VALUE: After Hours (S03 E17): Vale Charles De Vaulx, Falconry, and Journaling, Inversion

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In this episode of the VALUE: After Hours Podcast, Taylor, Cassel, and Carlisle chat about:

  • Vale Charles De Vaulx
  • Investing Lessons From Falconry
  • The Calendar Portfolio
  • If You Want To Hold A Multi-bagger, You Have To Hold A Multi-bagger
  • Journaling Helps Your Investment Process
  • Left Tail Buyer, Right Tail Holder
  • Maker’s Schedule, Manager’s Schedule – Paul Graham
  • You Invest Like You Live Your Life
  • Frugality Drives Innovation
  • Altos Ventures Unique VC Strategy
  • Winners & Losers In Bunches
  • Mohnish Pabrai: Keeping Your Schedule Clear
  • Bargaining With The Universe For A Bust
  • Forget The Macro And Focus On Businesses
  • Hustlers In Micro-Caps
  • MySpace Tom

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Jake: Toby, are we live?

Tobias: We are live. How are you, gents? It’s 10:33. We’re running a little bit late. Apologies, folks.
10:33 on the West Coast, 1:30 PM on the East Coast. I’ve got no idea what time it is UTC. It’s like 3:30 AM Australian Eastern Standard Time, so I expect lots of Aussies on this one. How are you, gents? We’ve got a special guest today. Ian Cassel’s joining us as a locum for Bill who’s having a break for a few weeks. Welcome, Ian.

Ian: Hey, it’s great to be here. I’ve tried to bring 10,000 bots to the program today as well.

Tobias: [laughs]

Jake: Yes. One of my sons poked his head in, he’s like, “That’s not, Bill.” I said, “I know, get out of here.”


Ian: Sorry to disappoint.

Jake: Yeah, sorry.

Tobias: What are we talking about today? I’ve got a little bit on Charles De Vaulx, who’s sadly passed away. Do you have any topics, Ian? Did you prepare?

Ian: There’s a couple things I could talk about. I’ve been journaling a little bit on some mental models for micro-cap investing. I could share a little bit about that or just– [crosstalk]

Tobias: Ah, that sounds good.

Ian: Thinking about it in the last couple of days.

Jake: Hmm, I’m excited for that.

Tobias: What about you, JT?

Jake: I got a little mini-veggies cooked up. It’ll be on this–[crosstalk]

Tobias: Baby carrots.

Jake: Yeah, they’re just baby carrots. Not even really cooked. Just raw.


Tobias: It’s the best way to have them.

Jake: Yeah, it is better. On a falconry term that might be of interest for everybody. We’ll get to that.

Vale Charles De Vaulx

Tobias: Very sad news today. We just learned Charles De Vaulx passed away. He was the founder and the prime mover behind International Value Associates, I think, IVA. They announced that they’re winding up their funds very beginning of April. There was a long article written by someone who I think had been an investor and a supporter of theirs, since their inception, 2012. I read that article, and it was an awful experience because it exactly mirrored my own experience, as we’ve gone through the last 10 years for value. In the sense that they’ve just struggled to find the undervalued positions that they like, and so they’ve been extremely disciplined, and they’ve carried a lot of cash. As a result, they’ve really underperformed.

I think that they looked at March last year as being one of those rare opportunities where you can deploy some capital and expect to get a pretty good return. As everybody now knows, they struggled to get the money deployed because it was a very sharp bounce and recovery to now new all-time highs, and value has lagged initially out of that, bounced, has come to life a little bit more over the last six months and even the last month more so. What do you guys think about that? Did you have any thoughts?

Ian: When I saw the headline, and I read a little bit about it, it’s really hard to go a long stretch underperforming. I know as a stock picker like I am, and I’m rather concentrated, call it a dozen positions, sometimes less. The more concentrated you are, the more likely you’re going through some long durations where it doesn’t feel like anything’s working. Yeah, that can be a really, really negative spot to be in. Back maybe 15 years ago, I was in three or four positions. Now I’m closer to a dozen, and some of that has to do with matching some capital as well. It really helps just to have something working in the portfolio, even if it’s the smallest position in the portfolio. It’s something that I think it might not even mean anything to the returns, it might just be a mental lift that it gives, but it’s something that I’ve thought more and more about over the last two or three years as well.

Winners & Losers In Bunches

Jake: Do you actively try to put something in there that you think will be especially non-correlated with the rest of it?

Ian: I try. Seriously, going back 20 years here, it’s funny. Even the portfolio today, we’re rather diversified across different areas and sectors and industries, but it still is amazing just how sometimes it just all goes in sync. It feels like they should be uncorrelated bets, but a lot of times you win and lose and bunches in the winter stock picker for some reason.

It definitely has helped my psyche, I believe, just expanding the portfolio up to even a dozen equities. Oftentimes, it’s that smallest one or two or three positions that you have in the portfolio that end up outperforming even the largest positions because you’ve given them the mental space that they need to actually grow, you give enough space so that they can stumble a little bit. You’re not going to overthink it, you’re going to give them enough space to get overvalued a little bit, and you’re not going to sell them. That’s just helped me mentally, just that in a few positions.

Tobias: One of the challenges is that businesses in an industry often get undervalued at the same time because there’s some industry-wide issue. Then you’ve got this problem where you know that to outperform, you need to buy a few of these things because this is the rare opportunity. They get undervalued, but then you’re also taking on this now industry risk that, if you are wrong. I’ve backtested this many, many times, and basically, you get better returns if you’re unconstrained. You can buy whatever you want, which means you get the industry concentration. That’s how you get the really good returns. It’s a double-edged sword, it cuts both ways. You end up being concentrated in for-profit education, which that’s a disaster because they all go to zero. I guess it comes down to, what are you trying to do? Are you trying to maximize your gains? Are you trying to minimize your potential risk? I started out trying to maximize gains, and as I’ve got older, I’ve gone to minimizing the risk side of the spectrum.

