Mastering the Markets & Weathering Market Drawdowns w/ Andrew Brenton (TIP770)
Summary
Market Inefficiency: The guest argues public markets have become less efficient, creating larger mispricings that reward long-term, fundamentals-driven investors.
Floor & Decor (FND): Positioned as a cost-advantaged disruptor in hard-surface flooring via direct sourcing and big-box, cash-and-carry model, with long runway for organic store growth.
US Housing: Thesis assumes cyclical weakness and pent-up demand in home improvement; eventual housing rebound should benefit FND while the company continues to take share.
Valuation & Sizing: Despite a high headline P/E due to depressed earnings, FND is assessed on intrinsic value and normalized cash flows; position sizes flex with margin of safety under a buy-and-optimize framework.
Kinsale Capital (KNSL): Specialty insurer with a technology-enabled cost advantage and disciplined underwriting in the E&S market, growing share from the regulated market while avoiding unprofitable policies.
Specialty Insurance: The E&S opportunity supports multi-year growth; KNSL targets prudent expansion, opportunistic buybacks when below intrinsic value, and maintains high ROE with surplus capital deployment.
Risks and Cycles: FND faces housing and renovation cyclicality, while KNSL navigates insurance hard/soft cycles and competitive behavior; both are managed with long-term forecasts and capital discipline.
Overall Approach: Emphasis on owning unique, high-quality businesses at discounts to intrinsic value, optimizing weights with volatility, and focusing on 5–10+ year outcomes over short-term market noise.
Transcript
(00:00) But the other thing to understand about the public market is that most like good companies are public for a bunch of reasons. Often the original owners, it's a route for them to diversify their own portfolio, whether it was a family business. And so we own companies that are self-funded companies. (00:21) They just happen to be public. And Kin sales a really good example of that. I think of companies like that as slow motion management buyouts. The number of companies in our portfolio over the years who have said to me either the share price is a lot higher in 3 years or you and I are going to own the whole company. 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. (00:54) It's a free and easy way to support us and we'd really appreciate it. Thank you so much. So, you've been a guest a few times on the show now and I'm I'm thrilled to have you back and we're going to be chatting about today's market as well as a couple of your holdings a bit later. Let's talk by talking a bit about the efficiency of markets. (01:15) So, as you know, value investors will shun the efficient market hypothesis and pride themselves on trying to spot the market's biggest inefficiencies. How about we start by discussing why having efficient markets are important and something that we should even care about? Sure. I mean, if you believe the purpose of the capital markets, and I'm now talking private markets, the debt markets, the public stock market, if you believe the purpose is to allocate capital to the deserving groups at the right price or cost, then I think it's (01:52) absolutely critical. It's a foundation of almost the definition of capitalism, right? and it's the foundation of the success of the western world uh since the middle ages or even predating that. So I I think that foundational idea of how do you get information uh that messy messy process of figuring out what a company is worth and therefore what you should pay for shares when that company needs to issue equity is absolutely a critical component of the modern world. (02:30) and and I think very important. >> So Cliff Asnes wrote this great paper titled the less efficient market hypothesis and he actually believes that the stock market is becoming less efficient over time and he points to three different factors there. So he's pointing to one that everyone's familiar with which is index funds and the passive flows. (02:51) The second is the very low interest rates we've had for a long period of time. And then the third is just technology and social media sort of leading to this hurting effect where people are crowding into the same stocks and everyone has sort of the same outlook and uh there's a lot of group think happening. Do you follow uh Assens's line of thinking and believing that markets are becoming less efficient over time at least the stock market? No, I I think that's right. (03:20) And it's it's funny when I you know when I was at school, which is probably around the time that Cliff Asus was at school, that was the height of the efficient market hypothesis. And I didn't start as an investor. I started in investment banking and mergers and acquisitions. And I quickly realized that, you know, came out of school thinking markets are perfect, markets are efficient, and quickly realized that isn't true at all. (03:46) But I also haven't I don't spent we don't really if you will read a bunch of other stuff if that makes any sense. Our approach is to be intensely owners of companies that are happen to be public is how we think about it. But you know someone sent me Cliff's paper actually I think I saw it and read just the abstract and thought yeah that that makes sense. (04:13) But I didn't read the paper. And about 6 months ago, I actually sat down and read the paper. And it was actually a foundation for our one of our quarterly commentaries this this year. And I do agree that markets have become less efficient. We've seen it over our 27y year now history at Turtle Creek. They're not less frenetic. they're not less liquid. (04:43) So if you define efficiency as lots of reaction to the latest tweet, the latest quarterly results, that hasn't changed. That's actually become more extreme. Um, but that doesn't necessarily equate to efficiency. If you think efficiency means getting reasonably close to fair value for the shares of a company and that's I think what most people would define as efficiency as opposed to volutric reaction to to every new piece of news. (05:18) I love the quote from Robert Schiller, the economist, and it goes along the lines of um the thought that because the markets are reacting to every new piece of information that they are then getting it right is there's no logic in that connection and it's the greatest economic error in thought in the 20th century. I mean that's I'm paraphrasing but that's the essential thought and and if you think markets were inefficient always at to some degree I do agree with Cliff's observation that in his career markets have become less efficient and we've (06:00) seen the same thing. >> I think uh it's such an interesting thought experiment. A couple thoughts come to my mind with when it comes to uh the market's inefficiencies and how those end up resolving themselves over time. I think part of the inefficiencies is just simply due to human nature. You know, humans are the ones doing most of the buying and selling or programming all these algorithms that do the buying and selling. (06:25) And um I think about how people just tend to be uh loss averse for example. So when a stock is dropping, our gut instinct usually tells us to avoid that stock to avoid losing money. And you know, many stocks drop simply due to things like uncertainty. Humans tend to hate uncertainty. And another human bias that I think plays into markets quite often is just this natural tendency to extrapolate. (06:51) So the market tends to assume that a company is growing is going to keep growing or a company that's experiencing decelerating growth is going to keep experiencing decelerating growth and then once the tide sort of turns you can see a stock double you know fairly quickly and I think there are plenty of examples that we could point to that sort of illustrate just how moody the market can be. (07:13) You know it's interesting right? Um when I went to school I mean not in school but recently meaning the last 10 years with the whole rise of behavioral finance and all of that great work like thinking fast thinking slow when I read about all of the biases I look at them and say that's not us and I read the next one I say that's not us. (07:39) So for example, loss aversion. My view is if you have done the work ahead of time and you have a good fundamental view on what you think a company's going to do for the next 10 and 20 years and if you also believe that there is noformational content in the share price. I think that's an important point. (08:03) I can understand people on the outside looking in on a company that the market's telling them things aren't going well uh because the share price is down. But if you understand that very very few people an increasing number of fewer people um are actually doing that fundamental work. A declining share price doesn't fuss you or fuss us. (08:27) And but equally a rising share price doesn't get us excited. And so you know it's not really a fair description when the classic line of why do people get excited at the supermarket when tuna goes on sale but not when stocks go on sale. And the simple answer is people have an understanding of what the price of tuna is. You have to go fish it. (08:52) You have to process it. You have to get it into cans. You have to get it into the stores. And so if a food store puts something on sale like that, you know you're getting a deal. The problem is in the stock market, very few people have done the work to say, "Wow, at that lower price, that's a really good deal. (09:14) " And so, as I say, it's not really a fair comparison. And if you think there are fewer fundamental investors in the market and for sure there are. I mean you can just look at the number and then if you take the fundamental investors or the active investors and you put them into the bucket of closet indexers or quasi closet indexers and then when you mention the three reasons that markets have become less efficient from Cliff as standpoint you know the one that doesn't really resonate with me is necessarily low interest rates. it does create, you (09:51) know, exuberance and and easy money. So, I get that. Um, but I think there's a there's a fourth and that is the shift in active management from that longer term fundamental investor from groups like a Fidelity or a T-roll price um to the the pod shops to the quants that are given the mandate. (10:16) You know, you can't look beyond 3 months. We want you to figure out where their share price is going to be in the very short term so that their temporal situation is they have to think very short term. And so it's not just a move toward index funds. It's this I think a structural shift in the stock market to more of the trading or more of the activity who are people who are making their own decisions are doing it based on trying to figure out what's going to happen in the very short term. (10:51) So I think that's a and maybe of all of those maybe the most profound in terms of the impact on the market where we're sitting today. One of