A Soulful Journey to Stellar Returns w/ Nima Shayegh (RWH064)
Summary
Core Philosophy: The guest advocates a concentrated, long-term approach focused on businesses with durable reinvestment runways and resilient economics, while ignoring macro theatrics.
Quality and Roots: Emphasis on qualitative “roots” like culture, customer alignment, and management integrity as causal drivers of future economics over easily measured “branches.”
AppFolio (APPF): Bullish case on vertical property-management software with high stickiness, continuous feature expansion, strong pricing power, and a decade of >30% annualized returns despite frequent drawdowns.
Carvana (CVNA): Example of an asymmetric opportunity in used car e-commerce, outlining execution history, market scale, pricing dynamics vs. CarMax, the 2022 collapse, and subsequent recovery potential.
Themes Highlighted: Vertical Software benefits from referenceability and workflow centrality; Used Car E-commerce leverages logistics integration, pricing, and scale effects.
Market Outlook: Volatility and drawdowns are framed as normal and even beneficial for recycling capital, reinforcing staying fully invested in high-quality compounders.
Risk/Process: Sell decisions driven by opportunity cost (“love” decisions) rather than fear-based rebalancing; structure and aligned LPs enable patience through turbulence.
Overall Perspective: Success stems from humility, alignment, and a calm, reflective process that privileges deep thinking over hyperactive trading.
Transcript
(00:00) Personally, the craft of investing was the part that I loved. That's how I wanted to spend the majority of my time. That meant that the structure had to be exceedingly simple and free from unnecessary complexity. So, today I run one portfolio. There's fewer than 10 holdings. I might find one or two new ideas in a year. (00:23) The rest of the year is spent quote unquote sharpening the axe. That simplicity gives you an enormous amount of space for reflection, to try to think clearly, space to make long-term decisions without distractions. Before we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy way to support us, and we'd really appreciate it. Thank you so much. (00:52) Hi folks, it's a great pleasure to be back with you on the Richer, Wiser, Happier podcast. The conversation you're about to hear was a total joy for me. My guest is a high-flying young hedge fund manager named Nema Shay, who's one of the most talented and thoughtful investors I've met in recent years. (01:11) In some ways, this episode is an unusual one. For one thing, Nemer is still in his 30s, which makes him possibly the youngest fund manager I featured on the podcast. Also, as you know, I've tended to interview a lot of investors who are already very well known. (01:32) People like Howard Marx, Ray Dallio, Bill Miller, Terry Smith, Rick Reer, Chris Davis, and the like. By contrast, Nema has flown almost entirely under the radar. As far as I'm aware, this is the first extensive wide-ranging interview that he's ever given. Nemo runs a relatively small hedge fund called Roomie Partners, which is named after the 13th century Persian poet and mystic Roomie. (01:54) He works on his own in California, managing money for a fairly small group of wealthy limited partners. He's not really focused on marketing or gathering a huge amount of assets. Rather, I would say he follows in the tradition of investors like Nick Sleep and K Sakaria who really were devoted entirely to the essential challenge of generating superb long-term returns. (02:20) Nema, much like them, does it by investing in a very concentrated portfolio, in his case, fewer than 10 stocks. His approach to investing also owes a great deal to his mentor, the late great Lou Simpson, who was one of the most successful stock pickers of all time. Nema spent several years working for Lou, who was hailed by Warren Buffett as one of the investment greats. (02:42) In today's episode, you'll hear a lot about what Nema learned from Lou, about the art of long-term investing. I think you'll soon see why I'm so impressed with Nema and why I regard him as one of the rising stars of the investment world. (03:03) He's not just an excellent stock picker, but also a a really interesting thinker and I regard him as unusually wise and prematurely wise both about markets and life. In any case, I hope you enjoy our conversation. Thanks so much for joining us. Hi folks, I'm absolutely delighted to welcome today's guest, Nema Shai. Nema is a very talented hedge fund manager who runs an investment firm in California called Roomie Capital Partners which is named somewhat idiosyncratically after the great 13th century Sufi poet and mystic room. (03:32) Nema is definitely one of the most thoughtful people I know in the investment world and he and I have had several fascinating conversations privately over the last few years but he typically flies under the radar so it's really a rare gift to have him on the podcast. (03:49) It took a lot of cajoling and coaxing over the last couple years to get him on the podcast and to have this opportunity to share his insights more broadly with you, our listeners and our viewers. So, Nema, it's lovely to see you. Welcome. Thanks so much for joining us. Thank you so much for the invitation. It's a real honor. It It took a while, but we're here together in the end. So, thank you. It's great to see you. (04:07) I wanted to start by asking you about your family background because I I think it's fair to say that your parents weren't yearning for you to go to Wall Street or become a kind of swaggering hedge fund manager, right? What kind of environment did you grow up in and how did it shape the person you would become? Yeah, thank you for the question. (04:27) My parents came to the US, they came to Southern California following the Iranian revolution and like many Persian families of that era, they basically had to come here and start from scratch. I was the first generation to be born and raised in the US. You know, my family is full of intellectual curiosity. Many people were educators. (04:54) Multiple people have authored books. You know, my family has a handful of really talented musicians. Almost no one, very few people in my family were all that interested in business. You know, dinner conversations in my house would sort of migrate to philosophy or classical music, definitely not interest rates or the stock market. So, business was never really part of my orbit whatsoever. (05:20) And I think that the initial spark of interest in investing was sort of born out of insecurity. If anything, I remember seeing how both the dot bust and the 2008 financial crisis impacted so many people around me, people that I loved. And there's this particular discomfort when you have no understanding for something like that which is happening and sort of reshaping society. you don't know why it happened. (05:50) You don't know what's going to happen and really having just no sense. And I sort of made it a priority to learn a little more about this this world. And as I started to learn more, it really felt like this very natural extension of my temperament and interests. And ironically, it's not all that different from those same sort of dinner conversations that we were having, which on the surface may have been about literature or poetry or something like that. (06:22) But really, it was about observing human nature and understanding human psychology and sort of seeking the essence of things. What's the nature of things? You know, trying to figure out what's really going on. Now, at the same time, in Persian culture, there's this running joke that you can be anything you want as a profession. (06:41) anything you want, any kind of doctor or engineer that your heart desires. And so when I decided to become an investor, there really wasn't much precedent for that. I would tell that to someone in my circle and the response would be something like, "So you want to be like a bank teller?" And I would say, "No, you know, I want to invest in the stock market. (07:04) " And you could just see on their face some concern like I had just confessed to like a gambling problem. But from the very beginning, investing was it felt like the ultimate kind of intellectual adventure. It was this microcosm where you could practice your discernment and your creativity and your temperament and your reasoning and you got this objective feedback loop which was so appealing. It was incredible. (07:29) It was sort of an amazing thing that you could professionally pursue your natural curiosity. So, we were chatting right before this conversation about your high school years and that you were a somewhat eccentric high school student and already very independent spirited. Can you talk a little bit about that because it seems like in some way that's something that all of the best investors have in common is this this kind of willingness to diverge from everybody else. (08:00) Yeah, it's a little embarrassing when I reflect on it now, but a little funny as well. When I was thinking about what led me to investing, I was kind of playing back all of these different parts of my life. And one of the commonalities is that it was always really difficult for me to buy into something that my heart wasn't in it fully. (08:21) And I remember on many occasions in high school, you know, once you turned 18, I learned that you could actually just go sign yourself out and you didn't need a parent note anymore. You could just say the reason you were leaving and sign your name and and leave. And so there were many occasions where I would not be all that interested in whatever it was that we were studying and I would sign myself out and I would ditch school. (08:44) And ironically, it wasn't that I would ditch school and go smoke cigarettes on the side of the building. No, I would go to Barnes & Noble and read something much more, you know, fascinating. And I think that that natural inclination to go deep in areas that I was very interested in was a bit of a foreshadowing to investing for sure. It's funny, I I was pretty similar at high school. (09:10) I I went to eaten, right, where, you know, it was very very disciplined. Like if you if you showed up late, you were in trouble and if your work wasn't good, you got literally what was called a rip. They would rip the piece of paper and you would have to show your homework to your housemaster. And I in my last year, I was only taking three subjects like English, Spanish, and history. (09:27) And I just decided my history teacher was boring, so I didn't show up to history anymore. I just decided I was going to teach myself. And in some weird way, as a journalist, as a writer, that's a really useful characteristic. just say no, I'm going off and doing my own thing. And so I I think it's one reason actually why I was really fascinated by great investors is there is an element of kind of diverging from the crowd and deciding no, I'm just going to crack the code for myself. You guys just make more money than we do (09:53) as writers. U I'm not sure, but I think it's definitely true that this willingness to think for yourself was definitely hammered into me as a child. Not so much with investing, for sure, but this tendency to not accept what is the commonly held view or the mainstream view or what the news media is talking about all the time or the narrative, but to try to figure out what's actually going on. (10:23) And my parents certainly instilled that in me pretty early. And you went to UCLA and then studied mathematics and economics. So in some way there was a part of you that was kind of very left hemisphere oriented as you've explained it to me in the past and sort of convinced that if you could master things like maths and statistics and economics, you'd have these skill sets to understand reality. (10:49) And my sense is that you gradually came to realize that actually comfort in numbers and logical reasoning and the like was not going to cut it. Can you talk a little bit about that evolution? The way that it's actually come together for me is this idea of branches and roots. Roomie has this quote that I love where he says, "Maybe you're searching among the branches for what only appears in the roots." And I think that that quote has a lot of significance for investors. (11:22) And when I just reflect on the investment industry broadly, I noticed it both in myself, but I noticed it in the industry in general. And it's this idea that if you can just get more precise, if you can quantify reality, if you can sort of measure things, the industry today has swung so far in the direction of quantification. (11:47) And you see it in expert calls and credit card data and web scraping technology. We have these extremely powerful tools today that can measure and try to predict what's going on. But it's still the case, as it's been for much of the last century, that almost no one compounds capital at very high returns for all that long. (12:11) despite the fancy tools, despite, you know, having tons of incentives, despite working really hard, it's just still very difficult. And so I reflect on this and I wonder, what is it that we're missing? What is it that we're missing? What is it that I'm missing? because I started out as being really technical and really focused on mathematics and quantification and everything is about reason and science and sure but it felt like I was just lost in the branches and I missed the roots. (12:41) What are the branches and roots as it relates to investing? So the branches are what everyone can see and measure. It's last quarter's margins. It's this week's unit growth. It's next month's inflation print. You know, it's all of these quantifiable pieces of information that are devoid of reality, devoid of context. And so, what would be the roots? The roots of a business are all of these qualitative forces that are causal to the future economics of a business. (13:11) You know, Lou Simpson used to always say that all investing is figuring out the future economics of a business. And that statement might sound easy enough to just blow right past it, but it actually creates an extraordinarily high bar. Most investors tend to fixate on the current economics, the current branches. They fixate on the present reality. (13:36) But every once in a while, you can get a really deep sense for what the future economics of a business might be. And in those cases, it's usually the case that you have a sense for the roots. And so, what are the roots? The roots could be something like the motivation of management, the culture of the company, the quality of the product, the alignment with customers. (13:54) None of that shows up on any spreadsheet. You can't model it, you can't quantify it, but they're actually the most real parts of a business. So the question to me became, if the roots are what truly matter, why isn't everyone focused on them? And the challenge from my perspective and actually the opportunity is that the roots require some intuition. (14:17) So it wasn't all about getting better at Excel and suggesting that the stock market investing in the stock market requires intuition I think makes many people uncomfortable because it feels subjective and it feels squishy and it feels you know very hard to communicate. But it's precisely those qualitative invisible factors that live upstream from the financials that everyone else is sort of focused on. (14:42) As you mentioned, you wrote this piece, Roots and Branches, and I I think it was originally a speech that you gave at Columbia, maybe in our friend Chris Beg's class in 2023, but then it became a shareholder letter of yours. So, I I've read it in both places. (15:00) And um you quoted in there I think Robert Persik talking about pre-intellectual awareness and you talked about this ability to apprehend essence being supraational. Can you talk a little bit about that sense that it's kind of suprational? There's something pre-intellectual in it. It's something I sometimes have talked about with Chris Beg as well that he has this sense that we have an embodied ability to tell whether something is true or not. (15:28) like when you meet a CEO and you're trying to decide, do I trust this person? Is this person actually honorable or not? Yes, absolutely. I think that in most cases the roots of a business are too hard to tell. It's not obvious. And I think the first thing to note is that you only really want to swing when it's pretty obvious. (15:51) In Buffett's parliament, you know, there's no called strikes, but there are some cases where you can know with some confidence what the roots of a business are. And in Persian, we have this very old expression that is probably more than a thousand years old. And it is cheshmed, which literally translates to eye of the heart. (16:15) And it's this idea that the heart is more than merely this organ that pumps our blood. It's actually a faculty of perception and it's capable of grasping non-material truths. And whether we like it or not, we live in a reality that's qualitative. And seeing with a qualitative perspective is so important, I found in investing. (16:43) And in terms of the pre-intellectual awareness, sometimes intuition is framed as this sort of superpower that you have to develop. And I think that it's less about developing or sort of achieving a superpower and more about clearing away everything that's muddying or perception. I truly believe that all human beings have this capability to discern and perceive non-material qualitative truths. (17:06) These are things like trustworthiness and sincerity and ambition and beauty. These are qualities that you can't model them and you can't quantify them. You can't measure them, but there's something pre-intellectual that can actually grasp and recognize those qualities when you're in the face of them. (17:29) You had a lovely example of this when we spoke a couple of weeks ago where you were talking about the experience of, I think, going into the mall of a parking lot in a Tesla in like the full autonomous driving mode. Can you talk about that a little bit? Yeah, I mean this is actually quite timely because or Tesla got an update just this morning and I was out, you know, testing it. It's version 414. (17:52) 2 which is the latest update that the company has rolled out. It's hard to explain what makes this product special, but overwhelmingly when I take my in-laws for a ride or my parents or friends who are not familiar, there's this kind of moment of awe. And the example that I was talking about before was that we were driving to Costco one evening and you know I click the button in the car and it's navigating through all of these construction zones and it pulls over for emergency vehicles and it gets on the highway and it gets off the highway. I haven't touched the steering wheel or pedals the whole ride. And then (18:32) it pulls into the parking lot of Costco and there's plenty of open spaces, but it decides I'm going to skip these open spaces and I'm going to go a little further and see if I can find an even better spot. And then it just pulls in perfectly and it stops. It finds its own parking spot. (18:49) And I'm thinking this is almost a miracle that this exists. And very few people I think understand the power of that technology without having felt had a direct perception of it themselves. And I think that that is one example of coming face to face with quality. There's plenty of other examples. (19:12) I'm sure the first time that we all touched an iPhone, we thought, "This is some incredible black magic." and the first time you got same day delivery from Amazon where you order a book and it shows up to your doorstep in two hours. You know, some of these customer experiences, it's worth just listening to them because they tell you something about the quality of what's leading to that experience. (19:37) You had a lovely word for it that you mentioned a while back that you and a friend, an investor friend had talked about the quality of blowness. Yes. Yes. blown away is that that experience that I'm referring to and unfortunately it's not an industry term that you can quantify one out of 10 but I think it tells you a lot about the quality of something that you're encountering and it's anything as simple as you know your favorite restaurant you have a perception that tells you when the quality of that restaurant has either improved or deteriorated there's something within you that knows and often times it's emotional it's physiological we all have this commonly (20:15) held dogma that you're supposed to turn off your emotions when you're an investor and I'm not sure that that's that's always right. Yeah. And it it's very related to both Robert Persig and Ian McGill talking about left brain. (20:36) There's a there's a lovely thing I think you've quoted in one of your letters where Persig writes about dynamic quality and he describes it as the pre-intellectual cutting edge of reality. So I I think we have this sense this sense that there's something there where you know like my friend the endow would say you know that quality has its own frequency like you can tell when you're in the presence of something usually that's extraordinarily high quality but yeah it's it's hard to explain it in spreadsheet terms and and there's something lovely I think you once quoted something from Roomie to me where he said something along the lines of the the soul has been given its own (21:09) ears is to hear things that the mind does not understand. And so it's it's kind of hard, right? It's like in the same way that Nick sleep and quesaria Zach were becoming obsessed with Persig and I I think I wrote in my chapter about them that you know on Wall Street it wasn't really popular to be having all this mystical mumbo jumbo about motorcycles and maintenance and the like. (21:34) And yet there's something real there that tends to be I think underestimated by very leftrain, very logical, very numbers driven people on Wall Street. And I think that there's even more to that. You know, this idea that we should shut off our emotions as investors, I think is a mistake. (22:01) In my judgment, it's not so much emotions per se that get us into trouble. I think it may be the human ego that really gets us into trouble. And there's a subtle difference, right? You know, the human ego is like this armor that we build that tries to protect us against the uncertainties of life. It's the part of us that operates from fear. (22:25) It's the part of us that, you know, when we realize how little we actually control in life, we develop this ego to try to protect ourselves. It's sort of self-preservation. And when we make investment decisions from that place, of course, we will make terrible mistakes because the ego is what distorts our perception. We already have this capability to discern quality. (22:49) We have that cheshmade, but we develop this egoic perception that kind of muddies the mirror of being able to see clearly. It distorts our perception. And when I look around our little microcosm of investing, I see this ego showing up all over the place. You know, it could come in the form of self-preservation. For example, I can't own that because it'll make it harder to raise money. (23:13) You know, you hear that all the time. or I can't sell this losing position because it will be admitting to my clients that I made a mistake. And the ego is unable to admit error. The ego thinks it already knows. So then the behavior becomes, well, I'm just going to hold on to this losing position even though I know, you know, it's not the right thing to do. (23:37) And I think another way that this egoic perspective shows up in the investment world is this illusion of control. And I'm as guilty of this as anyone. You know, early on as an investor, it was very natural to think if you just build that perfect spreadsheet or if you make the hundth customer call, then you're getting closer to reality. (23:59) And we usually have to learn the hard way that reality seldom bends to the whims of our spreadsheet. And all that activity may be simply masking our inability to just say, "I don't know what's going to happen. the map is not the territory. And you know, by contrast, emotion can be incredibly beneficial to investors. It might be blasphemous to say, but I don't think investors are using their emotions enough. (24:29) You know, in my experience, when you discern whether the CEO sitting across from you is trustworthy or not, or whether you've experienced the craftsmanship of a product, these are all pre-intellectual. there's a direct perception and you sort of know it when you see it. Even subtle emotions can tell you something important. (24:54) What I mean by that is when I reflect on my ownership of a business, right? Like you've owned a company for a few years. When you reflect on just how that feels within you, that can tell you a lot. When you own something for a few years and you find yourself becoming more and more impressed with the business as time has gone on, that's a signpost by itself because the normal experience is that you own something for a few years and the mediocrity of it just becomes more and more evident and it just took you a while to figure it out. (25:23) So when you notice that you're actually becoming more and more impressed and you notice that emotion within yourself, that is something to listen to. I think I want to go back in time a little bit in the chronology of your career because um in some ways you know you you started out in a very different place in a very different kind of environment where you came out of college having left UCLA and you got hired at PIMCO which is a very powerful firm with enormous amounts of money under management. (25:51) And I think at the time 2014 to 16 when you were there it was the world's biggest bond firm and had been co-ounded famously by Bill Gross clearly a brilliant very eccentrically talented difficult demanding guy by his own admission. I was reading an article about him in the um in the Wall Street Journal today from 2014 co-written by Gregory Zukman and he quoted gross saying sometimes people will say gross is too challenging and maybe so I would say if you think I'm challenging now you should have seen me 20 years ago so it's a kind of famously hard charging intense place not the sort (26:26) of place where you would talk about your emotions and your intuition and about room and the like and in Zukman's article he was talking about how people on the invest team there would literally arrive at 4:30 a.m. and stay for 12, 13 hours or more. (26:46) What was it like as a 22-year-old kind of new to the business, a kind of hungry, driven, smart young investor, and this is sort of so it's so not like a I mean, obviously they're brilliantly clever, highly educated people, but it wasn't a sort of soulful, ruminative, contemplative kind of environment. And it was sort of the opposite. Yes. You know, Roomie actually has a quote which is that all things are known through their opposites. (27:11) So I think in some ways that experience working at a place with that sort of intensity was what clarified and sort of gave me a sense for what I wanted to be doing long term. And you know the experience of PIMCO I was very lucky because I was hired there directly out of undergrad. So I was the youngest analyst on the team by by some years. (27:32) And it was this intense environment. And you're right, we would get to the office 4:45, 5:00 a.m. You would have a suit and tie on. It's usually dark when you arrive in the office. It's usually dark when you leave the office. There's this culture that you're kind of expected to have a smart sounding cogent opinion on every little economic development, every little piece of news that's related to one of your companies. (28:05) And I was so lucky to have had that kind of experience where you essentially have an ability to fly around the country to meet with executive teams as a 22-year-old to get access to any piece of