10 August 2023

Back by popular demand, Clay Finck brings back Chris Mayer to chat about his book, How Do You Know – A Guide to Clear Thinking About Wall Street, Investing, and Life. This book is one that really made us think as it is not your conventional investing book and questions much of traditional thinking in the world of finance. If you’re interested in becoming a better thinker as an investor, then this episode is a must-listen.

Chris is the author of 100 Baggers and How Do You Know?, and the co-founder and portfolio manager of Woodlock House Family Capital.

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  • How being a learning machine has impacted Chris as an investor.
  • Chris’ goal as a long-term investor in public equities.
  • What general semantics is, and how it relates to investing.
  • Finance terms that investors use that muddy the waters of how people think about stocks.
  • How either/or thinking doesn’t align with how the real world typically operates.
  • Why can we do without broad terms as investors such as: “GDP,” “the economy,” “value investors,” “growth investors,” etc.
  • Why we shouldn’t always take labels and names at face value.
  • What companies Chris owns are in what many would call “unattractive industries.”
  • Chris’ opinion on what drives long-term shareholder returns.
  • What Sosnoff’s Law is.
  • How meeting management teams play into Chris’ investment process.
  • Why Chris believes that “This Time is Always Different” and that reversion to the mean is a flawed concept.
  • How Chris thinks about judging what numbers actually mean rather than judging the numbers themselves.
  • Why we shouldn’t take accounting earnings at face value.
  • Why Chris encourages investors to develop a “delayed reaction.”
  • How Chris developed the ability to not take himself too seriously.
  • Chris’ book recommendations.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Clay Finck: Backed by Popular Demand. We bring back Chris Mayer. Chris is the portfolio manager of Woodlock House Family Capital, and the author of the very popular investing book, 100 Baggers. But today we’re going to be chatting about his lesser-known book. How Do You Know A Guide to Clear Thinking about Wall Street Investing and Life

[00:00:18] Clay Finck: how do you know is a much different book than 100 Baggers, and it really got me thinking and changed the way I think about the investment landscape Constantly. We are being bombarded with these broad terms like value investing, growth investing, the economy, GDP, the list goes on and on. Chris makes a compelling case during this episode that we can do away with all of these broad terms altogether.

[00:00:41] Clay Finck: During this chat, we also touch on what Chris’ goal is as a long-term investor in public equities, general semantics, and how it relates to investing, why we shouldn’t always take labels and names at face value. What companies Chris owns that are in, what many would call unattractive industries, and what is Sosnoff’s law is.

[00:00:58] Clay Finck: How Chris developed the ability to not take himself too seriously, his top book recommendations, and much more. If you enjoy this chat, I highly recommend you pick up this book as well, which we’ll have linked in the show notes. With that, we bring you today’s episode with Chris Mayer. 

[00:01:13] Intro: You are listening to the Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:01:34] Clay Finck: Welcome to The Investors Podcast. I’m your host today, Clay Finck. Today is a great day because we bring back Chris Mayer to the show. Chris, welcome back. 

[00:01:43] Chris Mayer: Thank you, Clay. Good to be back with you. Looking forward to it. 

[00:01:47] Clay Finck: Since I was such a huge fan of a hundred Baggers, which many people in the audience are aware of, I picked up one of your other books titled, How Do You Know A Guide to Clear Thinking about Wall Street Investing and Life.

[00:02:00] Clay Finck: After I read this book, I realized that you really love to read and you fully embrace what Charlie Munger calls being a learning machine. So I’m curious, has being an avid reader always been a part of who you are or how did that start for you? 

[00:02:18] Chris Mayer: Yeah, I think so. I think I’ve always been somebody who’s always had their nose in a book.

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[00:02:23] Chris Mayer: And even when I was little I can remember I used to love reading like fantasy and science fiction and as a preteen reading The Hobbit and Lord of the Rings and all that. And then my reading just sort of shifted all around and, but yeah, I think I’ve always been a reader. I’ve always enjoyed reading and learning and having books around.

[00:02:42] Clay Finck: And I think about the way you invest you select say 10 or so businesses and I think it’s really easy to become complacent and think that you got your set it and forget it type portfolio, but you know, you’re still a learning machine. You’re always reading and learning, and I think you sort of live in a way that Buffett and Munger sort of live, where they’re always thinking about things, they’re always thinking about their businesses.

[00:03:06] Clay Finck: So can you talk more about. That role that being a continuous learner played for you? 

[00:03:12] Chris Mayer: Yeah, I think that’s important because when you think about it, It looks like you’re not doing anything ’cause the portfolio isn’t changing. You’re out in there doing buy ourselves. But that’s just one activity. If you think about doing things as also including reading transcripts and keeping up on the companies that you own, and not only them but their competitors and peers.

[00:03:30] Chris Mayer: And then there’s ongoing work that I enjoy doing where I talk to people who used to work there, former executives or people used to run divisions or locations if, depending on the business. And so that’s ongoing and you always learn new things. Businesses change all the time. Some of these businesses now I’ve owned for years, and it’s just the environment’s change, different things happen.

[00:03:53] Chris Mayer: So there always seems like there’s stuff to learn. I tell people if I wanted to, I could just do this job 24/7. But you going to discipline yourself a little and realize that there’s a point of diminishing returns. You get to with a name and then you leave it aside for a while, work on something else and you come back to it.

[00:04:08] Chris Mayer: So I’m always doing something, it’s just not buying and trading, buying and selling. 

[00:04:14] Clay Finck: Before we dive into the book here, add one more point related to our previous conversation. During that chat, I mentioned that the goal for most investors is to beat the market, meaning they’re trying to outperform some sort of benchmark like the S&P 500, and I think that’s the goal of many fund managers because those who invest with them, they know that their clients can go out and just buy an index and not have to deal with.

[00:04:40] Clay Finck: Managers and paying fees and such. And during that chat you pointed out that it probably shouldn’t be the goal for most investors, or at least it isn’t your goal. And that really stuck with me from that chat. You stated that trying to beat the market is like approaching life with the goal of trying to be happy.

[00:04:59] Clay Finck: So with that in mind, I’d like to ask you, just throw it over to you to, what is your goal as an investor if it’s not beating the market? 

