Jeff Gramm – Activist Investing - [Invest Like the Best, EP.01]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast. My guest today is Jeff Graham, a portfolio manager at Bandera Partners and the author of one of my favorite investing books. Dear Chairman, Boardroom Battles and the Rise of Shareholder Activism. Jeff is also one of the nicest people I've come across in this business. It's been a pleasure getting to know him in recent months. In our conversation, we discuss the history and current state of shareholder activism and how Jeff invests himself, taking large positions and often board seats in undervalued companies. Please enjoy. Okay, Jeff, so I'm going to start with a couple quotes from your book. because I think there are good bookends for understanding this history of activism that you explore. The first one is from Ben Graham, which kicks off the book. And really, I'm quoting these two passages less for their content and more for their tone, because it's changed so much over the years. So Graham was fighting against a company called Northern Pipeline, which I'll let you describe kind of what he was doing in a few minutes. But this is an excerpt from the letter you published in Dear Chairman, where he says, Because of its ownership of the largest interest therein, and because of the prestige represented by its name,

It's a very nice professional tone. And then we'll fast forward to a later letter in your book written by Dan Loeb to Eric Seven, who was the CEO of StarGas at the time. Loeb writes, sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders, which have led us to dub you one of the most dangerous and incompetent executives in America. I was amused to learn in the course of our investigation that at Cornell University, there is an Eric Seven scholarship. One can only pity the poor students who suffer the indignity of attaching your name to his academic record. So pretty interesting change that we've seen in eight or nine years. decades in activism. So what I'd love to start by doing is really highlighting the major stages that you lay out in your book, maybe starting with what Graham was fighting and what he was doing and how he was a pioneer of activism. Sure. Well, with Ben Graham, he kind of existed in a different era, right? So like when he was a shareholder in the Northern Pipeline Company, it was the mid-1920s. And most of the smaller public companies had big concentrated owners. And so he had to appeal to the Rockefeller Foundation, who was a 30 percent holder, to win their vote. And you don't do it like by, you know, we're calling them a crazy person and, you know, we're pulling a Dan Loeb on them. But obviously, I mean, just, you know, the kind of like the times were very different. I mean, it was interesting like to read like the company's responses to Ben Graham. Like I don't think I put them in the book, but they were very civilized. With Ben Graham, the era was very different. By the time that we got to the 1950s and the proxy tiers, which was the next chapter, you had seen this big diffusion in stock ownership in the country. And the proxy fight...

in the 1950s that I highlight, which is the Robert Young against the New York Central, it was like a political campaign because you're appealing to these individual shareholders. And that's kind of the key movement in the book. It really is a history of how passive share ownership evolved. So a lot of the changes of activism and the changes in... the dynamics of these campaigns has to do with the changes in the underlying shareholders. Can you describe kind of how that happens? So, you know, you mentioned that early on there were huge holders like, say, Rockefeller Foundation, and that became much more widely distributed. Can you kind of describe what precipitated that change? Sure. I mean, like it kind of like historically, like it's a lot about like the history of American capitalism. I mean, in the early days, like the capitalists were, you know, like would be. you know, big strategic investors or sometimes even bankers. But like you kind of, a great example for this is General Motors. So in the 1920s, a GM had a big ownership from DuPont, but also, you know, when they made all of their acquisitions, they did it with stock. And so like you had like a lot of these, you know, owner capitalists, as Peter Drucker called them, you know. And what happened ultimately is between the 20s and the 50s, a lot of those, you know, were kind of older capitalists, died and passed away. And these, you know, big concentrated stakes in public companies got, you know, essentially distributed and diffused out to individual shareholders. And in the 1950s, there was even a movement by the markets, by like the New York Stock Exchange, to advocate for this, like, you know a populist movement of like this is the people's market and like you know you need to own your share so it was both like the passing away of the old concentrated owners and a public interest in owning shares like that that drove that big diffusion and it really didn't last long like you had the 1950s when like you had this you know very diffuse ownership and beginning in the 1960s and

the late 50s even, you saw this re-concentration into the mutual fund industry, the big pension plans, institutional investors as we know them now. So it was a quick flash. So let's back up for a minute and we'll come back to the proxy tier movement because I also felt that that was kind of the most interesting turning point. both for the idea of shareholder value, but also for the activist movement, more broadly speaking. So going back to Ben Graham, though, obviously what activists want to do is earn a great return. And Graham's story was so interesting because Northern Pipeline, which I think you mentioned in the book, was trading at $65 or whatever it is, had $90 of what he called gilt-edged securities just sitting there. Basically cash. Right, basically earning nothing. And back then, companies were required to publish much less information. So this wasn't readily available. knowledge and sort of the ultimate goldmine that Graham found, I think, through the ICC or some commission that Northern Pipeline was required to report to. So he basically found a goldmine sitting underneath this company where the cash was worth a lot more than the shares. And his effort was ultimately to release that shareholder value, if you will, get that cash into the hands of the actual shareholders who could earn a much higher return than Pipeline was earning on that cash. Yeah, I mean, it's a great example because it is... I mean, ultimately, if you're trying to kind of explain to your readers about the value of a company, it's a lot easier if just there's a huge pile of cash there to fight over. But yeah, I mean, it's a fascinating story. Basically, the government collected a lot of information on the railroads. the public could go look up these reports, ICC reports, on the financial state of all the railroads. And a lot of financial analysts did that. And so Ben Graham was looking through the annual report of the ICC, and he sees kind of in the footnotes a table on the pipeline companies. There were eight public pipeline companies that had been formed when...

Standard oil was broken apart. And he sees it and he's like, wait, I didn't know that the pipeline companies reported to the ICC. If they do, then they might report more than just the basic statistics on this table. So he takes the train down to D.C. and he asks them, do you have any reports on the pipeline companies? And they bring out these full 20-page reports. I have the one for Northern Pipeline. I got it. you know, from the National Archives. And it's got like a full balance sheet, like a list of shareholders, all the kind of things that back then were very hard to get. And he sees, you know, well, not only the size of their balance of valuable bonds, but like the names of the bonds. And like, he's like, well, these are, you know, these are money, good bonds. So it was then that he knew that like the company was essentially like if you liquidated just their financial holdings and kept the business whole, it would be a bonanza for shareholders. Sort of like the perfect example against market efficiency back then. Pretty amazing that nobody else knew that information. Yeah. I mean, it is like just the fact that you had to do hard work. Even after, you know. Probably still true today. Yeah. Yeah, I mean, even after, like, the formation of the SEC, like, you still had to go to the SEC reading room to get your reports, you know. So, like, even in the 50s and the 60s, like, a lot. of public information about public companies was hard to come by, which made the market less efficient. Sure. So what is the transition from Graham to these proxy tiers? Because I think that that movement probably sets the stage for the rest of activist history. Yeah. I mean, the proxy tier movement is a pretty fascinating movement because it really was the beginning of this pro-shareholder populism. And people talk about... That beginning in the 80s or the 90s and that like the corporate raiders and the shareholder activists and Boone Pickens were the first guys that talked about the shareholders rights. But that's not true. I mean, like you had this whole public.

