Bob Robotti - Finding Opportunities In Cyclical Industries

Jim Grant has a comment that says, right, in science and engineering, knowledge is cumulative, but in finances cyclical. And cycles happen and people lose sight of that fact. And therefore they think that what happens today is and will be in perpetuity. And that gets reflected in price. And when those things change, the logical conclusion is who wins in the new situation with a different road that you may have turned on is different than the ones that were on the road that you were on. And the explanation cannot be found in any mathematics, but it has to be found in the rest of the psychology. You know, the game in our kind of life is being able to recognize a good idea when you're rarely gathered. What does the old say? Opportunity comes to the prepared mind. Human nature has a change to why I'm 25,000 years old. I think volatility is perfect. Who's money for the firm and I will be understanding? Welcome to AUM on this show. We explore what it takes to produce outstanding investment outcomes in the complex adaptive system that is modern markets. I'm your host, Ryan Henderson. He founded in 1983. In addition to his role as CIO, Bob also serves on the board of directors of several publicly listed companies in the robot company portfolio. I've personally followed Bob's career for some time. And I can say without hesitation that he is one of the most passionate and rigorous investors I know and I think you'll be able to see that in today's discussion. Bob, welcome to the show. Hi, Ryan. Great to be here. Thank you. Let's start with, I guess, the genesis of your career. If I recall correctly, you kind of fell into the investing world in sort of a funny way. I guess it was initially sort of the accounting world. Can you tell us how you got into it? Sure. So January was 50 years. I got an internship with a small accounting firm in New York, Puster, Reno, a Gleasing, 25 people. And the audit client, they put me on to do my internship for the month of January, 1975, was a firm called Tweety Brown. And so when I graduate, it started working for them in May June. I'm working on the audit of Tweety Brown. For the next four years, I was with the firm for three, four months of the year in terms of the various entities they had. So that was the very first client of the firm that I was exposed to. When you audited Tweety Brown, did you know who anybody at the firm was? Did you have any idea of, I mean, we look at them now as some of the names as kind of legendary people in the world of investing, was that the case then as well? It kind of was. Well, of course, the firm that I worked for, of course, knew who they were. So therefore, however, I didn't know much about investing. I didn't know anything about investing. So therefore, the idea that I could understand kind of who they were and where they fit into the equation, you know, was probably pretty remote. The other thing I kind of point out is, you know, how fortuitous it was really in terms of timing. So, again, unbeknownst to me, since I know nothing about investing, you know, in 1973 and 1974, you know, was the substantial market correction. So the nifty 50 after phenomenally well. And of course, we all know that the nifty 50 were these wonderful companies that had done extremely well and they were one decision stocks. You bought it. It didn't matter the price you pay. You were going to make money. You were guaranteed to make money. So therefore, you know, suddenly those stocks had their come up with an, you know, half of the stocks probably in the nifty 50, you never saw that price ever again. And the other half took probably 10 years to get back to where they had been at that time. So, you know, I had a substantial correction. Some decision stocks, great companies, and evaluations that reflected they were great and would continue to be great. And as I said, half of them, 10 years, 15, 20 years later, we got, so they weren't great businesses because trees don't grow all the way to the sky. Past the sky, there's a limit to what they do and things happen in competitive forces, focusing on valuable businesses and things can change. So the timing was such also that means that value investing wasn't the thing. It became. So, right, that's the, that's the opening gun for the rotation and the beginning of the ascendancy about you. So whether it's Tweety Brown, mutual shares, Mike Price, you know, you go through a Ruin Kniff, all the, all the people in Graham and Doddsville, when Buffett speaks, you know, many years later at Columbia, all the people whose records started really to outperform at that time. So I happen to find out about investing at the inception of this rotation, it to value and its ascendancy. So phenomenal opportunity in terms of timing for me. Yeah, what a place to be at that time. What, I guess, how did you go from the auditing world to the investing? What was, what sparked that interest? Well, it's pretty, pretty easy, right? Here I am sitting in, you know, a little side office there, doing my cooking and footing and my auditing and all that kind of work, but sitting in the room also, the Tweety Brown was originally Tweety Brown a Riley for decades. Joe Riley had retired for the partnership and when he retired, he had a one third partner. So he got one third of every stock that Tweety Brown owned and right in the first John Train book, Tweety Brown is identified as the porn brokers because they made markets at all these inactive small companies and so the, and Joe owned all of them. Joe would sit in the office and come in every day around noon and one