[00:01:54] Clay Finck: Alrighty,

[00:02:04] Clay Finck: welcome to The Investor’s Podcast. I’m your host, Clay Finck. Today, I really couldn’t be more excited as I welcome Andrew Brenton to the show. Andrew, it’s such a pleasure and honor to be chatting with you today. 

[00:02:17] Andrew Brenton: Clay, really excited to be here today. 

[00:02:20] Clay Finck: So for those who are familiar with Andrew, he’s the co founder and CEO of Turtle Creek Asset Management, which is a Toronto based firm that has put up these stellar returns.

[00:02:29] Clay Finck: Since late 1998, they’ve delivered an average annual return of 20%. relative to both the benchmark and the overall market returning just 7%. Andrew, we’re going to be diving into how you did this, but I’d like to start with your background to help paint a picture for how you developed this skill set for investing in the public markets.

[00:02:51] Clay Finck: You initially worked as an M& A advisor, and then you eventually set up a private equity fund at a Canadian bank. And, So talk to us about your story of getting into and working in private equity and how that helps shape you to Eventually start Turtle Creek in the late 90s. 

[00:03:08] Andrew Brenton: Sure. Happy to do that Clay. When I was in business school here in Canada I had concluded that I wanted investing was what I wanted to do but especially back then because that was a long time ago There weren’t a lot of what I’d call there weren’t a lot of jobs like joining a firm like Turtle Creek at the time.

[00:03:28] Andrew Brenton: Plus I needed to make money. And so I turned and focused on joining one of the investment banks and as a mergers and acquisitions specialist or advisor, because I thought what better way to learn about what companies pay for other companies or divisions than to work in that world day one as a young kid, fresh out of school.

[00:03:51] Andrew Brenton: And it really was great schooling, if you will, over that time. It was then that I noticed that as I got to work with a client, or if I did even just a little bit of work with a company, and then we would go in often to meet with some of their big investors and talking about maybe they were looking at doing a deal or they want to lock up.

[00:04:14] Andrew Brenton: I realized the accounts really didn’t know the company very well. They were a shareholder, they owned it, but they didn’t know it as well as by then I did. Given the work I had done. So it put pay to my view that the efficient market thesis, if you think back to the 1980s, when I went to business school, I think that was the height of the efficient market theory.

[00:04:36] Andrew Brenton: And I came through that process thinking, oh, man, markets are far from perfect. They’re far from efficient. There are a lot of inefficiencies. And so that thought was in my head, even in that early period of my career. And in fact, my two co founding partners at Turtle Creek were at the same firm. They were younger than me and they were both in M& A.

[00:04:59] Andrew Brenton: And so if you think of the next phase of my our career was having the opportunity or being asked to look at setting up a separate division subsidiary inside the bank. We were at the large Canadian, 1 of the large Canadian banks to be a private equity investor, i. e. control investments. Typically on our own.

[00:05:21] Andrew Brenton: And so we took that knowledge from acting as an advisor and now had to be a principal. We actually had to write checks and sit on boards and control the company. And I think through that period, we really developed an appreciation. of the complexity of corporations. And that’s one of the things I think we bring to the public market.

[00:05:45] Andrew Brenton: But as we were doing that, part of our career investing and we had good returns. It’s not like we, that didn’t work out and we had to go try something else. I kept seeing what I thought were better run companies valuations in the public market. And I thought, I don’t want to spend my time sitting on boards I’d rather instead spend my time sorting through the public market for us first in Canada in the first decade and in the last 15 years now in the U.

[00:06:16] Andrew Brenton: S. If we ever finish with the U. S., we’ll look to other parts of the world, like Europe, perhaps, to identify the type of company that we wanted to potentially invest in, and we’re not activists, we’re just engaged investors. And so the journey to me is logical in that, if you think about it, it’s first advising, learning, watching good and bad companies, frankly making bad acquisitions or great acquisitions.

[00:06:46] Andrew Brenton: And then taking that experience and applying it to being a control shareholder as a private equity investor, and then taking that combined experience to now in the last 25 years, being a minority investor, but in an engaged way with the public companies that we own. 

[00:07:04] Clay Finck: One of the fascinating things I discovered with you was that it seems that so much of what you’ve learned is through this experience in M& A and private equity, rather than studying Warren Buffett’s letters or whatnot, you had almost joked in our previous conversation that you’ve never been to a Berkshire meeting.

[00:07:22] Clay Finck: Would you say that’s a fair characterization where this prior experience was really critical to making that step to starting Turtle Creek? 

[00:07:31] Andrew Brenton: No I think that’s true. It is for sure true that I’ve never been to Omaha and we developed our investment approach, which is I think I’ve heard this term from value investors saying there’s only 1 way to invest.

[00:07:48] Andrew Brenton: And so it never occurred to me that there might be other ways to invest. In other words, if you go back to our, the steps in our career, I think sometimes I’ll describe it as there’s the upstairs market and there’s the downstairs market. And the upstairs market is what’s a company worth? And that is how you live in the world of mergers and acquisitions.

[00:08:09] Andrew Brenton: And then when you’re in private equity, it’s what is the company worth? Not where is the share? Where are the shares trading every day? As Turtle Creek pivoted to the public market, we continue to marvel at what people are doing out there. It is extraordinary and it might work. There are studies that show momentum perpetuates.

[00:08:32] Andrew Brenton: That might be true. I’ve never worried about that. Our approach is just fundamental investing and there is no other way to invest. It’s the present value of cash flows. I, the first time I ever spoke at a, for a prof asked me to go and speak to his investment class a long time ago. And I thought, what am I going to talk about?

[00:08:49] Andrew Brenton: So I talked about complexity, how companies are really complicated. And you have to accept that, and you have to be humble about it. But then I made the comment, and as I said it, I thought, he’s never going to invite me back. I said, I feel like everything I’ve learned about investing in business school was in my capital budgeting class.

[00:09:09] Andrew Brenton: Cash in, cash out. It’s all about cash in, cash out. And it wasn’t until years into Turtle Creek, as I would meet other investors outside, because we started on a very tight group, and then as we’ve grown, we now have investors from around the world, and people would start saying, you’re a value investor.

[00:09:30] Andrew Brenton: And I’d heard the term, but I’d never read any of the value investing material. And, I have to admit, at that time, I did read one of the better biographies of Buffett, and when I read it over the holidays one year, and I thought, gosh, I wish I’d read this 10, 15 years ago, because would it have changed?

[00:09:52] Andrew Brenton: And then I thought, no, in my view, you have to live it, and so the path that we’ve taken Has made us the investors that we are. And as I say, it was only later as I go back, it’s just confirmatory that, oh, look, there are other people who think the same way that we do. It’s not like we read other people’s approach and said, let’s apply that to us.

[00:10:14] Clay Finck: Andrew, let’s transition here to talk about what you call your investing approach, which is a different kind of value investing. You have this four step approach that you’ve developed over the years, and then I’d like to dive in a little bit deeper into each one. The first step is finding the right company.

[00:10:30] Clay Finck: The second is determining the valuation and understanding what the company’s intrinsic value is. Third is portfolio construction and the sizing of your positions. And then Fourth is the continuous optimization and repeating that whole process. So how about you talk about how you came to develop this 4 step approach and maybe you could talk about what’s been maybe the leading driver in this outperformance your fund has had.