a movement that got a lot of press attention of these guys like Louis Wolfson, Robert Young, that were in Time magazine and on TV talking about how public companies needed to protect their shareholders. And they said, look, there's this whole campaign by the New York Stock Exchange, like this own your share in American business, and that if you buy shares, like that we're partners. And if we're really partners, then we deserve. you know, like our rights, like to vote in a new board if we want to. And so they really began to flex, you know, that muscle that had not, you know, I mean, like the Ben Graham thing with Northern Pipeline, that was very under the radar. That was not in the newspaper. Like when I did a search of the Wall Street Journal archive, that was not even in there. Like these things in the 1950s were front page news. And so that was like the real beginning of this kind of. pro-shareholder populism. How much of that was kind of all talk for them trying to earn a buck for themselves or their investors? And how much of it was real reform? I mean, I'm always of the opinion that people are self-interested animals. And so as far as they were concerned, I mean, I think it was all kind of posturing to make profits for themselves. But I think a lot of what they said was right. And I'm sure that they believed it. So, I mean, I guess a combination of both, but ultimately I think, you know, those guys were all out to make a buck. So Peter Drucker says that... kind of through this era, we're the first truly socialist country because we're the first where this ownership of American business is so widespread. So you get from that, and then what's the next stage? I think about it as the junk bond era, the corporate raiding era, especially of the 1980s. Would you say that's the next kind of major chapter in the history of activism? No, because I think that you can't ignore, well, there are two things that you can't ignore. You can't ignore the conglomerators, right? So that was this big M&A movement.

that did have some elements of hostile M&A. They had hostile tender offers. Those were smaller companies in general, but that sowed the seeds for the hostile takeovers that began in the 70s. I couldn't leave it out of my book. You have to talk about the emergence of Warren Buffett, too, which his career began in the mid-1950s. The 60s were... a pretty grand time for him too, I think. So when you get to the 1980s and some of the more famous activists that people now still are talking about today, Carl Icahn, et cetera, what changes? Because there seems to be a self-interest driving their actions kind of above all else. And a lot of change in terms of how companies start to protect themselves from these raiders who don't seem to be acting on behalf of broad shareholders, but to make as quick a buck and as big a buck as possible. Yeah, I mean, it's an interesting question. And I mean, it's always, you know, fascinating, like with, you know, with any kind of historical exploration, because there is, you know, like your prejudices and how you think the world works, like the lens through which you see the world has a huge influence on how you interpret these past events. So this emergence in the 1980s of the corporate raiders, like a lot of people are like, oh, this was the beginning of the birth of greed. These guys are greedy now, where before that, business was more honorable. And I kind of don't buy that at all. I think in the 50s and the 60s, you had a lot of greedy guys. And you did in the 70s, too. They just got all washed away. But I think in the 80s, to me, the defining thing was Michael Milken and this vast... infusion of capital that he gave directly to the Raiders. And so guys who were small fry in the 50s and the 60s or the 70s, those kinds of outsider investors would now have access to huge sums of capital. And so in my book, I profile Carl Icahn versus Phillips. And Phillips was like a top 20 company.

in the country it was i forget you know 10 billion dollars or something it was a huge company and you have a carl icon you know going after it i mean he doesn't have the money and he's not financed by the big banks or like investment banks he's like financed by by these you know like the cronies of Michael Milken and the people that buy those junk bonds. He got to do this whole thing of going after a huge established company without any help from the financial establishment. What was he trying to do with Phillips? What was his specific mission? He was out to make a buck. With Phillips, they had been targeted by Boone Pickens. And Boone Pickens is actually a great story, which I put in the book, too. It's like he actually, like his father worked for Phillips, and he worked for Phillips, and he had a long history with the company. And he goes after them as a hostile raider, and they basically buy him out. Now, Boone Pickens was very sensitive to charges of green mail. And so he was like, well, you can buy me out, but you have to do, it has to be equal treatment to all shareholders. And so instead of just paying. Pickens a lot of money to go away, Phillips had to devise this scheme to pay out Pickens, but to also do right by shareholders. And they give the shareholders this complicated restructuring that the market ultimately values for less than the cash that is paid to Boone Pickens. And so Icahn sees that. He sees I can go after Phillips. Pickens is a smart guy and he knows the space and he clearly thinks it's undervalued. But what he's also going for is if he buys into the public shares, he thinks that they need... to sweeten their offer, you know? And so he succeeds in doing that. Like he makes a big fuss and Phillips sweetens the recapitalization. So his shares go up. It's an interesting example of making a quick buck. I remember in the, or at least I've heard the story where my mom would wear a shirt called people before profits in the late seventies, early eighties, which has a better ring to it than stakeholders before shareholders. But that's kind of what's going on here is, you know, you put in your book a couple.

The example that stands out to me was, I don't know who it was, but somebody took over Pacific Lumber, which had a sustainable kind of growing plan for timber, basically fired everyone, canceled that sustainable plan, clear cut a bunch of old growth redwoods to make the quickest of profits. Yeah, Charlie Hurwitz. It was a gruesome case. And I wonder... Was it through the 80s, and obviously the junk bond era came to an end ultimately, was it public reaction to things like that, to things like ICANN making a tremendous amount of money very quickly, really to the benefit of nobody else but him? Did that change things? Was the attitude towards activism or even the strategy of activists changed after that era? Yeah, I mean, that's a good question. And in a weird way, our society both... like detested those people but also held them up for our admiration so like i was too young at the time like to really process it all obviously but i don't really know the answer in terms of public opinion i do think that you did have a few specific policy initiatives and you had the end of michael milkin right which you know a kind of put an end to the rating in the 80s as we know it like you know like the 90s was a bigger deal decade than the 80s was there were lots of huge mergers in the 90s like some big hustle deals but like this period where you could basically be a nobody and if you found like an undervalued company get quick funding like to go after it in an aggressive manner You know, that's over and it hasn't come back. It didn't even come back in the early 2000s when you had this, like, ample supplies of capital out there. Like, it's a funny thing I talk about, like, in my book that, like, you know, that was, like, the only time in history where, like, you know, they just, like, allowed people with no experience, like, at all, like, to go on a spending spree. And then I had in my footnotes, like, except for, well, maybe, like, the Icelandic investment banks in the mid-2000s, which was, like, a little bit of a similar thing.

So ICANN had this idea, this, I think you call it anti-Darwinian idea of kind of corporate management that for the most part, it was dominated by really good institutional politicians, people who are good at rising the ladder, but not necessarily at either managing the company or allocating capital. And you've got this sort of Peter principle that people rise to the level of their incompetence and that creates the opportunity for a lot of these activists to go out and shape companies up. Obviously, I think that has persisted, right? That the world is still... full of, especially maybe in what you call the wasteland of the small cap market, still full of companies that are badly or even horribly mismanaged. But given the end of the kind of I can, you know, milk and junk bond era, obviously activists are still targeting companies like that. So maybe kind of close this history off for us through the 90s and then, you know, the 2000s to the present of what it's looked like since then. Well, I mean, I think like that since then, you've seen this. you know, continued concentration of share ownership in the institutions. Like you did see this brief period that I talk about in the book of kind of the Dan Loeb, you know, public hedge fund letters, like the shame driven activism, you know, but that didn't really last long because the way that it's evolved is that, you know, they're like in any given public company, if it's not controlled by. by insiders, there tend to be a handful of institutions that have a lot of the votes. And so the game of shareholder activism is a lot more a game of persuasion now. And so you, as an activist, are trying to convince the institutional shareholders that you have the right ideas and perhaps that the current... A management doesn't. So in the 80s, you could go for the quick takeover. In the 90s, you kind of, if you were a young activist with no access to capital, like you, lots of them did this, like embarrass the company thing was all they could, you know, really think of. You know, by now, like a lot of it is like behind the scenes, like persuasion. And as a result, the big institutions are the arbiters in a lot of these disputes.

