[00:03:00] Hari Ramachandra: This time he was somewhere, he didn’t really go for the cheerleading. He was thoughtful. He said there are a lot of things going for United States, but tribalism has to cover so, and he is not so sure. I think for me, that was the key takeaway from the meeting.

[00:03:19] Stig Brodersen: How about you, Tobi?

[00:03:21] Tobias Carlisle: I think it’s amazing that they can sit there for three hours at a time eating peanut brittle and drinking coke and just field questions. They’re very diverse questions. Sometimes it’s about specific to the Berkshire Hathaway and sometimes they’re sort of more philosophical and Buffett’s ability to sort of say something succinctly is amazing. Last year they only got through five questions before lunch, something like that. And this year I thought the answers, Buffett rambled a little bit last year and he’d get off topic a little bit on some of the questions and I thought it was a little bit, it’s tough to be that kind of in your nineties and be coherent and cogent.

[00:03:54] Tobias Carlisle: There aren’t many around who are in that sort of with that intellect that sustains into that age. But this year I thought he was back better than ever. You got to hear how fast he’s spoke in the sixties and seventies. He now speaks at sort of at a normal pace now, but in the sixties and seventies he’s spoke exceptionally fast pace.

[00:04:12] Tobias Carlisle: So maybe he’s just come back to the crowd a little bit. Munger, amazing that he’s a hundred in February if he makes it but it’s an amazing run and he’s brilliant as well. Yeah, I really enjoyed it. I just sort of soak up the philosophy that they have. I think is more about trying to survive. First of all, trying to do the right thing. Second of all and I find both of those things really attractive as businessmen and as investors and then everything else is sort of secondary to that. But those two things really stand out to me and I just like going in there and soaking that up once a year. I’ll be sad when it doesn’t happen anymore, but it was a great time. Great seeing everybody.

[00:04:47] Stig Brodersen: Yeah and it was absolutely wonderful and I agree with you Tobi, last year was like, he had, I don’t know, three to five things he really wanted to say and it didn’t really matter what kind of question he would get because we would just like go on and like say whatever he wanted to say about a specific topic.

[00:05:02] Stig Brodersen: This time he was very much like, no, we have, I want to say he was 60, he mentioned, and he said 26, now we are, and we still have like 34 to go or whatever, just before lunch. And like, so he was, he very much to the point, there was some really great questions about like, not just about the successions and all that you always have, but like how to motivate people who are financial, independent, running those subsidiaries.

[00:05:21] Stig Brodersen: I really like that question and I really like the way that they responded to that. So yeah. And then I had a chance to hang out with you guys. That was that was pretty cool.

[00:05:30] Tobias Carlisle: Yeah. I was sad I didn’t cross paths with Hari but I sort of have to run from event to event.

[00:05:35] Hari Ramachandra: Yeah, I guess we missed each other by an hour or so.

[00:05:38] Hari Ramachandra: Tobi, I think there was one TIP get together I was part of, I was told you’ll arrive and Stig hadn’t arrived but then Stig came later. But then I had to go, my son was really hungry, so we have to run.

[00:05:52] Stig Brodersen: Fair enough. Alright, so we have not been drawing straws who are going to kick this off, but Hari, you… cause you have to go here a bit later in our conversation, so why don’t you take it from here.

[00:06:04] Hari Ramachandra: Awesome, so good to be back in the mastermind pitching ideas again. So my pick today is Palantir and I’ve been thinking about this company and Tobi and Stig I know we spoke about it offline as well.

[00:06:17] Hari Ramachandra: I’m still forming my conviction around this idea, so that’s why I was kind of hesitant to pitch it here but I felt it was timely to get your thoughts on. For those who are not aware, Palantir is in the broad area of data analytics, but it’s really hard to bucket them into any one category but data analytics kind of, but they’re into security as well.

[00:06:39] Hari Ramachandra: Their claim to fame was their willingness to work with the government agencies and especially after 9/11, the work they did caught everybody’s attention. So that’s and then also the eclectic CEO, Alex Karp who moved the company from Silicon Valley, San Francisco to Denver squandered by Peter Theil back in 2003.

[00:07:02] Hari Ramachandra: So it’s been around for a while. They took a while to really identify their markets and as we stand today, the majority of the revenue comes from government agencies, especially working with security agencies. They’re now famous for helping Ukraine in the war with Russia with the intelligence in their software.

[00:07:22] Hari Ramachandra: Ukraine has actually been able to do very well is what Alex Karp claims what their core technology is about bringing data in desperate places within an organization, whether it’s started with government, with different departments, harmonizing them, having that data available to provide insights and intelligence and recognizance, and it’s a very complex problem.

[00:07:49] Hari Ramachandra: There are many companies in this area that are trying to solve this problem, and it’s a real problem for government, obviously, like, especially when we have FBI, CIA and other government agencies or local police departments not talking to each other. In fact, there is a YouTube video on how 9/11 happened and many months before, there were some agencies who knew something will happen but they were not able to connect the dots and that’s what volunteer claims to do.

[00:08:20] Hari Ramachandra: They’ve helped agencies connect the dots. In fact, this problem also surfaced in the work shared annual meeting when Ajit was asked about Geico and how Geico is doing, and he talked about one of the major challenges Geico is facing is that there are so many software’s and so many sources of data. I forget the number, whatever it was in the thirties or forties.

[00:08:44] Tobias Carlisle: Six hundred systems

[00:08:47] Hari Ramachandra: Thank you Tobi. It’s really hard for them to kind of connect all this together and I was thinking if somebody from Palantir had attended this meeting or at least watched this, they will be making a call to Geico. Palantir probably will be really a good fit. So they have two platform. One is Gotham, which is mainly focused on security agencies and government customers.

[00:09:10] Hari Ramachandra: And another one that they recently, that is three or four years back came up with is Foundry but they’re all powered by another platform called Apollo, which is basically not just software delivery of data or harmonizing of data, but also delivery of the software. They’re cloud native, so they have really amazing partnerships with Microsoft and AWS.

[00:09:33] Hari Ramachandra: They have been growing their revenue at the rate of 40%. This year, it dipped a bit low but their revenue growth is in the range of 40%, close to 50% back in 2020. Today, their revenue is close to 2 billion. Their market cap is 22 billion. It’s definitely not cheap by any standard. They were losing a lot of money, but they’ve been able to kind of get close to break.

[00:09:57] Hari Ramachandra: So their earnings per share is negative 26 and the market in which they’re playing. So far, 55% of their revenue comes from government agency is only 45% from commercial. But there is a huge potential for what they do. Like I believe it is the VP who took out Chevron. I need to, one of the oil majors actually took a 1% stake in this company after they saw what volunteer can do for them.

[00:10:25] Hari Ramachandra: And I am, I’m forgetting which one. It was VP of Chevron, one of them, because that was the impact. And when companies use their software, they see the difference and. Alex Cox in many of his interviews, he’s always saying that we are not slideware like many companies, they just have power points, but not software.

[00:10:44] Hari Ramachandra: But he says like, try us. And that’s where their strength comes from. Their market in which they operate as data analytics, which is 41 billion today in terms of total address for market, it is expected to grow to 346 billion by 2030. So they’re kind of set up in the right place. They have the right technologies with 4,000 plus employees, they’re the right size, they’re very efficient.

[00:11:08] Hari Ramachandra: Having said that, everything is not rosy. I think for them it’s a go-to market. Their per unit cost is really expensive in the hundreds of thousands of dollars. So usually they play in the big enterprises, but their sales force is not the typical sales team. They have a very small percentage of their employee base sales team, only 15% I believe.

[00:11:31] Hari Ramachandra: They’re struggling to kind of, making roads in scale. So that’s where it’s more like a venture but is they can solve their sales and channel problem. And build an ecosystem they can really grow from here. So that’s the bit here, because their product is, they have a killer app or a killer product, which is one of the best.

[00:11:51] Hari Ramachandra: But they need to figure out the guru market strategy. They have been growing, but I can, if you look at something a company like Snowflake, which is growing a hundred percent year over year for past three years with around 22 billion market caps, it is valued at 55 billion today and then EPS is negative $2.50 cents.

[00:12:10] Hari Ramachandra: So they’re losing a lot of money but they’re able to figure out the go market strategy and one of the criticism of Palantir is that it doesn’t have a starter package or a modular breakdown of their product so that somebody can just onboard with a slower cost and then kind of, gradually expand where Snowflake offers that.

