During their latest episode of the VALUE: After Hours Podcast, Porter, Vinny, Taylor, and Carlisle discuss What Drives Investment Returns. Here’s an excerpt from the episode:
Jake: I saw this great chart recently that was showing– It’s called What Drives Investment Returns? It’s just like time spectrum. It was, over one quarter, it was sentiment change. One year, multiple change. 2 to 5 years, cycle and industry. 5 to 10 years, return on incremental invested capital. And then, 10 plus years, people and culture. And so, just knowing which game you’re playing on that and where are you trying to optimize your process, I think, is like half the battle of this.
Vincent: You bring up a great point for us. Management teams and really feeling uncomfortable with the management team, particularly industries where there’s not just the underlying tailwinds, makes a material difference. I could go back to– You talk about our reserves in the back of our head of names that we like. There are like four or five really world-class CEOs in financial services land in midcap bill, where if the stocks ever got to the levels, we almost just go out and buy them knowing that the management team is still there and then just pick up a phone and call them.
I’ll give you one of them. We’re not involved in it now, but PFSI is this small midcap mortgage bank, so a monoline mortgage bank. The guy who runs it is spectacular, but it’s a mortgage bank. It’s a deep cyclical. So, you just sit there, and it sits on your screen, and you just wait until it gets to evaluation. Then once it does, you start buying it and then you pick up the phone like, “It’s the Grim Reaper. I’m back.”[laughter]
Vincent: They own your stock again. But yeah, I’m a big subscriber of getting to know management teams over the course of the cycle and their actions suggesting that you really should be looking at this thing, even if it’s just on your watchlist.
Porter: That’s a great example. The stock, last year, got down to $40 as everyone’s like, “Oh, mortgage cycle is going to suck.” Of course, it’s going to suck. But at that point, we were like, “It’s just too cheap here. At $40, we bought it.” Stock went up and– If you probably talked to the CEO right now, you’d probably say, “Yeah, this is not that good and stock is $60. So, at $60, we’re not going to play. I’m not going to short it here, but I’d rather buy it back at $40.” It’s coming. [chuckles]
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