiples would actually be lower than they are if they were allowed to treat intangibles of capitalized expense. But GAAP isn't doing that. But I know analysts are starting to work on that to try to get at the true level of what economic value is being added by you. Don't you just don't expense all your intangibles. They are worth something somewhere down the road.
- [37:34]
Chris Mayer
Yeah, I mean this was one of the things that kind of made Amazon a little hard to see too. And I remember wrote about this in Hunter Bagger's book which is that if you know they were expensing so much stuff through their income statement and then if you bet a lot, basically growth capex that other, you know, you might take out. But if you could kind of back that out, they were pretty consistently earning 10% profit margin every year. That's just, they were running everything through the, they were just expensing everything aggressively. So sometimes, you know, Gap reporting can hide the real cash. Generations of a business as well.
- [38:06]
Robert Hagstrom
I think Bill said it's, it's called generally accepted counting principles. Not divinely inspired counting principles kind of get you in the ballpark. But it's, I think Warren said it's where you begin, it's not where you end. Cap is where you start, it's not where you end.
- [38:22]
Chris Mayer
Yeah.
- [38:23]
Matt Ziegler
Inside of this thematically and it's understanding what you're competent in and how you can break this stuff down. And a lot of this is easy to explain in hindsight. Just like Robert, we already established you beat Buffett to Apple. Chris, we already established your mother in law is a better investor than you. But you came around eventually. I'm curious in this, this parsing because these industries are changing so fast too. That's what you were just explaining like seeing Amazon in real time. It was tricky. Just like the App Store and what it's going to be for Apple or Microsoft with these expenses. Chris, how do you, how do you wrestle with how fast this stuff changes and making sure you understand an investment you're going to make or you don't have adequate understanding if you're going to pass?
- [39:11]
Chris Mayer
Yeah, I mean, it just gets to the whole circle of competency, competency idea. And so, you know, there's certain things I feel comfortable owning and there's some things that are going to be difficult for me. Like, for example, things in biotech are always going to be difficult for me. It's not something I know much about. I'm not intrinsically that interested in it. And so it's hard for me to research it. This, this is something, something that I tell people is unappreciated. You have to really like the businesses that you're in too. You know, you have to, because if you're going to own them for a long time, you're going to follow them. You're going to research and read about them. You better like it, I think, to have some, some curiosity about it, some, some interest. It's hard to, you know, invest in something you actually dislike or don't, you don't want to follow. So, yeah, I mean, that, that's kind of a. I mean, Robert probably has better idea on this because he's involved in a lot of those big companies that have gone through tremendous changes.
- [40:08]
Robert Hagstrom
But.
- [40:10]
Chris Mayer
Yeah, go ahead.
- [40:11]
Robert Hagstrom
Well, now, Chris, I would share. I have no clue how to value biotech.
- [40:14]
Chris Mayer
Yeah, it's tough.
- [40:16]
Robert Hagstrom
And even health care, I know the drug stocks are running right now, but, you know, Warren said I didn't do technology because I couldn't figure out what it would be 10 years down the road. You know, I understand what they were doing. I just couldn't see. I didn't understand what it would look like. I can't, I can't figure out health care. 10. I don't know what this pill is going to cost. You know, with biotech, I got to buy 30 of them to figure out five that are going to make it. It's just, and as Chris rightly pointed out, you know, if you're not going to get jazzed about it, you're not going to do a lot of hard work on it. You're not going to start on top of it. So healthcare is kind of something I put over. And staples, you know, staples are probably peak margins right now. Units are slowing. Private label is coming in. Overseas are much better at it than they used to be with you Know, when we own Nestle and we own Unilever 10, 15 years ago, and great, but you know, that game's gone. And so when you think about it, if you take staples in healthcare, that's a big chunk of the market that I'm saying I don't think I want to be there right, right now with tech though. You know, clearly being at Bill with Bill Miller was just a home run. He was the first value investor to unlock the puzzle of how to think about technology. We went out to Santa Fe Institute, met a guy named Brian Arthur, phenomenal economist, and he wrote, you know, it's called Arthur's Law of the networks, There'll be few. And when you began to think about that, you're saying, okay, they're not going to be that many Amazons, there are not going to be that many Googles, there are not going to be that many metas, you know, of these networks that are being put together, they get big as fast as they can because the bigger they are, the faster they get there, the more powerful they are because people want to join the biggest network. And so that, that helped us understand the moat of technology and we still had to do the cash. What I'm interested in and you guys push back on this is all these large language models. Start with ChatGPT and you can go to Gemini and you go to, you know, Anthropic Clock, you go to Perplexity and you know, Grok, whatever. They're only going to be four or five of those guys, you know, today if you, if Chris and I wanted to go and start a large language model, we'd probably say, no, we can't do it, we don't have enough capital. There's already five people out here that are doing better than we could ever be. So you can almost say X China, let's take China out. That they probably got five or six of the large language models right now. That's it. And I don't know who's going to come in and say I can do better, cheaper than what you're doing. I don't see it that way. So if that's true, then we know where the moats are, then the question is how to value them. And with all of these new networks, they don't want, they don't want profit yet. They want number, they want subscribers, they want people, they want, they want, you know, people using their models and as they get millions and millions and hundreds of millions do it, that then is the moat. Then they turn on the economics and Then it's home free. That's, that's what Bill taught me.