You have these funds, like people like Value Act or Bill Ackman even. They're very politically astute in some ways and persuasive, and they tell a very good story. So there's this persuasion that's happening. So I'm a quantitative investor, but I'm always very curious to see. who are the major shareholders of some of the key businesses that we own. And one of the things you have to do is scroll down a little bit on the page every time on the 13Fs because 1, 2, and 3 is Vanguard, State Street, BlackRock, Dimensional, you know, a couple really concentrated, massive asset players that are either purely passive or, you know, quant lite. I'll call them like a dimensional. But you'd be surprised. I mean, if you look at Vanguard, I mean, it's just like an index. I don't know if you'd call that. Yeah, well, whatever. Whatever Vanguard is, they're passive investors in the sense that they put together these, well, products like to match an index, but they have a pretty robust team to study governance issues and to vote shares. And so even like a lot of these big institutions that they're not actively choosing to buy X or Y stock because of how they think it's going to do. they are active participants in its governance. And so those are the kind of people that you need to persuade. It's kind of fascinating. It's almost like we're witnessing, and I'm sure this will continue, you know, Vanguard. captures market share every day, an inversion of these ideas of passive and active, where active for the longest time has been active selection, meaning you're picking stocks, trying to beat the market, and probably less so than being involved in those stocks. It's active selection, passive ownership, I'll call it. And now it's the opposite. It's passive selection, and it sounds like with teams at Vanguard, and probably this will happen in other places, active involvement in the management of the company. Yeah. I mean, if you're at Vanguard, then you are so... established right that your long-term interests are a that the s&p 500 is well managed will be that the markets have integrity like you want for people to trust in the s&p 500 like and see like that corporations have integrity and so like they do have a real vested interest in promoting good governance can they do it like you know can you build an incentive system that makes sense it's a it's a weird dynamic when you have

Like this entity with, you know, 22 paid professionals who have this huge impact. I mean, like how much are those people getting paid? Probably not that much. And how is their performance measured? Yeah. Well, it's extremely hard to measure it, right? So it is a weird dynamic. And, yeah, if you think about it too hard, it's a little bit uncomfortable to think about, wow, so, you know, what's going to happen when Vanguard? owns 10 percent of the market um you know how persuadable are the people who vote their proxies they're going to be to to bad ideas you know i mean you know power intoxicates that's you know that's a lesson from history right yeah so like it'll be fascinating to see and the whole growth and passive and etf investing i don't know about etfs that could be a flash in the pan but you know indexing is is going to keep growing So that dynamic is only going to be stronger. So we've got kind of the complete history now where we start with Graham operating very much under the radar with information that nobody else has to unlock value in one very small specific company to almost activists as marketers. They're persuasion experts and trying to convince, I guess we'll call them passive or big institutional owners. to vote a certain way or to promote a certain kind of governance. So for me, that raises the question, which I think is fascinating, of the very idea of shareholder value. You talk about this quite a bit in the book. And unless you really dig into the history of this idea, you probably just take it for granted that U.S. companies or companies in general should act in a way that is best for their shareholders. And I guess what that means is the most cash going back to their shareholders, the greatest growth of share price, so on and so forth. But when you dig in, as you do in the book, you realize that that is kind of a not only a fairly recent concept.

but also potentially a fictional one. So I'm going to read a quote from, you don't actually quote this in the book, but I went and read a book that you recommended or at least referenced by a woman named Lynn Stout talking, I think the book was called The Shareholder Value Myth. And so she says, shareholder value thinking is a mistake for most firms and a big mistake at that. Shareholder value thinking causes corporate managers to focus myopically on short term earnings reports at the expense of long term performance, discourages investment and innovation, harms employees, customers, communities, and causes companies to indulge in reckless, socially irresponsible behaviors. That's obviously probably an extreme opinion. If there's some continuum of opinion on the idea of shareholder value, she's obviously very much against it. So the question is, is this the right way to think about it? Let's say stakeholders that includes employees and customers and society at large, the environment, what have you, versus just pure equity shareholders. Where do you fall on that continuum? What should companies be optimized? to do well you know that's that's a key question and and i really do think that's a good book by lynn stout it's like a really thought-provoking book and she definitely i mean like she kind of has two arguments there's the legal argument of like look there's like no legal reason like the corporations are required to prioritize the shareholders um which is true uh technically but then there's like the practical thing of like well except Like they're not forced to, but a board of directors is appointed by shareholders. And so like that will bias is always going to be there because you have to raise your capital from somewhere. But then like she also gets into the practical argument of, you know, will companies that like are run specifically for shareholder value can be a myopic, like can be short term oriented. We have to be careful there because.

it's easy to kind of slip into kind of a semantic argument because I think, you know, when some people say shareholder value or people are focused on shareholder value, they don't like, like we're not all talking about the same thing. And I think like for someone like me, I'm, I mean, obviously, I guess not obviously, but if you have read my book, I think that you see that like I'm pretty much pro, you know, shareholder and like in terms of corporate governance. And I think that a board of directors, I think their job is to protect the long-term interests of the shareholders. And I think if a board is beholden to too many bosses, it's easy for them to be beholden to nobody. And so I do think it's important to run companies for the benefit of shareholders. But I think the way this devolves into semantics at times is, like, look, I mean... People in our shoes inherently understand that it's not in the long-term interest of shareholders to kind of denude the environment and to exploit the labor to the point that we don't get good service, to neglect our customers to the point that we lose them. And a lot of the debate, in a weird way, is about... you know, that happening. And to me, that's, well, bad long-term governance. And I do think that the whole long-term, short-term issue is a human nature issue. Like, I think boards can be too short-term oriented. Shareholders can be short-term oriented. But so can managers. And, you know, so can CEOs. And so that's a problem, like, for all of us. And, like, I haven't seen lots of compelling evidence that, like, oh, well, public company shareholders are just well, so myopic and, like, they're, well, so short-term focused that it's, like, destructive to the economy. Like, I think there's a lot of examples where, like, if you look at a company like Amazon, you know, where they are investing all of their excess cash into long-term growth. Like, they're doing everything, like, for their long-term benefit. You know, well, possibly for...

the negative benefit of society but you know well for their long-term benefit and for their customers benefit and for their shareholders benefit and so like i'm not like that compelled you know by the argument that oh like we live in a world like you know where shareholders just like completely short-sighted rampaging you know and misinformed you know alfred rapapur who's written a number of books on this topic says that managers talk shareholder value, but then walk quarterly earnings. And obviously, Bezos is maybe the perfect example of the opposite of that, one of these kind of rare, truly long-term thinkers that really does seem to walk that walk. But I guess the problem is balance, right? That for every Bezos, there could be 50 or 100 much more myopic managers that are focused on hitting. performance targets because let's face it, the average CEO tenure these days in the Fortune 500 is something like six years. So I wonder, coming back to the idea of stakeholder versus shareholder value, if the idea of shareholder value has become so popular. and so commonly accepted because it's very measurable. Share price is share price. Earnings are earnings. You can really track those things and say whether or not a company is being effective for its shareholders. We live in this kind of age of measurables where we're obsessed with T-stats and R-squareds and statistics. It's much softer and fuzzier once you start getting into stakeholders. And so I wonder, I guess my question is, is there some set of measurables or at least some governing objective that companies could start to bake into the essence of their businesses. Because as you say, if you go read companies founding papers, none of them say our mission is to maximize shareholder value. They don't want to tie themselves to that. So can we get out of this bind? Can we move past kind of the simple, pure measurable of share price to something that better promotes stakeholder value? Or do we just need to let things play out as they have? Yeah. I mean, I think, A, that we basically can't. But B, I mean, I would even question your premise about the value of the measurable of the share price because I'm a firm believer that the markets are not efficient.