o'clock and at 6, 6, 30, you know, I'd be able to stop doing my cooking and footing and start to talk to Joe about investing. So therefore not only did I know what Tweety was buying and selling and it could see those things, but then I had the retired partner, a founding partner, the firm sitting in the room, talking me through the, what the concept is, what the logic is, why those things made sense and how to think about those things. So, you know, for four years, I got this intensive look into what Tweety was doing and then I had someone translate it to me as to what it was, why it worked and how it worked. Looking back now, are you glad you started your career on the auditing side of things? Were there any lessons from that? Oh, absolutely. You know, it's also at the same time it's the sentencing, the efficient market and you know, you can't perform the market and all this intelligent thought about how to invest. If I had studied it in school, I would have gotten the dog butt that they would tell you you can't beat the market, the market knows everything. It's an accurate discounter of the future values. So therefore I would have had polluted with these crazy ideas. Instead, I came in as a clean slate and the only thing I knew was what Tweety did and could understand what Tweety did and could see how it would manifest and generate great returns. So yes, I was very fortunate in being a clean slate as opposed to having been polluted by bad ideas. Okay, and as you mentioned, you have been in this value investing world for some time now. I think you said you just hit 50 years. Congratulations. How have the skills required to be a good value investor? Well, Ryan, let me, let me, let me. So, so, A, I got my undergraduate degree working for four years and knowing the people at Tweety and what Tweety invested in, right? Then I went out to get an executive MBA program, right? And then that same little accounting firm also awarded it a firm called Gobelly. So in 1980 to 83, I was the chief financial officer of Gobelly and company. Now Gobelly and company in that period of time, you know, was 12 people. You know, Mario, when I started working for him, it managed $7 million. When I left to start my own firm in 83, it was only $77 million. Of course, he was, you know, had become clearly a night, identifiable, you know, the phenomenon, had Alan A. Abelson and Barron's and Keith Welley had discovered him and he became a big thing because his performance was family, interesting, good. And the belly at this time his main business was a brokerage business because that was originally he was a sell side analyst. So every day he had his morning meeting and he'd go through his favorite sock idea that he'd share with the people at the firm. So that's what I say. I have for three years, I had an executive MBA program and value investing taught to me one-on-one by Mario Gobelly and he paid me to attend class. I didn't pay him to attend the class. So not only do I have tweety's approach to investing in concepts, then I go to another value in the raster and that's Gobelly to see what he does, how he does things, how he thinks. And here I am in a more senior position. Here I am, the senior administrative person working with Mario every day, huge amounts of time spending and a time when it's a small firm, it's only 12 people. So everybody spent a lot of time with him. So I had those two introductions that have been invaluable to me. Sorry. Yeah, it's a pretty phenomenal education and time to be going through it. Looking back today with the way I guess the investing world has evolved and looking back to those early years, let's say the early years of Robotic and Company in 1983, maybe through the mid-80s, have the skills required to be a good value investor changed at all? I don't think so. Actually, in many ways, it's probably just a zzzz today. Because they do think if you do bottom-up individual analysis on companies, it's not that hard. I think there are a multitude of companies that are attractively priced on an absolute basis. That's absolutely true. and obviously on a relative basis too. So I think you could do it. Now, do you make money? Does your stock perform in that period of time? Is it outperform the market? Well, if you're talking about 23 and 24, it's outperform the market. It's someone about herculean task. So probably not likely to. So therefore, are you a success? Maybe you're a success because you're only up 20% so you put some stocks. But I do think there's a, and I have that experience, right? There are 14 people who work here. And it constantly, I must have three people walk in every day and say, here's a really cheap stock. This is why we should own it. And I think the investment thesis they have is compelling. So from my experience, the people here, who have the right framework to think about, how to think about investing, regularly come to me with compelling investment ideas. OK, let's dig into that process a bit. So on this show, we try to get sort of a grip on each firm's investment process. And I know there's a number of analysts at Robotian Company one that I know well. And I'm curious what the process looks like for them and for you. If an analyst is presenting a new idea, what are you looking for in that pitch? So I'm a terrible manager. I don't manage people. I'm looking for people who are self-motivated, who can think on the road, who generate ideas. And those ideas can be things that I would not have thought of. And are it-- because I have certain core competencies, I regularly go back to, and there's opportunities for me to invest in those spaces. But other