Full Transcript: Robert Hagstrom and Chris Mayer on 100 Baggers and Base Rates
How Extreme Outliers, Moats, and ROIC Drive Long-Term Returns
Matt: You are watching Excess Returns. I’m Matt Zeigler. Bogumil Baranowski of Talking Billions is co-hosting with me. This is the 100 Year Thinkers. I’ve got Robert Hagstrom in one corner — of The Warren Buffett Way and CIO at Equity Compass — and Chris Mayer, Mr. 100 Bagger himself, co-founder of Woodlock House Family Capital, all live in the flesh.
Today we are talking about Michael Mauboussin and all sorts of things. I have a feeling this is going to stretch out into more than one episode, but that’s for the better. Straight into the deep end. Let’s start by talking about base rates — the starting point, I think, for everything. So a base rate, if you haven’t encountered the term: the distribution of past outcomes for a reference class of similar situations.
Chris, we’re leading off with you. The whole 100 Bagger research — fundamentally, is that not just an updated base rate study?
Chris: No, it’s not really a base rate study. It’s a study of extreme outcomes. Sometimes every once in a while I hear somebody say, “Oh, it’s survivorship bias.” It’s not survivorship bias, because I’m not looking at the study and saying, what statistical profile or whatever is going to predict the next 100 bagger.
I’m looking at the ones who’ve made it, and what we can learn from that in studying our businesses — and what conditions maybe are not sufficient alone, but which otherwise seem to be necessary. I sometimes use analogies from sports. If you were studying great golfers — let’s say you were studying Tiger Woods’s swing — you wouldn’t say, “Oh, survivorship bias,” because you didn’t look at all the people who swung like that and didn’t make it. You wouldn’t say that. You’re looking at Tiger Woods, you’re looking at a guy who has made it, who is very successful, and you’re looking at traits and things that he has, or other pros have in common, that you can then apply to your own successes.
It would be different if I was saying — if I looked at a whole population of people that swung like Tiger Woods, that’s when you start thinking about survivorship bias. I don’t know if that makes sense, but there is a difference between taking a statistical study and using it to make a prediction versus just studying certain extreme outcomes and learning what sorts of traits you can pull out from that.
Matt: I wanted to start here because I wanted the anti-definition, so thank you for getting appropriately riled up by this. Parse survivorship bias, base rates, and untangle those. Why you reacted the way you did to my provocative question.
Chris: Me?
Matt: Yeah, you.
Chris: Yeah. I mean, I don’t know what I can say more than I already said, in a way. Because I’ve had people say that before, like, “Well, it’s survivorship bias.” But I think they’re misunderstanding the intent of the study, because again, it’s not that I am looking at all these things and trying to come up with a profile that then we’re going to apply to an existing population of companies and predict which ones are a 100 bagger.
So it’s — I think another way to think about it is that markets are extremes. Power laws prevail. And it’s interesting because Bessembinder just updated this study a couple of days ago. I don’t know if you all saw it, but again, I think it shows you the extreme outcomes in markets, and that’s where people are interested — people interested in looking at great businesses and seeing what ones may have similar traits as these other extreme outliers. That’s really the usefulness of the study. It’s not meant to be a statistical analysis of predicting the next 100 bagger.
Bogumil: I was thinking of Bessembinder — how very few companies actually represent all the gains in the stock market. Right. You’re looking for the extremes. The 100 bagger stock.
Chris: Yeah. His study actually — I have it here. He looked at 29,000 stocks listed from 1926 to 2025, and the median return was negative 6.9. Yeah. Despite an enormous amount of wealth creation.
Bogumil: Yeah.
Chris: And he said, after including outcomes from the most recent nine years, just 46 firms account for half of the net wealth creation over the full century.
Bogumil: I’m hearing it’s a land of extremes. A need for a concentrated portfolio. But we’ll come back to that. Robert, I want to ask you — Buffett seems to spend enormous time looking at long historical records, multi-year profitability margins, ROEs across decades. What is he doing? Is he anchoring to the base rates before he lets any story take over? What is he up to?
Robert: Yeah, I’m not sure if he’s anchoring to base rates, Bogumil. What I think he’s doing is — he likes companies, we wrote this in The Warren Buffett Way under the tenants — he likes companies that have had consistent operating histories, regardless of the vagaries of the economy, interest rates, inflation, et cetera.
And so he is looking: can you motor through and still provide good economic returns for your owners, despite all of the things that you’ve had to endure over the last 10 years, 20 years, whatever the case may be? So he believes by looking backwards and seeing how you endured during these challenging periods — if you had endured in those challenging periods, the likelihood was that perhaps you will endure in the future when the period gets difficult.
So I think he’s looking for consistency over time, believing that consistency might prevail going forward.
Chris: I would also throw in — with Buffett, I think he’s intuitively thinking about base rates, although he doesn’t explicitly ever say that as far as I know. But that’s part of the reason I think why he has historically avoided tech stocks, because he knows that the disparity of outcomes there is much wider than he’s comfortable with.
So I think he — sticking with the companies, like Robert said — the base rate outcome of those companies is generally a narrower spread of outcomes than with some of the things he’s avoided.
Matt: Keep pulling that thread for a second.
Robert: Yeah. When Mauboussin wrote the base rates paper, I think he was cautioning people that you ought to be looking at base rates. Because to diverge away from base rates is very rare — well, I should say to diverge away from base rates over the long term, to do something —
Chris: Mm-hmm.
Robert: — quite differently than your base rate, that’s going to endure and sustain, is really highly unusual. And so you really need to sharpen your pencil, or sharpen your thinking, when you have a company that has moved past its base rate.
Because it’s so rare — it doesn’t happen that often. Now, I would suspect that Bessembinder’s report, if we looked at those 46 companies, pretty much every one of them probably diverged from base rate over time, because that’s the source of the excess return. But Michael was just saying it’s so very rare.
So start with the base rate, yes. And then if you have strong conviction that they’re going to do something other than the base rate, then you better be very, very good in making that assumption or calculation, whatever the case may be. So I think it was almost kind of a Graham thing — like, start with the base rate, and how is this thing valued on its base rate? And if you’re going to buy it because it’s going to do something other than its base rate, you better be really thoughtful about that.
Chris: Yeah, I think it’s not like it’s an either/or question — it’s like base rates or this. The base rates: know in the back of your head that the odds are against you in this particular business because you’re betting on some outlier. It’s just — you just know the odds are against you. It doesn’t mean that you’re not going to do it. And so that’s part of what we do in portfolio management. We want those extreme outcomes. That’s why we have a portfolio. So hopefully you have 20 names, 15 names, whatever it is — that gives you lots of shots at possibly getting one of these extreme outcomes.
Matt: Tack that on to today for a second, Chris — including the stuff that you’re probably not going to go out and invest in. I’m thinking about how do you think about base rates with all the talk of AI stuff? How do you think about base rates when you talk about the giant run-up in the last couple of weeks or months in — I don’t know — gold or energy or something else? How do you use that understanding to help sort of filter how you’re seeing the world?