They certainly are not efficient in the short term. So even evaluating CEOs on the performance of their stock during their tenure is very problematic. To me, that's a big concern that I have with share-based compensation. I'm a value hedge fund manager. All of us for years have kind of... talked about the importance of incentivizing the management in the right way and making sure they have the skin in the game, all that stuff. But to me, stock options are highly problematic because A, they're highly leveraged, and then B, they're levered to an irrational market. And so you ultimately introduce this big hunk of compensation that's... completely erratic. And you'll have companies where everyone will get a huge pay year just because of the movement of the stock, which may or may not be warranted. And in a year that they're doing all the right things and they make all the right decisions, they might not get rewarded. So I think it's really problematic. And I think, again, it's among the many things in governance that boils down to the value of an effective board of directors. Ultimately, the board has to evaluate the CEO, and they shouldn't just do it on the short-term share price movements. They need to understand that markets can get suckered into overvaluing companies. Do you think that governance today, and I guess this is another way of asking whether or not the opportunity set for activists. how that stacks up today versus the past. And I guess one proxy for the opportunity set is how good is governance? The worse the governance, probably the better the opportunity set. So where do you think we stand today? I mean, I would kind of question the premise because I think there's a lot of bad governance and there always has been and there always will be. But in terms of an opportunity set for activism, I think you really also need...

like a deeply undervalued company because of the work involved, the possibility of failure. When you go active on a company, you lose your liquidity. So I think the governance opportunities are there. Valuations are higher. Like we're like in the middle of this or at the tail end or like, who knows? I mean, you know, who knows where we are in this historically long bull market. So like to me, the real, you know, gating. factor on activist opportunity is undervalued companies. And I'm not seeing them as much. I think if you're an activist and your only target is bad governance, then I think that's a dangerous situation to be in. Very interesting. So I would love to move now. into kind of your history and your professional career outside of the book and outside of activism. I know you started in music. Maybe talk a little bit about that. Yeah, well, I played in a highly mediocre band. Pretty much through college, we started at the beginning of my sophomore year of college. And so that was 1990. four or 95 and um it's been called Aiden we were on uh Team Beat Records which is a DC based indie label and we had four records and we pretty much toured from 96 until 2001 when I went to business school so for those years like I lived in in Chicago for one of those years but then I moved back to DC so like I lived some in DC and some in the near DC suburbs and I pretty much attempt and toured um but it was i mean it was a great it was a really um educational lifestyle i think and i really think that going on tour is a a pretty incredible life experience sure but it was like it was hard i mean like it's funny when like when i moved to new york um like i came here for for business school like i realized that all my friends in bands in like in new york

had like real jobs. Like they had jobs that like would tolerate their artistic ventures. And so they all had careers going, whereas everyone in D.C. and most everywhere else in the country, if you played in a band, you were a bartender or a temp or like you did this, you know, hourly work. So like it was hard. Like I do feel like I kind of had this great life experience, which was incredibly valuable, but I didn't like accomplish a lot. professionally in that time. I find that most people that have a story like yours, ultimately a very successful one, have some sort of threshold crossing moment. So going from that lifestyle to Columbia to business school seems like an odd transition. How did that come about? I think ultimately I knew at some point that I would go back to school and do some kind of... I don't know what you would call it, you know, career advancement. You know, I mean, like the band was really fun, but like we never were a good enough, but like we never, I mean, like you really have to work hard and like to make it work. And, you know, there were seeing the bands that, that became successful in the time like that we were doing it. The ones that succeeded pretty much. 100% of them were incredibly hard workers, and all of the band members were completely committed to it. And we could never really do that. We were never all on the same page. We didn't tour nearly as much as we could have and should have. So I think that deep down I knew that we weren't going to be a successful band. So I didn't really know what to do. And I thought about, like, do I want to learn to be a computer programmer or do I want to go to some kind of a professional school? And I had a family friend, Arthur Levitt, who was Clinton's SEC chairman, who basically helped me get into business school. So, like, I thought of business school at the time as like a versatile degree that you could potentially do a lot with. And I think it all...

I got real lucky. It worked out very well for me. So you went to Columbia, and I know you now teach there, and that's sort of probably the school. If you talk about... What school has produced the most maybe famous investors, period, but certainly the most famous value investors? Obviously, Graham and Buffett being the kind of founding fathers, but tons of huge names. Joel Greenblatt. I think Avelli went there. I think Cooperman went there. Some really big names. So I'm curious, when you got to Columbia, it sounds like your idea was that a business degree... can be broadly, uh, yeah. I mean, I didn't know what I was going to do. I got strong. I mean, so when I got there, like I didn't know anything about investing. I had never heard of Warren Buffett. I mean, I didn't know that stuff and Columbia was, it was pretty different. Like we didn't have that, that value investing program that we have now. Um, and I love that program, but I think one downside of that program is it restricts a lot of the best teachers to this selective program that is hard to get into. So like when I was there, I mean, I must have heard at some point like, oh, you know, you should take security analysis. It's a popular class. So like there were three sections and the one that fit my schedule was the Joel Greenblatt one. And like it really I was that lucky. I mean. I took it, and it resonated with me. But I had no master plan to do investing. I didn't even really know what investing was about. So I took that class, and it really clicked. And at that time, I didn't know about Columbia's history with investing. I think the spring of my first year there, I had a person in my little, like what's called an IP group, but it was like a four-person study group into Warren Buffett, and he gave me a book on Buffett. I think that he gave me the Lowenstein book, which I didn't read, but then I read the Warren Buffett way, and then I read the Lowenstein book. And so, yeah, once I got into it, I got super focused on it. How was the green-black class structured? Was it investment case studies? Was it broad principles? I mean, it was a lot about the secret hiding places in his book.

Yeah, it was basically 12 classes. In the first class, I remember he kind of focused on debunking efficient markets. He brought the Wall Street Journal out, and we looked at the 52-week highs and the 52-week lows of these companies like American Express and Walmart. And then usually he would have, in the first three or four weeks, case studies. And he would have these very simple... special situations. So we looked at the Dunn and Bradstreet spinoff. Like we looked at Muncingware where like you kind of, it was like, like they had a particular line of business that was very profitable, but everything else, you know, well drained all the profits, but, but those could be cut away. And then by the end of the class, he began to have a lot of guest speakers and we just would do more stock pitching. So like we would get in our little groups and pitch stocks. So to me, it was more the beginning of the class. I had never heard of this special situation stuff, and it really clicked with me. And I don't know to what extent this is delusional, but at the time, I felt like I was getting it faster than everyone else in the class, that he would go through an example, and I would get it. you know, we'll raise my hand. I can get it first. Like perhaps everyone will knew the answer, but didn't want to raise their hand or whatever. But I just felt like I kind of had a knack for it. Tell me how you got back into teaching there. So a friend of mine who I met in that class, Eddie Ramsden, who's a fund manager, he runs a fund called Cabern Capital, which I invest in actually. It's a great fund. He was like a superstar student. Like he got... seated by Greenblatt after that class. And he also took, so to back up a bit, like the one, I think there were two classes there in investing that you had to apply for that were like the new model at the investing school. There was this Paul Sonken class and then a class taught by the Blue Ridge guys. I applied to both those classes and got rejected. Eddie took them both. He took the Sonken class and did so well that he got asked to be the co-teacher the next year.