people think differently. And my experience having done this for as long as I have, I don't have any key to this is the magic formula. And if it isn't that, I don't want to do it. And obviously doing something a little different than what I've done that is intelligent, well-thought, and the valuation attractive is something that I find healthy for me. And so therefore, I welcome the opportunity to-- my door is closed right now, but it's almost always open. And people want to rent all the time. And so that's the process here. It is very-- you pick-- you do it. You think about it. You tell me why it makes sense. Although we generally think in the same context about valuation really does matter why the business is interesting. What is the business understanding what the business is? And therefore, that enables you to therefore have some view on not only with the current earnings or what the earning outlook is, and therefore, present value or the future cash flows or the business to determine if the stocks are cheap stock or not. All right. For yourself, then, do you spend more time on researching new ideas or maintenance research? Well, it's an interesting question. What's the definition of maintenance research? Because maintenance research, like maintenance capital, sounds like if you don't do what you fall apart, and so therefore maintaining means you're just maintaining the position. I spend a lot of time on the companies that I know. I spend a lot of time on the industries that I know. Now, of course, that itself has its recycling process. The industry I might know, in which is the company that's well positioned and to outperform changes over time. So therefore, maintaining a knowledge of an industry is necessarily maintaining an investment and just it. It really continues to inform views on-- A, yes, how the capital is invested, that be where there are new opportunities, and what might be compelling today, and therefore what changes it might make. Has serving on boards of the companies that you guys have has that-- do you think that's made you become a better investor in any way? I think that clearly Buffett said it long before I did the idea that the kind of the closer you are on board to the business itself and understanding the business and better informs you review in terms of how to think about businesses, how to think about that business, but to think about the competitive landscape, the industry, and all those things. And of course, the way you understand a business is there's different knowledge and information you get about the complexity of the business. And of course, sitting on the boards also does remind me that, frequently, the old phrase is that's like working in a sausage factory. So you see everything. And so, of course, everything's not perfect and wonderful and almost at any business, I would guess. So, therefore, you understand all of those aspects. So, A, it forms your view in the company. B, it gives you information about the competitive landscape and all the opportunities that potentially come along with increased knowledge and understanding of those other businesses' dynamics. And, of course, C, specific to the company, I am sitting in a room with a number of other people who are determining the CEO, the company, evaluating the CEO, helping the CEO think through strategic ideas and the allocation to capital. And that's the reason I go on the boards is I think that there's a long-dated opportunity to work along with the rest of the board members' and management to maximize value and kind of how to think about that and how to have a longer-term view right, 'cause the market and investors constantly shorten your horizon and make you think about things through the short-term and what's the rage today and therefore Wall Street tells you, this is what you have to do and yet, that's not the right thing to do for the next three or five years. And, you know, I'm gonna only stock for the next three to five years and I think our owners wanna think that. Think us to think that way and don't get distracted by the siren-songal looking for something that seems as if it kind of makes sense in the short-term, but it's not the right path. - Yep, let's say a new idea comes across your desk that it's not a company brought to you by an analyst, but one that, you know, maybe a friend, someone in your network mentions a company to you, maybe it's mentioned through competitors of a company you already know. How long does that due diligence process for you typically take? Is it depend on the industry or the somewhere you take 110K and you instantly have a grasp on it or is it sometimes longer than that? - No, well, generally it takes a little bit longer time, right? To, you know, looking at something quickly is hard to really have a fully-formed view on. And so generally I am a slow learner and so they've always takes me over time to kind of have some comfort and appreciation. That said, there are situations where that's not the case. You know, the facts happen to line up. By understanding the knowledge happens to line up. The valuation happens to line up. So sometimes it can happen pretty quickly. So the answer is it depends. - Okay. Are there any industries, I look through their body and company portfolio and it's all over the place from industrials to home builders to some tech companies in there as well. Are there any industries that are a nobo for you that you avoid altogether? - Well, yeah, 'cause that's a limit in every of our companies we are interested in. So most industries are an in-mail. And so, and that's an absolute, the length of time it takes to