(Ep.102) The Acquirers Podcast: Matt Joass – Growth Maven: “S” Adoption Curves, High Growth, And The Motley Fool

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In this episode of The Acquirers Podcast Tobias chats with Matt Joass from Maven Funds. During the interview Matt provided some great insights into:

  • “S” Adoption Curves
  • High Growth At A Discount
  • Fundamental Inflection Points
  • Looking For Power Law Winners
  • Merging Value & Growth
  • Catching Fundamental Multibaggers
  • Behavioural Moonshots
  • Villagers Turning On Robinhood
  • David Gardner’s Non-Dominant Strategy
  • How To Think About Balancing Your Portfolio
  • Growing A Business Out Of Motley Fool Australia
  • Missing On $APT
  • Companies That Burn Cash
  • NZ Market Like Monolopy
  • Uniqueness Of The Australian Market

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirer’s Podcast. My special guest today is Matt Joass from Maven Funds, formerly of the Motley Fool. Matt’s got an absolutely fascinating take on high-growth companies, how to identify those that can make a leap across the chasm, how to find those that can’t, where you want to buy them in the S-curve. Coming up right after this.

[intro]

Tobias: One of the problems that you have when evaluating very high-growth businesses is getting comfortable with the valuation because a lot of it depends on what the next few years to the terminal value are going to do. How do you go through that process? How do you get comfortable with that?

“S” Adoption Curves

Matt: Yeah. We think a lot about the limiting factor of the business. One of the big areas we disagree, I think the whole framework of how we think about investing is slightly wrong, because we think about return on capital as being the primary limiting factor and endpoint, which is definitely how the world was, but I don’t think it is anymore. I guess, capital is now so abundant that I don’t think it’s a limiting factor in a business. You can think about it like there’s a lot of different inputs to a business, we’ve just chosen capital has been the one that we typically measure, generally investors, but you could say something else. You could think return on land. Every year, they get some province, they reinvest in more land, but you don’t think that because it’d be ridiculous because businesses, that’s not the constraining factor.

It’s the same for a lot of the technology businesses we look at. The constraining factor isn’t the capital, because there’s so capital-light and looks like, if you actually calculate the return on incremental capital for high-growth technology, it’s just so large, it’s like abstract, it’s not really a factor. I think often for it, it’s more of the adoption curve. We think a lot about like S-curves of growth, which is like the derivative of the adoption curve, if you look at how things go. So, we’re trying to find when they’re inflicting at the start of that adoption curve. That’s how I think about modeling it, basically. It’s trying to think of at what rate will adoption happen as things I can do to tip adoption forward. That’s probably the best inflection point if I can find it as that hypergrowth just getting up that phase of the S-curve. I think that’s also why it’s undervalued.

People tend to linearly project forward, I don’t think we think exponentially. We just can’t basically, our brains don’t work that way. Everything I do– that’s why I say I’m a value investor still, as I’m still thinking of pockets of mispricing. Basically, at the start of the S-curve, people project linearly forward, but the S-curve is going to start going like this. Then, that starts, people have to constantly rewrite and realize what the business is going to do. At a certain point, at the top of that S-curve, people are projecting forward too much, and the S-curve starts flattening out, and that’s when you want to start getting off. That’s why I think valuation still matters because I think if you’re never sell land, and you just get caught in that, if there’s not another S-curve to catch you, I guess, you get caught there. Thinking about that is the limiting factor, I guess, of the business, that’s more so than capital.

Tobias: That’s an interesting comment, because I did notice that when I worked in a reasonably high-growth telecom company for a long time and never earned more than 13% on equity but grew six times over 10 years because they were raising capital and reinvesting in a very hot ride, the natural question from that is, how do you know where you are on the S-curve?

Matt: Yeah, good question. I think it’s just having a good idea of the market size itself and talking to people in the market and get an idea of who’s adopting really. If you have a really good idea of the market size and who the other competitors are, you can see how much they’ve signed up of that business. If they’re starting to get into the mainstream and then late majority, that’s when you start tipping past that point. That’s probably the main thing, is having a really good idea of what stage of the lifecycle just by knowing market share, basically for all the participants. Not really market share because they’re creating the market as they go. It’s more like total adoption share. You do start to see it– I think this all just fits basically, Peter Lynch talked about sell when they’re not growing earnings anymore, because you do start to see it come through in the fundamentals. I think that can be a trap for a lot of quality value guys, because they see a really great company that has a bad quarter and that’s where often people want to pounce, I think it can be the worst time if it’s because they’re starting to flatten out. So, they just spinning their wheels now because they’re not getting those early adopters.