[00:10:54] Clay Finck: What step you believe maybe is more contrarian or it’s been a big driver for you? 

[00:11:00] Andrew Brenton: Sure. The first step really is the application of our prior parts of our career, right? If you think about Over, over the years prior to setting up Turtle Creek, I’ve seen my partners and I have seen hundreds and hundreds of companies, again, first as advisors, being on the inside, working with management, and then in our phase of private equity, frankly, meeting thousands of opportunities and winnowing that down to 100 that might be interesting enough.

[00:11:32] Andrew Brenton: And then, We ended up investing in around 15 companies back in the 1990s, so we have a lot of scar tissue. We have a lot of experience of saying, that’s a good company. And that’s not, and it’s never black, a hundred percent black and white. And then you might think you found a good company. And then you, as time passes, you realize it’s not as good as we thought.

[00:11:56] Andrew Brenton: And so in essence, we’ve, we brought that background to meeting with public companies. Unfortunately, there is no button on Bloomberg that you can hit and say, give me the. The highly intelligent owner mentality, honest, shareholder focused for the long term companies, you have to find them meeting them one, one, one by one.

[00:12:21] Andrew Brenton: And that’s why I mentioned earlier in the first decade, when you look at us, it’s correct to think of us as overwhelmingly a Canadian equity fund. And then as we, 15 years ago, said let’s now do the same thing in the U S we found not surprisingly equally remarkable companies on a lot of them in the U S and now our main fund is over two thirds U S and therefore less than one third Canadian.

[00:12:50] Andrew Brenton: It’s just trying to find those highly intelligent organizations, by the way, they don’t always stay highly intelligent. If you think of over 25 years, we’ve watched some companies lose their edge, people retire, and frankly, in the reverse, we’ve seen companies we didn’t think were great 20 years ago, become.

[00:13:11] Andrew Brenton: Really fantastic companies with governance and board renewal and different management. So that is a 1st step when we talk about a different kind of value investing. I’d say the only thing that might be distinguishing in that 1st step is versus call it a. Standard or traditional value investor is that I’m really drawn to unique companies, one of a kind companies, because I look at the public market and think what’s more likely to get mispriced in both directions a great company.

[00:13:43] Andrew Brenton: So assume they’re all at least above average, and a lot of them that we follow are great companies that a company that has 5 various comps, as they say, comparable companies. Or a company where there’s really nothing else like it in the public market. And so in that stuff, we’re really drawn to one of a kind, unique companies.

[00:14:05] Andrew Brenton: And because our view is if you’re going to do all that work, and we do a lot of work over the years, wouldn’t it be great to own companies that get more mispriced in both directions? And that’s really been our experience. And I think. To a small extent that as one of the sources of our outperformance over time.

[00:14:24] Clay Finck: Diving more into finding the right company, you’ve once stated that sometimes it’s just blindingly obvious that a company is remarkable when you meet them. So other than looking for a unique business that doesn’t have easy comps or comparables when looking at the business, looking at the valuation, what else is it that makes for the right company for you?

[00:14:45] Andrew Brenton: There isn’t a checklist. It’s sometimes I think of it as we’re just waiting for them to say something stupid and when they do, then we realize it’s not a great company. There are lots of companies that are great at telling their story and pitching their story. So it’s more ongoing conversations.

[00:15:03] Andrew Brenton: It reminds me of recently with one of our longer time holdings where the CEO. They’re now on to their third CEO, which has transitioned in a very orderly way over 20 plus years. He is promotional, may not be the right term, but in the quarterly calls and things he’s somewhat just standard in the way he talks.

[00:15:26] Andrew Brenton: But when you then get him on a one on one, when you speak to him, when you go and visit them, And you start drilling down and asking questions about the company and this part and how do you incent your salespeople? Just in a sense, the cream rises to the top. So it’s just asking questions, being curious, and you just.

[00:15:49] Andrew Brenton: Know it over time, or I shouldn’t say know it because we’re constantly tweaking our views. We we’re elevating our views on some of our companies, but we’re also decreasing our views on other of our companies and sometimes. Our view decreases to the point where we, as we call it, voted off the island.

[00:16:11] Andrew Brenton: If you think about the history of our firm in the main fund I always preface it by saying we’ve only, but we’ve only owned 115 companies over 25 years, and we own 30 today. If you think about that, there are, what’s the math? There are 85 companies that we owned at some point that we don’t own today.

[00:16:32] Andrew Brenton: And what I find interesting is if You put those companies into different three buckets, as I think about it, they’re almost equal buckets. So one bucket are companies that have been taken private. Somebody’s bought them. So you lose them. They may have been great, but you can’t own them anymore because they’re owned by somebody else.

[00:16:50] Andrew Brenton: Another third are companies that we still think are great. We’re following them closely. They’re just not as cheap as the ones we own in the flagship fund today. And then the other third is that bucket of companies that have lost their edge. And it’s not surprising over 25 years. You would expect some companies to not be as good as they were 20 years ago.

[00:17:17] Andrew Brenton: And I always say we’re trying to find generationally great companies. And so all you can do is figure out of that. This management team, this board, this culture is something that is suited for us today. The expectation that can remain or be retained for the next generation of management, it might happen and we’ve seen it happen, but that is a really tough thing to bank on.

[00:17:45] Andrew Brenton: Like I said, instead, we just, I just think of it as we’re looking for generationally great companies that we can find a company that at least for the next 10, 20 years is aligned with their shareholders and doing. Impressive things and out competing the competition. That’s as much as anyone can ask for.

[00:18:05] Andrew Brenton: And I’m also curious, 

[00:18:07] Clay Finck: I believe you’ve almost always focused on businesses with market caps between 2 and 25 billion, I think sometimes you venture outside that, but over the 24 25 year period your funds been around, it seems like you’ve stuck with that threshold. Is there anything about that specifically that attracts you, or what is it about that more mid cap space?

[00:18:28] Clay Finck: Yeah Part of it is, if you think about our approach, we need access to management. We need to be able to reach out to them. We need to be able to have a call with them after the quarter. We need to be able to go to their investor day. And as I mentioned, we’re having a dinner with one of our companies tonight, a US company that is in Toronto, those just a private dinner with them.

[00:18:53] Andrew Brenton: Those are valuable things for us, just that interaction of just picking up, understanding how they think. And so the market cap, in a sense, falls out of the size of Turtle Creek I think about when COVID hit, we were able to get on the phone with all of our companies within the first week or 2, and that was very helpful for us to understand not only what they were doing.

[00:19:17] Andrew Brenton: But the implications for the other companies that we own, and then I would also say our experience in the smaller cap space, I’m not sure that investors get compensated for the risk they’re taking. When we look at that mid cap space, when you’ve got a 10 or 20 billion dollar market cap company market cap, meaning they have earnings that justify that market cap.

[00:19:43] Andrew Brenton: I don’t mean. Earlier stage or some of the tech companies, so well built out companies that are trading at attractive valuations. They’ve gotten past a lot of that earlier company risk. And at least in our experience, they’re very attractively valued at times, not all of them. A lot of companies we follow today are trading above our view of their intrinsic value, but the ones that we own today.

