← The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP708: Why Wall Street’s Playbook Is Broken w/ Harris Kupperman
01:19:13
Kyle is joined by the Founder and Chief Investment Officer of Praetorian Capital Management LLC, Harris Kupperman. Here, they discuss Harris’ investing strategy based on concentrated macro and events bets.
Loading summary
Transcript57 lines
- [00:01]
Harris Kupperman
You're listening to tip.
- [00:03]
Kyle Grieve
Today's guest is Harris Kupperman, the founder of Praetorian Capital, a fund that has absolutely crushed the S&P 500, delivering net returns of 711% since 2019 compared to the S&P 500's total return of 155% now. Harris has a unique investing style, blending businesses that benefit from secular inflections or cyclical tailwinds with event driven special situations. Like any value investor, he loves a good deal and lately he's been finding plenty in hard assets. While many investors have shifted towards capital light businesses, Harris has taken an opposite approach. About half of his capital is invested in hard asset rich companies. His reasoning is pretty compelling. Inflation dries up the replacement costs of these assets that benefit existing owners. There's limited supply in industries that he's invested in such as shipping, energy and real estate, and this limited supply strengthens pricing power. Many of these assets generate massive amounts of cash flows, and then on top of that, Wall street tends to undervalue hard assets, which creates great buying opportunities. And then since these assets are undervalued and you mix that with the strong cash flows, this allows companies to buy back shares below intrinsic value. And then on top of that, the reason this kind of opportunity exists today is that institutions have offloaded some of these assets for non investing reasons which have created these opportunities with significant upside and lower risk. Another thing that makes Harris stand out to me is how he runs his fund. Instead of structuring it like a traditional investment vehicle, he truly treats it like his own personal account, with others just along for the ride. While many fund managers invest a large portion of their net worth in their funds, they often face restrictions on what they can and can't buy due to institutional constraints. Harris has structured his fund to remove much of that, allowing him to invest exactly as he would if he were only managing his own money. His approach does come with some pretty wild price swings, but he expects that. He's not focused on relative returns, he's after absolute returns. Since the industry is so benchmark driven, that leaves opportunities for investors willing to buy businesses that may struggle for a few quarters but have a bright future ahead. That's where Harris prefers to fish. If you enjoy learning about unconventional but highly effective ways to succeed in today's markets, you won't want to miss this conversation. Now let's dive into this week's episode with Harris Kupperman.
- [02:23]
Harris Kupperman
Since 2014, and through more than 180.
- [02:26]
Kyle Grieve
Million downloads, we've studied the financial markets.
- [02:29]
Harris Kupperman
And read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve.
- [02:47]
Kyle Grieve
Welcome to the Investors Podcast. I'm your host Kyle Grieve and today we welcome Harris Kupperman onto the show. Harris, welcome to the podcast.
- [02:55]
Harris Kupperman
Hey, thanks for having me on.
- [02:57]
Kyle Grieve
So one thing that I found super fascinating about your investing story is just your overarching strategy, which is a lot different than a lot of the people that we talk to on the podcast here. So a big part of that strategy is making, you know, concentrated bets specifically on macro inflections. And what really interested me here is that there's so many investors that clearly are trying to profit from macro events, but they usually end up getting either the event itself incorrect or the market's reaction to it wrong. So I would just love to dig in here. You know, how have you been able to do this so successfully given how low the average investor's success rate is with this kind of approach?
- [03:33]
Harris Kupperman
I don't know if my success rate has been very good either. I'm probably batting about 50, 50. I think the difference is that when I get it right, I get it really, really right because I let these things run. And when I get it wrong, I don't lose too much. I try to set up every trade with a risk reward where I'm buying a bunch of equities that are beaten down, they're unloved, that have super low expectations, low valuations. And look, when I get it wrong, I really get a lot of these wrong. I usually get my money back plus or minus 10, 15%. And when I get it right, you know, I'm not putting anything on the books that is at least a 5x in the next three years. But I'm really looking for, you know, more than that. And so pretty get right. I get it really right. And when I get, like I said, when I A lot of times it's not so much that you lose money when you get wrong. It's highs of capital for a year, 18 months. And the theme is sort of working. It's just doesn't have the strength to, you know, push the equity multiple because you know, it's not just earnings growth, it's really equity multiple that you're looking at. You're trying to find things where other guys can get excited about too. And so sometimes, yeah, the earnings are growing, but you know, you thought it was going to grow 30% and they're growing like 12, you know, and so you make A little bit of money. I think that's the key to this, you know, make sure that when you set up your trade, you can't lose money. Because that's always the number one rule of investing.
- [04:54]
Kyle Grieve
Yeah, exactly. And I think that speaks to, you know, the frequency and magnitude effect. Right. You know, if you, you can be wrong, but as long as like George Soro says, you know, it doesn't matter as much as just when I'm right I need to make a lot of money and when I'm wrong, I need to hopefully minimize my losses.
- [05:09]
Harris Kupperman
Right. I mean if you look at kind of, you know, the history and you know, I've had a fund now, this is year seven for a fund, but you know, I've been doing this a long time before, you know, it's either a lot of things work, you know, a lot of my ideas are just working in unison and you know, we're going to be up huge that year, Mark. Nothing really happens. You know, we're up or down smallish. Usually links to the upside, you know, just event driven. I think we'll talk about that in a little bit. But yeah, that's just usually the return profile. It's, it's odd for us to ever have like an up 40 year, you know, either going to be up triple digits or hope, you know, we're going to be kind of, you know, bunch, you know, or 15, 10, 15 on either side of bunch. You know, hopefully we already big down years. Right. That, that's, that's the real goal. You know, if you avoid your mistakes and you get out of your mistakes fast, the winners solve most of the problems for you. Right.
- [05:58]
Kyle Grieve
So something else that really stood out to me was how you kind of balance both these shorter event driven trades to kind of self fund some of your longer core positions or longer term inflection bets. So you know, you use this specifically so that you can fund these long term bets when there's market drawdown. So I'd love to dig into this a little bit, you know, are you usually staying completely fully invested? So, you know, and is this the strategy that helps you free up capital when those big opportunities do end up coming around?
- [06:27]
Harris Kupperman
I mean we're usually pretty well invested. I mean look, there's more to do that I have capital. That's, that's always been the case. Sometimes, you know, we'll get a little skittish and pull back, but there's always a lot to do. On the event driven side, when the markets are volatile, we tend to make money Event driven means a lot of things to me. We're tracking about 25 event driven, you know, sort of corporate events. These are like spin offs, privatizations, demutualizations, you know, restructuring, you know, CEO change. We're tracking about 25 of these things. But they tend to give you really interesting setups where you know something's going to happen, you know, roughly the timeline of this thing happening. And there's usually probabilistic sort of trading opportunity around those sort of events. And we're active in a lot of these and you know, obviously, you know, there's going to be hundreds of them a month and we're going to choose five. But you know, we're active in these. We're also really active just in what's in the news. I'm a reasonably good, just discretionary trader and when stuff's in the news, when markets are, you know, volatile, moving around, I'm just going to be taking trades and know it's, it's additive. The whole point of event driven is you never want to lose more than 100 pips in a mistake. You size it appropriately, you know, based on, you know, risk, reward. And you know, you try to do this over dozens of situations during the quarter. You, you're, you're trying to grind your way forward and occasionally you get a steep velocity on something and it really hits it out of the park. Now you're just really trying to set up situations where you can't really lose much and you make some. It produces a really consistent cash flow. In my experience, event driven will have a couple months each year where it's very profitable, bunch of months each year where it sort of makes small and then one, maybe two, we lose a little. But you know, it's pretty rare that we lose more than, you know, 50 or 100bps in a month on eventually it's quite likely that we'll be up a couple hundred bips in a month. And so we have this additive sort of cash flow in a way. And I hate to use Berkshire analogies because they're overused, but you know, Buffett has an insurance business which produces cash for him. In most years I went driven, it produces cash for me. And when the markets are volatile, which for instance right now they are volatile because you never know what Trump's going to tweet yet next. And I don't even know if Trump knows there's going to be a lot of pin action. There's going to be a lot to do. Implied volatility, you know, Struck really like five to seven points higher now to Trump, which means that, you know, every time something happens, you can sell puts and calls and own your yield that way. This just a lot to do right now. And you know, the core book is not doing so great. You know, the markets are kind of trending lower this year and you know, the event driven has really offset a lot of that draw down in my book and given me cash that I could just keep averaging down my favorite ideas. And you know, it's doing exactly what it's meant to be doing. And yeah, I mean, I'm super happy with the way it's been going this year. And that's how it goes most years. It's, it's rare that we ever have a losing year in event driven. It's rare we even have a losing quarter, but we tend to make good money.