research. Former central bankers would come and advise us on the economy. And so you would think that we had every possible resource. (28:26) We had PhD computer scientists that would come, you know, run correlations on different asset classes. And we had hundreds of analysts that were flying around the country to meet with companies and form opinions on specific securities. You would think that we would have every possible resource there is to compound capital at extremely high rates. (28:47) And yet I think six months in I was reflecting on this and it was a little confusing to me why people like Warren Buffett and Charlie Mer and Louis Simpson and the like were able to compound capital at 20 plus% for decades despite being essentially a person in a room without a computer. Whereas we're sitting here in our very large offices working really hard. (29:13) you know, cortisol is in the air with great pedigrees and our taon and we're compounding at, you know, basis points above the benchmark. Not to say that that's not an admirable thing to do, but it just felt like I was missing something in some ways. Now, I was incredibly lucky that there were certain people at PIMCO that took an interest in my development and they really wanted to teach me how to think about things the right way. (29:38) And so from that perspective, it was an incredible learning experience and one that I wouldn't trade for anything. There was a lovely line I think in one of your shareholder letters. I just read all of your shareholder letters over the last couple of days and you wrote somewhere, why in this age of information overload where data gushes like a digital waterfall? Is investment success still so elusive? Why does Warren Buffett with his egg mcmuffins and bridge games outperform the armies of well-paid analysts with six monitors each? which I think gets at this question that you were wrestling with at (30:08) PIMCO. Like there's something really strange about this game, right? That as you put it in that shareholder letter, you have these web scrapers kind of predicting weekly revenues or algorithms discerning the emotions of people's posts on X and you have every tool and yet there's something that's missing. (30:27) And we'll we'll talk in a minute about L Simpson which is sort of the opposite of that. But what did you conclude about why these incredibly smart people who in many cases I mean literally I I think Muhammad El Arian was paid over $100 million a year. Bill Gross was paid over $200 million a year. I mean these were the smartest incredibly intense people with every resource. (30:51) Why isn't that reflected in outrageous returns like Warren? I think it's a complex problem. When I reflect on what is the root what's the root quality going on here I think a lot of it has to do with risk aversion and that's across the spectrum that's not just the investment products that we were managing it actually goes into the institutional level it goes to many of the people overseeing these institutions there is very little tolerance for volatility no one wants to look wrong for any short period of time even if it means that (31:26) your longerterm results will be much better. There's very little tolerance for discomfort of any kind. And so the bias and the incentive structure is to just operate in a way that will keep the assets. And if that means, you know, slightly less performance over time, I think that that's a trade-off that this industry has has made for better or worse. For better, you know, it it allows for people with a different orientation to have better results. (31:57) Yeah. You mentioned somewhere that when you look at the history of investing, you see that there were these very long periods of outperformance for a lot of the great investors, you know, which are very uncomfortable, right? They're emotionally very uncomfortable, you know, whether it was John Mayn Arcanes or Ben Graham or Warren and Charlie. (32:21) Can you talk a little about that because I think I think that's one of the things that makes outperformance so difficult is as as Monai once said to me you know the most in the most important quality of a great investor is the ability to take pain. Yes. I think that studying investment history at any level makes it clear that over the course of a multi-deade investment journey, there will be these large periods of underperformance and large declines inside of those periods. (32:53) Just glancing casually at some of the notable investment records of history, this just becomes quite obvious. You could look at the 1930s and great investors like Ben Graham's fund I think declined by 70%. And he was still making distributions out of his fund. (33:12) And so I think the starting capital was down maybe 80%. By the end the personal portfolio of John Maynard Kes I think declined by 80% in the 1930s and the portfolio that he was managing at Cambridge declined by like half. You could go to the 1970s where Charlie Munger had 80% of his capital in two stocks. It was Blue Chip Stamps and the New America Fund and they were both very cheap stocks. (33:39) But his portfolio declined by more than half in 2 years. In those two years alone made the prior seven years of returns I think something like zero cumulatively. Even Shelby Davis, I was reading recently, I think his personal portfolio in the 1970s declined by 60% because he had margin debt at that time. (34:04) You know, in the last few years of the 1990s, Lou Simpson himself was 50 or 60 points behind the S&P 500. And that little stretch of performance actually wiped out like a decade of outperformance against the market. And of course, you know, Berkshire Hathway itself has declined by 50% multiple times over the years. So, the list goes on and on. (34:28) You know, I'm kind of a a nerd in looking at these old old records because they fascinate me. But we know we know that these periods of extreme volatility and underperformance are just very normal. So, the question then becomes given that reality, how should you structure your environment for that inevitability? How should you structure your life and your business and your environment? And what I found is that when you have a truly long-term orientation, you start to just have to surrender in some ways. (35:00) You simply stop engaging with certain kinds of questions. For example, will there be a recession next year? Is the market about to crash? Is AI a big bubble that's about to pop? Is the US fiscal situation unsustainable and going to lead to a crisis at some point? These are all very interesting questions, but over a long time horizon, they just don't matter that much. (35:27) And spending a lot of time sort of ruminating on these kinds of questions has been an expensive distraction for many people over many years. As far as I'm concerned, there will be severe bare markets over time, and there might be even one or two every decade. I have found that it's not worth having a lot of anxiety about when those periods come. It's much better to just know that they will come. (35:52) There's a story about Lou Simpson that really was instructive to me about this and it was his experience in 1987. So he went into the 1987 period thinking that stocks were very overvalued and I think many smart people at that time believed that stocks were very overvalued. He couldn't find anything to do. (36:17) So he actually took his portfolio to 50% cash early in 1987. And you might think this is incredible. This is you know clairvoyance. What amazing market timing. And when he reflects on that period, he sold stocks at the highs and paid his taxes. And then the market crashed and he sort of deployed a little more capital, but the market snapped back so quickly that he didn't deploy his capital fast enough. (36:48) And so he made the right decision at the highs, but didn't make the right decision at the bottom. And this to me was very instructive because you have to make multiple decisions correctly to really take advantage. And I think in his estimation, he thinks that he added some value net of all of that, but it may have just been better to remain fully invested and just roll with the punches. And so that's kind of the approach that I've taken to thinking about this. (37:11) Just to close the loop on this idea of your willingness to ignore macroeconomic prediction, there were a couple of lines I really like from your shareholder letters that I wanted to highlight. One of them from a recent shareholder letter. who said, "One of the enduring amusements of this profession is how reliably investors are shaken by what is in fact a recurring pattern, right? This pattern of of market meltdowns and and dips and predictions of gloom and doom." And you said, "What if we simply chose (37:37) not to partake in the theatrics?" And I think that's a that's a really important question just this decision as you put it. It's a liberating question to to say no I I'm willing to free myself from geopolitics and macroeconomics and all all of that. (37:55) And what you said which I'm quoting because I think it distills an enormous amount of practical wisdom. You said we are focused on owning individual businesses whose long-term reinvestment dynamics are resilient to changes in macroeconomic conditions. Do you want to comment on that in any way? I think it gets at such a profound and essential truth about investing that if you're you can make this very conscious decision just to focus on businesses that are resilient to changes in macroeconomics rather than saying I'm going to try to predict what's going to happen. Yeah. I (38:26) mean I think that this work is it's almost unnervingly simple. You know the investment business is really quite simple and at the end of the day it's about trying to understand the economic reality of a business and as I said Lou used to say all the time that it's about understanding the future economics of a business. (38:54) Now to the extent that the macroeconomy is going to have a huge impact on the future economics of this business then it may not be a great business. To the extent that you know going into a recession is going to hurt the business or to the extent that there will be competitive onslaught at some point or you know a product might fail for example. Things can happen in businesses all the time. (39:17) And I think the idea is to own specific businesses that are resilient despite the inevitable sort of turbulence that life presents. And I think it really simplifies life to opt out of a lot of these things that are outside of our control. I want to go back and talk in in much more detail about Lou Simpson who's clearly been in many ways the formative influence in your life as an investor. (39:44) And so you moved to Naples, Florida in um I think 2016 and worked until 2019 with Lou at his firm SQ Advisers. And for people who don't know, who've just heard us mentioning him, Lou was head of investments for Geico, this auto insurance company that's now owned by Burkshire Hathaway completely. (40:11) And he was there for 31 years, I think, from 1979 to 2010, and crushed the market over that period by a huge margin. You recommended to me a book that I I read a chapter on Lou yesterday, a book by your friend Alan Banello on concentrated investing where he talks about the circumstances when Buffett first hired him. (40:29) Um when Buffett said after meeting him asked him about his personal portfolio and then after meeting him said something like stop the music we found our guy and he later said simply put Lou is one of the investment greats. This is from a letter I think that Buffett wrote in 2010. Tell us about what it was like when you first met Lou because in some ways the culture that he created was diametrically the opposite of the culture that you had seen at PIMCO. And this isn't a criticism of Pimco. It's just he embodied something very very different. (41:04) Every time I think of Lou, the memory that always comes is the first time that we met. And I was in my mid20s at the time and you know as you mentioned I was working at a more or less traditional investment firm which was Pimco. And I remember the energy that I carried with me at my first job was this sort of over analytical habit. I had this formality, this intensity. (41:33) And when I arrived in Chicago to meet with Lou for the first time, I carried a lot of that energy with me. The context of our meeting was actually to discuss a company that I thought he might be interested in. And in my mind, I imagined this very intimidating investment legend was going to rigorously cross-examine, you know, every little detail of my investment thesis. (42:01) And so mostly out of insecurity, I lugged along with me to Chicago this very thick stack of research material with charts and valuations and and everything. You know, I was ready. I was sort of ready to go to battle intellectually speaking. And I remember stepping into the elevator with my suit and tie on and you know, your heart's beating a little faster than usual and I lugged along my data points with me and my my thick stack of research. (42:28) And it's one of those long elevator rides of where your ears are sort of popping along the way. And I remember thinking I'm going to be met by an assistant or ushered into some kind of waiting area. And instead, you know, the doors open and it's just Lou himself standing in the hallway, very unassuming, no formality, no pretention. (42:52) And he led me into an office that was really the polar opposite of the office that I had just been in, you know, the day before. There were no Bloomberg terminals. There was no financial TV on. It was like the library of a scholar, you know, a comfortable chair, couple piles of reading material and this just very calm presence that immediately struck me. (43:18) And he looked at me as he led me inside and he he said, you know, make yourself at home. Let me make you a coffee. And I remember that that line just sort of stopped me in my tracks because here was someone who had compounded capital at worldclass rates for decades. Someone who Warren Buffett had praised many times over the years and someone that I had been studying from afar since college. (43:43) You know, my idea of passing time between classes in college was to pull up an old Berkshire Hathaway 13F. And in some of those early years, you could actually scan down and see which holdings belong to Lou and which holdings belong to Warren. And so I would sit there at the UCLA coffee shop trying to reverse engineer why Lou bought Freddy Mack or Moody's, why he bought Nike in the early 90s and held it for 20 years or more. (44:09) And now here he was, this person behind these decisions, stepping away to make coffee for a probably visibly nervous 20-some year old kid who hadn't done anything yet and who was so early in his compounding journey. And I remember thinking to myself, you know, I should be making you the coffee. (44:28) And when he returned, he didn't launch into some kind of monologue. He didn't try to assert how smart he was. He would ask these questions with this very sincere curiosity and it was this remarkable receptiveness for someone with his experience and with his reputation. And you know that first meeting left such a deep imprint on me because it kind of opened a window that there was just a different way of being in this work. (44:56) It didn't have to be this hard charging zero someum way of operating. This kind of hyperactive way of operating. Lou carried himself with remarkably little ego. And that was so different from the archetype of person that you typically run into in the investment world. (45:16) You know, the normal experience is that you come across folks who are very bright, very hardworking, but for whatever reason, they insist on puffing up their accomplishments and telling you all about their most recent investment win and their assets under management and all this sort of thing. And Lou was just so different from this. (45:36) Some of his most extraordinary achievements would just sort of slip out accidentally after having known him for years. He seemed deliberately uninterested in indulging that kind of self- congratulatory aspect of himself. He was quick to say, "I don't know. (45:57) " You know, when someone would disagree with him or challenge one of his beliefs on a company, he wouldn't get defensive. He would simply say, "Yeah, you know, maybe you're right. I should think about that more." And I truly believe that his humility was, you know, his lack of egoism was the reason why he was a good investor, was a big reason why he was a good investor because it gave him a clearer perception of reality. (46:21) The one conversation that I ever had with him, I think I may have told you this before, this was when I had a Zoom breakfast with Charlie Mer and a few people like Lou were on the call and Lou already passed in 2022 was already obviously pretty unwell, I think. (46:41) And he was so lovely on the call and it was a very it was a very strange call because I was told, "Oh, our homework is going to be to study your book, Rachel Wiseer, and then we'll discuss it." So, I'm in this sort of embarrassing position where it's like, "Oh, here I am. I'm going to teach Lou and Charlie about how to invest. (46:58) And um there was a moment where someone turn you know Charlie was very dominant through the conversation and then someone turned to Lou and said what do you think of the book Lou? And Lou was really lovely about it like very very polite and charming and said how helpful it is to have stories of great investors like because we learn through stories. And then we were talking about Alibaba, which he and Charlie had just been buying. And that, you know, Charlie had been saying, "Oh, I'm all in. (47:16) " And Lou said something like, "Well, I just bought it yesterday, so it's bound to go down 50% immediately." And there was something sort of so self-deprecating about it. Like he wasn't there to tell you I just bought the, you know, and I asked him why why did you buy it? And he was saying, well, you know, it's a it's a dominant business in a fast growing country and it's extraordinarily cheap. But it was funny because it did go down 50%. (47:42) And um in a way it was like very typical of him that he was so humble and self-deprecating and in a way maybe it was also a recognition of the fact this is a really hard game. You are going to go through these periods where just stuff happens. Yeah. Absolutely. You know, it brings to mind a friend of mine offered me a definition of humility that I think is remarkably precise. (48:08) I think it's the best definition of humility that exists. He said that humility is the awareness. It's your awareness of your utter dependence on all that exists and your interdependence on everyone around you. And the opposite of humility, of course, is like a self-centered perspective. To think that we did it all alone, that we're the ones in control. (48:34) That clouds your perception. It distorts your judgment. And this dynamic was so clear when Lou talked about his portfolio. When everyone else would pitch their great ideas, Lou would say things like, you know, I think the portfolio is just okay. Maybe it's a little tired. And this is, you know, this is one of the best investors of all time and he's just sort of hoham about his portfolio. (48:59) Whereas if you went into the Monday morning meeting of many large investment firms, you would hear people pounding the table on probably mediocre ideas in many cases. And I think there's something that's objective about his humility. It allows you to see things clearly. And his humility wasn't performative. It wasn't like this inauthentic humble bragging. (49:19) It came from a real awareness in how little we actually control. And I think Buffett's line about the ovarian lottery, I think, captures that spirit so well. We all like to believe that we are the sole cause of our own success that things are so deterministic. (49:38) But in truth, you know, so much of anything that goes right in life in investing is really just the beneficence of life. There's a really lovely line also in Alan Banella's book that I remember seeing before many years ago from Lou where he said we are sort of the polar opposites of a lot of investors. We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting and not a lot of thinking. (50:04) And I'm wondering what you learned from him about the importance of detaching ourselves from the noise and distractions and the kind of casino element of Wall Street. Yes. Lou lived a pretty balanced life in the years that I knew him. He would read broadly. He had this amazing sense of humor. You know, he would make it a priority to exercise. In the mornings, he would go for a long walk or he would go for a swim. (50:31) I remember on one occasion it was definitely in the middle of the week and I think the market was open and I think our portfolio was probably down quite a bit that day and he just called me up and he said you know there's this new exhibition at MoMA in Chicago do you want to go with me and I said great and we just spent the afternoon wandering around you know looking at art and you know this is this is very different from the kind of experience that you might have at many many investment firms. You know, I won't claim to have all the answers about this, but what I do know (51:04) is that if you intend to have a long-term investment journey and you have surrendered to a lot of this volatility, I know that if you're constantly sprinting and you're always wired and you're reactive to every little data point and you're just staring at ticks on a screen, maybe that will help your results for the next month or two months or six months, but over the long term, it will completely destroy your It will destroy your physical and mental health. It will strain your relationships. And ironically, (51:36) it will make the investment decisions worse at some point. And it's sort of perverse that the harder you push, the harder you try at investing, the shorter your runway. And in the end, compounding is all about the number of years. (51:54) And so, I think creating space in your life is something that I learned from him and something that's invaluable. So much of modern investing is preparing a memo or updating a model. You know, there's so much reactivity. And to his point, you know, so little time is intentionally devoted to reflection. And it's not intuitive for most people to think that going for a walk may be better for your portfolio than, you know, adding another scenario to your Excel model. (52:25) Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our tip mastermind community, a private group designed for serious investors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. People who understand your journey and can help you grow. (52:44) Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next dog pick, but also sharing lessons on how to live a good life. We certainly do not have all the answers, but many members have likely face similar challenges to yours. (53:05) And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. (53:27) We're capping the group at 150 members, and we're looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevesspodcast.com/mastermind. That's thespodcast.com/mastermind. or feel free to email me directly at clay@theinvestorspodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. (54:01) Each week, Shawn and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, AutoZone, and Airbnb. (54:20) And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all the aspects of a business from an investment perspective. Go follow the Intrinsic Value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (54:44) You've mentioned in the past that sometimes your best investment insights feel like these gifts of serendipity. They're not always the result of mechanical rigor. But I remember also you talking to me about the importance of actually kind of structuring your life in a very conscious way to give yourself this kind of spaciousness and lack of noise. (55:07) And you were you were saying that it's it's not just how you schedule your day and how much meditation you do and the like. It's also your choice of who your limited partners are and your fund and who's on your team if you have a team or the kind of businesses you hold. Can you talk a little bit about that? Because it seems to me this is such an important part of actually creating a kind of countercultural lifestyle that gives you a sort of unexpected edge in investing. (55:36) Yes, edge is a funny concept. Maybe we talk about another time. My view is that whatever you build, whether it's an investment partnership or anything else, it ultimately lives downstream from how you choose to live and the values that inform that. (56:01) And so I have always tried to ask myself, what are you actually optimizing for? Because if what I'm doing is not in alignment with the answer, my personality is such that I will not last very long. I'll start to feel that imbalance internally somewhere, even physiologically. And in investing in particular, the power of compounding reveals itself when you stay in the game for a really long time. (56:25) Longevity carries most of the freight here. So for me, the first principle in deciding what to do was to build the house that you want to live in long term. You know, that was really critical. And I can't tell you the number of times I've seen someone very talented, you know, lovely person build this sprawling investment business only to privately resent a lot of the complexity that comes along with it. (56:52) Less time becomes devoted to the craft of investing. More time is spent managing people or fundraising or doing administrative tasks. For me personally, the craft of investing was the part that I loved. That's how I wanted to spend the majority of my time. And that meant that the structure had to be exceedingly simple and free from unnecessary complexity. (57:22) The work had to fit my temperament and you know it had to sort of match your energy in some sense. So today I run one portfolio. There's fewer than 10 holdings. I might find one or two new ideas in a year. the rest of the year is spent quote unquote sharpening the axe. You know, that simplicity gives you an enormous amount of space for reflection, to try to think clearly, space to make long-term decisions without distractions, space to have close relationships with every one of partners. In more than six years, we haven't had a single redemption, which I think is some kind of record for a (58:00) strategy that's sort of flinging up and down depending on the year. But it's really a reflection of having found, you know, so grateful to have found partners who are truly high quality and are aligned in, you know, our goals and in our thinking. There's always an inherent tension, though. (58:19) It's something that I've been wrestling with for a long time and it's this idea that if you can help more people, of course, that's intrinsically better. It's something I spend so much time wrestling with because what greater fulfillment is it than to be of service to people that you have real relationships with? It's like the more the marrier. But there's always this counterbalance to be mindful of. (58:38) And I don't think that you can scale close real relationships infinitely. The moment that you stretch something beyond its natural equilibrium, I think it exacts a payment from some part of your life, whether it's your work, whether it's your personal life. (58:58) And stretching something can dilute what makes it work in the first place. And it's something that I just continue to think about. when you founded Roomie Capital Partners, I I think it was October 2019, so it's probably a few months after SQ Advisor closed or after Lou decided to close the firm and and retire. Do you remember his advice to you? Cuz it seems like in some I mean I remember reading that he typically had something like 8 to 15 stocks I think at Geico. (59:30) What did he