[00:05:07] Chris Mayer: Yeah I think being in the market is more like the outcome of a very good process. So yeah it’s like putting a cart before the horse. If you’re saying you want to beat the market first thing you want to do is develop a good process that leads to high returns, and I.

[00:05:22] Chris Mayer: The problem also is if you make being the market your goal, then you know you’re not going to beat the market all the time. You and the greatest investors will trail know a third of the time or more, and it might make you make decisions that might get you ahead of the market in the short term but would be detrimental to the long-term returns of your portfolio.

[00:05:40] Chris Mayer: So I want to, ultimately, I hope that I’ll beat the market by a wide margin when I look back 10 years and see the results. But that again, is sort of a, that’s the end product of a lot of other things that have to go first. So, that for me entails finding an approach that meshes with my skill set and my temperament, and all the work that I’ve done.

[00:06:00] Chris Mayer: So that’s my goal, my, so my goal, then it really becomes more of a discipline of sticking to what I’ve found, sticking to that process and not straying. ’cause it’s also easy to, any style that you have is going to, again, it’s going to trail a market at some point. And if you’re not committed to that process, then it’s easy to sort of switch and think that you can do better by altering your style.

[00:06:21] Chris Mayer: And most of the time that’s a mistake. 

[00:06:24] Clay Finck: It reminds me, I believe you wrote that most great investors like you think of Buffett and Munger. They’re going to be trailing the market one-third of the time. So during those years where they’re trailing the market, they might think they’re doing something wrong when in reality their process might be just fine, but they just need to stick with it and focus on that long term like you’re mentioning.

[00:06:44] Chris Mayer: Yeah, I’m not very goal-oriented myself when it comes to that specifically. Do investors always like to ask that kind of new investors they’ll say what kind of returns do you expect? Or what do you hope? I sometimes I’ll say I I’d like, I like to double the money, double your money over five.

[00:06:58] Chris Mayer: It’s a good pace, but it’s not like it’s a goal per se. I’m just trying to the highest returns I can with the skillset and knowledge that I have without doing anything crazy or risking the whole thing. So yeah it’s I don’t know what a good analogy would be. If you were running a sports team, you want to go as far as you can, but you don’t necessarily, I don’t know, you don’t have goals that you have to hit, like have to beat certain metrics along the way.

[00:07:22] Chris Mayer: I don’t know if that’s a good analogy. I’m trying to think of a good analogy.

[00:07:24] Clay Finck: Alright, let’s turn to your book. How do you know A lot of investment books say a lot of the same things as you probably know, but I think yours is much different. It’s a book that really made me think kudos to you for that, for creating something that I think really is just a lot different and it’s almost hard to explain, but we’re going to be diving into some of the ideas here.

[00:07:48] Clay Finck: The book talks a lot about general semantics, so let’s start there. Can you define what general semantics means? Because this is a term I had never even heard of before reading the book, and how does this relate to investing? 

[00:07:59] Chris Mayer: Yeah, it’s tough to describe what it means exactly. It was a discipline that was created by a guy named Alfred Ksky, and he wrote a book in the thirties called Science and Sanity.

[00:08:08] Chris Mayer: It’s a big fat book with many footnotes and some math and 800 pages. It’s not an easy read-in, so I’ll admit to being stumped the first time I tried to go through it. But that’s where it began. It begins with him and then what he was trying to do, or I should say, one of the things that general semantics tries to do is sort of analyze and look at how we use language and symbols and the assumptions that underline those words and symbols and how they then affect how we think about things.

[00:08:40] Chris Mayer: I think that’s a very broad way to think about it. It’s an aid to critical thinking too is an even shorter hand way to think about it. And so how’s this relate to investing? This is what my book wants to do, is to relate general semantics to investing and there really has been very little on it.

[00:08:56] Chris Mayer: There was one other book, it was written in 1958 by John McGee, and originally he called it General Semantics on Wall Street. That was the original title I. And I guess it didn’t sell very well because within a year they issued another edition. They called it Winning on Wall Street rather than General Semantics, which is not the best name.

[00:09:12] Chris Mayer: And I think even people who are enthusiasts of discipline today will complain. General Semantics is not a great name, and I wish he’d given it a better marketing handle, a better name, but, It’s been around for so long, it’s hard to change it. So the way I think general semantics relates to investing is you take all those analytical tools and so Ksky has this whole toolkit, which I get into in the book and apply it to how we use language, in Wall Street.

[00:09:36] Chris Mayer: We have, in investing, lots of terms that we use that are very vague and abstract, and general semantics helps you cut through a lot of those abstractions and get down to more concrete ideas. I know I’m speaking generally now, but I’m sure we’ll get into specific ideas here soon.

[00:09:53] Clay Finck: And the main quote, I think that applies to this book broadly is a quote from Korzybski. The map is not the territory. So just because you attach a word to something doesn’t mean it tells you anything about it, you know what it is you’re describing. 

[00:10:09] Chris Mayer: That’s right. That’s his most famous coin agent. Although I don’t think he was absolutely the originator of it, he definitely popularized that term.

[00:10:15] Chris Mayer: The map is not the territory, so, and it’s there’s been a lot of similar ones. Like the menu is not, the meal is another one. This idea is that what we say about something and what we describe it is not the actual thing itself. And that’s a very important idea that Korzybski hammered at again and again.

[00:10:34] Clay Finck: Let’s dive in and chat about some of the terms that people use to try and simplify the investing world and maybe not the best possible way. What are some of the examples that come to mind for you? 

[00:10:44] Chris Mayer: Yeah I always think of just basic ones, like think about how we talk about value stocks and growth stock.

[00:10:51] Chris Mayer: That’s always one that’s maybe easier to describe because. What is a value stock, really? The way we talk about it and the way investors talk about it, certainly the way the media talks about it, it’s like there’s an identifiable tag that you just put on a stock. This is a value stock, this is a growth stock.

[00:11:06] Chris Mayer: And those categories, of course, have very little meaning when you get down into it. You can see people call themselves value investors, own stocks that are also owned by people called themselves. Growth investors. Stocks move around between the boat. They really don’t mean much of anything when you’re in the business of owning individual stocks and businesses.

[00:11:24] Chris Mayer: You could do without that terminology entirely. I don’t think you’d lose anything. At all. And there’s a lot of macro terms as well that we just throw around like, we’ll say the economy is doing well or the economy is doing poorly, or we’ll throw around things like GDP like it has a precise meaning.