- [09:22]
Kyle Grieve
And so are you tracking specifically which side of the book, whether that's event driven versus core has been driving the most returns? It sounds like you, you definitely do.
- [09:31]
Harris Kupperman
We, we definitely track it. Yeah, yeah.
- [09:34]
Kyle Grieve
And, and, and so is there kind of, would there be kind of a time in the market where you'd go maybe all in or, or focus more on one side depending on the opportunity set that you have?
- [09:44]
Harris Kupperman
Yeah, I mean, look, eventually goes in cycles, you'll have a couple good months, then it kind of trails off. You have a couple good months and when things are good, you want to put a little more capital to event driven. The way event driven works though is it's often self liquidating. You know, if you write a put on something that's oversold and you say, look, Stock's gone from 60 to 40 and I don't mind owning it at 35, well, I'm gonna write the 35 put, I'm gonna get paid my $2 and 45 to 60 days later either I've gotten, you know, my, my stock and you know, I got it below the price. I was going, you know, where the put was, you know, I was, or I've earned my yield. And these things tend to be very self liquidating and it tends to be that by the time that put expires, the stock's either moved up or it's moved down and I've been assigned so I can kind of overdraft in a way off the core portfolio. And we, you know, like say we're running a 110 exposure in the core book. I could always overdraft another thousand mips, which lets me write puts or do a couple of These strategies, it gets me to 120, which we kind of target this 115, 125 range. So it gets me right into the middle of my target exposure. We could take exposure out if something's really good in a van driven, or we can sell a position if we need something in adventure, if there's a really good privatization or a really good spin or a really good bankruptcy emergence. And we say, look, going to size this. You know, a lot of the adventure stuff, like 50 to 100 bps exposure. We're going to size this 500 reps. We really like this. Well, then I got to go find popular rips somewhere. I can't just, you know, go from 120 to 125. You start pushing your exposure too much, and you never want to get too overexposed. You know, there's a couple times a year where maybe it makes sense and about once every 10 years where it really, really makes sense. But, you know, I'm at 125, 130. That's really a ceiling. You don't want to go above that, especially because we don't short. We don't really hedge.
- [11:34]
Kyle Grieve
So another thing that I think really resonated with me was your focus very specifically on absolute returns. So, you know, you've had some just incredible years. Like, I mean, you already mentioned here that you had a couple years here where you've had triple digits, and that was in 2020 and 2021. And then, you know, even in 2022, when every. When the market was, you know, kind of getting slaughtered, you ended up with a positive return, which was very interesting. So let's dive in more into how you develop this mindset kind of to focus more on absolute performance when, you know, it seems like 99.9% of other funds are very locked into specifically relative returns compared to an index.
- [12:08]
Harris Kupperman
Right. Well, I mean, I think most hedge funds start with the initial principle of I want to build a return stream that lets me go market the big money comes from institutional investors, pensions, endowments. So I'm going to build a return stream that the teachers pension of Cleveland and the firefighters in Mississippi, like these guys, want this return stream where we don't have, you know, any down quarters, hardly any down months, and we make 1 to 2% a month positive on average, and we end the year 13. And that's a really good return stream that lets you manage tens of billions of dollars and become a very, very wealthy man. The problem is most people can't achieve it. I approach this with a very different approach. I say look, this is my PA Primate Jounce. Sorry pa I'm going to run it like my pa and if anyone wants to come along they can pay me a fee and they get exposure like it is my pa. But I really treat this just as my pa and they said they're a different approach and it means we have a different return stream. But the approach is where I do this with my own money. What do I want to do with my own money? Look, I want to make the most money possible in my pa, right? And I don't care if it's volatile, I don't care how we get there. I just want the best rolling three year returns I can achieve. And there's always in the markets these weird opportunities that are created by this institutional incentive structure of turning into 10 billion of asset. And when you want a really smooth return profile, it means you can't do a lot of the things that we do. I think one of the most obvious ones is that most investors right now can't own a stock as they think Q100 is what be bad, right? So if you know that Q1 is going to have a bad print but you think Q2 and Q3 will be great and then Q4 outstanding, we can't buy it until after the Q1 print. And if you think Q2 will be sort of mediocre and maybe Q3 is the inflection, then you can't buy until the Q2 print. Well, I take a very different view and say stock prices are sort of random. We've become not super large, but we've gotten larger. So we're going to impact price sometimes. Well, I'm just going to average in. If Q1's terrible, I'm going to buy some more. If Q2 means the stock goes down with a 10%, I'll just buy more. Eventually I'm in a really good cost basis and I feel like a lot of funds also are very IRR focused which means they have to catch it where it's going up. So if a Stock is at 12 and you say, well the chart, do the SQUID meeting thing and every time it goes to 13 it stops. And every time it goes to 11, it stops. I'm gonna buy the 12 and no, I'm sorry, I'm not gonna buy the 12, I'm not gonna buy at 13, I'm gonna buy a breakout at 14. Okay, great, you just paid up 15 or 20%. Like I'm saying, look, I'm gonna buy at 11, I'm just sit there at 11 and close to nine and a half, I'm gonna buy more. Because if you can buy it at 14, what does that do? It means you're gonna sell it. When it drops to 13 or 12, you're gonna stop that and you're buying again next week at 14. Like, makes no sense. I just want to buy it as cheap as possible. And this is because most of my net worth invested in this fund. And my focus isn't irr. My focus is not losing money. My focus is buying as cheap as possible. So as little downside as possible. And then when it turns, and no one knows when it's going to turn, I'm going to catch that turn. And then the guy who's buying it at 14, I'm going to look at him and say, I bought it at 11. You missed out on a 25, 30% move. I mean, in our industry, that's called a good year. You know, like, so I just, I don't understand that logic. But like, like I said, you know, a lot of things don't make sense to me in finance and a lot of people from the institutional world tell me stuff. And I go, okay, that's, that's nice. I don't know why people do that this way. You know, I do it my way. My way seems to work for me. It doesn't work for other people. And I've sort of accepted that. And that's just, you know, me running my own pa with 190 people, you know, coming along for the ride.
- [16:03]
Kyle Grieve
So I'd love to dig in a little deeper. I mean, we've talked a lot about here about the core book and your event driven book. And, you know, I know you don't like using these Warren Buffettisms, but I can't help but mention him here one more time. So, you know, he kind of somewhat similar to you? Not exactly, but he had multiple buckets when he was running his partnerships where he had his generals, which were kind of similar to what your, I guess, your core book would kind of be. And then he had, you know, his turnarounds and workouts that I guess would end up offsetting sometimes when the generals would, you know, not be performing so well. So I'd love to know, you know, how are you thinking about balancing, you know, these two parts of your portfolio in terms of concentration? You know, how does concentration maybe shift where the best opportunities lie, especially in relation to the core book? Well, I think it's just exactly what.