advise you as you launched your career as a fund manager? You know, his main advice to me was to focus on producing results rather than doing a lot of the things that you're told you should be doing, like getting a fancy office and putting together a pitch deck and running around and trying to raise money from all these people. (59:53) And I am so grateful that he gave me that advice because the first couple of years gave me so much space that I think benefited both the process but also the relationships with the people that did invest with me from day one. I started Roomie not too long before CO and not too long before another decline in 2022. (1:00:20) And the experience of these these periods were so serene. You know, not to say that it's always comfortable to watch your account balances declining, but it was about as easy as you might expect because you felt this alignment across the ecosystem that just made things much more seamless. And I suspect if I would have raised a lot of institutional capital out of the gate that probably some percentage of that capital would have left during one or these periods. And maybe that experience would have been, you know, uncomfortable and you would have felt like you (1:00:50) disappointed people and that sort of thing. And I think his advice to just focus on producing a good outcome for the people who trust you was was wise. That word alignment seems very central to you. Right. (1:01:11) I was looking the other day at the founding principles of Roomie Partners and and you talked about a a culture rooted in in alignment and elsewhere you write about investing in a a small number of exceptional businesses whose leaders are similarly driven by a core sense of alignment. I think you're very aligned in your fee structure as well, right? Like you have a small management fee that gets smaller as you get more assets under management. (1:01:37) So the shareholders benefit from the growth in scale and you get an incentive allocation. Basically if you beat a 5% annual hurdle the compound so it's cumulative. So if you if you fall behind it becomes harder and harder to catch up with the rabbit. And there's a lovely line that you repeat a lot in your shareholders where you say I'm wholly uninterested in being rewarded for simply existing. So you're not trying to gather lots of assets and then just collect fees. (1:02:01) Can you talk about the importance of that sense of alignment because I see it also in the companies that you invest in that something like Brookfield which has always been one of your two or three biggest positions. I remember you commenting once about how they would invest billions of their own capital alongside their shareholders capital if they set up a huge infrastructure fund say. (1:02:24) So it seems like alignment is a very central theme for you. Very much. And the concept of alignment is another root quality that can't be quantified and it can't be measured. What happens in the investment world is that we try to set up rules and huristics to sort of force alignment. So they'll say, you know, what percentage of the company does the CEO own? Sure, if they own a lot of stock, that's great, but not necessarily. (1:02:52) I think for certain kinds of companies, certain kinds of people, the output doesn't matter so much. Like, if Warren Buffett owned a little less Bergkshire Hathaway stock, I don't think his behavior would change all that much. (1:03:10) If you gave him some big incentive plan to incentivize him to compound, I don't think it would change his behavior that much. So, alignment is something that I think it's best done. You have to sort of embody it first and then the output of that is just the output. In the case of Roomie, I wanted to emphasize that this is a performanceoriented partnership. It's not about raising capital. (1:03:32) It's not about having a good couple of years. It's about compounding capital for multiple decades. And I'm thinking in a quite long time horizon when I make investments. And what that means is that you also have to find businesses where the managers of those businesses have a similar orientation. So if you can align that time horizon and that sense of patience and that goal over across the ecosystem, whether it's Bruce Flat at Brookfield is thinking about the next 20 years and then Roomie is thinking about the next 20 years and (1:04:06) Roomie's limited partners are thinking about the next 20 years. If you can create alignment across that ecosystem, the odds of compounding, the odds of a good outcome, I think, are dramatically improved. How does a company like Brookfield or Appfolio, which have been two of your biggest positions since inception, h how do they embody what you're looking for in terms of management, but also what you're looking for in terms of what you call long duration reinvestment runways? because it seems like a focus on the potential for reinvestment is always almost like (1:04:43) the defining quality that you're looking for in a business. I think Charlie said it best where the longer you hold something, the closer you will get to the intrinsic reinvestment return of the business. And so if you intend to own something for a very long time, it's imperative that the business itself is generating high returns. (1:05:09) Not to say that it's generating high returns on a reported basis, but it has an ability to reinvest at high returns because if you're just throwing off cash and you have to either dividend it out or buy back stock, it's not intrinsically compounding the business. So, I'm I'm looking for businesses that have this intrinsic ability to compound capital over time. (1:05:28) So I basically won't buy things or add to things unless I'm convinced that the direction of the future economics. The direction of the compounding of intrinsic value is long lived. So that excludes all kinds of things from the funnel. I tend not to buy things just because they look statistically cheap. (1:05:50) these ideas that they seem like they'll be okay just for the next few years, but they'll likely face some kind of existential threat over the next few years. So, I won't buy a melting ice cube regardless of valuation. I won't buy bad business models or people that I don't believe are aligned or talented. Some people can do this well. Some investors can do this well. I'm not one of them. (1:06:14) Now, in terms of the long duration reinvestment, I think something like Appfolio is a good example of that. It's a business that sells software to real estate property managers. And ultimately, the product is a significant entropy reduction in the real estate industry. So, it saves property managers a lot of time. It reduces the need for labor. (1:06:40) It just simply makes their lives easier. And the product allows you to fulfill many tasks, whether it's collecting rents or screening new tenants or scheduling maintenance or executing a lease. And because it sits in the middle of all these workflows and the employees at the property management company are all trained on this product, it creates an incredible stickiness. (1:07:06) It sort of enjoys this center of gravity in the real estate market. that stickiness when you have customers for 10 years, 20 years. In many cases, many privately held software companies will take advantage of that stickiness by cutting costs, by stopping the innovation, by levering up the balance sheet, you know, jacking up prices. (1:07:30) But Appfolio's ethos, it sort of embodies a partnership approach. It's by far the most customer oriented culture in the market. And to be in a position like that allows them to take a much longer term view. So they tend to add functionality that is impactful for the customer. (1:07:53) And because they're sitting in the middle of all these workflows, they can continuously develop new features and functionality that's increasing their potential for pricing power. And as they add these features, they can charge, you know, a small sliver of the value created. And as you grow in the market, the vertical software business is such that you gain a reputation. (1:08:12) There's what's called referenceability, which allows you to gain incremental market share. When someone's making a purchase decision, they're usually calling over to a friend of theirs in the industry and saying, "What do you use?" And they say, "Oh, I use Appfolio." And so the product becomes kind of the standard in the market increasingly as you get bigger. (1:08:31) And as long as you're treating customers well, you have these relationships for a long time. And so it's really a win-win sort of ethos and allows them to reinvest capital for the next decade. It's interesting because they're obviously very customer focused and not that Wall Street focused, right? Like that there was a sense I I think in one of your shareholder letters you wrote about how they would they would have an investor day and they wouldn't they wouldn't webcast it. They wouldn't have a transcript. (1:08:55) They would have earnings calls and they would have no Q&A session in the earnings call. Can you talk about that? cuz it seems like in the same way that you're having to be fairly stubborn and obstinate in focusing on the long term on long-term compounding of wealth, you're also favoring businesses that are kind of ornery in saying to Wall Street, "No, no, we're perfectly happy to suppress our short-term earnings because we're trying to build value over time." That's exactly right. (1:09:28) And I think that I may be just drawn to it because I notice when someone's doing special, they don't always have to go and and broadcast it to Wall Street. Now, Folio certainly fits the bill there. You know, it's an extremely nonpromotional culture. They don't provide long-term financial guidance and that frustrates, you know, sellside analysts and many other funds because they basically want the company to do their work for them. (1:09:51) They don't have Q&A on their quarterly calls as you mentioned. You can listen to one of their calls. It's like 10 minutes of prepared remarks and then they say all right thank you very much see you next quarter and you know people are left like you know what happened and for that reason the stock has been largely misunderstood by the market for years and the shares have also been closely held by a handful of long-term owners for a long period of time you know I think at one point it was more than 50% of the company was held by people on the inside and that illquidity (1:10:25) and lack of promotionality creates a situation where the shares historically have traded with a fair amount of volatility. I was recently looking back at this and it was sort of interesting that the company has been public for around 10 years now and over those 10 years it's compounded quite nicely. I think the long-term compound return has been more than 30% a year for a decade. (1:10:49) But over those 10 years, more than half of the trading days of those 10 years were spent in a draw down of more than 20%. So it's like you hold this stock that's bouncing around and more than half of the time you're sort of experiencing this draw down which I think makes it quite difficult for people to own something like this. (1:11:13) Can you talk about this general topic of a willingness to hold stocks for a long time? Cuz obviously your your fund isn't that old. It's 6 and a half years old, but there are these stocks that you've held since the very beginning that I assume you'll continue to hold for many years. But when you look at a lot of the great investors, you've written in the past about how, for example, Ben Graham owned Geico from 1948 or Phil Fiser owned Motorola from 1955 or Buffett bought the Washington Post in 1973 or Tom Russo bought stocks like Nestle in 1986 or Lou Simpson bought Nike in 1993 (1:11:44) or Charlie I think bought Costco in 1997 and they would just kind of hold. Same thing with Chuck Akray with his American Tower investment in 2002. Can you talk about the challenge of holding exceptional businesses when even the most exceptional businesses go through these periods that are pretty awful? Absolutely. (1:12:10) It's something that I like to spend some of my free time doing, which is to reverse engineer the great investments of the great investors. And not just those periods where things are going great, but I'm really keen to understand those long stretches of time where nothing happens and it's hard for you to sit on your hands and you start to see everything else going up and you start to think, you know, my current companies are not doing so well and you get seduced by greener grass over there. And I think so much about so much of (1:12:41) holding a business for a long period of time is to be able to see what you have clearly. You know, Roomie has the quote where he says to be able to look at the thorn but also still see the rose. And so to have a balanced understanding of what you have and not to be swayed by these long periods of underperformance. (1:13:01) Costco is an example that I find to be quite striking because Charlie bought the stock I think in the early 90s and he held it until his death. You know he held it for decades and within that period you could look and say wow you know I think the stock has compounded in the high teens for multiple decades and so it was a wonderful outcome but there was a period I think between 2000 and 2010 where the stock didn't move at all. I think it was basically flat. (1:13:33) And I wanted to understand this case because it's very few people would think of something like Costco flatlining for an entire decade. But really what happened was that they went into the late '9s and they were very ambitious. (1:13:53) They thought they could grow new stores at 10 or 15% a year and their comps, you know, their same store sales would grow in the high single digits and all of that would sort of roll up with operating leverage. you'd get to mid- teens earnings per share compounding. And you know, that sounds great. But what happened is that in the early 2000s, they realized that they sort of overshot on their ambition and they had to rein it in. (1:14:16) So their store growth went down a little bit and their same store sales were getting impacted by a number of company specific issues including competition from folks like Sam's Club and Walmart. And the stock declined quite a lot. And it went from, I think, 50 times earnings in the late '9s down to 12 times earnings somewhere in the early 2000s, maybe 2003, 2004. (1:14:38) And very few investment firms would be able to hold a stock like that for the whole way because throughout that period, it's so easy to say, well, Sam's Club is going to come kill them and this business has low margins. And you can concoct all of these narratives to shake yourself out of the position. I once asked Charlie what did he see that allowed him to own something like this for such a long period of time. (1:15:03) And the first thing he did was actually remind me, don't forget that in markets where Sam's Club was opening stores across the street, we were actually cutting our prices. So you can imagine, you know, the very sharp Wall Street analyst is doing his channel checks and looking at what's going on in the stores and he would find that this business doesn't have any pricing power because everywhere that Sam's Club's coming, they're cutting their own prices. So what kind of good business is Costco if they have to cut their own (1:15:26) prices? But of course, these were all temporary dynamics. And Charlie's answer was that the product quality was improving, the management was ethical, you know, the culture was meccratic. These are all root qualities that wouldn't ever have shown up in any spreadsheet or in any fancy research report. (1:15:50) But the root qualities were what allowed him to own the stock for multiple decades and never get shaken out of it. Yeah. It's really interesting. I was reading your account of your dinner with him, which I think was just a few months before he passed away at the age of 99 back in late 2023 and I was really struck by the fact that all of the things he talked about that enabled him to stay in in Costco for all those years were really qualitative, right? So unwavering commitment to customer trust or employee loyalty or product excellence or ethical people or a meritocratic culture or whatever. So, it really reinforces what you were saying (1:16:21) before about trying to look for qualities that aren't necessarily expressed in a spreadsheet, but they do exist, but you have to be attuned to recognizing them. And you said you said something really nice in one of your shareholder letters where you discussed this. You were talking about the difficulty of going through these periods of stagnation for a stock. (1:16:39) And you wrote this may be precisely why attractive long-term returns are available to those with a different temperament, orientation, and structure. I think that gets at something really important. You need this kind of intellectual understanding of why you want to be patient, but there is an element of temperament that you know as Charlie would talk about the ability to defer gratification that if you don't have that deferred gratification gene, it's really hard. But then there's also this issue of structure that you actually have to have structured your (1:17:08) investment firms so that your shareholders will allow you to be long-term, which I think almost nobody has been able to do like that. you know, you have like Josh Tarasoft has like there are you have to be kind of slightly orary to sort of say, well, I'm just not in the asset gathering business and so I'm perfectly happy to sit and just quietly compound money. (1:17:34) Yeah, it's a really tricky problem and I think so many of these questions with investment, they are what's called a divergent problem. In the 1970s, there was this gentleman named EF Schumacher and he wrote a few books that I really enjoyed over the years. Schumacher himself was actually a protege of John Maynard Kanes and one of the books he wrote was called Smallest Beautiful. (1:18:03) Another book that he wrote is actually called Guide for the Perplexed, which of course is a homage to the same title by my monities. Yeah. In guide for the perplexed, she talks about the difference between convergent problems and divergent problems. And a convergent problem would be like one where the solutions to the question increasingly converge on a single answer. (1:18:29) So the classic example would be how should we create a two- wheeled humanpowered means of transportation? And so people will put solutions forth and increasingly you'll learn that it's the bicycle and the bicycle has been the answer the convergent answer for quite a long time. Divergent problems are different. Divergent problems are those where they don't converge on a single solution. (1:18:49) In fact many solutions become polar opposites. And the classic example here would be asking you know how should we educate our children? And so one group of people might say,"Well, you should give the children immense freedom so they can explore and nurture their own interests. (1:19:07) " And another group of people might say, "No, you need discipline. You actually need rigorous discipline and following the rules and that's how they'll learn." And so at the extremes, you've created a divergent problem where the answer to how should you educate our children is either freedom or discipline. And you're sort of on two different ends of the spectrum. (1:19:25) And you know, I'm not sure that this idea is all that new. I think Aristotle said it best when he said that every virtue is in the middle of two vices. But so much of investing sits at this point, you know, to your point about urgency versus patience, about working hard versus letting go, about, you know, trust versus skepticism, concentration versus diversification, you know, generalist versus specialist. (1:19:55) All of these these questions, you sort of learn that you need both and you need them in some kind of harmonious proportion which only intuition can tell you, you know, how much of each you need. And so with something like building an investment firm, of course, you need some capital to start. So you can't just go off and start, especially when you're young in most cases. (1:20:15) But if you spend all your time doing that, then your actual investment performance will suffer. There's this line that needs to be found between the two. You know, another one is to have a network versus to be independent. That's another classic divergent problem that one has to solve when they're in this investment business. Yeah. (1:20:33) You and I have talked a lot about that in the past because you obviously spend a great deal of time or have spent a great deal of time over the years chatting with friends like Chris Beg and Josh Tarasoft and the like, these really smart people about investing. (1:20:52) And there is some crossover in some of your your holdings and your approach and yet at the same time I remember we were talking about Carvana at some point and you said yeah I didn't tell them I was investing in Carana. Can you talk about that? Because Covena is a really interesting example of something where you actually took a different approach that you do have these really exceptional long-term businesses, but then sometimes you'll buy something where there's tremendous asymmetric upside potential, but that it's pretty hairy and it's not something you really want to talk to people about. So, so again it gets at this kind of (1:21:23) conflict between having a network where you share ideas and actually being quite secretive because you don't want people to judge you and you have to defend yourself. Can you talk about Cavano through that lens? Yeah. Well, first of all, I'll say, you know, I'm incredibly grateful to have a small circle of friends in this work. People that I respect enormously, not just for their talent. (1:21:46) You know, some are peers, others are mentors. And having a circle like that can be incredibly valuable. You know, it gives you access to thoughtful perspectives. It can create a healthy intellectual tension. It sharpens your own thinking. (1:22:03) But like like we were just saying, like almost everything in investing, this one there's a paradox to manage. Meaning, if you rely too heavily on a network, you risk group think and you risk outsourcing your judgment. And that robs you of the conviction that you need when markets become volatile. And I always think of that that uh old Templeton line where he says the best performance is produced by a person not by a committee. (1:22:27) And you know, but on the other hand, if you isolate yourself completely, you risk missing important perspectives and you risk falling in love with your own ideas, creating an echo chamber. And so I try to live in that kind of in between place, you know, what in Buddhism they might call the middle way where you're open and receptive, but at the end of the day, you're trusting your own judgment, your own instincts. (1:22:52) And so one of the most helpful evolutions on that point is letting go for me was letting go of what you, you know, might call investor idol worship. Because when you're just starting out, it's very natural to sort of subjugate your own intellect because people that you respect, you put them on a pedestal to assume that because they're famous, because they have a great track record or manage a large fund, you know, they must know better. (1:23:17) And of course, it's good to have enormous respect for those who come before you. But usually, you have to learn the hard way that investment judgment is deeply personal. I notice that all the time, even with people that share an almost identical philosophy where it's like we're finishing each other's sentences in many cases, we still end up disagreeing all the time about specific businesses and position sizing and how to weigh certain kinds of risks with a specific company. (1:23:44) And so investment judgment is deeply personal and I think Carvana is probably one uh example of this. You bought it. I I think you know it had obviously had this amazing period of expansion and then it got kind of crushed in I think 2022 and a lot of people thought it was going bankrupt and the stock I think fell about 93% before you bought it. (1:24:10) You told me a great story at one point about someone saying to you, you know, how do you avoid things like Carvana and having to kind of keep your mouth shut cuz you were quietly buying Carvana. talk about the discomfort of that of like being willing to go buy something like that. Like what was it that you saw in it that embodies this kind of this sort of slightly more speculative part of your portfolio where you're willing to take things where there's less certainty and less of a guarantee of excellence? Yeah, I'll preface this by saying my preference is always for a large holding in something where the risk of impairment is basically deemed remote and I would prefer the whole portfolio (1:24:50) to just be you can participate in a tax deferred way in low risk compounding for many years. You know, that's much better. But every once in a while, you may find something where you can have potentially the same impact as a large successful position, but even when the position size, the starting position size is sort of immaterial. (1:25:16) And uh I will occasionally own something where you have a smaller position and it's deemed to be highly asymmetric. Warren Buffett has his rules of investing about, you know, don't lose money, don't forget, rule number one. And I I might add in a little addendum in there that says if you may lose money, just make sure it's not that much. Make sure it's just a little bit. (1:25:33) And stylistically, I think on this point, I've learned a fair amount from people like Bill Miller. And you know, another good friend of mine is Quincy Lee, who's done some of this over the years, being able to sort of migrate in and out different styles. Even Charlie Munger, when I spoke with him, he's done this to a certain degree. (1:25:51) He had his large Costco holdings, but he also, you know, bought something like Tenico in the early 2000s, which was a distressed auto supplier. You know, not a good business, but he was able to buy it at a very low price and sort of participate in this big big outcome. In terms of Carvana, the story there really began when I was working with Lou because we were shareholders of CarMax and I think at one point we owned around 5% of Carmex equity and I still remember being in Chicago, you know, walking down Michigan Avenue listening to the Carvana Road Show and just being completely struck by the thoughtfulness and (1:26:29) ambition of this management team. And at the time, my own sort of investment pallet was not really geared towards companies that were so early in their growth, you know, growing hundreds of percent, burning so much capital. And so I decided to just watch watch and see from the sidelines. (1:26:52) And over the next few years, they really executed flawlessly. They extended into new markets. They turned their inventory faster. They increased delivery speeds. They improved profitability and specific cohorts. They created like an in-house logistical infrastructure that was vertically integrated first party and they could create, you know, scale economics and sort of uh create this much better customer experience in the used car market. (1:27:18) And while I was working with Lou, a colleague of mine, Armen, a good friend of mine, he created this web scraping tool. It was sort of an early web scraping tool that could compare apples and apples cars on Carvana versus cars on CarMax. And it was clear that Carvana was underpricing the industry by like $1,000 per unit. (1:27:43) And that's significant for a product where the gross margins are like 2,300 for CarMax over the years. And so it felt like in a market that transacts 30 to 40 million used cars per year, this business