- [43:04]
Chris Mayer
Yeah, I mean, some of you know, I always have an affinity for these businesses where the economics seem like they'll, they're just so stable. So you look at something like Copart and Salvage, you know, that's been pretty stable for a long time as far as dealing with wrecked cars. But even that's going to be, you know, subject to some technological change as we have electronic vehicles and self driving cars and all this kind of thing coming in. So you really can't sit in your laurels anywhere. I mean, you just always have to pay attention. In times we live in, there's, you know, technological change is always happening and so it's just something you have to be on top of. And it's also good to be parts of management teams that are responsive to that and don't sort of stick their head in the sand. So AI, for example, it's been interesting to collect little examples of companies using AI and then claiming, you know, different savings and efficiencies from it, so versus someone who's just not bothering with it or you know, not, not using it, not experimenting with it.
- [44:10]
Robert Hagstrom
So yeah, I think that's the biggest thing. We're, we're definitely in the middle of AI fatigue now. I think people are, where's my payoff? Where's the payoff? And if they can't see the payoff, they become skeptical. This guy named Roy Amera, what's called Amera's Law. With every technological revolution, the tendency is to overestimate how it's going to change your life immediately. And when it doesn't, you become a skeptic and never invest in it. Well, these things unfold over multiple years. And to Chris's point, what we need is more use cases. We need more people saying I'm using AI and it made my margin go up. I did AI and my earnings are up. And when you begin to see that in spades, then people are gonna go, oh, okay, I get what AI is. And then it's all right, it's off to the race.
- [44:54]
Chris Mayer
But I think, I think the irony of that whole thing may be that the biggest winners will be just sort of incumbent players like that who figured out how to use it.
- [45:02]
Bogumil Baranowski
That's a twist.
- [45:04]
Robert Hagstrom
That's our productivity miracle that's going to get us out of this debt trap, right?
- [45:11]
Matt Ziegler
Well, speaking of productivity miracles, I'm going to keep you guys on a time budget. Okay, Chris, this is fascinating. You're going to Come back. We're going to continue this conversation because I still don't think we've finished what a perfect stock is. But if people want to find you on the Internet, read more of your stuff, where would you like to send them?
- [45:31]
Chris Mayer
Well, I mean, if you Google Woodlock House, you can find me there. And yeah, I mean that, that's about it. I don't produce anything all that regularly now, but I do. I will have a book coming out next year at some point, so keep an eye out for that.
- [45:45]
Bogumil Baranowski
Nice.
- [45:46]
Matt Ziegler
Very exciting. Robert, same question to you. People want to read more of your stuff, follow you online. Where should they look you up?
- [45:53]
Robert Hagstrom
Well, we're@equitycompass.com all one word, www.equitycompass.com. we have several strategies, but the global leaders, my portfolio is there, plus our literature. And we try to write as much as the attorneys will allow us to write. Yeah. So, you know, it gets tough. You can go on a podcast and you can go on TV and talk about stocks all day long. And the attorneys say, well, you can't buy it for 72 hours, but you can't write about it in a report because it lasts for weeks and weeks and weeks, you know, So I don't know. You know, you need to get an attorney on for your next show to explain to us why we're being handcuffed and communicating to our shareholders.
- [46:32]
Matt Ziegler
I thought your attorney was, you know, chat GPT now or something. Robert and Chris Bogomil, thank you so much for joining me today. Bogomil, you're hanging out with me for one more second to talk about some of this stuff.
- [46:46]
Bogumil Baranowski
Yes, yes. I think it's a good idea to, to recap a little bit what we heard.