do, it's an industry we don't know, you know, it takes much longer to us to get an understanding as the business therefore they have the comfort to be able to do that. Although we generally do look for businesses that are beaten up and out of favor and frequently those might be industries. We really have it historically invested in and therefore it is a process to therefore get to learn the business and we think it makes sense to do that because you know, probably things if they go through difficult times they'll correct overnight and problems persist and so therefore it's worthwhile to spend the time and effort and look into it more deeply. - Yeah, and touching on that point in a recent letter, you wrote that you have quote, a recurring pattern of investing in businesses that are in industries experiencing difficult financial conditions and you likened it to that rubber band analogy. Can you explain that analogy a bit and why do you find attractive opportunities in those circumstances? - So not only are they going through difficult times is a good chance that the earnings are not existent and so you know, the key metric that people value businesses is earnings multiples, free cash flow. That free cash flow is like negative even, you know, then what's the business worth? And so those stocks perform poorly and you know, the poor it performs the bigger the discount so a valuation potentially becomes attractive. B, what we think is we for having invest in in cyclical businesses in difficult times in the past, you know, there's a, you know, economics one-on-one really does work and that is that people stop investing. People shut businesses, people consolidate, people write size, they do, they make a lot of adjustments and so therefore the business itself starts a cathartic process and correcting itself and the industry frequently then also downsizes. People exit the business. So the competitive landscape changes. So that's what it is, you could buy a business for far less than what it costs to build that business because nobody in their right level would build that business because it doesn't make any money. And so therefore, and therefore capital is being retracted. So A, the process of the company in its competitive situation and its earnings profitability and especially if someone's a good manager, a differentiated product has certain attributes that mean the downturn actually accelerates their opportunity over time to get returns so that they buy something when valuations were depressed and therefore expanded the business counter-cyclically and that mean again, earnings power, the business is enhanced. So those things were all things that were regularly looking for. And the rubber band is the longer it takes for a business and the longer it stays bad and the more that happens, the more cathartic because more people leave the business or capitulation, the boat that's internal to the business and the allocation of the capital to scale and the business. And it's also the stock market because the stock market says, "This is a value trap. I wrote a mistake forever. Yeah, I used to make money. You'll love it, make money again and get me out of it." So the market helps out because it further discounts. The business continues to correct. And that's what I pointed out. So one of the companies that we had good fortune, good result with was Builders First Source, distributed to home builders. They, and then from that, we saw another company, that was BMC in which we then invested in BMC. So that industry, right home building went from 1.7 billion homes when they were giving away free money and people were buying homes that, you know, are gonna be owned by somebody who was an owner, couldn't own the home. And then they had overbilt. So therefore it took a decade really to absorb the overbilting. And so therefore it just went down and then it went down further and it went down further. So it took longer and then the recovery was really slow. And so in that process I do look in 2015. So '09 starts the process. '11's probably the bottom of the market. In '15 you started to have recovery. When these businesses recover, it's not a, never it's a straight line thing. You know, goes up two steps and then pulls back a little bit. And then investors said, "That's it. That's the end of the cycle. Get out." And so the capital exacts or bates the movement in the business and it's not stair step, but progression in a direction. And that gives all kinds of opportunities. But in 2015 that industry had two phenomenal things. One is stop building supply, had gone public. It was control was seized by Gores Group, out of bankruptcy in 2008, 2009. They were very clever financial people who bought a business to stress. And then shortly thereafter sold off a bunch of the assets that raised capital that paid off their investment in the business so that the equity they owned was a free call. As the businesses recovering, they're looking to monetize. So they took the company public, but the business really wasn't good and stock then languished. So they're looking around and looking around. How do I do? How do I monetize my investment? So they went to BMC, which it also got through bankruptcy, which the largest shareholder, we were the number two shareholder, but the number one was Davidson Kemper, who again was a distress investor, boy a cheap lake, owned it, was also looking for an exit. So therefore approached them about merging those two businesses. In the meantime, built his first sources, this other company that I thought was the perfect match. So I said, before we talk to stock, let's go talk to