Amit Wadhwaney - From Montreal to Moerus: Amit Wadhwaney's Deep Value Discipline

Welcome to a new edition of the Valley Investing with Lay in Spontas. My name is Tano Santos, the Robert Halbrun Professor of Asset Management and Finance here at Columbia Business School and the Faculty Director at the Halbrun Center for Graham and Dola Investing. I'm here with Michael Holmes, Michael Mabousen and Ajahn Professor at Columbia Business School and also a faculty member at the Halbrun Center. Michael, how are you? Have you seen anyone? I know I'm doing great, Tano. Great to see you. I'm really really looking forward to our discussion today. Yeah, so it's going to be great. So before we introduce our guests today, I want to run our idea through you and our guests. I would welcome his views as well. And it's that we have decided to start doing something new here at the Business School and it is to give a grand lecture every year in January that we call the Stop Market a year in review because why embarrass oneself only in the privacy in the classroom when you can do it in front of everyone? What do you think of that idea? Will you come Michael to provide support? Yes, I would. I love the idea. It's always fun to have time to unpack what's happened in markets and perhaps look forward a little bit. It's always an exciting time, but thinking about what's going on with the world of artificial intelligence and really a resurgence in international markets. So there's a lot of fun stuff to talk about in review. I think it's great. And just to have a fun with entire community here at the Business School, everyone is welcome to talk about the always fascinating comments and goings of markets everywhere. Let's get into our program today. One of the ideas of this podcast is not only to interview great investors, but also great investors who should be better known by the Valle Investing Community because of the record. The record of our guest today is simply a thing of wonder. The insights or the uniqueness of their portfolios. And we're happy to bring one certain investor today to the Valle Investing Community in Spontant. Our guest today is Amit Watwenay, the Founding Manager of Moiros Worldwide Value Fund, which was launched in 2015. Moiros 5 years record is on the north of an analyzed 23% between the index by more than 10% points. So it's really a remarkable performance of the last 5 years. Prior to confounding Moiros, Mr Watwenay was a portfolio manager and partner, a third avenue management working with someone who as a great value investor, was a great value investor in lane, multi-bwidment. He was there. I believe that he meant many of his coworkers now add Moiros. He has an MBA from the University of Chicago, my alma mater, and a MBA with honors and an MA in economics from Concordia University. Total economic classes there, I believe. So a fellow professor, always good, and holds a BS degree in Chemical Engineering and mathematics from the University of Minnesota. So I'm very interested in academic background. I'm looking forward to getting to know that. Amit Watwenay, welcome to the Valle Investing with the Lay-in Spontant. Thank you. Thanks for having me. We always start with some biographical details of our guest to get to know them a little bit better. So tell us a little bit about where you grew up and was there any inkling about your future in investing in your youth? A group in Bombay, India, known to most people these days as Mumbai, I'm exposed to finance at the time as a diminimus and nonexistent really. I mean, sensing that I had some an aptitude for things quantitative, I was pointing the direction of the science of the screen in high school. So nothing could have been further from my mind than finance or matters of commerce. This is complete terror inkognita for me at the time, anyway. Can you tell us a little bit about how do you get to Concordia? How was your path then? I started at the University of Minnesota in tentative degree in Chemical Engineering. I found it way less than engaging. Mathematics on the other hand was great fun. So I did a second degree in mathematics. That sort of kept me sane. I was already there, so why not? At that time a career in pure sciences was probably in the cards probably, but nothing so far pointed out in the direction and finance. Now the first baby steps towards finance took place when I knew to Montreal after finishing up in Minnesota. My day job I had evenings off. It's as ridiculous to have something that's circumscribed by a nine to five kind of schedule, but it happened at that time in my life, which is a great thing. Well, as a day job at that time, there's a chemical engineer. I was writing path applications for research center. It's highly unscrupulous. It's very, I'm not saying predictable, but it's generally circumscribed in terms of its time demands. So you had lots of time, I mean, there was a year I studied some Japanese, which was fun, and then I just happened to take course in economics. And it suddenly was my first course, and I fell in love with it. I said, my god, this is good stuff. But three years later, I graduated with a bachelor's degree, animatist degree in economics. I think it was lucky. I was working full time in doing this in evenings. It was great fun. I quite, quite, quite enjoyed it. These were quantitative sort of things. There's lots of economic tricks, lots of mathematics, and that was the way I was going. Now starts this succession of random events. Why I was there, I suppose I was keen on the subject. So there was a publication which I'm sure you'll know about the journal of economic literature, which summarizes recent developments in economics. But therein I read an article, a rebook review. It was a review for book written by a famous Mathematical Economs to Gaines Theory, it's called Martin Schubik at Yale. And so Martin, they said, I certainly know Martin Schubik and my god, he wrote a book of investing. That should be interesting. An adjustment published with 79. I took another library and I thought, this is a strange book. The book is totally user unfriendly. The prose is totally totally unfriendly. And there was nothing to get fascinated by the book. Now the problem with the book was it frees the pose to you knew a bunch about accounting and finance. I knew neither was the two things. So it was a bit mysterious, but nonetheless it was a pretty engaging book. As it turned out, the course of the book was none other than Marty Whitman, a person I do nothing about. I wouldn't have known. Martin Schubik I knew something about. Marty Whitman, I did not know anything about. Since I liked the rudimentary understanding of accounting for finance, I mean, there's a lot that I glossed over. A lot that made no sense to me. Because both of them were at Yale. If I not mistaken, Martin Schubik was at Yale Econ department for Marty Whitman was at the School of Management. Correct. Marty was a professor. He taught at Yale for a number of years. Martin Schubik's name was known to me. As I mentioned, I have this of a vaguely quantitative bent, which I will not admit to anybody at this point in my life. And you about it, that's what caused me to read the book. Enjoyed it, but I wasn't sure I really quite grasped it, but was very, very engaging. After the masters in economics said, what do we do next for fun? I want lots more economics. I wasn't sure I wanted to become PhD in economics and become a lesson economics. I had seen academics as great as long as you wind up at the right place doing the right thing. You can be honest, I made with house. No, no. So, why not? Why don't you do some things of hybrid? Take a course, I'm a master's, an MBA, for example, which is very, very heavy with economics. I thought of two schools, two different schools in terms of doctrine, MIT and Chicago. And for four BICs, I applied to one, I got it. Now, that was Chicago, then followed what was I think of kind of an influential part of how I learned to think about what I like and what I don't like. But how do you fund this? Because the head scholarship said I wasn't getting one. I was working in Canada, getting Canadian salaries and engineering, paying Canadian taxes at a Canadian exchange rate. And that is in nightmare of nightmares. I want to go to Chicago, but I can't afford it. Well, the first thing is how do you reduce costs and be realize assets? The one thing I did figure out that one could do with a bit of maneuvering is you could squeeze the program into roughly one year. It's doable, but very painful, as I found out, but it's doable. So that's part of it. So that reduces one set of fixed costs, living expenses and so forth. It was a time dependent. The second, of course, you can't change, is tuition. Now, the tuition, of course, is an invariant. You have to start figuring out how you fund that and funding for Canadian study for masses in the United States was very limited. Just for context, this is taking place in 1980. 