the other interesting uh points I'd like to touch on is just this understanding of, you know, value investors needing to be patient and sit through some periods of pain, let's call it. (11:18) So, one of the core principles of value investing is buying something for less than it's worth. And a lot of money can be made by simply waiting for the market to recognize that value. You know, in some cases, a stock can go up 50% in 6 months after the market realizes it it initially had it wrong. (11:34) And in other cases, a stock might trade relatively flat for, you know, 2 3 years, and the market just simply doesn't care about it for whatever reason. Maybe the story is too complicated. Maybe the market's more interested in AI or quantum computing stocks or, you know, perhaps it's just in a sector that the market just doesn't like at that period of time, and maybe their peers aren't aren't doing as well. (11:52) But eventually the market does tend to recognize that value. Based on your experience, how long do you think these really big inefficiencies tend to last on average? >> Um, well, I think it's probably getting longer. So, I can only speak from our experience. And in the first decade of our, you know, so 25 to 15 years ago, we were overwhelmingly Canadian equities. (12:17) So I can only speak to the Canadian market at that time and now we're the majority are are US companies. So think of us as a North American manager, but I can't I can't comment on the US market 25 years ago. I can just commented on 15 years ago compared to today. If you think about it that way, generally we use a 5-year time frame. (12:40) So our approach in terms of portfolio construction uh in terms of how cheap something is, we give the market credit that over the next five plus years the share price will get dragged kicking and screaming toward our view of intrinsic value if we're right in our view. And we've seen that borne out time and again. And to your point, sometimes it happens in a year or two. (13:08) Sometimes it takes more than 5 years. And I think the time that it it's really hard to make this statement because I think we're in a unique stock market environment right now, but for sure it takes longer today than a decade ago. And I think that again was one of Cliff Aes' point that if you can take the approach of being truly understanding value and owning value given the market structural changes, the opportunity set is greater, but you have to be willing to sometimes wait longer. (13:45) And I think that was the most important summary in a way conclusion that he made at the end of of his paper. And we absolutely believe that we see greater mispricing today than we've seen in the past. And I'll set the dot bubble aside because that was a, you know, you can analogize to today, but there was crazy mispricing then. (14:11) Um, but otherwise, if you think of regular markets, the mispricing on average is greater today than it was 10 or 20 years ago. I think you hit on a really good point earlier of not falling prey to resulting. I think the stock market's just such a great place to gain humility because if you, you know, attribute success as an investor to a stock price going up and failure as an investor to a stock prices is going down, you can do some really silly things uh in the near term. (14:46) And um Asenness, he has this wonderful point in his paper that the enemy of a the efficient market hypothesis is a bubble. According to Asenness, we're in a bubble when uh we have a large number of stocks that are trading at prices that can't be justified under any reasonable model. And I think a couple important points on that sentence is it needs to be a large number of stocks. (15:07) So it's not just, you know, maybe one little sector, maybe a few small caps that are trading at high prices. And then also their prices can't be justified under any reasonable model. So if there is a you know a reasonable case for higher valuations then it's more difficult to justify it calling it a bubble. (15:29) And as you mentioned, today's market is particularly interesting as there are several industries that are really struggling or as you've stated are really in a recession. While the broader market continues to march upward and is primarily being lifted by the market's big winners in tech and AI, how about you talk a little bit about if today's market does resemble the 99 tech bubble and maybe in what ways? you know, what's the line? A history doesn't repeat itself, but it rhymes. (15:59) Um, and I think again in Cliff Aes' uh paper and in, you know, other commentators who've been around for a while, I agree with this comment that you expect a bubble once in your lifetime because once people realize it's the next generation that creates a bubble, and I guess it's been long enough now that it is the next generation. (16:23) Um, we were around for the.com bubble and I remember at the time people asking my view on a Canadian company called Northern Telecom, um, 360 Networks, Global Crossing, and Cisco Cisco and uh, Intel, in fact, Microsoft is the one that comes through all of that, but it took a long time for them to come through in terms of recognizing what they're worth and we refused to give a view because we weren't doing work on those companies. (16:59) And so it's similar for us today with the Magnificent 7 and AI in that you know our approach is to try to find the special company in an industry and we're going to talk about two today I think that that are really uh doing unique things in their industry as opposed to trend investing or thematic investing where we look at a theme like AI um or synthetic biology ology and then try to find a company that is in that space. (17:35) But just in terms of the attitude of people and what it feels like and frankly the multiple of the broad market that feels it feels very similar to the dot bubble again you can always find arguments to say this time is different but those are the four most dangerous words in investing. It's funny. The other day I was chatting with a listener of the show and um his son was a college student and he had the best returns of anyone I've heard of in the past year owning Palunteer. (18:09) Many of many of these AI stocks uh I haven't heard of that are up 3 4x in the past year. And I think that's uh sort of some of the telltale signs of some of the things that happen during market euphoria. So, let's get here to talk about two of your portfolio holdings. We have Floren Decor and Kinzel Capital. Many of our listeners are going to be familiar with these and you believe that the market is getting these the pricing of these stocks wrong and we'll get into why that is. (18:40) Um, how about we start with floor and decor? Uh, talk about some of the things that you like about this business. >> You know, it's interesting. I mean the two you mentioned Clay are they have similarities in that uh let's talk about floor and decor and I will say we you know as a Canadian investment manager and that our for that continues into the US is only 15 years on and we came across floor and decor uh a number of years ago and it's interesting I think in my office in here in my office one day years ago I was having a thought experiment and the (19:18) thought experiment was if we'd been active in the US uh when Costco was you know early days would we have understood the opportunity set that they had because our approach is not to just um you know we're trying to build we're thinking out 10 20 plus years and trying to be balanced in our forecasts and um and I walked down the hall and spoke to some of the people on the investment team who were hanging out in the hall and I posed that point. (19:54) I said, "Do you think we would have recognized it?" And they smiled and looked at me and said, "We think we have one for you." And uh and it it was Floren Decor. And so if you think a good value investor, I think, is not someone who's looking for a net net, right? That was 60 70 years ago. (20:17) And a good value investor is trying to find uh what's the present value of all future cash flows. Could be high growth, could be low growth. It's just what's it worth based on the future. And with Floren Decor, if you understand their business model, they set out, you know, 20 years ago to essentially recast the hard surface flooring market as they describe it. (20:43) They go direct to the mountain. So they have 250 vendors in 25 different countries around the world and the founder who is not running the company uh but is on the board set to out to democratize hard surface flooring and I don't know what that means but I think I understand the you know the thought and uh their structural cost advantage against the Home Depots and the Lowe's and other specialty chains is shocking. (21:18) They've cut out the middlemen to the extent they can. They have their own big box stores as you know. It's cash and carry. You know, they've just ch they've upended the market. It's a true disruptor in their industry. And so when we founded and met with management and talked to them and understood it, one of the things I stressed to the people working on that financial model is I will be as upset, right? Looking into the future, if you are conservative in your forecast, we conclude, you know, it's not it's not cheap enough to make it (21:59) into our portfolio because we are very valuation focused. And then five ten years later I look at what they've done and look at our original forecast and we were woefully low. Um I said that will make me in a way more upset than if I look in 5 to 10 years and realize we were too high you if that makes any sense. (22:23) Trying to get it right company by company. And so, um, it's a little surprising to me that a pure organic growth company that many investors understand that has that business model uh, was cheap enough 3 years ago to to make it into our portfolio given our valuation criteria. So, you know, it needs to be a great company with great management, long tenur management typically, which this company meets all of that, high business quality, but then it has to be cheap enough to kick something out of our portfolio. (23:02) And I I, you know, would speculate that 3 years ago with the short-term focus on, you know, is the US going into a recession, um, it got cheap enough to make it into our portfolio. And I'd also speculate that there'll be a point when things are fine out there, because they're not fine right now, but when they are fine out there in North America, because this is such a attractive organic grower taking share every year in their industry that it may well get to the point where the share price is such that it doesn't stay in our portfolio. (23:40) 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. (23:59) People who understand your journey and can help you grow. 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That's thespodcast.com/mastermind. or feel free to email me directly at claytheinvestorpodcast.