[00:12:33] Hari Ramachandra: And also there is no easy on ramp to them in the sense you go to Snowflake, you can. Sign up for a free trial on Ram to the product, do a trial use. That part Palantir is not so smooth. So those are some of the challenges. So it’s not like it’s a sure shot but if they can figure that out, then there is huge potential for this company.

[00:12:57] Hari Ramachandra: So it’s more kind of a venture, but so Tobi, this is definitely not value. So there is a lot of ifs and buts there. But as a technologist, when I look at their products, I have looked into a lot of their demos, have seen their CTO and the CEO who really deeply understands the problem set, they understand what ontology very well.

[00:13:22] Hari Ramachandra: They’ve launched an AI platform recently and they have been doing AI all the while. All the while because it’s all about anomaly detection, signals and synthesis and prediction. So they’re really prepared well for the next era in that sense. And they’re prepared to empower many enterprises.

[00:13:43] Hari Ramachandra: So that’s the bet here but I wouldn’t give it a hundred percent probability that it’ll work out the way I’m projecting it. Well, if they can figure out their go-to market, if they can figure out and build a good ecosystem and a good on ram to their products, they have a huge potential and this might be a very undervalued company if that happens. That’s my pitch and looking forward to your feedback.

[00:14:10] Tobias Carlisle: As Hari was delivering that, I was thinking, I’m so glad we have Hari on this podcast because this is just not something that is understandable for me. The way that I invest is mostly through the financial statements, trying to model the ability of a business to earn in the future.

[00:14:27] Tobias Carlisle: And with something like Palantir, it’s just, I don’t have enough domain expertise to be able to do that, and I can’t read the financial statements, see where the business can get to. I tend to like more mature businesses that are at the point where they’re returning capital to shareholders, where they’ve got material free cash flow that they’re returning and they’re still able to grow with what they’ve established for Palantir.

[00:14:52] Tobias Carlisle: It’s just not enough has happened for me to make those assessments. So it’s just something that’s, it’s just too hard for me. But I was impressed listening to Hari, it sounds attractive and when they figure out that go-to-market strategy and I can get a better idea about how they are. There are many things that are very attractive about it but I’ll have to defer to Hari on this one. I’m going to pass.

[00:15:14] Stig Brodersen: I just saw that Cathie Wood of Ark Fund just brought it back today. So I don’t know if that’s a bull sign or a bear sign. I’ll let the listeners decide how they feel about it. One thing that I’m not a not a big fan of is just the way that she has outstanding, it’s just ballooned.

[00:15:31] Stig Brodersen: It’s almost parabolic. And I know like all the seven past quarters it’s gone down the pace. It’s been even more than I, I looked up more than a hundred percent of revenue. It’s like, is that possible?

[00:15:43] Tobias Carlisle: Is that as part of the listing or is it subsequent to the listing?

[00:15:47] Stig Brodersen: No, this was in 2021 and today it’s around 26 ish, and I’m not really sure what to do about that.

[00:15:54] Stig Brodersen: If you look at the revenue number, it looks great. Like, like Hari said it’s, it looks nice, but then you go revenue per year and it looks…that’s nice. Who knows? I have the chance to read a few stocks analysis before I jumped on this call. There were quite a few that seemed pretty bullish, but I, it, oh man I hate to come out here.

[00:16:13] Stig Brodersen: It was just like, it was in my two hard piles. I have a really hard time wrap my head around a company operating like this and how they’re going to change the future. I don’t doubt that they’re as good as Hari is saying, but for me, doing the valuation piece, it’s just really tricky for this company, in that framework of doing the destination analysis, I have an idea of, the pick I’m going to talk about here today, but it could be any other pick where I was like, this is sort of like how I think it would look like in 10 years with all the mistakes that I can possibly make and biases of not of, just be wrong.

[00:16:46] Stig Brodersen: I have a really hard time figuring out where Palantir is in 10 years essentially. It stems from, I have a really hard time figuring out where they are today. So it’s just above my pay grade.

[00:16:57] Tobias Carlisle: Hari, can I just ask you a few questions? You describe it as a killer app. Can you just for the non-technologist like me, why is it a killer app?

[00:17:05] Hari Ramachandra: I think that’s a good point and Stig, I’ll also come back to your point, but thank you. This is really helpful feedback. So when we say a killer app, what I mean by the Tobi is think of like ChatGPT as a killer because what it did was it caught the imagination of the public and also it is solving a use case.

[00:17:26] Hari Ramachandra: It really honing on a use case that is really impactful for the users. Or it’s basically either scratching an itch or really solving a pain point for many companies. So in an enterprise world, a killer app is something that is where the customers will chase you to buy your product. Like what Aji was describing in the Geico is like that basically there is no capability within that organization to solve that problem.

[00:17:56] Hari Ramachandra: It’s not a, it’s not an easy problem, otherwise they would’ve solved it. And what Palantir has done is, has figured out how to solve this problem because they solved a more complex problem with government agencies, especially counterterrorism security and all that stuff. So dark expertise. Now they’re applying to commercial and enterprise.

[00:18:22] Tobias Carlisle: So the problem is that you have all of these different systems that don’t talk to each other, and they’re producing data that’s humans have to sort of put together across these systems. And so what Palantir does is they create some sort of AI or some ability to read this data and put it all together into one user interface.

[00:18:44] Tobias Carlisle: So that you can then automate the sort of monitoring and analysis of these data feeds, and then you’re able to make some sort of analysis that rolls up into something that’s understandable by a human, and you can see where there’s some deterioration or some, something is going on so that you can then monitor that system more closely is that description?

[00:19:09] Hari Ramachandra: Yeah, that’s a very good summary of what they do but then there are certain problems with doing that. So bringing all the data together is one part but making sure it is secure. And also making sure that, how do you apply security predicates so that not everybody can access everything, but they have only certain view of the data, for example.

[00:19:34] Hari Ramachandra: That’s a very complex problem. It sounds as, so it’s like just not a feature, but it’s core to that product because. The reason we don’t bring all the data into one place is because of security. So having that security architecture in place, having the right security posture for the product is critical as well.

[00:19:56] Hari Ramachandra: And Palantir seems to have solved both of these problems. Actually, that part is well figured out. Like once you have data harmonized and secure, you can apply ml or you can use visualizations, you can use anomaly detections, or you can also use predictions. So those part is figured out.

[00:20:14] Tobias Carlisle: Thank you.

[00:20:15] Stig Brodersen: Alright, I think that was what we had for Palantir. I am going to throw it over to Tobi.

[00:20:22] Tobias Carlisle: Thanks, Stig. My pick today is Virtu Financial. Virtu is a high frequency trading shop that does market making and execution across an enormous number of financial markets. Anything from ETFs. So they provide the backend infrastructure for many ETFs, not mine, but they are one of the parties that I could have used.

[00:20:45] Tobias Carlisle: They essentially make a market in between, it could be Forex Foreign Exchange, it could be equities, it could be futures, options. They’re trying to buy and sell at the same time, standing in between two parties and to take a penny or so every single time. So they rely on having the best technology, good connections.

[00:21:08] Tobias Carlisle: They are the second biggest market maker for retail. They are 25% of the market. Citadel is bigger. Citadel I think is about 40% of the market. The business does well when there’s more volatility in the market and there’s more trading. So they did very well through the whole meme stock explosion.

[00:21:29] Tobias Carlisle: And there have been a few sorts of developments there that the retail public has largely moved away from that speculative mania. And so their financials are going to have to normalize beyond that. And so that’s been, I think that’s one of the main reasons that the stock has traded as low as it is because the last few years don’t look great on a revenue basis just because they’ve come down like that.

[00:21:51] Tobias Carlisle: But there have been some other developments that are sort of interesting so that, there’s been this explosion in these zero day to expiry options. So people to speculate, inspire options in options that expire today or tomorrow. So zero days to expiry options mostly inspire, so people come into spy and trade in these things.

[00:22:13] Tobias Carlisle: And there was some question initially whether they would be beneficiary of that or whether that would hurt their business. It seems that it’s mutual to slightly beneficial but there is also this other concern that if you, this is a slightly complex idea, but the abstract version of it is basically this, that sophisticated market participants can use options to move the underlying equity.