- [46:51]
Matt Ziegler
I wanted to keep you around for an extra second on this because, I mean, I got a bunch of notes. I'm sure you do, too. What, what are your takeaways? Do we know what the perfect stock is or do you have any shifted thoughts on this?
- [47:04]
Bogumil Baranowski
We're looking for a perfect business. It's kind of interesting because we have an idea of what a perfect business is. After listening to Chris and Robert, it's kind of a refresher reminder of what kind of a quality of a business we're looking for. This business if it's a stock, right. Because we're owning shares of companies might be hard to own. I think that's something that we have to accept that even a great business might be a hard stock to own. And Chris points out in this conversation, other conversations, there will be Dead money periods, there will be drawdowns, sell offs, but if it's a good business, you continue to hold it. So it was one thing that stood out to me. I think I was a bit surprised, but I shouldn't be by how much we ended up talking about the errors of a mission. What are you thinking? What's your thought? Like I was a little bit caught off guard by that.
- [47:50]
Matt Ziegler
Were you not after the first answer? Because when we started talking about what is a perfect stock and, and hahaha. Stock that never goes down. Ah, stock that never goes up. Like we make all those statements, the, the reality is what that framed up was like a perfect stock is only knowable in hindsight. Okay, we can try to guess these things going forward, but the real time game of finding a good stock, let alone a perfect stock, is really hard. And that means you start to look back of what would have been a perfect decision in hindsight and the aware, the level of self awareness and critical thinking that they can go that Apple example is going to be with me for a long time where Robert said I was early by two years because I figured out this app store thing and then Buffett's decision comes in. You're like oh. But I think Buffett sees it for a different reason than I see it because that was one of the things that he said. And then Chris comes in with well my mother in law bought it, but I did it. And it's those little errors of we have a great story along the way, but in real time you can't tell if it's right or if it's a mistake. It's only in hindsight. And then you have to, you have to examine those hindsight observations almost obsessively to try to get the next stuff better. That's my take. What do you think?
- [49:13]
Bogumil Baranowski
I think that on one hand it's kind of obvious what we're looking for, but it's not that obvious if it's available and if it's going to last over a long period of time. The errors of omission really struck a chord with me because when you really think about it, it's the money that you left on the table that was available. And I think this on a human level, it's something that bugs us. I found a way, a guardrail in my own process to work around it.
- [49:42]
Matt Ziegler
So do tell, do tell.
- [49:45]
Bogumil Baranowski
1 if I'm almost convinced that this is a good idea, the least I can do is to start with a small position and, and I'm so Surprised how many investors out there that I know that I have a respect for will not start a small position and just let, let it just fly away, run away from them, start with a small position. So that's one thing that I do and I've done it many times. And sometimes that small position in some of the stocks that were even mentioned today can become a very meaningful position and make a difference. The second thing I do, we're giving away secrets for the people that stayed until the end of the episode. But I tell people that I'm a value buyer, I want to get a deal up front, but I really bite my nails, sit on my hands and I want to be a growth holder. And I've seen so many situations that a stock I bought before, nobody paid attention to it, it was out of favor, people didn't like it. Three, four, five years down the road, it's in the headlines, everybody must own it. And I see so many people holding it across the board. And that stock is in the heart of all the conversations. And I have a dilemma because it's no longer the kind of stock I bought. But if I sell it, when do I go back? And I find it really, really hard. And I ask many investors on talking billions, when do you go back? And if you really are honest about it, it's very hard to go back to an idea. So the second best thing I can do is just let it, let it run, let it be the fact that it gets overvalued, over inflated, overhyped, if it's still a good business. That's why there's a difference between the perfect business and the perfect stock. That's why I wanted to play on those words and reactions with, with the, the guests just sit on your hands, wait it out.
- [51:39]
Matt Ziegler
I love, I love that framing. Not just because I can get behind that completely. I think you can buy something at a valuation that makes the entry point go. I think other people are mispricing this for one reason or another. And I think there's an attractive entry point for me to start gaining access to this and start gaining access, meaning you can start with a tiny position, you don't have to start with a big position. Having a position which rewire your brain and how you look at it because now there's money on the line and then you can look at it over time. But as it progresses over time, as that valuation increases, it might get to be a silly valuation. Likewise, that doesn't mean you have to sell the whole thing. There's position management there's little things you can do if you have to, but I've seen too many times a small position that starts out of a starter and then just goes off to the races, like it grows into a full size position on its own. You don't have to add any money. You're like, well, all right, that's a convenient problem. And then all of a sudden it becomes a more dominant player in the portfolio when you go, okay, I may not want to take this to zero because I don't know what I'm going to buy this back, but maybe I want to rebalance away from it or I want to tweak it a little bit. But that idea of if especially a high return on capital business, or the business is just humming along and growing, be a value buyer and a growth holder. That's a perfect scenario in my book.