[00:11:40] Chris Mayer: And so what general semantics, I think when you get familiar with it, what it forces you to do, anytime you see any of those kinds of big abstractions, it makes you stop, gives a little flag and saying what do, what do you really mean when you say that? What are we talking about? Does it matter?

[00:11:53] Chris Mayer: And those are some of the things that come to mind. 

[00:11:56] Clay Finck: I pulled a bit here related to the value investing one. You mentioned that it can include investors that are so different from each other that you have to question the validity of the term altogether. Then a bit later you have, if you want to get on the path to clear thinking, you have to see through this charade of value and growth.

[00:12:14] Clay Finck: Another quote that really stuck with me is you said there’s really no such thing as a value stock or a growth stock, and it’s just something that you just read it and you’re just like, He is really right to some degree here, and it just like turns your world upside down because people talk about value stocks and growth stocks all the time.

[00:12:31] Chris Mayer: Yeah. And value investors. And growth investors and Absolutely. That’s the key is being able to see through those labels. We do it too when we talk about companies we’ll say this company is an auto manufacturer, and then you just start thinking about it in a certain way, like Ferrari that’s technically an auto manufacturer, but it behaves more, or it looks more like a luxury goods company.

[00:12:51] Chris Mayer: Those are some examples that people get stuck in. Certain buckets and instead of looking through the underlying economics, will change the way you think. 

[00:13:02] Clay Finck: Another term I think is really interesting that people love to use is durable. Competitive advantage. Does a company have a durable competitive advantage?

[00:13:12] Clay Finck: It’s really profound to think about how it’s not really an either-or thing. It’s dynamic, it’s ever-changing, and what. Is strong today, but might not be strong in the future. So it’s something that continuously needs to be sort of studied, thought about, and that’s how it sort of applies to your sort of philosophy of continuously learning and continually questioning what is reality.

[00:13:35] Chris Mayer: Absolutely. And you mentioned something in there that’s also a big point with Korzybski the either or, so that’s always a distinction. Anytime you come across something and it’s presented as an either-or, that alone is another little flag because there’s almost always a third alternative where there’s always a case where there are gradations in between.

[00:13:53] Chris Mayer: And so in your example with durable, competitive advantage is one of those. It’s not that you have it or you don’t have it. It’s a matter of degree, right? It’s just understanding what allows a company to earn high returns, let’s say. And usually, there’s something that has, that’s special that it does, and then your job as an investor is to figure out what that is and how long it might last and stay on top of it.

[00:14:15] Chris Mayer: So not about putting on a label on and saying this company is a wide moat. What does that mean? It’s not that you just have it and don’t have it like we’re talking about. 

[00:14:23] Clay Finck: I want to tap more into these really broad, big idea terms, like terms that come to mind are the economy and GDP people seem to be very obsessed with.

[00:14:35] Clay Finck: Are we entering a recession? Are we in a recession? They’re obsessed with what’s GDP going to come in at. Could you talk more about why we shouldn’t be so fixated on these big terms and why GDP itself is just a flawed metric that is really difficult to attach meaning to when you’re looking at these numbers?

[00:14:55] Chris Mayer: Yeah, that’s it. It’s a very big vague term. There are a lot of different critiques of GDP and I know I’ve included some in the book. I remember one that comes to mind as Rory Sutherland points out that Wikipedia is a great free resource for everybody. I think he said it’s like putting a library in everyone’s house, but of course, doesn’t get counted in GDP at all.

[00:15:14] Chris Mayer: There are lots of things that. Are like that, where if you don’t spend money on it, it’s not counted, even though it clearly has value. I know Bill Bonner, who’s my partner, always likes to point out the example of saying if you mow your own lawn and your neighbor mows his own lawn, there’s no contribution to GDP, but he pays you 20 bucks to mow his lawn and you pay him 20 bucks to mow your lawn, suddenly it’s 40 bucks added to GDP.

[00:15:36] Chris Mayer: And so it measures things like spending. So if you’re we spend money on healthcare because we’re sick, GDP goes up, but that’s not necessarily. A good outcome we want. It goes on and on with GDP, it’s a very large abstraction that kind of tries to track spending in an economy, but when you really get down into the particulars of it, it doesn’t really make a lot of sense.

[00:15:58] Chris Mayer: And again, it’s one of those things I think you could do without as an investor. And if you never looked at GDP or knew what GDP was, I don’t think it would hurt your results at all. 

[00:16:08] Clay Finck: You really opened my eyes, Chris, to why we should be skeptical of labels and names and what, as you’ve mentioned, when people don’t understand something, they like to slap a label on it and think that they understand it without really looking and digging into what it actually is that you’re talking about.

[00:16:26] Clay Finck: You mentioned one ETFin your book that had $132 million in assets under management, and it was called the Power Shares Dynamic Leisure and Entertainment ETF so investors were presumably getting exposure to the leisure and entertainment industry, but this fund held companies like McDonald’s and a bunch of the airlines companies.

[00:16:50] Clay Finck: And funnily enough, the ETF didn’t even hold the obvious players like Disney and I. It’s a big wake-up call that we really need to look at what it is we’re actually talking about and not just take a label like the leisure and entertainment ETF just take that and assume that’s what it actually is.

[00:17:10] Chris Mayer: Yeah, there are lots of examples of that in ETFworld, and I remember there was also a home builder stock or home builder, that I talked about in the book, and one of these ETFs had something like only a third of its assets in a home builder. So you know, you’re getting a whole bunch of other stuff other than that.

[00:17:25] Chris Mayer: And the power of labels. It can have really big consequences. I used to work in banking in the nineties and early two thousand and back then we still very much, people would very much trust the S&P ratings and AAA for securities. And so I know that bank treasury would buy and sell bonds just because they had an AAA rating.

[00:17:43] Chris Mayer: Wouldn’t do any more work on it than that. We used to joke, ’cause I was in commercial lending, I didn’t do a lot more work on individual company through field audits and all this other stuff. The Treasury Department could buy and sell tens of millions of dollars of bonds just because it had an AAA rating or not.

[00:17:56] Chris Mayer: And all that came undone with the big general financial crisis. And you saw that was a case where people were just trusting the label and not looking at what was in it. So this is, can definitely have real serious consequences overlooking these labels. 