was poised to compound. It had this long reinvestment runway and these people were very focused. (1:28:00) And so I watched from the sidelines as the stock promptly rose, you know, 20 times in just a few years from there. And then, you know, in 2022, a combination of bad luck and misexecution basically brought the business to a sudden halt. They made this big acquisition. They took on a lot of debt in order to do it to sort of finance themselves to sustain this rapid growth rate. When the mistake happened and the business sort of turned the other way, the bonds got down to 30. (1:28:27) The stock declined by, you know, 90some%. By the time we bought our first shares, the stock had declined from 370, $370 to 25. And I think the short interest at the time was 75% of the free float. So everyone thought basically this business was going to go bankrupt. And actually, you know, my timing was not so great because I bought the stock at 25 and just a few months later it had gone to $3.50 or something. So it went down. (1:29:00) It went down by another 85% or so after I bought it. And during this period, I definitely was not talking it up to people that I knew. I was talking about it. So, I would bring it up just to talk about it. I wanted to see if there were different perspectives, but I didn't want to I didn't want to say that I liked it and I didn't want to say that I owned it because there were certain times during this ownership where the stock would be up or down 70% in a day because of some headline. And what I wanted to prevent myself from was having a lot of inbound inquiries from people. (1:29:32) Even though I want to be helpful, I knew that it would be challenging for my psychology to try to respond and defend it would create commitment bias. And really, I think the moral of the story is that stocks can do anything in the short term. You know, literally anything. (1:29:52) And to spend a lot of time trying to predict if or when they might go down by a lot, I think has been challenging. I'm curious to know how you handle the emotional psychological side of the game of investing particularly as a very concentrated investor. I think you own about nine stocks and you'll often have maybe 90% in six or seven of them. And so obviously there are periods where it's really volatile. (1:30:15) I mean it gives you more of a chance to outperform but also more of a chance to underperform in certain ways. And I mean, your returns have been excellent since you started the fund, but you did have that year in 2022 where I think you were down about 42%. And then, you know, the next year 1%. Yeah. And then the next year you're you're back up about 70%. And I'm just wondering, I know you meditate. (1:30:35) You always seem to have a reasonably chill kind of temperament to me. I'm curious how you actually what you've done in practical terms to deal with just the sheer emotional intensity of the game. Maybe it's two things. The first is, as I mentioned, it's really studying history. It's recognizing that these periods are normal. And so when they come, you shouldn't be surprised. (1:31:02) You should just know that every investor has had their due over, you know, a 30, 40, 50 year record. every investor gets their time. And so when it came in 2022, it didn't last that long, but I was mentally preparing for it to last for five or 10 years. I just knew that every investor has these periods and so buckle up. You know, that's what was going on in my mind. (1:31:26) So part of it, I think, is just intellectually understanding that it's normal and constantly reminding yourself of it, constantly reminding your partners of it. It's easy to become complacent when you notice your capital accounts just rising, you know, month after month to think that this game is easy. And I think that these moments where things are going really well are an opportunity for humility. (1:31:48) And when the moments are going poorly, it's an opportunity for trust to sort of recognize that this is normal and to trust to trust the process. In practice, I won't claim to have it all figured out uh first of all, but I try to find some harmony between different aspects of life, whether that's work, family, health, inner life. (1:32:13) That may mean exercising, that may mean making space for meditation. I think, you know, my family, which I joked about in the beginning, has no interest in business, is sort of a blessing in some ways because spending time with people that you love who have absolutely no idea what the stock market is doing can be great. And those things sound trit, but they really do restore a sense of perspective and a sense of proportion to this whole process. (1:32:39) I was very struck also in reading your shareholder letters. There's a there's a lovely section in one of them, I think, about the willingness to surrender in the face of uncertainty, which is sort of philosophically very appealing to me because I spend a lot of my time worrying about uncertainty. (1:32:55) And um I'm going to quote this because it's kind of really elegant. You wrote, "Surrender also demands that we embrace uncertainty. To surrender is to accept that markets are fickle and anything can happen year to year. The unknown cannot be tamed. Attempts to control or predict it will only drain our limited resources. (1:33:15) There will be years when our portfolio experiences sharp declines, likely for reasons few expected, rather than fearing this inevitability. My recommendation is to surrender to it. And then you talk about how for you part of the meaning of surrender is actually to stay fully invested and not trade around your core positions and just focus on the quality of the businesses that you're invested in. (1:33:36) I think that's such an interesting insight. I've been thinking about this a lot recently because I, you know, there's a part of me that's sort of a pessimist that I always think of that line from Yates where he says, "Things fall apart, the center cannot hold. Mere anarchy is loosed upon the world. (1:33:52) " And I always have this sense when everything's been going well, oh my god, it's all going to fall apart. And so there's a part of me that having ridden this bull market for the last 16 years sort of keeps thinking, I really don't want to give back 50%. And then I the last couple of weeks I've really been thinking about this partly after a conversation with Nick Sleep where he said you know just just don't fiddle William just just leave it be if if you get back 50% you'll just buy cheap stuff. (1:34:17) And I'm like yeah why why am I even worrying like I instead of trying to fight this thing or predict this thing I should accept the fact that my entire approach to investing anyway is built on taking advantage of disruption. Like why am I why am I bracing with this sense of pain and fear at the prospect of disruption when it's inevitable because we live in an uncertain world and you should just sort of set yourself up to kind of deal with it and so you'll survive it. Does that does that raise any thoughts for you? It's such a great point. The more that (1:34:48) I've thought about this the point on surrender I think surrender goes handinhand with trust in some sense. The reason why we can all intellectually say that it's normal to go down 50% but we don't want it to happen in some ways we don't trust that we'll do the right thing when that happens. (1:35:10) You know there's a lack of trust in the self and I think that the experience in 2022 was illuminating in some ways because on one hand in 2020 2021 it was as though everyone's a long-term investor. Everyone wants to own these stocks for 10 years because month after month, it's just getting richer and richer and richer and people are very excited. (1:35:28) But then in 2022, you could just see the time horizon shrink and suddenly everyone wants to learn a lesson. Everyone is, you know, I shouldn't have owned this. What was I thinking? And in some cases those were true, but in other cases it was merely a reaction to price action. (1:35:47) And ironically, I think that had we not had 2022, our returns since inception would actually be worse. Like if you just took Roomie's portfolio at the end of 2021 and just rode it for the expected returns that I thought we were going to get at that point. It would have been okay if it was just linear up to the right. It would have been nice and comfortable. (1:36:06) But I think the opportunity that a down market gives you is the ability to coil the spring. You can recycle your capital. You can sell things that are down 30 40% to buy things that are down 70 80 90%. And that actually benefits you over the long run. And that's why you know Warren Buffett and L Simpson and so many people over history have tried to make this point that volatility is your friend. It's the friend of the investor. (1:36:36) And the hangup I think is that even if we know that, do we trust our ability to make the right decision when that moment comes? And I think if you trust that when we're down 50%. That I'll know what to do. Then what's there to fear? You can just sort of let it come. Yeah. It's funny because the reality is I look back to 2008 2009 I didn't I didn't sell anything. I bought some stuff. (1:37:01) I didn't panic even though I lost my job in the middle of the period as well. And then in 2022 I think I I didn't sell anything and I bought Burkshshire like four times. You know, I'm not trying to say this in self- congratulation. It's like more like so why am I so afraid of like a repetition of pain when actually I sort of I'm kind of okay in in periods of pain. (1:37:23) I I think cuz I'm sort of to some degree a pessimist who always sort of expects it and so I'm positioned to be able to take advantage. I I don't know. So I mean some of it is just managing our our own kind of weird psychology I guess. Right. Absolutely. I think uh managing the psychology, structuring the environment, you know, the experience in 2022, I hate to put it this way, but it really wasn't a big deal. It really wasn't. It just felt like a normal run-of-the-mill time. (1:37:53) And I remember the day that Carvana hit $355, I was out on a hike that morning, and it really just wasn't all that big a deal. Now, if it was a huge position, maybe it would have felt like a bigger deal, but it started out as a smaller position and I sort of added to it on the other side. (1:38:13) I added to it at 10 and I added to it at 40. And so on on the way back the other way, I I made it a bigger position. This is a difficult balance to to find, you know, between sizing something to the point where it becomes psychologically difficult versus small enough where you can sleep at night but still have an impact on the portfolio if things work out. (1:38:34) You said something very interesting to me recently when we chatted a few weeks ago as well where you talked about avoiding fear-based decisions. You were saying that you with something like Carana for example you trimmed Appfolio to buy Carvana and then later Carvana sores and you trimmed Carvana a little bit but you were saying because you are always running pretty much fully invested. (1:38:58) You're not really making fear-based decisions. You're selling something because you find something that you love more. Can you talk about that? Cuz there's a really interesting nuance there. I think that's not something we usually discuss. Yeah. Someone was asking me recently, how do you sell? And it's the classic difficult question to answer. (1:39:16) And what just emerged was that my cell decisions are like a love versus fear question. And suboptimal sell decisions in my opinion are fear-based decisions which are you know I had a 10% position and now it's 12% that's too big what if it goes down I'm going to pair it back to 10. (1:39:39) This kinds of thinking happens all the time in the name of sort of risk mitigation in the name of rebalancing the portfolio. And if that's the case you sort of never get the full benefit of one of these great investments. So what's a love decision? A love decision is something where you feel compelled. You feel sort of called to own more of this business over here. (1:40:00) But because you run fully invested, you have to get the capital from somewhere. And it's much more of a positive decision rather than a negative decision. A negative decision says, "This is too big. I'm scared. What if it goes down?" A positive decision says, "I really need to own more of this because it's so great. I got to get the capital from somewhere. (1:40:19) " And I think that, you know, sell decisions come in a few flavors. You can either sell because you made a mistake, which happens, of course, from time to time. You can sell for opportunity cost reasons, which is what I'm talking about here. There's opportunity cost of capital. You'd prefer to own one business over the other. (1:40:38) There's also the sell decision which comes when something is sort of egregiously overvalued. Meaning, you know, you may not make money for a long time. you may have negative returns for a very long time from here. I'm not sure that that has ever happened in my experience over these first six years. So that that's super overvaluation. I haven't seen that yet when I'm studying these specific businesses. (1:40:57) So really I think 80 plus% of the time it's an opportunity cost kind of a calculation. I was struck when I was looking at your letters the other day that you talked about surfing a couple of times. You know, you often have these quotes, and there was there was one quote at the end of your January 2025 shareholder letter from John Katzen, this great meditation teacher, who said, "You can't stop the waves, but you can learn to surf. (1:41:24) " And then at the end of your January 2023 letter, you had a quote from William Finnegan, the great New Yorker writer who wrote this book called Barbarian Days, a surfing life, which has a longer quote, but I'll I'll read it cuz it's kind of cool, where he said, "Surfing always had this horizon, this fear line that made it different from other things. (1:41:47) You could do it with friends, but when the waves got big, when you got into trouble, there never seemed to be anyone else around." And then he said, "The waves were the playing field. They were the object of your deepest desire. At the same time, they were your adversary, your nemesis, even your mortal enemy. (1:42:06) They were your refuge, your happy hiding place, but also a hostile wilderness, a dynamic, indifferent world." And I was curious given that you have both of these quotes about surfing and that you live in California like what's the parallel between investing and surfing and managing a fund that's been helpful to you to think through? Yeah, I won't claim to be a great surfer. I love to surf. (1:42:31) I do think that there are plenty of parallels in surfing and investing. Surfing really demands a a surrender. This idea that you're not going to predict what's going to happen, but you have to sort of be open and receptive. And you know, I had one experience actually down in Costa Rica with Chris Bay. And there was an investment lesson which came ironically when I'm I was out there waiting for a wave and I saw one coming and I sort of looked to my left and looked to my right and being not a great surfer I'm always looking for you know someone to tell me this is the right wave to take and I was looking and everyone was sort of focused on their own there everyone was playing (1:43:08) their own game. They were sort of in their own heads and I was waiting for this validation. I wanted someone to tell me this is the right one and I just end up deciding that this is a great wave and I took it and it ended up being a lovely ride. But it really sort of reinforced this idea that no one's coming to save you particularly in investing and that idea of investor idol worship. (1:43:38) It's easy to think that by following someone else's path, by investing in the way that someone else invests, that that's the right path. But ultimately, it comes down to you and you have to make your own decisions, and you have to trust your own judgment, and you have to develop your own discernment. There's no substitute for that. Before I let you go, we've talked a bit about the poet room. (1:43:57) We've mentioned a few quotes from him along the way. It was an unusual decision in many ways to name the firm after a 13th century Sufi mystic when you founded the firm in 2019. How has he been a really important figure for you both as an investor and in life? I I guess this is related to the general sense of why it's been helpful to you as an investor to have this kind of deep spiritual life where you're thinking about things like trust and surrender and a willingness to end your periods of contraction and you know getting beneath the facade and seeing (1:44:34) the underlying reality. All of the sort of things that that Roomie talked about. You know, Roomie, as you say, he was a 13th century Persian mystic. And one of the things that I always find fascinating about him is that in the late '9s, early 2000s, Roomie was actually the bestselling poet in the United States. (1:45:03) So, he sold more copies than Shakespeare, Homer, you know, Dante, Milton, you know, take your pick. And it raised a question which is what are all these Americans doing reading the poetry of a Persian mystic from 800 years ago. I think part of it is that Roomie's ideas are universal. He speaks to something timeless in the human condition which is this deep yearning to see beyond the surface and to discover meaning beneath appearance. (1:45:31) And one of the main stays of Roomie's teaching, as you say, is this constant sort of provocation. He provokes you to see past appearances and ask what's actually real, what's going on, what's the truth. And he was also astonishingly prolific. He composed, I think, 60,000 lines a verse, something like that. (1:45:52) And yet, he wasn't even a professional poet. You know, I think he would laugh at the idea that people are now calling him a poet. He was a spiritual guide and he had disciples and many of his poems were actually spoken, you know, spontaneously when he was in this ecstatic meditative state. (1:46:11) And some of his companions would write things down that he wrote. And as to why I chose him as the namesake of my partnership, you know, what I think makes him timeless is his ability to embed deep truths about existence into the most ordinary everyday imagery, whether it's a garden or the sun or a candle or, you know, a moth. (1:46:38) He points you from the obvious and the visible towards the invisible and the essential. And that way of seeing always resonated with me as an investor because you know investing at its core is an act of perception. It's about seeing beyond the narratives and what the news is talking about and what other investors are talking about to try to grasp the essence of the business. What is it that actually makes it tick? And you know that's all Roomie was about. (1:47:03) And is is there a favorite line or saying of his that you live by? Like before for example we we were talking about this willingness to live with paradox and contradiction. I was thinking of this line of his that you somehow quote where he said life is harmony among opposites which seems like a lot of what you're doing is trying to find harmony between these things like being aggressive and having a sense of urgency and being patient and slowm moving and and the like and having a circle of friends you talk to but also thinking for yourself. You know, are there things like that that really in (1:47:34) terms of your inner monologue daytoday that you live by because you were taught them by Roomie? You know, there's one quote of his that is one of my favorites, which is if you are irritated by every rub, how will your mirror be polished? And you know, he's talking about on one hand, he's talking about something that's probably pretty obvious to everyone, which is that if you take everything personally, if you're sort of uh oversensitive, then you're missing the lessons. You're missing sort of the teachings of these moments that irritate you. But what he's (1:48:11) actually talking about was the way that our egos distort our ability to see clearly. So what is it about a mirror? You know, in the ancient world, mirrors were not made of glass. They were actually made of bronze and the craftsman of those years would, you know, I think for 10,000 years they were probably made this way where a craftsman would combine copper and tin and create bronze. (1:48:38) And before glass mirrors existed, you would just polish the surface of these mirrors and polish it and polish it and polish it until the bronze became reflective. And if the metal that you were polishing was left uneven or corroded, then when the light came into the mirror, it would sort of scatter in every direction. It wouldn't actually reflect clearly. You couldn't see clearly. (1:49:02) And that to me, this metaphor about us as mirrors, human beings as a mirror that needs to be polished because we're essentially we start out as this base metal which is not reflective and is not beautiful. But with polishing, you can sort of reflect the reality that is such a precise metaphor for the human condition. (1:49:27) And that unevenness and the corrosion of an unpolished mirror is essentially akin to the distortions that are caused by our own egoic perspectives. When we need to appear superior, when we fear being wrong publicly, when we fear public humiliation, our perception of reality becomes warped and we stop seeing things as they truly are. And I think this has plenty of parallels to investment because when we're making decisions from that place of fear and ego, then of course we make these terrible decisions. Yeah. I mean that's that's my roomie quote. Yeah. I love that. One of the reasons (1:49:58) why I love talking to you is um I think I tend to have this sense that investing is like this beautiful subset of worldly wisdom as Charlie would say and that it sort of includes everything and it's just this lovely microcosm where you can you know you can study like human nature and psychology and philosophy and spirituality like it's it's all part of it and I was reminded when we talked last time you you quoted a conversation you'd had with I think the author of Vaklav Smile who when you told him what you did. He said, "Oh, you're a money (1:50:29) massager." And actually, I think this conversation is proof that you are much more than a money massager. Yeah. He uh I called him about, you know, I was doing some work on the renewable energy business. At the end of it, we had this long conversation and he said something like, "So, what is it that you do again?" And I said, "You know, I'm an investor." And he said, "Ah, so you're a money massager. (1:50:52) " And I think that it's classic that the perception of what this business is is like we're sort of sitting around just massaging this portfolio of securities. You know, it's not a real profession. I don't feel like it is actually a real profession. (1:51:10) It's sort of a it's a beautiful means of exploring your curiosity and hopefully serving people while you do it. On that note, it's just been a real delight chatting with you and I hope I'll see you soon. Well, we'll definitely see each other in Omaha. I hope. But um but hopefully I'll see you in New York before then. Absolutely. It was a pleasure. Thank you. Thanks so much. It was a real delight. All right, folks. I hope you enjoyed today's conversation with Nema Shai. (1:51:30) As we draw to the end of 2025, I wanted to take the opportunity to wish you a very happy holiday and a wonderful new year. I also wanted to take the opportunity to thank the fabulous team at the Investors Podcast Network, which makes it possible for me to host this podcast. (1:51:50) That includes Bianca, Sel, Camille, Katrina, Noel, and Jasmine. And I'm especially grateful to my terrific editors, Jadilia Lamper, and Christine Romero, who um not only do an excellent job editing the audio and video versions of the podcast, but are also unbelievably patient in putting up with how late I always am with my deadlines. (1:52:11) So, thank you for your your tolerance, your talent, and your kindness. I really appreciate it. It's also a total pleasure to work with my friends Stig Brodesen and Preston Pish who co-founded the Investors Podcast Network more than a decade ago. I couldn't have been luckier in uh becoming partners with them. They've just been a total delight. So, thank you. I'm really grateful. (1:52:30) And it's been fantastic to get to hang out in the last year with my fellow podcast hosts Clay and Sha and Daniel. And I've also been particularly fortunate to get to work closely with my friend and fellow podcast host Kyle Griev who's been an invaluable partner in helping me to create the richer wiser happier masterclass. He's just been a lovely and hugely capable partner on this project. (1:52:55) So thank you. On a separate note, I'm excited to announce that I'm about to launch after many delays and much pondering a new YouTube channel. You can find it by looking for this handle apparently which is William Green Markets and Life. And in the coming weeks and months I'll be sharing pretty regularly some of my favorite video clips from interviews that I've done with many great podcast guests. (1:53:24) So these are people like Rick Reer, Tom Russo, Mish Pabry, Joe Greenblat, Ray Dallio, Samantha Mackmore, Chris Bloomstrand and many others. And I think I'll also share some clips from my appearances on other people's podcasts. (1:53:42) So hopefully there'll be plenty of interesting stuff there that if you're deeply interested in this whole topic of the intersection between investing and life and how to think and how to live, you'll find helpful and lifeenriching. I'm really grateful to my friend and collaborator Weld Royal who'll be helping to run my YouTube channel. Weld has been an invaluable partner over the last year. She officially is my chief of staff, although given that I am the only person on staff, I'm not sure really what that means, but she's just been great to work with and I'm very grateful to her. And also, I'm really grateful to Jeremy (1:54:14) Stikney, a renowned YouTube expert who's given me and Weld a lot of great advice that we'll attempt to follow. And um my wonderful daughter Maline Green has helped with the design of the YouTube homepage for this channel and also designed the thumbnails for all of the videos I think. So it's just a real pleasure to work with your own kit. (1:54:35) What could be better in life? I think for me anyway. Whether whether it's as good for her, I don't know. Anyway, I hope you'll check out this new channel which as I say is William Green Markets and Life. And feel free to subscribe. (1:54:53) And likewise, feel free as always to follow me on X at William Green72 and to connect with me on LinkedIn if you like. Uh and do let me know how you're enjoying the podcast. I'm always really delighted to hear from you, especially if um if your messages are full of praise and warmth. If uh if you don't like the podcast, just keep it to yourself or mention it on YouTube. That's fine. (1:55:10) And in any case, thanks so much for listening and uh take good care and stay well. and I wish you and your family a very happy, healthy, and prosperous, joyful new year. I wrote a memo called fewer losers or more winners. You have to make a choice. And if you're going to try to win in investing, which means win in our business means having superior results. (1:55:35) How can you possibly get superior results? And the answer is you either have more of the things that go up or less of the things that go down or both. Most people can't do both because the skillful aggressive player might be able to get more of the winners. The skillful defensive player might be able to have fewer of the losers. Very few people have enough equipment to do both. Most people that means you have to choose.