Ian: How do you guard against that, Toby? I mean, you just mentioned it. At certain time periods in the cycle, certain industries are going to be cheaper than others. All of a sudden, you’re 50% in gold miners or something. [laughs] How do you guard against that data from portfolio level?

Tobias: I have an explicit rule where I won’t buy long. I won’t buy more than 20% in an industry, and short, I won’t do more than 10% in an industry.

Ian: That makes sense.

Tobias: That still hurts returns. That still hurts returns in a backtest. It’s just that I figured that that’s like the most amount of capital unprepared to tear up in any one industry, if it’s real. This evidently, this happens now like that, you get that the for-profit education, they will screen really cheaply. They all look really cheap businesses. But that industry was just burnt to the ground. [laughs] You got to be careful.

Bargaining With The Universe For A Bust

Ian: I think it’s also an area that we were talking about this a little bit before we came on the program today. It’s even when you’re looking at your cash position, if you’re managing your portfolio, especially if you’re more of a value or deep value bent, where you’re waiting to buy once every 12 years when the market gives you that opportunity and that 60% drawdown, you’re sitting there 40%, 50% cash and you’re waiting and waiting. Just that mental drain of– you wake up in a negative mood because you want the world to end, so you can buy this stuff cheaper.

Tobias: Yeah. I’ve been there.

Ian: Yeah.

Jake: [laughs] Yeah, and then you start bargaining with the universe that-

Tobias: [laughs]

Jake: -if it just crashes, and let me get deployed, I’ll never hold cash again. [laughs]

Ian: [laughs]

Jake: Give me chase, but not now. [giggles]

Tobias: That’s it. That’s exactly right. Yeah, I don’t know if there’s any really good answer to it. I’ve done a little bit of testing with that. Whatever really come up has failed, because the market has–[crosstalk]

Jake: [crosstalk]

Tobias: Well, yeah, the markets got more expensive over time, whatever fixed rule you applied, has always got out of sync because basically, we’re essentially all-time highs now. Whatever rule you would have applied, it forces you into holding more cash than you’d otherwise want. There’s never really strong signal in there. You test the other way, you don’t hold any cash at all, and you invariably outperform. The only opposite side of it though, is that you get these bigger drawdowns. Then the immediate thought that comes to mind is that Buffett line about rather a lumpy. — think he says a lumpy [crosstalk] 15 rather than a smooth 12, like you have to make that explicit choice. Am I going to have the lumpy 15 or the smoother 12?

Jake: Yeah, but is it like the lumpy 15 and the smooth 2?

Tobias: Well, on the other hand, it’s just a–[crosstalk]

Jake: That was if [crosstalk] you can get 6% in your treasury bill without breaking a sweat.

Tobias: That’s true. There’s Seth Klarman out there who underperforms for the bulk of the cycle, except he’s got a whole lot of cash. When the market actually, really does fall over, he gets most of it invested and as a result of outperforms over the full cycle.

Jake: Yeah. I feel really bad for De Vaulx because I think I know how he got where he got. I think it started out with the things that you owned got fully priced in your opinion, and so you decide to sell them, and you had a hard time finding things to replace it with that made sense to you at these prices. That keeps happening and happening until before you know it, you’re 40% cash and you’re making a macro call now, even though that was not your intention when you started in the least-

Tobias: Yeah.

Jake: -you were doing bottom-up analysis. Before you know it, you’ve been in cash for a long time and now you’re fully reputational a pot-committed to cash. Now, you really have to have that big crash before you can get back to where you should probably should have been all along maybe. That’s brutal. That’s rough, and I know because I’m speaking from experience. [laughs]

Tobias: Before we came on, I had a look at the Multiple website which is got the Shiller PE at 35.58 today. The one-year PE, I think it was at 42, something like that, just absolutely bonkers. The 10 years at 1.58, that’s up a lot over the last 12 months. When you look at it in the context of that long-run [crosstalk] that goes back, there’s nothing that suggests that experience is over either. Clearly, still be in that downtrend that maybe it looks– a year, it maybe it goes into a negative territory. But macro stuff, you give yourself the worst headache trying to solve that problem, and I don’t know how to solve it.

Forget The Macro And Focus On Businesses

Ian: I try not to think about it. I don’t spend too much time thinking about the macro the way I think about is on the micro-level. I just thinking about the businesses I own, and can they weather a storm? Can they survive a COVID timeframe like last February, March, and throughout the year? It’s the only thing I can do. It’s only thing I have control over just trying to be, obviously invest a little bit different than you guys, but you’re just trying to find those unique growing businesses that, obviously, they are small because I’m a micro-cap investor, but that can weather that storm. A lot of my filters that I use, they’re there to protect the downside as much as realize the upside.

Tobias: How do you think about valuation for those companies? Where does valuation come into it for you and what stage of the process?

Ian: I look at everything through a three-year lens. This has evolved overtime, too. It’s funny, when you think about the maturation of an investor, we’ve all gone through similar maturations where you when you first get into investing, you’re just looking at fundamentals and financials because that’s the only knowledge base that you have, because you went through an accounting class or went to school, that type of thing. You’re overly emphasizing the financials, almost of a company because that’s all you know. Then over time, you start looking at different industries or different sectors and then all of a sudden, “Oh, look, I love this oil and gas sector. I just want to focus on this,” and all of a sudden, you become an expert in that area, and then all of a sudden–

Jake: Then you’re out business.