[00:18:10] Clay Finck: And I think about how a lot of times people will attach a label to something, and when I relate this to investing, someone might think they’re a growth investor, they want higher growth, and when they see that a stock is like a value stock, then they’ll just like not even look at it and not even understand what it is.

[00:18:28] Clay Finck: And I think about how some of your holdings. Are in what some people might call unattractive industries. I just think about how you dug underneath the surface and just because it might be in what people call an unattractive industry, it still can be a very attractive long-term business.

[00:18:45] Chris Mayer: Absolutely, and this has happened to me multiple times. I know that I have old Dominion Freight lines in the portfolio. It’s this trucking company and most people trucking, look at it. It’s an unattractive industry. Why would you want to be involved in that? It’s lots of competition by then. You get into Old Dominion and you see that it’s return on invested capital is huge and it’s got this deep competitive advantage, over everyone else, and it’s been taking market share, doubles market share over the last decade.

[00:19:11] Chris Mayer: And then you see. In terms of results, it’s, it would be silly to just say I don’t own trucking companies because the economic to that are not something you expect to see. It’s a real outlier, even within its own industry, and I’ve had that before too. I never had too much success with retail or retail stocks and retail.

[00:19:28] Chris Mayer: But I own Dino Polska, which is Polish Grocery Store. And again, that’s getting beyond just its category and looking at the underlying economics, which is phenomenal for that business. And it made me want to look further. And so ultimately it’s been a very successful investment so far. So again real-world consequences for taking these labels at face value and in your, if your willingness to dig behind them can lead to some real insights.

[00:19:51] Chris Mayer: It seems really obvious. Sometimes when I talk about general semantics to people, they’ll be like, yeah it just seems so obvious, but it’s not the way people behave. They behave exactly like we’re talking about. They’re taking the label at face value and they’re allowing it to do their thinking for them.

[00:20:05] Chris Mayer: They’re not looking beyond it. Not looking behind it, and it’s lots of examples. We’ve talked already about a bunch. 

[00:20:12] Clay Finck: You also caution against confusing correlation with causation. Don’t fight the Fed is a phrase that gets thrown around a lot. And you’re right. Whenever you see an if x then Y statement, then you should distrust it.

[00:20:27] Clay Finck: And when I think about what drives stock market returns, I tend to think about sustainable growth. And free cash flows will ultimately drive long-term shareholder returns. And this book really makes me. Question a lot of my assumptions. So I want to just turn that question to you and have you talk about what you believe drives long-term stock returns.

[00:20:50] Chris Mayer: I’ll answer that, but first I’ll go back a little bit and on the if then the problem is that, and finance people do this all the time, is they want to just change one variable. So they’ll say okay, if interest rates go up, then the stops are going to go down because oh raises everyone, discount rate and the cash flows were discounted.

[00:21:09] Chris Mayer: Cash flows now at this higher rate and asset values will fall. The problem is, of course, in the real world, You can never just change one variable. There’s like all these other things that change at the same time. The underlying cash flows change. Expectations change. All kinds of things change. And so you can have a result that then is then surprising.

[00:21:26] Chris Mayer: So here we’ve had a period of time where the Fed has increased rates at a faster clip than ever has in the markets ripping. And there are lots of examples in the past where if you had known ahead of time what some outcome was going to be, you would still be wrong on the investment side. So one of my favorites in the book, ’cause I think I got this from Michael O.

[00:21:42] Chris Mayer: Higgins, pointed out and he had an example where even if you knew the price of gold more than doubled over some period of time. You thought to yourself, that’s pretty good. Logically I’m going to buy the largest gold miner Newmont. And then if you roll forward, Newmont’s stock actually fell 5% during that time again, ’cause it wasn’t just one variable to change.

[00:22:00] Chris Mayer: Newmont has costs that went up a lot. There are other factors in the business expectations involved. So you had a dramatically different outcome than you would’ve thought based on the initial conclusion. So that’s why you have to distrust any if then if X happens, then Y And when it comes to market.

[00:22:16] Chris Mayer: Because there are so many other things going involved going on. So when it comes to, you know what drives long-term returns, I think it helps just to get down to really basic stuff. So a business, you think of it as a pile of capital. And what rate can it increase that capital over the next 10 years that’s the fundamentals that drive returns.

[00:22:36] Chris Mayer: So it’s some kind of return on invested capital plus growth rate over time that really drives returns. What return you may get is also a function of the price that you pay. So in those three things, you know you have everything. And mathematically it can’t work out any other way. One of those three things has to lead to returns now.

[00:22:54] Chris Mayer: Being able to forecast or figure out what return on invested capital’s going to be over the next years and what’s the growth rate going to be and what kind of valuation going to be, that’s probably impossible to know. We’re all making the best guesses and what we can, based on our research and digging into why certain businesses are able to generate such returns and that’s what we do.

[00:23:16] Clay Finck: You’re a big believer in’s. Sarnoff wrote that the price of stock varies inversely with the thickness of its research file, and the fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most. In short, I sort of see this as the best idea.

[00:23:38] Clay Finck: They really stand out to you and they don’t require extraordinary levels of research to build that conviction. And I think this points to what you mentioned there, you want us to find the essential elements of what’s going to lead to this business’s success and then understand the factors that play into that.

[00:23:56] Clay Finck: And you filter out. About everything else. In a way, it’s drastically simplifying the extremely complex world around us, which is really liberating to do as an investor. So I’d love for you to talk more about Sosnoff’s law. 

[00:24:12] Chris Mayer: That’s beautifully put there, Clay. That’s good. That, that’s exactly it. You hit it right on its nose.

[00:24:17] Chris Mayer: I spent a lot of time trying to figure out what kind of essential things to know about a business that’s usually less than a handful of things. Really key the really important things. And then the rest of it are details that are not that important in the long term, although they could, might be important in the short term.

[00:24:33] Chris Mayer: It might have big impacts in particular quarters or whatever, but, Long term, they don’t matter much. So I spent a lot of time on that. When it comes to sauce, I was always a he-wrote a book called Humble on Wall Street, and I think it came out in the seventies. So the thickness of the research file is something that doesn’t hold up as well over time, but we get the metaphor.