A Soulful Journey to Stellar Returns w/ Nima Shayegh (RWH064)
Summary
Transcript
(00:00) Personally, the craft of investing was the part that I loved. That's how I wanted to spend the majority of my time. That meant that the structure had to be exceedingly simple and free from unnecessary complexity. So, today I run one portfolio. There's fewer than 10 holdings. I might find one or two new ideas in a year. (00:23) The rest of the year is spent quote unquote sharpening the axe. That simplicity gives you an enormous amount of space for reflection, to try to think clearly, space to make long-term decisions without distractions. Before we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy way to support us, and we'd really appreciate it. Thank you so much. (00:52) Hi folks, it's a great pleasure to be back with you on the Richer, Wiser, Happier podcast. The conversation you're about to hear was a total joy for me. My guest is a high-flying young hedge fund manager named Nema Shay, who's one of the most talented and thoughtful investors I've met in recent years. (01:11) In some ways, this episode is an unusual one. For one thing, Nemer is still in his 30s, which makes him possibly the youngest fund manager I featured on the podcast. Also, as you know, I've tended to interview a lot of investors who are already very well known. (01:32) People like Howard Marx, Ray Dallio, Bill Miller, Terry Smith, Rick Reer, Chris Davis, and the like. By contrast, Nema has flown almost entirely under the radar. As far as I'm aware, this is the first extensive wide-ranging interview that he's ever given. Nemo runs a relatively small hedge fund called Roomie Partners, which is named after the 13th century Persian poet and mystic Roomie. (01:54) He works on his own in California, managing money for a fairly small group of wealthy limited partners. He's not really focused on marketing or gathering a huge amount of assets. Rather, I would say he follows in the tradition of investors like Nick Sleep and K Sakaria who really were devoted entirely to the essential challenge of generating superb long-term returns. (02:20) Nema, much like them, does it by investing in a very concentrated portfolio, in his case, fewer than 10 stocks. His approach to investing also owes a great deal to his mentor, the late great Lou Simpson, who was one of the most successful stock pickers of all time. Nema spent several years working for Lou, who was hailed by Warren Buffett as one of the investment greats. (02:42) In today's episode, you'll hear a lot about what Nema learned from Lou, about the art of long-term investing. I think you'll soon see why I'm so impressed with Nema and why I regard him as one of the rising stars of the investment world. (03:03) He's not just an excellent stock picker, but also a a really interesting thinker and I regard him as unusually wise and prematurely wise both about markets and life. In any case, I hope you enjoy our conversation. Thanks so much for joining us. Hi folks, I'm absolutely delighted to welcome today's guest, Nema Shai. Nema is a very talented hedge fund manager who runs an investment firm in California called Roomie Capital Partners which is named somewhat idiosyncratically after the great 13th century Sufi poet and mystic room. (03:32) Nema is definitely one of the most thoughtful people I know in the investment world and he and I have had several fascinating conversations privately over the last few years but he typically flies under the radar so it's really a rare gift to have him on the podcast. (03:49) It took a lot of cajoling and coaxing over the last couple years to get him on the podcast and to have this opportunity to share his insights more broadly with you, our listeners and our viewers. So, Nema, it's lovely to see you. Welcome. Thanks so much for joining us. Thank you so much for the invitation. It's a real honor. It It took a while, but we're here together in the end. So, thank you. It's great to see you. (04:07) I wanted to start by asking you about your family background because I I think it's fair to say that your parents weren't yearning for you to go to Wall Street or become a kind of swaggering hedge fund manager, right? What kind of environment did you grow up in and how did it shape the person you would become? Yeah, thank you for the question. (04:27) My parents came to the US, they came to Southern California following the Iranian revolution and like many Persian families of that era, they basically had to come here and start from scratch. I was the first generation to be born and raised in the US. You know, my family is full of intellectual curiosity. Many people were educators. (04:54) Multiple people have authored books. You know, my family has a handful of really talented musicians. Almost no one, very few people in my family were all that interested in business. You know, dinner conversations in my house would sort of migrate to philosophy or classical music, definitely not interest rates or the stock market. So, business was never really part of my orbit whatsoever. (05:20) And I think that the initial spark of interest in investing was sort of born out of insecurity. If anything, I remember seeing how both the dot bust and the 2008 financial crisis impacted so many people around me, people that I loved. And there's this particular discomfort when you have no understanding for something like that which is happening and sort of reshaping society. you don't know why it happened. (05:50) You don't know what's going to happen and really having just no sense. And I sort of made it a priority to learn a little more about this this world. And as I started to learn more, it really felt like this very natural extension of my temperament and interests. And ironically, it's not all that different from those same sort of dinner conversations that we were having, which on the surface may have been about literature or poetry or something like that. (06:22) But really, it was about observing human nature and understanding human psychology and sort of seeking the essence of things. What's the nature of things? You know, trying to figure out what's really going on. Now, at the same time, in Persian culture, there's this running joke that you can be anything you want as a profession. (06:41) anything you want, any kind of doctor or engineer that your heart desires. And so when I decided to become an investor, there really wasn't much precedent for that. I would tell that to someone in my circle and the response would be something like, "So you want to be like a bank teller?" And I would say, "No, you know, I want to invest in the stock market. (07:04) " And you could just see on their face some concern like I had just confessed to like a gambling problem. But from the very beginning, investing was it felt like the ultimate kind of intellectual adventure. It was this microcosm where you could practice your discernment and your creativity and your temperament and your reasoning and you got this objective feedback loop which was so appealing. It was incredible. (07:29) It was sort of an amazing thing that you could professionally pursue your natural curiosity. So, we were chatting right before this conversation about your high school years and that you were a somewhat eccentric high school student and already very independent spirited. Can you talk a little bit about that because it seems like in some way that's something that all of the best investors have in common is this this kind of willingness to diverge from everybody else. (08:00) Yeah, it's a little embarrassing when I reflect on it now, but a little funny as well. When I was thinking about what led me to investing, I was kind of playing back all of these different parts of my life. And one of the commonalities is that it was always really difficult for me to buy into something that my heart wasn't in it fully. (08:21) And I remember on many occasions in high school, you know, once you turned 18, I learned that you could actually just go sign yourself out and you didn't need a parent note anymore. You could just say the reason you were leaving and sign your name and and leave. And so there were many occasions where I would not be all that interested in whatever it was that we were studying and I would sign myself out and I would ditch school. (08:44) And ironically, it wasn't that I would ditch school and go smoke cigarettes on the side of the building. No, I would go to Barnes & Noble and read something much more, you know, fascinating. And I think that that natural inclination to go deep in areas that I was very interested in was a bit of a foreshadowing to investing for sure. It's funny, I I was pretty similar at high school. (09:10) I I went to eaten, right, where, you know, it was very very disciplined. Like if you if you showed up late, you were in trouble and if your work wasn't good, you got literally what was called a rip. They would rip the piece of paper and you would have to show your homework to your housemaster. And I in my last year, I was only taking three subjects like English, Spanish, and history. (09:27) And I just decided my history teacher was boring, so I didn't show up to history anymore. I just decided I was going to teach myself. And in some weird way, as a journalist, as a writer, that's a really useful characteristic. just say no, I'm going off and doing my own thing. And so I I think it's one reason actually why I was really fascinated by great investors is there is an element of kind of diverging from the crowd and deciding no, I'm just going to crack the code for myself. You guys just make more money than we do (09:53) as writers. U I'm not sure, but I think it's definitely true that this willingness to think for yourself was definitely hammered into me as a child. Not so much with investing, for sure, but this tendency to not accept what is the commonly held view or the mainstream view or what the news media is talking about all the time or the narrative, but to try to figure out what's actually going on. (10:23) And my parents certainly instilled that in me pretty early. And you went to UCLA and then studied mathematics and economics. So in some way there was a part of you that was kind of very left hemisphere oriented as you've explained it to me in the past and sort of convinced that if you could master things like maths and statistics and economics, you'd have these skill sets to understand reality. (10:49) And my sense is that you gradually came to realize that actually comfort in numbers and logical reasoning and the like was not going to cut it. Can you talk a little bit about that evolution? The way that it's actually come together for me is this idea of branches and roots. Roomie has this quote that I love where he says, "Maybe you're searching among the branches for what only appears in the roots." And I think that that quote has a lot of significance for investors. (11:22) And when I just reflect on the investment industry broadly, I noticed it both in myself, but I noticed it in the industry in general. And it's this idea that if you can just get more precise, if you can quantify reality, if you can sort of measure things, the industry today has swung so far in the direction of quantification. (11:47) And you see it in expert calls and credit card data and web scraping technology. We have these extremely powerful tools today that can measure and try to predict what's going on. But it's still the case, as it's been for much of the last century, that almost no one compounds capital at very high returns for all that long. (12:11) despite the fancy tools, despite, you know, having tons of incentives, despite working really hard, it's just still very difficult. And so I reflect on this and I wonder, what is it that we're missing? What is it that we're missing? What is it that I'm missing? because I started out as being really technical and really focused on mathematics and quantification and everything is about reason and science and sure but it felt like I was just lost in the branches and I missed the roots. (12:41) What are the branches and roots as it relates to investing? So the branches are what everyone can see and measure. It's last quarter's margins. It's this week's unit growth. It's next month's inflation print. You know, it's all of these quantifiable pieces of information that are devoid of reality, devoid of context. And so, what would be the roots? The roots of a business are all of these qualitative forces that are causal to the future economics of a business. (13:11) You know, Lou Simpson used to always say that all investing is figuring out the future economics of a business. And that statement might sound easy enough to just blow right past it, but it actually creates an extraordinarily high bar. Most investors tend to fixate on the current economics, the current branches. They fixate on the present reality. (13:36) But every once in a while, you can get a really deep sense for what the future economics of a business might be. And in those cases, it's usually the case that you have a sense for the roots. And so, what are the roots? The roots could be something like the motivation of management, the culture of the company, the quality of the product, the alignment with customers. (13:54) None of that shows up on any spreadsheet. You can't model it, you can't quantify it, but they're actually the most real parts of a business. So the question to me became, if the roots are what truly matter, why isn't everyone focused on them? And the challenge from my perspective and actually the opportunity is that the roots require some intuition. (14:17) So it wasn't all about getting better at Excel and suggesting that the stock market investing in the stock market requires intuition I think makes many people uncomfortable because it feels subjective and it feels squishy and it feels you know very hard to communicate. But it's precisely those qualitative invisible factors that live upstream from the financials that everyone else is sort of focused on. (14:42) As you mentioned, you wrote this piece, Roots and Branches, and I I think it was originally a speech that you gave at Columbia, maybe in our friend Chris Beg's class in 2023, but then it became a shareholder letter of yours. So, I I've read it in both places. (15:00) And um you quoted in there I think Robert Persik talking about pre-intellectual awareness and you talked about this ability to apprehend essence being supraational. Can you talk a little bit about that sense that it's kind of suprational? There's something pre-intellectual in it. It's something I sometimes have talked about with Chris Beg as well that he has this sense that we have an embodied ability to tell whether something is true or not. (15:28) like when you meet a CEO and you're trying to decide, do I trust this person? Is this person actually honorable or not? Yes, absolutely. I think that in most cases the roots of a business are too hard to tell. It's not obvious. And I think the first thing to note is that you only really want to swing when it's pretty obvious. (15:51) In Buffett's parliament, you know, there's no called strikes, but there are some cases where you can know with some confidence what the roots of a business are. And in Persian, we have this very old expression that is probably more than a thousand years old. And it is cheshmed, which literally translates to eye of the heart. (16:15) And it's this idea that the heart is more than merely this organ that pumps our blood. It's actually a faculty of perception and it's capable of grasping non-material truths. And whether we like it or not, we live in a reality that's qualitative. And seeing with a qualitative perspective is so important, I found in investing. (16:43) And in terms of the pre-intellectual awareness, sometimes intuition is framed as this sort of superpower that you have to develop. And I think that it's less about developing or sort of achieving a superpower and more about clearing away everything that's muddying or perception. I truly believe that all human beings have this capability to discern and perceive non-material qualitative truths. (17:06) These are things like trustworthiness and sincerity and ambition and beauty. These are qualities that you can't model them and you can't quantify them. You can't measure them, but there's something pre-intellectual that can actually grasp and recognize those qualities when you're in the face of them. (17:29) You had a lovely example of this when we spoke a couple of weeks ago where you were talking about the experience of, I think, going into the mall of a parking lot in a Tesla in like the full autonomous driving mode. Can you talk about that a little bit? Yeah, I mean this is actually quite timely because or Tesla got an update just this morning and I was out, you know, testing it. It's version 414. (17:52) 2 which is the latest update that the company has rolled out. It's hard to explain what makes this product special, but overwhelmingly when I take my in-laws for a ride or my parents or friends who are not familiar, there's this kind of moment of awe. And the example that I was talking about before was that we were driving to Costco one evening and you know I click the button in the car and it's navigating through all of these construction zones and it pulls over for emergency vehicles and it gets on the highway and it gets off the highway. I haven't touched the steering wheel or pedals the whole ride. And then (18:32) it pulls into the parking lot of Costco and there's plenty of open spaces, but it decides I'm going to skip these open spaces and I'm going to go a little further and see if I can find an even better spot. And then it just pulls in perfectly and it stops. It finds its own parking spot. (18:49) And I'm thinking this is almost a miracle that this exists. And very few people I think understand the power of that technology without having felt had a direct perception of it themselves. And I think that that is one example of coming face to face with quality. There's plenty of other examples. (19:12) I'm sure the first time that we all touched an iPhone, we thought, "This is some incredible black magic." and the first time you got same day delivery from Amazon where you order a book and it shows up to your doorstep in two hours. You know, some of these customer experiences, it's worth just listening to them because they tell you something about the quality of what's leading to that experience. (19:37) You had a lovely word for it that you mentioned a while back that you and a friend, an investor friend had talked about the quality of blowness. Yes. Yes. blown away is that that experience that I'm referring to and unfortunately it's not an industry term that you can quantify one out of 10 but I think it tells you a lot about the quality of something that you're encountering and it's anything as simple as you know your favorite restaurant you have a perception that tells you when the quality of that restaurant has either improved or deteriorated there's something within you that knows and often times it's emotional it's physiological we all have this commonly (20:15) held dogma that you're supposed to turn off your emotions when you're an investor and I'm not sure that that's that's always right. Yeah. And it it's very related to both Robert Persig and Ian McGill talking about left brain. (20:36) There's a there's a lovely thing I think you've quoted in one of your letters where Persig writes about dynamic quality and he describes it as the pre-intellectual cutting edge of reality. So I I think we have this sense this sense that there's something there where you know like my friend the endow would say you know that quality has its own frequency like you can tell when you're in the presence of something usually that's extraordinarily high quality but yeah it's it's hard to explain it in spreadsheet terms and and there's something lovely I think you once quoted something from Roomie to me where he said something along the lines of the the soul has been given its own (21:09) ears is to hear things that the mind does not understand. And so it's it's kind of hard, right? It's like in the same way that Nick sleep and quesaria Zach were becoming obsessed with Persig and I I think I wrote in my chapter about them that you know on Wall Street it wasn't really popular to be having all this mystical mumbo jumbo about motorcycles and maintenance and the like. (21:34) And yet there's something real there that tends to be I think underestimated by very leftrain, very logical, very numbers driven people on Wall Street. And I think that there's even more to that. You know, this idea that we should shut off our emotions as investors, I think is a mistake. (22:01) In my judgment, it's not so much emotions per se that get us into trouble. I think it may be the human ego that really gets us into trouble. And there's a subtle difference, right? You know, the human ego is like this armor that we build that tries to protect us against the uncertainties of life. It's the part of us that operates from fear. (22:25) It's the part of us that, you know, when we realize how little we actually control in life, we develop this ego to try to protect ourselves. It's sort of self-preservation. And when we make investment decisions from that place, of course, we will make terrible mistakes because the ego is what distorts our perception. We already have this capability to discern quality. (22:49) We have that cheshmade, but we develop this egoic perception that kind of muddies the mirror of being able to see clearly. It distorts our perception. And when I look around our little microcosm of investing, I see this ego showing up all over the place. You know, it could come in the form of self-preservation. For example, I can't own that because it'll make it harder to raise money. (23:13) You know, you hear that all the time. or I can't sell this losing position because it will be admitting to my clients that I made a mistake. And the ego is unable to admit error. The ego thinks it already knows. So then the behavior becomes, well, I'm just going to hold on to this losing position even though I know, you know, it's not the right thing to do. (23:37) And I think another way that this egoic perspective shows up in the investment world is this illusion of control. And I'm as guilty of this as anyone. You know, early on as an investor, it was very natural to think if you just build that perfect spreadsheet or if you make the hundth customer call, then you're getting closer to reality. (23:59) And we usually have to learn the hard way that reality seldom bends to the whims of our spreadsheet. And all that activity may be simply masking our inability to just say, "I don't know what's going to happen. the map is not the territory. And you know, by contrast, emotion can be incredibly beneficial to investors. It might be blasphemous to say, but I don't think investors are using their emotions enough. (24:29) You know, in my experience, when you discern whether the CEO sitting across from you is trustworthy or not, or whether you've experienced the craftsmanship of a product, these are all pre-intellectual. there's a direct perception and you sort of know it when you see it. Even subtle emotions can tell you something important. (24:54) What I mean by that is when I reflect on my ownership of a business, right? Like you've owned a company for a few years. When you reflect on just how that feels within you, that can tell you a lot. When you own something for a few years and you find yourself becoming more and more impressed with the business as time has gone on, that's a signpost by itself because the normal experience is that you own something for a few years and the mediocrity of it just becomes more and more evident and it just took you a while to figure it out. (25:23) So when you notice that you're actually becoming more and more impressed and you notice that emotion within yourself, that is something to listen to. I think I want to go back in time a little bit in the chronology of your career because um in some ways you know you you started out in a very different place in a very different kind of environment where you came out of college having left UCLA and you got hired at PIMCO which is a very powerful firm with enormous amounts of money under management. (25:51) And I think at the time 2014 to 16 when you were there it was the world's biggest bond firm and had been co-ounded famously by Bill Gross clearly a brilliant very eccentrically talented difficult demanding guy by his own admission. I was reading an article about him in the um in the Wall Street Journal today from 2014 co-written by Gregory Zukman and he quoted gross saying sometimes people will say gross is too challenging and maybe so I would say if you think I'm challenging now you should have seen me 20 years ago so it's a kind of famously hard charging intense place not the sort (26:26) of place where you would talk about your emotions and your intuition and about room and the like and in Zukman's article he was talking about how people on the invest team there would literally arrive at 4:30 a.m. and stay for 12, 13 hours or more. (26:46) What was it like as a 22-year-old kind of new to the business, a kind of hungry, driven, smart young investor, and this is sort of so it's so not like a I mean, obviously they're brilliantly clever, highly educated people, but it wasn't a sort of soulful, ruminative, contemplative kind of environment. And it was sort of the opposite. Yes. You know, Roomie actually has a quote which is that all things are known through their opposites. (27:11) So I think in some ways that experience working at a place with that sort of intensity was what clarified and sort of gave me a sense for what I wanted to be doing long term. And you know the experience of PIMCO I was very lucky because I was hired there directly out of undergrad. So I was the youngest analyst on the team by by some years. (27:32) And it was this intense environment. And you're right, we would get to the office 4:45, 5:00 a.m. You would have a suit and tie on. It's usually dark when you arrive in the office. It's usually dark when you leave the office. There's this culture that you're kind of expected to have a smart sounding cogent opinion on every little economic development, every little piece of news that's related to one of your companies. (28:05) And I was so lucky to have had that kind of experience where you essentially have an ability to fly around the country to meet with executive teams as a 22-year-old to get access to any piece of research. Former central bankers would come and advise us on the economy. And so you would think that we had every possible resource. (28:26) We had PhD computer scientists that would come, you know, run correlations on different asset classes. And we had hundreds of analysts that were flying around the country to meet with companies and form opinions on specific securities. You would think that we would have every possible resource there is to compound capital at extremely high rates. (28:47) And yet I think six months in I was reflecting on this and it was a little confusing to me why people like Warren Buffett and Charlie Mer and Louis Simpson and the like were able to compound capital at 20 plus% for decades despite being essentially a person in a room without a computer. Whereas we're sitting here in our very large offices working really hard. (29:13) you know, cortisol is in the air with great pedigrees and our taon and we're compounding at, you know, basis points above the benchmark. Not to say that that's not an admirable thing to do, but it just felt like I was missing something in some ways. Now, I was incredibly lucky that there were certain people at PIMCO that took an interest in my development and they really wanted to teach me how to think about things the right way. (29:38) And so from that perspective, it was an incredible