BU, the builders. But what happened then was the number one guy in the business is ProBuild. ProBuild is owned by the Johnson family, Fidel. And they've been writing checks, $100 billion every year to keep the business afloat. So 2015, they came to him again and said, "Yeah, business is still tough, I need another 100 million." So the Johnson family said, "That's it, I'm out. No more, sell this thing, I don't want it anymore." So a capitulation, when the business had started to recover, but it was still difficult times. So they put it up for sale and build his first source that leaked at that. They're gonna buy the number one guy before they get a merge with us with number three or four guy. And so they levered up to do that and it worked well. And we then merged that the stock building supply. So that consolidation had the business recovery a year or two earlier. The Johnson's wouldn't have been right and checked for another 100 million. They would have stayed in the business, would have stayed, this fragment is that kind of historically had been. Instead, that was the next to last. 'Cause then you had one and two combining with three and four and then eventually two years later, the two of them combined again. So that consolidation kinda only happened because the recovery took longer that people expected and wanted and didn't wanna persist through that process. So the rubber band got stretched off afar and then eventually when it started to come back created a whole bunch of opportunities. But it also had not stretched that far, and stayed bad for that long. Those opportunities would not have manifested. And the outcome that what you have today would not have been, it still would have been much more fragmented business than the consolidated businesses today. That's it, Jim. - From the looks of it, you guys own a number of companies that are in cyclical industries. And to use that to stay on that rubber band analogy, what are some of the mistakes you see management teams make at the bottom of the cycle? And also mistakes that they might make at the top of the cycle. - Well, the top of the cycle, everybody spends too much money and best and much capital. Potentially there's a real risk because everything facilitates that money's available to you and you can do things and your perspective is warped. And it's an odd management that understands the risk associated with being at Jza. - High end of the cycle, which is interesting though, 'cause like one of the first investments, there was a company in 1976 that bought out with Oceanics an offshore drilling company. And it's a great example of what happens when you are smart and thoughtful and counter-serve of a investor. 'Cause what happened was, the smallest of all the public offshore drillers. And end of the 70s and the 80s, everybody was building new rigs, borrowing money, money was available cheap and easy and by these wonderful pieces of equipment that could do things that others can't and it's the next round and it's the second generation, the third generation. So you wanna own the next and the biggest, the biggest. But, and now we didn't do that. Now we was controlled by hammer campaign. So hammer campaign had been in this business forever. Hammer campaign had lived through the depression and the people that hammer campaign who controlled the board said, "We're not doing that." We're not spent, there's just too much risk. There's too much euphoria here. And so when business fell apart, right, it had no debt in 40 million cash. And the rest of the industry went bankrupt three times in the 80s. So therefore you had recurring bankruptcies because people were cold and did spend the capital, did graph that as opposed to hammer campaign didn't do that. And that would, is the one that clearly survived and was in a much better position. And so having seen what they did and experienced that was informative for me as how you can totally not listen to what Wall Street was telling you. Have your own view, understand your in a cyclical business, understand and putting capital to work at that point is a very risky proposition and didn't do it. And the force stayed out of the, you know, they sat down and they didn't want to play musical chairs because they know how musical chairs ends and they don't want to end. So you know that you can see that, you could do that right thing but that's a really difficult process that's an exception as a part of the role. But on the other side of the equation, you know what you can do at the bottom of the cycle, obviously anything you're forced to do to pair back to shrink the business, you know make be a survival technique but isn't it clearly not optimal? But you know are you in a position to be able to do something? How do you figure something out to do? So that's a difficult process too but there is, there are people who can be successful and that's one of the key things we look for is like who's got a company in its position and a combination of balance sheet management owners because clearly what you're looking for too is probably someone there is a control shareholder who it is his cap and he's committed to the business and understands the opportunity and therefore can seize it and figure ways to be opportunistic which you have to be creative 'cause it's not easy to do that. - Makes sense and I would imagine investing in some of these cyclical industries it takes sort of at macro view on what you imagine the industry is going to look like and I believe you guys have a term around the firm called grassroots macro economics. Can you explain what that is and can you also elaborate on why