- [16:50]
Harris Kupperman
You said where the best opportunities. Why? You know, Event driven has a bunch of stuff coming. And Event Driven is that we're tracking these things. So like sometimes stuff comes out of nowhere, like a CEO change, they just press release it. But a lot of times, you know, there's going to be a demutualization and you know, it's coming for the next six months. So you know, like there's a pretty good chance we're going to commit capital in this situation. So we need to free up capital. You know, it's, it's, you know, so there's a lot of that. I mean sometimes something happens in the news and so sometimes it's very reactionary, but a lot of it is, it just. We always, we never run fully invested. You know, we have a self imposed cap at 150 exposure. You never want to get there though. Like if you got to 150, you know, it's danger zone. But you know, we're usually running this at like 115 to 125, like I said, which gives us at the midpoint, you know, 120, which is 1,000 nips of room to flex up our exposure at any moment. And then when you flex up the exposure, you don't want to immediately have to sell something because you don't want to impact price. But you kind of look at the book and you're saying, well, where do we go find ourselves, you know, 500 pips to, you know, take the exposure down and then over the next couple of weeks you better take your exposure down somewhere. And so it's really just where the best opportunities are. We have some names in the book that we've owned for a few years. We're probably going to own them in a few years. So that's not what we flex. But one day those stocks will get valued fairly and we'll get that capital back. It tends more that we have a bunch of names that kind of cycle through the book. They tend to be, you know, a couple weeks on the event driven side, you know, maybe a month or two. We have a bunch of other things that are more like inflection oriented where you know, it's a clear catalyst, it's coming in the next six to 12 months. We're positioned ahead of the catalyst and we're probably going to sell three months after the catalyst. And you know, there's a bunch of that sort of stuff and it's got a 6 to 24 month duration on it. And so that recycles pretty fast.
- [18:45]
Kyle Grieve
And do you have any constraints specifically each side of the book? Like, you know, do you, do you prefer to keep your core book, you know, at a specific concentration level or does it need to stay above a specific level?
- [18:55]
Harris Kupperman
No, I mean, when there's nothing to do, you take it down. I started getting marriage in the US economy last spring and we kind of have a, have a culling we called it. Or it's a purge is kind of what we called it internally. And we're a bunch of names that, you know, if the US economy is going to soften and it has softened, I think it might not show up in the official datas yet. I mean, the official data says the economy is still growing, but you know, everything that finance has done on rate of change and so the rate of growth is slowing. Your second derivative, which means that equity prices are going to decline. You want to get out before that. We made a lot of sales. I wish we sold more, but honestly. But anything that had GDP exposure, we sold. And having done this for a long time, I know that there's always some illiquid things. Well, not totally illiquid, but when you own a couple percent of a company, it's going to take you maybe a couple weeks, couple months to get out, especially if you don't want to impact price. And so you just kind of know like, it's going to take me 60 days to get out of this. You better get going, you know. And so we kind of clean up the book that way. And we do that from time to time. We just clean up the book. But no, I mean there's no target. We just kind of go where the opportunities are.
- [20:03]
Kyle Grieve
Let's take a quick break and hear from today's sponsors.
- [20:06]
C
Holding Bitcoin is the best way to protect your family from the threat of fiat currency collapse. And few people understand this better than Tony Yazbek, cybersecurity expert and founder of the Bitcoin Way. Tony was in Lebanon when the currency imploded. He's seen the chaos that erupts when the ATM stop working and the bank accounts get frozen. He knows what it's like to lose everything. But with his cybersecurity expertise and by fully adopting Bitcoin, Tony was able to engineer his escape. And now Tony and the Bitcoin Way team work to make sure this never happens to you. With over 25 years of experience, their expert training empowers you to self custody your family's Bitcoin the right way, secure your devices and protect your privacy. Develop robust inheritance plans and secure for Plan B Citizenship the Bitcoin way can transform you into a sovereign individual. You just need to take the first step. Schedule a free consultation today@thebitcoinway.com tip. As Bitcoin's role in global financial landscape evolves, understanding its potential impact on your wealth becomes increasingly crucial. Whether we see gradual adoption or accelerated hyper bitcoinization, being prepared for various scenarios can make the difference between merely participating and truly optimizing your position. This is why Unchained developed the Bitcoin Calculator, a sophisticated modeling tool that helps you visualize and prepare for multiple Bitcoin futures beyond traditional retirement planning. It offers deep insight into how different adoption scenarios could transform your wealth trajectory. What sets this tool apart is its integration with the Unchained ira. The only solution that combines the tax advantages of a retirement account with the security of self custody in any future state. Maintaining direct control of your keys remains fundamental to your Bitcoin strategy. So explore your potential futures@ Unchained.com fundamentals that's Unchained.com fundamentals looking to save in Bitcoin for your retirement? Meet Onramp, the leader in bitcoin financial services. Onramp has just launched the industry's first Bitcoin IRA with multi institution custody. That means unparalleled security, transparency and peace of mind for retirement. With Onramp, you can verify your assets directly on chain and protect them with the support of three independent institutions, eliminating the risk of a single point of failure. Ready to take control of your bitcoin retirement? Visit onrampbitcoin.com to learn more about Onramp's Bitcoin IRA.
- [22:42]
Kyle Grieve
All right, back to the show. So let's talk a little bit more here about culling your portfolio because I really enjoyed reading about that. You had an article and you also mentioned it in your shareholder letters. So basically what it was was that you felt like there were specific positions maybe that were lower conviction bets or just smaller positions in your in your portfolio. And you know, why keep those when you have higher conviction ideas that you can put some more money behind? But the question here is, you know, with someone with maybe more of a value investor mindset, how are you building the discipline to really sell off some of these smaller positions, even if, you know, like right now, I'm sure a lot of these smaller positions are probably looking really cheap and attractive.
- [23:19]
Harris Kupperman
So we have some of these names that we've had for a while. I'm just pulling up a ticker right now. I'm sorry, no one around me, you know, look, we owned an Italian newspaper company, media company, rcs. We owned quite a lot of it. And it had been a large position for us. And as we had inflows and as we had performance, the position just got diluted down to the point where, you know, it was 1%, a little less than 1% of our capital. And we kind of said so I don't, I have a very strong view that I don't have anything that's less than 500 bips. Either we have tons of confidence and we're going to make it bigger, or if we don't have the confidence to make it 500 bips, then we should know that. Right? It forces you to concentrate on your best ideas. It forces you to really know your names. I have a team that supports me here and so it's super helpful to have them. But I mean, we got to dinner once a week and go through all our book. And it's never the little names that you focus on. It's always the big ones. And so I feel like, you know, we avoid landmines that way and you kind of want to jettison the things that you're not really focused on in the same way. So we have a stock and we knew it was cheap. We loved it, we love management. And we just said, you know, it went down from a couple hundred bips to less than 100 bibs. And you can't size it up just because, you know, it's not that liquid. Let's just exit it. I mean, I'm looking at the chart now and it's up. It's up a lot since we entered it. It's up like almost 50%. We sold it last summer. And it doesn't hurt me. It doesn't, you know, bother me. You know, we took a bunch of dividends out of it over time and it was actually an okay irr. Not great. But, you know, I don't let these things bother me. I'm not really very backwards looking. It's more of a. And it wasn't like there was anything wrong with, with the names either. It was just that we kind of said either we take this to 500bps, which would be probably difficult, or we shouldn't have it. And I don't mind having, you know, a large position in a cheap Italian newspaper company, but it just thought what I thought there'd be better opportunities and I just have no regrets. And there were a lot of things like this that we just kind of sold a lot of things that started off as 500 bips or 300 BS or as a basket of 2, 3 dams and the basket diluted. There were also a lot of things, like I said, that had just economic sensitivity, especially the US ones. And we looked at these and we just said we think we're going to have a slowdown. I don't want anything with economic sensitivity. Let's, let's get rid of them. And a lot of those sort of things are down 30 to 50% from what we sold. And so I'm glad we had the co because, you know, especially when you know it's going to take you 60 or 90 days to get out. Like I'm glad we're not, you know, before because now it's building on people's to be in recession and there's no bids left.
- [25:56]
Kyle Grieve
So you mentioned there that you prefer to have a position that you can take to, you know, 5% of your portfolio or even more. So let's dig into a little bit more about, you know, concentrating bets here. So I know you've mentioned that you've had just three bets making up, you know, over 50% of your portfolio at any one time. So clearly you're willing to go, you know, very heavily concentration in something that you believe in. But given that you also have these short term trades in the mix, how do you kind of decide how concentration goes across the whole portfolio and what makes an idea strong enough to warrant one of these very large allocations?