learning experience and one that I wouldn't trade for anything. There was a lovely line I think in one of your shareholder letters. I just read all of your shareholder letters over the last couple of days and you wrote somewhere, why in this age of information overload where data gushes like a digital waterfall? Is investment success still so elusive? Why does Warren Buffett with his egg mcmuffins and bridge games outperform the armies of well-paid analysts with six monitors each? which I think gets at this question that you were wrestling with at (30:08) PIMCO. Like there's something really strange about this game, right? That as you put it in that shareholder letter, you have these web scrapers kind of predicting weekly revenues or algorithms discerning the emotions of people's posts on X and you have every tool and yet there's something that's missing. (30:27) And we'll we'll talk in a minute about L Simpson which is sort of the opposite of that. But what did you conclude about why these incredibly smart people who in many cases I mean literally I I think Muhammad El Arian was paid over $100 million a year. Bill Gross was paid over $200 million a year. I mean these were the smartest incredibly intense people with every resource. (30:51) Why isn't that reflected in outrageous returns like Warren? I think it's a complex problem. When I reflect on what is the root what's the root quality going on here I think a lot of it has to do with risk aversion and that's across the spectrum that's not just the investment products that we were managing it actually goes into the institutional level it goes to many of the people overseeing these institutions there is very little tolerance for volatility no one wants to look wrong for any short period of time even if it means that (31:26) your longerterm results will be much better. There's very little tolerance for discomfort of any kind. And so the bias and the incentive structure is to just operate in a way that will keep the assets. And if that means, you know, slightly less performance over time, I think that that's a trade-off that this industry has has made for better or worse. For better, you know, it it allows for people with a different orientation to have better results. (31:57) Yeah. You mentioned somewhere that when you look at the history of investing, you see that there were these very long periods of outperformance for a lot of the great investors, you know, which are very uncomfortable, right? They're emotionally very uncomfortable, you know, whether it was John Mayn Arcanes or Ben Graham or Warren and Charlie. (32:21) Can you talk a little about that because I think I think that's one of the things that makes outperformance so difficult is as as Monai once said to me you know the most in the most important quality of a great investor is the ability to take pain. Yes. I think that studying investment history at any level makes it clear that over the course of a multi-deade investment journey, there will be these large periods of underperformance and large declines inside of those periods. (32:53) Just glancing casually at some of the notable investment records of history, this just becomes quite obvious. You could look at the 1930s and great investors like Ben Graham's fund I think declined by 70%. And he was still making distributions out of his fund. (33:12) And so I think the starting capital was down maybe 80%. By the end the personal portfolio of John Maynard Kes I think declined by 80% in the 1930s and the portfolio that he was managing at Cambridge declined by like half. You could go to the 1970s where Charlie Munger had 80% of his capital in two stocks. It was Blue Chip Stamps and the New America Fund and they were both very cheap stocks. (33:39) But his portfolio declined by more than half in 2 years. In those two years alone made the prior seven years of returns I think something like zero cumulatively. Even Shelby Davis, I was reading recently, I think his personal portfolio in the 1970s declined by 60% because he had margin debt at that time. (34:04) You know, in the last few years of the 1990s, Lou Simpson himself was 50 or 60 points behind the S&P 500. And that little stretch of performance actually wiped out like a decade of outperformance against the market. And of course, you know, Berkshire Hathway itself has declined by 50% multiple times over the years. So, the list goes on and on. (34:28) You know, I'm kind of a a nerd in looking at these old old records because they fascinate me. But we know we know that these periods of extreme volatility and underperformance are just very normal. So, the question then becomes given that reality, how should you structure your environment for that inevitability? How should you structure your life and your business and your environment? And what I found is that when you have a truly long-term orientation, you start to just have to surrender in some ways. (35:00) You simply stop engaging with certain kinds of questions. For example, will there be a recession next year? Is the market about to crash? Is AI a big bubble that's about to pop? Is the US fiscal situation unsustainable and going to lead to a crisis at some point? These are all very interesting questions, but over a long time horizon, they just don't matter that much. (35:27) And spending a lot of time sort of ruminating on these kinds of questions has been an expensive distraction for many people over many years. As far as I'm concerned, there will be severe bare markets over time, and there might be even one or two every decade. I have found that it's not worth having a lot of anxiety about when those periods come. It's much better to just know that they will come. (35:52) There's a story about Lou Simpson that really was instructive to me about this and it was his experience in 1987. So he went into the 1987 period thinking that stocks were very overvalued and I think many smart people at that time believed that stocks were very overvalued. He couldn't find anything to do. (36:17) So he actually took his portfolio to 50% cash early in 1987. And you might think this is incredible. This is you know clairvoyance. What amazing market timing. And when he reflects on that period, he sold stocks at the highs and paid his taxes. And then the market crashed and he sort of deployed a little more capital, but the market snapped back so quickly that he didn't deploy his capital fast enough. (36:48) And so he made the right decision at the highs, but didn't make the right decision at the bottom. And this to me was very instructive because you have to make multiple decisions correctly to really take advantage. And I think in his estimation, he thinks that he added some value net of all of that, but it may have just been better to remain fully invested and just roll with the punches. And so that's kind of the approach that I've taken to thinking about this. (37:11) Just to close the loop on this idea of your willingness to ignore macroeconomic prediction, there were a couple of lines I really like from your shareholder letters that I wanted to highlight. One of them from a recent shareholder letter. who said, "One of the enduring amusements of this profession is how reliably investors are shaken by what is in fact a recurring pattern, right? This pattern of of market meltdowns and and dips and predictions of gloom and doom." And you said, "What if we simply chose (37:37) not to partake in the theatrics?" And I think that's a that's a really important question just this decision as you put it. It's a liberating question to to say no I I'm willing to free myself from geopolitics and macroeconomics and all all of that. (37:55) And what you said which I'm quoting because I think it distills an enormous amount of practical wisdom. You said we are focused on owning individual businesses whose long-term reinvestment dynamics are resilient to changes in macroeconomic conditions. Do you want to comment on that in any way? I think it gets at such a profound and essential truth about investing that if you're you can make this very conscious decision just to focus on businesses that are resilient to changes in macroeconomics rather than saying I'm going to try to predict what's going to happen. Yeah. I (38:26) mean I think that this work is it's almost unnervingly simple. You know the investment business is really quite simple and at the end of the day it's about trying to understand the economic reality of a business and as I said Lou used to say all the time that it's about understanding the future economics of a business. (38:54) Now to the extent that the macroeconomy is going to have a huge impact on the future economics of this business then it may not be a great business. To the extent that you know going into a recession is going to hurt the business or to the extent that there will be competitive onslaught at some point or you know a product might fail for example. Things can happen in businesses all the time. (39:17) And I think the idea is to own specific businesses that are resilient despite the inevitable sort of turbulence that life presents. And I think it really simplifies life to opt out of a lot of these things that are outside of our control. I want to go back and talk in in much more detail about Lou Simpson who's clearly been in many ways the formative influence in your life as an investor. (39:44) And so you moved to Naples, Florida in um I think 2016 and worked until 2019 with Lou at his firm SQ Advisers. And for people who don't know, who've just heard us mentioning him, Lou was head of investments for Geico, this auto insurance company that's now owned by Burkshire Hathaway completely. (40:11) And he was there for 31 years, I think, from 1979 to 2010, and crushed the market over that period by a huge margin. You recommended to me a book that I I read a chapter on Lou yesterday, a book by your friend Alan Banello on concentrated investing where he talks about the circumstances when Buffett first hired him. (40:29) Um when Buffett said after meeting him asked him about his personal portfolio and then after meeting him said something like stop the music we found our guy and he later said simply put Lou is one of the investment greats. This is from a letter I think that Buffett wrote in 2010. Tell us about what it was like when you first met Lou because in some ways the culture that he created was diametrically the opposite of the culture that you had seen at PIMCO. And this isn't a criticism of Pimco. It's just he embodied something very very different. (41:04) Every time I think of Lou, the memory that always comes is the first time that we met. And I was in my mid20s at the time and you know as you mentioned I was working at a more or less traditional investment firm which was Pimco. And I remember the energy that I carried with me at my first job was this sort of over analytical habit. I had this formality, this intensity. (41:33) And when I arrived in Chicago to meet with Lou for the first time, I carried a lot of that energy with me. The context of our meeting was actually to discuss a company that I thought he might be interested in. And in my mind, I imagined this very intimidating investment legend was going to rigorously cross-examine, you know, every little detail of my investment thesis. (42:01) And so mostly out of insecurity, I lugged along with me to Chicago this very thick stack of research material with charts and valuations and and everything. You know, I was ready. I was sort of ready to go to battle intellectually speaking. And I remember stepping into the elevator with my suit and tie on and you know, your heart's beating a little faster than usual and I lugged along my data points with me and my my thick stack of research. (42:28) And it's one of those long elevator rides of where your ears are sort of popping along the way. And I remember thinking I'm going to be met by an assistant or ushered into some kind of waiting area. And instead, you know, the doors open and it's just Lou himself standing in the hallway, very unassuming, no formality, no pretention. (42:52) And he led me into an office that was really the polar opposite of the office that I had just been in, you know, the day before. There were no Bloomberg terminals. There was no financial TV on. It was like the library of a scholar, you know, a comfortable chair, couple piles of reading material and this just very calm presence that immediately struck me. (43:18) And he looked at me as he led me inside and he he said, you know, make yourself at home. Let me make you a coffee. And I remember that that line just sort of stopped me in my tracks because here was someone who had compounded capital at worldclass rates for decades. Someone who Warren Buffett had praised many times over the years and someone that I had been studying from afar since college. (43:43) You know, my idea of passing time between classes in college was to pull up an old Berkshire Hathaway 13F. And in some of those early years, you could actually scan down and see which holdings belong to Lou and which holdings belong to Warren. And so I would sit there at the UCLA coffee shop trying to reverse engineer why Lou bought Freddy Mack or Moody's, why he bought Nike in the early 90s and held it for 20 years or more. (44:09) And now here he was, this person behind these decisions, stepping away to make coffee for a probably visibly nervous 20-some year old kid who hadn't done anything yet and who was so early in his compounding journey. And I remember thinking to myself, you know, I should be making you the coffee. (44:28) And when he returned, he didn't launch into some kind of monologue. He didn't try to assert how smart he was. He would ask these questions with this very sincere curiosity and it was this remarkable receptiveness for someone with his experience and with his reputation. And you know that first meeting left such a deep imprint on me because it kind of opened a window that there was just a different way of being in this work. (44:56) It didn't have to be this hard charging zero someum way of operating. This kind of hyperactive way of operating. Lou carried himself with remarkably little ego. And that was so different from the archetype of person that you typically run into in the investment world. (45:16) You know, the normal experience is that you come across folks who are very bright, very hardworking, but for whatever reason, they insist on puffing up their accomplishments and telling you all about their most recent investment win and their assets under management and all this sort of thing. And Lou was just so different from this. (45:36) Some of his most extraordinary achievements would just sort of slip out accidentally after having known him for years. He seemed deliberately uninterested in indulging that kind of self- congratulatory aspect of himself. He was quick to say, "I don't know. (45:57) " You know, when someone would disagree with him or challenge one of his beliefs on a company, he wouldn't get defensive. He would simply say, "Yeah, you know, maybe you're right. I should think about that more." And I truly believe that his humility was, you know, his lack of egoism was the reason why he was a good investor, was a big reason why he was a good investor because it gave him a clearer perception of reality. (46:21) The one conversation that I ever had with him, I think I may have told you this before, this was when I had a Zoom breakfast with Charlie Mer and a few people like Lou were on the call and Lou already passed in 2022 was already obviously pretty unwell, I think. (46:41) And he was so lovely on the call and it was a very it was a very strange call because I was told, "Oh, our homework is going to be to study your book, Rachel Wiseer, and then we'll discuss it." So, I'm in this sort of embarrassing position where it's like, "Oh, here I am. I'm going to teach Lou and Charlie about how to invest. (46:58) And um there was a moment where someone turn you know Charlie was very dominant through the conversation and then someone turned to Lou and said what do you think of the book Lou? And Lou was really lovely about it like very very polite and charming and said how helpful it is to have stories of great investors like because we learn through stories. And then we were talking about Alibaba, which he and Charlie had just been buying. And that, you know, Charlie had been saying, "Oh, I'm all in. (47:16) " And Lou said something like, "Well, I just bought it yesterday, so it's bound to go down 50% immediately." And there was something sort of so self-deprecating about it. Like he wasn't there to tell you I just bought the, you know, and I asked him why why did you buy it? And he was saying, well, you know, it's a it's a dominant business in a fast growing country and it's extraordinarily cheap. But it was funny because it did go down 50%. (47:42) And um in a way it was like very typical of him that he was so humble and self-deprecating and in a way maybe it was also a recognition of the fact this is a really hard game. You are going to go through these periods where just stuff happens. Yeah. Absolutely. You know, it brings to mind a friend of mine offered me a definition of humility that I think is remarkably precise. (48:08) I think it's the best definition of humility that exists. He said that humility is the awareness. It's your awareness of your utter dependence on all that exists and your interdependence on everyone around you. And the opposite of humility, of course, is like a self-centered perspective. To think that we did it all alone, that we're the ones in control. (48:34) That clouds your perception. It distorts your judgment. And this dynamic was so clear when Lou talked about his portfolio. When everyone else would pitch their great ideas, Lou would say things like, you know, I think the portfolio is just okay. Maybe it's a little tired. And this is, you know, this is one of the best investors of all time and he's just sort of hoham about his portfolio. (48:59) Whereas if you went into the Monday morning meeting of many large investment firms, you would hear people pounding the table on probably mediocre ideas in many cases. And I think there's something that's objective about his humility. It allows you to see things clearly. And his humility wasn't performative. It wasn't like this inauthentic humble bragging. (49:19) It came from a real awareness in how little we actually control. And I think Buffett's line about the ovarian lottery, I think, captures that spirit so well. We all like to believe that we are the sole cause of our own success that things are so deterministic. (49:38) But in truth, you know, so much of anything that goes right in life in investing is really just the beneficence of life. There's a really lovely line also in Alan Banella's book that I remember seeing before many years ago from Lou where he said we are sort of the polar opposites of a lot of investors. We do a lot of thinking and not a lot of acting. A lot of investors do a lot of acting and not a lot of thinking. (50:04) And I'm wondering what you learned from him about the importance of detaching ourselves from the noise and distractions and the kind of casino element of Wall Street. Yes. Lou lived a pretty balanced life in the years that I knew him. He would read broadly. He had this amazing sense of humor. You know, he would make it a priority to exercise. In the mornings, he would go for a long walk or he would go for a swim. (50:31) I remember on one occasion it was definitely in the middle of the week and I think the market was open and I think our portfolio was probably down quite a bit that day and he just called me up and he said you know there's this new exhibition at MoMA in Chicago do you want to go with me and I said great and we just spent the afternoon wandering around you know looking at art and you know this is this is very different from the kind of experience that you might have at many many investment firms. You know, I won't claim to have all the answers about this, but what I do know (51:04) is that if you intend to have a long-term investment journey and you have surrendered to a lot of this volatility, I know that if you're constantly sprinting and you're always wired and you're reactive to every little data point and you're just staring at ticks on a screen, maybe that will help your results for the next month or two months or six months, but over the long term, it will completely destroy your It will destroy your physical and mental health. It will strain your relationships. And ironically, (51:36) it will make the investment decisions worse at some point. And it's sort of perverse that the harder you push, the harder you try at investing, the shorter your runway. And in the end, compounding is all about the number of years. (51:54) And so, I think creating space in your life is something that I learned from him and something that's invaluable. So much of modern investing is preparing a memo or updating a model. You know, there's so much reactivity. And to his point, you know, so little time is intentionally devoted to reflection. And it's not intuitive for most people to think that going for a walk may be better for your portfolio than, you know, adding another scenario to your Excel model. (52:25) Are you looking to connect with highquality people in the value investing world? Beyond hosting this podcast, I also help run our tip mastermind community, a private group designed for serious investors. Inside, you'll meet vetted members who are entrepreneurs, private investors, and asset managers. People who understand your journey and can help you grow. (52:44) Each week, we host live calls where members share insights, strategies, and experiences. Our members are often surprised to learn that our community is not just about finding the next dog pick, but also sharing lessons on how to live a good life. We certainly do not have all the answers, but many members have likely face similar challenges to yours. (53:05) And our community does not just live online. Each year, we gather in Omaha and New York City, giving you the chance to build deeper, more meaningful relationships in person. One member told me that being a part of this group has helped him not just as an investor, but as a person looking for a thoughtful approach to balancing wealth and happiness. (53:27) We're capping the group at 150 members, and we're looking to fill just five spots this month. So, if this sounds interesting to you, you can learn more and sign up for the weight list at thevesspodcast.com/mastermind. That's thespodcast.com/mastermind. or feel free to email me directly at clay@theinvestorspodcast.com. If you enjoy excellent breakdowns on individual stocks, then you need to check out the intrinsic value podcast hosted by Shaun Ali and Daniel Mona. (54:01) Each week, Shawn and Daniel do in-depth analysis on a company's business model and competitive advantages. And in real time, they build out the intrinsic value portfolio for you to follow along as they search for value in the market. So far, they've done analysis on great businesses like John Deere, Ulta Beauty, AutoZone, and Airbnb. (54:20) And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes highquality, comprehensive deep dives that cover all the aspects of a business from an investment perspective. Go follow the Intrinsic Value podcast on your favorite podcasting app and discover the next stock to add to your portfolio or watch list. (54:44) You've mentioned in the past that sometimes your best investment insights feel like these gifts of serendipity. They're not always the result of mechanical rigor. But I remember also you talking to me about the importance of actually kind of structuring your life in a very conscious way to give yourself this kind of spaciousness and lack of noise. (55:07) And you were you were saying that it's it's not just how you schedule your day and how much meditation you do and the like. It's also your choice of who your limited partners are and your fund and who's on your team if you have a team or the kind of businesses you hold. Can you talk a little bit about that? Because it seems to me this is such an important part of actually creating a kind of countercultural lifestyle that gives you a sort of unexpected edge in investing. (55:36) Yes, edge is a funny concept. Maybe we talk about another time. My view is that whatever you build, whether it's an investment partnership or anything else, it ultimately lives downstream from how you choose to live and the values that inform that. (56:01) And so I have always tried to ask myself, what are you actually optimizing for? Because if what I'm doing is not in alignment with the answer, my personality is such that I will not last very long. I'll start to feel that imbalance internally somewhere, even physiologically. And in investing in particular, the power of compounding reveals itself when you stay in the game for a really long time. (56:25) Longevity carries most of the freight here. So for me, the first principle in deciding what to do was to build the house that you want to live in long term. You know, that was really critical. And I can't tell you the number of times I've seen someone very talented, you know, lovely person build this sprawling investment business only to privately resent a lot of the complexity that comes along with it. (56:52) Less time becomes devoted to the craft of investing. More time is spent managing people or fundraising or doing administrative tasks. For me personally, the craft of investing was the part that I loved. That's how I wanted to spend the majority of my time. And that meant that the structure had to be exceedingly simple and free from unnecessary complexity. (57:22) The work had to fit my temperament and you know it had to sort of match your energy in some sense. So today I run one portfolio. There's fewer than 10 holdings. I might find one or two new ideas in a year. the rest of the year is spent quote unquote sharpening the axe. You know, that simplicity gives you an enormous amount of space for reflection, to try to think clearly, space to make long-term decisions without distractions, space to have close relationships with every one of partners. In more than six years, we haven't had a single redemption, which I think is some kind of record for a (58:00) strategy that's sort of flinging up and down depending on the year. But it's really a reflection of having found, you know, so grateful to have found partners who are truly high quality and are aligned in, you know, our goals and in our thinking. There's always an inherent tension, though. (58:19) It's something that I've been wrestling with for a long time and it's this idea that if you can help more people, of course, that's intrinsically better. It's something I spend so much time wrestling with because what greater fulfillment is it than to be of service to people that you have real relationships with? It's like the more the marrier. But there's always this counterbalance to be mindful of. (58:38) And I don't think that you can scale close real relationships infinitely. The moment that you stretch something beyond its natural equilibrium, I think it exacts a payment from some part of your life, whether it's your work, whether it's your personal life. (58:58) And stretching something can dilute what makes it work in the first place. And it's something that I just continue to think about. when you founded Roomie Capital Partners, I I think it was October 2019, so it's probably a few months after SQ Advisor closed or after Lou decided to close the firm and and retire. Do you remember his advice to you? Cuz it seems like in some I mean I remember reading that he typically had something like 8 to 15 stocks I think at Geico. (59:30) What did he advise you as you launched your career as a fund manager? You know, his main advice to me was to focus on producing results rather than doing a lot of the things that you're