1980 was a period of very high interest rates. It was also a period when Quebec, where I lived, Montreal, had its referendum. As the assets were being sold willingly, real estate was being sold. It was absolutely crazy. I said, "Well, you know, I'm going to live here, buying an apartment or house cheaply is an excellent thing." So I bought a slice of a multi-unit dwelling with this idea of living in it. And then I get into Chicago and this, and what do I have that's not nailed down that I can sell. Now, this now be a post-referendum against Chicago. Now, it's 1981. And of course, the environment has changed. Amazing enough, I was able to sell that place. We're probably about 120 percent more than I paid a year and a half earlier. And that paid for one of my years of my tuition. This would be an interesting way to make a living. There are times of distress when people are losing their marbles if you don't lose yours and can calmly buy something. And that, of course, points to my views of death a version, leverage a version. You can't have a margin call on this moment. So you buy, you buy, and you sit, and you can do quite well. There was a part of the learning. One was reading this book with Martin Sue Bick and Marty Whitman, which talked about how they invested. The other was his actual real-time experience. I go to Chicago, I have had my good hefty dose of economics, finance and accounting, I returned. Now I said, well, this education was quite the opposite of what I read in the book. You returned to the book with some knowledge. Hopefully you'd understand a bit better what you're reading when you read it. It still wasn't very unusual book. It was very, very unusual book. It was written from a very different perspective. I'm so in and so forth. So that was my introduction to Marty Whitman, originally. Separately, now we are now talking 80 to 83, 84. I get to know the firm MJ Whitman, the predecessor to Third Avenue. It was a broker-dealer. I got to know them. I was not quite in the world of finance yet other than being their client. I wound up working at a cell site firm in Montreal as an analyst focusing on paper and forest product securities. Two years into that, I inquired if there was some interest in doing something with me forming, I could do something at MJ Whitman. And they said, sure. So I joined MJ Whitman in July 1990, ironically, Canada day. That was my starting point in my education, so to speak. You arrived and it started working before. It became Third Avenue? Correct. It initially was just MJ Whitman. They were managing what was called equity strategies fund, which was subsequently liquidated. Equity strategies fund was closed at fund that he took over the management contract hostile takeover and opened ended it. It became an investment vehicle. The only problem with investment vehicle was they made an investment in a company called Angler Energy, which later turns into neighbors, which was an outrageously successful investment. And Marty being Marty said, I don't think I should sell it, and I will not sell it. And of course, in the process, he blew through all the diversification requirements of the 40 act. It ceased to function as a mutual fund. It is late in 1990, which was the first year I started that starting July. In late October early November, they started the Third Avenue value fund, which was run by Marty. That was the flagship fund of the firm for a number of years. If I can dwell a little bit on Marty Whitman because it's one of the giants in the Van investing community, I got to know him once when I was being trained to take over the center, Bruce took me to meet some investors, who from one was Marty Whitman. It must have been in 2008, 2009. I remember that conversation very well because the man left an impression on you, the rock you there was quite evident. But I want to ask you something about his biographies and investors. If I may, even though you had a front row seat there, he started as a distressed bankruptcy investor. And then he made the transition as an equity investor. I don't know if you know these, I mean, but one of the first things I did when I took over the center is to add a credit track to the program on our investing. And it's kind of like the Marty Whitman career in Reverse. And I wanted to ask you about that transition in Marty Whitman's style of investing. You go from thinking about, I can see the connection with you, this emphasis on assets, this emphasis on downward protection. But how was that transition from Marty Whitman from being bankruptcy to being an equity investor? Just a nuance here. Bankruptcy investing is a much more high profile thing. There's lots of posturing, bearing of teeth, threatening each other that goes on. It's a very public noisy kind of thing. A bit of like a zero sum game that our president plays. But seriously, though, Marty always invested in equities. There's no question, for example, I mentioned Anglo-Anagyme, which is an incredible investment. The company was a land driller, which blew up in 85, was recapitalized twice through two bankers proceedings, and emerged with a completely debt-free balance sheet and with equity. The equity was created at a very, very, very low price. Probably had 50 cents on the dollar. This thing went to 60, 70, whatever price, dollars a number years later. But he was a great debt investor and was known for that because there's a much more high profile activity. It's much higher profile. But there was always equity investing along the way. Equity investing, I mean, even the 70s and 80s, apparently the phone mentioned Whitman was running those years, they'd be buying things like token marine and fire in those days because there's an ADR over here. And then it's also fab. This company was also very cheap. Equity investing has always been a part. Now, the connection between the two is so-called follows. If you think about bankruptcy investing, and this is my sort of very naive, very high-level take on it is what you have is a business on one hand, the left hand side is probably a functional business of some sort. Hopefully it is good to decent an average business. It's the right hand side which needs work. The right hand side, it can is often highly leveraged. There's different categories. There's whole pecking order. There's a seniority all the way down to the bottom. The bottom is this poor little thing called equity, which is of course vulnerable to everything else that goes above it. You obviously have to pick the correct fucking security to be able to garner a serious payoff in a bankruptcy reorganization. If you think in those terms, you are buying it as an equity investor, which he was a good part of the time, buying the junior most security, hence there was, I don't want to use the word, persistent paranoia, but the fear, the concern that you would be steamrolled by the people above you. It's more than just that, and we had more sort of worry about more than just the capital structure. There's a whole bunch of business-related things that concern us typically when we buy things. His mindset, he called it the primacy of the balance sheet when he thought of equities, as opposed to thinking about earnings. That is something that we have, I don't want to use where we're refined because I think that'd be the self-adulatory. We think of it as our asset-based approach investing. We think about assets and you think about the capital structure of the business. Marty spent a lot of time on the right-hand side. We spend time on actually both sides. Being mindful, this is something I learned from dire experience by observation and experience, I suppose, is balance