And then the next year, I think, Sonken had to back out of it. And so Eddie, one year removed from being in the school, was the teacher. And he did a great job. He's a really good teacher. So he moved back to England. He teaches at the London Business School now. And when he moved, he kind of put my name forward for doing it. I stutter. And it's gotten a lot better, but I had a really bad stutter. in college and after college and yeah I mean even at Columbia like um I had a you know like a pretty bad stutter so when I got asked to do it I mean this is not what I told you know Greenwald when you know when we were talking about it but but I kind of viewed it as if I'm not going to do this then like I'm never going to do something like this and it was like my chance to kind of try like I mean I basically did it as a form of speech therapy wow and so that was you know kind of the reason I did it It was a little bit like I got this opportunity. For my entire life, I would have said no to something like this. And it was like eight months away. It was just abstract enough that I was like, screw it, I'm going to try this. And I did it. And so, yeah, I think this will be my fifth or sixth year. teaching there. Wow. What a neat story. I didn't know that origin. So where we'll go next is your actual portfolio. So there's no more, I guess, interesting way to really see what you believe than to look at what you own. And one of the things I'm most fascinated with as an active manager myself is the institutionalization of asset management, the rise of, we'll call it closet indexing, where portfolios look more and more like the market, or at least more and more sensitive to key risk exposures relative to the market because the fastest way to get fired, and I can attest to this, running portfolios that look a bit different from the market, is to underperform. Even if that underperformance is over a very short window of time and nothing's changed about the strategy or the philosophy, there is a, I think, shorter and shorter leash for doing badly versus very low-cost passive alternatives. And so I got a nice big smile on my face when I looked up kind of your top holdings because there's no mistaking you for a closet indexer. And you had a good line where you said, value investors are journalists at heart who feel...

compelled to gather their own facts and do their own analysis, which I think obviously needs to be the case for the kind of portfolio you have. So what we'll do is maybe walk through a few examples, kind of think about them like case studies and maybe use them as jump off points for asking a few kind of broader questions about investing. So the three we're going to go through. are Stargas, Popeyes, and Tandy Leather. Okay. So we'll start with Stargas, which was, it's, I think, if I'm not mistaken, at least in the last filing, it was about a quarter of your overall portfolio. I think it's like 21%. Okay. So it's still the number one holding. Yeah. You know, so like with 13Fs, obviously, they don't include cash. They don't include unlisted stocks or foreign stocks. It's not the whole picture. But yeah, StarGas is our largest position. So I was interested to see that because obviously that was one of the topics or chapters in your book was Dan Loeb versus StarGas. I mean, it's not a coincidence, right? When you're writing a book, you definitely... hop at an opportunity to take a shortcut so it was easier for me i mean i knew that i wanted an angry dan lobeletter yeah of course i knew that that was a good one and it was way easier for me to like to write about that company than like icpt like or something where like i didn't know the company at all So just to take one more opportunity before we dive into StarGas to highlight, because the Loeb letters are just awesome. So Loeb writes in that same 13D to 7, to Eric 7, the CEO. How is it possible that you selected your elderly 78-year-old mom to serve on the company's board of directors and as a full-time employee providing employee and unit holder services? We further wonder under what theory of corporate governance does one's mom sit on a company board? Should you be found? derelict in the performance of your executive duties, as we believe is the case. We do not believe your mom is the right person to fire you from your job. And I love how he keeps saying mom instead of mother. This is so condescending. So anyway, so obviously you're not involved with Stargas when Loeb is fighting. Well, I was. Where were you? Well, so my first job in the industry, I was at a distress fund.

Like I started during business school in 2002, and then in either 2004 or 2005, my direct boss, Greg Schrock, he was the director of research at that fund, and he and I launched a new fund called ARCLO, where I was the junior partner. We were funded by – or seeded by a protege, and that was also a distress fund. And I think at both HPV and at ARCLO, I had looked at the SGU bonds. And then at Arclo, like, that was when all of this, the Dan Loeb and the blowout, you know, will happen. And, like, we looked, I think that we owned both the bonds and the stock, like, a little bit. And so I, you know, will follow that whole thing. I remember we talked, like, to Loeb, and he had a lot more stories, like, off the record. You can only imagine. You know, that, like, were even harsher about Eric Seven. And so I, like, had been following it. And then when we launched Bandera, It was among our first positions. I mean, you know, one thing that you see a lot with special situations is you do see kind of investor fatigue, you know. So with StarGas, they did a restructuring, like they equitized a lot of bonds. So there were, you know, kind of two dynamics. A, the event had happened. Well, there were a bunch of dynamics. I mean, like another one was like the event had loudly and publicly happened. Just describe that event. Oh, well. So SGU in the old days was a basic, it was run by an investment banker and was like a dividend paying security. It was an MLP. It was, it traded on yield. Like the SOC was like, you know, 20 to 25 bucks a share, even though like, you know, they were kind of, well, ran these hard businesses, including like this heating oil business. Like they ran into trouble. They made some like essentially like directional bets on the price of oil and they blew up. with this guy, Eric Seven in charge. They sold their propane business because it was an MOP. They passed on a $10 per share taxable gain to their shareholders at almost the same time as announcing that they might have to file for bankruptcy. So, hey, here's your stock. You're about to lose everything, by the way. Here's a $10 gain. Yeah, well, $10 per share gain.

So Dan Loeb got involved, called for his ouster. They did this whole restructuring. It was all very ugly and public. When they did the restructuring, that was a controversial thing too because the board took what on the surface looked like the less good deal. There was a Soros-backed deal that... looked like the better deal for shareholders in the short term, but they went with the more reputable management team. So they went with this Yorktown Partners, a private equity firm who now controls SGU, had sold the old SGU, like a heating oil company, in 2000. So it was their management team that came back in to recapitalize it. So you had all of that happen. You had the new management team. You had a lot of the equity in the hands of these old bondholders, which creates a dynamic. And then you had that whole Dan Loeb noise where it got lots of attention. And when all that died away, you're left with a stock where people are like, oh, yeah, SU, I've heard of that. And people don't. They tend to underfollow these things that have been in the public eye. And also, I think a part of it being in the public eye. and of a lot of blow-ups in the heating oil space. So at the same time that SGU blew up, this other company blew up called Heating Oil Partners, that business got dismissed as a crappy business when in reality it's a surprisingly good high-return business. And so we kind of saw this excellent management team buying into these assets. They're really good capital allocators. They're like a good private equity firm. So it all kind of lined up, right? And then 08 and 09 happened too. And then also in 07, the huge increase in oil prices, which is bad for their business. And so it was a situation where lots of bad things were happening in a fatigued stock. And then you had these real bad macro pressures. But yet underlying it all, you had a good change in management.