There’s a real book that influenced me, Crossing the Chasm, and it’s another one where a lot of companies just get stuck even earlier than that, where they don’t kind of talk, it’s not actually a smooth curve. There’s this chasm between the two, between the early adopters and the early majority. That’s probably the hardest part, I think you see some early traction, but maybe they just stall out there. They never really make that jump from being something that’s good enough for really passionate techno or whatever people to everybody else.

Tobias: Just too hard to use to get across from that first group of prepared to where the arrow is.

Matt: Yeah, I think that’s a tool to use, and maybe the technology is just not there, or maybe they haven’t really solved the problem well enough, because the first people willing to close their eyes and endure a lot of pain to use your product, a lot of people if they get too cocky with that stage, they’re not constantly thinking bigger and improving and what they can do. Then, it just often we just see it stall out. Maybe it’s bad management as well. That’s why you need to think of the management team really there to be a global company. Because it’s hard, man. I’m not managing a global company. The more I learn about it and culture and everything else, I have an appreciation for these guys, how hard it is to grow a business to be 500 or 1000 people. It’s just phenomenally difficult. I think Andreessen had a– or maybe Paul Graham had a line that most startups self-destruct, they don’t get destroyed by a competitor. I think that’s the biggest thing by far, is just looking for avoiding those signs of self-destruction.

Tobias: Did you start with the Motley Fool in Australia?

Matt: Yeah, I did. I was writing for them when I was living in Copenhagen and then moved down to Australia.

Tobias: You’re running for Motley Fool, Australia, from Copenhagen?

[laughter]

Matt: Yeah, pretty much.

Tobias: How did that happen?

Matt: I’m originally from New Zealand. I was in Copenhagen. I kept like a grad roll out of uni and wanted to see the world and whatever else and so, living in Copenhagen. Around then, I get bitten by the investing bug, I guess you’d say. When I arrived there, I think my girlfriend then became my wife, was then there for about six months, so Danish winter. Sun sets at 3 PM, all I was doing was investing, started investment club, just looking for other ways to get engaged, basically while I was working at the same time. I just started writing for Motley Fool, Australia. [crosstalk] Yeah, working in finance, but not that kind of finance, it’s for a big shipping company. It was managing the P&L for all trade to Africa or something, which was pretty cool, but yeah, definitely not stock market investing.

Tobias: What made you a value guy or do you not characterize yourself as a value guy?

Matt: No. I started investing when I was about 18, and was just lost. I had no philosophy, but I was really interested in it. Then my mid 20s, discovered Buffett, which is kind of weird. I don’t know if he was that well known in New Zealand at the time, but I didn’t know much about him. I don’t know anyone who was an investor, and then discovered him and it was just like a lightbulb went off, like all the classic things of feeling like you suddenly knew what was going on. Then, that’s when it started really taking over my life because before then I was just kind of lost. [chuckles] [crosstalk]

Kiwi Investors

Tobias: Who are the big Kiwi investors? We can’t mention Brierley anymore now that he’s got in trouble, but who else is?

Matt: Oh, my God. Yeah, it was crazy. There wasn’t that much when I was growing up that was a big influence. It was always more looking globally, and even now, looking to the US a lot more.

Tobias: There’s a couple of blokes who are big LBO-type guys. There was a guy who’s a truck driver who turned into–

Matt: Oh, Graeme Hart?

Tobias: Graeme Hart. He’s the one who punched out Russell Crowe in an English restaurant?

Matt: No. That’s a different guy. I’m blanking on his name, but he’s had his own brushes with the law actually.

Tobias: Has he, really?

[chuckles]

Matt: Graeme Hart, he started as panel beater. He’s a hero of every self-made man. Now, he’s one of the richest men in New Zealand. Anyway, bit of a hero.

Tobias: He’s a pretty good operator. I remember– this is a long time ago before, I was even working at the time but he helped save that Aussie spice company. It was going under and he came in and kind of bailed them out and ran it. I’ve not really seen him mentioned much since then just in the States and in Australia, but– [crosstalk]

Matt: Yeah, he’s [crosstalk] packaging, which is like, I guess–

Tobias: Is that what it was?

Matt: [crosstalk] -industry.

Tobias: Yeah, smart.

Matt: Most of the time he gets mentioned in the media with someone like attacking him for being rich, and not much else. He just gets into boring industries and just strain the deficiencies out– [crosstalk]

Tobias: Can’t hate that. That’s very value like.

Matt: Yeah, pretty much.

Tobias: When you were at The Motley Fool, what was your sort of remit or what was your focus?

Matt: I was like a value guy. Part of why I wanted to join was learn more of like David Gardner style investing. I see myself now is like a mix between the two, which is obviously pretty contrasting. Yeah, so I joined as a research analyst for a portfolio there which is like a small-cap growth portfolio, which is basically kind of what I’m doing now, I guess.