[00:20:09] Andrew Brenton: are trading at significant, I’d say, remarkable discounts to their intrinsic value. And as we grow our AUM over time, and as we interact with larger companies, we have found no, no correlation between, call it market cap and market efficiency. I think they’re all inefficient. They’re all mispriced at times.

[00:20:29] Andrew Brenton: But you’re right. And you think about that 20 to 25 billion market cap space in North America. That’s a big space. That’s a lot of companies. And so we’re, we are pretty busy. As I mentioned earlier, still working our way through the scale and size of the U. S. market is substantial. We’ve still got a lot of work to do to call it, if there is any finish, to continue to at least get close to finishing our work of identifying and flagging the kind of companies in the U.

[00:20:59] Andrew Brenton: S. that we might want to own in a game, which is that first step in our investment process. 

[00:21:05] Clay Finck: As I was prepping for this interview, one of the pieces that really stood out to me, you mentioned 85 names that you’ve owned that you don’t own anymore. And there was only a few of them over your fund’s lifetime that you’ve actually ended up losing money on.

[00:21:21] Clay Finck: And it was pretty negligible amount that you ended up losing. So it seems that you’ve really honed in on figuring out what is a quality business. And then also the valuation, which we’ll be getting to is also an important point of that, where you’re only purchasing those companies at attractive valuations.

[00:21:39] Clay Finck: And I think that was just quite amazing how you’ve owned over a hundred names, and then only a few of them have ended up not contributing positively to the performance. 

[00:21:49] Andrew Brenton: Yeah. And then the 85 happens to line up with a different 85 number, but it’s true. That’s shortening the time period and saying not in the last 25 years since we started, but just looking at sense of credit crisis and saying in that period, we’ve owned 87 or 85 companies and then, of course, 30 today and you’re right, jumped out at me and we were asked to do this work by some large U.

[00:22:12] Andrew Brenton: S. groups investors, where did the returns come from? And because I try to explain to people, we don’t hit home runs. We’re the group that we’re trying to hit singles. We’re sacrifice flies. We’re bunting to get on. We’ll even let ourselves get hit by a pitch to get on base. We’re trying to manufacture runs and when we get to the last steps of our investment process, I think that will make it clear.

[00:22:39] Andrew Brenton: And, but I was frankly surprised looking back to see that there were only two investments that we lost money on. And the aggregate amount was really quite small. In other words, it had an immaterial impact. If we hadn’t had them, you almost wouldn’t have noticed because it just wouldn’t, it didn’t have an impact on the aggregate return.

[00:23:02] Andrew Brenton: I think it’s. As you hear the 1st rule of investment is don’t lose money and the 2nd rule is the same as the 1st. Yeah, I think that’s part of the approach, but it’s not like we’re not trying to be timid. And I’ll talk about that in the 2nd step when we talk about our evaluation process.

[00:23:22] Andrew Brenton: It’s just the reality that we. That we have and it isn’t like we’re afraid of losing money. We fully expect to in some investments to make the investment and not get it right. And to lose money. 

[00:23:35] Clay Finck: You’ve said that valuation is actually the biggest risk in your investment process. I’d love for you to dive in and talk about what makes.

[00:23:45] Clay Finck: Successful process of determining the intrinsic value. You’ve said it’s all about the cash flows and the present value of those cash flows. But I’m curious, maybe what sort of internal rate of return you need to target, what sort of discount to the intrinsic value you need to target to make sure you’re not falling for this biggest risk of valuation risk.

[00:24:06] Andrew Brenton: Yeah our approach, that second step, where we, so we found a company, we think it’s our kind of company. Then the problem is, you don’t know if it’s cheap or not. In our view, you can’t look at a PE multiple. There are so many accounting irregularities, whether it’s IFRS or US GAAP. And so you need to do a lot of work.

[00:24:27] Andrew Brenton: You need to build a financial model because it also forces you to explicitly think about all the assumptions and it. It creates a lot of back and forth and dialogue with management of the company over time. And one of the key differentiators, back to that idea of a different kind of value investing, in that process, and this is one of the things that I’m frankly constantly doing with the people on the investment team, is trying to make sure they don’t, they’re not conservative.

[00:24:55] Andrew Brenton: Last year, a term crept into the investment team. It was something like underwrite. I’m not sure I’m willing to underwrite that assumption and I say, we’re not an insurance company. We’re trying to get it right. We are trying to, if a company has big organic growth, and we believe they have big organic growth.

[00:25:15] Andrew Brenton: Then I want to see that in the forecast. I want it to be balanced. I want to look at the end of the year. And look back and say, that’s okay, some of our forecast turned out to be maybe a bit too high. We’ve taken our long term numbers down. That’s okay. If I saw that we never did that, then I’d conclude we’re being too conservative because 1 of the risks.

[00:25:36] Andrew Brenton: Yes, there’s valuation risk in terms of paying too high a price for an investment and owning a great company. And then looking at it 10 years later and saying, wow they’ve really done well. And the share price is the same price because of the price you paid at the beginning. But there’s equally a risk that you didn’t recognize and embrace the organic growth or the inorganic growth, the ability to create value through acquisitions.

[00:26:03] Andrew Brenton: We own a lot of what I call platform companies, not roll ups, but platform companies. And if you’re not willing to consider that in the forecast, You’re going to sell your shares too early, so I think at least we try to do a good job of being balanced and recognize that some companies have a remarkable opportunity set for many years to come and if you don’t, if you don’t see that or aren’t willing to acknowledge it in your financial model, in your forecast, you’re going to look at it and say it’s a great company, but it’s really expensive and I don’t want to own it.

[00:26:39] Andrew Brenton: And many times. We’ll look at companies and when we factor in that long term growth and the inorganic growth, the platform companies. We’ll conclude that, that a stock is cheap when other investors will say it’s really expensive because it’s trading at 25 times earnings or 30 times earnings and we’ll say, yeah, but they’re requisitive and there’s a lot of amortization in the earnings number.

[00:27:06] Andrew Brenton: So you have to take that out because that’s a non cash number and then they have a lot of growth, whether it’s through acquisitions or through organic growth. And the work that we do causes us to conclude it’s actually pretty cheap and we want to own it. So I think it’s that process of trying to be balanced deals with that valuation risk, i.

[00:27:26] Andrew Brenton: e. just paying too much for a really good company. 

[00:27:30] Clay Finck: You just mentioned factoring in the long term growth of a business, and it reminds me of another comment you’ve made where you stated you don’t believe in economic moats. And I think this points a bit to being careful when forecasting higher growth rates into the future, because eventually all businesses hit their stage of disruption and decline.

[00:27:53] Clay Finck: So when you find a great business, how do you think about forecasting out above average? growth rates and doing so in determining an accurate picture of the intrinsic value because it seems like you’ve really nailed down this process of intrinsic value. What is the business worth and you have to make some sort of forecast maybe even more than five years out from now into what the business is going to be able to do in terms of the cash flow generation.