Ian: Yeah, exactly. It depends where you’re at in that and which cycle. Then you’re like, “Okay, well, now I care about management. I didn’t care about it before, but this is a new area.” Now I’m going to dive into qualitative attributes of investing and start looking at leadership. I did that with Intelligent Fanatics, and you overemphasize that area, and then you go to growth. Well, let’s just look at things that can grow 40% a year because growth can cure a lot of bills. If they overspend who cares, they can grow, whatever the case may be. You’re always going away from the main thing coming back to reality. I think all of a sudden, 20, 30 years later, you realize all of those pieces are necessary for the investing puzzle whether it’s financials, growth, valuation, the management part of it.

Life’s all about that journey, especially through investing. That’s where I’ve been at, too. I mean, even when I wrote two books on Intelligent Fanatics, I was probably over-emphasizing the Intelligent Fanatic of the organization. I mean, the one key takeaway from the Intelligent Fanatics work I did was actually to pay less attention to the person at the top and pay more attention to the people they have around them.

Tobias: Hmm, that’s interesting. Why is that the key takeaway?

Hustlers In Micro-Caps

Ian: Well, because a lot of micro-caps, they’re just hustles. They’re one or two-man or woman operations that they can– Brent Beshore talks about this as well, where they can take a company from zero to 20 million in revenue and then they become their own ceiling because they keep on having to do everything. I’m interested in finding the ones that go from 20 million to 100, 200 million. For that, you have to put great people in place, put processes in place, put feedback loops in place that will allow you to spin that flywheel and get the business humming.

Even a lot of successes in micro-cap, especially in nano-cap, a lot of them are just really glorified hustles. There’s a lot of big moves of 10 million market cap companies going to 50 million and that’s a 5x, but that was just the business that went from 5 million revenue to 15 million revenue and earn four times more, and then that’s all whatever is, so anyway.

Tobias: It’s like the difference between– Sorry.

Jake: I was going to say our processes are like, the blind man who’s feeling the elephant. We over-index to whatever part of the elephant we’ve been touching recently.

Tobias: Recency bias?

Jake: Yeah.

Tobias: Yeah. It’s the difference between an entrepreneur or someone who just had that singular insight to building a business. That’s quite a challenge, I guess, because there’s lots of guys out there who will come in, and they’ll pile at your business once it gets to a certain scale, like the mid-cap and above and they’re like professional CEOs who know how to take something that’s stable, and then grow it stably. There’s plenty of guys who are entrepreneurs, who can get from zero to whatever 20 million, say. It’s that putting all the systems in place to get from 20 to mid-cap or 20 that sort of solid small cap, there wouldn’t be a lot of people around who’ve got that skill set, I guess. Unless they’ve done it themselves and then why would they want to do it for somebody else?

Ian: Yeah. Thing I really like to see is the Intelligent Fanatics, somebody that had previous success, somebody that built up a business and sold it for 20, 50, 100 million. Now they’re just using their personal net worth to backstop this vision of a new company. They’re bringing the band back together again. They know what worked, they knew what didn’t work. I love finding those. I usually stumble upon maybe one a year of something like that, and it benefits it from the capital market side too, because this is a person with a personal net worth, where if the company needs another 3 million, he’s writing a check or she. It cures a lot of bills when you find those qualitative measures in a leader, in these small companies.

Journaling Helps Your Investment Process

Tobias: You said earlier at the beginning, you’re going to talk a little bit about journaling and some ideas that you’ve had. How do you keep a journal? What do you do for journaling?

Ian: Normally, I just get up and just throw up on a page. Sometimes there’s no [laughs] rhyme or reason to it. Lately, I’m doing an interview in another week with Rohith, who’s actually worked with me on Intelligent Fanatics. He’s now doing some work for Manual of Ideas. He asked me to think about mental models for micro-cap investing. It’s a scenario that I’ve written on and journal about haphazardly over the years, but I wanted to put a little bit more construct to it. I’ve been thinking more about that and the two main– I mean if their mental models it’s not like you hear Charlie Munger thinking about them or using them, but they’re just two themes of–

The most powerful thing in microcap is when you can find a tailwind combined with scarcity. When you find an industry or consumer trend or technological tailwind, and Josh Wolfe would call this The Directional Arrow of Progress and we think we’ve probably heard some presentations he’s done. When you can find something like that and then when there’s only one or two or three public ways to play that directional trend. A million people want to buy something, but there’s only three pieces of artwork out there. It just drives price and that’s the power of scarcity.

Jake: Is this your NFT portfolios?

Tobias: [crosstalk] That’s what I was going to say. [laughs]

Ian: Yeah, it is. It seems like it’s oversimplified a little bit, but those are the things that I generally try to find. There’s things where there’s a tailwind. It’s just easier to roll with the tide as they say and then also to pick the areas where the institutions are going to come after this tailwind at some point and there’s only going to be two or three ways for them to participate in it and I want to own it before them.

Tobias: It sounds like a pretty good pitch for Bitcoin.

Ian: Yeah. Well, it’s a little bit of the same. Trying to think to get a good example I could give you guys.

Tobias: [crosstalk] -that historical example?

Ian: A good example– when did Facebook go public?

Tobias: 2013.

Ian: 2012 somewhere around there, right?

Tobias: 2012.

Ian: It’s probably like 2010 then, social networks were becoming the rage. Facebook wasn’t public yet. There was this small website called, which was the only publicly traded social network that existed. It was a small 20, 30 billion micro-cap company. It was a Latino social network. I stumbled on it. I met with management when they went to New York, and I was like, “Okay, this is an area that I think they are going to get hot. It’s the only one that’s public.” Eventually, there’s going to be more that are going to come public, but I think that institutions are just going to buy this thing up because their investors will demand exposure to this ecosystem whether just this one, or two or three other ones, this thing’s going to go higher. Sure enough over the next 12 months, it went from $1 to $12.

Tobias: Uff.