Then, became portfolio manager, companies like fast-growing businesses and trying to figure out which ones had the potential to be the next big winners, whatever else. That was pretty cool getting to do that, starting out the gate, not having to do one pick a month, typical newsletter stuff. It was much more like a portfolio that we’re managing.

Tobias: Yeah. Now that you’ve got your own firm, Maven, what’s the focus at Maven?

Matt: Yeah, it’s pretty similar. It’s just Australia and New Zealand, and I was debating that when I decided to start it. I just wanted to– I’m really big on mastering a particular area, and I just get information anxiety. I think Josh Wolfe talks about if there’s something that you don’t know, so I just like to like really know that domain.

The idea is just trying to find small and micro-cap companies, like Ian Cassels a big influence on me, that have the potential to go on to be those big dominant businesses and trying to find them as small as possible, and recognizing. You need to cut bait with a lot of them along the way. Yeah, that’s the focus, basically, just trying to find them as small as they are, and then hold the whole way.

David Gardner’s Non-Dominant Strategy

Tobias: There’s two things that I want to ask you. How much of it is a sort of David Gardner type philosophy? Does he do that? Does he cut bait, or does he sort of hold them hell or high water?

Matt: No, he doesn’t. Yeah, I got to meet David a couple of times. He’s really fascinating guy. He’s one of the happiest guys you’ve ever met. I think he’s just designed his life, like he manages– I don’t think he has any direct reports at Motley Fool.

Tobias: Smart.

Matt: Despite being the biggest owner of the company. He just does what he wants, basically. I’ve thought a lot about, like, how he got to deliver the returns because he doesn’t do any valuation. You might say there’s some compared, relative stuff, but it’s really small. He just played a huge amount of games. He’s like a board game obsessed dude. I remember him saying once that the best strategy is often the nondominant strategy. I think a part of his years just trying to find it– he just picks up little inefficiencies by doing the opposite of what other people are doing often.

Tobias: Nondominant strategy. What’s the–[crosstalk]

Matt: Yeah. If you’re playing a board game, and everyone, like he plays Settlers of Catan, I don’t play that game. He says that if everyone’s going for one thing and they’re all battling for that, you want to be doing the opposite of that because it’s going to be not much competition. If everyone’s trying to value the next quarter’s earnings, I guess he’s thinking very long term.

If everyone’s trying to jump in and out, he’s trying to do the opposite. Some of that kind of stuff. It’s how he’s like, willing to do things that seem really crazy and put his list of things that he looks for, like past price appreciation and whatever else. It just seems it’s really an eclectic mix. I guess I’ve tried to pull out the parts that I really resonate with.

What leads to I think, high-quality long-term returns, but then marry that with valuation, and so that’s where I wouldn’t– I’m definitely not a never-sell camp, pretty good set side, and just trying to really do like a DCF, and trying to forecast out those cash flows. That gives me the confidence to hold. A lot of his approach has really been willing to hold during all the ups and downs, because it’s like massive drawdowns, and any of those runs that he’s had on Amazon and whatever else. For me, at least it comes from the valuation side.

So yeah, the cutting bait has just been willing to sell quickly if you realize that it’s not working out, if that thesis is wrong, I should say. Yes, that’s again, just kind of marrying the valuation approach with what he’s trying to do.

High Growth At A Discount

Tobias: What’s an ideal position? You’re hunting initially in small and micro, looking for high growth, conducting some DCF valuation. You’re assuming quite a lot of growth, but you’re still trying to buy at a discount to that.

Matt: Yeah, that’s right. I just always love finding something that’s completely missed and under-followed, I like being one of the first guys then ideally. If not the first to look at it, then the first at least look at it in a particular way. I guess that’s more of analytical difference. Just trying to find them as early as you can. It doesn’t mean immediately. It’s more like when they have enough traction to have some view of what that’s going to be because I am always forecasting cash flows.

I’m never doing relative valuation or anything like that. It’s really at a point where I think I can forecast base case for them. Typically, if they outperform that it’s often because they have multiple ways to win optionality, and they layer that on top later, but it’s getting really comfortable with the management team, making sure that it’s very ethical group because that’s pretty rare. I guess it’s also a nature of the market.

Micro-cap generally, I think, is much more listed venture capital, and Australia is… pretty wild market. I think it’s just filtering out a lot of the worst and then just narrowing in there and then. Yeah, finding stuff to hold away through– [crosstalk]

Tobias: You just filter out the junior miners, and you wouldn’t have– [chuckles] we’ll have to do after that, would you?

Matt: Yes, I did. I tried to go through every company, A to Z, like Buffett’s old thing, a couple times a year. Last time I did it last year, I think there’s 2200 listed companies, 40% are explorers, and those are pretty quick. I don’t touch those at all. Then, you’ve got a good chunk of biotech.