[00:22:38] Tobias Carlisle: And so it’s called gamma hedging, gamma manipulation. But basically what they’re trying to do is they can move the underlying by piling into the options, and then the market maker has to hedge their exposure by buying it. So if I wanted to push the stock price up in something, I’d go and buy a whole lot of calls, which would then make the market, make it a hedge, a call, which is the ripe but not the obligation to transact at a higher price in the future.

[00:23:05] Tobias Carlisle: To hedge that position. It’s necessary for the market, make it to buy the underlying, so they buy the equity, which incrementally pushes up the price. And so there was some, there’s been some sort of conspiracy theory that there’s some gamma manipulation in Tesla stock, for example, that there’s a lot of option activity and that to hedge it, you then buy the underlying and it pushes up the stock price.

[00:23:29] Tobias Carlisle: So are they hurt by that? Are they able to trade their way around? That seems that in the zero days to expiry options they seem to be okay neutral to maybe slightly beneficial because more trading is good for them. They’re trying to be market makers on the other side. The business though, has suffered because of this sort of the disappearance of the meme stock.

[00:23:49] Tobias Carlisle: And it attracted a lot of attention from the SEC in that payment for order flow where Robinhood, for example, They could give you a free trade because they sold the trade information to one of the market makers who then front ran the trade, and they made that penny in front of the Robinhood trader who was trying to make their own.

[00:24:10] Tobias Carlisle: And they were very wide bit ask spread. So they were making a lot of money and that’s why Robinhood was able to be, that’s how Robinhood generated its income. They were paid by these market makers. The SEC doesn’t seem to like that. And so there’s this ongoing reform process. I think that some of the changes are to the market structure are going to be good for the market makers.

[00:24:30] Tobias Carlisle: Some of them are going to be bad for the market makers. They’re pushing back against the bad ones. They’re trying to adopt the good ones. They’ve also received a wealth notice, which is that the SEC will take some enforcement action against them. And we don’t know what that is yet, but they’re going to be, it gives them an opportunity to respond and negotiate because these are quite complex.

[00:24:47] Tobias Carlisle: Businesses. And so the SEC is not necessarily as familiar with the underlying nature of the business as the business themselves. So they give them these notices and they then negotiate. All of that has sort of pushed the price of this stock down to, it was $18, last time I looked, it was closed at 18 last night.

[00:25:08] Tobias Carlisle: In addition to that, they have this reasonably complex capital structure where they’ve got various different classes of shares. The insiders hold these shares that have 10 times the votes of others. So the insiders are in control of this company. And so you have to kind of trust the insiders here that they know what they’re doing.

[00:25:24] Tobias Carlisle: They also, they get quite a lot of their options and all of these things being paid out to these guys all the time. So I’m not describing something that sounds particularly attractive. I appreciate that and I think that if I’m being completely honest about this doc, I think it’s…my main attraction to this, I think that this is more of a trade than an investment that you hold forever.

[00:25:46] Tobias Carlisle: But I’ll explain to you why I’m attracted to it from a trading perspective. And when I say trade, I mean you’re looking at to an event and beyond that event, it’s less interesting. And so the reason that I like this stock here is that it is, it’s trading close to its lows over the last few years that basically free cash flow, generative as interest rates go up, that’s likely the cost of funding will go up.

[00:26:11] Tobias Carlisle: And that’s been an advantage for them. Their cost of fundings been virtually zero, but they do have some debt interest rates will go up because they’re trying to, they’re trying to trade on margin for the most part on both sides of the or they’re trying to trade on, they’ve got some debt in the business cause they can do that.

[00:26:27] Tobias Carlisle: Their cost of funding will go up. So that’s another reason why it’s probably depressed, but. The event is that if we get some market correction, if we get a lot of volatility returning to the market, they will be massive beneficiaries of that volatility and they could have an explosive period where the rest of the market is going down.

[00:26:45] Tobias Carlisle: And so the thing that I like about it is that it’s basically a market hedge in the event that you get a very substantial crash, which I think there’s a reasonable chance that we see something like that in 2023 or early 2024, very early 2024. So my attraction to it is, I think it’s undervalued. It’s quite free cash flow.

[00:27:06] Tobias Carlisle: Generative, they’ve been using that free cash letter buyback stock, I think in my notes to sort of the lesser voting shares that the public holds. There are about 122 million of them in 2020. At year end. There were 95 million of them in the last queue. So they’ve bought back, I don’t know what that works out to, but 20% say of their stock.

[00:27:29] Tobias Carlisle: Over that period of time as they’ve come down. So I think they think that they’re undervalued at that level. They also pay a very substantial dividend. So the dividend is now, the yield on the dividend is over 5% at $18 where it’s currently trading. So the trade looks to me like a positive carry into a potential correction where they would do very well.

[00:27:50] Tobias Carlisle: And it would be one of those things that should perform if we get a crash. And so that’s, it’s a dirty shirt and there’s things that I don’t like about it, but that quality, that it has positive cash flow, positive carry into a correction is the reason that I’m attracted to it. I hold it in Zig and it’s one of the 30 positions.

[00:28:11] Tobias Carlisle: And you, as I’m trying to build a portfolio that will perform there rather than focus too much on any individual stock. And I can rebalance out of any of these positions at any given time. And I’ve got to rebalance that coming up in a month. And I don’t know between now and then what the circle clicks at.

[00:28:27] Tobias Carlisle: If you return to my portfolio, if you hear this and it’s past a month and you return to the portfolio and you see it’s not in there, and I’m explaining this, you know why that could have happened. I don’t know what happens. I have an idea what my model looks like all the time, and it’s well inside my model and it’s undervalued and it’s got that sort of quality in it, but it’s a, there’s always a possibility that I rebalance out and I just want to make that plain to everybody from the outset.

[00:28:49] Tobias Carlisle: But in short, positive, very material dividend, good potential for something to happen in the event we get some market instability, volatility, they’re buying back stock in the interim, which is always I think is a very good sign when a management will do that, particularly when they do it in material numbers.

[00:29:06] Tobias Carlisle: Like there’s 20% over a few years is a very good number. And then the downs, the risks and the things that I don’t like is the, I don’t like the different share classes. The share classes make it difficult to sort of determine what the true market capitalization with. You’ll see it quoted at 1.7 billion in some places, which is only counting one set of shares.

[00:29:24] Tobias Carlisle: You’ll see at 2.9 billion in other places. They’ve got a little bit of debt in there. The cost of funding will go up with interest rates going up. And there is this ongoing negotiation with the SEC that has culminated in wells notice and wells notice of enforcement. So that’s something that you shouldn’t ignore.

[00:29:40] Tobias Carlisle: But all of those things are the reason why I think it’s cheap. It’s potentially explosive in the event that we get some sort of big draw down. Happy to take questions, gents.

[00:29:49] Hari Ramachandra: Well, thank you Tobi. This was very educational for me because not just about the stock, your kind of also explained how the market works, especially the Tesla case was very interesting.

[00:30:00] Hari Ramachandra: So thank you for that and what got my attention is it’s more like a mining stock or any other cyclical stock is what you’re saying. So what you’re, what I understand is you’re catching it at a low point and when things go back, when low point, I mean when things are stable right now in, in whatever way, when it is calm, the markets are up.

[00:30:23] Hari Ramachandra: But when the volatility picks up, you basically sell out because that’s when they’ll make a lot of money. The only question I had was, is there any tail risk for this company where they can go out of business or their business can be materially impacted or are they present to kind of survive this cyclical?

[00:30:43] Tobias Carlisle: They are very good at generating free cash flow. They’ve been very good at generating revenues. As the business shrinks, the business seems to scale quite nicely. They can just scale the business down, scale the business up. So to me that says that they’ve got that sort of flexibility in the business margins compress as they go down and the margins will expand as they go up.

[00:31:03] Tobias Carlisle: The business was an amazing looking business when they were going through in 2019 and 2020 because the, there’s just so much trading and it was less sophisticated trading that jumps across it ask spread to, for them. That’s great. They make lots of money and they’re in 25,000 interests.

[00:31:22] Tobias Carlisle: There’s always something that’s, there’s always something that’s happening that they can, there’s always some place for them to make money. They’ve been kind of cagey about the zero days to expire options. I suspect that they can probably make quite a lot of money in there, but it remains to be seen a little bit.