sheets more forward time. The same balance sheet, a snapshot at one point in time, at a different point in time. At one point in time, it's a thriving company. Another point in time, it is a company that has an unfeasible balance sheet, something that's not workable. Can you just tell us a little bit more about your career in third avenue? In particular, we're curious about the expansion into international markets. We were responsible for founding global value, emerging markets, international value funds. Tell us a little bit about that process and evolution. Nothing is linear in my past. One was I own Energy Whitman. That was in 1990. That was in July 1990. In October, late October, early November, the third avenue value fund was founded. This fund was run by Marty and uniquely by Marty. I was an analyst, the sidelines. But the one thing that was obvious to me was that what we did in this fund could be pursued outside the United States. The Marty was the very US-centric fund. All of us come with a personal baggage, a person experiences, a knowledge and so on and so forth. The fund was very US-focused, US-centric. I wonder, wouldn't it be great to do this outside the United States where there's a lot of competition? Most people do not think quite so much in terms of downsheets. People tend to think much more in terms of earnings based valuations and so forth. So there's a big large gaping yawning open opportunity for us. I take this to Marty in various occasions. His comment was the same each time, "Look, the SEC isn't there. I don't want to go there." Everything had to be anonymously litigated, but everything had to be either arbitrated or the rules and so forth. It is true there's a lot of stuff that the SEC requires investors to do and companies to do. There are many measures that are protective of investors. However, I think with careful work and careful security selection and careful analysis of the know-how, the lay of the land and so on and so forth, one could actually do quite well. So I said, "Well, look, I love what I do here, but I really do need to follow my own dream here." With Marty's blessing, I left third avenue, MG with at the time. And I want to be the firm called Karl Marx. It's CRL, M-R-K-S. Not the literary giants that we know. Karl Marx, new Marty very well. In fact, Marty used to match one of the funds for the Marx family. The Karl Marxist history was similar to Arnold and Lychschroder, who I'm sure you'll know about, very well. So Arnold and Lychschroder were market makers originally of the United States as was Karl Marx. Karl Marx sold the market making business to Smith Newquart, which was then taken over by Merrill Lynch. It turned basically a family office and they had some pools of capital they managed for the family and outsiders. They had a distressed, special situations fund which Marty was for a number of years co-manager off. So they knew me at MG with men as a director research, collaborated with them, approached it. This is why you start a fund investing outside the United States here. So I did. I started September 1996. It was a small fund and it status more fun, which being a scale business, it was not to the dissed but I think you should probably wind it up. And I wound up taking it with me returning to now what was third avenue. Myself, a little funded toe which is then called Karl Marx Global Valley Fund, we returned to third avenue with a number of the limited partners, most of whom notably were actually people in the industry, people who were investors, professional investors themselves. So I mean this is ridiculous, you're one down year and you're small fund over time you will grow and we'll come with you. And so they did. That was by return to third avenue. I returned both as a manager of this, as well as working as an analyst or a number of the other investments in Marty had. For example, and with their areas that people perhaps weren't so keen on working on insurance, I mean insurance is something I've always ensured. In fact, the first things I've worked on when I joined Marty, he thrust me into the world of life insurance, there was a big meltdown going on at the time in 1990, Drexel was blowing up and that's where the opportunity lay. So that's where he said you will work on all these insurance companies. There was a number of things I could contribute to. So in 2001, we've got these five years for this fund which is now called third avenue global value fund LP and they said, gosh, you can do it. So why don't we have a mutual fund? That's how the third avenue international value fund was spawned. The business sort of flourished after that over the years. I mean we did what we did. It seemed to work. We had a reasonable record. People seemed to like it. And the funds group, we were the largest and the the financial institutional funds within the third avenue at the time when I left. There's a fascinating story and I didn't know that episode in your biography, the Karl Marx advisory going back to third avenue. I'm bringing some expertise to probably with that team that you brought to third avenue, which is one of the questions that I had for you. There's always a difficult question that Michael and I always ask to our guests when they leave the firm where they grew. Why did you leave? And we don't want like a complicated story. You know, what is that you felt? You needed to accomplish on your own. Why were the things that you thought you could not accomplish inside third avenue that led to the founding of Moiros? As I mentioned, I was in third avenue as a priestess in two stints. The first one was 1990, 1994. Was five years? The second one was from a 99 to 2014. In the aggregate, but on the 20 years, it's a totally for questions, a totally reasonable question. Third avenue, it was a great place. The first stint was wonderful. The second one was great. I was much more the asset management side, managing investments for variety of different portfolios. It was a dream. In the early years, it was a small collegial, very much a meritocracy, and was a very focused on investment management. Success happened. With success, something's changed. People want more and more. And with that, the culture morphs also. And the problem with being less offered investment focused firm, more an asset gathering firm, the culture changes. And again, we were doing many, many different things. We had debt funds, we had small debt partnerships, and there was a decided, started a very large distressed bond. There was a whole slew of efforts that went on. So became a large multi-sort of headed beast, culturally that changed enormously. Well, there was clearly some level of unhappiness amongst the people. My team at that time, in 2013, five people in New York. Of the other four, in 2013, three of the four resigned one each on successive week. I was theoretically losing three of the four. The quality what you do is very much function of the team you have, how they work together. And the thing about us was a two who started in 2003 and four. Another one who started in 2007, a third avenue. And so now we are in 2013. What we did and what we do now is not sort of off the shelf discipline. It's not a plug and play kind of thing. So finding somebody, training somebody, I mean, because of finding somebody, this is a six-month process. Mentoring somebody will take at least a year possibly more. And maybe she or he may or may not succeed. We don't know. But that said, there's a tremendous risk that you take when you start off with somebody in terms of education helps. But learning by doing helps even more. There's a way we do it. The way we think about things, which tends to be a bit different. It's not conventional. It's not what one encounters. I mean, fact, just forward, it's where the youngest member for us, he graduated from CBS, I think about a year within the last year. Gabriel. Yes, the thing is to find three people at that point, it was not a budgetary issue. It was just there was not enough time and the risk of doing it was enormous. Either the team stayed in place or I just moved on. The team members, one of them said, I will absolutely not work here. And the other two came back for a while as consultants and we transitioned the assets to another manager. One of our colleagues was staying on. I removed