Then, you’ve got quite a few industrials and some kind of middling companies, like a lot this kind of hang along. Basically, there’s a huge number that are outside any in any real index, like people only talk about the top 500 says at least once 1700 other companies, and even then, most people focus on the top 200 companies. It’s basically 2000 companies that don’t have as much or very little institutional following. That’s the area I try and plan.

Uniqueness Of The Australian Market

Tobias: One of the funny things about the Australian market that I have– I wasn’t aware of it when I was in it, but when I came out of it, I became a little bit more aware of it, that market cap falls off dramatically. Even the top 200. The last one in the top 200, I can’t remember the last time I looked, it might have been $50 million market cap. Is that too small?

Matt: No, that sounds about right. It varies. It depends on how much we’re falling out. [crosstalk]

Tobias: Where we’re in the market.

Matt: [crosstalk] [laughs] -to be honest. Yeah, but it is wild. There’s a lot of companies with $4 million market cap and they’re probably too small in terms of distraction for what I’m looking for. I’m just looking for something that actually has real traction basically, has something that’s working, I guess you’d call it product-market fit, but a business that’s actually executing.

That’s how I build my models, is basically what they’re doing today. I think, I don’t know, some of it’s getting a bit crazy. We’re catching some of maybe the Robinhood bug from the US. [crosstalk]

Tobias: The Aussie GME or whatever that is, took a run.

Matt: Yeah, exactly. A mining explorer again.

Tobias: Is that what it was?

Matt: It was. But generally, for a long time, particularly technology had been really disregarded in Australia. I think because of the dotcom crash, like a lot of people got burned, maybe more so even than the US, I don’t know. It’s just a whole generation that didn’t even look at it. It was a small part of the market as well, so you could ignore it, and it started to change more recently.

Tobias: With Afterpay maybe. What was the big– [crosstalk]

Matt: Yeah. Xero– Although Xero is a New Zea– I’m from New Zealand, so I’m definitely not letting Aussie claim that completely, but that was definitely one of the big ones in the ASX. They have their own acronym, which is like WAAX. I think it’s WiseTech, Altium, Appen, and Xero, which I think it’s a weird acronym– [chuckles]

Tobias: Right. I don’t mind.

Matt: Yeah, those are some of the ones that started paved the way. Unfortunately, Atlassian obviously listed overseas, that would have been a good one to have in Australia. Those paved the way and then there’s a whole lot more under that umbrella. Australia, the ASX, is trying to be the world’s easiest place for business to list, which has its pros and cons. Even Israeli companies listing on the there, which I think probably pretty fishy, overall track record of that, the outcomes from that.

Tobias: There’s a few good things about Australia. One of them is that there’s only one board, so you don’t have like– if you list in Toronto, there’s the Venture Exchange. If you’re in London, there’s the AIM. In Australia, you’re straight on the mainboard, which I think looks good, if you’re a small company. And then, the listing rules are a bit– I mean, I don’t know exactly where they are now, but they’re always a little bit lower. You could get on with pretty minimal capital raising, pretty minimum market cap, which is probably why there’s a lot of gamble in that lower end of the market.

Matt: Yeah, I think so. I think Aussies, as you know, are a nation of gamblers. I think per capita gambling losses or something like $1200 per person losses, somewhere around there. I think that bleeds over as well because you’ve got that culture. People love to have a punt, and then you have people who make a lot of money on these speculative mining companies.

Then, that just bleeds over to like, “Yeah, let’s get into this thing.” You see these huge cycles where things just run crazy and then crash down. I typically like to find them when they’re coming back up. It’s like the hype cycle, like [crosstalk] hype cycle. They crash down, then they start building the real business. Hopefully, they raise some capital at the top, [chuckles] and then they can start feeding that through. That’s also why we need to determine valuation I think because things can get crazy sometimes.

How To Think About Balancing Your Portfolio

Tobias: How are you putting together a portfolio? How many positions do you like to hold? How diversified across sectors or do you not consider that at all? What’s a good initial position size? What’s a trimming size?

Matt: Yeah. I think a lot about the portfolio management side, that was the value out of what we were doing at Motley Fool, the service that I ran is differentiating from just ideas to portfolio management. I think it’s just underrated. I always think if I could ask Buffett one thing is like, “How do you decide that?” Because a 5% position which has a 5X impact on your portfolio compared to 1%.

For me, anyway, it’s 15 to 30 companies. It’s kind of a sweet spot where I think you’re getting enough diversification. You’re not getting punched in the nose too often, but also concentrating to your best ideas. Within that, probably leaning more towards, maybe the top five, or something having a slightly higher weight. I think at cost, 15% would be a very large position if we’re initiating, wouldn’t ever really initiate. They would have to be– I wouldn’t say never. If Berkshire Hathaway is trading for $1, or whatever, you always think of something–

Tobias: Right. It’s perfection– [crosstalk]

Matt: Yeah, pretty much yeah. Then, I think trimming it as it got larger than that. Initiating probably the smallest I go is maybe like a 2% position, around that kind of level. You want it to be meaningful enough that you’re thinking about it, and it’s actually generating some returns for you. Then, in terms of like, sectors, one area where I disagree with a lot of people is thinking of technology as a sector. I think it is regarding price movements, but I’m not thinking about price.