[00:31:35] Tobias Carlisle: I don’t think that it has the donut risk. I’m not as confident as I am said about, lots of the other consumer facing good companies, but I think that they’re seeing pretty gnarly conditions at the moment and they’re still working their way through. I think the big risks are that. If the s e c does something to change the nature of that market making business, that’s a black swan that I don’t know exactly how that plays out, but I think that they’d be crazy to do something like that cause it might completely change the structure of the market that they, I mean, they seem to be trying to change the structure of the market a little bit, but I’m hoping that it’s mostly, they seem to say, Virtu seems to say that the people who will be hurt are the investors and that they’re going to be fine, whatever happens.

[00:32:22] Tobias Carlisle: So I’m taking that at face value. I think that they’re in a good position. There’s a little bit of debt in there, but they’ve been doing some acquisitions that’s, it is largely from the acquisitions and I think probably they’ll bolt something else on when there’s some more volatility in the market. I suspect it makes them stronger rather than hurting them but if volatility completely drains away and the SEC does something, then there’s always the risk that, yeah, that something happens there.

[00:32:48] Hari Ramachandra: Thank you Tobi.

[00:32:50] Stig Brodersen: I don’t know if I like the company. I sort of do and I sort of don’t, so wow. That’s a terrible way to start.

[00:32:56] Tobias Carlisle: That’s where I am.

[00:32:57] Stig Brodersen: Yes, right. So I like the price for sure. I like the free cash flow. That’s amazing. You already mentioned the capital allocation with the buyback of shares, just from 2021 to 2022, the win from 117 million to 104 million share, like, it’s material. And like you mentioned, the yield right now is more than 5% under dividends.

[00:33:18] Stig Brodersen: So this is really interesting what’s going on. They say that time is a friend of a great company and the enemy of a bad company. And I don’t really know how to put this like this is not a company that’s 10 times bigger in 10 years. That’s not the business model at all. But whenever you look at how cheap it is, like there’s so much catastrophe priced into the price probably cause of the regulatory headwinds.

[00:33:42] Stig Brodersen: And so I don’t know what the probability of this of the s e c, waving the white flag. I would not estimate it’s that great. But if they did like the stock price would just, go to the moon and something like this. And even if they don’t structurally change what’s going on with virtue, I would say that you are priced in for something good to, to happen.

[00:34:00] Stig Brodersen: Seems like they have gotten a lot of headwinds from retailers for retail investors like you mentioned. But they, I can see they also do a fair amount of business for institutional clients, which is interesting in itself. I would also imagine that they would benefit from a secular trend of just more trading in general.

[00:34:17] Stig Brodersen: I’m not so much talking about what happened during the pandemic, but just I pull up some stats here. The average holding period for individual stocks in the US is now 10 months and down for five years, back in the 1970s. Now, by itself, that gives you a lot of volume and the level of volume as, as well as volatility.

[00:34:35] Stig Brodersen: I had a conversation with Mohnish about the Turkey stock mine. He said that the average holding period was nine days. I don’t think it’s going to be similar to that here, but I don’t know if it’s too easy to extrapolate and say it’s probably going to be shoulder than 10 months more than the other way around.

[00:34:49] Stig Brodersen: Who knows? If I had to guess, I’ll probably say it would be in that direction. So it has a lot of tailwinds working for them, so yeah, it’s definitely like the valuation let me put it like that.

[00:35:01] Tobias Carlisle: It’s peak uncertainty for this business. It’s peak uncertainty and a cyclical trough. And so I think that you remove the uncertainty and you get some event, or there’s just an increase in volatility, and that’s a, they’re a beneficiary of that.

[00:35:17] Tobias Carlisle: In the interim, you’re getting paid a little dividend and they’re buying back stock. So that just means that when the event happens, the move will be pretty big. The risk is that the s e c does something material. I mean, the world’s notice is a serious thing. We don’t know exactly what happens with that, but I don’t think that it’s ultimately going to be destructive to their business.

[00:35:37] Tobias Carlisle: I think they’ll negotiate something just because the sheer complexity of these businesses, the s e c needs to be careful when they’re dealing with them. So I think that on balance, it’s a good, it’s good, it’s a good trade looking out over the next few years. But as you point out, it’s not a compounder.

[00:35:53] Tobias Carlisle: They pay out what they earn. Basically the payout comes in dividends and buybacks. I like those two things. I like, when companies are returning capital, the, I don’t like the cap the share structure. I don’t like the, and it’s all a little bit strange with the minorities in there as well.

[00:36:07] Tobias Carlisle: It’s not perfectly clean. It’s not an easy company to analyze and it’s already a reasonably complex financial business. So it suffers from those things that also pushes down the valuation. But I think that, that idea that you sort of sell the rumor by the news, I think that this is one of those situations where everybody’s worried about what will happen when they get some clarity.

[00:36:26] Tobias Carlisle: Probably with an event, probably it does reasonably well over a short to medium term. But I don’t want to be holding, I mean, if I’m not going to be holding this thing forever.

[00:36:35] Stig Brodersen: Alright, so let’s go here to my pick as we are letting Hari go. And so my pick is a small Swedish stock called Teqnion.

[00:36:45] Stig Brodersen: Full disclaimer, I’m long Teqnion, so I won’t be trading at all the next 30 days. That would make me a long term in Turkey apparently. But we have these guidelines here and so I won’t be trusting that for the next 30 days. But I am long Teqnion and this will be gone out June 3rd.

[00:37:00] Stig Brodersen: So Teqnion is trading on the small Scandinavian Exchange, nest stock first North under the ticker TEQ. And if you’re based in the US can be borrow of the calendar through intact Brokers child swap and whatnot. And so, the stock…

[00:37:15] Tobias Carlisle: How small is it?

[00:37:16] Stig Brodersen: It is $267 million dollars.

[00:37:21] Tobias Carlisle: US?

[00:37:21] Stig Brodersen: US, Correct and it’s opposite your pick. I, at least I hope because it’s very expensive, whereas your pick was very cheap. But it, I hope that it’s a compounder and the stock really came on my radar after listening to Clay interview Chris Mayer, on episode 543.

[00:37:37] Stig Brodersen: And he also wrote the book a 100 Baggers and I tuned into the episode because I thought I’d be learning about Constellation software which I also did, but that was actually not really piqued my interest after going through Chris’s portfolio. Teqnion was really what I was interested in and. We already talked about that it’s a very small stock.

[00:37:57] Stig Brodersen: Not a lot of people have heard about it. Also the reporting is mainly in Swedish, so, so that also limits the field and I’d send Tobi and Hari before this call, I sent the, my Google translated version of the reporting and I do like that it’s a little odd. As a Dane I do have a home field advantage given it it’s in Swedish, but as a value investor, regardless, I’m always excited to go that extra mile and look when no one else is, I’ll make sure to link to that Google translated any report.

[00:38:26] Stig Brodersen: I’ll also make sure to link to the Swedish version if anyone would be interested in that. The business model of Teqnion is, it’s simple but not easy. And so, these days you will call them a serial acquirer and for the companies that they have in their portfolio, have, they have 24 right now.

[00:38:44] Stig Brodersen: They don’t expect a lot of, again, growth especially not adjusted for inflation. They grow through acquisitions, which by definition is just b really hard. And the intention is to get the money back in five years. They pay everything in cash with 60 to 7% up upfront and the rest in the two year earnout.

[00:39:03] Stig Brodersen: And that cash is financed 50% eternally and 50% by bank debt. And they would typically prefer to keep the existing management and then in case they take control of the board. That’s not always possible because, sometimes the owners want to run into the sunset. And so it will be their job to find a replacement.

[00:39:21] Stig Brodersen: Generally the target companies are small industrial companies with [inaudible] and pricing power in these industries. They want to grow and they have these financial targets and perhaps those three financial targets will also give you a good idea of where they are. So, net debt to EBITDA lower than 2.5.

[00:39:37] Stig Brodersen: It’s 1.5. Ok, sorry, its 1.1 At the moment EBITA. So without the D, the higher than 9%, it’s 11 at the moment. And through that, as a result of that, they want to double the EPS at least every five years. And so that’s sort of like the, that’s the structure. If you look at the 2022 report, stock prices up by 456% here at the end of 2022.

[00:39:59] Stig Brodersen: And since then, at the time of recording went up another 20%. And note that’s not 20% as in 456 plus 20%, it’s 456 times 1.2. So there’s some rocket fuel tied to this stock and who knows? Perhaps it reflects that it’s just very expensive, or perhaps it’s a reflection of a very strong business.