- [26:30]
Harris Kupperman
So when you look at a concentration, the first thing, and this is the most important is what's your downside? If you're looking at a situation where there's almost no downside, I mean, look, every three has downside. You have stuff happens, exogenous events happen. You can't predict when you don't think there's a lot of downside, you think there's a lot of upside. Well then you put it on, you know, and you size it up. There's a lot of situations where you can look down and say, I think it might be 30% downside, but maybe it's a thousand percent upside. You can't size that at 20% of your portfolio because you don't want to lose 600. And you know, you just start like going through what the math on it is. I'd much rather have a position that I think is only 3x upside, but it has no downside. You know, it's trading for less than cash and it's profitable. Like it has no mark to market. Do whatever it Wants, but has no downside. So maybe it doesn't change our 5x threshold, but you can't lose money then play it big. I think that's, that's a lot of what goes into it. It's also just what you think the best things are, what have the strongest tailwinds, you know, what's really working. And yeah, we, I like to play big. There's not a lot of opportunities within the market. I mean, you have this sport called investing that turns the smartest people in the world. Every day is like an mvp, you know, ballar game. And you're going up against smartest people and the smartest computers and there's just not a lot of really interesting stuff to do. Most things are fairly priced. And so when you find something that's really quirky and interesting, well, you simply. And the whole point of a hedge fund is we're supposed to dramatically outperform over, you know, my world at rolling through your period. I mean, you can't just have 20 ideas because you're going to sort of look like the benchmark and you know, no one wants to pay you for that. Like, you better be able to outperform and outperform our lives.
- [28:23]
Kyle Grieve
So you've mentioned here in that example that you gave earlier, where you have no problem with averaging, you know, down onto a position if the price goes down, depending, you know, like you said, if one or two quarters is going to be soft. So I'd love to know more about just generally how you get into a position. You know, there's, there's kind of these two schools of thought that I've generally seen where certain people are like, you should know everything you know about a business. Then you just, you know, go all in on, on one position and, or not all in, but just like, you know, take it to whatever concentration levels you, you want at a, at a reasonably fast pace. And then there's another field of view where people are like, okay, well, you know, maybe I'm going to get to understanding this business at a reasonably high level, let's call it 60, 70%. And then over time, as I start understanding the business more and more, you know, seeing how they, how it plays out over a few quarters, I'm going to add more and more over a few quarters. So, you know, which line of thought are, are, are you on, on, on that spectrum?
- [29:16]
Harris Kupperman
Well, we're usually looking at something that's neglecting, you know, we're usually looking at something where we think it's going to be dramatically higher and the results can be much better and something that's, you know, play. And as a result we like to think we're intelligent but there's a lot of smart people that might just be a couple days behind us in fig. And so we like to buy when we've done one third, one half of the work, start buying and as we do the work maybe buy some more. But we kind of this knowledge that if we figured something out or we thought we figured something out, someone else will come up behind us. And so we'll have exit liquidity if we decide we don't want to be in. But it's usually something really emotion. You know, I gave the example before of something where we think Q1 is blood death, but we think Q2 is kind of, you know, the turn and then Q3 is going to start looking good. Well then we'll buy a bunch now because by the time we announce the blood bath quarter they're going to be guiding higher already and then everyone's going to forget that last quarter. You know, that's re review. You know, everyone's going be looking forward. And so Maybe it drops 10% on, on the earning spread it pl it's going to end the week higher. And so you know, we're usually buying at the moment that it's turning. My biggest mistakes are the ones where I'm buying and averaging down and buying if, if I'm averaging down, I, I made a mistake outside of like a market crash or something. Like if I'm averaging down, I made a mistake. I mean I'm not saying I'm always averaging up, but I'm usually out there fighting for shares against a couple other guys that figured out the same thing I figured out. I said that the other time we're buying years. If you look at one of these site these trends, okay, we do a lot of cyclical industries. Let's say the cycle is going to add to the last 10 years. Okay, just, just made a number. And usually at the bottom of the cycle when we're buying, the company's losing money but we have line of sight that it's going to get a lot better. We're buying a lot, right? Then it starts making money. Things are good. The Stock goes up 2, 3, 4 times and then eventually there's going to be a bad quarter or two. Because the way these industries work, people overstock the product. There's a destocking phase. It's like a sign curve and it's upward sloping. And so because it's Such a cyclical industry. Everyone goes, oh, the cycle's over. It's only, you know, 18 months in, the cycle's over. Let's take my ball and go home. And then the problem is that the cycle's not over. It's just a destocking. You know, the price of the gizmo, you know, it went from $100 each to $200 each, and it cost you 150 to produce it. And now it's pulled back to 160. So it's like sort of making money. And everyone's like. And the stock will be down like 60%, right? So why it's like a 10? It goes to 50 and then, you know, it drops to like 25 or something. And everyone panics. And that's usually when we've now had two years to learn this industry, we've usually figured out what's happening. We have a much better understanding what's happening. We have good relationship with management. We double and triple dip on it. Because before we're buying something then was sort of clunky that we were really hoping to pray would fix itself. And here we are. They've had a year or two of retained earnings. They delevered. They maybe bought some competitors, consolidated nations, at least great for whatever cyclical industry it is. And it's now cash flow positive. And they're using that cash flow for buybacks, which means you're gonna, you know, have a, you know, bigger ownership of it. And everyone's freaked out when they think the cycle's over. We're like, no, guys. Like, because we do so much the cyclical stuff too. We're just like, no, guys, cycle's not over. Like, everyone who is good, you know, capacity expansion, you know, they put it on hold. You know, the bank said, whoa, we're not lending to this. The boards of directors are like, no, guys, it's going to be lever. Like, it puts the whole process on, on hold. That's why these cycles last, you know, 10 years, let's say, instead of four years. And so that's usually what we're adding on the way down. And for some reason, I always buy too soon. I always, you know, it goes from 50 to 30. I'm like, guys, it's so cheap. And then it goes to 25. And I'm like, I'm buying it bottoms at like 19. There's that crazy day where it drops to 17. And, you know, like some. I get to margin call. And it's funny, all the brokers that are like, you know, I have $100 price target. Six months later they're like, yeah, $12 price target and we're strong sell. And you know, like six months later they're back to $100 price target. It's like you guys have never seen a, a commodity cycle, like, come on. So that, that's the only time we're buying the pullback. And as I get older, and I'm already have an old man as I get older, I want to make sure that I'm a little more patient on those pullbacks. I think that that's where I've probably been a little sloppy. I just get so optimistic about these things and I feel like other people have actually done homework, but in reality no one's done homework and they just get spooked out. I mean, we're in one of these right now and I get like 10 emails a day from people asking what's happening. And I'm saying, nothing's happening. Go buy some.
- [34:02]
Kyle Grieve
So back In January of 2024, you pointed out that the Mag 7 were driving much of the index's gains. And you know, we fast forward to now and they're up another 44% as of March 5, 2025. With that in mind, I'd love to get your latest thoughts on market blow offs, which you've discussed in some of your articles. So you mentioned that there's certain moments in time where, you know, the markets end up blowing off. And you know, an example that you gave was a tech bubble where capital would rotate out of these expensive names and then go into cheaper names after the bubble popped. So, you know, are you thinking that you're seeing this play out right now and, you know, is that a kind of a catalyst that you're looking for to drive returns in certain businesses you own? You know, like things like St. Joe or some of the offshore services plays that you own.