Ian: [crosstalk] -back of just institutional inflows needing exposure to this. Eventually Facebook went public in 2012 or whatever a year or two later and then this company actually morphed and merged and became MeetMe, and I think MeetMe just got acquired for 500 million last year. It ended up evolving into something else, still social network and dating app more or less. That’s a crude example and that’s not representative of great business either, but just to give you an example of that directional tailwind and then there’s only one or two ways to play that. I think you can find things like that in microcap in certain areas of the industry where it’s going to be a place that’s going to garner a lot of attention. I don’t characterize myself as a momentum investor, but I want to find things that are undervalued that will get overvalued. That’s kind of the metric that I look for, things like that.

MySpace Tom

Tobias: I just stumbled onto MySpace Tom’s– my original friend, MySpace Tom. I found his Instagram feed. It’s insane. That guy’s just been on holiday, been on vacation for since he sold it. That was a great deal. He punched out of that for 700 million to News Corp. News Corp sold $2 billion of advertising that Google paid them $2 billion to have exclusive advertising. It worked out well for everybody there as far as I can see. MySpace Tom gets ripped every now and again because he’s not Zuck. Then, I look at its life and I don’t think that MySpace Tom wants to be Zuck, I think he’s living his best life.

Jake: He’s not going in front of Congress. [laughs]

If You Want To Hold A Multi-bagger, You Have To Hold A Multi-bagger

Tobias: I think he’s got a drone and he’s got an interest in photography. His Instagram feed just looks like a professional travel photographer’s wet dream. Basically, it’s incredible. He goes everywhere.

Ian: One last one I was just thinking about it. Probably another one that I think its works really well as obviously something like inversion which Munger talks about, but I tweet about this for three or four times a year just about, if you want to hold a multi-bagger, you have to hold a multi-bagger. If you want to find great companies early, and experience that gain and actually realize that gain, you’re going to have to hold these things and that means you’re going to have to go to the volatility it takes to endure that and you’re going to have 30%, 40%, 50% drawdowns.

Case in point, the largest position in my portfolio right now, it’s down 40% since the end of the year. Now, that hurts, but the business hasn’t changed. It’s that just come off a little bit, fundamentals backfilling into the stock price and that’s just a big part of these things, but I find if you want to hold multi-baggers, there’s like two ways to do it. You either Chris Mayer coffee can them, either make them so small that you’re not going to think about them almost, or the opposite side of that, which is make them a concentrated bet that you’re going to know them better than most and you’re really going to have your pulse on that company where you can hold through that volatility because you know that business almost on an intimate level. There’s almost like two ways where you can do that.

Jake: It’s interesting that they’re at opposite ends of the spectrum, too. Like buy it and then just completely forget about it. Lose the account logged in-

Tobias: [laughs]

Jake: -or, know it so well, that you’re mentally can handle the rough ride that you’re about to receive.

Ian: Yeah, I don’t think there’s any right or wrong, either one of those is wrong either. I’ve thought before about– I stumble upon ideas all the time. Again, he does micro-cap investing the way I do it. It’s not batting average, I’m not trying to get beat 10 out of 10. It’s still 6 out of 10. I’m not going to be right all the time on the things I think I know and a lot of the ones that I may be passed on end up being big winners. What is a coffee can 40 company micro-cap? All right, I’m going to equal weight two and a half percent across all these things. How does that do overtime? Obviously, it looks more like a venture bucket, but I don’t think there’s any right or wrong answers to it. It’s more fits your personality I think.

The Calendar Portfolio

Tobias: I have done a little bit of testing in that space, just because I’m interested in what happens if I just buy the list of the best, and not a particularly strict valuation basis. I’m just saying they need free cash flow better than the existing 10-year. Then you assume some growth. I’ve found that the portfolio is like, in any given year, you’re buying 40 or 50 companies because I think there’s 200 or 300 worthwhile ones globally, you end up buying 40 or 50 in any given year, and then a portion of them go to zero. It’s very, very hard to detect at the outset I think to eyeball and work out which one’s going to be a zero. Then some of them end up going up quite a few times.

You do become each little portfolio that you form in any given year winded for 20 years, it becomes concentrated just unavoidable. You’re going to have positions in it that go up 10, 20, 60 times in some instances and they become material to the portfolio and then you have lots that go to zero or don’t go anywhere. It becomes a concentrated high-quality portfolio at the time, it’s just you really riding on a handful of– by that stage pretty overvalued name, so you won’t end up owning Netflix and you’ve got a big chunk of Netflix like. I don’t know what I’d be doing with that if it was concentrated, it’d be very nervous-making.

Jake: Not sleeping at night.

Tobias: Not sleeping, yeah. Even not being concentrated, it still ends up being like 8% of the portfolio.

Jake: I was thinking about what if there was like a Ender’s Game bait-like layer between you and what was actually happening in the portfolio. You’re picking names and you’re overweighting this concentration, but what actually is getting done after that is like, “Oh, it’s even positioned sizing it. It’s holding for longer than you were going to.” It’s doing all the things that you think you should be doing, but you are really too hard to execute because they’re just too mentally painful. [laughs]

Tobias: Well, I don’t mind that as an approach. I think you get there with a quanty kind of doing it explicitly from the outset.

Jake: You have to watch what’s happening on a day-to-day basis, so that can be painful, right? [giggles]

Tobias: Yeah, I think that’s probably the solution just to forget about. Once you’ve formed a portfolio, that’s the 2021 portfolio and you’re not allowed to look at individual names and it’s just going to trade as a monolith and then next year, you’re going to form the 2022 portfolio and you’re not allowed to look. You just going to torture yourself if you look.

Ian: It’s almost like the VC vintage. You’re going to have vintages. [crosstalk]

Tobias: Yeah. That’s exactly what it is. Who had the idea of– They would trim these smaller positions. Do you remember that? If it fell below some portion of the portfolio 1% or 2%, I forget what the exact number was, but then they’re just sell out. Do you remember who that was, JT?