[00:40:19] Stig Brodersen: The business of acquiring businesses is just notoriously difficult. Whenever you look at value creation for holistic companies, the shareholders of the acquiring company typically do not gain any value. If you run a long time series, all the value goes to the shareholders of the target company. And the reason why is quite simple.

[00:40:42] Stig Brodersen: Synergies are overvalued. Cost cutting isn’t as easy as you typically thought. And there’s also an element of management vanity in that. I read about one CEO who called it, I think he called it company dating, or he said, it’s so romantic because that’s sort of like what you do whenever you shove around for companies, cause it, it’s more fun to buy and take over another company than is to do your daily operations.

[00:41:08] Stig Brodersen: If you buy listed companies, you have to pay a premium to the existing shareholders of the acquiring company. That, and you are paying for that if you’re an existing shareholder in a company. And so you might say, well, how does that relate to being a private company? Well, if you typically, and Joe Buffett talked about this, he talks about how difficult it is to get private companies for real good price because you typically speak with very sophisticated sellers. It’s not like the stock market where sometimes the market is going crazy and sometimes you can’t find a bargain, even though, again, as if you’re acquiring an entire company, you have to do a tender office so you don’t get the same discount. And so you might be thinking whenever you’re hearing this but Stig, you just said there at the top that there was a five year payback period and you also said there was a difficult buying private companies. How does, how do you square that circle? And I think there are different ways to look at that, and the track record has shown that it is indeed possible for Teqnion to do that.

[00:42:03] Stig Brodersen: First of all, there are not a lot of potential acquirers of small Swedish companies and that is the main market for Teqnion. That’s where most of their businesses are located. They’ve done very few acquisitions outside. And also think you need to understand the Swedish culture a bit more to understand how these somewhat bar bargains can occur.

[00:42:25] Stig Brodersen: So I should probably also say at top, I used to live in Sweden, so that’s why I tend to think that I know a bit about the country and also live in Denmark. But anyways, the Swedish culture is together with the other Scandinavian countries characterized by high level of trust. It’s somewhat easier to decentralize, which is a big component of this, especially if you’re going to have so many subsidiaries that have 24 at the moment.

[00:42:47] Stig Brodersen: Succession is very difficult for well generally succession is very difficult for all companies, especially very small companies. But I would say that, so most of the companies that are acquiring their family businesses, depending on which country you live in, you’ll probably see, you’ll probably experience that there are different expectations by those parents for the kids to take that over. In Scandinavia there are no such expectation for you to do so. You are more encouraged to paint your own canvas and follow your dreams.

[00:43:16] Stig Brodersen: And I would say if the US were your point of reference, I would say it’s way more prevalent than in the US which is already quite prevalent whenever you compared to other countries.

[00:43:26] Stig Brodersen: Equality is a core value in the Swedish society. You don’t want to strive for money to an excessive amount. You would probably be looked down upon if you talk too much about money and you that you probably just state that you have ambitious financial goals. And I think it would surprise a lot of people that is the culture in Scandinavia.

[00:43:47] Stig Brodersen: And so money is perceived as a comparable small role. It doesn’t play a big role once you read a bit more than middle class in Scandinavia. And so let me come up with a simplified example of how this could come into play. Pretend that you are living in a small village, a thousand people by a thousand people.

[00:44:07] Stig Brodersen: You want to take your tips off the table. Your business is generating a million dollars in annual free Tesla, and you don’t want to do whatever you’re doing anymore. Would you like to sell to a private fund for 8 million or sell to Teqnion for 5 million? I think you would be surprised of how many that would go for the lower offer.

[00:44:26] Stig Brodersen: Whenever you are dealing with a company like Teqnion who promised not to put a lot of debt on your balance sheet, not to sell it off. It’s a very different discussion. If you have a small business, you probably have your accountant be a good friend of yours and you might go to the same club or whatever is the case.

[00:44:44] Stig Brodersen: If you go with some of the private equity companies, they will do a lot. They were centralized a lot. That’s not the case for Teqnion at all. So this was just a very simplistic example of why this why you have this, the case here and it’s simply also very difficult if you live in a place like that and a lot of these small industrial companies are located in a place like that.

[00:45:04] Stig Brodersen: It’s very difficult for you, for yourself to find a replacement to take over the CEO role for something like that. So Teqnion is simple, but it’s not easy and you definitely need the right people to execute on that strategy. So I have a really long section about different risk factors and valuation but I kind of feel, I’ve been rambling for so long now, so I’m going through it to you, Tobi. Any thoughts and reflections?

[00:45:29] Tobias Carlisle: I think the challenge with these businesses is always that you are relying on the acquisition discipline of the management team. And as long as their rules concrete and they continue to apply them, then they should do pretty well. I think there are lots of examples of constellation, the Canadian company that buys the, famously buys the vertical market software. Little tiny little businesses in Australia and Canada. The roll ups have never sort of worked that well because I don’t know why we overpay or they tend to be siloed in one industry, so they’re just, they end up just paying more and more for these businesses when the thing that makes them succeed is discipline on what they pay.

[00:46:17] Tobias Carlisle: I agree with you that the negotiated sale price tends to mean in the public markets particularly, and often in competitive private equity markets, they tend to pay at least a fair price, and they make up they generate their returns by layering in some debt and then paying off the debt and then dressing them up a little bit for sale and trying to get them, trying to sell them at the right time.

[00:46:39] Tobias Carlisle: But as a kind of proposition, like clearly that’s what Berkshire Hathaway is like, acquiring discipline, not overpaying for things. Incentivizing the managers appropriately so that they continue to run the businesses, send all the free cash flow up to Warren Buffett, who redeploys it sensibly. Do that for a really long period of time, generate absolutely fabulous returns.

[00:47:03] Tobias Carlisle: The two ways that you can go wrong, too much debt and overpaying that will kill you, and that applies also for someone in investing in these businesses. You need to be getting a pretty good, not a good, you just need to get the right price. You need to pay the right price for them so that your own returns look a little bit more like the underlying returns of the business.

[00:47:21] Tobias Carlisle: You’re just not overpaying the, I don’t know, the valuation of this business. That would be the main risk that I would see if they’ve got a good track record of making acquisitions and their rules are concrete and they seem inclined to follow them, and they’re an acquirer of choice. If someone will sell for them, sell to them for five times when there’s another acquirer out there prepared to pay eight times, that’s.

[00:47:42] Tobias Carlisle: That’s, that means that they’re getting a lot of value every time they’re buying and they’re probably going to do very well. It’s it sounds really interesting to me. It’s when I was young, when I graduated from law school, this was exactly the kind of thing that I wanted to do.

[00:47:53] Tobias Carlisle: Cause I thought it was a really interesting, I thought it would’ve been a fun business to manage. I did a few, as a corporate advisory lawyer, I did a few buyouts and just saw how much effort there is in making an acquisition. And then we had to, when the acquisition failed, we worked on the other. I mean, when the business failed cause, it was, had too much debt and they been in a price war.

[00:48:12] Tobias Carlisle: We worked on the other side to, to pull them apart. And that was at that time that I could just see comparable businesses on the stock exchange trading for three times where the EBITDA when they had to pay six times to get control of this thing. And I thought, what if you just bought the ones that were cheaper on the market?

[00:48:27] Tobias Carlisle: And that’s sort of the entire reason that I have written the books, that I haven’t run the business that I do because I do like, I love this stuff. It sounds like a really interesting opportunity. I’m going to keep an eye on it. I don’t know much about it other than what you’ve just said, but there’s no reason why it wouldn’t work other than overpaying in too much debt.

[00:48:44] Stig Brodersen: Yeah, it’s one of those things that, are simple but not easy. Keeping that discipline would be tough. And so, so we definitely have different risk factors. So we have Johan, who is the CEO, and Daniel who is the Chief Acquisition Officer. I don’t know if I offend anyone in the company, if I say that they run the show, but there’s definitely some key main risk there.

[00:49:03] Stig Brodersen: And if one of them would depart, I would seriously consider whether or not it would still make sense to be in, to be invested. Because so much of the value in Teqnion is future growth. Right now it’s trading at 26P of 26. And so you really have to have a lot of faith in the. Long runway of the business.

[00:49:22] Stig Brodersen: Johan started the company in 2006 with his friend Jonas, who is no longer part of the company. Johan’s parents are still pretty big shareholders and they didn’t really have a lot of high degree of inside ownership. Johan still owns 5% of the company today. He has a background as a mechanical engineer and speaks really the jargon of the company that they acquire.