and good governance and you know good oversight so a setup great and like ultimately it still isn't as respected as it should be which is the reason that we you know we'll still own tons of it like we've owned it for a very long time and i and i and i still feel like It's extremely undervalued. So value investing is, I would say, like a nice way of saying very pessimistic outlook. And look, this is like the heating oil business is... Secular decline, right? Declining, and it has been like for decades. But Yorktown, like these guys that control StarGas, you know, like they launched a heating oil business in 1981 that they sold to StarGas in 2000. The same dynamic was happening over that period with a little bit of differences in the relative price of natural gas to oil, but it was a declining, doomed business, and they returned with something like 65X in that period, and they know what they're doing. So the main thing there is they perpetually... like are valued as this terrible commodity business when they're kind of not. I mean, it's not a great business, but you can earn an outsized return. What do you think? I mean, so how long have you owned it? I guess how long has it been either your number one or top position? Probably seven, eight years. So is there a catalyst that would cause the market's perception to change, do you think? I would have thought with the low interest rates. You know, them paying a dividend, you know, I mean, you know, they pay kind of the lowest dividend that they feel they can pay to keep the shareholders happy, but they prefer to retain the cash, which I agree with, like for acquisitions and buybacks. But it yields, well, 5%. I mean, I would have thought at some point that it would kind of go back to trading on yield. And look, I mean, markets are optimistic. And in history, there have been times that people have valued heating oil companies like propane companies, like, you know, with a lot of optimism. So, I mean, I would have thought, like, at some point that that would have happened. And then, you know, we had two years in a row of these, like, abnormally cold winters where they just made gobs and gobs of money.

And I would have thought that the valuation would have improved more than it did. When you say they're good... capital allocators that kind of perked my ears up. I think that that is one of the more interesting ways of evaluating a business or certainly a management team. And you mentioned both acquisitions and buybacks. So when you say good allocators, what do you mean by that? And is that allocation piece or that allocation skill a key part of what you look for when screening for new investments or at least want to see continued good allocation from your existing investments? I mean, honestly, like... When I look at stocks, I'm more looking for bad allocation as a thing to avoid. Great capital allocation is so rare, and it can be hard to predict in the future that it's not the driving thing that I'm trying to identify, even though it's hugely important. It's more like I'm trying to avoid the disasters with bad allocation. With Star Gas, Yeah, it's like they're extremely disciplined and good on the acquisition front, which is hard to be in a declining industry where you're the biggest player. So among the more annoying things that has happened to us with StarGas is there were two or three great assets that popped up for sale in the industry that got gobbled up by these Canadian propane companies. you know, like we're playing the dividend game with their investors and, you know, they needed to grow and they, you know, were grossly like, you know, overpaid for those assets. You know, the new star gas has been great. Like they've gotten up like a bunch of good acquisitions done, but they don't overpay for the bad ones. And then they are really opportunistic on, you know, debt and share repurchases. So in the financial crisis, they... They bought back a lot of their bonds at a huge discount. Since we've owned the stock, they've bought back about 25% of the shares at opportunistic times. And so they really are good on the capital front, which is key for a declining cash-generating business. Do you have a broader opinion on buybacks? It's one of the, we'll call it quant factors, that I find most interesting. And the empirical evidence suggests that companies that buy back...

as you say, gobs of their shares, especially ones that do it at cheaper relative prices, low PEs, low prices, sales, et cetera, have pretty significantly outperformed the market over the longer term. Now, we're in a period now of certainly 2015 and thus far in 2016 when these high buyback firms have lagged pretty considerably. But longer term, it's been a pretty effective signal or factor to look for in companies. So do you think that... And I guess I'll frame the question also by saying that most coverage of buybacks is pejorative or negative. There seems to be this kind of narrative that it's manipulative, it's self-serving, it's a way of boosting EPS, hitting targets, and that instead that cash should be invested for growth. So where do you stand on kind of buybacks more broadly and knowing that it's been a good thing for StarGas? Yeah, I mean, those are all great points. And it really is the area. of corporate governance that's probably the least understood. Like in every board I've been on, in lots of dealings with management teams, they really don't understand buybacks. I vividly remember I was in a meeting with Popeyes, you know, billion-dollar company, great company, discussing a buyback. And, you know, I was kind of pushing them. They had been essentially badgered into doing buybacks by their shareholders. And I was pushing the CFO just, you know, trying to figure out how he thought about it. And so we're trying to kind of evaluate, would he be opportunistic? Would he turn it up or down depending on the market price? And he was like, well, you really want to put these things, you know, get them in the front, like the beginning of the year. So it, you know, has the biggest effect on your, you know, diluted share count for your annual earnings. It's like the worst thing that you want to hear as an investor. doesn't have anything to do with long-term intrinsic value. And so they're so misunderstood. And as you say, there are lots of companies that will kind of have them on autopilot. So to me, it's like I really love to see it when you have these opportunistic, aggressive buybacks. And I don't know. I mean, to me, the main issue is that boards often don't know how to value companies.

They don't know how to think about the value of their companies. When they seek a guidance on valuation, they'll get a banker report that's a means to an end. So they don't really know, A, even if they knew how buybacks worked, which they predominantly don't, they don't understand valuation enough to do buybacks in the right way. So, yeah, it's another example of how with corporate governance. It's hard to have a best practice because with buybacks, like you can see the best and the worst of performance. And there's like a good buyback, you know, creates a tremendous amount of value. A bad buyback directly destroys value. Burns money. The shareholder base is ultimately, if you own the share, then you're going to be biased in favor of thinking it's undervalued and that a buyback is the right thing. So it's a hard issue to think about from a governance perspective. That seems to be a new major tool in the toolkit for activists is agitating for buybacks. Apple's the most famous example. Yeah, but I think that you did have a little bit of a one-time period. like where companies are overcapitalized, interest rates had dropped precipitously, and the cost of borrowing was so low, and CFOs were not quite as sophisticated on their ability to borrow cheaply. And so I think a lot of that, of the low-hanging fruit there, is gone. And that was a powerful tool that I think... you know, was good, like for shareholders, like when these like overcapitalized companies, you know, were borrowed to buy back shares cheaply. But now it's less clear. And I don't think it's just a tool that's always going to be there. I mean, you know, like with buybacks, if like if you look at the math on buybacks, like if you're only buying back a small percentage of the float, it's really hard to move the needle. Like you have to buy back a lot and you have to like to buy it back at a pretty, you know, big discount.