you think it's important to have a view of the macro situation overall? - What we're saying is you know by knowing the individual dynamics of a business identifying companies that we think actually have management that understand those things so therefore kind of can inform us as to how to think about the business. Those are critical elements in identifying a) what's going to be successful but understanding the dynamics. Now what we don't get is we don't get the timing, right? And so therefore we don't know when that happens and so therefore the process of correction is one that is uncertain and so therefore you have to be judicious with being aggressive, right? In terms of doing things and what's the timing to do things and having an appreciation of understanding what to do. - Makes sense. The, I was listening to a conversation you had recently and you mentioned the, and this is kind of shifting to the market overall. You mentioned that time horizons overall were shrinking and whether that's from more news being fed today, the accessibility of information is so much easier. I guess is there anything that you do in particular to sort of eliminate the noise or have you gotten to the point where you know when or when not to care? - Hey listeners, before we move on, I wanna mention the company that actually runs this show. AUM is a Finchat podcast. Finchat.io is the fastest growing equity research platform on the internet. Powered by AI, Finchat offers institutional grade financial data on all stocks globally. And the best part is the data extends well beyond the generic financial metrics. You know all those companies specific metrics that you track on your own spreadsheets? I'll talk about Amazon's segment revenue, Netflix's, Payne subscribers by region, Chipotle's Comp Sales, Uber's Active Customers, Spotify, MAUs, Finchat tracks all of it so you don't have to. If those numbers matter to you, I recommend checking out the platform. All new users get two weeks free of Finchat Pro automatically. So head on over to Finchat.io. and chat.io and check it out. Now let's get back to the interview. - So that is the problem today. There's just too much information. And to be able to put contextually understand it, that's one of the reasons why it's really good to try to have an understanding as to what the business is. And therefore what the intermediate to long term likelihood of something happening is, and that's what we say, we don't get the timing right, but it's easy to identify what's gonna happen over five years, and it's gonna happen in the next six months, right, and especially, there's a combination of factors all doing that. So that's generally some of our ideas in terms of what happens. And we still say that, we say information, if you wanna have a full on the market, right, just three ways you have a full on the market, you have to have a advantage, right? It's a behavioral edge. So that's a critical part of what we do. We're investing in businesses that are sick who go out of the favor room. We know that more likely they go down versus they go up. So we're open to that idea, I'm gonna lose half my money. That's perfectly fine in a market-to-market basis because I don't think I've lost it. On an investment basis, and the company becomes cheaper in whatever else. The second one is information edge. And of course, that's what we do actually think we have an information edge that ties into the behavioral edge, that is the information I'm looking at is, what's the impact in the business in the next three to five years? And frequently information that's negative for the next month quarter year is positive for the next three to five years, right? 'Cause continued reduction in prices means that someone else is gonna shut capacity. There's more that leaves the market. So yes, that negative news flow on the short term means there's a more custodic process on a medium-longer term. Therefore, the opportunity said, probably it's getting better. If you've got the right company, that's a survivor and someone who's gonna be opportunistic in that environment. So keeping which pieces of news to get. And I think that's really not as hard as kind of it kind of seems to be, because that's what it is. It's just asking the question, okay, so what's the impact of this on the next three to five years? What impact is it's gonna have long-term on the business? Not what's the short-term impact of it, which is going to be the bulk of the flow. And frequently, right, negative news is positive news, right? Negative short-term news is positive for the medium to long-term outlook for the business that company must like them. You've also said recently that you believe the next decade will belong to stock pickers and not the index. Why is that? Well, evaluation matters. And there's a significant number of companies that we think the valuations are extremely interesting and compelling. And obviously, those are in stocks that are performed well because if they did, they'd have a large market caps and they had a large market caps to be higher weighted in the index and more capital flow into them. So this capital that flows into and flows out of. And we all know that the concentration of the companies that have been done well, that therefore have great performance. And of course, the point we would make today is stocks are in board of soul by individual analysis and selection to say, this is a good company and we'll own more of it. And this is not a company we want to own. It really is the flow of funds is predicated on something else is it in index, what did it actually add to? We've got kicked out