[00:49:43] Stig Brodersen: It’s the type of business where if you meet up in a suit, it might be a lot harder to acquire that company. There’s a lot of, it’s not just a cold business transaction with these small companies that they’re acquiring. So Johan just comes with a load, loads of trust and knows how it is to run a small business.

[00:49:58] Stig Brodersen: And I should also say this before we move on. I had the opportunity to meet up with the management in Omaha and they were just fantastic people. Johan and Daniel and I actually met Tobi that night at one of our events and told Tobi like this is not good. I met the management now, which I never do.

[00:50:18] Tobias Carlisle: You’ve fallen in love.

[00:50:19] Stig Brodersen: Yeah, I’m falling in love and Buffett never takes my calls but you know we were in a lucky situation and Daniel was a big fan of the podcast and, I got in touch with him and he was just like, Oh my God, let’s hang out and talk about business and so I had a bunch of questions to them and they were just amazing answers.

[00:50:36] Stig Brodersen: And I have all the biases that you could have, it’s terrible. I read Daniel’s book after meeting them and which is a wonderful book too, and. He talks about that if you fall in love with the company, do not buy any shares in that company in the next 30 days. And so I want to live by that, not just because it’s a rule with TIP that you cannot do it whenever you go public with the stock.

[00:50:57] Stig Brodersen: But also because I just think it’s, it makes sense, a lot of CEOs it wasn’t the case with Johan who found the company, but a lot of CEOs became CEOs because they were great salespeople. Everyone liked them and so, so you have to be mindful of that. But again, really impressed by the management.

[00:51:14] Stig Brodersen: Daniel owns 0.24% of the company and he bought all the shares on the open market, NorthStar options for Daniel, it’s the Berkshire Hathaway approach. And a lot that he has a background from Bain McKenzie the like, but he doesn’t come across as that type of consultant. It’s actually tremendous compliment.

[00:51:31] Stig Brodersen: I don’t know if I saw anyone by saying so, but I that, that he has that background because it really helps you in dissecting a lot of companies really fast. I would also say that whenever I meet up with people, I like to test them if I’m going to do business with them, obviously you’re not going to phrase it as a test, but you want to know if the top management understand capital allocation.

[00:51:53] Stig Brodersen: Well, and so I had like this, I should say that the company do have a stock option program, and last year it was 0.1% of shares is outstanding, which to the best of a knowledge game was not part of. He said that he bought all the open market, but I talked to him about that to him and Johan about that options program.

[00:52:11] Stig Brodersen: And I said something like long and complicated which probably sounds super arrogant if you’re listen ng, tuning in, but I sort, I asked that question. It was about a European style call option with a strike price out of money something. I did it to test the management because whenever you ask a ridiculous question like that, you typically get three different types of responses.

[00:52:31] Stig Brodersen: The first one is they have no idea what you’re talking about. So they just start to BS you. You don’t want that because that means that they’re also going to be as whatever else that they’re doing. They probably don’t have a healthy corporate culture if they do that. The other response you can get is that they just say, I don’t understand what you’re saying.

[00:52:48] Stig Brodersen: That’s okay. That’s completely okay. But that also tells you something because that tells you that they’re honest and humble, which is typically also signals that they have good, a good corporate culture because something like that, that humility trickles down throughout the entire organization. And then you also have the third option that they actually do understand what you’re saying.

[00:53:05] Stig Brodersen: And Daniel understood that he had no problem understanding all the rambling I was doing. So I was impressed by Daniel and Johan. Daniel stayed a very cheap hotel outside of the city. I looked it up whenever they told me where they were staying. I really like that. As a shareholder, you want the management to be frugal.

[00:53:23] Stig Brodersen: Alternatively, you can be the McLennan’s of the world if you do have the cash, but he travels on his own dime, so I don’t care if he goes private or whatever he does. They talked about how they were tired. They were, because they were doing like three different flights and what up too early in the morning.

[00:53:36] Stig Brodersen: And I was like, they didn’t have to. But it said something to me about the culture. And then again, the company has 452 employees seven people in the HQ. The HQ have rented a coworking space in the suburbs of Stockholm. It’s just another wonderful observation. And they also include the expense for the HQ as a presenter of sales in the annual report.

[00:54:01] Stig Brodersen: That’s not something that you typically see. So the level of transparency is just absolutely wonderful. So I also want to say that the bet is very much on the manage spend. I guess it always is, especially because it’s priced relatively high with a P of 26 right now. And so you have to be, had to be mindful of that.

[00:54:20] Stig Brodersen: So let’s talk about the valuation. Like you mentioned before, I don’t feel that the current portfolio justifies a P of 26. If price is your margin of safety, you should probably go with something like, like Tobi’s pick. I like that much better, like a low single digital multiple. But time should be the friend of this wonderful company.

[00:54:41] Stig Brodersen: So if you run the numbers, the type of stock return is very much correlated with the return on invest capital, which like I mentioned before, is well above 20% has been for some time you have low leverage. So you have to count on that for a very long time. And so I if you’re talking about decades, it doesn’t matter too much if the P is 10 or 50, like if you go long enough and the return invested capital is high, it gravitates toward your return, I should say incremental return on that capital.

[00:55:10] Stig Brodersen: And so for example, if this company grows 10% of year, the next 10 years, and then trades are the multiple of 10, You don’t really make any money. You break even. So in opportunity cost, that would be a terrible decision. If you feel that they can do this for 20 years, returning 20% a year, and then trades at trade at P of 20, which depending on the interest rate level may or may not be realistic, you are at 18.3%.

[00:55:37] Stig Brodersen: And so it very much goes in line with how long is that runway. How do you think they can continue to have the discipline whenever they’re acquiring companies. So where does all of that leave us? If you look at the return from an index, roughly five, seven ish percent of that comes from a, from very few stocks.

[00:55:56] Stig Brodersen: It’s thinking about the Amazon and Alphabets of the world and you have the index driving that appreciation because the index is too dumb to sell the best performing companies. Whereas we as investors tend to call off flowers and waring the weeds as Peter Lynch would say. You want to buy those high quality companies for single digit multiples.

[00:56:18] Stig Brodersen: It’s tough. I’m not saying it can’t be done, but unless you’re doing some sort of investing in some sort of crazy turnaround, it’s close to impossible. So you have to pay up and you have to have faith in that long runway. So is this one of those companies? I would like to say yes. It may and may not be the case.

[00:56:38] Stig Brodersen: I just wanted to add one more thing here before I throw it over to you, Tobi, I really, I keep on talking about this wonderful management, but I just want to throw more numbers at you. Compensation is relatively low, even by SW standards. And so if you compare it to other companies, unless it’s perhaps Berkshire and how Buffett compensates themselves you just wouldn’t believe it.

[00:56:59] Stig Brodersen: So the CEO in 2022, he was paid 140,000 in base, $140,000 in base, and he received a 120 thousand bonus. So that was a record year and the way that bonus is being calculated is that it’s a split on the profit they made compared to the previous three years. So the benchmark keeps on going up, and that’s the case for everyone in the management, seven people in HQ, but also the CEO of this specific area.

[00:57:25] Stig Brodersen: So I that’s the way it’s being run. The chairman of the board was paid $20,000 for his time. The others paid between 10 and 14. And Johan being the CEO, he was not paid at all for being on the board. And so, believe it or not, this was like my short version of my, of going through the company together with you.

[00:57:46] Stig Brodersen: I did do an interview with Daniel, the Chief Acquisition Officer that was published a few weeks ago. I’m sure to link to that. It’s on YouTube right now, but I’m sure to link to that in the show notes but let me throw it over to you, Tobi.

[00:57:58] Tobias Carlisle: I mean, I like all of the risks are always that management’s taking up more than they’re earning for the shareholders.

[00:58:05] Tobias Carlisle: And there’s, that’s the norm rather than the exception. That they overpay, that they don’t know what they’re doing. There’s too much debt. Sounds like all of those things are not there. They sound like my kind of guys, honestly, I don’t know much about it other than what you’ve said today. But all of that sounds very promising for those guys.

[00:58:22] Tobias Carlisle: The valuation, when you say it’s a 26 times PE and you say that the e is pretty close to cash flow, so it’s like a 4% free cash flow yield growing at about 20% a year, maybe a little bit more than that potentially. So interest rates, currently 5% of the 10 years. Let’s see, year, you’re a few years until you’re earning at the 10 years.