them. That was the end of third avenue. I wasn't really quite sure I want to do it all over again because this investing and there's a business investment management. One is fun. The other is much less. So I was persuaded by my two colleagues that perhaps we should start a firm. Now the firm would be a very narrowly focused firm, relatively few people and not a large for both in people and the aggregate amount of assets. We would not have constraints upward upon us in terms of what kinds of investments we could make, where we could make them. And being mindful that we were few people all focused on doing one very coherently well-defined strategy, it becomes quite scalable. That could be interesting. Morris was launched as a firm in 2015. The fund itself was launched in 2016 because of the commitments I made to my previous firm. So we started in 2016 but we decided that we were going to be very narrowly focused. Maybe we were going to be global, we were going to deep value and we were going to adjust that. We were not going to suffice and dice the we're not going to be emerging market portfolios. We're not going to be a sort of go anywhere. Starting as a global firm, one thing that happened since the day we started a few items. One, security in the US markets were at the expensive end of the spectrum and they got more and more and more so. Progressively, of course, we had less of less of the US people said, you're not running global firm, you're running an international fund. They said, "Call what you wish." Of course, now we've been categorized as an international fund. The second, we arrived in, I suppose, I don't see a perfect strong for value investing, it was quite the early years were difficult years and we said, well, we'll just soldier on. I've seen this before. Have we sorted the 1998 to 2000 period? That was the time I was running a small portfolio. We actually did not lose any money during that time period, which was surprising, it was good. But we started this thing and we just said, well, soldier on. And ultimately, what we did, five years only goes back to 2000. You remember, 2000 itself was not a great year. 2008, of course, every test to pick, oh my god, you were down that year. Indeed, we were down that year. There's no question. I will not represent that we do not go down, but we do not have, shall we say, primord impairments of capital. We've been striving to do that and we've tried to continue doing that. We persisted. We've operated the business with a long-term focus. Everybody is with time, a principle. Everybody shows them the good days and the bad days. That's the way we worked. We aspire to have a very flat structure with tremendous intra company transparency. So, Amit, can you give us a brief summary of your investment process? You've dropped a little bit of nuggets along the way here, but how do you find securities? What do you look for them? What are your criteria for selection? You describe yourself as deep value. You mentioned looking at the left hand side as well as the right hand side of the balance sheet, but things like competitive advantage and cash flows and ROICs and redeployment and all these other fun topics. How do you think about, if you're explaining to a potential partner, how you think about going about finding opportunities? There are three interlocking characteristics. Valuation, safety of your capital, and then there's the long-term time horizon. The three things are actually quite related. We do not think of ourselves as capable of forecasting things macroeconomic again and again, correctly enough that we risk capital, our capital and our partners gap. It can't do that. So, how do we think about things macroeconomic? And this will frame the rest of my comments. Especially if you want to own things for a long period of time. If you're going to own things for say three to five years or more, a lot of stuff could happen. Now, if you're a trader, you're going to know something for say six months? A lot less can happen. A lot less probably we'll have. You have to have some sort of expectation that bad stuff could happen and pretty bad stuff could happen. So, you start with this idea that it's a bottom-up process. You study a business, you learn about what affects the business, its operating performance, its financial performance, things that are top-term factors, being interest rates, inflation rates, exchange rates. These are those generic kinds of factors that would affect the business. Effectively, think in terms of adversity, how would this business behave under adversity and adverse moves in these macro variables? If there's any sort of possibility of existential risk, because of adverse moves, we just don't do that, because I don't know what the macro economy is doing, I don't want to go there. So macro is a disqualifier, not a qualifier for inclusion within a portfolio. Now that's the starting point. Now, valuation, because we don't make projections of the future, what's the best piece of information that we have about the business, is the here and now. The here and now typically draws from, if you will, the balance sheet. Now, when I talk about balance sheet, I don't mean a sort of accounting balance sheet, you use the accounting balance sheet to get an economic balance sheet, so to speak, economic variables, and economic values. And you try to do it in a very conservative manner, because conservative both in terms of methodology, preferable liquidation, a wind up kinds of methodology, or conservative assumptions. You don't have some hockey stick projections, of course embedded in your expectations of value issues. So you value the assets, you try to just aggregate the left hand side of the balance sheet, try to value them conservative. The right hand side of the balance sheet, well, there's unbalance sheet, there's off balance sheet liabilities. There's stuff that actually doesn't turn up off the balance sheet, not just let me get quick explanation of whatever I'm going with this. There's a paper analyst in my youth. One thing I learned, paper company's horrible businesses, they're absolutely horrible businesses. Even I will admit to them being horrible businesses, because they're highly technical, they're very capital intensive, they require recurrent inputs of capital, dollops of capital, to just keep moving forward. And if you don't do it, you post one capital expenditure, it's going to catch up with you. You know, it's either going to be environmentally related or it's going to be upgrades, it's going to be maintenance. Sometimes you wind up with companies, paper companies have great downsheets. The reason they have great downsheets is because they haven't spent any money. And this comes and bites them. When you learn about a business, learn about capital needs or the business so that you are not going to be so tripped up by these sudden capital demands. So you try to bring these north off balance sheet liabilities into your valuation as you learn about the business. And then of course, this typical standard thing, you always add a charge, you capitalize on running operating expenses. The future left hand side and right hand side, you come up with a net asset value and so to speak, NAV because you've been very careful, a conservative with your left hand side and you fully loaded your right hand side, you went over the very conservative estimate NAV. I just write about it and discount to that. Now, what is an adequate discount? That's of course one could argue about this, it's a blue in the face, but there's a couple of simple rules of thumb. One is if it's an industry which is capital and Tesla cyclical, fragmented, you need a big discount. Conversely, if it's an asset light, it's an industry which is consolidated and there are fewer and fewer players, you can get away with a smaller discount. It's a judgmental thing so we've done is, like just 60-70% discount, down to 20% discount. The second part is risk. Risk avoidance for us is not the day-to-day stop price of all certainty. Risk avoidance is anything that could impair, impinge, diminish the value of the business because ultimately what you're trying to do is buy a business cheaper than what anybody else in the business who lives in the industry is willing to pay for that business. In a cash transaction, of