like to really drive value. So I don't know. I mean, there are two approaches there, like our people that think, well, there's a tax advantage if you buy back at fair value over time as if it's a dividend, then you add value there too. That is true. But to me, what... A me excited as an investor is a board that understands the value of their company and you see that manifest through aggressive buybacks. It's interesting that all the work I've done on buybacks and it's been a kind of key area of focus in my research has more or less empirically confirmed what you're saying, which is the best way to, let's say, qualify a buyback program is sort of this lumpiness. this relationship to big discounts and these kind of high conviction bets that companies make. And I once separated that into what I call lower conviction, which was 5% or less of shares in a one-year period. And high conviction or highest, which is, you know. 5% or 10% plus of shares. And sometimes you see a 15% or a 20% massive, massive bet. And what you find is a couple interesting things where there's a correlation between the conviction level, the percentage of shares being repurchased, and the relative valuation. So higher conviction, on average, the share prices are trading at cheaper or bigger discounts. Yeah, that's interesting. And then the second thing, maybe more... you know, useful for active investors is that the forward returns of those stocks are considerably higher. So, you know, you get large stocks at, you know, call it 10% return since 1982 when share buybacks became, you know, really popular. The low conviction group outperforms by, say, 1% a year, a little bit, but not hugely significant, and it's varied. And then that high conviction group outperforms by about 4% a year. So it's a big gap, and there does seem to be – and, of course, there's plenty of examples even within that high conviction group of value-destroying buybacks. But from an empirical standpoint, it does seem to be true that the lumpier, higher conviction –

bigger buybacks that aren't just like a dividend proxy where it's 1% or 2% of shares every year or timed at the beginning of the year with diluted EPS in mind. I mean, it seems intuitively true to me. It'll be interesting to see if we get a sustained bear market, what the data looks like. Because it's also you just have had a market that has gone up and people were buying back shares. But to me, if I see buybacks with a brain behind them, Usually they're good. And at times they're bad if the board's just wrong and delusional, which happens. So we talked a little bit about Popeyes. I'd like to move to the last position we'll talk about before getting to some closing questions, which is Tandy Leather. Sure. And what I'm really most fascinated about about Tandy Leather, first of all, I intentionally didn't really look into their business because I kind of wanted to hear it from you. It's a weird business. But the number that jumped off the page is not... the weight of Tandy Leather in your portfolio, but the percent of shares outstanding that you own of the business. So I, I, are you the largest shareholder? Yeah. You are. Yeah. Yeah. Well, so we own about 30%, which this is also, that's like a real, you know, we'll hornet's nest with like affiliation rules, all that kind of stuff. And I'm on the board. So I have to be careful like about what I can say about it. But, you know, the main thing with Tandy is it's a really good niche business. So they're a retail company that sells leather and tools to leather crafters. So for people who make things with leather, they have, like, a fanatical customer base, you know, so they can have their stores in very low-rent areas, and the customers will come to them. And I bought it, you know, like, it's kind of a classic, you know, micro-capa story, these tiny companies. like their valuations will heavily influence by the activities of the large shareholders and liquidity. So in 2008 and 2009, there was a 16% shareholder, like the Wellington Group. I don't know why a company like that would own 16% of Tandy Leather. They're a big microcap player, I think. Oh, really? Yeah. I mean, they're big funds. Oh, yeah, sure. They have big funds. So we basically bought.

A big hunk of our position at probably like a $30 or $40 million valuation for a company with no debt and excess cash that at the time was probably doing like $8 million of operating income and did like $12 million like last year or the year before. And then we bought another huge chunk from a retiring CEO to bring us up to... Like to basically the 30% where we are now. So I was just a real fan of the quality of their business. And usually, like with our positions, again, like as we talked about with Stargast, like with Popeyes, it's a lot like the Stargast story. It was a special situation. They were a conglomerate. They basically liquidated. They went a year with no CEO. They got an excellent CEO. People were tired of the name and then the financial crisis hit. And so you had a year of great performance. But during the financial crisis with a new CEO, it had a special situation narrative. With Tandy, it was just like a really good business where you had, for some reason, a shareholder that wanted to sell at all costs, like at any price. And we stepped up with the bid. It strikes me that when you think about... Obviously, hyper liquid, large cap markets that dominate stated equity returns. You know, everyone talks about the S&P 500. That maybe the future of we'll call it active management. I want to get your opinion on the active passive debate in a minute. But maybe the future of active is. is more in situations like this where you're sacrificing liquidity, obviously, um, for a longer term view on a good operating business that, you know, obviously tandy leather means nothing to almost every single stockholder out there. Uh, but, but as a meaningful part of your fund, do you think that that's true? Do you think that, you know, the real opportunity is going to be in smaller cap, less liquid, longer horizon type investments like this? No, I mean, I'm

I mean, I'm agnostic, like, on that front. I mean, I'm agnostic about a lot of things. But, yeah, look, I think there's a dynamic to microcaps and the liquidity problems and, like, the issue, like, of ultimately, like, a lot of times, like, you're at an information, you know, disadvantage from the seller. It's a lot like distressed investing with, like, you're buying a block of distressed bonds, like, from someone that knows a lot. There, like, are all these aspects of a microcap, like, investment that... would make it hard to have a quantitative or like an, like an indexing strategy. So I think there like will always be room for like active, you know, managers in tiny, tiny companies to your question of, so there's a second, you know, we'll question like implicit in yours, which is with this, you know, we'll fund and, and indexing in the mega caps, you know, will we hit a point where, The quality of it, like an individual fund managers will judgment in general, like they're not going to be good enough to compete. I think it's just a completely different question. And it's a question about, you know, I mean, essentially, you know, judgment or what kind of like access to information. But I don't know. And I just assume like the market is prone to. bad misjudgments and i do think there's a place for concentrated big cap investors too and so i think there will continue to be and look i mean i think it's it's hard to outperform and i think over time there will probably be you know compression on fees but i think there's a place for like active managers across the board and i mean i kind of wonder as you know quantitative and like investing grows Will that help a small pocket of active investors? To me, the more problematic issue with the growth of algorithmic hedge fund investing and the mega caps is I think that we're seeing this real imbalance in access to information there, too, where you have the really big funds are now will have the resources and the world has evolved in this way where they have access.

to more real-time information than even the companies do. And so they're buying all of this real-time data on consumer habits, which I assume skirts the gray areas of securities law, but it's pretty fascinating. So I've thought a lot about that. and the impact that that'll have in the long term. I've seen, like, you know, satellite imagery for mall parking lots. That kind of stuff, yeah. Crazy unstructured data. I mean, I get, like, an email, like, I mean, every day from, like, oh, we have a few big cap positions. So, like, we own, like, you know, Google or Chipotle. And I think that puts us on the radar of these firms that are like, hey, we have all this value-added research on how Chipotle is doing this week or whatever. So there's this whole industry of that stuff. It's kind of like Graham looking through the ICC at special information. And I think the question now is the problem we face now. as active investors is how in the world to separate signal from the noise because surely most of that information is completely useless. Well, I mean, I mean, and I think that's a good thing for long-term investors. I mean, ultimately is like, that's, I mean, that's not going to hurt them. Right. They're like, are people out there that, that know what the next quarter is going to look like. Two quick questions on, on your business. And I'm curious, one, if you benchmark yourself and if so, against what? And, and two, Maybe talk a little bit about your investors because I can tell, having talked to you before this conversation, but also through this conversation and based on your portfolio, that you've got a high conviction, long-term investing strategy here. That's not all your money. You've got investors. And so the quality of those investors, I'm sure, matters. So maybe you could touch on that. Sure. Yeah. We've been really, really extraordinarily lucky in that a large percentage of our current investor base. and they were only a fraction of our beginning investor base, but they have come to dominate it in terms of assets, our collection of high-frequency traders. So they're all high-net-worth individuals. They tend to be young and sophisticated and interested in markets. And we've been very fortunate that over the life of our fund, which coincided with 07, 08, 09, which were banner years in that industry,