- [34:47]
Harris Kupperman
So I, I think we have had bubbly and you know, call it Mag 20. You know, everyone knows the Mag 7, but I'd add in, you know, a bunch of other things like Walmart and Costco and Starbucks and these like Mega Cap stocks. I mean, a lot of them say what you want, at least. Most of Mag 7 stocks, you know, are reasonably good businesses. They have a lot of cash flow and outside of Tesla and Nvidia, they're not particularly expensive. You know, you look at like Walmart, it's 40 times earnings and it doesn't really grow. I mean, it grows little like, you know, Starbucks is a shrinking business, like you look at these, some of these things and you just kind of wonder why they treated the valuations they do. And this thing, it's been just non stop passive inflows in the United States. It's created a bubble because the capital goes to the largest stocks. And I think that bubble, you know, think of it like a capacitor, right? And it takes in all this energy and then finally it just like releases. And so it's taking all the world's liquidity. Right now I have a lot of friends who live overseas and I'm asking them about their markets. We're Long Brazil, we're Long Turkey, all these emerging markets that are doing phenomenally well. I asked them, are you guys investing in your own money markets? They're like, we only own an S and P. I'm like, why don't you own yours? They're like, whenever it goes up, I'm like, are you guys looking the last little bit? Is it starting to go up? They're like, oh really? You know, it's like the capacitors like, oh, and all the capitals would come out and it's going to go back to these other markets. And you know, I hope so my names get a little bit of that, you know, capital release I think just goes everywhere and it's going to help the valuations of these abandoned equities, I guess is what I'd call it. You know, there's just a lot of capital locked up in things that, I mean, don't really make sense, like in terms of valuation. I mean, it's been like this for so long now that we've all kind of numb to it in a way. Like there's a lot of these large US tech stocks that don't really make much money. What money they do make mostly goes to offsetting stock dilution. You know, after stock dilution, it actually kind of loses money. You could say SBC is, you know, non cash, but I don't know if you didn't pay these people, you know, piles of options at RSUs. I mean, could you pay an engineer 200 grand? Or that engineer want a million bucks? And if that's the case, well, your business doesn't make any money. I don't know, like at some point you kind of have to look at this and say like, these aren't really very good businesses, right? And they, they, they, they're just not very good. They're cash generative, I guess, but it's kind of like this weird like cash stock option laundering operation that like Helps to raise capital as a deferred capital raise through stock options. And that's how they get their cash flow. I mean some of these things like Amazon literally have no cash flow. I mean there's a working capital, you know, cash flow, but it's really without SBC like that, that's their cash flow like and you kind of look at these and it's like, okay, it's a mature business. It really, it makes somebody. It's a little hyperbolic to say it doesn't make any. But look at me just like I don't get it, like I don't understand who's buying this thing. I mean they have multiple giant businesses at a huge scale and they don't really make any money still. I mean their ROIC is just terrible for a scaled business. But you know, we don't short much. We're not trying to take sides in these things. We're just kind of looking at this and saying, wow, this is kind of weird, right? And it's gone for so long. You stop thinking about it. And so we stopped thinking about it. And we're going to focus on a bunch of things that are really growing fast at three to five times cash flow. That's what we've always done and that's what makes us money.
- [38:23]
Kyle Grieve
So you've highlighted how valuation agnostic traders create opportunities for long term investors. So there was an example that you gave, you know, let's just say ESG where there was the opportunities created because you know, having an ESG fund and in order to get to that status they had to sell positions that maybe they had in high quality businesses and they would just basically essentially becoming for sellers. So you seem to have played this in kind of a basket bet kind of way. You know, you have investments into companies like Valeris, Tidewater and Noble. So I'd just love to learn a little bit more about this strategy. How are you kind of finding these opportunities in battered industries? And maybe not, maybe not even just industries, but specific companies that nobody seems to want to invest in.
- [39:05]
Harris Kupperman
Well, ESG was this weird thing because for the history of investing, it goes back to thousands of years. We have trade receipts on papyrus going back 3,000 years ago. People were lending money to guys who owned a ship and they were going to move a cargo from one place to another. This has been going on forever and for the first time ever in the history of society, a bunch of people deciding they didn't really want to make money, then they were going to try to make the weather better. It takes like a weird cult, right? Look, I don't want to go into climate, but I don't think, you know, one portfolio manager buying or selling coal stocks is going to make the weather better. I think it's totally irrelevant. I've come to the conclusion that we run a, you know, decently sized hedge fund but we can't fix the weather. It's just out of my capacity and a lot of my people convinced themselves they could fix the weather and they all sold stocks and it was great for us because we bought a bunch of IRreplaceable assets at 5 and 10% of replacement cost. At the time when they were cash flow positive, the companies were buying box of stock, it was hard not to make a lot of money. And as is always my curse, I was a bit early because it seemed so obvious to me what seemed obvious to no one else and eventually selling into it. I think ESG is the high water mark of ESG and hopefully it disappears. I never hear about it again. But there was a moment in time where I was a year and a half early and there was just waves of selling. There weren't enough guys like me that could buy. And eventually the shares got absorbed mainly by the companies with their own buyback programs. They only made a lot of money, A lot of money. I always ask myself, where are there people that are totally uneconomic? I mean, I think the most obvious one is when someone's getting a margin call. They might love their stock, but you know, if the broker says you have to sell, you have to sell. And oftentimes really, really rich people got really wealthy because they borrowed a lot of money to get there and they overextend themselves. Sometimes whole countries do this. And so you have these kind of like idiosyncratic crashes and it's either one tycoon bust or a sector or a country. And I think that's interesting. I think what's happening with pawn shops right now where they say they can be delta neutral. So every time they buy something they have to short something. And oftentimes they totally evaluation agnostic, they're much more focused on rate of change. So they're always showing up in the morning and asking themselves what industries are getting better? Let's go buy those. What industry is getting worse this month? Let's go sell those. They have credit card data, they have satellite data, they have all this data, right? And so in real time they're putting positions on what's getting better and what's getting worse and they don't care about valuation, they don't read a spreadsheet, they're looking at web traffic or something else. And you get in situations where you have companies where 20, 30% of the shares outstanding are shorted and treats it three times earnings. And yeah, maybe it's going to get worse and maybe it's next year, five times earnings. You kind of look at this and it's like it's a cyclical industry. Yeah, we know it's getting worse, but it's really cheap. Doesn't mean we have to do something today. But you put in the back of your brain that once a month I want to check up on this thing because when it starts turning, all these guys need to cover and then they're probably going to go long. So you know, it's just going to be this huge cycle. I think the pawn shops have created more opportunity than anything else. It's a little bit more dispersed than esg, but I think it's a huge amount of opportunity. I'd say a lot of what we do at our fun is we sit around drinking beers and we say, what's happening in the world? Politicians usually have a two or four year election cycle and cause it. Effect isn't really a strong point with politicians. They don't really understand economics and they often don't really care about the effects because either they get reelected, they'll figure it out next cycle, or they don't get reelected and it's someone else's problem. And so you have this weird setup where there's a lot of action, there's a lot of opportunity created just by having a sort of Austrian libertarian mindset of how economic cycles work. And if you have a really high dose of cynicism, you're going to make a lot of money as long as you're willing to have a one year or 18 month timeline of what's going to happen because some politician just made an uninforced error in their domestic economy. These are the sort of things we look about and think about something happening in the news. Every day something happens and my job is to say, is this just noise or will this dramatically change something? And oftentimes it changes one little subsector and you kind of miss it. But sometimes even one of those subsectors, you know, someone in my firm is knowledgeable about that and they say, hey Cuppy, like we think this is about to happen. Okay, let's go buy some. And that's where a lot of our opportunities come from.
- [43:44]
Kyle Grieve
Yeah, that makes sense. So you mentioned there a little bit about capital allocation with some of these businesses that, you know, no one liked the stock and so they were very cheap. And then that was a perfect time to obviously do buybacks below intrinsic value. So I just wanted to ask you a question a little bit here on capital allocation at a business point level. So obviously with these types of businesses, once the buyback strategy is kind of maxed out and there's not enough liquidity to continue going down that road, they kind of have to either pay a dividend or reinvest back into the business. So my question for you is, you know, do you have a preference between the two of them or are you just purely looking at which offers the highest return?
- [44:20]
Harris Kupperman
Well, I mean, there's always capacity to do buybacks. By the time it gets to the point where it destroys capital because it's not accretive, we've already exited. Right. So it doesn't bother me that I don't like dividends. No one shows up for 3%. You know, we made 3% on the year. It's a terrible year for us. So I don't really know who benefits from it. It sort of offsets your funding cost of having a slightly larger portfolio, but that's neither here nor there. I just don't like dividends. I don't feel like any buys a 2, 3% dividend, no one cares. The dividend gets increased by a doula. Just doesn't matter. Right? A lot of buybacks are new stocks. That's my career, Pat. Otherwise I want to see consolidation. I don't want you to go into our new field, but consolidate the sector. We tend to live here, cyclical business. So it's going to be looking at things where they probably haven't added capital in a while because the sector is shrink capital. So no one's adding new supply and the number of players consolidating through bankruptcy. And so at the top of the cycle is 20 guys. The bottom of the cycle, after all the bankruptcy was selling, you have a little pricing power. And let's see if you can buy two or three more of these and we get an oligopoly with four guys and then push pricing. And in a fixed cost business, pricing is usually very high incremental margin, very high incremental roic, twice the consolidation. That's kind of what I'm really gonna say.