told you should be doing, like getting a fancy office and putting together a pitch deck and running around and trying to raise money from all these people. (59:53) And I am so grateful that he gave me that advice because the first couple of years gave me so much space that I think benefited both the process but also the relationships with the people that did invest with me from day one. I started Roomie not too long before CO and not too long before another decline in 2022. (1:00:20) And the experience of these these periods were so serene. You know, not to say that it's always comfortable to watch your account balances declining, but it was about as easy as you might expect because you felt this alignment across the ecosystem that just made things much more seamless. And I suspect if I would have raised a lot of institutional capital out of the gate that probably some percentage of that capital would have left during one or these periods. And maybe that experience would have been, you know, uncomfortable and you would have felt like you (1:00:50) disappointed people and that sort of thing. And I think his advice to just focus on producing a good outcome for the people who trust you was was wise. That word alignment seems very central to you. Right. (1:01:11) I was looking the other day at the founding principles of Roomie Partners and and you talked about a a culture rooted in in alignment and elsewhere you write about investing in a a small number of exceptional businesses whose leaders are similarly driven by a core sense of alignment. I think you're very aligned in your fee structure as well, right? Like you have a small management fee that gets smaller as you get more assets under management. (1:01:37) So the shareholders benefit from the growth in scale and you get an incentive allocation. Basically if you beat a 5% annual hurdle the compound so it's cumulative. So if you if you fall behind it becomes harder and harder to catch up with the rabbit. And there's a lovely line that you repeat a lot in your shareholders where you say I'm wholly uninterested in being rewarded for simply existing. So you're not trying to gather lots of assets and then just collect fees. (1:02:01) Can you talk about the importance of that sense of alignment because I see it also in the companies that you invest in that something like Brookfield which has always been one of your two or three biggest positions. I remember you commenting once about how they would invest billions of their own capital alongside their shareholders capital if they set up a huge infrastructure fund say. (1:02:24) So it seems like alignment is a very central theme for you. Very much. And the concept of alignment is another root quality that can't be quantified and it can't be measured. What happens in the investment world is that we try to set up rules and huristics to sort of force alignment. So they'll say, you know, what percentage of the company does the CEO own? Sure, if they own a lot of stock, that's great, but not necessarily. (1:02:52) I think for certain kinds of companies, certain kinds of people, the output doesn't matter so much. Like, if Warren Buffett owned a little less Bergkshire Hathaway stock, I don't think his behavior would change all that much. (1:03:10) If you gave him some big incentive plan to incentivize him to compound, I don't think it would change his behavior that much. So, alignment is something that I think it's best done. You have to sort of embody it first and then the output of that is just the output. In the case of Roomie, I wanted to emphasize that this is a performanceoriented partnership. It's not about raising capital. (1:03:32) It's not about having a good couple of years. It's about compounding capital for multiple decades. And I'm thinking in a quite long time horizon when I make investments. And what that means is that you also have to find businesses where the managers of those businesses have a similar orientation. So if you can align that time horizon and that sense of patience and that goal over across the ecosystem, whether it's Bruce Flat at Brookfield is thinking about the next 20 years and then Roomie is thinking about the next 20 years and (1:04:06) Roomie's limited partners are thinking about the next 20 years. If you can create alignment across that ecosystem, the odds of compounding, the odds of a good outcome, I think, are dramatically improved. How does a company like Brookfield or Appfolio, which have been two of your biggest positions since inception, h how do they embody what you're looking for in terms of management, but also what you're looking for in terms of what you call long duration reinvestment runways? because it seems like a focus on the potential for reinvestment is always almost like (1:04:43) the defining quality that you're looking for in a business. I think Charlie said it best where the longer you hold something, the closer you will get to the intrinsic reinvestment return of the business. And so if you intend to own something for a very long time, it's imperative that the business itself is generating high returns. (1:05:09) Not to say that it's generating high returns on a reported basis, but it has an ability to reinvest at high returns because if you're just throwing off cash and you have to either dividend it out or buy back stock, it's not intrinsically compounding the business. So, I'm I'm looking for businesses that have this intrinsic ability to compound capital over time. (1:05:28) So I basically won't buy things or add to things unless I'm convinced that the direction of the future economics. The direction of the compounding of intrinsic value is long lived. So that excludes all kinds of things from the funnel. I tend not to buy things just because they look statistically cheap. (1:05:50) these ideas that they seem like they'll be okay just for the next few years, but they'll likely face some kind of existential threat over the next few years. So, I won't buy a melting ice cube regardless of valuation. I won't buy bad business models or people that I don't believe are aligned or talented. Some people can do this well. Some investors can do this well. I'm not one of them. (1:06:14) Now, in terms of the long duration reinvestment, I think something like Appfolio is a good example of that. It's a business that sells software to real estate property managers. And ultimately, the product is a significant entropy reduction in the real estate industry. So, it saves property managers a lot of time. It reduces the need for labor. (1:06:40) It just simply makes their lives easier. And the product allows you to fulfill many tasks, whether it's collecting rents or screening new tenants or scheduling maintenance or executing a lease. And because it sits in the middle of all these workflows and the employees at the property management company are all trained on this product, it creates an incredible stickiness. (1:07:06) It sort of enjoys this center of gravity in the real estate market. that stickiness when you have customers for 10 years, 20 years. In many cases, many privately held software companies will take advantage of that stickiness by cutting costs, by stopping the innovation, by levering up the balance sheet, you know, jacking up prices. (1:07:30) But Appfolio's ethos, it sort of embodies a partnership approach. It's by far the most customer oriented culture in the market. And to be in a position like that allows them to take a much longer term view. So they tend to add functionality that is impactful for the customer. (1:07:53) And because they're sitting in the middle of all these workflows, they can continuously develop new features and functionality that's increasing their potential for pricing power. And as they add these features, they can charge, you know, a small sliver of the value created. And as you grow in the market, the vertical software business is such that you gain a reputation. (1:08:12) There's what's called referenceability, which allows you to gain incremental market share. When someone's making a purchase decision, they're usually calling over to a friend of theirs in the industry and saying, "What do you use?" And they say, "Oh, I use Appfolio." And so the product becomes kind of the standard in the market increasingly as you get bigger. (1:08:31) And as long as you're treating customers well, you have these relationships for a long time. And so it's really a win-win sort of ethos and allows them to reinvest capital for the next decade. It's interesting because they're obviously very customer focused and not that Wall Street focused, right? Like that there was a sense I I think in one of your shareholder letters you wrote about how they would they would have an investor day and they wouldn't they wouldn't webcast it. They wouldn't have a transcript. (1:08:55) They would have earnings calls and they would have no Q&A session in the earnings call. Can you talk about that? cuz it seems like in the same way that you're having to be fairly stubborn and obstinate in focusing on the long term on long-term compounding of wealth, you're also favoring businesses that are kind of ornery in saying to Wall Street, "No, no, we're perfectly happy to suppress our short-term earnings because we're trying to build value over time." That's exactly right. (1:09:28) And I think that I may be just drawn to it because I notice when someone's doing special, they don't always have to go and and broadcast it to Wall Street. Now, Folio certainly fits the bill there. You know, it's an extremely nonpromotional culture. They don't provide long-term financial guidance and that frustrates, you know, sellside analysts and many other funds because they basically want the company to do their work for them. (1:09:51) They don't have Q&A on their quarterly calls as you mentioned. You can listen to one of their calls. It's like 10 minutes of prepared remarks and then they say all right thank you very much see you next quarter and you know people are left like you know what happened and for that reason the stock has been largely misunderstood by the market for years and the shares have also been closely held by a handful of long-term owners for a long period of time you know I think at one point it was more than 50% of the company was held by people on the inside and that illquidity (1:10:25) and lack of promotionality creates a situation where the shares historically have traded with a fair amount of volatility. I was recently looking back at this and it was sort of interesting that the company has been public for around 10 years now and over those 10 years it's compounded quite nicely. I think the long-term compound return has been more than 30% a year for a decade. (1:10:49) But over those 10 years, more than half of the trading days of those 10 years were spent in a draw down of more than 20%. So it's like you hold this stock that's bouncing around and more than half of the time you're sort of experiencing this draw down which I think makes it quite difficult for people to own something like this. (1:11:13) Can you talk about this general topic of a willingness to hold stocks for a long time? Cuz obviously your your fund isn't that old. It's 6 and a half years old, but there are these stocks that you've held since the very beginning that I assume you'll continue to hold for many years. But when you look at a lot of the great investors, you've written in the past about how, for example, Ben Graham owned Geico from 1948 or Phil Fiser owned Motorola from 1955 or Buffett bought the Washington Post in 1973 or Tom Russo bought stocks like Nestle in 1986 or Lou Simpson bought Nike in 1993 (1:11:44) or Charlie I think bought Costco in 1997 and they would just kind of hold. Same thing with Chuck Akray with his American Tower investment in 2002. Can you talk about the challenge of holding exceptional businesses when even the most exceptional businesses go through these periods that are pretty awful? Absolutely. (1:12:10) It's something that I like to spend some of my free time doing, which is to reverse engineer the great investments of the great investors. And not just those periods where things are going great, but I'm really keen to understand those long stretches of time where nothing happens and it's hard for you to sit on your hands and you start to see everything else going up and you start to think, you know, my current companies are not doing so well and you get seduced by greener grass over there. And I think so much about so much of (1:12:41) holding a business for a long period of time is to be able to see what you have clearly. You know, Roomie has the quote where he says to be able to look at the thorn but also still see the rose. And so to have a balanced understanding of what you have and not to be swayed by these long periods of underperformance. (1:13:01) Costco is an example that I find to be quite striking because Charlie bought the stock I think in the early 90s and he held it until his death. You know he held it for decades and within that period you could look and say wow you know I think the stock has compounded in the high teens for multiple decades and so it was a wonderful outcome but there was a period I think between 2000 and 2010 where the stock didn't move at all. I think it was basically flat. (1:13:33) And I wanted to understand this case because it's very few people would think of something like Costco flatlining for an entire decade. But really what happened was that they went into the late '9s and they were very ambitious. (1:13:53) They thought they could grow new stores at 10 or 15% a year and their comps, you know, their same store sales would grow in the high single digits and all of that would sort of roll up with operating leverage. you'd get to mid- teens earnings per share compounding. And you know, that sounds great. But what happened is that in the early 2000s, they realized that they sort of overshot on their ambition and they had to rein it in. (1:14:16) So their store growth went down a little bit and their same store sales were getting impacted by a number of company specific issues including competition from folks like Sam's Club and Walmart. And the stock declined quite a lot. And it went from, I think, 50 times earnings in the late '9s down to 12 times earnings somewhere in the early 2000s, maybe 2003, 2004. (1:14:38) And very few investment firms would be able to hold a stock like that for the whole way because throughout that period, it's so easy to say, well, Sam's Club is going to come kill them and this business has low margins. And you can concoct all of these narratives to shake yourself out of the position. I once asked Charlie what did he see that allowed him to own something like this for such a long period of time. (1:15:03) And the first thing he did was actually remind me, don't forget that in markets where Sam's Club was opening stores across the street, we were actually cutting our prices. So you can imagine, you know, the very sharp Wall Street analyst is doing his channel checks and looking at what's going on in the stores and he would find that this business doesn't have any pricing power because everywhere that Sam's Club's coming, they're cutting their own prices. So what kind of good business is Costco if they have to cut their own (1:15:26) prices? But of course, these were all temporary dynamics. And Charlie's answer was that the product quality was improving, the management was ethical, you know, the culture was meccratic. These are all root qualities that wouldn't ever have shown up in any spreadsheet or in any fancy research report. (1:15:50) But the root qualities were what allowed him to own the stock for multiple decades and never get shaken out of it. Yeah. It's really interesting. I was reading your account of your dinner with him, which I think was just a few months before he passed away at the age of 99 back in late 2023 and I was really struck by the fact that all of the things he talked about that enabled him to stay in in Costco for all those years were really qualitative, right? So unwavering commitment to customer trust or employee loyalty or product excellence or ethical people or a meritocratic culture or whatever. So, it really reinforces what you were saying (1:16:21) before about trying to look for qualities that aren't necessarily expressed in a spreadsheet, but they do exist, but you have to be attuned to recognizing them. And you said you said something really nice in one of your shareholder letters where you discussed this. You were talking about the difficulty of going through these periods of stagnation for a stock. (1:16:39) And you wrote this may be precisely why attractive long-term returns are available to those with a different temperament, orientation, and structure. I think that gets at something really important. You need this kind of intellectual understanding of why you want to be patient, but there is an element of temperament that you know as Charlie would talk about the ability to defer gratification that if you don't have that deferred gratification gene, it's really hard. But then there's also this issue of structure that you actually have to have structured your (1:17:08) investment firms so that your shareholders will allow you to be long-term, which I think almost nobody has been able to do like that. you know, you have like Josh Tarasoft has like there are you have to be kind of slightly orary to sort of say, well, I'm just not in the asset gathering business and so I'm perfectly happy to sit and just quietly compound money. (1:17:34) Yeah, it's a really tricky problem and I think so many of these questions with investment, they are what's called a divergent problem. In the 1970s, there was this gentleman named EF Schumacher and he wrote a few books that I really enjoyed over the years. Schumacher himself was actually a protege of John Maynard Kanes and one of the books he wrote was called Smallest Beautiful. (1:18:03) Another book that he wrote is actually called Guide for the Perplexed, which of course is a homage to the same title by my monities. Yeah. In guide for the perplexed, she talks about the difference between convergent problems and divergent problems. And a convergent problem would be like one where the solutions to the question increasingly converge on a single answer. (1:18:29) So the classic example would be how should we create a two- wheeled humanpowered means of transportation? And so people will put solutions forth and increasingly you'll learn that it's the bicycle and the bicycle has been the answer the convergent answer for quite a long time. Divergent problems are different. Divergent problems are those where they don't converge on a single solution. (1:18:49) In fact many solutions become polar opposites. And the classic example here would be asking you know how should we educate our children? And so one group of people might say,"Well, you should give the children immense freedom so they can explore and nurture their own interests. (1:19:07) " And another group of people might say, "No, you need discipline. You actually need rigorous discipline and following the rules and that's how they'll learn." And so at the extremes, you've created a divergent problem where the answer to how should you educate our children is either freedom or discipline. And you're sort of on two different ends of the spectrum. (1:19:25) And you know, I'm not sure that this idea is all that new. I think Aristotle said it best when he said that every virtue is in the middle of two vices. But so much of investing sits at this point, you know, to your point about urgency versus patience, about working hard versus letting go, about, you know, trust versus skepticism, concentration versus diversification, you know, generalist versus specialist. (1:19:55) All of these these questions, you sort of learn that you need both and you need them in some kind of harmonious proportion which only intuition can tell you, you know, how much of each you need. And so with something like building an investment firm, of course, you need some capital to start. So you can't just go off and start, especially when you're young in most cases. (1:20:15) But if you spend all your time doing that, then your actual investment performance will suffer. There's this line that needs to be found between the two. You know, another one is to have a network versus to be independent. That's another classic divergent problem that one has to solve when they're in this investment business. Yeah. (1:20:33) You and I have talked a lot about that in the past because you obviously spend a great deal of time or have spent a great deal of time over the years chatting with friends like Chris Beg and Josh Tarasoft and the like, these really smart people about investing. (1:20:52) And there is some crossover in some of your your holdings and your approach and yet at the same time I remember we were talking about Carvana at some point and you said yeah I didn't tell them I was investing in Carana. Can you talk about that? Because Covena is a really interesting example of something where you actually took a different approach that you do have these really exceptional long-term businesses, but then sometimes you'll buy something where there's tremendous asymmetric upside potential, but that it's pretty hairy and it's not something you really want to talk to people about. So, so again it gets at this kind of (1:21:23) conflict between having a network where you share ideas and actually being quite secretive because you don't want people to judge you and you have to defend yourself. Can you talk about Cavano through that lens? Yeah. Well, first of all, I'll say, you know, I'm incredibly grateful to have a small circle of friends in this work. People that I respect enormously, not just for their talent. (1:21:46) You know, some are peers, others are mentors. And having a circle like that can be incredibly valuable. You know, it gives you access to thoughtful perspectives. It can create a healthy intellectual tension. It sharpens your own thinking. (1:22:03) But like like we were just saying, like almost everything in investing, this one there's a paradox to manage. Meaning, if you rely too heavily on a network, you risk group think and you risk outsourcing your judgment. And that robs you of the conviction that you need when markets become volatile. And I always think of that that uh old Templeton line where he says the best performance is produced by a person not by a committee. (1:22:27) And you know, but on the other hand, if you isolate yourself completely, you risk missing important perspectives and you risk falling in love with your own ideas, creating an echo chamber. And so I try to live in that kind of in between place, you know, what in Buddhism they might call the middle way where you're open and receptive, but at the end of the day, you're trusting your own judgment, your own instincts. (1:22:52) And so one of the most helpful evolutions on that point is letting go for me was letting go of what you, you know, might call investor idol worship. Because when you're just starting out, it's very natural to sort of subjugate your own intellect because people that you respect, you put them on a pedestal to assume that because they're famous, because they have a great track record or manage a large fund, you know, they must know better. (1:23:17) And of course, it's good to have enormous respect for those who come before you. But usually, you have to learn the hard way that investment judgment is deeply personal. I notice that all the time, even with people that share an almost identical philosophy where it's like we're finishing each other's sentences in many cases, we still end up disagreeing all the time about specific businesses and position sizing and how to weigh certain kinds of risks with a specific company. (1:23:44) And so investment judgment is deeply personal and I think Carvana is probably one uh example of this. You bought it. I I think you know it had obviously had this amazing period of expansion and then it got kind of crushed in I think 2022 and a lot of people thought it was going bankrupt and the stock I think fell about 93% before you bought it. (1:24:10) You told me a great story at one point about someone saying to you, you know, how do you avoid things like Carvana and having to kind of keep your mouth shut cuz you were quietly buying Carvana. talk about the discomfort of that of like being willing to go buy something like that. Like what was it that you saw in it that embodies this kind of this sort of slightly more speculative part of your portfolio where you're willing to take things where there's less certainty and less of a guarantee of excellence? Yeah, I'll preface this by saying my preference is always for a large holding in something where the risk of impairment is basically deemed remote and I would prefer the whole portfolio (1:24:50) to just be you can participate in a tax deferred way in low risk compounding for many years. You know, that's much better. But every once in a while, you may find something where you can have potentially the same impact as a large successful position, but even when the position size, the starting position size is sort of immaterial. (1:25:16) And uh I will occasionally own something where you have a smaller position and it's deemed to be highly asymmetric. Warren Buffett has his rules of investing about, you know, don't lose money, don't forget, rule number one. And I I might add in a little addendum in there that says if you may lose money, just make sure it's not that much. Make sure it's just a little bit. (1:25:33) And stylistically, I think on this point, I've learned a fair amount from people like Bill Miller. And you know, another good friend of mine is Quincy Lee, who's done some of this over the years, being able to sort of migrate in and out different styles. Even Charlie Munger, when I spoke with him, he's done this to a certain degree. (1:25:51) He had his large Costco holdings, but he also, you know, bought something like Tenico in the early 2000s, which was a distressed auto supplier. You know, not a good business, but he was able to buy it at a very low price and sort of participate in this big big outcome. In terms of Carvana, the story there really began when I was working with Lou because we were shareholders of CarMax and I think at one point we owned around 5% of Carmex equity and I still remember being in Chicago, you know, walking down Michigan Avenue listening to the Carvana Road Show and just being completely struck by the thoughtfulness and (1:26:29) ambition of this management team. And at the time, my own sort of investment pallet was not really geared towards companies that were so early in their growth, you know, growing hundreds of percent, burning so much capital. And so I decided to just watch watch and see from the sidelines. (1:26:52) And over the next few years, they really executed flawlessly. They extended into new markets. They turned their inventory faster. They increased delivery speeds. They improved profitability and specific cohorts. They created like an in-house logistical infrastructure that was vertically integrated first party and they could create, you know, scale economics and sort of uh create this much better customer experience in the used car market. (1:27:18) And while I was working with Lou, a colleague of mine, Armen, a good friend of mine, he created this web scraping tool. It was sort of an early web scraping tool that could compare apples and apples cars on Carvana versus cars on CarMax. And it was clear that Carvana was underpricing the industry by like $1,000 per unit. (1:27:43) And that's significant for a product where the gross margins are like 2,300 for CarMax over the years. And so it felt like in a market that transacts 30 to 40 million used cars per year, this business was poised to compound. It had this long reinvestment runway and these people were very