[00:28:20] Andrew Brenton: It’s interesting, right? Because if you think about what an investor does, if they’re even just sticking a price earnings multiple on the current earnings, they are making a long term forecast. There are a bunch of implicit assumptions, whether it’s simply 1 over K minus G, right? The cost of capital minus the growth rate.

[00:28:38] Andrew Brenton: And what we’re doing is simply saying I think we can come to a better long term view if we force ourselves to explicitly. Make assumptions next year and in 5 years and in 10 years and in 20 years and then all that we’re doing in our financial models is once you get to that, there is no better assumption than standard assumptions, standard margins, standard growth rates at that time.

[00:29:04] Andrew Brenton: Then we stop, but even then, like any model you’re putting a terminal value on it. And I always say to my team, just make sure the methodology is the same as if you forecasted out on static assumptions for the next 100 years and discounted it back. I think when people say how can you forecast more than 5 years?

[00:29:29] Andrew Brenton: You can. But that’s why I use a discount rate, and we use a pretty high discount rate, around 9%, it’s a small range, and so that means even if you’re wrong in 12 years, it doesn’t really have a huge impact on the present value of the cash flows, but as I say, everyone’s doing that, they don’t even know they’re doing it when they stick a simple price earnings multiple on current earnings, and we just want to make it explicit.

[00:29:58] Andrew Brenton: and force ourselves to think about all of the different drivers of the business. 

[00:30:03] Clay Finck: Turning to step three here, portfolio optimization. To me, this is one of the most interesting parts of your investing process. You essentially size your bets based on how attractive they are and then continually update those weightings as market prices change.

[00:30:20] Clay Finck: And I find this interesting because when I look at many great investors, I noticed sort of a power law in where their money is made and where the returns come from. I’ll mention a few investors here. Benjamin Graham, for example, he’s known for buying extremely cheap companies and flipping it and getting in and out of all these cheap businesses.

[00:30:39] Clay Finck: But he actually ended up making a lot of his money by buying and holding Geico for decades. And then Warren Buffett. He’s bought and not sold a lot of these great businesses, Apple, Coca Cola. There’s a list there of great businesses he’s owned for quite a large number of years. And then Bill Miller, he purchased Amazon at their IPO in 97.

[00:31:01] Clay Finck: And he said somewhat jokingly on our podcast that the best investment decision he ever made was buying shares of Amazon. And his worst investment decision was ever selling a share. Now, this isn’t my way of saying that we should completely ignore valuation, but these truly spectacular businesses, I think they can be really difficult to come by.

[00:31:23] Clay Finck: So I’d like for you to talk more about how you guys have combined this approach of buying great businesses, but being willing to part ways with them when generous expectations are built into the price. 

[00:31:37] Andrew Brenton: The way I think about it, I just think this idea of continuous portfolio optimization, it’s an enhancement of a permanent buy and hold approach.

[00:31:46] Andrew Brenton: I can’t speak to Amazon because We weren’t around then. Of course, I can’t speak to GEICO, but what I would say is that we have owned companies in our portfolio for 20 plus years now, and we have always so far. And these are really good companies. We have always so far. Improved upon a buy and hold return.

[00:32:10] Andrew Brenton: So some of the buy and hold returns have been terrific. We’ve owned a Canadian specialty food company that’s actually, I think it’s the best in North America. It’s very, they have big operations in the US. They’re based in Vancouver. And if you have had simply bought and held that company. In the last 16 years from when we first invested, you would have a 20 percent compound of return.

[00:32:34] Andrew Brenton: That is, as we know, that’s pretty good. And we’ve earned a 30 percent compound of return because we have flexed how much we own. But it’s always been a holding in the fund. And I can’t imagine, I can’t, it’s possible it won’t be a holding at some point, but it’s because we work hard to embrace, if we think it’s real, their opportunity set, and I think this company is a classic platform company that is very good at making accretive acquisitions, bringing smaller food companies into their ecosystem, making them part of the family, as it were, adding value.

[00:33:17] Andrew Brenton: And I have had other investment managers over the years because they, we’ve been a big shareholder and it’s a varying amount, say to me it’s impressive management, but it’s expensive. And if again, back to what I said earlier, if you’re not willing to give them credit. For being that platform company, and I’m going to say, which I know nothing about, so I probably shouldn’t, but like a Teledyne, like some, a company that is very good at acquisitions.

[00:33:45] Andrew Brenton: Obviously, as a Canadian Constellation Software and Mark Leonard, that’s very good and creates value through acquisitions. If you’re not willing to give that company credit ahead of time, looking at what they’ve done and what they tell you they’re going to do when you look at the industry and you then no, you probably won’t own it.

[00:34:03] Andrew Brenton: And so I don’t like the distinction between value and growth that this is the company I’m describing is is both are high organic grower and also grow grower through acquisitions. But like I said we’ve owned it for 16 years continuously. We’ve just owned it in varying amounts, which has allowed us to own less when the market gets really excited and own a lot more when the market gets disappointed with it.

[00:34:30] Andrew Brenton: They actually released this morning and the market’s disappointed. So despite the fact that this was a really good day in the stock market, that stock was down and we were buying more stock that we’d sold at higher prices. So I’m not disagreeing that a buy and hold. If you find a great company is, of course, you don’t sell it just because the price goes up, but we’ve layered in I think of it as simply an additive.

[00:35:00] Andrew Brenton: Most of our returns come from. That fundamental step of finding the kind of companies that we, we spoke about, but having the discipline to wait to add it to the portfolio where we say, boy, at this price, a buy and hold over the next 5 to 10 years, it’s going to be good. And then if the price goes down from where we added it, common sense to us would say.

[00:35:26] Andrew Brenton: If nothing’s changed, you should own more, right? And I think we all agree with that, but we’ve just applied a symmetrical approach and said, but equally, if the price goes up enough and nothing’s really changed, and you thought you own the right amount at that lower price, you should not own as much, but we’re talking about little changes in both directions.

[00:35:49] Andrew Brenton: And that, that the core part of our approach. Is the bulk of our returns that fundamental approach that those investors that you mentioned have taken. We’ve just I just think of it as it’s simply icing on the cake. It’s the. Maybe it’s because we come from private equity and you didn’t have that lever.

[00:36:11] Andrew Brenton: I just thought, how terrific is it in the public market that you can take a long term buy and hold mentality with really good companies and then tweak around it. And it’s interesting as our long time holdings and our companies get to know us better and better, it won’t surprise you to hear they’ll say to us sometimes.

[00:36:29] Andrew Brenton: I get what you’re doing and it’s actually really logical. I just wish you’d own us and never sell a share because of course, that’s what a good company wants. They want shareholders that are like that, but they don’t argue with the logic of it. 

[00:36:43] Clay Finck: One of the brilliant aha moments for me in learning about your approach is that you’re not only outperforming the market, but you’re also outperforming your own investments.

[00:36:55] Clay Finck: And that kind of makes your head spin when you first think about that and realize that you own all these great businesses and you’re outperforming many of these great businesses through the ownership of each one. You talked about one example, but I wanted to provide one more. Example of a portfolio company here out of Canada called Automation Tooling Systems.