[00:24:52] Chris Mayer: And he was big on a couple of things I learned from him. One was he really emphasized the skin and the game aspect, but also I liked Sosnoff’s law because it jives with my experience as well. When you’re really laboring over an idea and you have to rely on detailed spreadsheets and assumptions to justify it, it’s probably not a good idea.

[00:25:10] Chris Mayer: The ones that are really great are the ones that just jump out at you, and you’re just really excited and it seems obvious. I mean that again, it jives with my own experience. Some of the in best investments I’ve made have had very short I write little internal memos to myself, and some of ’em have been very short, and they’ve been great and the ones that I have to spend a lot of time on, sometimes those don’t do as well.

[00:25:30] Clay Finck: You really understand the qualitative aspects, you know the qualitative aspects of the business, of the management, and you’re not having to fiddle around with a complex model just to make the numbers turn out to be what you want ’em to be. 

[00:25:43] Chris Mayer: Yeah. And that’s right. And the models are sort of so sensitive to what assumptions you make.

[00:25:48] Chris Mayer: You could twist it and make it say whatever you want it to say. And the qualitative things anyway probably overrule a lot of the details in the long run. When you think about what drives returns for a business over a decade, it’s going to be related to things like people and culture and those qualitative competitive advantages we talked about.

[00:26:06] Chris Mayer: So yeah, I think that’s right. 

[00:26:08] Clay Finck: I’m also curious how meeting management teams in person, maybe on a call, how that sort of plays into this, because it seems like a lot of work to maybe fly across the world to meet a manager that you’re considering investing in. And then that also introduces a number of different biases, like the liking bias and different things.

[00:26:29] Clay Finck: Can you talk more about how meeting managers play into your research process? 

[00:26:34] Chris Mayer: Yeah, this is a great question because I do believe that Managers and CEOs are in that position, partly because they’re charismatic people, and so you go there and you’re charmed. So I try to do all the research first, and I know I have a pretty good opinion initially, and that’s not always true.

[00:26:50] Chris Mayer: Sometimes it’s happened where I’ve, if I haven’t met management, I’ve seen them or heard them, and then that’s been the attraction, something that they’ve said. Or philosophy that they’ve sort of put out there that I think, Hey that’s a clue that something good’s going on there. So I don’t, I haven’t met the management teams of all the companies I own, probably a little more than half I have, and I think it’s valuable to meet them.

[00:27:10] Chris Mayer: And it depends on the situation. Sometimes for a larger company where the disclosures are very good, the business is pretty simple, a management team is. A lot of transparency. You don’t get a lot of extra meeting them and you have to be frank about that. Like sometimes I think investors want to meet management teams just so they can check off that box and they can tell their investors we’ve met the CEO, but really, what value did you get outta that meeting?

[00:27:32] Chris Mayer: Sometimes you do want to meet them, find, particularly with smaller companies, and those companies are more accessible usually, but depending on the business, there might be things that you want to know that aren’t necessarily so obvious from the disclosures. Some management teams are not out there as much, or there’s not as much coverage, so there’s just not as much information, and management teams can be helpful in that case.

[00:27:52] Chris Mayer: So I like to do it, but it doesn’t always happen. 

[00:27:56] Clay Finck: Another thing I’ve learned from you and really admire about your approach is your appreciation for the reality that everything changes. A lot of people, I think form an opinion on something and they can be set in their ways I just read your book and I become very humbled by just questioning how little I actually know and questioning what I think I know.

[00:28:18] Clay Finck: I wanted to pull in this quote from Das that you brought in. It’s. From his writing titled Using the Structural Differential. If we accept that we don’t know all that’s going on around us, we’re less likely to be close-minded about our ideas, opinions, decisions, et cetera. If we accept that we don’t know all, we are more likely to develop a theoretical, experimental, and less absolutistic approach to what we believe.

[00:28:42] Clay Finck: What we understand or know or what we do. It reminds me of how you’re so willing to mention some of these individual names. You do it knowing full well you might change your opinion of this company tomorrow. That’s just for the reason that everything changes, businesses change, and industry dynamics change and I’d love for you to talk more about this appreciation for the appreciation that everything is always changing.

[00:29:05] Chris Mayer: Yeah. I think that’s something that. General semantics studying that has really helped bring home Korzybski has this idea, one of his ideas is he uses dates, so for certain ideas or opinions that you have, he recommends you just date it. You can either date it physically make a little subscript and date, or you can just mentally know that was your opinion at that time, and it has a way of detaching yourself from that.

[00:29:29] Chris Mayer: So, yeah, you hit it right on. Again, when you said I’m willing to mention those names because I know in my mind I’m not attached to these opinions at all. This is what I’m saying today is what I think right now. A year from now, it might be a different story with something so, and Ksky has a number of examples.

[00:29:45] Chris Mayer: Like he’ll say when you just look at old photos, you can see how you yourself physically have changed. You can see how things have changed. I know one of the things I do is keep a journal and one of the interesting things about keeping a journal is I try to write every day, even just stock market stuff, anything is it makes it harder to lie to yourself as far as what you thought back in time.

[00:30:04] Chris Mayer: And you can see how you. You’ve changed a lot as a person. Things that you liked and things that you thought you don’t think anymore. So it really makes you humble. I mean that everything changes and so if that’s your premise, you become less attached to opinions, less attached to facts today, and more willing to let them go and it’s time.

[00:30:23] Chris Mayer: It’s really been, I think, a very good and liberating exercise. 

[00:30:27] Clay Finck: Related to this idea of everything changes. I think there’s this profound mental model you sort of introduced to me that this time is always different. People try and make comparisons today to previous times in the past, and they’re trying to make predictions about what’s going to happen.

[00:30:45] Clay Finck: Is the stock market going to crash? Are we going to enter a recession? This mental model of this time is always different, which is again, very liberating. Because even some of the great investors talk about how history tends to repeat itself. Maybe it rhymes but not repeat. Exactly. And I think about how companies are always changing, market dynamics are always changing and everything is changing again.

[00:31:06] Clay Finck: And you talk about indexes and how they’re changing. So people will look at it. The S&P 500, and they’re not really looking at the companies in that index. They’re looking at what the price say in 2003, what’s the price in 2023? What are the multiples between the two? And the reality is that you’re comparing things that are entirely different because the index itself changes.

[00:31:29] Clay Finck: The top holdings in 2003 were much different than in 2023. 