Jake: Yeah, the first person I heard talk about that was actually, Mark Simpson.

Tobias: Mark Simpson, yeah.

Jake: Yeah, in his book saying, like, once it falls below a certain level– it’s just a distraction for me at that point. I need to cut bait and find something else.

Tobias: I think that’s a good approach because if it’s a good company and it gets cheap again, you buy it again with a full-size holding. I don’t know what the level is, I don’t know what the materiality is, but 1% suggest, if you get 50 stocks in a force of 1%, it’s basically halved.

Jake: Yeah– [crosstalk] [laughter]

Ian: I like that thought process though, Toby. I think the first time ever, he said so eloquently, but Brian [unintelligible [00:28:49] on Twitter, he had a tweet about that. If you naturally just let your winners run, they become more concentrated and your portfolio becomes more concentrated your winners and that should be sort of your goal. That’s what you described.

Tobias: The problem is, and this is the only thing that gives me pause. I look at it now and we’re close to where the market is. The market is high. Everything’s performed for a long period time, 12 years of performance. What does that portfolio look like? If you go through a drawdown, would I regret? You had Netflix there and you had some huge waiting in the portfolio in it and you knew it was overvalued. Why didn’t you sell it at that point?

Ian: Yeah, it gets really difficult. I’ve had the same thought just with putting that to work even in micro-cap, just gets back to what I was saying about nano-caps. A lot of them that are even hustles can 5x and are still hustle. Same thing, a lot of really big micro-cap winners, they went up 10x, but that’s all they went up and then they went down 50% and they stayed there. You don’t want to just coffee can these things, and especially in the smaller realm of micro-cap. Usually it’s more obvious when something stops working on a large cap from a business level. It’s stupid just to keep holding things you know aren’t working.

Tobias: You had anything it’s like graduated to mid-cap and then made it into– not necessarily holding all the way through, but something that you were looking at when you started out 20 years ago and now it’s a big company?

Ian: It’s a good question.

Jake: Little company called Amazon.


Ian: Unfortunately, Amazon only got down to like 250 million market cap, I think, kind of at the trough and that’s when nobody above– Bill Miller was only one buying it.

Jake: [laughs]

Tobias: What’s your cut off? Is it 300 or that’s the inflation-adjusted number? That means it was like 100 back then or something?

Ian: Yeah, it probably was. Micro-caps considered sub 300 million. It depends if it’s in Vogue or not and somebody wants to make a 500 million or less. They call themselves a micro-cap.

Tobias: Yeah.

Jake: Yeah.

Ian: It really depends. [laughs]

Tobias: It’s a good trick. I’m just going to write that one down. Hold on.

Jake: Yeah, under a billion, okay.

Ian: But it’s funny like you go around the world based on exchange rates. A friend of mine, Sanjay Bakshi, who manages the fund over in India. He’s a mid-cap investor and his average market cap 600 million USD. [crosstalk]

Tobias: Could be small-cap here.

Ian: Yeah, just the business or just smaller because of where they’re at, probably their economic cycle and just the maturation of their economy.

Tobias: I think that’s true globally. I think Australian businesses tend to be smaller. The US businesses around unusual that they get so big. A trillion dollars. I’m struggling a little bit to wrap my head around that one and there’s a few of them, stuff like that’s a new thing.

Ian: It’s ridiculous. It’s annoying to me as a micro-cap investor and it’s why the markets probably as high as it is, when you look at– I don’t know, 7 of the top 10 largest companies in the world are technology companies. Oh, and they’re all growing. They’re still growing 20% to 40% a year. They’re the largest companies in the world growing 20% to 40% a year with 30% EBITDA margins. It’s like, “Okay, 0% interest rates. Yeah, I can see why though.” With the market cap, weighted indices pushing them higher. Yeah, I could see how that works.

Tobias: I’m surprised the indexes look as stretched as they are because they make such a big part of the index and they’re all free cash flow positive, growing really quickly, really good businesses. It still means there’s some the rest of the index is not really pulling us weight. [crosstalk]

Jake: Yeah, fundamentally speaking, you mean.

Tobias: Fundamentally speaking, yeah.

Jake: Yeah. What did all these other laggards doing? [laughs]

Tobias: Trying to appeal the deep value investors or something like that.

Jake: Yeah, I guess so.

Tobias: That’s not a good place to be.

Jake: Melting ice cubes.


Tobias: Do you want to do your baby carrots?

Jake: Sure, yeah. Ian, did you have any other mental models you wanted to-

Ian: No.

Jake: -drop on us.

Ian: That’s enough, yeah.

Jake: Okay, well, save some for next week.

Ian: Yes.

Tobias: Save some for the podcast we’re supposed to.

Ian: Yeah, exactly. [crosstalk] talk about it.


Jake: Yeah, just show up there, “I’ve got nothing.”

Ian: Yeah, just listen to this. [laughs]

Investing Lessons From Falcons

Jake: All right, so I came across, one of my friends told me about this idea that’s actually from falconry and it came originally, I think he learned about it from Yvon Chouinard who was the founder and driving force behind Patagonia. I don’t know if you guys know much about him, if you’ve read his book, Let My People Go Surfing. Just a terrific book, and just like the culture that he built is so unique and I’m very– I don’t want to say envious, but I think he really did a lot of things right on a long-term sustainable business standpoint. If you know about him, you know that he was a hardcore, actual adventurer guy. It wasn’t just like, “Oh, I’m a CEO, buttoned-down, wear suits to work.” No, this guy’s like up climbing in the Pyrenees and just doing all this crazy stuff. He walked the walk. It wasn’t just like BS.