Chris: Well, it’s not only base rates, I would say — but it’s also where your own circle of competence is and lies. So the run-up in, say, oil stocks or something like that: is this going to be a long-term outperformance, or is it just a result of temporary macro conditions?
And same with the other side. We have had things that have sold off because energy costs are going to be higher for them or whatever. But again, you have to think about full cycle — does it really matter? So it’s a little bit different than a base rate analysis per se. It’s more just a factor of where your own circle of competence lies, and whether these factors are long-lasting or if they’re just something that’s going to happen for some number of months and then go away. I mean, there’s a lot of flows in the market, and Robert knows full well that they’re just there to take advantage of these short-term trends and the money flows in and out. And people like us don’t really invest around those sorts of things.
Robert: Yeah, I think, Matt, you’d have to separate commodity base rate changes from business base rate changes. So commodity base rate changes are changing all the time based upon supply and demand and interruption of supply, like we’re seeing in the oil market.
But those are almost always temporary. I can’t think of anyone, Chris, in the commodity space that changed its base rate and that base rate was changed for five to 10 years. I mean, they’re typically imbalances in the market. But those imbalances are corrected pretty quickly, because the commodity is not hard to dig out of the ground or grow or whatever the case. But you can solve that imbalance — which generated the excess return. You can solve that pretty quickly. But businesses — that’s a different game. Your sales and earnings, and if you’re going to diverge from your historical base rate or the market’s base rate — that’s where you have to do the really good thinking.
Chris: And I don’t know, Matt, if you were trying to get us to go in this direction, but in some ways you could argue the AI scrambles base rates, right? Because we’re based on some sort of historical outcome. And now you can argue AI is a brand new technology where you have to throw that out. Right?
Matt: Well, spend a minute on that, because I think that’s a very compelling marketing message to tell potential shareholders: “Throw out the base rate books. Forget all that stuff.” What’s — I mean —
Chris: Well, it depends from the angle, right?
Matt: Yeah.
Chris: I mean, it depends from the angle. So let’s say you’re an investor in a software company and you’ve had this long track record — maybe a 20-year track record of success — and now AI comes along, and the market is basically saying throw out that base rate, that 20-year track record or whatever it is, because this new technology has completely changed the landscape.
So that makes it a little tougher. If you flip it around as the AI investor — the guy who’s investing in the AI natives — and say, “Okay, well, this is new technology, throw out the base rates, because this is going to be the next best thing” — yeah, you’re on the other side of the table. But I think both of them are not easy to handicap, in general.
Robert: Yeah. Every innovation — I think Chris is spot on. When we had the damage done to the software space — we had sold many of the software companies, except for Microsoft, back in 2024 — only because I couldn’t figure out what the new base rate was going to be with AI in the software companies, right?
I mean, if you think about the sell-off in software, it really was a debate about the terminal value. So when you run the DDMs — you know, 80% of the value of your DDM is in year 11 on out to perpetuity. 20% of the value is — if you’re running a two-stage, 10-year model — you know, 20% of the value is that 10-year stream of cash.
But Bessembinder would tell you that the residual value was what created those 46 companies, right? So I think the market struggled with: what’s going to be the residual value? And that’s based upon what’s the future base rate, right? What are these things actually going to grow now?
Are they still going to be around? Yes. I think that’s the argument. But the question is, nobody has an idea exactly what’s going to be your revenue, what’s going to be your revenue base rate growth from here, because AI is going to take part of it. But you might have other opportunities that you can jump in that can offset that.
We just don’t know. And the market — when the market can’t figure that out, that’s when you’re going to get these big swings in prices. Now I find it very, very interesting. Everybody wants to jump back into the oversold — what they perceive to be the oversold price of the software companies. And I get it — here’s reversion to the mean, and Ben Graham and all that.
I get that. But they still haven’t answered the question: what is the residual, what’s the base rate of this thing going forward? Nobody knows because of AI. So that, that’s a tricky bet to make. A reversion-to-the-mean bet is a trade. A reversion-to-the-mean bet that you want to hold long-term means you’ve got a firm handle on what that residual growth rate will be.
And for me, Chris, I struggle with trying to figure out what Salesforce is going to look like five years from now. What ServiceNow is going to look like five years from now. I can’t get that into my mind. And so therefore we don’t play that game.
Bogumil: With every innovation, it looks like the rules that applied so far no longer apply. But every single time, even with AI, I feel like we’re going to be surprised at how big it is. And then we realize it takes longer and it’s a bit disappointing in many places. But we’ll come back to that. I’m curious about the inside view, outside view concepts — so the inside view being the blend of deep specific knowledge, and then you have statistical base rates as the outside view. Chris, when you research a stock, you have your thesis, you’re convinced you’re right. How do you compare that to the outside view? You know the business very well, and then the outside tells you this business will likely be average, like most of them are. How do you reconcile that?
Chris: Yeah. Well, that’s a good question. And I think that gets down to really doing your research on your competitive advantage, and those sorts of things that allow the high returns on capital to sustain themselves over a long period of time.
So a lot of that deep research is spent just on that. Like — what makes this business special today, which is the reason why I’m invested in it or I like it? But what sort of moats and so forth does it have that will allow the business to continue to earn those returns five years from now, 10 years from now?
And you spend a lot of time on that. Sometimes — a lot of times — it’s difficult to say. You can’t really say why one company is so much better than another, or maybe it’s a slight advantage, or maybe it’s one you’re not really convinced about. So there are lots of those kinds of instances.
But sometimes you’ll find something where, yeah, it’s pretty clear, and you have a real idea of why it’s hard to replicate what they’re doing. And in those ones you can be more confident. That’s ideally what I try to find — those examples.
Bogumil: I remember one of the exercises we did in research, with a bunch of analysts, was somebody was taking the other side — devil’s advocate. And now with AI you can have a very powerful, very competent devil’s advocate. And I put in some of my stocks, and I have to tell you, the other side sounds as convincing as my case sometimes.
Chris: Well, the other difficult thing about this is — it’s hard to prove a negative. So sometimes, yeah, like with AI — when Robert was saying you can’t really get at terminal value five years from now — the proposition that we’re being told about AI is that it’s this godlike thing that’s going to be able to do pretty much everything. And so if you are an investor in a software stock, it makes it very hard to prove that that’s not the case. Right? You can’t prove what it’s going to look like five years from now. So it just puts you in a difficult spot. And I think that’s again why the multiples have come down.
Matt: Robert, specific probably to Buffett’s letters — where you’ve read and watched him think through so many of these things kind of in real time over the years — extract the inside/outside view.