[00:37:15] Clay Finck: I believe you first found it in 2004. And if you look from 2004 to 2022, the shares have compounded at 9% per year. But you didn’t make a purchase initially because the valuation wasn’t right. And then when 2009 came around, that’s when you recognized that it was trading at a deep discount. And if you look at the share price compounding from there, if you just bought and hold, you’d have earned 22 percent per year and because of the system of portfolio optimization sizing it up when the share price is down and then pulling back your sizing when the share price runs up, your return in that company is around 30 percent per year.

[00:37:54] Clay Finck: And I just think this is just it just seems to be something that not a lot of investors talk too much about, or have at least seen a success in actually implementing that. 

[00:38:05] Andrew Brenton: Yeah it’s, so you’re right. We, when we first met them, we loved the business. This is today a remarkable company, a global automation company helping think of fortune 1000 companies around in North America and in Europe.

[00:38:21] Andrew Brenton: Improve and automate their processes. The current CEO, he’s been running the company for 6 years. He’s an ex Danaher executive. They listed on the New York Stock Exchange, so they’re co listed now. They listed earlier this year. It’s gone from being a company that didn’t meet our criteria in 2004 to 2009 with new management, where it absolutely met our criteria.

[00:38:46] Andrew Brenton: But now with current management has just elevated their game to be a. Just a remarkable company. And one thing that’s important to understand, we are not, we’re not trading because we have a feel for where the stock’s going. We have no idea where the stock is going. I’m comfortable in, given enough time, the stock will be higher.

[00:39:09] Andrew Brenton: And I did have a large family out of the US say to me a couple of years ago, as we first met, he said we’ve got some really good managers that we like a lot, but every time they try to trade around one of their positions, they take away from a buy and hold, but you clearly have done the opposite.

[00:39:29] Andrew Brenton: And how do you explain it? And I said If you’d let me and I actually, I used ATS, Automation Tooling Systems as an example. I said, if you had let me pick when I would buy shares and sell shares, guaranteed I would have taken away from a buy and hold over all of that time, because that, then you’re trying to read the mind of the market and I’ll give you a more recent example of a stock hit all time highs in the mid 60s.

[00:39:57] Andrew Brenton: Now I’m thinking Canadian dollars. Okay. Somewhat less in US, but it’s the same percentage change. And then, as of a couple of weeks ago, it had drifted down into the 40s. I don’t know why they had their first investor day in September in New York. So their first US investor day, and like I said, it’s a very well run company.

[00:40:18] Andrew Brenton: It’s sexy. It’s a good story. And so we’re just anchored on the return that you will make a few years ago when the stock was a 20 versus the return you will make looking forward when the stock is 65. When it’s the same company, we’re just going to own less at 65 and a lot more at 20. And then as the stock drifted down into the 40s, for whatever reason in the last weeks ago, we bought back stock that we had sold at higher prices and it’s relative, right?

[00:40:51] Andrew Brenton: If you think of the COVID crash, we had to pick our spots in the crash of March of 2020, because if everything falls by 20%. There’s really nothing to do. And so what really makes a difference for us is when half the stocks are down and half the stocks are up. But I want to come back to the point that we’re long term owners of ATS.

[00:41:14] Andrew Brenton: I could see a scenario where the stock. Because it’s such a cool story gets captured up in enthusiasm and we trim and trim and possible it could go to zero, but it would be temporary. 1 way to think of it is I can’t think of a situation which we have at times. So we’ve, I mentioned how there’s 3 buckets that middle bucket of 25 or so companies that.

[00:41:42] Andrew Brenton: We owned at a point in time, then we trimmed all the way to zero because the price approached or actually went through our estimate of intrinsic. I haven’t yet seen a time where I look and say, darn it, our intrinsic value, our forecast was way too low and we missed it, or we sold it too early. So far, they always come back at some point, they always fall back to earth.

[00:42:06] Andrew Brenton: And so I think that’s the way to think about it. Is if you’re, it’s back to my comment, if you’re giving the company trying to give it full credit for all of the things that they can do in the future, then the risk that, and we’re trying not to miss things on the upside, if you will, then we haven’t seen where something where we just look back and say.

[00:42:29] Andrew Brenton: Darn it, we never should have sold it. I want to come back to your comment. You’re right about those examples of the company themselves are compounders and then we’ve been able to add a bit on top of that. If they were all that, our returns would be higher, right? We’ve got plenty of examples of companies that have not generated those kind of returns at least yet for their shareholders.

[00:42:51] Andrew Brenton: But at least even in those cases, we’ve managed to offset that. So we’ve got a number of examples where a US company that we added 5, 6 years ago, sitting here today, it’s the same share price as when we added it. And yet, when I look at how much we’ve increased our intrinsic value, it’s a bigger holding today 6 years ago when we added it to the portfolio.

[00:43:14] Andrew Brenton: So for us, it’s a dynamic process. You think of the 2 components. One is constantly from a new information. What’s happened? Is it a transitory? Is it negative? Is it net positive? My partners and other members of the team at dinner tonight with one of our companies, they will learn things and they will come back and that will be.

[00:43:37] Andrew Brenton: Part of the process of should we take our long term view up a bit? Should we take it down a bit? And I would also stress that some of the younger people on the investment team probably think that the partners are a little slow to react because we don’t want to get whipsawed when when there’s a bad quarter or when or something exciting happens.

[00:43:57] Andrew Brenton: Because we’ve seen it too many times in the past that you let emotion perhaps come too much into the process. So we’re if we are raising our view, it’s been in a a bunch of steps and equally when we’re derating a company, it’s not an aha moment where we say. We thought they were great, and now we realize they’re not.

[00:44:18] Andrew Brenton: It’s this continuous changing of views in both directions. 

[00:44:23] Clay Finck: You had said there that for ATS, if you had to be the one that was adding and trimming, then you would, if I heard you correctly, you wouldn’t add alpha to the buy and hold approach. So what is it about what Turtle Creek’s doing that’s different than how you might approach it?

[00:44:39] Clay Finck: Is it the emotional aspect you’re referring to there, or what is it? 

[00:44:43] Andrew Brenton: It’s taking the market or the mind of the market out of. So if you think of all of our holdings and all of the other companies that we’re closely following, we have a view of that at the current share price. What is our long term buy and hold?

[00:45:00] Andrew Brenton: And I want to stress buy and hold. It isn’t about trading. It’s just this point. What is the long term? Like 5 to 10 year return? Is it each company has a risk adjusted expected return? That doesn’t bring the market into the discussion. And so when I look at ATS and I think, wow, like on shoring and they’re, and they are very focused, whether it’s battery pack assembly for GM, like they’ve won massive contract with GM who are desperately trying to catch up in the electrification of vehicles or in radio pharmaceuticals or in food processing.

[00:45:39] Andrew Brenton: They’re very thoughtful as to where they operate. And so when I look at how they’re executing, and then you think about automation, you think about labor costs, you think about the whole trend toward onshoring both in Europe and in North America. There’s lots of tailwinds. And then you start thinking about the market’s going to love that.

[00:46:00] Andrew Brenton: It’s a great story. And they’re listing in New York and American investors don’t know about them. And now they’re going to know about them and the stock is going to go up. And actually it did go up, but then out of the blue this fall, it fell from Canadian dollar 65 down to 45 dollars in a fairly short period of time.