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. (25:17) 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. (25:38) 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. (26:04) During our previous interviews, we discussed in depth the idea of, you know, buy and optimize instead of buy and hold. And looking back at floor and decor stock chart, buy and hold investors aren't fairing too well over the past 5 years or so. Uh, you know, in 2020 the stock price was 60. you see it double, get cut in half, double again, get cut in half again. (26:26) And um you know, you look at the business and revenues have nearly doubled. The number of stores have also doubled. Um the earning side of the equation is struggling in light of you know the industry being uh you know in a cyclical downturn. So how about you touch a little bit on this buy and optimize that we've touched on so many times in the past and how you manage that with a stock like Fuller and Decor. (26:50) >> Sure. I mean and and I would start on this conversation uh to say um I worry that we over emphasize this as part of our process because uh because it's different. All right. The best investor of all time, Warren Buffett, preaches buy and hold. He doesn't practice buy and hold, by the way, but he preaches it. (27:15) And I understand why he does that. our approach and and it's funny, right, that we my partners and I come out of private equity. We we set up and ran the private equity arm of one of the the big Canadian banks back in the '90s. And uh and I looked at the public market and thought there's this extra lever. You find good companies and and you take a buy and hold mentality the way you do in private equity, but then the price moves around and it's just a lever to to be additive to your return. (27:46) So the the fundamental idea, take a floor and decor is you've done the work, you have a full long-term forecast and at a point in time the share price is cheap enough to make it into our portfolio and then uh which means since we have a target of a fixed number of holdings, it does push something out. (28:08) And if nothing then were to happen, we would we wouldn't do anything. We are at core a buy and hold mentality like any good value investor. But here's the thing about the public market as you mentioned. We added it at around 60 a few years ago more than once and I looked at the stock chart last night in preparation for uh talking to you today and it it just reminds me how much it's moved around. (28:35) And in the meantime, our view of what the company's worth hasn't really fluctuated that much. It's gone up over time because you move forward in time. So value is increasing as you move forward in time almost by definition if you're a value investor and they're making money and they're on plan with what you forecast. So, if we feel like we sized the position when we first bought it at 60 bucks and at a point the stock's 120 to sit and say, "Oh, look how smart we are. The stock has doubled. (29:10) " If you don't say to yourself, "We shouldn't own as many shares. Uh, we should actually make sure it's a smaller percentage waiting in the portfolio with that higher share price." Then, and this is our thought experiment when we started uh Turtle Creek was, hey, then if you don't want to sell stock at a hundred bucks, you didn't own enough at 60. (29:37) And of the things that we try to communicate, the most difficult thing to communicate with our philosophy is we are a buy and hold. Unless Floren decor's valuation goes through the roof, we're going to own this company for a long time. But the amount that we own is going to be a function of our view of value which changes a little bit over time right but primarily it will be the margin of safety right what's the share price versus our view of of intrinsic value and it's something that we apply across the portfolio but as I say I want to (30:14) make it clear it's icing on the cake it is the bulk of our returns come from adding a company like Floor and Decor at a good entry point and sizing it to the correct waiting to the best of our ability and then reacting to owning more at a lower price but owning less at a higher price. I also just can't help but think about uh you know flooring decor is a great business but in the 2010s it has had this massive tailwind at its back. (30:48) you know, being a hardwood flooring company, they are very much tied to the housing market. So, if real estate prices are going up, if interest rates are going down, this is a a major tailwind for floor and decor as you know, a lot of homeowners go and refinance, do a home equity line, get some capital to go and redo parts of their home. (31:09) And uh you know I think a lot of the investment case today is that the housing market or the hardwood flooring industry is near a cyclical low and there's a lot of pentup demand that's going to eventually be unlocked as the market rebounds. I just checked prior to this interview the operating income for flooring decor has gone from just shy of 400 million in uh 2022 to 256 million in 2024. (31:34) So, uh, I have this natural bias against trying to avoid many cyclicals just because I just never know where we're at in the cycle. So, talk about how you think about where we are at in the cycle for Floor and Decor uh, to ensure that, you know, we're not entering a value trap. your term value trap. (31:54) I think of value trap as basically getting things wrong on our forecast because if you you know Florent Decor is a company that's never going to issue equity. They actually don't they're not at the point of returning capital to their shareholders because they have such a runway for growth and can take all of their capital even at this lower rate of earnings and redeploy it into geographic growth. (32:27) And the last time we spoke to the CEO, I did ask him when are you coming to Canada? because I I recently did a renovation and I know how how expensive it is for stone and slate and tile and understand the value prop that they that they provide. So, I don't think, you know, I don't believe in value traps if you've done a full model and you've done your best and you own companies that don't need a high share price and then when they have surplus capital, they return it to their shareholders and and I I think the reason why as we found floor (33:08) and decor and did work on it that the reason we own it is all of the things you just said And if you have the ability to think long term to look past this frankly profoundly weak environment we're in in North America, you know, I think that maybe what we talked about earlier, the AI wave and the hyperscalers and the mega projects and the data centers are clearly I think covering up a quite a weak economy away from that. (33:45) It was interesting when we spoke to management, I guess a few months ago, maybe 6 months ago now, they've taken their new store build for 2025 down twice. And we asked them, well, in what situation will you um regret that decision? I think they went from 30 to 25 and then 25 to 20. and they said, "Well, if we come out of this recession with a V recovery rather than, you know, like a U recovery. (34:18) " And so in their world, they've been in a recession for a number of years. And as as you say, Clay, there there is pent up demand since the great financial crisis and the housing bubble. The household formations have been profound. New home builds have not been. And so uh there is pent-up demand. There is no question about that. (34:45) But we've got the time frame to not really worry about is it going to happen in 6 months or a year or in in 3 years because if you own the company in an industry that's just structurally advantaged as Flor & Decor is and they're taking share from their competitors. They're still growing as you say. (35:08) They've doubled their store count over the last few years. And the point they made to us is, well, we've taken our store openings from 25 to 20. But by the way, we're still we've acquired the land. We're building those stores. We're just not staffing them and putting inventory in them until next year. So, it is still a high growth company that is taking share from competition. (35:31) And we don't spend a lot of time thinking about well when does the turn happen. We're looking out 5 years 10 years plus. That's our focus. And I think because of that there are a number of companies that have made it into our portfolio in the last 3 years because of the fact that the economy in North America is soft and they're more impacted by that. (35:58) And so the share prices have gotten to the point where we're able to say these are, if you have a long view, these are now cheap enough to make it into our portfolio to push other things out. And Florent Decor is a good example of that 3 years ago. >> Yeah, I mentioned interest rates there and, you know, the low interest rate environment that fueled the real estate market and now of course we're in a a slightly higher interest rate era. (36:25) I believe uh 30-year rates you'll get today are around six six and a half percent something like that. How does recent interest rate cuts and just your outlook on the US housing market how does that play into the thesis on flooring decor? >> I mean it doesn't in in a way it doesn't right because this is a company with net zero debt and and even in this soft environment they're making lots of money. (36:55) So the that thesis might play into where's the share price going to be a year from now but it doesn't play into what's our view of the intrinsic value of the shares. So the macro environment is not a big factor in how we think. But but let me be clear the um if you gave us two companies that are equally attractive, well-run, one of them's Flor and Decor, one of them is a nonyclical business with the same cheapness. (37:28) We would have more of the non-yclical business. So, we're not afraid of cyclicals like Flor and Decor, but we we do titrate down how much we would like to own versus something that is non-yclical. We own a US company called SSNC and they are very non-yclical. So, at the same cheapness, we'd have a lot more in SSNC than we would in Floren Court, but they're not at the same cheapness today. (38:01) So it's in our thinking but it's more we think about well what's the impact on their industry and what's happening to their competitors. I mean one of their large competitors has filed for bankruptcy or did last year. Um, sometimes the weak economy for a company like Florent can actually be a a positive if you're thinking out long enough because it's it's taking their competitors who are don't have the same business model. (38:32) It's taking them out of the market and it just gives them greater share in five plus years when when the economy is much stronger. Yeah, I think uh it's a classic case of you know many mom and pops just simply being undercut on price and you know these new stores are being built across the country and you know stealing share from many of these smaller players that just are structurally disadvantaged. (38:56) Um you mentioned being very valuation focused. How about you talk a little bit about the valuation