Robert: Yeah, well, we will swing back to Buffett. Going back to Mauboussin — the way that I thought about inside/outside views is that he always had these clever analogies. He would do horse racing. And I apologize to Michael and the audience — there would always be some favorite horse that’s a long shot, that came out and was going to upset the odds. And an outside view would glamour onto that.
They would just get all hyped about that. Like, this was the second coming, this was the horse that nobody ever expected. And all this drama builds, and the narrative in sports media — people are talking about it, cab drivers, “Do you think the horse is going to win the Kentucky Derby?”
So the outside view gets really blown up. The inside view is: go to the track, talk to the jockeys, talk to the trainers, what are the conditions of the track? Is it muddy? Is it dry? Who else is in it? The inside view is what Chris does, right? And he gets into the guts.
And so the inside view can really parse away when the outside view has gotten exaggerated. So I think what Michael was trying to do was say we probably spend too much time just defaulting to the outside view because it’s popular, it’s easy, it’s the conventional insight — that’s the outside view. Well, what’s the inside view? Right?
And that’s what Chris was talking about. Now, with Buffett — the one thing I think Buffett likes, and nobody really understands just how conservatively minded he is: he wants certainties at discounts. I mean, that is his sweet spot. When he bought Coca-Cola, he put a third of his bet in Coca-Cola. It went up 10 times over 10 years. The S&P went up three times over 10 years. That was a certainty at a discount for him. Right. He didn’t have to do outside/inside — he basically said, “I have a high degree of certainty that this thing will be much bigger in 10 years.”
He said something like, it was the only investment he could make where if he bought it and went away for 10 years and couldn’t change anything about it, couldn’t make a buy or sell, he was highly convinced when he came back it was going to be worth a lot more. That’s a certainty at a discount. That’s what he’s looking for. As Chris points out, AI does not give you certainties at discounts because nobody knows. Nobody knows what the certainties are, so you don’t even know if it’s at a discount. So it’s a little trickier.
Chris: Yeah, I love that example Robert gave with the sports analogies, and it reminds me — I’m on the board of a publicly traded company. I have been for the last, I think this is my third year coming up. One of the things that’s really interesting is you get to see this gulf between the inside and the outside view. So sometimes I’ll read an analyst’s view on the company, and I’ll be like, this is so off on certain points — but because I’m on the inside and I know what’s really happening there.
But then I sit from the outside and I think, well, what he says is reasonable for what he knows at that point. So there have been times where I’m like, wow, the gulf between the outside and the inside view is sometimes really, really wide. And it makes me very humble about everything else I own that I think I understand. And then you wonder.
Matt: Which I —
Robert: — think that’s one of the most — Chris, let me ask you this quick question to that point, which is — Damodaran, and I can’t even remember, it’s Damodarian or Damodaran, I can’t get it right — he talks about stories and numbers, right? And the bridge to investing is getting the stories and numbers right. Well, the stories are the outside view. The numbers are the inside view. And he says people spend too much time on the stories and not enough time on the numbers. People spend too much time on the outside view, and they don’t spend enough time on the numbers.
The numbers are the inside view. And I think that’s what Michael was trying to drive at when he talked about understanding the market’s outside opinion and what its inside opinion is. And the same thing Chris said about being on a board — he’s in the guts of the inside numbers, right? And he can tell very quickly when the outside view is way off base. And then of course it’s up to management to try to bring them back to reality by disclosing and communicating the reality of it. But it’s a good exercise. No doubt about it.
Bogumil: It’s very humbling to realize that as public investors, we only know that much. We’re not on the inside. I take a moment and I know that I only know that much, time and time again. So we talked about —
Robert: Wait, wait. On that point, what do you think about the SEC saying that a company doesn’t have to report except twice a year? What do you think about that, Chris?
Chris: Well, they already have that in the UK. I think I’m okay with it. I don’t think it would matter very much, to the extent that it cuts down on all this wasted time with quarterly calls and all that. It’s probably maybe a good thing. It’ll be interesting to see because — I think the proposal is it’s not going to be required, right? So some companies may still continue to do it. Some companies may go to the semi-annual, or might go to just a mid-year update and a year-end. So it’ll be interesting to see if there’s any difference in the way those stocks trade or any of that kind of stuff. But I’m kind of a long-term guy, so I’m biased on this already. I’m perfectly fine getting one update in the middle of the year and one at the end. What about you, Robert?
Robert: Well, I’d like to ask Warren — like Warren, right? You do this twice a year. Are you going to do it twice a year, or are you going to send the data four times a year? Now, what’s interesting about Berkshire is he sends the data four times a year, but he doesn’t do calls.
Chris: Right. Yeah.
Robert: He doesn’t talk to analysts and stuff like that. So I think he would say — my guess is he’d like to have as much data as possible. Send it.
Chris: Yeah.
Robert: I want to know what’s going on. Now, to the degree that the company feels obligated to hold calls and have these conversations with analysts, and then analysts go in with expectations — did you beat it? Yes? No? — he thinks that’s a waste of time. That’s just a bunch of crap. But I think he would side with: I want data, I want information. I don’t know anybody who would say they don’t want information.
I want information. And the question is, I don’t need it every day, every week. But 90 days wouldn’t be bad for me. But I think companies spend way too much time handholding analysts and kind of pleading with them: “Do you like me? Do you like me? Do you like me?” I think that’s where the waste of time is.
Chris: Correct me if I’m wrong, Robert, but I thought — I think the Buffett partnership originally only gave an annual update, and then his partners complained. And one of them — I remember the line he used — said, “One year is too long between drinks.” And so Buffett sort of agreed and went to a midyear update. And so, yeah.
Bogumil: You know what? You inspired a question as I’m listening to you. I have friends that own private businesses, and I talk to them, and I’ll mention in a second how they think about it. But let’s assume your portfolio is all private businesses. There’s no price for it. You don’t know where the price is. How often would you honestly like to hear from the management? How are things going? They don’t have to give you all the numbers they report, just a phone call — “How are things going?” How often would you call your private companies?
Chris: That’s a great question.
Robert: I’d probably do a monthly call. I think Warren does monthly tabs. When the independent operating businesses send the data in — to Mark Hamburg, whoever the case may be, Mark’s retiring — I think it’s monthly that they’re sending sales revenues and earnings. I think you’d see that monthly. Now, that doesn’t mean that he’s taking action or calling them and saying, “What happened?” But I’m under the impression Warren loves data. I think he loves information. Chris, do you disagree?
Chris: No, you’re probably right on that. Sure. I was just thinking about myself — what would I really do? I’m not sure. I remember I did work for a family office for a while, and we had some private investments, and yeah, I wouldn’t check in quarterly. Come to think of it, it probably would be maybe once, sometime during the year. And I’m not sure. It’s an interesting question, and it might depend somewhat on the business too. Some businesses just kind of plod along and there’s not a lot going on. Some are maybe earlier-stage and there’s deals or something else where you might want to get more touches and updates as to what’s going on. So it’s a good question though.