course, we don't want funny money called equity or oppressed equity big years in a transaction. The kinds of risks that we deal with, there's the risk in turn to a business and the extended business. We have written a couple of essays under investor members on our website. One is in turn to business could be self-suffering management, dishonest management, that kind of stuff. Then there's leverage balance sheet. Leverage should be viewed in the context of the business. Some businesses look great at some points in the cycle and look horrible. Not to throw stones at anybody. Glencour. Glencour, what came public, I think, was in 2011, there are about 2011 is the hottest thing ever. A great balance sheet roaring, chugging out huge amounts of cash. Fast forward commodity prices fail. And of course suddenly, they've discovered a wildly overlavered and had to emerge to the equity issue. You have to view a balance sheet in the context of his business. You have to have a set exactly. You cannot have wildly cyclical cash flows and assume that a certain static liability structure. The third internal business concern would be something a business model. And this is savory for many, many, many times. When business model I tend to have a fear and loathing off for lack of a better term is a business that requires access to capital just to keep the business moving ahead. It's one thing if a business needs dolefs of capital to make an acquisition, but to keep the business going. There are businesses, unfortunately there are and businesses models accommodate them, but that's not what we tend to do is, for example, bear's turns, they're brothers, they need a great credit rating. Absent the credit rating, they're going to should commercial pay point that was curtain time for them. And that's the kind of business I worry about. You worry about the business model to see the sustainable and good times and bad times. And those that are so fragile that in a bad time, the crumble, I think that's going to be more and more important in our current environment as we continue. But those external business could be other things like the risk of government meddling, industry structure. There's a lot of elements to thinking about risk, but none of them really relate to day-to-day stock price volatility. Stock price volatility is matters to us in so much as we want to buy something or sell something. At the extremities of stock price volatility, finally long-term horizons. You buy things really cheaply, something has happened. Something is bad has happened, the company to the industry, the geography, capital market prices, who knows, but it's bad. It's something that causes something to be cheap. It takes time for that to be resolved. So when we invest, we typically think in terms of where 3 to 5 is possibly more. The time can vary, it could be more, it could be less. What happens is because of this, there are a couple of things that matter here. As a long-term investor, you better be sure that your company has inner resilience, survivability to make it through this long polypide. The second thing, and this is another aspect about long-term ownership, if you're planning to buy things for a long term, is there's a lot of a whole lot of people, the fewer and fewer people, fishing in a long term, that end of the swamp. Long-term investors have been sort of bit by bit by bit becoming, I know it's indeed, you're species, but they're fewer and fewer than. So it can be an opportunity rich area. That is how we do it. What gives us opportunities? Well, as I mentioned, I mean, a company could slip on a banana peel. A good company, bad things can happen, and you might be able to get it cheaply. Second, you could have some problems in the industry or the geography. You could have a capital market supply. There's always a crisis in moving in some form or another. Depending on the geography or depending on the industry, there are opportunities you just had to be awake and you had to be careful to pick your spots. But there's a more, shall we say, benign form of opportunity. Sometimes, stuff slips between the cracks. Sometimes, people just don't have a sharp enough pencil and paper at hand. And opportunities happen. You just have to be there. To grab them, yeah. I want to people to live a bit. I mean, to the issue of how do you think about portfolio construction and bridge management before that? And I think it's related. I was reading your latest semi-aneral letter, which I recommend to everyone. It's really a wonderful review of what you guys do and how you see the market and how you see these opportunities. You have a big exposure in the material sector that has done very well for you guys. Now, there's a sector that benefits from particular events in the market. Let's put it this way that have a very macrochromic flavor to them. And I realized that you guys look deeply at their specific companies that you're investing because it's kind of the interaction. But how you think about the performance, for instance, of this sector to which you have a lot of exposure in the context of say, what is going on in this sector, what's going on with gold and with other things that are taking place in that space. Can you walk us a little bit about that issue of risk management, concentration, portfolio construction? After global financial crisis, in 2008, nine, I thought the wildest option in the world was insurance companies. So we wind up with insurance companies in Japan, in Germany, in Finland, in the UK and in Bermuda. There was this big heading of insurance companies and people said, my god, you got a lot of insurance companies there. I do worry about risk aggregation. However, insurance companies in each of these different markets, which are segregated and separate from each other are the Japanese insurance companies living in parallel universe to the ones in Germany and so on and so forth. These are different segments. But I can't make the same commentable materials because of course, they're common driving forces. But let's be gold for example, because gold is like a unitary commodity because the other ones have all the things that other stuff in them. So gold. I think from memory, the three gold companies sitting there, India's supposed to love gold, I don't. It's very expensive and gold stocks, it damn expensive, it's terribly expensive. And who hell knows where gold does? But be that as a man, it has this mystical premium attached to it. The people who believe in it, I'm not so sure, I've quite read it to it, but we have gold related copies. So how does it come to be? What is started more is, one of the areas that was unusually cheap, because gold prices were doing terribly, mines were doing terribly, but gold related companies. And we actually found, Grahamite NetNess, yes, that is ridiculous, a Graham-and-Dawd net current asset kind of company, with an operating business thrown in. And the amazing thing was, it was a real business, the money was redeployed into higher yielding business assets, and of course ultimately the company was taken away at the multiple of its initial purchase. Really what we try to do is buy a business. The commodity is a part, I'm not saying it's a side show, we will do better if gold prices go higher. However, if gold prices say put, we will probably do just fine. We have three gold related companies in our portfolio. The oldest one going back to probably 2016, something when we first started the Morris Worldwide Value Fund, the mutual fund, or a bit earlier, when we started the Morris Global Value Fund, this company go wheat and precious metals. Business here is streaming. They basically provide funding to a specific project. In exchange for that, the project is completed, but the life of the mind, for the life of the project, they will get a certain percentage of, either the revenue or the output, depending on the contract, the output volume at a massively discounted price. This is a compound year. The thing about this business, that people love and have loved for years, and has caused this area to be an absolutely wildly expensive place to be, has been the business model. It is once you make investment, you're not liable for any more capital investments, anything raised in mind. You just keep collecting. If the mind life expands, you have many