of floor and decor and in general what sort of discount to intrinsic value you're looking for in your portfolio additions. >> Sure. I mean, so when we say intrinsic value, you can think of it as what's the present value of all future free cash flows back to shareholders at about a 10% rate. (39:23) We we've never played with that discount rate whether when rates were when we started rates were higher than they are today and of course rates for a long time went close to zero as as you mentioned. Um, and now they're back to what I think of as a more normal environment if you have a very long view. So, we've never changed our discount rate on our companies because of changing interest rates. (39:50) And so, when we talk about intrinsic value, that isn't where we think the shares should trade. You when people have share price targets, we don't have targets. We we just say there's a huge range over which Floren decor could trade and it would be very defendable, right? Um people can always come up with a reason why it's trading where it is today. (40:17) And as you mentioned, the share price has been north of 120. Now it's back today a little below 60. Um they're both fine. It's those are reasonable prices. Our view of intrinsic value is well above 120, but that doesn't mean we think it should trade there. I mean, in a very rough way, you you could think of it as the, you know, the takeover price of a company. (40:45) Not that we think anybody's going to step up and offer a huge premium for a floor and decor. It's just not that kind of target. So what we do is we say the bigger the gap between the intrinsic value and the share price adjusted by a bunch of uh aspects of a company like cyclicality just as as I mentioned uh we just have a target waiting for each holding and it's higher today than it was a month or two ago when the share price was actually quite a bit higher than it is today and nothing's changed in the business. (41:25) If something did change, if there was a new entrant and some structural change was occurring in the industry, we would we'd really focus on that. But none of that's happening with floor and decor. It's a very strong management team uh with some new additions and some recent very logical changes for executive management. (41:51) So I think everything's good in the company if you know what I mean. And so we just let the noise of the market wash over us and we take advantage of that noise to to do somewhat better than a long-term buy and hold. What we know is that the long-term buy and hold for us on Floren Decor is going to be really good. (42:13) Just don't know the pathway if if you know what I mean. >> So as you mentioned, you're a very valuation focused investor. I believe uh the typical stock in your portfolio is around a PE of 11 or so and uh you know you love cheap stocks but when you look at floor and decor its headline PE is actually around 30 which leads me to believe that there's going to be some adjustments that need to be made here and uh you could also probably make the case that this might be a higher growth name relative to some of your other holdings. How do you think about you (42:42) know making adjustments to you know the earnings of a company like Floren Decor uh if any in this case? >> Yeah I mean it's company by company and in the case of a pure organic growth company under US GAP it's not bad right there are some of our companies we own a lot of what we call platform companies that where they they make acquisitions and then the accountants under the accounting rules you you no longer amvertise goodwill, but you put them in buckets of, you know, customer lists and things and tangibles, (43:17) which doesn't make any sense to me. And then that impacts earnings per share. So there are some companies that you really have to make some sometimes some pretty material adjustments to the gap earnings or in in our case in Canada, IFRS. But in the case of Flor and Decor, it's the gap earnings are not too bad in terms of a in terms of a number. (43:44) And it's it's funny you mentioned 30 times. I had it in my head that it's more 40 to 45 times. So you're right. you've got a high growth company uh and we have a lot of high growth companies but then we own some 10% earnings growth companies over the next 5 years plus and we own them because they're trading at a singledigit price earnings multiple and so it is a mix but if you recognize that the earnings for Florida core they're obviously depressed at this point in time so so if thought about a normalized number, it's lower. (44:24) And then if you think about the growth they have for probably for decades, it ends up being cheap. But we never think about the multiple in terms of our decisions. We we do have these large financial forecasts and financial models. And so when we quote 10 or 11 times for the portfolio, we're just trying to find a way to communicate to our investors, you know, how attractive the portfolio is as opposed to saying that's how we value companies, if you know what I mean. (45:02) >> Excellent. Well, let's get to Kenzel Capital here. This is another stock in the portfolio that's fairly well known by our listeners. So this is a specialty insurer that's been successful in its strategy to grow in the excess and surplus market. They only have around 1 and a. (45:21) 5% market share in their industry and that share has doubled over the past 5 years. And one of your statements that stood out to me in one of our first interviews was how you're looking for one-of-a-kind unique companies. And I think Kenzel certainly fits that description. actually uh previously worked in the insurance field. So I saw firsthand how slow and archaic some of these companies in the space can be even when a highly disruptive player like Kenzale steps into the industry. (45:48) And you know this is another very high growth company. You know you look back at uh previous years many years they grew top line by over 40%. Currently they're growing around 20%. How has the story and thesis on Kenzale developed since we last spoke last year? Well, you know, I don't in terms of develop just everything is as we expected and the you know it is as we get to know companies better um we either rate them higher or we derate them and it goes both ways right the more time you spend with management in the case of kinsale (46:32) you know I I sometimes joke. We deal with companies. We follow them. We try to follow them closely. We speak to them when we can, trying to be respectful with the fact that they're running a company in almost in a way of waiting for them to say something stupid. Kinsale has never said anything stupid to us, right? And so that idea of it is what we look for a highly intelligent company in a fairly mature market. (47:06) although uh especially in excess is is that share is growing from the regulated market and as you mentioned they're taking share in that market but they're also it's not just that they have a profound cost advantage which they do I mean you can think of it as much of as a technology company as it is an insurance company and it's tough to imagine their larger competitors saying, "Hey, we should rip out our systems and uh and do what Kinsale did from scratch. (47:45) " It's really hard to imagine that happening. And so, they do have a meaningful cost advantage, but also I think as an organization, they're just really good underwriters. They're thoughtful. they um you know recently and I'm not an insurance expert by any means. Our our approach is to find a highly intelligent company and then you learn the industry from them. (48:12) Now we we know insurance a little bit at times. We've owned Fairfax Financial which uh many people would know terrific insurance company based in here in Toronto. So, but we learn from the company and when you watch how they, you know, dial back their exposure. When you ask them about large policies like multinational corporations, what they explain is you probably don't want to underwrite that because they're big enough to self-insure. (48:48) And so they're they're really just testing are you willing to give them a pol like a policy at a cheaper price than they're willing to write internally. So their focus is small and mediumsiz businesses. It's just we've learned so much from them about their industry and it just continues to impress us. So you know as I mentioned we have all these aspects of a company that factor into our waitings away from just the intrinsic value and you whether it's management business quality which often is the management team has created the business quality. Pinsale gets (49:28) really high marks frankly across the board and so uh yeah it's better than than when we last spoke I guess is the way I would put it from from our standpoint. >> Mhm. And you mentioned you know looking out at least five years. I mentioned the market share today uh here in the US they have around one and a half% market share. (49:55) That shares doubled in the last five years and they have around two billion in revenue in a $130 billion market. So certainly room to continue to capture more share. Do you have a a level of market share in mind that either the management team is looking forward to capturing or uh you guys are looking at or how do you think about you know how much room there is to for them to grow into this market? I mean that is the key question right with a high growth company with that kind of structural self-created structural advantage. I mean their expense ratio is (50:27) much lower than the competition and as I said they're really good underwriters so it's a terrific combination. Um you know are they will they be 5% market share at some point? I think it's inevitable. Will they ever be like Lloyds of London that our best guess is at 17%. I think Kin would say that would be a bad thing. (50:53) You don't want to be that much of the market. So again, it's a thoughtful approach from management, but they may not if the market is soft because we had a hard market and as you say, they were growing topline premiums, written premiums at 40%. It's lower now. That's that's self-induced because they're not going to write bad business. (51:22) And as an example, that in the commercial property space, at least in certain regions in the US, they drastically reduced their policies written a couple of quarters ago because they said like there's new competition who are going to lose money on these policies and we won't compete on that basis. So I think part of it is that, you know, the market share will partly be determined by the competition. (51:48) So they're not saying, "Oh, we want to be 10% or 6% or 5%." They just want to write good business. And last year they announced their first ever share buyback authorization. And people in the insurance industry when we talk about kinsale say, "Oh my god, they're they're looking at buying back shares at five times book and they think the way we do. (52:16) " Well, by the way, they haven't they bought very little stock so far. Um, but they say, "Well, there's book value