Anyway, one of the things that he talks about in his book is about in falconry, they have this term called yarak. Y-A-R-A-K. Be careful with your google searches there because it is slang for something you probably don’t want to come across. In this context, the context that we want to use, Yarak is the state that a bird gets in when it’s hasn’t been fed in a couple of days. If you have a falcon and it’s just recently eaten, like you can’t get it to do anything. It won’t hunt. It doesn’t want to fly. It’s not doing anything. If it hasn’t eaten in a couple days, it gets into this state where it becomes hyper-alert and you can see it in the bird’s eyes like, do a google search of falcon, Yarak together and look at this bird. You look at him, you’re like, “Holy shit, this bird would tear me apart if it got the chance.” It just has that eye of the tiger kind of look.

The important thing is that the bird is hungry, but not to the point of being weakened. It’s ready to hunt and it’s in its optimal state. To me, it actually makes a lot of sense that when the chips are down and you’re hungry, evolution would have been a forcing function would say like, “Okay, well, you have to be at your best right now to make it through to the next round. We can’t afford to get so hungry that we become weakened and we can’t then provide for ourselves.” This acuity that happens to me makes a ton of sense from an evolutionary selection bias process. What can we do with that? What does that mean? Well, especially in a small business context, a company that is yarak, they’re hungry, they’re conserving resources has a very serious advantage.

One of the ways of putting your small business into yarak is inverting the popular revenue minus expenses equals profits. That’s what we all learn in business school. It’s a cliché at this point. The correct formula there is revenue minus profit equals expenses. This is almost like pay yourself first as a business, like carve out your profit ahead of time and then use your expenses that you have available to delight your customer in the way that you best can. You want that forcing function that will unlock the creativity that will allow you to truly provide a great experience, but also guarantee that you’re staying profitable and you’re keeping your business in yarak. We can apply this same thing to your personal finances.

Automatically saving a certain amount of your income will put your family, yourself, your team in yarak and it’s not about living an austere life necessarily. It’s actually about forcing you to examine the expenses that you do have and run them through the rubric of, “Is this making me happy? Is this doing what I want it to be doing for me?” If not, then it needs to go. You won’t do that unless you have that forcing function.

The other part that’s really nice about it as someone who’s been doing it for a long time is that the expenses that you do spend then, you can do guilt-free, because you know that you’re taking care of the future already by saving ahead of time. That’s a nice place to be because, I know, for me at least, I feel guilty spending money often and there’s a little part of me that likes to deny myself.

Buffett has identified this when he says that, “A fat wallet is the enemy of superior investment results.” Then, if we go back even a little further, Cervantes said that, “The hunger is the best sauce.”

Tobias: [laughs]

Jake: Nothing tastes better than when you’re really hungry. Anyway, it’s a little falconry term that is fun and I think actually has some really useful life lessons.

Tobias: It’s a little bit like the Capital Returns book where– that’s something I’ve written about in Deep Value as well, where I said that, “What you want is companies that are good at husbanding capital through good times and having it there for the bad times, because that’s when they need it to–” which is funny given our conversation earlier about carrying cash, but I do think that– this is why it’s so hard. You want companies to be holding a little bit of cash or at least have some fire power in some respect so when they go through a bad time, they’re able to capitalize on it. Then the other side of that, I guess, is that you underperform a little bit through the rest of the cycle. It’s a tough business.

Jake: Well, you can’t optimize for both efficiency in the short term and resiliency in the long term. You have to choose one or the other.

Tobias: Right.

Frugality Drives Innovation

Ian: Well, I think that another segue with that is just how frugality a lot of times drives innovation from a company level as well when you’re restrained. Bezos talks about that and a bunch of people talking about that.

Tobias: What do you think that is?

Ian: Well, you’re forced to be innovative and just use the resources that you have and grind and get a solution. A lot of times the solution you find is probably the most efficient one, anyway, when you’re forced to have limited resources to some regards.

Tobias: Do you think that the abundance of venture capital for startup companies– I think that there’s this expectation for many young founders that they’re just going to go and raise VC and therefore, you don’t need to do anything to get you beyond– You don’t need to any other– [crosstalk]

Jake: [crosstalk] -ping pong tables. [laughs]

Tobias: Yeah, straight to the ping pong tables. Straight to the nice office. Do you think that makes them less resilient, if they start off well-funded?

Jake: I certainly can see that argument that if you’ve never learned any fiscal discipline, it’s going to be difficult when it does get forced on you at some point, whether the market forces it on you through competition, or whether an outside investor forces it on you, because they think that you’re pissing the money away. At the same time, what is an expense that is necessary to delighting the customer? The ping pong table.

Tobias: Ping table.

Jake: I say that jokingly-

Tobias: Foosball table. [laughs]

Jake: -but if the ping pong table builds a culture such that your team is super tight and really works well together and is really happy to come to work every day and maybe they put in an extra couple hours, shit, that ping pong tables a pretty good investment then.

Tobias: Yeah.

Jake: Always just clear cut. What’s a strategically smart expense and what is a wasteful expense?

Altos Ventures Unique VC Strategy

Ian: I also think that the only kind of VC backed companies we heard about in the headlines are the ones who were just tons of cash are thrown at them. There’s plenty of other ones that are successful that do well that are frugal as well. It showed up on my Twitter feed, his name’s @honam, H-O-N-A-M. Anybody’s listening to this, go search him out. Really smart guy. He’s a co-founder of Altos Ventures and it’s about a 10 billion-plus venture capital firm. He co-founded it in 1996. They go about venture capital in a completely different way than the norm. They actually go and they take more concentrated portfolios than normal in venture capital. They look to really help the businesses grow in a pragmatic capital-efficient type manner, like they want to get to profitability.