[00:46:19] Andrew Brenton: It ran out of steam. And again, like I said, one of the, I think, strengths for us is that we don’t try to predict that. We just let that wash over us. And so you’ll never hear us say I know it’s cheap, but what’s the catalyst that’s going to make it go up? Because we own direct operating companies.

[00:46:41] Andrew Brenton: We don’t own holding companies that have a bunch of pieces of other public companies where people try to do the math of some of the parts. If there are different parts, we’ll value each of them separately in our own discounted cash flow model. It’s a bottom up operating, owning operating businesses and companies that do not issue equity, that don’t need to issue equity.

[00:47:04] Andrew Brenton: Now, to be fair, ATS did an equity offering, but that was part of the New York listing. Apparently, you need to pay the investment dealers in the U. S. if you’re going to get coverage. And so they did an equity offering, but to be fair, they have big opportunity set for acquisitions, and they’ve actually pulled the trigger on a number of them.

[00:47:25] Andrew Brenton: But setting that unique model aside, we have another long time holding that is Canadian that listed two years ago in New York, in anticipation of knowing that if he wanted proper following in the U. S., it probably made sense to do an offering, he bought back a lot of stock leading up to that so that he could just, in effect, reissue it, but otherwise, think about our companies, They simply don’t, good companies, great companies, very few of them have so much use for capital that they can’t supply that capital through their own cash earnings and they’re increasing debt capacity, senior debt capacity as they become bigger.

[00:48:13] Andrew Brenton: And so if you own companies like that, that then are opportunistic and rational about when they will buy back their own shares. We don’t think about the stock market and the stock price as to where it’s going to go. We just, there are lots of examples of companies that we’ve Haven’t done much in their share price for years, and we’ve never worried about it.

[00:48:36] Andrew Brenton: The U. S. companies I’ve mentioned that we added to the portfolio 5, 6 years ago, and here it is 5, 6 years later, and the share price is the same price. It doesn’t bother us. It would bother us if the company’s not doing well, but what we do is we own a lot more of those companies today than we did 5, 5 to 6 years ago.

[00:48:57] Andrew Brenton: And at some point, someday, The share price will go up and that being our experience for 25 years, I think it will be the case in the next 25 years. 

[00:49:07] Clay Finck: Another point you’ve mentioned before is talking about the inefficiencies in the market. And you actually believe that the markets are becoming less efficient as you’ve gone on over time with the rise of things like high frequency trading, social media, leading people to invest very emotionally.

[00:49:27] Clay Finck: Have you seen these inefficiencies play into Turtle Creek’s returns over time? And is the inefficiencies tied to the returns you’ve seen over time, over the years? Or is there other evidence that leads you to believe this? 

[00:49:42] Andrew Brenton: It’s not like I can see it in the returns, actually. It’s hard to parse apart.

[00:49:47] Andrew Brenton: I think you’d have to have been operating for a hundred years and then look at different periods of time. I still will state. As inefficient as things are right now, and as pockets of froth have occurred and been in the market in the last few years, especially. During the pandemic, and we all know about those pockets, the inefficiencies in the.com.

[00:50:09] Andrew Brenton: Were, we have yet to see something like that again in terms of how broad-based it was. So it’s hard to claim, oh, things are definitely a better environment for us than they were in the.com. I think the.com was a remarkably attractive environment for us because back to the thought, we are not a static.

[00:50:29] Andrew Brenton: But I do think, and you see it, the amount of information that is out there for people, and how distracting it can be, and you combine that with the increase of index funds, which I think, again, for most people, it’s the right thing to do. You’re just, you’re going to have inefficiencies. But you don’t want a completely inefficient market.

[00:50:50] Andrew Brenton: If it was a completely inefficient market, then even if you own value, it could take a long time for it to show up. So you want a mix. You want a short termism, which I think of as an inefficiency. Maybe other people think not, but some of the companies we own because of the concern of a recession in the U.

[00:51:11] Andrew Brenton: S. or in North America have been absolutely crushed in the last year or so. And our long term view on the company hasn’t changed. And in fact, in many cases, as we tend to own the leading company in their industry, they actually can benefit from a recession, from an economic slowdown, because the competitors are weakened, or maybe they’re over debt burdened.

[00:51:36] Andrew Brenton: So you can build a case that a recession is good for the company back when the, in the Euro crisis, and there was a long North America bounce back really quickly after the great financial crisis, Europe, not so much. And I remember saying to people coming back to ATS automation, because there’s so much of their operations are in Europe and they’re part of their model is buying quality engineering shops that have hit the ceiling in terms of.

[00:52:06] Andrew Brenton: What the founders can do with the business, a softer economy can actually be a great environment for them. But if you think about the impact on value in those companies, if you take a long view. Then we end up owning a lot more of those companies, but what’s nice is there is enough efficiency in the market and enough people focused on, okay, the Fed looks like they may be done.

[00:52:33] Andrew Brenton: Wow. It looks like inflation is not so bad anymore. And that has a remarkable effect on the marginal share price on a bunch of our companies. And so you want both. You want inefficiencies, but you want a quick reaction to whatever they’re doing. So I think to a large extent in the stock market, there are lots of very smart people focused on.

[00:52:57] Andrew Brenton: I don’t want to say the wrong things, but not focused on the things that we are focused on. 

[00:53:02] Clay Finck: Earlier you mentioned the term random walk, essentially stocks from day to day, week to week, month to month. It’s essentially random whether the stock price is going to go up or down. And you had this chart in your annual report that showed rolling return periods.

[00:53:19] Clay Finck: of whether you’re beating the market or not. And over a one month period, you beat the market around 57 percent of the time. So it’s essentially a coin flip, whether it’s going to be a great month or not. As you extend that out rolling one year, rolling two year, the odds of you guys beating the market just continues to go up and up.

[00:53:38] Clay Finck: For example, Rolling three year periods is around 80 percent outperformance, 80 percent of three year periods, and then if you extend that to 10 years, it turns out to be 100%. And I wanted to ask a question around the number of holdings. You tend to target 25 to 30 names. Is that an amount that just lets you sleep better at night, or how did decide on that level of diversification within the portfolio?

[00:54:05] Andrew Brenton: I can’t mathematically justify or explain it. What I can tell you is when we started, we came at it two ways. It was there were three of us. Seriously, how many companies can three people know well? And we came to a number of 25, because the other side was since we’ve committed and remain committed to have 100 percent of our own wealth, our family’s wealth in Turtle Creek.

[00:54:32] Andrew Brenton: How many companies do you need to own to be sufficiently diversified? So we don’t own any other asset classes. And we’re comfortable that if you own 25. Of the type of companies that we’ve been talking about, and they happen to be in different industries and they happen to have strong balance sheets.

[00:54:51] Andrew Brenton: Although I wouldn’t stress not fortress balance sheets. We hate it when people companies talk about fortress balance sheets that just screams capital inefficiency to us but strong balance sheets. So again, think of the credit crisis. None of our companies. hit a wall back then. None of our companies hit a wall in the COVID crash.

[00:55:12] Andrew Brenton: So we came at it from those two sides, sufficient diversification, because sure, 25 companies, but they’re not equal weight. You can have 10 percent as we have had at times in one company of the portfolio. So that’s how we got that number. And then, and it’s in the main fund, it has drifted up over time to 30.