Bogumil: I think the fact that we operate in the public market and we have a daily price — it kind of dictates a whole different experience for us, right? So the quarterly earnings, and between quarters I see stocks drift down sometimes 10, 15%, and then they report and the stock is up 15. So it’s almost like the market is waiting: “What’s going on? What’s going on?” And then there’s a release and we all adjust how much we think this business is worth. So I think if you take the price away, we can actually check in on how the business is doing. And I think, to Robert’s point, that’s what Buffett is doing — he’s asking how is the business doing? And he doesn’t have a price quote for a lot of those businesses.
Chris: Right.
Bogumil: Food for thought.
Chris: Yeah. I mean, it’d be different — imagine if you got your price quote only once a week. Monday morning you got it, and that was it. Yeah. Or even less than that. What if it was only monthly? You only got a monthly price quote on what you own. I mean, I think it would change the way people behave.
Bogumil: Yeah.
Matt: So let’s talk about mean reversion specifically — in return on invested capital, or returns on anything. This is the idea that a company or an industry or whatever basically has some return on capital, return on equity, return on assets that goes on. Sometimes they do a little bit better, sometimes a little bit less, but it tends to mean-revert over time. First, Chris — where does that idea even land with you? How you think about it, how you understand it from Mauboussin, but then also where you see it, where it’s useful, where it’s not in your own work?
Chris: Yeah, there’s definitely truth to it — some things mean-revert. Return on capital, for one. But my first reaction on mean reversion is I kind of want to resist it and push back on it somehow. Because for one thing, the mean itself is always changing. A lot of times people use mean reversion for valuation, and I think it’s misused that way, because you’ll look at a business — a business may be substantially better now than it was 10 years ago, or even five years ago. But people are still anchoring on those valuations and using some sort of mean reversion when the return on equity was two-thirds of what it is today or something. It’s a better business today, so you wouldn’t do that.
But obviously it is a powerful force in finance. People talk about it for a reason. For ROIC, for example, it’s very difficult to have a return that’s consistently above your industry. But it can be done. I think about when I first was doing research on Old Dominion Freight Lines a while ago — trucking industry — and it was consistently so far above everyone else. But when you dig into it, you start to find there are reasons. They own their own distribution networks — it’s like a real estate strategy. They own that, and they have a non-union workforce, and they have all these other things, bells and whistles that get into it. It’s like a structural thing — they have an advantage over other companies in their space that can’t be competed away. And in that case, you wouldn’t want to anchor on the industry’s ROIC and therefore keep yourself out of Old Dominion because you think it’s just going to revert over time, when it’s persistently done otherwise.
So it can be good, but it can also be kind of dangerous.
Robert: Yeah. I’m not a big fan of the reversion of the mean. I think it can lead you astray. Buffett said polling does not replace thinking. And once again, reversion of the mean is a very simple-minded thing.
To think that which has gone up comes down, and that which has gone down comes up — it’s a very Newtonian physics-based concept. And we know the market is not Newtonian. It’s Darwinian, it’s biological. I love what Chris said, that the mean is never stable. The mean changes because the landscape changes, the environment changes, the competition changes, the companies change.
So there are things that are going up that are supposed to go up. We’ve got increasing-returns economics and information technology database businesses. And we never knew what increasing-returns economics were before that. Before you got into information technology companies, it was a diminishing-returns world. But now we have an increasing-returns world. And increasing-returns economics does not fit very neatly into a Newtonian framework of reversion to the mean.
So I get it. It’s a contrarian notion, and value investing is built on a contrarian kind of ideal. But that should be your first pass of how to think about the stock, not your final conclusion. Right? Reversion to the mean is not immutable. There are going to be exceptions to the rule. And so to just let that be your last focal point — “Okay, it’s gone up, so it’s going to go down, I’m not going to buy it. It’s down, so I will buy it” — that’s just not immutable. There are going to be problems with that. Very simple-minded way in which to think about things.
Bogumil: Robert, tying it back to returns on invested capital — studies show that over time, companies with high returns on invested capital do drift down. Competition comes, maybe something changes. And Buffett talks about moats, and we’re obviously looking for warning signs. Can you talk about that? How companies are protecting that moat, and what are some of the warning signs that you look out for that the returns looking back are not the same as the ones looking forward?
Robert: Well, I mean, the fact of the matter is — as we all know, and as Chris’s experience bears out — Schumpeter’s creative destruction: the whole basis of the capitalist system is somebody has a margin, and someone else says, “I can do that. That’s my profit. Your margin” — as Amazon looks around and says, “Those margins out there, those are my future profits. I’m going to go in and figure out how to do that cheaper, better, easier,” in which case that target’s return on invested capital is going to go down as more competition comes into the space to take away the high margins.
Right. That’s the whole basis of capitalism, in some way. Not the whole basis, but it’s a big, big part of the capitalist system — trying to figure out where I can do it better, cheaper so I can get the profit. And that eats into returns on invested capital. What I’m interested in is the moats that are sustainable. People that are coming after you, and you keep beating them off — that’s where Warren says, “I want a moat, alligators in there, big walls, deep water. I want a business so good that nobody can take it away.” Okay. That’s — we’re back to Hendrik Bessembinder. What was it about those 46 companies? They must have had a hell of a moat. They went at it for a long time, and my guess is they were probably high-return-on-invested-capital businesses. They might not have been 50 to 100%, but they were much higher than the cost of capital, and they were able to maintain it for a long period of time.
For me — I’m a growth investor — I think that’s where the market misprices things now. It’s a brutal, brutal lifestyle, being a growth investor, because you’re in a market with a bunch of crazy people that aren’t thinking about investing in growth stocks. They’re trading them based on betas and technicals and things like that. But I’m fascinated that Coca-Cola went up 10 times in 10 years. You know how to figure that out. And Chris made a career on figuring out 100 baggers. To me, that’s the holy grail. That to me is the fun part. And it’s also the most difficult part, which is why everybody would be doing it.
So returns on capital are not sustainable. But I am fascinated about the whole concept of the increasing-returns business. Buffett said: “If I gave you $5 billion and said go take out Coca-Cola, you couldn’t do it.” He said nobody can do that. If I today said, “I’ll give you $50 billion, go take out Amazon online retail” — just take out the retailing business — there’s nobody that can do that. Right? Okay. That’s a pretty good moat. I don’t think anybody can unseat Amazon’s online retail business.
Largest selection, cheapest price, best service, overnight delivery. How are you going to go and take that business away? Even if I give you $50 billion — what? Are you going to be able to do it cheaper? Are you going to be able to do it faster? What are you going to be able to do? That to me is a pretty interesting moat, and that’s how I think about it.