of, you know, get kicked out, it goes down, it goes in, up. What algorithm is following and whatever. So the flow of capital is not predicated on stock analysis. And so therefore that gives an increased likelihood you got a disparity between price and value. And therefore, we do think that that means there's a plentiful number of companies where you can identify dynamics that should give really good absolute returns. And we also think that on a relative basis, that probably when you've concentrated on a group that had clearly better valuations because they've had great records, which the Nifty 50 did, they were wonderful companies that had valuations that reflected that fact. Things happen and things change. In the meantime, you have another group of companies down here. And at part of what happened with value, right? Value back in 1975, there were a lot of cheap stocks and value investors own those cheap stocks who they did bottom up fund the mental analysis on companies and they own inexpensive securities. I think that that is the predominant situation today. What I also think is that even in the if even in the Magnificent 7, there's a good chance in the next 10 years that you got picked the right ones that they're not all gonna do the same thing, right? 'Cause there used to be what was the call that was fang stocks and that's maybe it was in 7. So over time, somebody changes who's one of those companies and maybe over time a couple of those change. And so there's some of those are gonna do well and some of them probably are. And I have no capability to know that. But some of who looks at them tensively probably can do that. So I think someone who is picking the right companies is actually going to outperform the index. So I think valuation is the thing that will eventually deliver performance. I also think that's rotation in economic activity, right? So what's the best company today? What's the best industry today? Over time industries that have been the best than companies that have the best almost always rotate. And so there's plenty of thing. And in addition, underlying economics. So you know, we lived through a long period of time where inflation was really low. Therefore, interest rates are really low. And you know, there are certain companies that benefit from that kind of economic environment. And yet, if that economic environment, things are cyclical, right? Jim Grant has a comment that says, right, in science and engineering, knowledge is cumulative. But in finance, it's cyclical. And therefore, they think that what happens today is and will be in perpetuity. And when those things change, there's the logical conclusion is who wins in the new situation with a different road that you made a turn on is different than the ones that were on the road that you were on. - Makes sense. - Why do you think energy intensive companies have a long-term competitive advantage? - So it's energy intensive businesses in North America. Have a competitive advantage. - Right. And that's because energy cost in North America are significantly discounted from the rest of the developed world. And that is because there's an overabundance of natural gas here that's more that we possibly consume internally. And that's a persistent asset and advantage that North America has that I think easily goes to the next decade and therefore longer than that. So if you're an energy intensive business and therefore you're using natural gas here in North America versus using oil and natural gas or coal somewhere around the world, there's a substantial, so is natural gas price a quarter, 20% of what it is that most of the world. And so therefore if energy is a key part of the cost of goods sold, you've got excess margin because the price is probably set by the marginal high cost producer someplace else. So he sets the price, you have a much lower cost because your natural gas cost of fraction of what they're naps the cost of what they're gas cost of what they're coal cost. So that means there's excess returns. And that's what we think is one of the phenomena is in the last two, three years people have been talking about reshoring to America. And what we think reshoring to America in large part is industrial businesses who have competitive advantage because of low cost of energy. And so that's the rotation of whose position in the right place, what are the economic dynamics? Who's gonna be the beneficiary? And that's what we think is that placing is set by somebody else so there's excess margin and realizable in low cost energy. And that's your restriction and that's America. But whatever it's worth, they say America because they do include Canada in that because that is the resource based in America in North America includes a huge resource based in Canada that's much lower cost of the even in the United States. And so I do think that's part of the equation that makes for an interesting investment. - Sort of on that topic, as we're recording this, there has been a lot of noise and news. I should say made about tariffs. With a lot of exposure to industrials, how do you think about that? What impact might that have overall on the US economy? - I think the fact that energy cost in North America competitively advantage will be the fact in three five years time that really is the most relevant thing. And tariffs really don't affect much where you're gonna produce it. Where the resource is. And so it will help you potentially because it may discount stocks because there would be the fear and concern about things. But what the outcome is, so one of the things the administration has said is drill baby