[00:55:34] Andrew Brenton: Because as I mentioned earlier, we have a deep following or deep knowledge on over 100 companies. So it’s been interesting talking to some investors where they don’t like that, where that it’s gone from 25 to 30 because they’re they’re taught to think you want to just own your high conviction holdings.

[00:55:53] Andrew Brenton: And my response to that is. You know that hundredth company that we don’t own any of and haven’t had for a few years, but we think it’s equally as good as the 30 we own? That’s an equal high conviction. The way I like to think of it. All of our 100 companies we have a high conviction on and then we just turn to the market and say this is what we think it’s worth or what the long term return will be from here.

[00:56:19] Andrew Brenton: And as I mentioned earlier, some of them today are trading above our estimate of intrinsic value. In other words, way to think about it, a buy and hold might earn you 5 percent returns over the next 5 to 10 years. It’s a great company, but we are not anywhere close to owning it. And so that, that’s why the number in the flagship fund has crept up to 30, but I’ve had to promise some of our longtime investors.

[00:56:51] Clay Finck: Since I mentioned Buffett and Munger, I also wanted to bring up Home Capital Group, a member of our investing community here at The Investor’s Podcast. He told me about the story of Turtle Creek being the largest shareholder in Home Capital Group, and they were going through some turbulence and some issues a few years back.

[00:57:12] Clay Finck: And then Warren Buffett comes in and purchases a large stake in this company. And I thought it was quite interesting how you guys were the largest shareholder. And then Buffett comes in when the share prices were beat down. So could you share that story with our audience? 

[00:57:27] Andrew Brenton: Sure. And it was actually Warren and and one of his members in his team who did the transaction because they had to act really quickly.

[00:57:36] Andrew Brenton: So this is a company that think of it as a niche. Bank, we have 5 or 5, 6 very large banks in Canada. It’s different than the US, but then there are some smaller niche banks. This is a, it’s a very good deposit taking institution that got about 5 years ago, hit with a. Just a confluence of events that I won’t go into in detail, but essentially there was a.

[00:58:00] Andrew Brenton: There was a classic run on the bank and, but because they were essentially other than a small percentage. Match funded, they survived the crisis and, but the stock had fallen a lot. And as you say, we were the. We were the largest shareholder at about 20 percent at that point at the lower share price and it’s not very common for us to go inside the tent with our companies, but given that they were in crisis mode, we agreed to do that.

[00:58:32] Andrew Brenton: I will say I was just, and it won’t surprise your listeners to hear this, but just the clarity of thought. And the intelligence of Berkshire and Warren, just looking at the company, recognizing that it was call it irrational. Think of the bank run and it’s a wonderful life.

[00:58:54] Andrew Brenton: You’ve got valid assets. And as I say, the company had survived and we, but we were supportive, we thought taking money from Buffett, That they didn’t need was such a, would have such an impact on the tone and the way depositors viewed the company and the market in Canada. And so Buffett actually wanted to buy about 50 percent of the company.

[00:59:22] Andrew Brenton: He viewed it as a long term strategic. Holding, but the way the laws work in Canada, a board can issue only 25 percent shares out of treasury without shareholder approval. So the transaction was in 2, 2 steps. So very quickly he invested to own 25 out of treasury means he was a 20 percent shareholder, which dropped us down, which then gave us freedom to buy more stock to get back up to 20%.

[00:59:53] Andrew Brenton: Because that is the limit if you’re an investment fund in Canada. End. But the 2nd tranche was turned down by the shareholders, which I was really impressed with. They didn’t try to lobby us because they understood that they didn’t, we didn’t, the company didn’t even need his 1st tranche of capital.

[01:00:13] Andrew Brenton: What they needed was the good housekeeping seal of approval and it was. Shockingly effective. It just changed the conversation and the dynamic and then actually 2 years later, year and a half later, actually. So the 1st, 2nd tranche was turned down by the shareholders and then because it wasn’t strategic, the company bought back, made an offer to everyone, but essentially it allowed Berkshire to sell their shares.

[01:00:41] Andrew Brenton: They bought in at 12. They sold at something like 17 a year and a half later, and so it was fine for them because it wasn’t strategic going forward. They were simply a 20 percent shareholder of a small ish Canadian bank, but I told the company after that, I said, that’s the best trade I’ve seen a company ever do.

[01:01:01] Andrew Brenton: Sell stock to Buffett at 12 and then buy it back from at 17 a year and a half later. And in fact, the company was just taken private this year at 45 a share. So it, it was, it was a terrific experience and watching the way that they operate. It’s, it is what we’ve always heard in terms of their investment approach.

[01:01:23] Andrew Brenton: It was quick and highly principled, but I can tell you that Ted Weschler the fellow who did the deal with Warren, he told the lawyers, he said we’re going to close on Thursday. We’re going to commit on Thursday. And the lawyer said, but what about due diligence? And he said, no we’ve looked at 25 years of audited financials.

[01:01:43] Andrew Brenton: We’re comfortable, but he told me the, I think he woke up in the middle of the night on Tuesday night and just said what if there’s a problem inside the company? Because again, they had to act really quickly. And I told him, I said We’re not on the inside purely, but I think you’re fine and they ultimately were it’s one of those classic doing a deal on the back of an envelope which has for Berkshire worked out a lot over the years.

[01:02:09] Clay Finck: I had a couple more questions here before I let you go. In your 2022 annual meeting, you talked about how not only your fund has compounded at a magnificent rate since its inception, but you’ve seen a continuous improvement in your process at Turtle Creek and then in building out your team. So it seems like you’re always looking for these ways to continually improve because you understand the long term benefits that come from that compounding and that continuous effort.

[01:02:38] Clay Finck: That’s put forth. So I was curious if you could just speak more broadly about the long term benefits of compounding, not only in your investments, but more so in life in general. 

[01:02:48] Andrew Brenton: At our holiday party dinner last year, the year before it’s funny because I said that I knew when we started Turtle Creek.

[01:02:58] Andrew Brenton: That we put decent returns. My 2 partners are remarkable and together we’re pretty good investors, but I hadn’t thought about the firm we would build and the culture that we would have. And that part wasn’t I guess maybe on the day 1 strategy, but. I’m quite proud of what we’ve built and I think that extends to lots of other parts of life.

[01:03:24] Andrew Brenton: You take a, when we do have turtle in our name the slow and steady endurance model compounding is one of the greatest forces in the universe and doesn’t have to be that much more when you see the percentage returns, if you can do it for a long time. Yeah, I think it applies to lots of.

[01:03:47] Andrew Brenton: Things in life and I guess it’s partly don’t let the current share prices beat you up. I yesterday was thinking about some of the companies in the portfolio and it’s human nature to think it’s been hasn’t what would make it go up? And then. Inflation was low today and the market ripped and some of our stocks are up 10 12 percent and if you let yourself worry about that, then I think for us, that would be a problem.

[01:04:16] Andrew Brenton: I like it when things go up. Don’t get me wrong. But I think partly we have the temperament to hit the reset button. So in the summertime, our unit price was an all time high, and I’m thinking, this is great. I’m glad that we’re at an all time high. And then August came and then September and then October, but we have the ability to hit the reset button and say, okay, the companies are still the same companies.