Chris: I was just thinking, while Robert was talking, about how some of these moats also shift and change over time. Moats that we used to think were insurmountable suddenly are not so insurmountable. I mean, Coca-Cola is an interesting example — yeah, take out Coca-Cola. If you’re going to replicate them today, that would be difficult. But there are lots and lots of small little soda brands that crop up — Monster Beverages and all these other things that have been built around that. So that’s an example of a moat that maybe isn’t so great now. Amazon — yeah, that looks like a really crazy moat today, but maybe 10 years from now somehow it won’t look so crazy. Maybe people will be drop-shipping by drones, who knows. But yeah, so it’s interesting to think about how these moats change over time, and that’s something as an investor you have to stay on top of as well.
Bogumil: What I’m hearing is a winner-take-all mindset. And I’m thinking, just for a second — do you think that with AI, more people trying more things and trying new projects, even people that can’t write software, developing different solutions, there will be more winners, more fragmented winners instead of one company that owns all of — I don’t know — operating systems for all laptops, like we’ve had for so many years? Do you think that’s where we’re going?
Chris: I don’t know. But the point about winner-take-all markets — I think that’s again, as Robert says as a growth investor: that’s kind of what you want. You’re looking for those kinds of situations. You like winner-take-all markets as long as you have the winner. And so that’s a good dynamic to have. But AI — I don’t know, I could see it going a lot of different ways. I certainly think there’ll probably be an explosion of new businesses and new services.
Bogumil: Yeah.
Chris: But once it settles down — I don’t know. It may just revert to the same as a lot of other businesses. Eventually someone will — there’ll be people who are really, really good at it, and we may get the same old thing as before.
Robert: Yeah. AI is definitely going to give you more competition. There are going to be more people nipping at your heels because of AI. The question is, can they make a business out of it? Can you take my business away? Are you doing it better than I’m doing it? Are you doing it cheaper than I’m doing it? In which case some of my customers are going to leave and go somewhere else. That’s what we want to look at in software — how many people are going to leave Salesforce to adopt a new CRM model that’s not Salesforce?
And we thought about it at our firm. Now, we’re not a big Fortune 500 company. I don’t expect that JP Morgan or anybody else is going to turn over their Salesforce CRM to a new entrant that doesn’t have a track record. But if you’re a little shop, you’ve got 15 people, 20 people, and they’ve got a new database that can help you manage your customer relationships and it costs 10% of what Salesforce does — which is very expensive — would you give it a shot? And you know the answer is you probably would.
Now, does it work? Is it better? We’ll find out. But there’s going to be tons of competition because of AI. The number of winners, though — I think Chris will agree — will probably be the same. There’ll be a few that will capture the best part of it, and there’ll probably be 97% that go to the dustbin.
Chris: Yeah, you said it better than I did. And it makes me think too — remember the internet was the same way. When the internet first came along, of course there was an explosion of dot-coms. But now it’s a fairly mature thing. I think we can say there’s a handful of dominant dot-com businesses or retailers and things, and it’s not —
Robert: Yeah.
Chris: So I don’t know. I think it probably has a similar trajectory.
Matt: And stuff gets repurposed, stuff gets reused. I mean — the Bible did okay with the story of the Holy Grail. Like, the Bible sold a couple of copies. But lest we forget, Indiana Jones, Monty Python — the list of ancillary businesses, the Monster Beverages of different industries, are going to exist. They’re going to have new rails to ride on.
All right. So inside of that, Chris — I’m bringing this back to you — the idea of incremental returns on capital. And I’m extra curious because Mauboussin’s written about this: not just your ability to earn that floating average of those capital returns, but then to be able to reinvest at those returns. My brain goes to your twin engines idea. Could you tee up that idea and then just explain how you think about this?
Chris: Yeah. The twin engines idea was just that looking at this 100 Bagger study, there were some times where you could get the double effect of starting with a relatively low multiple of earnings — and then you had this double effect where the multiple expands and also the earnings are expanding. So then the math suddenly becomes a lot more compelling. If you can have something double in five years earnings-wise, but also double the multiple — that does a lot of extra work for you, rather than just getting the double off earnings with the multiple staying the same.
So that was the basis of the twin engine idea. What leads to those expanding multiples? I mean, lots of things. Sometimes it’s just a cyclical thing — you happen to buy in 2008, you’re going to get the benefit of multiple expansion most of the time.
But sometimes the ones that I think were more interesting to study were those businesses where they actually had increasing return on capital as they go along. So in other words, they become kind of better businesses as they mature, as they scale, or whatever it is. And those ones are really interesting places to fish.
Robert: It’d be fascinating. Take Bessembinder’s 46 stocks and go back 20 years as a T-1 and see what the return on incremental capital was for the 46. And my guess is they either maintained it at a high level, maybe increased it, but it probably didn’t fall off the cliff.
In competition, a lot of those returns on capital do come down. But my guess is those 46 stocks — if you put a graph up of their return on incremental capital — which is probably, Chris, the only statistical accounting factor that I can think of that would give you a good sense of whether the competitive advantage period is being extended, whether it’s going to endure — look at return on incremental capital. But the problem is you’ve got to do it for 2, 3, 4, 5 years to get any sensible sense of where the numbers are going. If you try to do it quarterly, it’ll drive you crazy. But then after three or four or five years, my guess is the wisdom of the market’s crowd has probably already figured it out by the time you finish doing your graph. The market’s going to say, “We figured that out a long time ago, Robert, you’re still trying to chart this thing.” But return on incremental capital is very, very powerful. And if you’ve got some foresight that it’s going to stay high, you pretty much know your return on capital is going to stay high. And if you know your return on capital is going to stay high, that’s a great way to make money.
Chris: What’s challenging about it too — and Robert has alluded to it — in any given year, your return on incremental capital can be all over the place. It’s a very volatile number. So it almost requires you to have either some kind of average looking back, or, like Robert just said, some foresight about why it’s going to be higher in the future than in the past. So it’s not that easy, but it’s definitely worth thinking about and trying to find.
Bogumil: And it’s not always the case that the returns come the year that you invest the capital, right? It can take 2, 3, 5, sometimes 10 years to see the actual benefit from a billion dollars invested today. And I think that gets even trickier.
Robert, a quick follow-up to you. Buffett has this simple discipline — he basically says, only retain earnings if you can deploy them at better rates than the shareholder could earn elsewhere. When you watch management teams and their discipline, how many actually follow through on it? And how many are empire builders?
Robert: This is where Chris and I wish we had Will Thorndike here. Will studied this a lot in his book, The Outsiders. It’s a rarefied few that get it, and then have the support of the board — because you need board support to do what is right in the long term versus what could be achieved in the short run to appease Wall Street and the analysts and the stock price. It’s a rarefied few.
But when you go back and think about Tom Murphy at Capital Cities — I think Warren today still thinks that’s probably the best manager he has ever seen in his life — those guys built businesses over multiple, multiple, multiple years. I’m not sure the market affords that kind of patience anymore. And maybe — maybe it would be this, Chris, and you’ve written about this too — those who have high inside ownership. If you’re a management company and you own 20, 25%, maybe you then have the defensible capability to say, “I’m going to do it this way. I don’t care if the Street likes it, yes or no.” And you have the board support, you don’t have a lot of stock options out there, and the board isn’t living day to day on their stock price. It’s very, very, very hard.