- [45:41]
Kyle Grieve
Let's take a quick break and hear from today's sponsors. Trust isn't just earned, it's demanded. Whether you're a startup founder navigating your first audit or a seasoned security professional scaling your GRC program Proving your commitment to security has never been more critical or more complex. That's where Vanta comes in. Businesses use Vanta to establish trust by automating compliance needs across over 35 frameworks like SoC2 and ISO 27001. Centralize your security workflows, complete questionnaires up to five times faster, and proactively manage vendor risk. Vanta can help you start or scale your security program by connecting you with auditors and experts to conduct your audit and set up your security program quickly. Plus, with automation and AI throughout the platform, Vanta gives you time back so you can focus on building your company. Join over 9,000 companies like Atlassian, Quora and Factory who use Vanta to manage risk and prove security in real time. My audience gets a special offer of a thousand dollars off vanta@vanta.com billionaires that's V A N T A dot com billionaires for $1,000 off this is a.
- [46:50]
D
Message from our sponsor Intuit TurboTax taxes was dealing with piles of paperwork in frustrating forms and then waiting and wondering and worrying if you were going to get any money back. Now Taxes is easily uploading your forms to a turbo tax expert who's matched to your unique tax situation. An expert who's backed by the latest technology which cross checks millions of Data points for 100% accuracy. While they work on your taxes, you get real time updates on their progress and you get the most money back guaranteed. All while you go about your day. No stressing, no worrying, no waiting. Now this is taxes intuit turbotax get an expert now on turbotax.com that's turbotax.com only available with TurboTax live full service real time updates only. An iOS mobile app. See guaranteed details@turbotax.com guarantees for decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been complex, time consuming and expensive. But imagine if real estate investing was suddenly easy. All the benefits of owning real tangible assets without all the complexity and expenses. That's the power of the fundrise flagship real estate fund. Now you can invest in a $1.1 billion portfolio of real estate starting with as little as $10. 4700 single family rental homes spread across the booming Sun Belt. 3.3 million square feet of highly sought after industrial facilities. Thanks to the E Commerce wave, the flagship fund is one of the largest of its kind. Well diversified and managed by a Team of professional and now it's available to you. Visit fundrise.com WSB to explore the fund's full portfolio, check out historical returns and start investing in just minutes. That's fundrise.com WSB carefully consider the investment objectives, risks, charges and expenses of the fundrise flagship fund before investing. This and other information can be found in the Fund's prospectus@fundrise.com Flagship this is a paid advertisement.
- [49:05]
Kyle Grieve
All right, back to the show. So a recurring theme in some of your 2024 letters was your focus on these kind of hard asset heavy businesses. And that seems to tie directly into kind of your macro view around persistent inflation and high interest rates coming up here into the future. So can you maybe walk us through a couple of scenarios and explain the kind of asymmetry that you're seeing in some of the investments that you made here in in asset heavy businesses?
- [49:31]
Harris Kupperman
So I like asset heavy businesses because obviously everyone looks at earnings, right. Earnings are just so many people look at, right. It's weird. A while ago, 20, 30 years ago maybe when Buffet was first starting out he looked at asset every business and he was very much an asset focused investor. Buy stuff below replacement costs. Buy stuff below working capital. World's really competent to Jewish or he was I guess he really neither and it's definitely Jewish but. And everything's died. He die these days. But e especially in businesses that are cyclical, keep it on or Jewish. Well they're dumb matrix really because what you're really trying to figure out is like the mid cycle earnings but nothing ever gets value cycle earnings, you know which is why you know, guys like me money, you know when things are kind of bleak and they're losing money these things are value their fracture or and the peak they're buying three times per incentivizes them to add capacity and you know, even while you know the mid cycle earning stays flat. So I just look at a lot of these accessory investments because it's an easy starting point for what you think it can earn and until it goes, you know the valuation goes above the replacement cost and supply so you have this kind of break and you know the global economy grows mid each year. You if you know supply eventually demand catches up but what happens in an inflationary environment is that the replacement cost of this piece of equipment it goes out and so you're kind of making money. You know you have you know, let's look like shipping okay at the bottom of the cycle in 2017 or 2018 the VLCC carries 2 million barrels of oil, let's call it an $80 million piece of equipment to buy new. Today it's about $130 million piece of equipment to buy new. Part of that's inflation. Part of that is that at the bottom of the cycle bunch of Korean shipyards were basically losing money to build these things. They didn't want to lose their workers and now they have some margin. But I think maybe half and half, half's inflation. So let's say it costs you 20 million more to build this thing. 30 million more to build this thing. Well, if you have a five year old widely use, it's on your buck, you know, your 80 million dollar cost minus depreciation. But in reality the replacement cost of this, you know, you can sell it. It's a liquid market. It's not that equally starting point. It's 105 million or 110 million starting point which means if you're going to depreciate it over 20 years for residual value, you can move your whole curve up, which means that it's actually appreciating your value. I mean you do the math on this and you think you've suffered through your depreciation. In reality it's probably worth more today than you purchased it for. And that's the beauty of inflation in a current asset model. And you know we can look at this obviously you know, you know the DLCC depreciates, It has a 20, 25 year life and factory depreciates over time. But I guarantee you you can't rebuild the petrochemical plants for stated value is in fact it's much more per unit of production then you know, gap value or even the market caps these things and as a result there's not a lot of money supply coming. And you can say, well you know it's, it's straight in capital is you're at the bottom of the refining side. Sure. But you can kind of like look through this and say this asset's worth a lot more because eventually need to have more supply and it costs too much. And I think the best example this is something we do a lot of which is called St. Joe where they loan about 167,000 acres of land in Florida. That land appreciates every year and there's no depreciation. It's not like the refinery or the ship. A lot of that land is just forestry. It has trees on it. It actually produces a couple percent a year yield in terms of growing trees, harvesting trees, making paper and whatever else. I do in trees. So it appreciates plus it gives you a yield. It's a great asset. I like assets like that. And some years it appreciates faster. And now during the gfc, I guess probably depreciated for two years, but net net is just like the straight lineup because population of Florida keeps growing and it keeps attracting wealthy people mostly into the tax benefits. And as a result I think Florida land does great things. And you know, St. Joe economically has been a huge long run. Share price bias, you know, not so much. One day I think investors will realize how much elite values in S and you know, the same can be said for, you know, a company that owns ships or petrochemical plant or any factory, anything. In an inflationary environment you want things that have, you know, a certain expense to build, but you want stuff that doesn't have a lot of maintenance. Because the maintenance capital means that if it costs 10% more each year to build it, then it costs 10% more each year to maintain it. Which means that your cash flow is a loser because it just goes back into maintenance capital. I mean, you want something more like St. Joe, where there is no man. I guess they have some hotels and stuff. But maintenance cap is 15 million. Let's say it's kind of negligible on a couple hundred million of revenue. And most of it is just land. There's no maintenance, it's just trees, ocean front trees.
- [54:52]
Kyle Grieve
You've written that kind of your sweet spot for investing market cap wise is kind of in the 1 to $5 billion range. And that's an interesting number specifically because generally that excludes an investment from being part of, you know, let's say the s and P500. You know, I think as of a couple days ago the lowest one was something like 4 billion and everything else in it was above 5 billion. So I'm interested in knowing, you know, are you specifically looking for that as a catalyst, you know, are you looking for inclusion and at a future point as a catalyst to help generate returns as part of your strategy or is it more of a case by case basis?