- [52:59]
Bogumil Baranowski
And I think it's an advanced masterclass in portfolio management here. When you think about it, the stocks that are doing well, they're the ones that become a bigger portion of your portfolio. And the ones that for some reason you were wrong about, I was wrong about, they kind of dwindle. And Buffett had this story that he put the same amount of money in two different investments. I'm forgetting which ones. And one was not good and one did very well. And he showed the scale over a few decades. And we're talking about 100 year thinking in this podcast. It really spoke to me because I thought even if you did nothing, you let the bad idea just dwindle to a fraction of a percent of the portfolio. The portfolio management gets done for you, when you think about it, and the good idea becomes a larger. Obviously, you have to manage around it and think about it. The other thing that struck a chord with me was how few good businesses there are out there. Especially when you look at the metrics that Chris and Robert are looking at, the margins, the returns. It's very hard to make money in business, not in stocks and investing, but finding new opportunities for the capital to be reinvested, which is what they were talking about. There are not too many businesses that have an abundance of opportunities around them to redeploy capital at a very high rate. There are not too many, and the averages are very disappointing. So it's fascinating to see how, yes, there are a lot of publicly traded companies. Yes, there are a lot of businesses out there, but if you raise the bar, there are not too many stocks that make it to the other side.
- [54:31]
Matt Ziegler
Do you, do you run quantitative screens? Do you run Anything that's just like idea generator lists. Do you do this?
- [54:38]
Bogumil Baranowski
Yes, but less so. So I kind of have a running watch list, wish list. So any business that I come across, and I've been doing it for 20 years, so there's hardly anything I haven't looked at that I would consider that a lot of businesses I have no opinion about and I just don't know what. Don't know much about them except for their name. But then there's a list of probably 100 businesses that I know enough to have an opinion, and then I'm ready to act on it. If the price makes sense or if there's a certain break that allows me to buy something at a better price, it means that I'm also going to miss out on something. So it's. There's a certain range there where I'm accepting a higher price and in some cases I'm willing to. To pay up. But it's not that I wake up in the morning, I run a screen and I see a hundred new companies. I've never heard of it. It doesn't really happen that way. To my list, I'm gonna add a few stocks like I added even in the last month or two, a few stocks that got my attention. And the list continues to grow and some things drop out of the list. It's fascinating what Robert pointed out, because Consumer Staples was this easy to own universe of businesses. Dividends, dividends go up. The valuations are usually not too high. The returns are pretty good. They usually have pricing. But that's what investing is about. That even such a sleepy neighborhood, it's not the safe neighborhood these days. And if it is relatively safe, it's not going to offer the returns that maybe we're used to. So it's fascinating to listen to Robert that has been watching this for a lot longer than I have and realizing that neighborhoods change.
- [56:18]
Matt Ziegler
They change a lot. And you have to be thinking about that both as like a portfolio manager and somebody overseeing this stuff and then also realize the stuff that other people own is going to change over time too.
- [56:28]
Bogumil Baranowski
Yes.
- [56:29]
Matt Ziegler
I think that's another interesting part here because if we. I want to get into this with the two of them in a future episode, the types of portfolios they each own look. Look fairly different. I don't think there's a lot of overlap between what Chris has in his portfolio and what Robert has in his.
- [56:45]
Robert Hagstrom
Right.
- [56:46]
Bogumil Baranowski
Yeah, that's true.
- [56:48]
Matt Ziegler
Those are two different neighborhoods in my bucket.
- [56:50]
Bogumil Baranowski
Right.
- [56:50]
Matt Ziegler
Like in my book, two different neighborhoods with these guys Looking at each other and going, our neighbors, hoods have similar values. We think of things in somewhat similar ways, but we take a totally different approach.
- [57:01]
Bogumil Baranowski
Yes.
- [57:01]
Matt Ziegler
To how this operation is going to run. And I think there's a lot of insight in what that creates too. I wonder, A, I wonder if there's any overlap. B, I wonder if it's like if you could have one house in his neighborhood, which one do you wish you had?