They think it’s dangerous to crank up the burn rate, because they think that destroys the culture of the company when they do that. They’ve been wildly successful. I reached out to him through Twitter, because he showed up on my Twitter feed, I said, “Hey, do you have 15 minutes to talk? I want to bend your ear,” and we ended up spending two hours on the phone together. He’s just fascinating, because it’s like Brent Beshore meets VC. He’s been immensely successful in that model. I think they’ve had 26 companies they’ve funded that have returned more than the funds that they’re in. 20 of that return 3x of the fund and they just take a more pragmatic approach to venture capital and they average up into positions over time, like he tells a story of, I think, was it Roblox, that just went public?

Tobias: Yeah.

Ian: $40, $50 billion technology company. They were the first one and a half million into that company.

Tobias: Oh, wow.

Ian: They had to convince the founder and his dad to take the money. They’re like, “We don’t need this,” but they had to convince them. Anyway, fascinating person. You should interview him, Toby, on your podcast, but he just thinks through a different lens. I think there’s a lot of other companies that are kind of like that backed by people that like, Ho Nam who do take a pragmatic profitability, frugality type approach, so even the VC.

Tobias: Is that your model? Do you think of yourself as sort of listed VC or how do you think about the problem?

Ian: I reached out to him, because I was curious how– The other thing he’s done very well is hold for the right tail. I think he’s still holding a couple companies for 20 plus years and not because he’s stuck on them, but because there are winners.

Jake: Mm.

Ian: He doesn’t believe in taking companies public too soon either because he believes if a company’s profitable and growing, he’ll find liquidity. There’s always going to be a buyer even as a private company for a piece of the company.

Jake: The funds don’t expire then? Isn’t that typical–

Ian: Well, they’re longer duration funds and he actually sets up other funds to buy out other interests and SPVs to do some seek– It’s really smart how he does it. I was interested in how he handles just capturing as much of that right tail as possible. That was the basis of the conversation on how exactly he did that. You just went a little bit detail into that, but I do think there’s a lot of similarities to his approach to investing, and what I tried to do in the public markets to answer your question, Toby, yeah.

Left Tail Buyer, Right Tail Holder

Tobias: In this little project I’ve been doing, where I take these companies from 20 years ago, and they just never sell on. It’s one of the things that that I have observed that they do get through these very long periods of being often they can be overvalued and they just don’t do anything for years. Three or five years, but then ultimately, they come back to life. They don’t reappear in the screen in that period where they’re undervalued or not really working. I think that there’s something to that very, very long holding period you do– Jake and I’ve talked about in the past is like introducing the right term. It’s the way for value goes to get a right tail into their portfolio because you’re no longer holding these things for value reasons they are.

When you buy them, you’re buying them because they’ve had some misstep or they’re just not quite appropriately valued. Then there’s enough of them that become doughnuts over a period of time that, the Monte Carlo approach to it does make sense. There’s a reason why these things are undervalued because they do have some issues. I always give the example of Microsoft in 2011 or 2012. One year revenue going backwards, had Steve Ballmer at the helm, about to hand over to Satya Nadella, who nobody really knew about. The world isn’t a little bit more flux. Now, Microsoft’s become a gigantic ripper, but you would have sold way too early if you’re watching the value.

Jake: Almost like a left tail buyer and a right tail holder.

Tobias: Right. [giggles]

You Invest Like You Live

Ian: Toby, you interviewed William Green recently, and I think everybody on the planet has this book in front of them. I know, I do too. I’m like a couple chapters in, but what was maybe the– I don’t know if you read the whole thing yet, but maybe what were one or two things that you thought were most interesting out of the book or your conversation with them?

Tobias: Yeah, I love the fact that a lot of these guys have got probabilistic data-driven approaches to the market, and then they apply those same rules in their own personal life. I’ll bet if you talk to anybody on– I’m sure all three of us do that. I know, JT does it. I was going to talk to him about Yarak for human beings. Are you still an intermittent faster, JT? You still do that?

Jake: Yeah, that’s my– Yarak applies to the human biology as well and definitely feel better when I’m–[crosstalk]

Tobias: Yarak– [crosstalk]

Jake: Yeah. In fact, if I have something really important, mentally, that I want to optimize for, I want to go into in a pretty fasted state.

Tobias: How long is a fasted state for you? 18 hours or longer than that?

Jake: Yeah, typical like, run rate day is 18. For that, if it’s something– depends on what time it is, if I want to eat or not. It could be a whole day pretty easily if I wanted, and I’ll feel pretty damn sharp and good going into it.

Tobias: Yeah, I think it’s interesting to say how folks take the insights that they get from the markets which are basically, it’s just human psychology or human interaction sociability, and then apply that in their personal life, because there’s a lot of– I think William Green writes about this a little bit that there are a lot of guys who have low EQ and that seems to help them in an investing context because they’re happy to be apart from the herd. Then, I know a lot of guys, who’ve got very high self-awareness, who also seem to do quite well on the markets. The self-awareness helps them when they’re underperforming or something like that, or they’re able to understand the motivations or the movements for.

I think that someone like Bill Miller’s story is interesting. I also wasn’t quite as aware of the story as I now that have chatted to William about it, but I love that. He had that very long period of time, 15 years or something where he beat the market, and he outperformed. Then he had some years in the wilderness where he didn’t do very well, change firms, had the big position in Kodak that he bought all the way down. It’s must have been psychologically quite difficult. Then to see him sort of turn that around and the way that he’s very, very successful now, but he’s still got that same kind of stoic sort of approach to the market where it doesn’t really bother him anymore. I found that really compelling. I think that’s an important thing.

As William was talking, I was like, “This is all the stuff that I want to put in my new book, or this is the stuff that I’ve been researching for the book,” and it’s interesting to hear it in the context of many other investors, because I’m doing it explicitly in the context of Buffett, because I think that he definitely possessed some of these ideas. Yeah, there’s a lot to be having some philosophy outside of the markets that seems to be helpful. Have you read the book?