[00:31:35] Chris Mayer: Yeah, that’s an important thing. That’s, again, mixes in with a lot of stuff we’ve talked about. The S&P index is a name, that has a label and people treat it as if it’s this comparison over. Decades of time and that it’s a valid comparison.

[00:31:49] Chris Mayer: But you know, just look at the top 10 and the S&P. Now look at it 20 years ago, look at it, 20 years before that, substantially different. And the mix of companies is significantly different. I think the S&P only added financials in the seventies or something like that. So there’s been. A lot of big changes to the index over time, and that’s going to skew your numbers price, earnings ratio, or whatever.

[00:32:10] Chris Mayer: So, that’s been very important and I love that this time it’s a different example too because I think it was Templeton who made that famous, where he said, this time is different, is most dangerous, blah, blah, blah. And I get the idea behind it. The idea behind it is investors want to try to defend bubbles or something, and we all know that they come to an end at some point.

[00:32:29] Chris Mayer: So there’s. There’s some to that, but then the other side is that this time is always different from every other time before that details are always different companies, different people. It’s a different world than now, than it was 20 years ago or 20 years before that in mind. That is the case, which may prevent you from falling into some traps.

[00:32:47] Chris Mayer: Finance, people in finance do this all the time. And Twitter, how many times you’ll see, now they call it X. You’ll see charts where someone will say I have some bear market going like this. And they’ll have a present. It’ll be like this, oh my God, it matches up perfectly and has no validity whatsoever.

[00:33:03] Chris Mayer: At all. Nothing to do with anything, but people love to do that. 

[00:33:08] Clay Finck: Just to use an example here, they might look at the S&P 500. I’m just throwing out numbers. These aren’t based on numbers. I actually looked it up, we’ll say the multiple on the S&P was 20 in 2003, whatever it was. And today we’ll say it’s higher than that.

[00:33:23] Clay Finck: We’ll say it’s much higher today than multiple today, and people will assume that, oh, we’re way above the historical means. So eventually things tend to revert to the mean. So is reversion to the mean itself a flawed concept? 

[00:33:39] Chris Mayer: Yeah I have another outlier opinion on this, which is that yeah, the versions are mean that people talk about is it is very problematic because there is no real mean, it’s your imagination.

[00:33:50] Chris Mayer: It’s a concept we’ve created, but it doesn’t, there’s no mean, there’s no market. No market says I have to go to this mean, and that mean is always changing, as you pointed out. You could look at the multiple now today, and the SB is a lot higher than it was say in 2003, but in 2003, Some of the biggest companies might include ExxonMobil, which might’ve been a very large company.

[00:34:08] Chris Mayer: 2003 might have been slower growth, more capital intensive businesses that are part of that index versus now there’s. Reasons why they might be very different and it doesn’t make sense to say that today’s S&P has to go to some mean that’s constructed based on constituents that aren’t even in the index today.

[00:34:25] Chris Mayer: I think that’s an overlooked thing. Mean version. You have to be careful again with what are the components. That you’re saying has to mean revert. It might be one thing if you’re looking at a company that does the same thing now, exact same thing it did now 20 years ago, and the margins don’t change very much and suddenly you’ve got a little dip.

[00:34:42] Chris Mayer: There might be something, some way to defend, a reversion to mean, but I’m very skeptical of those kinds of arguments. 

[00:34:48] Clay Finck: Again, I think it’s another case where people are just maybe simplifying too much. They’ll be like this company’s trading at the lowest multiple it’s ever been. I’m like, have you looked at the business and the actual where things are trending, where the world is trending?

[00:35:03] Chris Mayer: Sure. Yeah. I know there’s a prominent example, like I know a lot of people are getting excited about, say Danaher, and because it’s traded at the lowest PE it’s traded at in however many years. Do you look at the return on invested capital in Danaher? It’s been in decline. It’s not the same business that it was that people remember in their head at this Great.

[00:35:21] Chris Mayer: High performing conglomerate for all those years, it’s maybe it will get back there. Maybe there’s a thesis that it gets back there. But a lot of times when you see a company trading at the lowest level it’s ever traded at, there’s a reason. And be careful about just assuming that you can buy this today and go back to it, it’ll mean revert, and you’ll make this great return.

[00:35:39] Chris Mayer: going to get behind it and figure out why. There’s another phrase I to love. Marty Whitman used to say that, you know what the numbers mean. I think that’s a good idea. It’s not so important what the number is, figuring out more what it means, what’s, why is it there. 

[00:35:57] Clay Finck: Let’s talk more about that.

[00:35:58] Clay Finck: I pulled in a point here talking about accounting issues. Some investors, they base the value of a stock. Just looking at the pe, the price side of the equation. We know it’s just the market price. And relating back to the pe, people would say a high PE is an expensive stock and a low PE is a cheap stock.

[00:36:16] Clay Finck: But it can be difficult. You say you want to look at what the numbers actually mean and not what the numbers just show. It’s difficult because the earnings side of the equation, it can get murky and it can be up to the interpretation of accountants. So do you have any tips for our listeners for how they can better interpret earnings or how you’ve sort of come around to understanding maybe quality earnings versus not-so-quality?

[00:36:42] Chris Mayer: Right. Sometimes when I look for shock value, I’ll say something like PE is not a valuation tool because it just leaves out so much. The most critical thing it leaves out is how much capital is required to produce those earnings. So if you have a company that’s trading at, let’s say 10 times earnings, seems attractive, but how much capital is required to produce that dollar earnings and.

[00:37:03] Chris Mayer: Even if a business is growing you’ll hear people say as long as free cash flow per share goes up over time, that’s good. Or earnings per share go up over time, that’s good. But again, not necessarily because you’re missing out. The key thing, which is how much capital is consumed or required to increase free cash flow or earnings per share over that time, And in the market over the long term generally sorts things out By that return on invested capital and growth or some sort of return measure.

[00:37:29] Chris Mayer: Businesses that are able to generate a lot more cash with a lot less capital are going to be worth a lot more money than a company that requires a. A lot more capital to produce the same amount of earnings or cash flow. So I guess my advice would be, or recommendation would be is to always benchmark your price-earnings ratio if you’re going to use that on some kind of return.