drill, we're gonna increase production in three million barrels in America. Seems the economics clearly argue against that from multitude of reasons. And so there's that come to pass. I have a hard time believing that possibly something that really could happen. So it may drive stock prices and make for headlines, but the economic reality is, oil companies aren't gonna go out, especially as a whole price gets weaker here. Grant spent all the money they need to spend to somehow bring on three million extra barrels of oil, which therefore reduce the price of what they're already selling. So they're not gonna commit economic suicide. And the government's not gonna drill those wells. And the opportunity set is also limited too. What's available in the United States is it's a finite amount of oil that really can be produced economically. At the end of the day, economics will constrain pretty much all activity in North America. - Okay, I guess two wrap up questions here. First one would be, What, when you join a board of one of your companies, I guess, first question is typically, is that typically something you do once you've owned it for a little while, or is that something you try to do, like you know you're going to do as you're sort of starting the position, and then the follow up there would be, what kind of value are you trying to provide? Why do you want to be on the board, typically? So historically, every board we've gone on as a company we already own the significant position in, and the reason we go on to the board says, "A, we think there's a long-term opportunity, because being on the board does create restrictions, limitations, and you know, does have some negative aspects to it, but that's what we're saying is, gee, you know, we're, "A, we don't trade around stocks really anyway." So the short-term trading in and out of stock is not something we would do, so therefore we don't lose the capability to do that. At times we may want to buy stock, and therefore we, you know, we lose that opportunity, but instead to be sitting in the room to understand the investment we have and how the business works better, clearly makes us a better investor, but it also we talk to the manager of the company and ask them how they think about things, and they're potentially, although with the rest of the board, be part of a process that helps them think more clearly about where the opportunity sets are, where the risks are, how to think about the business, how to allocate capital. So they have input into that process. We think that there's reasons to believe that you can accelerate and increase the amount of value the company can be created, that can create by having a seat at that table and talking to the people and being involved with the selection of the new CEO if there's reason where you change the CEO or someone retires, and how capital is allocated. Okay, last question for you. What advice would you give to someone entering the investment industry today? So we were down in Alabama recently, the Tuscaloosa University of Alabama, John Hines was a professor in a program there at its old teaching value investing, right? So student came up to me and said, "Oh, you know, so, you know, do you have internships, do higher people?" I said, "We do, but we're full with the summer." But, you know, like tell me about a company that you own and why you own and how you think about the company. And what he says is, "Well, actually, I have the money I have is in a passive index fund, and I've done well on it because I put 15,000 in and it's not worth my key dollars." So I said, "Well, the first thing you should do is to sell that index fund, because what have you learned about that? Instead, you should go buy some stocks. And hopefully, you'll lose money in those stocks, because what you'll learn from that is more important. So you have to be investing, you have to be doing that, you have to be taking the risk." And because that's face to face. So if you're 15, went to 19, that's not going to change your life ever. And so therefore, you know, making money is not the object of your investing as a younger person, but the object of your investing is to learn, because of the value of that education compounds multiple. And so therefore, that's what you should be doing. So do analysis, buy some stocks, find out if you're right, find out if you're wrong, whether ones you're wrong on, do less of that, and the ones you're right on, do more of that. So, you know, learning by doing is the way to learn. And there's no better way to do it. And, you know, an index isn't going to teach anything. And other than maybe that you think you can make money, that you think you're really good at coin flipping, and therefore, no, have flip coins, and maybe not. Yeah, the expression I've heard is life's too short to index, and it feels like the value you get, the best lesson, the best teacher you could have is owning stocks and kind of being on that journey, along with the company as well, especially in those early years. That is going to do it. I guess any other thoughts, Bob, before we wrap things up? Nope. Okay. Well, appreciate the time that's going to do it for today. Thank you, everyone, for tuning into this episode of AUM. I'd like to remind listeners that the AUM podcast is for informational and educational purposes only. All opinions expressed on the show by guests or hosts are solely their own and do not constitute formal advice or a recommendation. Thank you to Bob for joining the show. And thank you all again for listening. We'll see you next time. Thank you Ryan. All the best everyone. Bye bye. [Music]