I’m thinking about fundamental diversification, and in that regard, Xero is accounting software spends all this thing and other ones, Printed Circuit Board software, whatever else. It’s really thinking about the fundamental drivers. I’m okay with prices moving against it. I’m not okay with all the fundamentals moving against us. That’s how I think about balancing the two out to the degree that you can.

Tobias: I think Terry Smith said something similar to that recently where he said, “It’s silly to include Facebook, Google, Microsoft, Amazon. They’re very distinct businesses, but they all fall under the one.” I may be wrong about that, but they’re all [crosstalk] technology companies.

Matt: Yeah, completely agree. I think you just thinking about it from first principles, it was always kind of weird. I think it was partly because of the way the industry is driven by sell-side mandates, and whatever else. I guess it made sense for a lot of other industries. It just happened that technology all gets lumped into one sector even though it spans every industry now.

NZ Market Like Monolopy

Tobias: What are the differences between Australia and New Zealand in terms of the market?

Matt: I can’t invest in New Zealand as well. Unfortunately, New Zealand’s exchange is just kind of dying basically. I feel a lot is going to go into Australia and I feel they run it too much like a monopoly would be my hot take on it, because they seem to extract high prices. I think Interactive Brokers, you can’t even trade New Zealand because the NZX exchange wants too much money from them. I think, unfortunately, it’s not going to, but it does mean the companies that are there are very high quality, like a lot of monopoly type businesses or duopoly businesses.

They pay a lot in dividends, so the actual returns– Yeah, so I think the returns are around 15% a year for the New Zealand market. So, it’s actually returned pretty good returns, but they tend to be dominant businesses with not much reinvestment potential because it’s just the New Zealand market.

Saying that, there was when Xero really blew up in 2014, the first time it had that big hype, quite a few other companies listed under its umbrella. There’s a few there still I think that are just starting to come through now that we still find interesting. But yeah, I think generally a lot are going direct to Australia now.

Tobias: I remember looking one time, New Zealand Telecom has a secondary listing or I don’t know which one is the secondary listing but it’s listed on the NYSE as well it was for a long time. They still do that?

Matt: Yeah, I’m not sure what telecom, but it is pretty common. Xero even was– a lot will dual list on Australia as well, so the kind of biggest companies you can pick up on the ASX. Yeah, I don’t know. Xero actually delisted from New Zealand exchange, so it was pretty much breaking the hopes for the Kiwis.

It has definitely helped the share price, they concentrated all that float into the ASX, and suddenly they had a big run-up and could get picked up by all the funds and indices and stuff. Unfortunately, not the best for New Zealand.

Looking For Power Law Winners

Tobias: How are you hunting for ideas then? Do you screen, or do you read the AFR? What’s the process?

Matt: My overall philosophy is I’m looking for power law winners basically. Thinking like a VC basically, trying to cast a wide net. I’m not doing that with my portfolio, but just trying to do that with my scanning and checking. I try to read basically every announcement for companies in my universe, which is quite a large number of companies. That’s probably one of the main ways, is using myself as a screen and trying to train the pattern recognition.

It also helps you appreciate when you see a good business because you see so many bad businesses, and businesses with zero cash flow, incoming cash flow. I’m trying to do that. I try and do that, just go through all the companies one by one once a year, or hopefully twice a year, and then just reading AFR and following curiosity. You start talking to one, they mentioned another name, you start digging into that, that kind of thing, but yeah, kind of a weird [unintelligible [00:25:37] networking as well, talking to other investors in the market, what are you seeing and that kind of stuff.

Tobias: My old boss used to do the same thing. I think that Americans might be surprised to hear that you can even do that, but he used to sit there, basically he knew that– he’d just follow all of the announcements all day long–

Matt: Yeah.

Tobias: [crosstalk] -he recognized capital returns something like that, that he was looking for.

Matt: That’s awesome. At one point, I built like a scraper so that it could filter out some of the junk for me, but I have [unintelligible [00:26:06] keep doing that.

Tobias: Yeah. I have done the same.

Matt: [laughs]

Tobias: Bastards.

Fundamental Inflection Points

Matt: But thankfully, the new website at least you can filter by industry, which is one of the main things I’m trying to chuck out, like the mining explorers, and just look at all the others. I think that’s a good way to keep abreast at least because so many small companies, that it helps you like catch if someone’s– I think about it like a fundamental inflection point.