[00:37:49] Chris Mayer: So again, it’s not just growth, but it’s also say something simple like ROE or return on capital, something like that, you have to factor in and you’ll find that the higher return companies are going to command bigger multiples. And if you’re not accounting for that you’re in a huge blind spot as an investor.

[00:38:05] Chris Mayer: So that’s one. And two, keep in mind that earnings are really an accounting convention. They can be widely different from company to company depending on what accounting decisions they make. Or even in today’s economy, we have so much value and intangible assets that don’t, or get accounted for. But sometimes it muddies of water sometimes if you’re, so you going to understand that.

[00:38:23] Chris Mayer: So those would be my big points of advice. 

[00:38:27] Clay Finck: It also reminds me, you talk about in your book how two companies in the same industry investors might look at the pe, but the accounting, how they deal with their accounting is different. So like you can’t compare one earnings number to the other because the way they’re calculating those earnings is different.

[00:38:46] Chris Mayer: Yeah. The way, if you have a company that is more acquisitive versus another one who does the work in-house that affects the goodwill and messes up their earnings number a lot. Also, this reminds me of another thing I see people do a lot is they’ll take whole markets and they’ll say P or price to book ratio in Japan is so much lower than it is in the US and therefore it’s cheaper.

[00:39:06] Chris Mayer: But as soon as you you just put up a simple thing like benchmark against return on equity, for example. Suddenly you understand why. The return on equity for a typical American company is two x higher or more than a Japanese company. I don’t know what the number is today, but I know it’s. I know there’s a big gap there, or people do that all the time.

[00:39:22] Chris Mayer: Different European markets. UK is a lot cheaper on a PE basis, and they’re looking at some index and comparing it to an American index, not knowing that the UK index is weighted with financials or energy companies that inherently have low PEs, lower returns. So you always have to go back and to those fundamentals and benchmark things against that.

[00:39:40] Clay Finck: You have a chapter towards the end of your book that talks about having a delayed reaction. People can be really quick to judge something, and it reminds me how investors they when a company releases its quarterly earnings, investors will go and check what the stock price is doing, and then they’ll judge whether the company had a good or a bad quarter based on what the stock price is doing without.

[00:40:02] Clay Finck: Looking underneath the surface. So Keith, share the story that you share in the book of your experience of why we shouldn’t be so quick to judge something based on our initial reaction. 

[00:40:13] Chris Mayer: This definitely made an impression on me. I was pretty young at the time, but I was at a financial conference and I delivered a talk, and afterward people come up and ask you questions and this one guy came up to me and he was wearing overalls.

[00:40:25] Chris Mayer: He looked like a farmer. I’m telling you it’s not, this is true not. And this happened. I couldn’t believe it. You’re at a financial conference, people all dressed up and this guy really stood out. So my initial impression of him was to write him off as this country bumpkin.

[00:40:38] Chris Mayer: But then as soon as I started talking to him, I realized that He was a very smart man. He was quite wealthy. And if I had thought about it a little more I would’ve maybe thought that, ’cause here, who would come to a financial conference, first off, not cheap to get there, and who would have the stones to come in there like that, except somebody who was supremely confident and themselves and knew what they were all about.

[00:40:58] Chris Mayer: So that was a big wake-up call for me. And then I remember thinking, I would never do that again. Prejudge somebody so much based on appearance like that. And that’s just one example. And there are other times when this has happened. The delayed reaction is something you always taught and it’s probably one of the more difficult things to practice ’cause you’re naturally, your mind just jumps to conclusions and delayed reaction teaches you not to delay those conclusions as long as possible.

[00:41:27] Clay Finck: I think again about the PE where people, know, just want to judge if a stock is expensive or cheap, just based on the PE that shows up on when looking up the ticker. 

[00:41:37] Chris Mayer: Yes, that happens. Part of it you can understand. We’re just inundated with so much stuff, right? We need to get through it, we need to filter, we need some way to sort through it and people develop shortcuts to get through them.

[00:41:48] Chris Mayer: But sometimes, yeah your filters are not set right and, but you have to set it somewhere. I know I miss you a lot too. I miss you a lot. Everybody does. But you have to find some way to cut it down. 

[00:42:00] Clay Finck: Yeah, and you apply your own filters in some way. For example, the owner-operator, you want companies with high levels of insider ownership, but of course, there are going to be great companies that don’t have high levels of insider ownership too.

[00:42:13] Chris Mayer: Of course. Yeah. I’ve missed out on a lot of that. The other big filter I use is, I’m very picky on debt and leverage. Probably more extreme than most investors, and so, I have missed out on a lot of things because they have leverage. But I’m okay with that because the universe that I have is rich enough and I don’t feel like I am constrained for ideas or somehow that there aren’t good winners that I’ve found.

[00:42:35] Chris Mayer: So you have to be okay with letting a lot of things go. 

[00:42:39] Clay Finck: Another thing that really stands out to me as I read more and more of your work is your very relaxed nature and your ability to not take yourself too seriously. I want to read a bit here from your book, you write Laugh More. I. Life may not be a joke, but it is often funny.

[00:42:57] Clay Finck: If you keep in mind the abstractions. Most of the serious business of the world seems portentous, trivial, silly, and ridiculous. You can’t help but laugh at it. I read this and I think about this and I think about Buffett and Munger and I see some similar characteristics in that they don’t take themselves too seriously and they truly want to enjoy life.

[00:43:17] Clay Finck: So I’d love for you to talk about. How this maybe ties into investing because you’re managing a fund, you’re managing other people’s money real money at risk, yet you’re able to detach yourself in a way and not become too overwhelmed by it, and not take yourself too seriously. 

[00:43:34] Chris Mayer: Yeah, I would say this is learned too.

[00:43:36] Chris Mayer: This is something I’ve had to work at, but it helps to do the a hundred baggers book, looking at the long-term performance of companies. One lesson that’s inescapable from doing all that is you realize that things that seem momentous at certain points in time, I. Really just sort of bleed out and are almost imperceptible over a longer period of time.

[00:43:54] Chris Mayer: So certain quarters, or even where stock prices can make violent moves, 10, 15% move at the time they seem like, wow, it gets stressed out. Something drops 15% or whatever. But you look back in time, even severe bear markets and you look back in time and it’s a little bump in a chart. So when you zoom out, keep a bigger-picture perspective.