failing, then there's intrinsic value. And if we can buy our stock at a discount to the intrinsic value, that creates value for our shareholders. And so they're at the point now where because their returns on equity are so high when they're not growing at 40%. (52:42) They end up generating surplus capital. And that just adds another, you know, arm to the story, if you will, from being overwhelmingly uh fixed income in their float to now feeling like they can have an increasing amount of equities at the right time. Not sure right now is the right time um in terms of, for example, the S&P 500, but also adding the idea of buying a bit of themselves if the share price is attractive. (53:14) Look, if you can find companies like that, you know, the share price is going to be higher in 5 years and in 10 years. And from our standpoint, I hope the path is jagged. So far, we've only owned Kinsale for 2 years. It's been a very jagged journey in terms of the share price if you if you pull up a chart. (53:34) Um, and that's good for us. Like we what we love our low business value intrinsic value volatility and just a bonus is high share price volatility. I remember the first two quarters after we owned the company the first quarter they reported for us kind of what we were expecting the stock was down 20%. (54:01) I don't know why uh we bought more stock and then the next quarter uh the results were for us in line and the stock was up 20%. And so that's a nice thing for us. We embrace that as opposed to like a steady Eddie share price. Mhm. I think you hit on a couple of really important points in relation to Kenzale and the insurance industry overall. (54:31) So, uh, you know, insurance can have some very irrational players. Buffett and Munger have talked about this for years where, you know, some insurers will for whatever reason get excited and want to write unprofitable business just to grow the top line. And you know that's when a company like Bergkshire, a company like Kenzale is going to take a step back and let them you know pursue some of that unattractive business. (54:52) And then there can be periods where there's just opportunities everywhere to write business and that's when they can step in and um you can just really appreciate a manager that you know recognizes opportunities when they present themselves and not getting not chasing the playing the quarterly EPS Wall Street game right of oh we need to hit our quarterly numbers so we need to write this this business to uh grow the top line or grow the EPS shortterm and the repurchases I think is also worth highlighting there their first time (55:22) they're doing uh share repurchases and as we know the management team knows the business and knows the intrinsic value as well as anyone. So share repurchases are certainly a very good sign for a company as well as this. >> Yeah. Look, I mean at the end of the day it's what I mentioned earlier. We own companies that are never going to issue equity. (55:46) And that in a funny way maybe is the we started this conversation talking about efficient markets and the purpose of the you know why is it important that markets are efficient? It's capital allocation. But the other thing to understand about the public market is that most like good companies are public for a bunch of reasons. (56:11) often the original owners, it was it's a route for them to diversify their own portfolio, whether it was a family business. And so we own companies that are selfunded companies. They just happen to be public. And Kinsale's a really good example of that. They are so profitable. Uh the debate as we go forward will be well how much capital do they have that will get returned to shareholders. (56:42) I think of companies like that as slow motion management buyouts. The number of companies that in our portfolio over the years uh who have said to me either the share price is a lot higher in three years or you and I are going to own the whole company. So if you have companies like that, it's the classic, you know, the outsiders, that book by William Thorndikeke, who uh, you know, it's a terrific profile of eight companies, American companies that have just knocked the cover off. (57:18) And one of the attributes they have is really being focused on capital allocation. And it was interesting when I first had dinner with Thorndikeke and this is years ago now. He said Canada seems to have a disproportionate number of these outsider companies. He mentioned Kushtard out of Quebec and and others which may be true and maybe it is the less of a aggressive Wall Street mentality here in Canada uh that allows those companies to be more outsider companies. I I I don't know. (57:54) But um but yeah, if you you find a company that thinks about, you know, that they're not going to try to be a Berkshire Hathaway, they're going to stay as a pure insurance company and they're going to as they have more surplus capital at the right time shrink the share count. Um because it's funny, we think about share buybacks. (58:18) There are a lot of groups or people who can criticize share buybacks versus let's say dividends. We think of it as well why wouldn't you take your surplus capital and buy 100% of the shares from your shareholder who has the lowest opinion of what you're worth. And and that's how we think about buybacks. And and good companies think the same way. (58:44) Mhm. Before we close it out here, I wanted to give you a chance just to talk about some of your recent performance because when we look back at the the history of your firm, you've had, you know, different periods of outperformance and underperformance. And today, you're in a period of underperformance, which really shouldn't be a surprise given the developments with AI. (59:05) And I know that you likely haven't flinched at all with regards to sticking with your strategy. And I'd just like to give you a chance to reflect a bit on, you know, the importance of sticking with a strategy when it's going against you because all great managers are going to go through those periods. It's just an inevitable part of uh being a stock market investor. (59:24) >> Yeah, for sure. I mean, it's funny as you're as you were asking the question, you reminded me of someone, and this is a long time ago, who commented to me when we went through a bad patch within our first decade. And he said, "It's a good thing you had those great early years to know that what you do works, right?" And I said, "I didn't need to have a few good years to know that, you know, owning highquality companies with management and boards that are focused on shareholder value over the long term. (1:00:00) " That I didn't need to have some decent results to know that that's the right approach. And the same thing applies today. So yeah, we're lagging on a mark-to-market basis. It's one of the reasons that we well it's the main reason why we actually print a change in intrinsic value trying to deliver to our investors and people following us how we feel like we're doing uh based on the companies like Floor and Decor and Kinsale. (1:00:33) We didn't take our value up on floor and decor by 100% when the share price doubled. We didn't take it down by 50% when the share price fell back down to where it is. It's been a, you know, never a perfect steady progression, but it's it's company by company trying to communicate, hey, this is how the portfolio is doing. (1:00:52) And it the economy has been a headwind for some of our companies. There's no question with uh a floor and decor that's the case with kinsale. It's not economically cyclical but as you were describing it's industry cyclical. You have a canaba hard market and a soft market. It's not so much the shape of the economy. (1:01:14) It's uh new entrance and then there are three hurricanes that are devastating in one season and all of those new entrance leave. So every company has its own character and so from a you know increase in intrinsic it's it's business as usual and one of the thoughts and or terms statistics in the investment world is something called active share and we have an active share of 97 a.5%. (1:01:46) So we are we look nothing like the indices. I mean if it was compared to the S&P 500 it would probably be an active share of 99.9%. So what we do is we own a collection of highquality companies at any point in time at the most attractive valuation from the companies we follow. And you made the comment it's inevitable especially in the environment that we're in that we're going to lag. (1:02:15) It's it's happened to us before and guaranteed it's going to happen at some point in the future. >> Yeah. Well, uh, you know, not to make a statement about, uh, your future performance, but I think just looking at, uh, you know, in general, when you look at a number of great managers when, you know, the market is just roaring and some of these great investors, you know, aren't fairing as well. (1:02:39) I think, you know, that can be a sign of where we might be at in the cycle. Uh certainly not a forecast, but always interesting to look back and compare and contrast how things end up playing out. But Andrew, as always, I thoroughly enjoy uh having you on the show and appreciate you, you know, sharing your thoughts on the market and discussing a couple of your holdings. (1:02:59) Before I let you go, how can the audience learn more about you and Turtle Creek? >> Well, we have a website, but importantly it's.ca, CA, not.com, because we're Canadian. And yeah, there's plenty of information there, especially if you click that you're an international investor. Not that I'm suggesting that you should do that, but and then if you are on the if you click if it is a US resident, one of someone in the team will reach out and and you get a code and and you have full access. (1:03:33) We've got a we've got a I think a a pretty good website with all of our communications and lots of information. Uh we've written I think some decent stuff over the years and and it's all there on the website. >> Excellent. Well, thanks again, Andrew. I really appreciate it. >> Great. Thank you so much. This was fun. We're really drawn to one-of-a-kind unique companies because our view is if you're going to do all that work and we do do a lot of work over the years, wouldn't it be great to own companies that get more mispriced in both (1:04:08) directions? I think you know to a small extent that is one of the sources of our outperformance over
Mastering the Markets & Weathering Market Drawdowns w/ Andrew Brenton (TIP770)
Summary
Transcript