I guess that’s probably when I started making the migration from value into this kind of hybrid, is trying to find not where the share price is going to rally. It’s not like a typical catalyst, but where the fundamentals are going to improve a lot and trying to identify those spots as an opportunity to get involved with a business.

Tobias: I saw you had a post on your site about that. Can you just talk about that a little bit? How do you go about doing that identification?

Matt: Yeah. First, just having a really good grounding of what the business is doing and how its model works and you can identify at different times, but there’s a whole lot of different. It’s kind of a hidden growth often as part of it.

Maybe they’ve got a like a really fast-growing product or segment that’s been hidden by another that’s slower. Maybe it’s a new distribution agreement. As long as it’s not like a very pump-y management team that’s overselling, then people overreacting, often that doesn’t get appreciated.

If you can talk to management really understand, this is like a real agreement, where they’re putting like thousands of salespeople behind it, that’s a huge fundamental change. Then validating that as well talking to people in the industry. Yeah, there’s a whole lot basically, like launching a new product or some area that’s tipping [unintelligible [00:27:40].

Often operating leverage, frankly, is just when it’s starting to tip. Often once it’s tipping into cashflow positive, people don’t appreciate operating leverage when you’re going from losing $5 million to losing $1 million. When you go from losing $1 to $3 million positive, and suddenly everyone’s like, “Wow,” and then the next year that happens, so there’s just understanding the business model and the unit.

Tobias: Before you said it, I was going to mention that Ian Cassels– I think it was Ian, I don’t want to label him if it’s not, but I think he said something similar that he likes to– often you can find these companies that the best time to buy them is one or two or three quarters before they flip into cash flow earnings positive because they look like a loser until that point and all of a sudden, they pop up on all these screens because they’re making money, and that’s a good kind of inflection point for the businesses because that operating leverage is so massive at that point.

Matt: It’s a funny one, I think, particularly here, maybe people have always been much more focused on profitable businesses, so it’s like suddenly just into the universe. I think there’s just, I don’t know, there’s a lot, maybe it’s changing a bit more now, but people were– there’s a heap of dividends here as well.

It’s like your tax advantage to paying a dividend, you can have this hypergrowth tech company being asked when you’re going to pay a dividend and it’s like, “What are you talking about? Why would you want to pay a dividend?” Yeah, so I think that tipping into profit is suddenly like now it’s a real company in a lot of people’s eyes. Yeah, I think that’s just gets a rerate, typically.

Merging Value & Growth

Tobias: That’s how you scan for these companies. But how are you then filtering down into the things that– what’s the filter validation process like?

Matt: We try to go really deep basically, because a lot of people haven’t done this research before. There’s not like an initiation report often to read or if there is, frankly, it’s not very good sometimes. We just try and talk to everyone we can, talk to suppliers, customers, competitors.

We have what used to be called a one pager, it’s grown to about a 5 or 10 pager, I guess. What we wanted to do with that, though, is really try and exclude the business as fast as possible. So, we’re trying to break the thesis, rather than include it because we want to be able to move on.

So, we’re trying to turn over Peter Lynch’s, “The person who turns over the most rocks wins the games,” I’ve got that one stuck on my wall. It’s definitely, I think, a big part of what we’re looking for. Yeah, just trying to roll them out, like if they don’t have what we’re looking forward to typically have some kind of competitive advantage, either demand or supply-side, competitive advantage, hopefully both of those two combined. Then, basically looking for scalability and runway.

I don’t like total addressable market, because I think people will abuse it massively. It’s more about the size and strength of that niche, that often it is a niche that they’re in, it’s not like they’re not going to be the next Facebook, but they could be the next whatever, supplier to a small niche part of an industry and that can be really valuable.

Yeah, I guess the big framework for our thinking is a lot of Michael Mauboussin stuff, but particularly his measuring the moat. That was probably another big turning point and evolution for me as I kind of try and merge value and growth, is thinking about those few businesses and industry. He did that beautiful map and the original Measuring the Moat paper, which I can’t find anymore.

We’re like, I think the airline industry, like most the industry just destroys value for shareholders, creates value for customers, but destroys value for shareholders, and very few capture all of the profit of the industry. It’s, funnily enough, catering businesses and software, booking reservation, system businesses and a couple of other engineering services.

Yeah, that’s what we’re trying to find basically, those little niches within an industry. Just a whole lot of work trying to identify those and rule them out. Any dodginess is an early one, so we can rule that out pretty quickly.

Catching Fundamental Multibaggers

Tobias: How often are you finding new ideas? Because Australia’s, even including New Zealand, not a huge market, you must be fairly aware every time something new comes to market. There’s a lot of guys hunting for similar kind of stuff, I would have thought.