Mohnish Pabrai: Keeping Your Schedule Clear

Ian: I read the first two chapters, so I got through Mohnish and Templeton. It was interesting. I was reading about Mohnish and I remember, it brought up a memory. There was a part in the book– I should have it here. Bore everybody watching me page through a book-

Jake: [laughs]

Ian: -but there was a part in the book where he was describing Mohnish and how– He’s very guarded with his time and he’ll meet with somebody once, and then he’ll evaluate the person if they were worthwhile, or they were additive to his life or not. If they aren’t, he has no problem. Just not seeing them again. Yeah, that type of thing. He’s a clone of Buffett, so he believes in having a clear schedule, not having anything, any appointments and things like that. A friend of mine, who’s well-known investor– The summit that micro-cap club puts on, it’s usually in September in Chicago every year. It almost always coincides with Mohnish’s annual meeting he has for his fund.

Tobias: Are they on the West Coast? Where does he host that?

Ian: Usually has it in Chicago.

Jake: He has two. One in Irvine, one in Chicago.

Tobias: Okay.

Ian: One in Chicago. I thought, “Okay, well, our event’s going to be there, maybe I could just swing by and listen to it,” or whatever and so, but I never talked to Mohnish before. I had a friend of mine, who I knew him, emailed him, do an email introduction for me and he made the email introduction and then [laughs] should pull up the email. I forget exactly what it said, but he emailed me back something like, “I try to keep a clear schedule. If there’s something worthwhile to talk about, let me know.” That was like that.

Jake: [laughs]

Ian: It sat me back, I was like, “Oh, okay,” and I was like–[crosstalk]

Jake: “I don’t have anything.” [laughs]

Ian: Yeah, my first inclination was, “I’m sorry to waste your time, pal.” After a while, I sat back and reflected on that about how guarded he was at this time and I was like, “That’s pretty cool.” In some ways I could see and he realizes that probably rubs people the wrong way. It’s just how he probably has walls up around his life in his time, so he can focus on the things he wants to focus on.

Maker’s Schedule, Manager’s Schedule – Paul Graham

Tobias: Paul Graham has this great article where he talks about, I think it’s the maker calendar versus maybe the manager calendar. He says that because it takes deep work writing or something that takes, and it takes a long time to get yourself into the state where you can do it. If you’re writing, you need to read what you’ve written beforehand to get yourself into the state that you know what you’re talking about. If you’re interrupted through that process, it’s hard to get any kind of flow on. Paul Graham recommended that make a calendar should be like, “The morning is empty or the afternoon is empty,” like you need an entire block where you don’t schedule calls. I try to do that too, because I get lots of people who want– I just need 15 minutes of time, but the 15 minutes breaks up and make a block for me and so 15 minutes is as bad as an hour. I try to concentrate all the calls that I have to do in the same time that I’ve got other stuff where I’m being interrupted. I found that to be a useful thing, but there’s a lot of people who want 15 minutes and it’s just hard to give 15 to every single person.

Ian: Two hours. [laughs]

Tobias: Well, that’s the thing that you miss out on. That’s a serendipitous meeting of someone who’s interesting and can help.

Ian: I think it’s a commonality probably in a lot of people. I know a friend of mine, Yen Liow of Aravt, he’s the same way. He doesn’t schedule any meetings before noon. I’m the same way too. I’m more of a morning person, so that’s my creativity phase.

Tobias: That’s when you work.

Ian: Yeah, a little bit before the kids get up, so call it 5:00 AM to 7:00 AM, 8:00 AM. Crank a couple cups of coffee and I start writing, journaling, thinking that type of thing. Now that I have two young kids that my window is about an hour.

Tobias: Yeah.

Ian: My writing suffered. There’s not nearly as much journaling anymore. Let’s put it that way. I can certainly see why siloing those parts of the day are important, and for me too, like I get even for this podcast, same as, Jake. I haven’t eaten today. It’s 1:00 Eastern over here. Just because I feel like I’m more alert, when I do something like this, I definitely–[crosstalk]

Jake: I see that Yarak in your eyes, Ian.

Ian: That’s right. I’m ready to attack.


Tobias: Are you an intermittent faster?

Ian: I’m not, but I do enjoy denying myself of things from time to time. There’s usually a couple of months a year where I just won’t drink alcohol, just to not drink alcohol. I don’t go over and above. I don’t go extreme with it, but from time to time I like to get rid of things just to show myself that I can.

Tobias: Yeah.

Ian: Weird like that.

Tobias: You always want to do that in February because it is the shortest month. [laughs]

Jake: Yeah. [laughs] 28 days.

Ian: Last year, I did the non-drinking thing over– it was December. Over holiday. It was December and January, and I wanted to test myself because over the holidays and my birthday and New Year’s Eve. I was just–[crosstalk]

Tobias: Real denial.

Jake: Yeah.

Ian: It was tough.

Tobias: Did it work?

Ian: I made it.

Tobias: Did you lose weight? Did you notice you lose weight or anything like that?

Ian: A little bit. I definitely felt better.

Tobias: Yeah.

Ian: A lot better. It’s amazing. Just more alert I am. Why do you go back to drinking? Well, I still like to enjoy having a beer every now and then. [laughs]

Tobias: Yeah. [laughs]

Ian: It is what it is.

Tobias: I was coming up on time, amigos. Throw question and we’ll see if we can do a question. We might be just about out of time. It’s been fun having you here, Ian. You’re joining us one next week as well.

Ian: Yep, I’ll be back. I’m getting my second vaccine shot on Sunday.

Tobias: You might will be back.

Jake: You’ll be ready to go.


Ian: Exactly. I might be more lethargic. I’ll just be sitting here in a stupor. [laughs] Looking forward to it.

Tobias: That would be really fun. Look forward to seeing you again, amigos. That’s time. We’ll catch everybody next week. I’m going to try to stop broadcasting. Here we go. Let me see if I can do this.

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