that they grew at a period where it really helped us to have access to capital. So we've been really, really lucky on that front. I knew lots of fund managers in 08 and 09 who had to close shop who were doing just as well. I mean, like my old boss at Arclo, Greg Schrock, who works here now. He's the one at the end of the office. I mean, he was a big subprime short. He was up like 80% in 07. like, over 10%, you know, in 08. And then he was up in 09, but just a little bit. And he basically, like, lost his seed investor and had to fold up shop. So we've been really fortunate to have, like, a great investor base, like, that understands what we do and that, like, allows us to invest in the way that we know how to invest. And so when you think about, you know, benchmarking, like, we're not out there marketing, like, to new funds. We're not out there trying to get big institutions. When our clients invest in us, I think of them as choosing us over the S&P 500 index fund. So that's our competition. And I feel like not only is that hard to outperform in terms of its return, it's a lot more tax efficient. It's way easier from an administrative standpoint. So I think that we have a high bar to live up to. We'll sometimes have these investments where we're investing in some kind of a liquidating trust where it's a tax disaster and we'll get our K-1 in September. And so we really are an administrative burden on our investors. So they're choosing us. And I feel like to make it a worthwhile investment, it's the S&P 500. And it's not just that it performs well. It's easy for these guys. to not have to deal with the K ones and like the liquidity and all that stuff. So yeah, like we never really like compare ourselves to like the value indices or the Russell or I don't know. I mean, I guess that like we have, I mean, and there are times when like, you know, we obviously are going to be more correlated to the Russell. So like in periods where like we, you know, we really suck, like, you know, we, you know, we might say, well, like.

The Russell sucked. Yeah, and we're value-based. That could partially explain it. Right. But they know that we have 10 to 15 positions and that in any given year that it will be driven by these idiosyncratic things. Yeah. How often do you have, or maybe the most recent time that you've made a major portfolio change, which I'm assuming your turnover is very low. Yeah. Our biggest portfolio, like we sold, like we used to own a General Motors and we sold it. So yeah, in the last three years, all of our big changes have been sales. Yeah. We really haven't bought a new core position in like in a long time. Is that value driven? Is it a lack of cheap opportunities? I think so. I mean, I hope so. Yes. Yeah. I mean, I view it as its lack of... of productivity on our part. But hopefully the reason that is the case is because there's not compelling ideas out there. So I'm going to close with a few kind of fun, quick questions. Sure. The first of which is, what is the kindest thing that anyone's ever done for you professionally? Definitely Arthur Levitt got me into Columbia Business School. So I applied there. I did the interview. After I got in, I think it was the first week of school, I think it was the dean of admissions called me into her office and basically explained we wouldn't have let you in except for Arthur. Which in hindsight, I think her telling me was... I'm glad that she told me. I'm glad I knew. It did motivate me, I suppose. to make me resent them. I was, you know, like, and I'm incredibly grateful that they did it because, you know, going to that school has been extraordinarily good to me. But then at the same time, there's a part of me that like, that's like, you know, they should be taking more people like me. Right. I mean, I had the apt to go there by like a wide margin. I just didn't have the resume, like the business background. And so like, like a part of me is like, well, you know, like they should take more people like me, you know, but.

But, yeah, like, without him, like, I wouldn't, like, have gotten in there. I mean, you know, at the same time that I applied to Columbia, I got rejected by NYU. And, you know, those were the two schools I applied to. So it was, you know, real proof that Arthur, you know, did get me in. You mentioned that at Columbia, in Greenblatt's class, you felt like you just got some of the stuff faster than other people. So maybe this is the answer to the question. But I'm curious that if you could isolate. one skill or skill set that you feel you're just better, you have more aptitude that drives a lot of your advantage, what would it be? I don't know. I mean, if I have a skill set that is above average, it's above average for the general population, probably not above average for hedge fund managers. I mean, I think I'm good at big picture thinking. I think I'm a good writer. I think I'm a good written communicator. I think those are things that have helped me professionally, but I'm not sure that they make... If we're talking about above average in the peer group, I think I'm pretty average in the peer group. Given that we first met each other because of your book and we're both, I think, pretty voracious readers or at least have loved books throughout our lives and both writers as well. Every one of these kind of podcasts... has the interviewer ask people for a book recommendation. So I'm going to try to do it a little bit differently just to keep it more interesting. Not so much just a one book recommendation, but if you somehow had the power to force everybody in the world to read one book, what would it be? Interesting. I mean, so like I have thought about this some and I think, yeah, I mean, like I think the big issue is, you know, like I'm 41 years old. You know, when you're 41, like every book is a baby step. Right. Like there's no one book that you can read when you're 40 years old that is going to have a profound influence. I think I just think like it all, you know, will feeds like the way that you see the world in a positive way. But I mean, I read Ayn Rand in like the 10th grade and it had a profound impact on me.

even though like within three years i had completely like rejected everything that she said it was like you are just like at that age that books have a profound impact so like i think the way that like that i read now is very different from like in high school like you're like this Sponge. Yeah, well, Sponge. And you know so little that everything affects you in a huge way. So all of those books, all of the books that have a huge impact on the way that you see the world, that you have to read at that age. So I don't know. I mean, I love a lot of books now, but they don't. But every book is just a small change on you now, and it just. It depends on, like, on who you are. So, like, I don't really have an answer. In terms of business books, I guess, like, when people ask me, like, investing-wise, like, I do always push the snowball. Like, I feel like, A, it's... Great book. Yeah, and it's weirdly, you know, under the radar, even among the Buffett devotees. Yeah. And I think that book is more valuable than, like... I think like a young investor coming up now will get more from the snowball than from the intelligent investor or security analysis. Kind of like a lot of aspects of your story that we've heard today, I think there's huge value. in the snowball in just understanding the stages and hardships and hard work and, you know, strokes of good luck and all the things that go into what, you know, looking back seems like an inevitably great career. Yeah. It's, it's very hard to, to be successful as a, as a fund manager. And a lot has to go right. And I think snowball, I think snowball is probably the best example of understanding that journey. Yeah. Yeah. I mean, I mean, I think it's a significant achievement, and I think it does exactly what Buffett wanted the book to do, and I think it's a real shame that he's divorced himself from it because I go to the Berkshire meeting every year, but this year was the first year that I did the book circuit. So I went to all these book events, and the snowball was invisible from them.

And when I talk to young people, a lot of them have read The Lowenstein and not The Snowball. The Lowenstein book is good, but to me it's completely unnecessary, especially if you read The Snowball. And The Snowball just has incredible access. It gives you such a better feel for how much of an anomaly Buffett is, but also for how he thinks and what drives him. It's a shame that it's not like... the profile book at the meeting every year. It should be. Last question. If you could hear anybody else interviewed like this, who would it be? That's a good question. I mean, you know, like I'm always fascinated by people who are productive but have like diverse interests. So, like, I really like this guy, Tyler Cohen. Like, he blurbed my book. But he's interested, like, in lots of different stuff. Is that the Marginal Revolution guy? Yeah. George Mason? Yeah. He's great. Yeah. I don't know how he does it. I mean, you know, well, how does he have time? I mean, how does he organize his day to cover that much ground? I mean, yeah, like, I think that ultimately, and I think, like, a lot of fund managers, like, are kind of interesting people. I think Klarman, Cliff Asnes, well, guys like that. They're well-rounded and sophisticated thinkers. I mean, I think ultimately when you get writers or people who might have a little bit of a more narrow interest, you might learn less from guys like that than from people that will really cover lots of ground. Interesting. Great. Well, thanks so much, Jeff, for doing this. Cool. Thanks for having me. This was my first recording, and it's been a blast, so I appreciate it. Great. Well, thank you. Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to InvestorFieldGuide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at InvestorFieldGuide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, O-S-H-A-G.

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