(00:00) But the other thing to understand about the public market is that most like good companies are public for a bunch of reasons. Often the original owners, it's a route for them to diversify their own portfolio, whether it was a family business. And so we own companies that are self-funded companies. (00:21) They just happen to be public. And Kin sales a really good example of that. I think of companies like that as slow motion management buyouts. The number of companies in our portfolio over the years who have said to me either the share price is a lot higher in 3 years or you and I are going to own the whole company. 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. (00:54) It's a free and easy way to support us and we'd really appreciate it. Thank you so much. So, you've been a guest a few times on the show now and I'm I'm thrilled to have you back and we're going to be chatting about today's market as well as a couple of your holdings a bit later. Let's talk by talking a bit about the efficiency of markets. (01:15) So, as you know, value investors will shun the efficient market hypothesis and pride themselves on trying to spot the market's biggest inefficiencies. How about we start by discussing why having efficient markets are important and something that we should even care about? Sure. I mean, if you believe the purpose of the capital markets, and I'm now talking private markets, the debt markets, the public stock market, if you believe the purpose is to allocate capital to the deserving groups at the right price or cost, then I think it's (01:52) absolutely critical. It's a foundation of almost the definition of capitalism, right? and it's the foundation of the success of the western world uh since the middle ages or even predating that. So I I think that foundational idea of how do you get information uh that messy messy process of figuring out what a company is worth and therefore what you should pay for shares when that company needs to issue equity is absolutely a critical component of the modern world. (02:30) and and I think very important. >> So Cliff Asnes wrote this great paper titled the less efficient market hypothesis and he actually believes that the stock market is becoming less efficient over time and he points to three different factors there. So he's pointing to one that everyone's familiar with which is index funds and the passive flows. (02:51) The second is the very low interest rates we've had for a long period of time. And then the third is just technology and social media sort of leading to this hurting effect where people are crowding into the same stocks and everyone has sort of the same outlook and uh there's a lot of group think happening. Do you follow uh Assens's line of thinking and believing that markets are becoming less efficient over time at least the stock market? No, I I think that's right. (03:20) And it's it's funny when I you know when I was at school, which is probably around the time that Cliff Asus was at school, that was the height of the efficient market hypothesis. And I didn't start as an investor. I started in investment banking and mergers and acquisitions. And I quickly realized that, you know, came out of school thinking markets are perfect, markets are efficient, and quickly realized that isn't true at all. (03:46) But I also haven't I don't spent we don't really if you will read a bunch of other stuff if that makes any sense. Our approach is to be intensely owners of companies that are happen to be public is how we think about it. But you know someone sent me Cliff's paper actually I think I saw it and read just the abstract and thought yeah that that makes sense. (04:13) But I didn't read the paper. And about 6 months ago, I actually sat down and read the paper. And it was actually a foundation for our one of our quarterly commentaries this this year. And I do agree that markets have become less efficient. We've seen it over our 27y year now history at Turtle Creek. They're not less frenetic. they're not less liquid. (04:43) So if you define efficiency as lots of reaction to the latest tweet, the latest quarterly results, that hasn't changed. That's actually become more extreme. Um, but that doesn't necessarily equate to efficiency. If you think efficiency means getting reasonably close to fair value for the shares of a company and that's I think what most people would define as efficiency as opposed to volutric reaction to to every new piece of news. (05:18) I love the quote from Robert Schiller, the economist, and it goes along the lines of um the thought that because the markets are reacting to every new piece of information that they are then getting it right is there's no logic in that connection and it's the greatest economic error in thought in the 20th century. I mean that's I'm paraphrasing but that's the essential thought and and if you think markets were inefficient always at to some degree I do agree with Cliff's observation that in his career markets have become less efficient and we've (06:00) seen the same thing. >> I think uh it's such an interesting thought experiment. A couple thoughts come to my mind with when it comes to uh the market's inefficiencies and how those end up resolving themselves over time. I think part of the inefficiencies is just simply due to human nature. You know, humans are the ones doing most of the buying and selling or programming all these algorithms that do the buying and selling. (06:25) And um I think about how people just tend to be uh loss averse for example. So when a stock is dropping, our gut instinct usually tells us to avoid that stock to avoid losing money. And you know, many stocks drop simply due to things like uncertainty. Humans tend to hate uncertainty. And another human bias that I think plays into markets quite often is just this natural tendency to extrapolate. (06:51) So the market tends to assume that a company is growing is going to keep growing or a company that's experiencing decelerating growth is going to keep experiencing decelerating growth and then once the tide sort of turns you can see a stock double you know fairly quickly and I think there are plenty of examples that we could point to that sort of illustrate just how moody the market can be. (07:13) You know it's interesting right? Um when I went to school I mean not in school but recently meaning the last 10 years with the whole rise of behavioral finance and all of that great work like thinking fast thinking slow when I read about all of the biases I look at them and say that's not us and I read the next one I say that's not us. (07:39) So for example, loss aversion. My view is if you have done the work ahead of time and you have a good fundamental view on what you think a company's going to do for the next 10 and 20 years and if you also believe that there is noformational content in the share price. I think that's an important point. (08:03) I can understand people on the outside looking in on a company that the market's telling them things aren't going well uh because the share price is down. But if you understand that very very few people an increasing number of fewer people um are actually doing that fundamental work. A declining share price doesn't fuss you or fuss us. (08:27) And but equally a rising share price doesn't get us excited. And so you know it's not really a fair description when the classic line of why do people get excited at the supermarket when tuna goes on sale but not when stocks go on sale. And the simple answer is people have an understanding of what the price of tuna is. You have to go fish it. (08:52) You have to process it. You have to get it into cans. You have to get it into the stores. And so if a food store puts something on sale like that, you know you're getting a deal. The problem is in the stock market, very few people have done the work to say, "Wow, at that lower price, that's a really good deal. (09:14) " And so, as I say, it's not really a fair comparison. And if you think there are fewer fundamental investors in the market and for sure there are. I mean you can just look at the number and then if you take the fundamental investors or the active investors and you put them into the bucket of closet indexers or quasi closet indexers and then when you mention the three reasons that markets have become less efficient from Cliff as standpoint you know the one that doesn't really resonate with me is necessarily low interest rates. it does create, you (09:51) know, exuberance and and easy money. So, I get that. Um, but I think there's a there's a fourth and that is the shift in active management from that longer term fundamental investor from groups like a Fidelity or a T-roll price um to the the pod shops to the quants that are given the mandate. (10:16) You know, you can't look beyond 3 months. We want you to figure out where their share price is going to be in the very short term so that their temporal situation is they have to think very short term. And so it's not just a move toward index funds. It's this I think a structural shift in the stock market to more of the trading or more of the activity who are people who are making their own decisions are doing it based on trying to figure out what's going to happen in the very short term. (10:51) So I think that's a and maybe of all of those maybe the most profound in terms of the impact on the market where we're sitting today. One of the other interesting uh points I'd like to touch on is just this understanding of, you know, value investors needing to be patient and sit through some periods of pain, let's call it. (11:18) So, one of the core principles of value investing is buying something for less than it's worth. And a lot of money can be made by simply waiting for the market to recognize that value. You know, in some cases, a stock can go up 50% in 6 months after the market realizes it it initially had it wrong. (11:34) And in other cases, a stock might trade relatively flat for, you know, 2 3 years, and the market just simply doesn't care about it for whatever reason. Maybe the story is too complicated. Maybe the market's more interested in AI or quantum computing stocks or, you know, perhaps it's just in a sector that the market just doesn't like at that period of time, and maybe their peers aren't aren't doing as well. (11:52) But eventually the market does tend to recognize that value. Based on your experience, how long do you think these really big inefficiencies tend to last on average? >> Um, well, I think it's probably getting longer. So, I can only speak from our experience. And in the first decade of our, you know, so 25 to 15 years ago, we were overwhelmingly Canadian equities. (12:17) So I can only speak to the Canadian market at that time and now we're the majority are are US companies. So think of us as a North American manager, but I can't I can't comment on the US market 25 years ago. I can just commented on 15 years ago compared to today. If you think about it that way, generally we use a 5-year time frame. (12:40) So our approach in terms of portfolio construction uh in terms of how cheap something is, we give the market credit that over the next five plus years the share price will get dragged kicking and screaming toward our view of intrinsic value if we're right in our view. And we've seen that borne out time and again. And to your point, sometimes it happens in a year or two. (13:08) Sometimes it takes more than 5 years. And I think the time that it it's really hard to make this statement because I think we're in a unique stock market environment