Matt: Yeah. You’re just limited also by size. As funds get more successful, they tend to grow up and they can’t really fish in the same pond. They get to $500 million in funds under management, it’s pretty hard for them to invest in a sub-100-million-dollar company. We are willing to hold companies as they grow bigger as us. This could happen to a $500 million company or something like that. That’s one, and then I think it kind of depends.

There are definitely smart individual investors out there, but kind of relative capital, it’s less likely that they’re finding some other stuff, I guess. Just doing a huge amount of work on it. There’s so many companies that it does, although it’s a small market just having over a thousand of these things, it’s enough for people to get lost and focused on the same few names.

But yeah, you’re right, I guess our way of thinking about is, the yardstick although we’re obviously over longer periods, aiming to beat the market, also just another internal measure is just of these what I’d consider like a fundamental multi-bagger, something that’s fundamentally growing, cash flows manyfold, how many of those do we catch basically.

Stripping out mining, stripping out biotech stuff that we never would have done, but over the few years that we operate, what ratio of those are we catching, and hopefully, it’s a very high ratio is our goal. But yeah, you’re right, it’s not a huge number of new ones every year. The portfolio turnover is very low and it’s really about finding something good enough to displace whatever else you own.

Tobias: What do you miss? Historically, what sort of stuff have you missed?

Matt: I think just areas like circles of competence. There’s a lot more stuff happening now with FinTech and lending. You mentioned… Afterpay is probably like 10 different Afterpay probably now they’ve expanded more into. Just being aware of new business models and upskilling into them a bit, that kind of stuff is probably made some of the bigger ones.

Behavioural Moonshots

Tobias: Afterpay was an interesting one because it seems like such an obvious idea that I can’t believe that nobody had done layaway online.

Matt: Yeah. It’s really fascinating, because there were some big competitors in the US, but just that model of doing four payments, I think is bizarrely simple, but that was a big part of the driver because it just– I think it’s like a behavioral hack. People buy that and they don’t think they paid 120 bucks. They think they paid 30 bucks, and so they buy more. It sounds dumb, but I tried it and even my brain was like thinking that way.

Tobias: Tricked into it.

Matt: Yeah, just tricked. I think that’s actually some of the stuff we look for is, what was that? Alchemy that Rory Sutherland who talked about like behavioral moonshots, something that isn’t a 10X improvement product-wise, but a 10X improvement in customer experience. I think that’s where you can actually find a lot of that analytical edge, is really thinking through the customer and drivers and it might seem like, “Oh, there’s no edge.

That business has nothing that different about it,” that if it’s driving consumer behavior and just that kind of different way where people love it and whatever else, then you can find a real edge in those businesses. So, yeah, it’s something I think about a lot more now, not just looking for the hard product stuff, how does the behavioral drivers and the marketing fit together with it.

Missing On Afterpay

Tobias: Did you pick up Afterpay?

Matt: Yeah, a little personally but in between the two. Now, it’s been a tricky one, to be honest–[crosstalk]

Tobias: Because it was too expensive. It just rocketed– [crosstalk]

Matt: Yeah. I actually looked at it super early and the unit economics at the time were quite bad. They were losing money on every transaction and I figured. But what I missed was that what they charged merchants quite significantly. They were losing money, but they increased their take rate dramatically, and that was able to get them across the line. Out of WAAAX, I think we got WiseTech, Appen, Altium, and Zero, but we missed Afterpay. Afterpay is probably the biggest, maybe competing with Xero.

Tobias: For folks who aren’t familiar with the Australian market, which is probably a lot of people who listen, which is probably like 92% of the people who listen to the podcast, what are those other companies and what do they do?

Matt: They’re all software. It’s like the local version of the tech, but they’re pretty different. Appen is a company that provides data sets for AI. They basically have a huge remote workforce. It’s like tagging data sets for Facebook, Google, and Microsoft, etc. They just had exploding demand basically, and a bit of a scale advantage around what they were doing because they’ve 800,000 people and could turn around projects better than anyone else. Altium printed circuit board design software. You think of all the smart devices around, they helped made the software that help you design those circuit boards in those devices.

So again, really niche, but a really big global industry. Xero accounting software that was one came out in New Zealand, listed at $1, wouldn’t have been buying it when it listed because it was pre-revenue and just an idea. It’s now about 130 bucks, I think. Small business accounting software, so they found a way to sell through accountants to small businesses and bring it onto the cloud when it was all locally hosted, I guess, before then.

Then, WiseTech, again another software company. This time in global logistics management software, basically. Freight forwarders and trucking companies and whatever else use their software. That’s being a fertile ground. The tricky part with tech, a lot of those some of those are getting built up very expensive now, so we definitely don’t own all of those today. It’s really just trying to find that next generation that’s still really underappreciated, whether it’s in tech or something else, I think.