But Buffett also, I think, at the end of the day, given the choice between having a Tom Murphy and having a great business, he’ll take the great business every time. Right? He said even Tom Murphy couldn’t figure out how to run a buggy whip business — wasn’t going to make a lot of money, even though he’s one of the greatest managers in the world. At the end of the day, the first thing he wants is a great business. As he said: “I want a business so great that even an idiot can’t mess it up.” That’s the holy grail, right? Finding a business that’s almost on autopilot — it’s so great that even a mediocre manager can’t mess it up. That’s a pretty good place to be.
Matt: Chris, talk to me for a minute about intangible-heavy R&D. Part of this might just be outside my circle of competence — I don’t think about this a lot — but how do we think about return on capital in this intangible era that we’ve been living in? Especially as some tangible stuff is starting to come back into vogue because people care about it again, and also because we’ve got some giant companies moving from intangible to tangible, which messes up the way we study ROIC over time.
Chris: Yeah, this is a tough thing. Sometimes I look at companies where one company is more acquisitive, so they have all this goodwill and stuff on their balance sheet, so their return on capital looks lower than a company that otherwise spent similar money but invested internally — so they don’t have that goodwill, and their return on capital is higher. So you do have to make those adjustments sometimes.
But most of the value nowadays — and Robert probably agrees — is in intangible stuff. It’s in things that are hard to measure. It’s not physical, and the economy has been like that for a long time. So I don’t know that that creates any special adjustments, unless you’re — I mean, I’m not investing in a lot of things that are very capital-intensive either. So I think that would probably change if I did. But I don’t know. Robert, do you have any thoughts on that?
Robert: Yeah, and we go back to Mauboussin — he is drilling down on this whole idea of intangibles. How much should be expensed and how much should be capitalized, and things of that nature. It’s very clear that as you move up in healthcare and technology, more of the capital investment is intangibles. But as Michael would say, you expense it right through the income statement, but it does have value past that.
So you took an expense on that investment. And by accounting standards it’s a zero, but it’s in the company, it’s adding value. That intangible is adding value. How long does that last? How much is it worth? That’s what they’re trying to figure out. And typically, generally accepted accounting principles are going to be decades behind.
As Bill Miller used to say, they’re called generally accepted accounting principles, not divinely inspired accounting principles. They’re never ahead of the curve. Right. But as Chris says, when we move into healthcare and services and technology, most of the capital investment going on is intangibles. Now in this AI world, with energy and data centers and chips and stuff like that, there’s more tangible investing going on than there has been in the past. But there’s no doubt in my mind that accounting has not done a good job of helping you understand the value of your intangibles. And I think Mauboussin’s working on that. But it’s hard to wrap your hands around. It’s a hard one.
Bogumil: Well, you brought up something that’s been on my mind. Among Bessembinder’s 46 — or among the top companies you can think of — a lot of them were started in a basement, in a dorm room, with very limited capital. A handful of guys. And now you would think — speaking of Professor Damodaran’s lifecycle of a business — that they would be at a stage where their CapEx would be dwindling down, maybe some maintenance CapEx, with a massive return of capital to shareholders at this stage. And here we have those massive investments. We’re talking about 100X companies, but these companies have had 5X, 10X their CapEx in the last five years. What’s happening, and how do we think about returns here?
Robert: Well, if we go back, Amazon’s a perfect example. When we followed Amazon a long time ago, when we were involved in the IPO, I can remember in 2001, 2002, Amazon survived and got to the other side. But there was an analyst — unnamed — that still wanted to short the stock. I think the stock was nine bucks, and it was because he took their previous year’s CapEx, which was pretty big as Jeff was building out the distribution centers.
So if you look at Amazon, they always get ahead of the CapEx. They want to go ahead and get it done, and then they won’t have to do as much in year two, three, and four. So they’re not chintzy on the front end. They want to get it done. And the analyst’s view was: well, if you linearly extrapolate that CapEx line, it’s going to continue like this for the next five to 10 years, they’re going to go out of business, because there’s no way they can afford to do that.
Well, that was just very poor thinking, right? They didn’t really spend any time with Jeff and the rest of the team to say, “Look, we have to get ahead of this capital investment to have the capacity to grow the business.” And what they found out is that in 2002, 2003, 2004, and 2005, the CapEx budget went down as they had solved that.
Now the question I have is: we’re probably going to reach that in data centers. Everybody and their mother is building a data center, and we’re probably going to get to a point where Amazon doesn’t have to spend as much on AWS for data centers — or Google, or anybody else. We’re going to have it around the world. And then it’s going to be: how many new chips do you have replacing servers and stuff like that? But we’ll get to a point where you don’t have to continue to spend hundreds and hundreds of billions of dollars a year on data centers. Now, I don’t know when that’s going to happen, but we won’t be doing that 10 and 20 years from now, building this many data centers with this much money. We won’t need it. We’ll be able to reach the efficiencies that we need.
So there’ll be a time then — everybody was in love with them when they were asset-light and had no CapEx. Now they hate them because they’re asset-heavy and have a lot of CapEx. Well, that’s not going to last forever, and the market will get that figured out.
The trick will be: when they stop building data centers, what do you not want to own? Because when that pivot happens, there are going to be some stocks that you thought were going to be selling into data centers for a long period of time, and their products are not going to be needed anywhere near what they were in the previous five years. So we’ll see when that happens.
Chris: Yeah. One of my favorites with Amazon early on — I remember they were very aggressive about expensing everything. So it was one of these things where if you backed out some of that and treated it as CapEx and amortized it, they would’ve had a consistent, like 10% profit margin marching throughout that period. So it sometimes goes that way.
Robert: The other thing that was fascinating — I think it was around that 2001 period, and everybody — Bill would ask an audience of analysts and institutional investors: “How many of you think that Amazon is profitable?” And barely half a dozen hands would go up. And he would say, “How many of you think that Amazon made $300 million in cash over the last year or two?” No hands went up. And then he would walk you through it. And sure enough, Amazon in the early years had $200 million, $300 million worth of profits. But what Jeff did — which is what he was supposed to do — is he took every bit of those profits and sunk it back into the company in the CapEx budget.
So the outside view was: it’s not a profitable company. The inside view was: this is massively profitable — and that was Bill’s view. But he’s just putting the money back into the company as he should, because it earns high rates of return on invested capital. So you’ve got to parse that, you’ve got to get that part figured out.
But I don’t think the CapEx cycle — we may, I don’t know if we’re at the peak, but we’re probably getting near the peak of the CapEx cycle in some of these things, and then it’ll plateau for a little bit and then it’ll start to decline. And then it’ll be interesting to see how the returns are.