[00:44:13] Chris Mayer: That’s helped me a lot. It’s really helped me a lot to do that. But I do think it’s really important. I mean it’s, I think I’ve enjoyed it a lot more the way I am now. Just more relaxed about it. I’m a little more detached, taking a good long view rather than just being so intense where you’re so focused on the moment and the quarter or whatever is going to happen.

[00:44:32] Chris Mayer: And so those guys, buffet, Munger, they’re wise in a lot of ways. And this is one too when Buffet says he. Tap dance into work every day and enjoys it. Some of it has to be this. He can’t take it that seriously. 

[00:44:44] Clay Finck: To my understanding, you spent a number of years traveling the world, going to different countries.

[00:44:50] Clay Finck: So I’d be interested to hear sort of your those experiences and how that impacted you and maybe how that opened you up and maybe impacted you even as an investor and just understanding how different countries are different, how cultures are different, and yeah, I’d love for you to take that in whatever direction you’d like.

[00:45:08] Chris Mayer: Yeah, I mean I’ve, I did a lot of traveling all my twenties and thirties. I went everywhere,, all through South America, all through Asia, and especially those places and even some far fun places. I remember going to Myanmar when it just opened up and that was a real eye-opening trip. I remember they didn’t take credit cards.

[00:45:25] Chris Mayer: I carried cash and it was amazing. And people, I remember I was traveling with a friend of mine, people stopping, wanting to take pictures with us. ’cause we were one of the first westerners that wandered in there. Town or whatever it was. So that was a really remarkable trip. I’ve been to some far places at Mongolia.

[00:45:41] Chris Mayer: I remember doing that with Harris Berman. We had some good adventures there. So I think it’s affected me a number of ways. One is, yeah, I mean I’ve always had this more global focus so that transfers over to my fund in the way I manage money. I have 11 positions now and I think only four are us listed.

[00:45:56] Chris Mayer: So I’m more comfortable going other places and I’ve learned a lot too about what doesn’t work. ’cause I’m a lot of that. I’ve tried to invest in certain. Countries and you realize how difficult things are. Things don’t work out quite the way you think and you learn a lot more about disclosure, risk of disclosures, and yeah.

[00:46:12] Chris Mayer: So I think it’s been amazing just personally that having those experiences that also it’s definitely informed my investing by just widening the horizon and making me much more willing, interested to explore markets outside the US 

[00:46:25] Clay Finck: I’m sure many of the listeners are wondering how in the world were you able to afford traveling the world for so many years.

[00:46:31] Clay Finck: Were you doing the newsletter, a subscription newsletter, or what were you up to? 

[00:46:36] Chris Mayer: That’s it. That was the thing that subscription newsletter was wonderful to do all that time. Used to say, people pay me to just go out there and travel and meet people and I’d come back and write about what I thought, what I found.

[00:46:49] Chris Mayer: And that was a great gig that I did for a long time, but that’s how I was able to afford it. Yeah. Subscriptions from my newsletter. 

[00:46:57] Clay Finck: Amazing. Chris, this book, how do you know if you enjoyed this conversation? Those in the audience, I’d highly encourage you to pick up the book it’s one that really made me think, and I’m sure, Chris, you’ve read many books that have done the same for you, so I’m curious if you could share just one book with the audience that you’ve really enjoyed.

[00:47:16] Clay Finck: It might be a recent one related to the general semantics or maybe just honestly anything. 

[00:47:23] Chris Mayer: I could give two, one more recent that I just actually wrote a blog post about it, which was Rick Rubin’s book, the Creative Act. Definitely really enjoyed that. A lot of good thoughts in there around creativity and awareness, so I would definitely recommend that not a difficult read, but one that you all definitely linger over the pages and think about, so, Ruben if you don’t know, he was a, he’s an American record producer and has been involved in all kinds of great albums and a long list of artists, so he’s got some great experiences there.

[00:47:54] Chris Mayer: And I think it definitely relates to investing. Investing is also creative when you think about it. We are trying to create a portfolio and connect ideas and a lot of what Ruben says about awareness is definitely applicable to investing. So I would recommend that as a fun read. Another one.

[00:48:10] Chris Mayer: You mentioned something more along the lines of general semantics. This is not exactly a general semantic book, but I found it to be a really good kind of fellow traveler. So there’s a philosopher named Richard Rdy, and probably I would say one of his Harley’s most accessible books. It’s not very long, it’s based on a lecture he gave.

[00:48:27] Chris Mayer: It’s called Philosophy is Poetry and I would definitely recommend that it’s easy to read and he makes some really good points in there. It’ll make you think about how you think about philosophers or thinkers of any kind. And talks about, one of the things I like in there, he talks about the answer to a great poem is a better poem and there’s never a.

[00:48:46] Chris Mayer: A stopping point in what we can know or what the way we can describe things. And so any kind of philosopher, any sort of thinker is really just giving us a description. And once you think of it in those ways, it’s not about trying to prove who’s right or if this one’s wrong or this one’s better. This is one description, this is a separate description, and you can learn from both.

[00:49:04] Chris Mayer: I think it’s, it’ll change the way you read, I think, and the way you think about thinkers generally. 

[00:49:10] Clay Finck: I’m excited to dive into those. Chris, I don’t want to take too much of your time here. I really enjoyed this chat and hope the audience does as well. So, as always, I want to give you a chance to give a handoff to any resources you’d like to share, especially your Twitter, your blog, and anything else.

[00:49:26] Chris Mayer: Yeah if listeners want to follow me I’m on Twitter. My handle’s @chriswmayer, M – A – Y – E – R, and then I write an occasional blog over at Woodlock House. So Woodlock House, family Capital, you Google, it’ll come right up and you’ll find my blog there.

[00:49:42] Clay Finck: I’m a subscriber and whenever I get that email in the inbox, I am sure to drop everything and check it out.

[00:49:48] Clay Finck: I read the piece on the Creative Act by Rick Rubin and really enjoyed it. 

[00:49:52] Chris Mayer: Thank you. 

[00:49:53] Clay Finck: Awesome. Thanks again, Chris. Really appreciate it. 

[00:49:56] Chris Mayer: Yep. Thank you, Clay. 

[00:49:58]Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. 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 Investor’s Podcast Network. Written permission must be granted before syndication or re-broadcasting.


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