- [57:18]
Bogumil Baranowski
But back to Chris's point, you know, you have to have businesses that, however he phrased, that you enjoy and you want to follow. Right. So big deal. It's. It's very personal, right. So you and I and anybody sitting down, we can agree on the principles of what we're trying to do. And I don't just mean picking stocks, but you and I in the are in the family wealth aspect of it and managing family fortunes and thinking about the long term of those fortunes and compounding them over a long period of time. We agree about the principles, but then the expression of it. It's almost like an artist. Right. Like we both like music, but you're going to pick up a different instrument than I would. There's beauty in investing that 3, 5, 10 people can sit at a dinner table, agree on the principles. All of them might even like Buffett and Munger, but none of them have the same stocks. Isn't it cool? When you think about it, it's incredible.
- [58:10]
Matt Ziegler
I love that that's the reality of it. I love that different people can put up those results and numbers. And I don't think it's that dissimilar from. It's funny. You've been in the business, I think long enough to have this experience too. When I started, everybody spoke in terms of the Dow still, not everybody, but more people talked about the DAO or asked what the Dow was doing and what the S P was doing. And it was, it was really weird to watch this thing flip to where the S P became the dominant thing that everyone talked about. And now even we talk about. We don't talk about the NASDAQ as much, but it's still like we talk about the NASDAQ way more than we talk about the Dow anymore. I think I hear the Russell more than I hear the Dow these days. On anybody quoting.
- [58:58]
Bogumil Baranowski
Continues to evolve. You know, I had the benefit of seeing statements of some legacy old accounts from way back, and I was very curious what people held. And there were companies that I've never heard of that went out of. Absolutely business, got acquired and merged and so on. I think we. It's like watching a slow process that actually is very fast. I can't really explain it, but if you watch the market, for lack of a better way to explain it every day it looks like, you know, the other price moves up and down. It's still the same top 10 stocks. But if you zoom out even we talked about it in the last episode on this show. The top 10 stocks in the S&P 500 when I started 20 years ago, they are very different stocks. I think Microsoft is the only one among them. But you know, intel is getting government help. There were four or five banks that received bailouts two, three years after I joined the profession in 0809, I guess almost four years after I joined. So that top 10 was not exactly where you wanted to be. You would have been in the wrong neighborhood. So when people think about the top 10 today, I think there's a twist here and I somebody brought it up and I didn't want to lose that part. And it came up in the last episode that among the top 10 companies they might have the highest growth rates, which is very unusual because usually when you have a large company you don't have that kind of a growth rate. And the second thing that came up in a recording I was doing earlier this week is that usually when you have a new tidal wave like AI today, you have different winners in that wave. So Walmart won the brick and mortar battle. Amazon won the online e commerce battle. Right. Like Walmart is still around. But when you think about it, I mean Kodak, Kodak gave us the initial digital photography somebody invented in the lab somewhere at Kodak. But Kodak is not the one that gave us digital photography in our pockets to run around and take photos. So every time there's this moment where the incumbents don't really have a chance. This time around it looks like the incumbents own the neighborhood. I don't know. There's something interesting and different about it. Both the growth rates and the fact that we assumed that they won. Are we wrong about it? I'm not sure.
- [61:25]
Matt Ziegler
I think it's a fascinating question. I think this is a great one that we need to pitch to Robert next time we all get together because the incumbents being the return generating powerhouses that they are is the most staggeringly different part about when you do those case studies of here's how the top 10 companies over each three or five year, 10 year period are never are the same at the top of the. The top of the index and all of a sudden we have a period of time where it seems to be stickier and we also have higher returns on capital, stronger businesses than we've ever seen in this poll position. And it's a weird world out there. So I don't think we figured out what the perfect stock is. But I feel like I got a whole bunch of new thoughts on this. I'll just call it right now. You're the perfect co host. Thanks for doing this with me today.
- [62:17]
Bogumil Baranowski
What a pleasure. I really enjoyed it and it got me really thinking and you know, I thought I knew we were going to take it, but it surprised me and I'll leave it at that.
- [62:25]
Matt Ziegler
We get these two guys together. I'm surprised every time in the best of ways.
- [62:30]
Bogumil Baranowski
Until next time.
- [62:31]
Matt Ziegler
Until next time. Thanks, Bogoville. Thank you for tuning in to this episode. 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@excess returnspod.com. if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.