I’m thinking a lot more about what are the scalable businesses that can have those niches without just having a tech name on it? Or, maybe they’re enabled by technology, but not don’t get classified as a tech business or whatever else? Because I think there’s a whole heap that just gets passed still under the radar and don’t get appreciated, and that’s what I’m trying to find, I guess.

Companies That Burn Cash

Tobias: How do you feel about your opportunity set at the moment? Is it getting bigger? Or, is it sort of narrowing because of the prices are running up? Just what’s your sense?

Matt: Yeah, it’s really mixed. I guess longer term, like, I’m just a big believer, like, you can get too caught up in that stuff because people think the market is expensive forever, but there’s always going to be those few companies that do 10X revenue, like a2 Milk or whatever else that are still under-appreciated, but it is weird. I just went through a whole lot recently, all the ones that filed there 4Cs in Australia, if you’re burning capital, you have to file every quarter, [unintelligible [00:38:56] every twice a year.

I try to just quickly think what I think this business would be worth looking at that before I look at what it’s currently trading at. I think business, it’s got a few million revenue, growing but maybe it’ll be maybe it’ll be $30 million or something in this market. Then, some of them will be $200 or $300 million, burning cash. Yes, I think there’s definitely parts that are just crazy. But then, there’s other parts that are still under-appreciated. I don’t think we’ve quite got the full Robinhood vibe here.

We don’t have free trading here yet, so it’s not fully crazy. You’re going to have to work a bit harder and just really stick to that valuation because it would be easy to own them frankly and have them go up a lot and you’d feel great for a while, but eventually, you’re going to get punched in the face pretty brutally, I think, for some of those and that’s not our approach.

Villagers Turning On Robinhood

Tobias: How does Stake charge? Stake’s like the local Robinhood, isn’t it?

Matt: Yeah, Stake, I’m pretty sure they charge a buck for their transaction. They’re only trading US stocks, so they’re not trading Aussie stocks. I think they do something else with the spread. They have all these different ways. There’s always [crosstalk] ways to make money.

Tobias: Robinhood, those jackals, they’re not trading in the spread, they’re just selling your data. Somebody else is going to do it.

Matt: Pretty much. I don’t know what’s going to happen with that business. They seem to have been found out, the villages have turned on them.

Tobias: I’ve heard anecdotally from people who aren’t stock market, people who I know, they’re all trying to close their account, and all of them are having trouble closing their accounts. That’s the other funny thing that I’ve been hearing. I’ll be a little bit nervous if I was Robinhood, and then they pull down all the financing, so it’s like these– that’s not good. You don’t like to hear that.

Matt: Yeah. It’s a crazy time. It’s definitely a euphoric time. I don’t think you can deny that by any means. For guys like myself, it’s just a matter of being even more picky and trying to figure out where you can still hold stuff and think that it’s attractive valuation, and where there’s still opportunities basically.

Growing A Business Out Of Motley Fool Australia

Tobias: Do you find it hard sort of marketing your strategy in Australia? Is there a market for it?

Matt: I was pretty fortunate to be honest. I was running a portfolio service, The Motley Fool, which had a lot of clients in there. It was a very weird service because we did everything in full view of the clients, like every trade, we told them what we’re going to do. They would trade and then we would trade ourselves in the model. We did updates constantly, so it’s like a weird mix where we’re constantly putting our thoughts out to them. I think it built a lot of trust. I was quite lucky when I left there.

I was thinking I was just going to manage my own money, but I’m very grateful, I had a lot of them right in, saying how the whole journey had improved their lives, because we ran it for a few years, had some pretty good returns, some of them gave to charity. Yeah, it’s pretty cool. So, had a good community there. Then, they started reaching out to different people to manage their money, and it just kind of grew from there. I was originally thinking I’ll just do my own thing and then I thought I’d have a couple of client accounts.

Ended up being a journey to launch a fully-fledged retail fund. Yeah, in that fortunate position, I had a lot of those clients, I think, maybe they told other people to join. I try not to market basically. I don’t do anything trying to put together a pitch deck for [unintelligible [00:42:25] whatever asset. It’s just not my game. I don’t know if I’d be good at that, taking an ownership position in the business and holding long term, not kind of trading for quarterly volatility or whatever else.

Tobias: It’s absolutely fascinating. If folks want to follow along with what you’re doing or get in contact with you, what’s the best way to do that?

Matt: Yeah, I guess on Twitter, MattJoass. M-A-T-T J-O-A-S-S, and mattjoass.com, probably the two best, also mavenfunds.com.au. Yeah, any of those ways, feel free to reach out.

Tobias: I’ll tag those both in the notes, but Matt Joass, Maven Funds, thanks very much.

Matt: Thanks, Toby. It’s really great to chat.

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