- [55:27]
Harris Kupperman
Well, it's case by case, right? I mean, I'm not opposed to buying something that's many billions of value, hundreds of millions of value. I'm not opposed to buying something that's, you know, 5 million market cap. I mean, most in my life, but I've always done is try to figure out where the opportunity is in the market. And you have these cycles, something works for a while, but then a lot of people start making money at it and then it stops working and something mean happens. Because when you shift all the money to one strategy, it means another strategy has opportunity. And so right now it seems to be working. The best is because of the nature of passive. You want things that are going to get sucked up and absorbed by passive. So if you look at a company with like a 2 billion market cap, there's usually the founder, a couple insiders, they own 10, 20% of it. There's usually a bit of passive, you know, 10% of it. There's a bunch of, you know, hedge funds that own most of it. And there's some free float owned by everyone else. And as it gets to about 10 million market cap, so 5x, and remember we went out to AM without a 5x. When it gets that 10 million, the ratio of hedge funds that owns it goes down. The ratio of passive goes up by 10 billion. It goes from 10% passive to maybe 40% passive. And so you have this forced buying. And usually we're in things that have buybacks. You know, I just find that a forcing mechanism to force the share price higher. And remember, I don't make most of my money on earnings growth, though I do make some on pretty, a lot of just multiple expansion. And like earnings, multiple expansion is I buy something at 20% replacement cost, sell it at two times replacement cost, you know, then that 10x with, you know, talk about inflation, Inflation costs. Like it's very virtuous cycle. And so I'm looking for stuff where passive starts buying. You know, when it's to 5 billion, they start buying. And because they're buying it, it goes to 6 billion, which is more passive buys and eventually gets added, you know, maybe not the S&P 500, but goes in the S&P 600 and then the S&P 400 and the MSCI. And then the guy at Fidelity that calls it indexes, he has to buy some and you know, this other guy has to buy some. And it just becomes this like when you think of the return profile and this is on a win, obviously not always, but it's just like slow grind higher from 2 billion to like 6 billion and then from 6 to 15, it's like nine months. You know, you have to own it for two and a half years to get that nine months at the end where, you know, passive buys it. And I want to harvest that. What's your stuff that's in the S&P 500? It tends to be much more expensive. So you can look at two businesses and one's the S&P 500 trades at 25 times. And one that's not in anything, it trades at six times. And the one that's smaller often is growing faster because you know, just more of large numbers means it's harder to grow. You always have, you know, the optionality to a guy at 20 times buys your figure six times. See why both 20 times, you can buy the figure six times. And you know, there's also a small chance, you know, that they get acquired, but a much bigger chance that multiple spans and eventually gets added to the index. And so we tend to be kicking around in that like 1 to 5 billion range. You know, look, it used to be when I first started this industry, there were a lot of things in the 100, 200 million range. They're growing really fast. Those things tend to stay private now public company costs are, you know, obsessive. And so it doesn't make any sense. Those things stay in the private market. Private equity owns them. They let those businesses mature outside the stock market. The stuff you see in a 100 million market capital tends to just not be very good, tends to be very fragile. Businesses tends to be their speculative stuff that needs equity capital like biotech or something. So that's not really where, where we go hunting, doesn't go hunting. But even like 500 million it tends to be sort of like ah, it's really at that billion range. Because to get from 5,100 million to 10 million where you get that escape velocity or 6 billion, whatever the number is, like you're looking for something that 1020 x like that's a really heroic return. But asking someone at 2 billion to get 6 billion, that means you get a triple. I mean that's not so hard to do. Just you know, you retain some earnings, buybacks the stock, you know, the earnings grow. Like it's not impossible to do over three years. And so I'd rather hunt you there. Maybe that makes sense. And I'm sure if you ask me this question in five years, I'll tell you something totally different.
- [59:44]
Kyle Grieve
You mentioned a little earlier just about obviously capital inflows and outflows and how, you know, depending on what's moving right now. Like you, you said there a lot of the US businesses are moving. And so people that you know in these really interesting and high growth emerging markets aren't even investing in their own market markets. So I kind of wanted to circle that around to patience and asking you about patience because obviously a big part of investing success requires patience. If you're not patient and you're constantly looking for the next big thing to happen, repeatedly, you're probably going to end up losing money. Because I think, like you said, your first rule obviously is to not lose money. And there's definitely a degree of patience required. So how are you dealing specifically with the kind of inevitable times you're in the market where you have to stay patient? You know, how are you avoiding taking unnecessary action specifically because maybe you're bored and maybe a position that you really like, hasn't moved over, you know, maybe call it a year or so.
- [60:39]
Harris Kupperman
I just got serving.
- [60:42]
C
I got a farm.
- [60:42]
Harris Kupperman
I got my farm. A lot of, A lot of my success in this business is being really patient, really stubborn and willing to suffer a lot. You know, I, I find a lot of my friends, you know, something happens, the stock's down 10. What's going on? What's what? We should buy some. Should I sell something? I don't know. I'm like, stocks just move, you know, stuff happens, right? Bad news comes out. Does this cheese? He says, no, it's bad news. You know, a lot of times the best thing you could do is not be in front of your screens. You make decisions, but you let those decisions mature. And some are gonna be good decisions, some are gonna be bad, but you need to let it play out. I mean, offsetting this, sometimes a piece of news comes out and you go, well, these exchange and you smash it. You just gotta get out. That's kind of rare. Usually thesis don't change on press release. Thesis change, it's just like over time, it kind of just doesn't work. It, it just kind of like grinds and it's always like two bad pieces of news, one good piece. It just. And so you have plenty of time to just say, let's reallocate the money. Being patient's really hard. Being you know, unengaged in the day to day is the hardest thing to do in this business. You go on vacation, like I said, like a joke, you know, you just need to leave the office and go surf and just get some distance between you and the screen. It's like, because if you share the screen, you're probably putting orders in. If you're putting orders in, you're probably just drank out. You know, the adventure of Inside is different. But our career book, like if I'm trying to buy and sell St. Joe, like, I don't know, interest rates go up, interest rates go down. Trump tweets every three minutes. I don't know what that Means to the fact that I own a bunch of land at 20 cents the dollar, that's a good spot to be. I mean, the land's going up, I'm earning high, turns on my capital. I think it's really hard to be patient. And I think especially the world that we have where, remember we talked about very beginning, I run a hedge fund. A lot of people run hedge funds. Their hedge funds mostly are focused on having no down months, which means that they frantically have to avoid problems. This is going down, I gotta sell it. This is going down. Like when it's going down, I'm like, I don't want to sell it for less than it was yesterday. I probably buy some more incrementally. And their mentality is you sell on the way down, you buy on the way up because you don't have down months. And my mentality is the average stock moves around a lot. It's really random.
- [63:16]
Kyle Grieve
Another point that I want to bring up here is how you run the fund unhedged for pretty much all time. And so your thought process there really resonates with me because, you know, kind of getting to your point here about what other other funds do, you know, a lot of the times they are head, they are hedged, you know, and they're using complex hedges like, you know, if I buy stock XYZ and it goes down, then ABC will offset it by going up. But in practice, you know, I think the gains and losses from these hedges tend to just cancel each other out over time, leaving you with you know, kind of a mediocre performance. And worse, like, let's say you have a really, really good idea that has a long term tailwind and can maybe compound over multiple years. If you're then hedging it, you're basically just degrading that upside potential with another idea that's likely to underperform. So, you know, for some of the value investors that are listening, many of whom are definitely investors who are trying to build portfolios specifically cater to their best ideas. How do you think about the trade off between, you know, accepting volatility versus trying to smooth the ride? And you know, what advice would you give specifically to investors who feel tempted to maybe hedge but may not realize that they're just watering down their best idea?