[01:04:40] Andrew Brenton: And this is providing us an opportunity to improve upon that buy and hold. And the way to think about us is, Whatever our unit prices today, whatever the returns have been up to today, they wouldn’t be as high if there hadn’t been a credit crisis. And they wouldn’t be as high if there hadn’t been a COVID crash.

[01:05:04] Andrew Brenton: And so I think if you’re able to take that long view and having done the fundamental work, then you just let everything else wash over you over time. 

[01:05:13] Clay Finck: That’s really interesting. If there hadn’t been this market turmoil, then your returns wouldn’t have. But, I think back to the, GFC, for example, the unit price of your shares were declining so what was it about a period like that, if it hadn’t of happened then the returns would of been lower?

[01:05:33] Andrew Brenton: Let’s come back to just one simple example, you mentioned Automation tooling systems, ATS, the stock was in the twenties when we first met them. You And there was actually a board change. It was a proxy fight in 07 and a much better management team installed and they were improving the business.

[01:05:53] Andrew Brenton: We’re not much for investing in turnarounds, but we were able to visit them frequently, watch what they were doing. They were, they had a strategy to sell off assets that weren’t core that the founder who had passed away had diversified over time into. And to focus instead on the core automation business, which was the gem.

[01:06:14] Andrew Brenton: So you had this remarkable situation where the results are getting better. It was a little bit of noise in the financials and then the GFC hit and the stock went from in the double digits to in January of 09 to 5. It wouldn’t, I don’t think in any scenario would have gone to 5, but for the credit crisis.

[01:06:38] Andrew Brenton: And so that was a remarkable opportunity and we added it to the portfolio at that point and made it a decent holding. And then over the next few months, all that happened was the stock went down and it actually went as low as 3 a share. And now if I’d known it was going to go to 3, I would have waited, but we were buying at.

[01:07:00] Andrew Brenton: Each price point lower all the way down. And if it had gone below 3, we would have bought more. It turns out it only went as low as three. And this is back to my point. You can never predict these things. If there hadn’t been a credit crisis think of the spring of 09 where the S& P 500, I think at the famous 666 number, we would not have had the opportunity to buy stock, let alone a five all the way down to 3 a share.

[01:07:27] Andrew Brenton: So that’s what I mean by. Those market dislocations have provided opportunity to us. You have to have the temperament and you have to be willing to buy more stock at a lower and lower prices, which needs the building block of having done the fundamental work on each of the companies so that you’re not worried that the market knows something that you don’t know.

[01:07:51] Clay Finck: I’m just doing the math on when your returns started on your website. Is your fund crossing 25 years this month? 

[01:08:00] Andrew Brenton: Yeah, I crossed actually at the end of October, 25 years. 

[01:08:04] Clay Finck: Now that you’re 25 years in, I can’t help but ask what you’re looking forward to in the next 25 years. 

[01:08:12] Andrew Brenton: It’s funny. I so I make a point of never talking about those guys in Omaha, but you’ve brought them up a couple of times in this conversation.

[01:08:20] Andrew Brenton: So I will bring it up I would tease him 1 of my partners the other day that he’s about to turn 60, he did his MBA in Chicago more than 30 years ago. And when he was there, he heard about these guys in Omaha that were pretty good invest, like it was pretty good opportunity. And he looked into it.

[01:08:41] Andrew Brenton: And he said, Oh, my God, like this Warren Buffett, he’s in his 60s and just decided that can’t be interesting because how much longer can he do it? And so I was pointing out to Jeff Jeff, you’re going to be almost as old as Buffett was when you first found Berkshire all of that long time ago, and then decided it wasn’t worth digging in on.

[01:09:02] Andrew Brenton: And so I can’t suggest that we’re going to make it that far, but. The plan is to try. We love doing this. The three of us as founding partners are all in a hundred percent engaged and we love it, but I think part of the culture here, or I know part of the culture here, it’s a very collaborative model and so everyone on the investment team beyond the three founding partners, whether it’s people who’ve been with us for 15 to 20 years, Or starting people.

[01:09:32] Andrew Brenton: It’s really a team approach. It’s a collaborative approach. We then can’t point fingers at somebody saying how come the company missed or because everyone’s bought into the forecast. For each of the companies, and I think that creates longevity. So we’ll see. But what I know, and what my partners know is that the portfolio today.

[01:09:54] Andrew Brenton: Has never been as high quality in the past. And if you think about it it’s what you would expect, right? It’s not like we’re identifying and wanting to dig in on less quality companies. And if anything, over the years, we keep raising the bar on the companies that we think meet our criteria.

[01:10:15] Andrew Brenton: Why is that? Because over the last 15 years, as we’ve met these remarkable. U. S. mid cap companies, it causes us to just elevate the criteria for a company that actually meets our terms. And it doesn’t mean they all have to be perfect. If you’re only would look at perfect companies, you aren’t going to have a very long list.

[01:10:38] Andrew Brenton: But they have to be above average. They have to be honest. They have to be shareholder focused. But I remember a few years ago, we met with a Canadian company that we’ve known about for a long time, but it had management change. And so we met with them and we thought if we hadn’t met all of these US companies in the last 10 years.

[01:10:58] Andrew Brenton: We would have been all over this, but we’ve just elevated our view. And I think we’ll continue to do that as we meet more companies that just keep raising the bar. And that’s what makes my partners and I excited because we recognize the portfolio in terms of the quality and. Sometimes I look back and think, how did we earn those returns with those companies?

[01:11:23] Andrew Brenton: I think I’m a lot more confident with the companies we own today than I would have been 10 or 15, 20 years ago. 

[01:11:31] Clay Finck: Andrew, this was amazing. It’s really an honor and a privilege to have a chance to chat with you on the show. Before I let you go, how about you give the audience a handoff to where they can learn more about you and Turtle Creek and your funds?

[01:11:46] Andrew Brenton: Sure. We have a website, just Google Turtle Creek Toronto, and you’ll find us when you go to the website. If you’re an American, you have to click that you’re a US citizen. There is a tab where you click that you’re an international investor. Which has full access to the website, but if you, as you go through the U.

[01:12:06] Andrew Brenton: S. portal and then qualify U. S. investors, and then you have full access to the website. We’ve got, I think, pretty good content with more recent annual letters, some recordings of interviews and our 3 most recent annual meetings. And then we actually write a lot. We’ve got a series that’s called the Dow of the Turtle, the Way of the Turtle, which captures, I think, a lot of our investment approach.

[01:12:32] Andrew Brenton: So it’s a good starting point. 

[01:12:35] Clay Finck: I’ll echo that there’s a lot of investing wisdom on your website from the letters to the recordings of the annual meetings. It’s, there’s a lot of great stuff in there and I’d encourage the audience to go check it out and hope you enjoyed this chat with Andrew and Andrew, I can’t thank you enough again.

[01:12:49] Clay Finck: Thank you for joining me. 

[01:12:50] Andrew Brenton: Now, this was a lot of fun, Clay. I’m delighted to be on your show. 

[01:12:54] 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.