Matt: Such an interesting thing. I remembered — I think it was the guy who used to do stuff with Ben Thompson, the Stratechery guy, James Allworth — maybe financial-crisis era, or in the footprint of that — he went through all the Amazon numbers. It was like: “Just to reset this — you think nobody’s making money here, but let’s talk about what’s happened in the last decade to all that money.” That was not really an expense because they got something really wild going under the hood. So —
Robert: Yeah.
Matt: We got not even halfway through this list, which makes me joyful — not because I don’t have to prepare more notes for next time next month. We’ll get a little bit of that. And I really want to make a Hagstrom-and-Mayer “data center builders, like construction” T-shirt — see if we can get those, we’ll sell some merch. But this is just exceptional stuff. Robert, people want to find you online, bug you on the internet — please do. I know it’s early still. If you want to mention the upcoming book anniversary and new edition, feel free.
Robert: Yeah. Well, I’m CIO at Equity Compass and Portfolio Manager of the Global Leaders portfolio. The easiest way to track us is just equitycompass.com — all one word.
I feel somewhat shameless in that we’re going to be releasing another Buffett book, but we are. We’ve written The Warren Buffett Portfolio. Wiley wanted to go back and we’re going to have the 25th anniversary — it’s 25 years ago that it came out. And it’s a testament to Charlie Munger, because it was one of Charlie’s favorite books. He didn’t like The Warren Buffett Way — I mean, it was really kind of comical. When people used to ask him, “Charlie, what are you reading?” he said, “Well, I didn’t think very much of Hagstrom’s book on The Warren Buffett Way. I didn’t think it was that good. Nothing original.” My entire writing career is over, you know. But he liked The Warren Buffett Portfolio, which was the first book on concentrated, low-turnover portfolio management. And so we’re doing the 25th anniversary because in Poor Charlie’s Almanack, it was the only investment book that Charlie had on his reading list.
So it got some legs for doing that. We’ll bring that out. But I’m more interested in talking about Chris’s new book.
Chris: Mm-hmm.
Matt: That’s going to get an episode. So, Chris — same question. People want to find you on the internet, bug you.
Chris: Yeah. You can Google Woodlock House and you’ll find me there. You can contact me. And then yeah, I have a new book coming out in April. It’s called The Investor’s Odyssey, so I’ll talk more about that as time goes, but it’s pretty exciting.
Matt: Well, Chris and Robert, thank you so much for joining us. Bogumil, you’re hanging out with me for a couple more minutes.
You’re watching Excess Returns. Make sure you look up Chris Mayer and Robert Hagstrom respectively. We’ll talk to you guys soon.
Bogumil: And then there were two.
Matt: And then there were two. All right. What do you think? Let’s dive in. I’ve got a couple of notes here. So, first and foremost —
Bogumil: Yeah.
Matt: Michael Mauboussin. Moby. Like, I didn’t see that coming. I didn’t know —
Bogumil: I didn’t know —
Matt: — from one bogey. I’m trying to remember what Tony Greer called you. From one bogey. Did you know Mauboussin had a nickname? Did you know you could call him Moby —
Bogumil: — if you got close? I didn’t. I’ve read all his stuff and I’m very impressed, and he kind of creates a framework for our thinking — many people’s thinking — and he goes really deep. I loved how he explored those concepts, and I loved what happened today. Just interacting with the research and maybe giving us an idea of how to interpret what’s happening now. What did you think about this idea? When Chris was talking, I was thinking about Bessembinder and the study that many of the people listening probably know about — that very few companies are responsible for most of the gains in the stock market. We know it. What do we do about it? What were your thoughts? How did they react to it in your mind?
Matt: What I think is so interesting about these two in particular reacting to it is they both put their money where their mouth is, in a sense — like, both of them reject the idea that the way you overcome this is with diversification and you just buy a broad index.
Bogumil: Yeah.
Matt: And I don’t think either of them would argue against that as a logical solution for the average person to reach.
Bogumil: Mm-hmm.
Matt: But they both believe fundamentally that you could do this work, and you can do better than average over time because of the outcome of research like this.
Bogumil: Mm-hmm.
Matt: Which — I know you believe it too. I’m sort of mixed. I’m mixed in the sense of: I think some people should pursue this, but I think most people shouldn’t. And you have to self-discover inside of yourself what you’re wired to accept. But I thought it was really interesting to hear both of them sort of dance around the edge of this and say: you want to know all this so that you can understand it from both directions.
Like — the opening question was designed to make Chris reject the premise.
Bogumil: You got that one. Yes.
Matt: Yeah. We wanted to deliberately provoke him on this. But they both reject these premises, but without the Mauboussin language in the middle. I don’t think you can reject those premises and say, “Here’s why I fall on this other side.” And that was part of why I wanted to do the Mauboussin research with them in particular — because here’s why it’s important to know it, and then here’s where I fall on this thing, and it’s probably outside of the average index investor’s take on why this makes sense. What about you?
Bogumil: And they thought about it for a long time, especially Robert — I could tell. So it was fun to see.
I want to challenge the Bessembinder study here, if I can. So the idea is very few stocks are responsible for all the gains in the market. But there are a lot of 10X, 15X, 20X, 50X, 100X companies that never reach the scale of being the top 50 company. Right.
Matt: Right.
Bogumil: And either because they surge and they die off — the survivorship bias side — or, on the positive side, they scale from a much smaller company to a much bigger company. But they’re never a trillion-dollar company. Right. And in that universe — I’m not talking about micro or small caps, even decent-sized $5 billion companies — that became, in my lifetime, watching and seeing it, $50 billion or $150 billion companies these days. A $150 billion company doesn’t even get noticed. It’s not that big compared to the trillion-dollar companies and multi-trillion-dollar companies that we have.
So I want to caveat here that when people look at Bessembinder and think about it — people have all kinds of reactions, but one of them would be: “How in the world am I going to pick the 40 stocks?” But think of the other 200 stocks that you could have picked and you would have made 5X, 10X, 50X, because they do exist in those studies.
So I kind of want to flip it so that when people throw that study at me, I say: “I hear you, but you don’t have to own the top five companies.” Many of us maybe ended up owning some of them even long before — Buffett with Apple. But there are many, many ones that are much, much smaller, but they grew substantially, and they don’t have to be in the top five. I just want to mention it out there because I feel like it gets lost.
Matt: I feel like it gets lost too. And so number one — this is some of the incentive for people who go out and start their own businesses. Like, you might — you don’t have to become the next Amazon. There’s a whole range of wildly successful outcomes. Without starting a company, in the most opposite way — you could go work for a company, for example. But even if you’re going to start one, inside of that data you have companies that work out really well for periods of time and then taper off for long periods. You have the GEs of the world and companies like this. You also have a million examples of small companies who don’t really matter at the small scale, but that can get acquired. Especially when we’re talking about — “You can’t make another Coke.” Well, how many brands is Coke or Pepsi — in particular, how many brands has Pepsi rolled up over the years?