- [64:22]
Harris Kupperman
Man, there are times where hedging makes sense. You know, stocks about every three to five years go down a lot and they last for about six months and then it's over. And if you're really good at timing this stuff, you should be Hedging. Most people are not good at timing this stuff, including me. I'm terrible at timing this stuff. I'm always too early and I usually give up, turn a hedge right where it actually falls apart. That's why I don't hedge anymore. I just don't believe in it. Look, stocks go up over time. They go up a lot over time. And if you own good companies, they're almost immune to the volatility. And oftentimes whatever hedge you're going to use is going to be tied to Mac 20, which is probably not really correlated to what you own anyway, it's not correlated to what we own. So I don't really understand it. I mean, if you bearish Mac 20, go short Mac 20. But don't think of it as a hedge, think of it as a directional thing. But I found a lot of my friends in this hedge fund industry, they do really well in their long book. Like they're actually way better stock pickers than the market. And then they suffer on their short buck and then that they kind of track the market, underperform slightly, which is unfortunate because let's say their long buck is, you know, doing a thousand bips of actual alpha that you lose 1500 mips of the short bug. And I don't understand why they do it. Plus, when they're trying to hedge, there's always slippage costs, commissions there this frictional cost taxes which are, you know, big for clients. I don't think it makes any sense really. I mean, way I look at it is that I know there's going to be volatility. I know that about every 18 to 24 months we're going to have it down 30, 35 even. I tell my clients this, you know, with the market really gets hit hard, we might have a down 50. I mean, we had a down 50 during COVID It's going to happen again. And the whole point is you set up your portfolios that when there is a down 50, you don't get kicked out of the game. You know, you run with leverage profile that lets you hold on to what you want to hold on to. And hopefully at the bottom of the cycle, you always be early. So you're going to average in too soon, you get to buy some more. And that's why we target 115, 125. You know, it gives us room to add on a proper pullback. It gives us room to, you know, cycle some stuff around. I know that I'm gonna have it down 30. I don't know, but I like to say that adventure is gonna do very well in a moment like that and be additive or let me, you know, have that cash flow to average down too. But I just accept it. And I think, you know, every client in my fund, I have told now that we will have a down 30 to 35 every 18 to 24 months. We expect it. And if you're not prepared for that, don't invest. And if we have one of those, you should give me some more money because it's a great time to invest. And basically it's inevitable. Right? And so you have the hedge fund that decides they're going to raise $10 billion. That's their business plan. I don't fault them. They want to have no down ones. They have to be hedged. Fine. My business plan to spur my PA and I accept that we're going to have a lot of volatility once you accept this, it's very cathartic, it's very calming. You know, it's just like we're down 10%. I guess we'll be down another 10 to 20% more and then go down much more. You know, like, like if it's happened to you a bunch of times in your career, you get sort of used to it. And I just think the hedge fund world, because of the need to always be raising capital, has just never accepted this fact. And because they can't accept it, they panic and they scramble and just make the problem worse, usually. And, you know, to any hedge funds listening to this or to anyone else who's listening, I mean, just accept that it's going to be volatile and you can't really do much about it.
- [68:03]
Kyle Grieve
You wrote inflection investing works in most market environments, even the ones where most market participants are chasing, let's say, an AI bubble, assuming there actually is an inflection in underlying financial performance. So our question here for you is, what are the signs of an inflection point that maybe value investors should wait for before deploying capital into an optically cheap but maybe stagnant business? I know you said that you're always too early here, but maybe you could share some of your lessons on, on, on how you can maybe optimize that into the future.
- [68:31]
Harris Kupperman
Well, I mean, it's obvious what it's reflecting, right? I mean, what Wall street cares about, there's only one thing they care about. They want to see revenue growing and they want to see earnings growing. That's it. And Wall street tends to have a preference for revenue growth as Opposed to earnings growth because of the Amazon world. They've been deluded into thinking that if you keep growing the revenue for long enough, eventually earnings catch up. Sometimes they do, sometimes they don't. But as a result, Wall street really cares about revenue growth, which is why we had all these weird Ponzi bubbles where companies will buy a dollar of revenue because they do it at a negative 20 gross margin. And if you let me buy something worth a dollar, you know, at a discount, I'll buy a lot of it. So all this revenue growth and then they need to raise more money and it's a nice little Ponzi bubble until it comes apart. We see a lot of Ponzi cycles, but Wall street wants to see that growth and they want to see it accelerating. Remember rate of change? So you look at a bunch of industries and you say, what industry will next year have both revenue growth and earnings growth. And the rate of change is going to accelerate because a lot of businesses are, they're pretty steady, Eddie. You know, they grow 10 a year over year. So you need the growth rate to accelerate to 20%. You know, it needs to be faster than what everyone's modeling. A lot of things I look at, they kind of kick around and break even. And if you think positive is really, really good. And so you get more acceleration, but that's all you're looking for. And it should be pretty obvious. And we go back to the AI thing. Look, I'm kind of a little bitter that I didn't catch it, but look, these things accelerated. The revenues exploded, the earnings, actually some of the businesses, like there were earnings, but the revenues absolutely exploded. I get why people got excited about it, totally get it right. And I get why, you know, some of the things I own that went down last year, it didn't accelerate, you know, it was year three of a ten year cycle and we had decelerate, we had deceleration this year. And so I get it. Like I need to suffer because my businesses are suffering and those businesses need to prosper because it's actually, I get it conceptually. I mean, I'm one of those guys that likes to look at earnings and valuation, but I understand that certain people don't care. So good. You know, look, let the tech guys have fun, you know, one year, you know, not like they haven't won 20 years in a row. Go back, homework a year.
- [70:49]
Kyle Grieve
So I really enjoyed one interaction that you shared with a friend who regarding Nvidia. So you said your friend was upset because he didn't Own Nvidia. And since he was, you know, trying to track an index, which we've been talking to about a lot this episode, his performance was lagging behind that of colleagues who obviously did own a business like Nvidia. So I think this is a really interesting example because I feel it's kind of like an echo chamber of the market at large. Investors are pretty social people and they have an excellent idea of what their colleagues and friends buy because either they talk to them or there's a ticker flashing at them throughout the day telling them what's being bought and sold. But, you know, you've kind of managed your investing game specifically to bypass this pain point that most investors have navigated. I'm just interested, you know, how exactly did you land on this approach? And, and you know, also more, more importantly, why do you think it's so hard for other investors to, you know, kind of navigate that issue?
- [71:42]
Harris Kupperman
Well, I think the reason it's hard is that for e2 months, all people talk about is Nvidia. I mean, look, Nvidia peaked out last summer. It's gone kind of nowhere, incrementally down. Everyone still talks about it all day because that's all the media wants to talk about. I mean, it treats a, you know, tens of billions of stock a day. Hundreds of billions of stock a day. I think the option trading in Nvidia is more than the stock market itself. So it's this giant casino and everyone wants to be in the casino. You know, it's fun to go to the casino. I totally understand why there's a lot of focus on that. And look, we've traded Nvidia mostly from the short side. We've done okay. But I understand why there's a certain draw. And when you have a very large stock that goes up every day and it's a large piece of people's benchmarks, there's a certain incentive to overweight it because it's going up, which means that you have to overweight. Moreover, it goes up and it's very reflexive. And I can understand why a guy that runs a multi billion dollar mutual fund where outperformance is 50 or 100bps feels a lot of pressure when he's underweight. Nvidia and it just won't pull back and let him in. You know, I had a friend who, he was crying to me about it. And the way he was crying, I thought he was short. And no, he was just 100 bips underweight. Like, I don't know, I just don't think that way, you know, because, well, I guess Nvidia was a multi bagger, but I'm mostly looking for stuff that'll multi bag. And so, you know, I have large cap stocks in these benchmarks. They don't multi bag every year one or two of them will but like a lot of them, they kind of do 20, 30 a year. That's a really good year. Like I just don't care. It's not my world, so I just don't really think about it much. I mean like you see it, you know, everyone talks to you about it, but it's just not my world. My world is a bunch of things that no one's talking about, no one's thinking about. And when they start talking about it, I usually exit.
- [73:28]
Kyle Grieve
So, Harris, I want to just say thank you so much for coming to the show today and sharing your insights with me and my audience. So I'd love to give you a handoff and maybe let you tell the audience where they can learn more about you.
- [73:37]
Harris Kupperman
Sure. I mean I always say go. Follow me at Twitter. I guess they call themselves X this week my handle is nhcuby. Otherwise go to my website at praycap p r a c a p.com we have information on my bunk there, but I also write a blog. I used to write a lot more. I tend to write when something that's happening that's interesting and. But honestly it's been a really confusing world. So I've written less lately. But that goes in cycles. Thank you for listening to tip. Make sure to follow.
- [74:08]
D
We study billionaires on your favorite podcast.
- [74:11]
Harris Kupperman
App and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.