more years than you planned for. If the price is a higher, you make even more money, it is a beloved model. What made it uniquely cheap in that year was horrible gold prices. They had problems at various other minds, and of course the stock was cheap. We bought it, we sat on it now, for the better part of the decade, and it's still there. So that's one, and it continues it compounds. They reinvest the excess cash into new projects, and of course the business actually is a hate to use it when a compound year of some sort, and does. The second is more to our style. There's been such a long pause for exploration and drilling for minds. The drillers are the ones going out of business. They're fewer and fewer and fewer drillers. So there's one, which is called a major drilling, which we own, very, very good bounce sheet. People tend to focus on earnings. And of course, you know, in bad times, earnings for companies providing services, cyclical businesses such as these, earnings can disappear, and you can buy the assets very cheaply. And that's how we were able to buy major drilling way, way, way below its price. Again, there was no question of it going bust. Many of its peers, especially in Australia, went bust. And bit by bit, they've been expanding their footprint by buying up some of the trouble ones, buying up some of the marginal ones, consolidating them, and they're expanded Latin America quite, quite successfully. To be fair, the current environment is your gradually seeing money flowing into the coffers of the junior drillers, of the junior mining companies, which employs services of the drillers. Maybe at some point, this company will make money and will make money. The last one is a funny one. To this company called Dundee Corporation. The Dundee Corporation was a massive conglombrate. This is the Canadian company. Correct. Not Dundee Fresh, not the Dundee Corporation. It was run by a very, very well-known investor, Ned Goodman. He bought all kinds of things. I mean, this thing had cattle farms, it had fish farms, it had oil assets in shod. It has investment in a private company, which is in the world of Alzheimer's, looking for Alzheimer's curers. It has many, many, many, many things. Ned passed away. And the last few years were pretty bad, because Ned was not doing well. He too had Alzheimer's at the time. But still going on to it. His son, John Goodman took it over just for context. It used to be a $10, $15 dollar stock, Canadian. But then he stumbled on it. It was probably around $1. Now, it was very asset rich. Now, a bundle of assets, disparate assets, is for me, it's like a dream, because if you have a committed manager, a committed owner manager, in which his son, John Goodman, was a big shareholder, as well as a known from another life. He's a very, very good mining engineer and a financier. So it was a very potent combination. Procedure is methodically selling of the assets. By the time we got to it, the thing was yet another net net. Here we are. I mean, he's selling of these assets, paying off all those preferentials, no liabilities, shrinking the cost structure. And you wind up with a company which was probably a $1.40 per share, price. It had $3.00 per share of net current assets. That's good. Assuming you do something good with those net current assets. Obviously. That journey sort of continues. It has, in this environment, done well. This M.O. is to fund younger mining companies, be the precious metals, or be their base metals, whatever they are. And here's a long history of having done that, done that successfully. That's the third one. Notice that is the overarching theme or call on commodity prices per se. At a point in time, the factors that cause us to find a business attractive, we buy as cheaply as we can, fruitly can, watch it like hawks to make sure that the company doesn't zig when we think it's going to sag. That's the level of the balance sheet of do something stupid, which I'll be scarce out of our wits. And we'll wait. So can you tell us a little bit about your portfolio construction? For example, what is the number of stocks of companies that you hold on average? How do you size your positions, for instance? And what is the typical turnover? You mentioned one of your pillars being long-term rise in a zirtypical turnover, for example. We think in terms of a portfolio, an ideal portfolio between 15 to 50 securities. That's the most diverse portfolio. We do run bespoke, suddenly managed accounts, where we can train to say 20 or sub 20. There was one which was a 3 to 10 stock portfolio. So it really, really varies. But the most broad, based portfolio, the mutual fund in the limited partnership is 15 to 50. We can't get anything about around 40 or so at the present time. And that varies. It's typically been about 30 to 40. Nothing magical about that. The sizing of individual positions is dictated by a few things. One, there's obviously inherent attractiveness of the business as a business, its valuation, and how it fits into the portfolio. Sometimes you can go crazy. For example, in Q1 2020, oil stocks were so cheap. Maybe even oil became negative. They got cheaper and cheaper and cheaper and cheaper. The entire portfolio theoretically, if you had a lapse of sanity, would be oil stocks. But you don't do that. There is a judgmental common sense limitation on how much risk aggregation you wish to engage in. As I mentioned earlier, the example of insurance companies, it may seem tremendous about risk aggregation, but given that they operate in completely different regulatory environments, with completely different economic dynamics, there was not kind of risk aggregation. In the case of things like resources, we have a meaningful exposure to oils, but not in the way one thinks about them. If anything, I would love for peer-to-projected low oil prices because two of our companies are in the oil service business, and both of them are contracting this contracting field of players in each of them. So notwithstanding lower and lower oil prices, the risk aggregation is there, but it is not quite working, quite the way it expected. The day-to-day stock price policy will be affected by oil prices. But that said, you do try to have a modicum of commonsense, as opposed to rules based, numerically based, in that it probably will not do what Marty did, for example, when neighbors went up, up, up, up, up, up, and he had to close down the fund because he blew through all his diversification requirements. We do have diversification requirements, which are mandated by the SEC. But that said, we tend to typically cap things out below 10%. If that is not hard to fast through, but it has never yet gotten there, unlikely to get there. I suspect my colleagues will all lean heavily on me if it did get there. - It comes up in class all the time when we're talking about big international value funds, which is the issue of currency expulsion, how do you think about that? And how do you guys approach it? Do you hedge it? Do you just live with it? Do you have a view on these? - Each of these things that we buy is a business, individual business. The business comes with its own internal currency expulsion. So for example, companies that produce gold, iron ore, copper, and so forth sell the product in US dollars. So in my mind, I think of them as US companies, you don't need to hedge them. They can be traded in Hong Kong, they can be traded in China, they can be traded in Canada, but the US dollar companies, they're off the table. The second set of companies that you have to see long and hard about hedging, because it's hard And as quite expensive is emerging market companies. currencies often have very, very high hedging costs. So think hard if you really want to hedge those. It's a cost. So now what about this big vast middle? Big vast middle, you're talking about companies that are not US store companies. This is Japanese non-life insurance companies. Japanese banks, or you could have Swedish banks. That sort of stuff. Or Italian banks, which we own in town, have owned it now for about almost a decade, the question you ask yourself, the answer is going to be very unsatisfactory. I warned you, is this currency expensive versus the US dollar or not? For example, owning an Italian bank would you deem the euro to be expensive