focused. (1:28:00) And so I watched from the sidelines as the stock promptly rose, you know, 20 times in just a few years from there. And then, you know, in 2022, a combination of bad luck and misexecution basically brought the business to a sudden halt. They made this big acquisition. They took on a lot of debt in order to do it to sort of finance themselves to sustain this rapid growth rate. When the mistake happened and the business sort of turned the other way, the bonds got down to 30. (1:28:27) The stock declined by, you know, 90some%. By the time we bought our first shares, the stock had declined from 370, $370 to 25. And I think the short interest at the time was 75% of the free float. So everyone thought basically this business was going to go bankrupt. And actually, you know, my timing was not so great because I bought the stock at 25 and just a few months later it had gone to $3.50 or something. So it went down. (1:29:00) It went down by another 85% or so after I bought it. And during this period, I definitely was not talking it up to people that I knew. I was talking about it. So, I would bring it up just to talk about it. I wanted to see if there were different perspectives, but I didn't want to I didn't want to say that I liked it and I didn't want to say that I owned it because there were certain times during this ownership where the stock would be up or down 70% in a day because of some headline. And what I wanted to prevent myself from was having a lot of inbound inquiries from people. (1:29:32) Even though I want to be helpful, I knew that it would be challenging for my psychology to try to respond and defend it would create commitment bias. And really, I think the moral of the story is that stocks can do anything in the short term. You know, literally anything. (1:29:52) And to spend a lot of time trying to predict if or when they might go down by a lot, I think has been challenging. I'm curious to know how you handle the emotional psychological side of the game of investing particularly as a very concentrated investor. I think you own about nine stocks and you'll often have maybe 90% in six or seven of them. And so obviously there are periods where it's really volatile. (1:30:15) I mean it gives you more of a chance to outperform but also more of a chance to underperform in certain ways. And I mean, your returns have been excellent since you started the fund, but you did have that year in 2022 where I think you were down about 42%. And then, you know, the next year 1%. Yeah. And then the next year you're you're back up about 70%. And I'm just wondering, I know you meditate. (1:30:35) You always seem to have a reasonably chill kind of temperament to me. I'm curious how you actually what you've done in practical terms to deal with just the sheer emotional intensity of the game. Maybe it's two things. The first is, as I mentioned, it's really studying history. It's recognizing that these periods are normal. And so when they come, you shouldn't be surprised. (1:31:02) You should just know that every investor has had their due over, you know, a 30, 40, 50 year record. every investor gets their time. And so when it came in 2022, it didn't last that long, but I was mentally preparing for it to last for five or 10 years. I just knew that every investor has these periods and so buckle up. You know, that's what was going on in my mind. (1:31:26) So part of it, I think, is just intellectually understanding that it's normal and constantly reminding yourself of it, constantly reminding your partners of it. It's easy to become complacent when you notice your capital accounts just rising, you know, month after month to think that this game is easy. And I think that these moments where things are going really well are an opportunity for humility. (1:31:48) And when the moments are going poorly, it's an opportunity for trust to sort of recognize that this is normal and to trust to trust the process. In practice, I won't claim to have it all figured out uh first of all, but I try to find some harmony between different aspects of life, whether that's work, family, health, inner life. (1:32:13) That may mean exercising, that may mean making space for meditation. I think, you know, my family, which I joked about in the beginning, has no interest in business, is sort of a blessing in some ways because spending time with people that you love who have absolutely no idea what the stock market is doing can be great. And those things sound trit, but they really do restore a sense of perspective and a sense of proportion to this whole process. (1:32:39) I was very struck also in reading your shareholder letters. There's a there's a lovely section in one of them, I think, about the willingness to surrender in the face of uncertainty, which is sort of philosophically very appealing to me because I spend a lot of my time worrying about uncertainty. (1:32:55) And um I'm going to quote this because it's kind of really elegant. You wrote, "Surrender also demands that we embrace uncertainty. To surrender is to accept that markets are fickle and anything can happen year to year. The unknown cannot be tamed. Attempts to control or predict it will only drain our limited resources. (1:33:15) There will be years when our portfolio experiences sharp declines, likely for reasons few expected, rather than fearing this inevitability. My recommendation is to surrender to it. And then you talk about how for you part of the meaning of surrender is actually to stay fully invested and not trade around your core positions and just focus on the quality of the businesses that you're invested in. (1:33:36) I think that's such an interesting insight. I've been thinking about this a lot recently because I, you know, there's a part of me that's sort of a pessimist that I always think of that line from Yates where he says, "Things fall apart, the center cannot hold. Mere anarchy is loosed upon the world. (1:33:52) " And I always have this sense when everything's been going well, oh my god, it's all going to fall apart. And so there's a part of me that having ridden this bull market for the last 16 years sort of keeps thinking, I really don't want to give back 50%. And then I the last couple of weeks I've really been thinking about this partly after a conversation with Nick Sleep where he said you know just just don't fiddle William just just leave it be if if you get back 50% you'll just buy cheap stuff. (1:34:17) And I'm like yeah why why am I even worrying like I instead of trying to fight this thing or predict this thing I should accept the fact that my entire approach to investing anyway is built on taking advantage of disruption. Like why am I why am I bracing with this sense of pain and fear at the prospect of disruption when it's inevitable because we live in an uncertain world and you should just sort of set yourself up to kind of deal with it and so you'll survive it. Does that does that raise any thoughts for you? It's such a great point. The more that (1:34:48) I've thought about this the point on surrender I think surrender goes handinhand with trust in some sense. The reason why we can all intellectually say that it's normal to go down 50% but we don't want it to happen in some ways we don't trust that we'll do the right thing when that happens. (1:35:10) You know there's a lack of trust in the self and I think that the experience in 2022 was illuminating in some ways because on one hand in 2020 2021 it was as though everyone's a long-term investor. Everyone wants to own these stocks for 10 years because month after month, it's just getting richer and richer and richer and people are very excited. (1:35:28) But then in 2022, you could just see the time horizon shrink and suddenly everyone wants to learn a lesson. Everyone is, you know, I shouldn't have owned this. What was I thinking? And in some cases those were true, but in other cases it was merely a reaction to price action. (1:35:47) And ironically, I think that had we not had 2022, our returns since inception would actually be worse. Like if you just took Roomie's portfolio at the end of 2021 and just rode it for the expected returns that I thought we were going to get at that point. It would have been okay if it was just linear up to the right. It would have been nice and comfortable. (1:36:06) But I think the opportunity that a down market gives you is the ability to coil the spring. You can recycle your capital. You can sell things that are down 30 40% to buy things that are down 70 80 90%. And that actually benefits you over the long run. And that's why you know Warren Buffett and L Simpson and so many people over history have tried to make this point that volatility is your friend. It's the friend of the investor. (1:36:36) And the hangup I think is that even if we know that, do we trust our ability to make the right decision when that moment comes? And I think if you trust that when we're down 50%. That I'll know what to do. Then what's there to fear? You can just sort of let it come. Yeah. It's funny because the reality is I look back to 2008 2009 I didn't I didn't sell anything. I bought some stuff. (1:37:01) I didn't panic even though I lost my job in the middle of the period as well. And then in 2022 I think I I didn't sell anything and I bought Burkshshire like four times. You know, I'm not trying to say this in self- congratulation. It's like more like so why am I so afraid of like a repetition of pain when actually I sort of I'm kind of okay in in periods of pain. (1:37:23) I I think cuz I'm sort of to some degree a pessimist who always sort of expects it and so I'm positioned to be able to take advantage. I I don't know. So I mean some of it is just managing our our own kind of weird psychology I guess. Right. Absolutely. I think uh managing the psychology, structuring the environment, you know, the experience in 2022, I hate to put it this way, but it really wasn't a big deal. It really wasn't. It just felt like a normal run-of-the-mill time. (1:37:53) And I remember the day that Carvana hit $355, I was out on a hike that morning, and it really just wasn't all that big a deal. Now, if it was a huge position, maybe it would have felt like a bigger deal, but it started out as a smaller position and I sort of added to it on the other side. (1:38:13) I added to it at 10 and I added to it at 40. And so on on the way back the other way, I I made it a bigger position. This is a difficult balance to to find, you know, between sizing something to the point where it becomes psychologically difficult versus small enough where you can sleep at night but still have an impact on the portfolio if things work out. (1:38:34) You said something very interesting to me recently when we chatted a few weeks ago as well where you talked about avoiding fear-based decisions. You were saying that you with something like Carana for example you trimmed Appfolio to buy Carvana and then later Carvana sores and you trimmed Carvana a little bit but you were saying because you are always running pretty much fully invested. (1:38:58) You're not really making fear-based decisions. You're selling something because you find something that you love more. Can you talk about that? Cuz there's a really interesting nuance there. I think that's not something we usually discuss. Yeah. Someone was asking me recently, how do you sell? And it's the classic difficult question to answer. (1:39:16) And what just emerged was that my cell decisions are like a love versus fear question. And suboptimal sell decisions in my opinion are fear-based decisions which are you know I had a 10% position and now it's 12% that's too big what if it goes down I'm going to pair it back to 10. (1:39:39) This kinds of thinking happens all the time in the name of sort of risk mitigation in the name of rebalancing the portfolio. And if that's the case you sort of never get the full benefit of one of these great investments. So what's a love decision? A love decision is something where you feel compelled. You feel sort of called to own more of this business over here. (1:40:00) But because you run fully invested, you have to get the capital from somewhere. And it's much more of a positive decision rather than a negative decision. A negative decision says, "This is too big. I'm scared. What if it goes down?" A positive decision says, "I really need to own more of this because it's so great. I got to get the capital from somewhere. (1:40:19) " And I think that, you know, sell decisions come in a few flavors. You can either sell because you made a mistake, which happens, of course, from time to time. You can sell for opportunity cost reasons, which is what I'm talking about here. There's opportunity cost of capital. You'd prefer to own one business over the other. (1:40:38) There's also the sell decision which comes when something is sort of egregiously overvalued. Meaning, you know, you may not make money for a long time. you may have negative returns for a very long time from here. I'm not sure that that has ever happened in my experience over these first six years. So that that's super overvaluation. I haven't seen that yet when I'm studying these specific businesses. (1:40:57) So really I think 80 plus% of the time it's an opportunity cost kind of a calculation. I was struck when I was looking at your letters the other day that you talked about surfing a couple of times. You know, you often have these quotes, and there was there was one quote at the end of your January 2025 shareholder letter from John Katzen, this great meditation teacher, who said, "You can't stop the waves, but you can learn to surf. (1:41:24) " And then at the end of your January 2023 letter, you had a quote from William Finnegan, the great New Yorker writer who wrote this book called Barbarian Days, a surfing life, which has a longer quote, but I'll I'll read it cuz it's kind of cool, where he said, "Surfing always had this horizon, this fear line that made it different from other things. (1:41:47) You could do it with friends, but when the waves got big, when you got into trouble, there never seemed to be anyone else around." And then he said, "The waves were the playing field. They were the object of your deepest desire. At the same time, they were your adversary, your nemesis, even your mortal enemy. (1:42:06) They were your refuge, your happy hiding place, but also a hostile wilderness, a dynamic, indifferent world." And I was curious given that you have both of these quotes about surfing and that you live in California like what's the parallel between investing and surfing and managing a fund that's been helpful to you to think through? Yeah, I won't claim to be a great surfer. I love to surf. (1:42:31) I do think that there are plenty of parallels in surfing and investing. Surfing really demands a a surrender. This idea that you're not going to predict what's going to happen, but you have to sort of be open and receptive. And you know, I had one experience actually down in Costa Rica with Chris Bay. And there was an investment lesson which came ironically when I'm I was out there waiting for a wave and I saw one coming and I sort of looked to my left and looked to my right and being not a great surfer I'm always looking for you know someone to tell me this is the right wave to take and I was looking and everyone was sort of focused on their own there everyone was playing (1:43:08) their own game. They were sort of in their own heads and I was waiting for this validation. I wanted someone to tell me this is the right one and I just end up deciding that this is a great wave and I took it and it ended up being a lovely ride. But it really sort of reinforced this idea that no one's coming to save you particularly in investing and that idea of investor idol worship. (1:43:38) It's easy to think that by following someone else's path, by investing in the way that someone else invests, that that's the right path. But ultimately, it comes down to you and you have to make your own decisions, and you have to trust your own judgment, and you have to develop your own discernment. There's no substitute for that. Before I let you go, we've talked a bit about the poet room. (1:43:57) We've mentioned a few quotes from him along the way. It was an unusual decision in many ways to name the firm after a 13th century Sufi mystic when you founded the firm in 2019. How has he been a really important figure for you both as an investor and in life? I I guess this is related to the general sense of why it's been helpful to you as an investor to have this kind of deep spiritual life where you're thinking about things like trust and surrender and a willingness to end your periods of contraction and you know getting beneath the facade and seeing (1:44:34) the underlying reality. All of the sort of things that that Roomie talked about. You know, Roomie, as you say, he was a 13th century Persian mystic. And one of the things that I always find fascinating about him is that in the late '9s, early 2000s, Roomie was actually the bestselling poet in the United States. (1:45:03) So, he sold more copies than Shakespeare, Homer, you know, Dante, Milton, you know, take your pick. And it raised a question which is what are all these Americans doing reading the poetry of a Persian mystic from 800 years ago. I think part of it is that Roomie's ideas are universal. He speaks to something timeless in the human condition which is this deep yearning to see beyond the surface and to discover meaning beneath appearance. (1:45:31) And one of the main stays of Roomie's teaching, as you say, is this constant sort of provocation. He provokes you to see past appearances and ask what's actually real, what's going on, what's the truth. And he was also astonishingly prolific. He composed, I think, 60,000 lines a verse, something like that. (1:45:52) And yet, he wasn't even a professional poet. You know, I think he would laugh at the idea that people are now calling him a poet. He was a spiritual guide and he had disciples and many of his poems were actually spoken, you know, spontaneously when he was in this ecstatic meditative state. (1:46:11) And some of his companions would write things down that he wrote. And as to why I chose him as the namesake of my partnership, you know, what I think makes him timeless is his ability to embed deep truths about existence into the most ordinary everyday imagery, whether it's a garden or the sun or a candle or, you know, a moth. (1:46:38) He points you from the obvious and the visible towards the invisible and the essential. And that way of seeing always resonated with me as an investor because you know investing at its core is an act of perception. It's about seeing beyond the narratives and what the news is talking about and what other investors are talking about to try to grasp the essence of the business. What is it that actually makes it tick? And you know that's all Roomie was about. (1:47:03) And is is there a favorite line or saying of his that you live by? Like before for example we we were talking about this willingness to live with paradox and contradiction. I was thinking of this line of his that you somehow quote where he said life is harmony among opposites which seems like a lot of what you're doing is trying to find harmony between these things like being aggressive and having a sense of urgency and being patient and slowm moving and and the like and having a circle of friends you talk to but also thinking for yourself. You know, are there things like that that really in (1:47:34) terms of your inner monologue daytoday that you live by because you were taught them by Roomie? You know, there's one quote of his that is one of my favorites, which is if you are irritated by every rub, how will your mirror be polished? And you know, he's talking about on one hand, he's talking about something that's probably pretty obvious to everyone, which is that if you take everything personally, if you're sort of uh oversensitive, then you're missing the lessons. You're missing sort of the teachings of these moments that irritate you. But what he's (1:48:11) actually talking about was the way that our egos distort our ability to see clearly. So what is it about a mirror? You know, in the ancient world, mirrors were not made of glass. They were actually made of bronze and the craftsman of those years would, you know, I think for 10,000 years they were probably made this way where a craftsman would combine copper and tin and create bronze. (1:48:38) And before glass mirrors existed, you would just polish the surface of these mirrors and polish it and polish it and polish it until the bronze became reflective. And if the metal that you were polishing was left uneven or corroded, then when the light came into the mirror, it would sort of scatter in every direction. It wouldn't actually reflect clearly. You couldn't see clearly. (1:49:02) And that to me, this metaphor about us as mirrors, human beings as a mirror that needs to be polished because we're essentially we start out as this base metal which is not reflective and is not beautiful. But with polishing, you can sort of reflect the reality that is such a precise metaphor for the human condition. (1:49:27) And that unevenness and the corrosion of an unpolished mirror is essentially akin to the distortions that are caused by our own egoic perspectives. When we need to appear superior, when we fear being wrong publicly, when we fear public humiliation, our perception of reality becomes warped and we stop seeing things as they truly are. And I think this has plenty of parallels to investment because when we're making decisions from that place of fear and ego, then of course we make these terrible decisions. Yeah. I mean that's that's my roomie quote. Yeah. I love that. One of the reasons (1:49:58) why I love talking to you is um I think I tend to have this sense that investing is like this beautiful subset of worldly wisdom as Charlie would say and that it sort of includes everything and it's just this lovely microcosm where you can you know you can study like human nature and psychology and philosophy and spirituality like it's it's all part of it and I was reminded when we talked last time you you quoted a conversation you'd had with I think the author of Vaklav Smile who when you told him what you did. He said, "Oh, you're a money (1:50:29) massager." And actually, I think this conversation is proof that you are much more than a money massager. Yeah. He uh I called him about, you know, I was doing some work on the renewable energy business. At the end of it, we had this long conversation and he said something like, "So, what is it that you do again?" And I said, "You know, I'm an investor." And he said, "Ah, so you're a money massager. (1:50:52) " And I think that it's classic that the perception of what this business is is like we're sort of sitting around just massaging this portfolio of securities. You know, it's not a real profession. I don't feel like it is actually a real profession. (1:51:10) It's sort of a it's a beautiful means of exploring your curiosity and hopefully serving people while you do it. On that note, it's just been a real delight chatting with you and I hope I'll see you soon. Well, we'll definitely see each other in Omaha. I hope. But um but hopefully I'll see you in New York before then. Absolutely. It was a pleasure. Thank you. Thanks so much. It was a real delight. All right, folks. I hope you enjoyed today's conversation with Nema Shai. (1:51:30) As we draw to the end of 2025, I wanted to take the opportunity to wish you a very happy holiday and a wonderful new year. I also wanted to take the opportunity to thank the fabulous team at the Investors Podcast Network, which makes it possible for me to host this podcast. (1:51:50) That includes Bianca, Sel, Camille, Katrina, Noel, and Jasmine. And I'm especially grateful to my terrific editors, Jadilia Lamper, and Christine Romero, who um not only do an excellent job editing the audio and video versions of the podcast, but are also unbelievably patient in putting up with how late I always am with my deadlines. (1:52:11) So, thank you for your your tolerance, your talent, and your kindness. I really appreciate it. It's also a total pleasure to work with my friends Stig Brodesen and Preston Pish who co-founded the Investors Podcast Network more than a decade ago. I couldn't have been luckier in uh becoming partners with them. They've just been a total delight. So, thank you. I'm really grateful. (1:52:30) And it's been fantastic to get to hang out in the last year with my fellow podcast hosts Clay and Sha and Daniel. And I've also been particularly fortunate to get to work closely with my friend and fellow podcast host Kyle Griev who's been an invaluable partner in helping me to create the richer wiser happier masterclass. He's just been a lovely and hugely capable partner on this project. (1:52:55) So thank you. On a separate note, I'm excited to announce that I'm about to launch after many delays and much pondering a new YouTube channel. You can find it by looking for this handle apparently which is William Green Markets and Life. And in the coming weeks and months I'll be sharing pretty regularly some of my favorite video clips from interviews that I've done with many great podcast guests. (1:53:24) So these are people like Rick Reer, Tom Russo, Mish Pabry, Joe Greenblat, Ray Dallio, Samantha Mackmore, Chris Bloomstrand and many others. And I think I'll also share some clips from my appearances on other people's podcasts. (1:53:42) So hopefully there'll be plenty of interesting stuff there that if you're deeply interested in this whole topic of the intersection between investing and life and how to think and how to live, you'll find helpful and lifeenriching. I'm really grateful to my friend and collaborator Weld Royal who'll be helping to run my YouTube channel. Weld has been an invaluable partner over the last year. She officially is my chief of staff, although given that I am the only person on staff, I'm not sure really what that means, but she's just been great to work with and I'm very grateful to her. And also, I'm really grateful to Jeremy (1:54:14) Stikney, a renowned YouTube expert who's given me and Weld a lot of great advice that we'll attempt to follow. And um my wonderful daughter Maline Green has helped with the design of the YouTube homepage for this channel and also designed the thumbnails for all of the videos I think. So it's just a real pleasure to work with your own kit. (1:54:35) What could be better in life? I think for me anyway. Whether whether it's as good for her, I don't know. Anyway, I hope you'll check out this new channel which as I say is William Green Markets and Life. And feel free to subscribe. (1:54:53) And likewise, feel free as always to follow me on X at William Green72 and to connect with me on LinkedIn if you like. Uh and do let me know how you're enjoying the podcast. I'm always really delighted to hear from you, especially if um if your messages are full of praise and warmth. If uh if you don't like the podcast, just keep it to yourself or mention it on YouTube. That's fine. (1:55:10) And in any case, thanks so much for listening and uh take good care and stay well. and I wish you and your family a very happy, healthy, and prosperous, joyful new year. I wrote a memo called fewer losers or more winners. You have to make a choice. And if you're going to try to win in investing, which means win in our business means having superior results. (1:55:35) How can you possibly get superior results? And the answer is you either have more of the things that go up or less of the things that go down or both. Most people can't do both because the skillful aggressive player might be able to get more of the winners. The skillful defensive player might be able to have fewer of the losers. Very few people have enough equipment to do both. Most people that means you have to choose.