Bogumil: Many.
Matt: And that’s contributed to —
Bogumil: Yeah.
Matt: Like, if I started Dr. Pepper, are you telling me my return isn’t outlandish? And this is where it’s almost too broad of a brush stroke. It’s super informative as a reminder of where it accrues at the largest scales. But it’s too broad of a brush stroke to extract all the lessons from. That’s kind of where I fall with this.
Bogumil: I agree. Coca-Cola is not just Coca-Cola today. It’s many brands. Half of it is not carbonated even, and on and on and on — some of them they developed on their own.
I want to bring up the concept that came up halfway through the conversation — winner-take-all. And I wish we explored it more; maybe we’ll come back to it. But I would flip it on its head from the way we talked about it, and it dawned on me as I was listening to them.
In some industries, you eventually have to become number one — not to even thrive, but to even survive. You have to be Amazon to do okay at scale in online retail. And actually Amazon brought in a lot of competitors onto the platform to leverage their size.
But I don’t know what the future holds. One of my reactions to AI — and it’s still so new, so fresh — is that, first of all, there’s a lot more innovation. Just in my little space, investment world, software being developed that helps me. For many, many years I was using a handful of incumbents that basically refused to change much. It works for everybody — why would you tell us? And I mentioned it to you: every single week somebody sends me something to test, and they’re changing it as we’re talking. Like they say, “How about this? How about this?” The plus sign goes here. Anyway — I’m thinking, bottom line: are we going to see a lot of pockets of profitability that can coexist at the same time? As a public investor I might never see those companies. They will never be listed. But they might be $20 million, $50 million companies, happily operated by three people out of a small office or maybe out of a coworking space, and that’s all they will ever have. But they’re so specialized, so focused, and nobody wants to be in that space — it’s too little to roll up — and they will exist. I want to throw it out there that I’m not entirely convinced that the future will be all winner-take-all mindset. I’m not so sure.
Matt: I think at the highest level we continue to see winner-take-all. I think winner-take-all continues to be the giant justification. That’s part of the hyperscaler and the data center build-out — these companies are not dumb. They’re aware: “We have to get to a certain size because someone’s going to have pole position, and a few more others may fall in behind them, but somebody gets to be the dominant player.” So overspend, believe in your core that you’re not going to be the one who doesn’t make it. But also know in your core that you’re trying to get pole position, because if you aren’t going to make it, they’re going to get laughed at for the rest of — for the next 20 or 30 years — as an investment that went in the wrong direction.
Bogumil: It’s a very unusual cycle, that CapEx cycle — very mature businesses basically trying all over again to invest so heavily. It’s fun to watch. We’ll see what happens.
Before we wrap up, I want to ask you about what Robert brought up — the SEC may be changing rules about how often publicly traded companies talk to us. I don’t want to miss that. And the way I framed it was: if you own private companies, how would you feel about it if there was no price quote? What are your thoughts? I was very intrigued by how they tackled it.
Matt: I love that you brought this up, and I was curious about this too — especially from Robert, and especially from the Buffett read-through of it. So excellent framing, first off, by saying: talking to somebody who owns the private businesses.
Bogumil: Yeah.
Matt: It’s a different relationship when you own a private business. Checking in — “How’s this going? Is there anything I can help with? Is there anything that’s a concern I should be aware of?” That’s a different conversation than reading the Ks and the Qs, right?
Bogumil: We are looking into the price action as a feedback mechanism, and a signaling mechanism, to tell us: “Pay attention.” So if you held the stock for a year and now it’s down 10, 15%, the price is right there on your screen. You look at it, and it’s basically a red flag: “Dummy, look at it again.” Right? But if there was no price and you’d spoken to the management two months ago, you wouldn’t even think about it. Right? So the price sometimes really gets in the way of what you’re trying to do. Is the price more correct, or is my work more correct? Which — we talked about the outside and inside view. But the market is constantly telling you: “Think about it. Are you wrong? Are you sure?” It’s like that professor — you answer the question, you say “Aristotle,” and the professor says, “Are you sure?” And you’re like: “Not as sure as I was a second ago.”
Matt: What I think is most intriguing — and one or both of them brought this up too — even if this gets passed, it just means companies have the choice.
Bogumil: Sure.
Matt: And I also think we’ve been trained — especially by a lot of these tech companies — where the quarterly earnings is a really important part of solidifying to some of the shareholder base or the community: “These are the ways we run our companies. These are the expectations. This is the future we’re focused on.” And we believe that helps organize a shareholder base. I don’t see a bunch of the companies that communicate that way being like, “Oh, we’re going to drop to six months,” because they’re going to look at this as almost an advantage with their share base to communicate in these ways.
However, I think there’s a whole host of other companies that could not only go to six months, could probably go to annually if they’d let them — or they’re going to get much lighter in their analyst engagement, because what good are they serving the shareholder base, explaining these results in some grandiose method?
I’m not against this method or this proposal. I think it’ll be really interesting that there will be new games invented by CEOs and CFOs and CIOs in the next several years to game whatever these changes are as they try to win over shareholder support. And to me that’s the more interesting part — what does this create in a change in communication that arguably isn’t that valuable anyway, because people get stuck conflating it with price, to your point.
Bogumil: One last thought. I think more businesses are subject to more change than ever before. I think it’s true. So for me, any check-in — whether it’s quarterly — if it was a private business, I wouldn’t be surprised if I actually called the management even for five minutes: “Talk me through it. Don’t even show me numbers, just let me know what’s going on.”
Matt: We both work with people with private businesses. This is like a regular business owner review where someone just sits for a two-minute call, and other months you need an hour to go through stuff.
Bogumil: Exactly.
Matt: Yes.
Bogumil: Very quickly, I want to bring up Vitaliy — we had him on the show a week or two ago, for people to explore. But Vitaliy told us something that really stayed with me. He said, “I’m not as convinced — my conviction is not as strong as it used to be. There’s just too much change, and it’s very humbling to accept that.” And in his case, he says he’s going to hold more stocks. Just a thought — listening to somebody who has been doing this for 30 years, and I have a lot of respect for Vitaliy. He writes incredible letters, and you can kind of get a sneak peek of how he thinks. When he says that, I pay attention. Because I can’t disagree that it’s very hard to hold very strong convictions when the world is subject to a lot more change than I have seen in my lifetime.
Matt: That’s an amazing thing. It makes me want to go crack open one of those Fever-Trees. Make sure you watch that interview — that’s a good one. I’m Matt Ziegler. That’s Bogumil Baranowski. If you’re not checking out Talking Billions, what are you even doing with your life? Go watch Talking Billions. Get on the Substack, get on all the places. This is Excess Returns. Like, comment, subscribe — all the things below. Thanks for watching 100 Year Thinkers, and we’re out.