versus the US dollar? If the answer isn't the affirmative, that your is expensive versus the US dollar, you should contemplate hedging. Unicredit bank, which is the one we have, does not have inherent internal hedging of its capital value for a US-based investor. The bulk of its exposures are euro-based, aside from the exposure in Eastern Europe and Russia and so forth. But it is largely a euro-based bank. So you are taking on euro exposure. So you have to answer the question. If you're deeming the euro to be expensive, you should probably hedge. And historically, when we've hedged it, what we've done is we bought out of slightly out of the money, European capital options to hedge against capital values. As I said, hedging is expensive. It'll cost you money. Some cases are non-economic. Now, just one other caveat to this. You could have companies operating other currencies, other economies, which have US dollar-based balance sheets. Case in point is this bigger putt.com. Let's move into this bigger putt.com, which is an interesting company that has come up with my students and occasions. There were really two companies, perceived to be Argentine companies that we owned. One was a purely Argentine company, Group of Fiancia Galicia. The plot line there is roughly as follows. Argentino has been run, I mean, for lack of a better word, for many years, irresponsible. It's madness, how it's run. But it is one of those people make their choices and deliver that. That's very delicately important, I have to say. The thing about it is, periodically, you get investment opportunities which are absurdly cheap. I mean, there have been times that this is not our first thing. This is probably a third, maybe fourth. I mean, the first time was off the big collapse in 2002. I mean, it was wonderful. There were opportunities galore, but that's another day and another period, the different plot lines. The most recent one, they were coming off a long period of Peronismo, which was completely a reckless monetization of the deficit, a ran out of money. And while subsidies that had to be paid, it was madness. Very, very high inflation, rising inflation. Income, Mr. Millay promising, well, somebody say the moon, but promising. And I would argue that if he were to be successful, the early years of his term, taking the inflation from almost 300% to say 200 or 150, would be good. I would call that a low hanging fruit of the administration. And that's why I approached it. We start out our investment, Galicia, which is an attractive business to be fair. Latin America, the banking system in most countries is extremely concentrated. And the banks, they don't only use where it starts, but they do. They own fees, spreads are massive, and they have to have massive spreads because stuff that goes on there, and they also have very good bound sheets. However, they operate in places like Argentina. So in more certain same places, Chile, Brazil, Colombia, transactions take place in multiple books. Galicia acquired a good list from memory, acquired HSBC's business, for about 40% of books, and about 2.5 times pre-tax earnings. Galicia had a very large footprint. It had became an even bigger footprint after this. It was already the largest private bank in an Argentina, separately, apparently around the same time. Banco macro, another similar bank, large bank, they're all very well capitalized, Johnny. What itals, franchise in Argentina. And again, this became another big clear. When people are leaving a place on mass, that clearly rings the bell. I said, "Well, this is the flavor of the Jew. Let's run away from Argentina." I mean, Mr. Miele is coming into power. The elections are coming. Here we have Grupo Financiario Galicia trading at what looks like five, six times very depressed earnings, about 50% of book. So why are the earnings depressed? Banks are cyclical businesses. They're better times worse times. And specifically what happened was no one was worrying. Consumer lending had just died out because no one was going to get mortgages, these outrageous prices. Business were not born because given this variability the day-to-day affairs of Argentina, no one wanted to invest there. So the banks were very under-loved. They were the most under-loved set of customers in all of Latin America, and all of Latin America. If something sensible happened in the prospective election, it would be quite some. Well, it sort of played out reasonably well. Miele was elected after a few iterations. There was a primary then the falterly run with the run-offs and he finally won and he proceeded very rapidly. Squeezes squeeze squeeze the economy and just squeeze. Now all good interest rates reduced. The mortgage is being written soared. Businesses you intentionally began to spend. So Galicia's business just really really picked up and picked up very very well. So our purchases made in probably Q3Q4 2023 around the time of the elections. Now the problem with squeezing squeezing, squeezing inflation, remember you're coming from a very high inflationary period. The tolerance of people very high inflation is limited. And of course they will willing to suffer for a period of time. You've squeezed people for over a year. The squeezing continues. People jobs are slashed and so on and so forth. It becomes really really difficult. Now it's just the politically unsaved part of the term. The currency began to get overvalued. Sign of that. One of the companies we own is Latin Airlines. Latin Airlines is one of the very large carriers within Latin American overseas Argentinians who are busy traveling big time to be chilly to go shopping to New York to come shop because the currency had become wildly overvalued. Artificially overvalued I said well this is going to crack and we left. We left in the beginning of this year. So that was a holding period and I got three fourfold which is ridiculous. We just said here but all and shocked. We was going on here and so that was the end of our experience. The currency went for being wildly undervalued. I literally remember game as a part of CBS went to Argentina for a week or some day, some time. Everything was very cheap. I went about I think two, three months later as a my god this business is expensive. It can vary and vary enormously. Separately this we are put to come. It's head offices on Buenos Aires. Yes to that. Listen as no. It's an online travel agency. It's the largest online travel agency in Latin America. It was a creature that was funded by a number of private equity firms. It was brought public I think about a couple years before the pandemic in the 20s and winter of the 30s. The position is extraordinary. It spans most of the countries in Latin America. Now here comes a pandemic. All traveled between countries just ends. It just stops with the exception of Mexico. The thing with this regard, there's no revenues to speak of. If anything, there are negative revenues because they refund the cash that came in from various clients. So you have a situation with this company as zero revenues. A briefly negative revenues at the beginning of the pandemic and the stock obviously crashes and of course there's no end in sight to this horror show. What's interesting about this is the following. It's just a few numbers to sort of frame this. It costs one and a half to two billion dollars to build the IT infrastructure for this online travel agency. That's the sort of baseline there. The equity market capitalization was about 420 million dollars. It had about 225 million dollars of cash, no debt on the bound sheet. So $195 million enterprise value. So for what you're paying, $195 million enterprise value, you're getting a $2 billion company. The company had a very clean balance sheet. This increased on the cost quite severely in the beginning of the pandemic and they renegotiated the deal to buy well Mexico's largest travel agencies. No cash down will pay you after the pandemic. So here we were, you had a situation where at some point this would end. Planes would fly, maybe revenues slowly started to become, and it's been slow. Just for context, the cash was kept not in Argentina. It was in US dollars outside Argentina as most rationed people do. I mean, Argentina, I mean, Buenos Aires is good for a lifestyle. You've protected your assets, you hold