[00:58:48] Tobias Carlisle: I think the, for me, that would be the only thing that would be, maybe you could get, maybe you could put on a partial position and then wait for a better price. Maybe that better price never comes. Like there’s plenty of people who are waiting for that better price for Berkshire and it just never came.

[00:59:05] Tobias Carlisle: I’m pretty bad at paying up for things, so I sometimes I miss some of these better opportunities, so totally don’t listen to me with the mistake.

[00:59:14] Stig Brodersen: I still have a strong bias toward not doing it. It’s so easy to see something in that single digit range, and you can see the cast load and you can see the shareholder yield it, it looks so good and it just makes so much sense.

[00:59:27] Stig Brodersen: I tend to be a numbers guy and not a qualitative guy, so I’m practicing. I don’t necessarily think I, I do a good job. I’d probably say for people who might be interested in this stock, build your position slowly by very few shares and at whenever you learn more about the company.

[00:59:46] Tobias Carlisle: There’s a macro we didn’t mention this, but there’s I do think that there is this sort of macro trend that is worth observing here.

[00:59:53] Tobias Carlisle: That there is a, in the western world in particular, there is a baby boomer generation that is aging and exiting the workforce and they will need to transition these businesses to someone else. And we, there are a lot of people talking about at the moment, but having said that, I remember 20 years ago they were talking about this too, that there would be this transition and doesn’t seem to have really kind of happened yet.

[01:00:18] Tobias Carlisle: So it’s, but it must happen at some point. There will be, there must be a way of solving that problem as they transition. If these guys have got a solution to it, then I think that’s an interesting trend that’s worth sort of watching closely anyway. And probably this is a good way of playing it.

[01:00:33] Tobias Carlisle: These guys are in a good position to take some of these middle market, smaller businesses. Need a home, need the administrative help. Because often businesses, and this was something I found as a, as an activist, particularly in Australia, where many of the smaller listed companies are run by founders who are engineering typically as a background, haven’t spent as much time in financial markets and don’t know about buybacks and all that, the other levers that you can pull to improve your shareholder value.

[01:00:59] Tobias Carlisle: Not saying that they would need to consider that as private businesses, I’m just saying that they’re engineering types rather than financial guys. And so it can be a good marriage where you have a financial guy that’s helped with an engineering team that sort of runs the underlying business. And this might be that kind of opportunity.

[01:01:16] Stig Brodersen: I like that you say that and I had a discussion with the management about that not just the way that they’re being compensated, but also the way that the CEOs were compensated at the subsidiary level. And we talked about this whole stock option issue. And I would prefer not that to be the case at all, but if it were to happen, perhaps you could be structured X, Y, Z.

[01:01:38] Stig Brodersen: And they looked at me and they said, just what you were going at before. Like they’re engineers by trade. Like they don’t necessarily think of strike prices and is its American type of co-option or is its European style or whatever. Like they don’t think about like that, just like payment cash.

[01:01:55] Stig Brodersen: If a rich ex number of dollars in profit, I get more. That’s enough. And so I think that’s very telling. And I also feel things very telling that whenever they do the internal reporting, so they do that once a month with the subsidiaries. At the very top of their income statement. They have profits.

[01:02:13] Stig Brodersen: They don’t have revenue. They do stream once a quarter. And I checked out the last, I don’t know, five, six. I think that’s probably what they have online now that’s in English where they talk about why sale isn’t important. I know that sounds super counterintuitive probably, but they feel that sales are more derivative of the profits more than the other way around, and it’s the way that they build a thesis.

[01:02:31] Stig Brodersen: I just tend to like, especially, it’s probably not too much a problem here in 2023, but you don’t, you remember a few years back it was all about revenue. No one cared about casts at all. And I like that conservative approach and I asked them about the interest rate and what that meant, that they had a higher cost of capital and they said no.

[01:02:49] Stig Brodersen: Payback period is still, it’s still five years, it’s still 50% banded and 50% cash. Like we need to make it simple. I like that. I like that approach. I think it makes it easier for everyone.

[01:03:00] Tobias Carlisle: Yeah. Couldn’t agree more simple and concrete and incentivize so you don’t do silly things to hit numbers but do the right things in the business. Yeah, those are all good things to look out for in compensation plans.

[01:03:16] Stig Brodersen: So yeah, that was that was my pick here for today.

[01:03:20] Tobias Carlisle: Teqnion.

[01:03:21] Stig Brodersen: Teqnion, yes.

[01:03:22] Tobias Carlisle: Good name.

[01:03:23] Stig Brodersen: Tobi, anything else here before we wrap up the show? I would, as always, I would like to give you opportunity to tell about you and what you’re up to. Anything else you wanted to share with the audience before we do?

[01:03:34] Tobias Carlisle: I think they’re really good picks, reflective of who we are. We got Palantir from Hari, got the tech company from Hari, got the deep value financial from me and the European, unknown European stock for Stig. [Crosstalk]

[01:03:50] Stig Brodersen: Yeah. Well said.

[01:03:51] Tobias Carlisle: In a different language. Perfect.

[01:03:53] Stig Brodersen: In a different language. Perfect. Yeah. That’s the way I make sure you can’t criticize for too much. I send you a reporting in a language you don’t understand so.

[01:03:59] Tobias Carlisle: I like it.

[01:04:01] Stig Brodersen: Alright, Tobi.

[01:04:04] Tobias Carlisle: I have a website acquirersmultiple.com and that has I’ve written some books about my investment process and research that I’ve done by myself and with other people.

[01:04:16] Tobias Carlisle: I run two funds in the states that domestic US equities have a mid-cap, large cap fund called The Acquirer’s Fund. Ticket is ZIG and a small and micro-cap version of exactly the same strategy. The ticker is DEP, D.E.P and I’m on Twitter @Greenbackd, G.R.E.E.N.B.A.C.K.D. We’re I post a little bit and I spend a lot of time on Twitter just sort of watching what’s happening.

[01:04:40] Tobias Carlisle: I post less and less these days because I don’t really know what’s going on. I feel like there’s a fair bit of deterioration under the hood in the global economy, and it doesn’t seem to be reflected in stock prices. So I’m always pretty bearish though. So take that for grain of salt. Thanks for having me, Stig. I always love chatting to you.

[01:04:58] Stig Brodersen: We’ve had this mastermind discussions since 2015 and I don’t remember you not being bearish, which I like in an uncertain world. Tobi it’s good to know people like you.

[01:05:08] Tobias Carlisle: I want, because I’m a deep value guy, I really want to pay really cheap prices. So I’m hopeful that at some point we’ll have a gigantic collapse, and then I’ll come on and I’ll be super bullish where everybody else is bearish.

[01:05:21] Stig Brodersen: And you’re probably right. If you look at any historic metric, it’s as much as the market has dropped, even though at the time of recording, we’ve seen the rebound, like it’s still really expensive.

[01:05:32] Tobias Carlisle: Well, we’re two years in, ARC topped out in February 2021, so it’s more than two years ago. And the rest of the market topped out at the end of 22 or the beginning of 20, sorry, the end of 21, beginning of 22. So we’re more than 18 months into that drawdown. Historically, when markets have collapsed, they look like this. They bump sideways for 18 months and then the last third is the business end.

[01:05:56] Tobias Carlisle: And so we’re right into that business end. I sort of think we’re going to see it in 2023 or very early in 2024, but I think 2023 and soon for my 2 cents.

[01:06:08] Stig Brodersen: Time will tell. Wonderful. Thank you so much for your time, Tobi. I really appreciate it.

[01:06:12] Tobias Carlisle: Thanks for having me, Stig. Love seeing you, love chatting.

[01:06:15] Stig Brodersen: All right guys, I wanted to transition to the second segment of the show and include my co-host, Clay Finck for that, now that we are letting go of Tobi and Hari. Clay, how are you today?

[01:06:27] Clay Finck: Doing wonderful, Stig. Thank you. How are you?

[01:06:30] Stig Brodersen: I’m good. I came back from Omaha not too long ago, as you can probably hear here on my voice.

[01:06:34] Stig Brodersen: So this is this is being published June 3rd and actually recorded before the mastermind meeting that you heard before with Tobi and Hari because we came back and we got a lot of wonderful feedback from our audience and we had these four free events from Thursday to Sunday in Omaha where we met the listeners of the show.