right now, but for sure it takes longer today than a decade ago. And I think that again was one of Cliff Aes' point that if you can take the approach of being truly understanding value and owning value given the market structural changes, the opportunity set is greater, but you have to be willing to sometimes wait longer. (13:45) And I think that was the most important summary in a way conclusion that he made at the end of of his paper. And we absolutely believe that we see greater mispricing today than we've seen in the past. And I'll set the dot bubble aside because that was a, you know, you can analogize to today, but there was crazy mispricing then. (14:11) Um, but otherwise, if you think of regular markets, the mispricing on average is greater today than it was 10 or 20 years ago. I think you hit on a really good point earlier of not falling prey to resulting. I think the stock market's just such a great place to gain humility because if you, you know, attribute success as an investor to a stock price going up and failure as an investor to a stock prices is going down, you can do some really silly things uh in the near term. (14:46) And um Asenness, he has this wonderful point in his paper that the enemy of a the efficient market hypothesis is a bubble. According to Asenness, we're in a bubble when uh we have a large number of stocks that are trading at prices that can't be justified under any reasonable model. And I think a couple important points on that sentence is it needs to be a large number of stocks. (15:07) So it's not just, you know, maybe one little sector, maybe a few small caps that are trading at high prices. And then also their prices can't be justified under any reasonable model. So if there is a you know a reasonable case for higher valuations then it's more difficult to justify it calling it a bubble. (15:29) And as you mentioned, today's market is particularly interesting as there are several industries that are really struggling or as you've stated are really in a recession. While the broader market continues to march upward and is primarily being lifted by the market's big winners in tech and AI, how about you talk a little bit about if today's market does resemble the 99 tech bubble and maybe in what ways? you know, what's the line? A history doesn't repeat itself, but it rhymes. (15:59) Um, and I think again in Cliff Aes' uh paper and in, you know, other commentators who've been around for a while, I agree with this comment that you expect a bubble once in your lifetime because once people realize it's the next generation that creates a bubble, and I guess it's been long enough now that it is the next generation. (16:23) Um, we were around for the.com bubble and I remember at the time people asking my view on a Canadian company called Northern Telecom, um, 360 Networks, Global Crossing, and Cisco Cisco and uh, Intel, in fact, Microsoft is the one that comes through all of that, but it took a long time for them to come through in terms of recognizing what they're worth and we refused to give a view because we weren't doing work on those companies. (16:59) And so it's similar for us today with the Magnificent 7 and AI in that you know our approach is to try to find the special company in an industry and we're going to talk about two today I think that that are really uh doing unique things in their industry as opposed to trend investing or thematic investing where we look at a theme like AI um or synthetic biology ology and then try to find a company that is in that space. (17:35) But just in terms of the attitude of people and what it feels like and frankly the multiple of the broad market that feels it feels very similar to the dot bubble again you can always find arguments to say this time is different but those are the four most dangerous words in investing. It's funny. The other day I was chatting with a listener of the show and um his son was a college student and he had the best returns of anyone I've heard of in the past year owning Palunteer. (18:09) Many of many of these AI stocks uh I haven't heard of that are up 3 4x in the past year. And I think that's uh sort of some of the telltale signs of some of the things that happen during market euphoria. So, let's get here to talk about two of your portfolio holdings. We have Floren Decor and Kinzel Capital. Many of our listeners are going to be familiar with these and you believe that the market is getting these the pricing of these stocks wrong and we'll get into why that is. (18:40) Um, how about we start with floor and decor? Uh, talk about some of the things that you like about this business. >> You know, it's interesting. I mean the two you mentioned Clay are they have similarities in that uh let's talk about floor and decor and I will say we you know as a Canadian investment manager and that our for that continues into the US is only 15 years on and we came across floor and decor uh a number of years ago and it's interesting I think in my office in here in my office one day years ago I was having a thought experiment and the (19:18) thought experiment was if we'd been active in the US uh when Costco was you know early days would we have understood the opportunity set that they had because our approach is not to just um you know we're trying to build we're thinking out 10 20 plus years and trying to be balanced in our forecasts and um and I walked down the hall and spoke to some of the people on the investment team who were hanging out in the hall and I posed that point. (19:54) I said, "Do you think we would have recognized it?" And they smiled and looked at me and said, "We think we have one for you." And uh and it it was Floren Decor. And so if you think a good value investor, I think, is not someone who's looking for a net net, right? That was 60 70 years ago. (20:17) And a good value investor is trying to find uh what's the present value of all future cash flows. Could be high growth, could be low growth. It's just what's it worth based on the future. And with Floren Decor, if you understand their business model, they set out, you know, 20 years ago to essentially recast the hard surface flooring market as they describe it. (20:43) They go direct to the mountain. So they have 250 vendors in 25 different countries around the world and the founder who is not running the company uh but is on the board set to out to democratize hard surface flooring and I don't know what that means but I think I understand the you know the thought and uh their structural cost advantage against the Home Depots and the Lowe's and other specialty chains is shocking. (21:18) They've cut out the middlemen to the extent they can. They have their own big box stores as you know. It's cash and carry. You know, they've just ch they've upended the market. It's a true disruptor in their industry. And so when we founded and met with management and talked to them and understood it, one of the things I stressed to the people working on that financial model is I will be as upset, right? Looking into the future, if you are conservative in your forecast, we conclude, you know, it's not it's not cheap enough to make it (21:59) into our portfolio because we are very valuation focused. And then five ten years later I look at what they've done and look at our original forecast and we were woefully low. Um I said that will make me in a way more upset than if I look in 5 to 10 years and realize we were too high you if that makes any sense. (22:23) Trying to get it right company by company. And so, um, it's a little surprising to me that a pure organic growth company that many investors understand that has that business model uh, was cheap enough 3 years ago to to make it into our portfolio given our valuation criteria. So, you know, it needs to be a great company with great management, long tenur management typically, which this company meets all of that, high business quality, but then it has to be cheap enough to kick something out of our portfolio. (23:02) And I I, you know, would speculate that 3 years ago with the short-term focus on, you know, is the US going into a recession, um, it got cheap enough to make it into our portfolio. And I'd also speculate that there'll be a point when things are fine out there, because they're not fine right now, but when they are fine out there in North America, because this is such a attractive organic grower taking share every year in their industry that it may well get to the point where the share price is such that it doesn't stay in our portfolio. (23:40) 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. (23:59) People who understand your journey and can help you grow. 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. (24:23) 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. (24:44) 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 claytheinvestorpodcast.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. (25:17) 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. (25:38) 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. (26:04) During our previous interviews, we discussed in depth the idea of, you know, buy and optimize instead of buy and hold. And looking back at floor and decor stock chart, buy and hold investors aren't fairing too well over the past 5 years or so. Uh, you know, in 2020 the stock price was 60. you see it double, get cut in half, double again, get cut in half again. (26:26) And um you know, you look at the business and revenues have nearly doubled. The number of stores have also doubled. Um the earning side of the equation is struggling in light of you know the industry being uh you know in a cyclical downturn. So how about you touch a little bit on this buy and optimize that we've touched on so many times in the past and how you manage that with a stock like Fuller and Decor. (26:50) >> Sure. I mean and and I would start on this conversation uh to say um I worry that we over emphasize this as part of our process because uh because it's different. All right. The best investor of all time, Warren Buffett, preaches buy and hold. He doesn't practice buy and hold, by the way, but he preaches it. (27:15) And I understand why he does that. our approach and and it's funny, right, that we my partners and I come out of private equity. We we set up and ran the private equity arm of one of the the big Canadian banks back in the '90s. And uh and I looked at the public market and thought there's this extra lever. You find good companies and and you take a buy and hold mentality the way you do in private equity, but then the price moves around and it's just a lever to to be additive to your return. (27:46) So the the fundamental idea, take a floor and decor is you've done the work, you have a full long-term forecast and at a point in time the share price is cheap enough to make it into our portfolio and then uh which means since we have a target of a fixed number of holdings, it does push something out. (28:08) And if nothing then were to happen, we would we wouldn't do anything. We are at core a buy and hold mentality like