them elsewhere. The 60% plus office revenues came from Mexico and Brazil. The remaining 40% came from Colombia, Chile and Argentina. It's a pandemic company really. So you would be amused to learn perhaps that during the pandemic, I know that too. have a bit of fun in what was a very trying period. Of course, one doesn't want to make light of that. We had all the students thinking about the tourism industry. So that's how I came to know. So we look at the hotels, we look at the OTAs, we look at the airlines, we look at the amusement park companies, we look at all those things. And that's how we got to know this figure, which is no longer listed, right? It was a quiet, correct process. So it was quite in May 2025, but 1950 a share, I think. So now it's the list that you can no longer buy it, but it was very interesting business with big modes, those businesses are, oh yes. We're getting to the end of our conversation with it's a fascinating conversation. Michael and I always close these conversations with the same question. Let me ask mine, Michael will follow with his. And I want to ask you, what, where is you, what keeps you up at night with fear of excitement? What is that thing that your mind goes to naturally when you have that idle moment? There's a lot to layer on the worse side of the ledger. It's not just taps. This is already added burden to start with, but it's also the frequently changing nature of the rules. I learned something years and years ago in a world of highly changing economic variables. Years ago, we were training the Phillips curve, low inflation or high inflation, low unemployment, Argentina defied all that, the hyperinflationally depressions, which you think's changed so rapidly from day to day that people cease to produce. So you start to see that, no, it's not just a task with highly varying nature of the rules. We may have seen the first crack in the first brands operation because they complained that the changing nature, highly changing rapidly changing nature of the regulations made the customers pull back and decision making and spending. And that is something that we may well see more off if this uncertainty is a protracted one. That's one. First you go bankrupt slowly, then you go quite rapidly and you see these things are accumulating quite rapidly. There's another thing that you think about. This is probably my peculiar set of values. I have not found industrial policy. For obvious reasons, I am not sure what gave these people particular pressures to be so brilliant. This is the second success of government, which is throwing billions and billions and billions of dollars into what might very well turn to be misguided industrial policy. Only time will tell, but it is worries, it's expensive and it has an effect. Unraveling it will not be easy. Second, the last thing is immigration policy. It's broken. We know that. We know it's hatch work of things which are politically devised and done. Here is an opportunity to deal with it coherently, intelligently, in not in place. We seem to be throwing out people at both ends and skill spectrum and making it very hard. The problems with this will take time to service in a meaningful way. The problem is human capital, as I mentioned earlier, is not fundrable and human capital people progressively will compete for against us. Are you seeing signs of that? I think that might very well accelerate. That is very, very worrisome because what's made this country great has been the free flow of human capital coming here, relatively free flow. You haven't jumped to many hoops to get what you get here, and they do. And I think that may have riled a lot of people. And finally again, political decision making is that of split down the middle and the partisan manner which is very, very disturbing. God forbid we have a crisis with the two of them after talk to each other. A crisis that needs resolution rapidly. Those are the sort of things that worry me. Final question. What are you reading or listening to these days and is there a book or are there books that you would recommend to our listeners? One is a book about worth thinking about investing, how to construct portfolios. There's a personal basis and as a more institutional basis. I think someone you may have interviewed Ashwin Chabra, his book, The Asperishal Investor. Very good, Mark. He wrote it when he was still in Maryland, before he started head up Jim Simon's family office. I think it's actually quite fascinating his ideas of how to device a functional portfolio, the dividing up into three buckets, safety, marketing, aspirational, obviously exact proportions. The context of these things we totally determined by the needs and resources of the person. But I think it's a very, very interesting way to think about constructing portfolios, both from an individual side as well as from an organizational side. Organizations that needs have time horizon. It's a very readable book. It's a fun book. I mean, it was surprised. I mean, the subject, the man's a quant too. He writes complete sentences. This is really nice. The second book actually comes from an F.T. writer. My name is Jillian Tet. You probably know her. Jillian Tet, at first, came to know her when she wrote the book saving the sun. That was about the recapitizing long term credit bank, which became Shinsley bank, which we had worse owned before I was taken over. You would never know from that book and from the stuff she writes in the financial times, that her background is an anthropologist. Her PhD is an anthropology from Cambridge. I did not know that. So she did a book, but the silo effect. The silo effect, really, I mean, I think it's about segmenting knowledge. When I'm often asked how we think about Morris, I come down very firmly on the side that we should all be generalists. Siloing people, separating people from moving by geography or parts of the capital structure is kind of done. For lack of a better term, you will miss both threats and opportunities that way. I think silos, in the name of specialization people do it. I don't think it's a good thing, but that's me. And she certainly is much more articulate than I'm about talking about this. Also, some things that might have happened because of this silo wing. And finally, the last one, this one is an old one. It dates back to the late 1990s. It's written by a Pascal's design, Muchnic. It's called Oddman Inn. You may or may not have come across this book. It's about Norton Simon. Norton Simon was quite an investor. He was a Conglomeratur. You know him for various products like Hans Stem out of pace. It also took things like that. He did very, very well as an investor. He was also a very discerning art collector. He collected the same ferocity and intensity that he invests. And he assembled an amazingly good quality art collector. Not a huge one, but a very, very good quality one. After reading anecdotes of how he acquired his art collection, when we attempted to visit it, the North Simon Museum, very much existed past the data. It's a small, but superb museum. It's not very far from the Getty in Los Angeles. It's interesting to juxtapose the two. Getty had vastly larger amounts of money. Wrote lots about his collective, his art, and how he made money and so forth. But the quality of art is very, very different. And getting long lasted after Norton Simon's collection. And of course periodically, Norton Simon Museum had financial problems. So they tried to buy it on the tree. Of course, the band should resist it so far. And it still depends. So I think it's fascinating how people do things with their wealth. It's a value investor. Things happen. This has been a fascinating conversation. Thank you so much for coming, Amit. And we hope to see you around the business called one of these days. So thank you all for joining us in this new edition of our podcast. And we'll see you in the next one. Amit Vaudone, thank you so much for coming to the Valinveston-Gudley & Sportcast. Thank you very much, son of Michael. Thanks a lot. Appreciate it. Thank you. Thank you for listening to this episode of the value investing with Luchin's podcast. To subscribe to the show or learn more about the Hellburn Center for Graham and Dodd Investing at Columbia Business School, please visit GrahamAnd Dodd.com. Thank you.