[01:06:51] Stig Brodersen: And, we talked about investing life, everything else in between, and it just had a wonderful time there. And one of the things that we heard from the community was that they really liked the Mastermind episodes, and I wanted to use that as to transition into a discussion of our mastermind community, which it seemed like not a lot of people knew about.

[01:07:12] Stig Brodersen: It’s also very new and it’s something that, that you initiated. So perhaps Clay, let’s start with that. What is the TIP Mastermind Community?

[01:07:20] Clay Finck: Yeah. I’d like to tell a little bit of a story here to paint a picture, paint a background of where we’re coming from, Stig. When we were planning the Berkshire weekend and what TIP events we wanted to host for the audience.

[01:07:35] Clay Finck: You asked that I help organize a few meetups in Omaha, which completely makes sense because I’m familiar with the area. I used to live in Omaha, so logistically it just made a lot of sense that I’d work on that. So I was very involved in that process and we ended up planning four free meetups and we talked about our plans for the Berkshire weekend.

[01:07:56] Clay Finck: We talked about it on the show back in October 2022. And then just within just a couple months, I quickly realized that way more people were registering for our events than we had space for. So we kind of had a little dilemma on our hands. People were spending thousands of dollars to travel from all over the world.

[01:08:18] Clay Finck: And it wasn’t just a see Warren and Charlie, they wanted to meet like-minded investors. And after going to Omaha, I realized that this was absolutely the case. And people would tell me that, they were the one person in their circle, or the one person in their friend group that was interested in investing.

[01:08:35] Clay Finck: So they really had no one to talk about investing with. And I can totally resonate with that. I think back to when I was a TIP listener. The vast majority of my friends were not, and they weren’t interested in investing really. So I kind of had these conversations with myself in my head, and then listening to you and Preston on the show, almost having that internal dialogue with you guys.

[01:08:56] Clay Finck: So I had mentioned to you, Stig that I would absolutely love to start a community for the TIP audience. Specifically, what’s I wanted to be included in, it was, it’s a place where people could meet, like minded investors. They had a network to bounce ideas off each other, a place where they could get new ideas from others in that network.

[01:09:17] Clay Finck: They can run their stock ideas in there and get people’s thought and feedback on stocks. And then just somewhere they can ask questions to people, maybe explore new subjects. They could ask you or me a question, Stig. And then we also came up with the idea. Of having a live meetup in New York City as well.

[01:09:37] Clay Finck: And I think people were pretty excited about that. And we plan on doing that this fall. And so far, it just seems to be getting a lot of interest. And one thing we’re also doing in the Mastermind community is having weekly or maybe biweekly live events on Zoom for the community so people can join live, they can hop in with questions, and then we also record those for people to watch afterwards.

[01:10:00] Clay Finck: So, another thing I wanted with this community is for it to be relatively small and tight knit. I just really wanted people to have a place where they could build these strong and genuine connections with others. So, so we limited the TIP Mastermind Community to 30 members for the general audience.

[01:10:17] Clay Finck: And then going into Berkshire weekend, we had around 27 paid members, and then to my surprise, around 15 of them were going to Omaha. So I wasn’t planning this at all, and I’ve already met around half the community. So you know, many of the members are just truly incredible people. They’re engaging, they’re joining our live calls, they’re going to Omaha.

[01:10:37] Clay Finck: And I honestly just have a ton of fun learning from them, hearing their stories, and learning more about their own investing strategies because, that’s another interesting thing is everyone kind of has their own viewpoint and their own strategy. So I had mentioned on the Berkshire episode we’ve recently released that I feel like we have the best audience in the world.

[01:10:56] Clay Finck: It’s likely that all podcasts say that, or maybe they’re obligated to say that. But I truly do believe that our audience members are absolutely amazing, especially judging all the people we I met at our meetups and met from the mastermind community. And also, before I close out my answer here, I also wanted to mention that the price tag to join the community is north of $100 per month, which I’m well aware is not low.

[01:11:22] Clay Finck: But really, I just want to ensure that we keep the community relatively small and we can continue to attract to those high quality people. At the time of this recording, we have around 36 members. I had mentioned we wanted to cap it at 30, but I wanted to give everyone in Omaha the chance to get in as well and join as they’re kind of our TIP super fans I would call them.

[01:11:43] Stig Brodersen: And I guess, one thing that you hit on there was that not knowing anyone in your circle that could talk about stock investing, and I didn’t really know anyone before I met Preston in 2013 and so, and don’t get me wrong, people don’t love talking about stocks.

[01:11:58] Stig Brodersen: They just don’t get me wrong. I mean, they just don’t know what they’re talking about. And so like they would say, oh, buy this stock. And you ask why? Well, it’s awesome. Or you’ll get all kind of weird responses. They would never dream about opening, reading the financial statements. That’s not how I think about it.

[01:12:14] Stig Brodersen: It’s just like, oh, the price doubles. So I was probably going to double again. And so I had friends to talk to about investing. I just didn’t have anyone who were, who I felt I was in the, on the same journey with. And if you told them you were going to Omaha, spend thousands of dollars and fly 20 hours to go there to like, listen to Warren Buffett, they would be like, who’s Warren Buffett?

[01:12:31] Stig Brodersen: So it was just fantastic first to meet Preston and then to meet other like-minded investors. And that’s what we want to facilitate. But you know, even whenever I speak with Tobi and Hari, we also talk sometimes whenever we don’t record it, but whenever we do record it, you are also constrained to some extent.

[01:12:48] Stig Brodersen: Partly, we have time zones whenever kids back and forth and all of that. And, and it has to fit into the podcast format of we started building this. What I like about the mastermind community where you’ve been gracious enough to invite me, Clay, I should say is that we can have as many discussions about a stock as we want.

[01:13:04] Stig Brodersen: We can share our screens, we can compute together, you can sort of do different things. You can’t really do on the investors podcast format. It’s just not how we do things for a number of different reasons. So I really like that we can dig deeper and you can meet people from all around the world who are really on the same journey as you.

[01:13:19] Stig Brodersen: So if anyone finds this interesting, I’ll highly encourage everyone to check it out. And I wanted to throw it over to you, Clay. How can the audience join the community?

[01:13:30] Clay Finck: Yeah. Before I answer that, I do want to pull the string on that idea of people from all over the world. I’ve had one-on-one conversations with each member, and we have people from Australia and people from different areas of Europe.

[01:13:43] Clay Finck: We have people from California, New York, and many people from Canada too. I mean, this is people from all over the world and it’s just so many different interesting and new backgrounds and new perspectives, and. That’s just one of the truly incredible things about our TIP audience Stig, is just how global it really is.

[01:14:02] Clay Finck: It’s just a crazy to think how, I’m just a guy from Nebraska in the middle of nowhere in Nebraska, in the US and, we’re connecting with people from Australia and all over the world. Just an incredible thought but anyways, as of today I mentioned that our community is currently closed to new members.

[01:14:20] Clay Finck: And for the time being, I’d like to spend quite a bit of time focusing on our first cohort and adding as much value as I can to them. And then assuming all goes well for the next few months, and I feel that we have the capacity to add new members, I’d like to add around 15 to 20 more sometime during the summer, and that’s assuming that there’s still interest from new members to join, which I suspect there will be given the interest to date.

[01:14:45] Clay Finck: And I’d like to give those, listening to this episode today, the chance to attend our live in-person meetup in New York City. We’re still working out a lot of the details there on what that’s going to entail, but sometime this fall we plan on doing a weekend trip to New York City. If you have any questions about that, you can feel free to shoot me an email, clay@theinvestorspodcast.com.

[01:15:05] Clay Finck: And then because of the limited availability, we decided that we’re likely going to have people apply to join. We want to ensure that we can keep the group really high quality and we’re letting in high quality people that are excited to engage with others and learn from others. So it’s likely we’re going to have people apply as well.

[01:15:26] Clay Finck: So it’s just something to be mindful of. And I also wanted to mention that we do offer a 30 day money back guarantee. So if for any reason you decide the community isn’t a good or a right fit for you, then you’ll be a hundred percent refunded, no questions asked. Absolutely. I’ll send it right away. So if you’d like to stay updated on when we open the community back up to new members, you can join our wait list by visiting theinvestorspodcast.com/mastermind. That is theinvestorspodcast.com/mastermind to join the wait list and stay updated on when the community opens back up.

[01:16:01] Stig Brodersen: Thank you Clay, for jumping on the call and with that said, I’ll see the rest of you next week.

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