any good value investor. But here's the thing about the public market as you mentioned. We added it at around 60 a few years ago more than once and I looked at the stock chart last night in preparation for uh talking to you today and it it just reminds me how much it's moved around. (28:35) And in the meantime, our view of what the company's worth hasn't really fluctuated that much. It's gone up over time because you move forward in time. So value is increasing as you move forward in time almost by definition if you're a value investor and they're making money and they're on plan with what you forecast. So, if we feel like we sized the position when we first bought it at 60 bucks and at a point the stock's 120 to sit and say, "Oh, look how smart we are. The stock has doubled. (29:10) " If you don't say to yourself, "We shouldn't own as many shares. Uh, we should actually make sure it's a smaller percentage waiting in the portfolio with that higher share price." Then, and this is our thought experiment when we started uh Turtle Creek was, hey, then if you don't want to sell stock at a hundred bucks, you didn't own enough at 60. (29:37) And of the things that we try to communicate, the most difficult thing to communicate with our philosophy is we are a buy and hold. Unless Floren decor's valuation goes through the roof, we're going to own this company for a long time. But the amount that we own is going to be a function of our view of value which changes a little bit over time right but primarily it will be the margin of safety right what's the share price versus our view of of intrinsic value and it's something that we apply across the portfolio but as I say I want to (30:14) make it clear it's icing on the cake it is the bulk of our returns come from adding a company like Floor and Decor at a good entry point and sizing it to the correct waiting to the best of our ability and then reacting to owning more at a lower price but owning less at a higher price. I also just can't help but think about uh you know flooring decor is a great business but in the 2010s it has had this massive tailwind at its back. (30:48) you know, being a hardwood flooring company, they are very much tied to the housing market. So, if real estate prices are going up, if interest rates are going down, this is a a major tailwind for floor and decor as you know, a lot of homeowners go and refinance, do a home equity line, get some capital to go and redo parts of their home. (31:09) And uh you know I think a lot of the investment case today is that the housing market or the hardwood flooring industry is near a cyclical low and there's a lot of pentup demand that's going to eventually be unlocked as the market rebounds. I just checked prior to this interview the operating income for flooring decor has gone from just shy of 400 million in uh 2022 to 256 million in 2024. (31:34) So, uh, I have this natural bias against trying to avoid many cyclicals just because I just never know where we're at in the cycle. So, talk about how you think about where we are at in the cycle for Floor and Decor uh, to ensure that, you know, we're not entering a value trap. your term value trap. (31:54) I think of value trap as basically getting things wrong on our forecast because if you you know Florent Decor is a company that's never going to issue equity. They actually don't they're not at the point of returning capital to their shareholders because they have such a runway for growth and can take all of their capital even at this lower rate of earnings and redeploy it into geographic growth. (32:27) And the last time we spoke to the CEO, I did ask him when are you coming to Canada? because I I recently did a renovation and I know how how expensive it is for stone and slate and tile and understand the value prop that they that they provide. So, I don't think, you know, I don't believe in value traps if you've done a full model and you've done your best and you own companies that don't need a high share price and then when they have surplus capital, they return it to their shareholders and and I I think the reason why as we found floor (33:08) and decor and did work on it that the reason we own it is all of the things you just said And if you have the ability to think long term to look past this frankly profoundly weak environment we're in in North America, you know, I think that maybe what we talked about earlier, the AI wave and the hyperscalers and the mega projects and the data centers are clearly I think covering up a quite a weak economy away from that. (33:45) It was interesting when we spoke to management, I guess a few months ago, maybe 6 months ago now, they've taken their new store build for 2025 down twice. And we asked them, well, in what situation will you um regret that decision? I think they went from 30 to 25 and then 25 to 20. and they said, "Well, if we come out of this recession with a V recovery rather than, you know, like a U recovery. (34:18) " And so in their world, they've been in a recession for a number of years. And as as you say, Clay, there there is pent up demand since the great financial crisis and the housing bubble. The household formations have been profound. New home builds have not been. And so uh there is pent-up demand. There is no question about that. (34:45) But we've got the time frame to not really worry about is it going to happen in 6 months or a year or in in 3 years because if you own the company in an industry that's just structurally advantaged as Flor & Decor is and they're taking share from their competitors. They're still growing as you say. (35:08) They've doubled their store count over the last few years. And the point they made to us is, well, we've taken our store openings from 25 to 20. But by the way, we're still we've acquired the land. We're building those stores. We're just not staffing them and putting inventory in them until next year. So, it is still a high growth company that is taking share from competition. (35:31) And we don't spend a lot of time thinking about well when does the turn happen. We're looking out 5 years 10 years plus. That's our focus. And I think because of that there are a number of companies that have made it into our portfolio in the last 3 years because of the fact that the economy in North America is soft and they're more impacted by that. (35:58) And so the share prices have gotten to the point where we're able to say these are, if you have a long view, these are now cheap enough to make it into our portfolio to push other things out. And Florent Decor is a good example of that 3 years ago. >> Yeah, I mentioned interest rates there and, you know, the low interest rate environment that fueled the real estate market and now of course we're in a a slightly higher interest rate era. (36:25) I believe uh 30-year rates you'll get today are around six six and a half percent something like that. How does recent interest rate cuts and just your outlook on the US housing market how does that play into the thesis on flooring decor? >> I mean it doesn't in in a way it doesn't right because this is a company with net zero debt and and even in this soft environment they're making lots of money. (36:55) So the that thesis might play into where's the share price going to be a year from now but it doesn't play into what's our view of the intrinsic value of the shares. So the macro environment is not a big factor in how we think. But but let me be clear the um if you gave us two companies that are equally attractive, well-run, one of them's Flor and Decor, one of them is a nonyclical business with the same cheapness. (37:28) We would have more of the non-yclical business. So, we're not afraid of cyclicals like Flor and Decor, but we we do titrate down how much we would like to own versus something that is non-yclical. We own a US company called SSNC and they are very non-yclical. So, at the same cheapness, we'd have a lot more in SSNC than we would in Floren Court, but they're not at the same cheapness today. (38:01) So it's in our thinking but it's more we think about well what's the impact on their industry and what's happening to their competitors. I mean one of their large competitors has filed for bankruptcy or did last year. Um, sometimes the weak economy for a company like Florent can actually be a a positive if you're thinking out long enough because it's it's taking their competitors who are don't have the same business model. (38:32) It's taking them out of the market and it just gives them greater share in five plus years when when the economy is much stronger. Yeah, I think uh it's a classic case of you know many mom and pops just simply being undercut on price and you know these new stores are being built across the country and you know stealing share from many of these smaller players that just are structurally disadvantaged. (38:56) Um you mentioned being very valuation focused. How about you talk a little bit about the valuation of floor and decor and in general what sort of discount to intrinsic value you're looking for in your portfolio additions. >> Sure. I mean, so when we say intrinsic value, you can think of it as what's the present value of all future free cash flows back to shareholders at about a 10% rate. (39:23) We we've never played with that discount rate whether when rates were when we started rates were higher than they are today and of course rates for a long time went close to zero as as you mentioned. Um, and now they're back to what I think of as a more normal environment if you have a very long view. So, we've never changed our discount rate on our companies because of changing interest rates. (39:50) And so, when we talk about intrinsic value, that isn't where we think the shares should trade. You when people have share price targets, we don't have targets. We we just say there's a huge range over which Floren decor could trade and it would be very defendable, right? Um people can always come up with a reason why it's trading where it is today. (40:17) And as you mentioned, the share price has been north of 120. Now it's back today a little below 60. Um they're both fine. It's those are reasonable prices. Our view of intrinsic value is well above 120, but that doesn't mean we think it should trade there. I mean, in a very rough way, you you could think of it as the, you know, the takeover price of a company. (40:45) Not that we think anybody's going to step up and offer a huge premium for a floor and decor. It's just not that kind of target. So what we do is we say the bigger the gap between the intrinsic value and the share price adjusted by a bunch of uh aspects of a company like cyclicality just as as I mentioned uh we just have a target waiting for each holding and it's higher today than it was a month or two ago when the share price was actually quite a bit higher than it is today and nothing's changed in the business. (41:25) If something did change, if there was a new entrant and some structural change was occurring in the industry, we would we'd really focus on that. But none of that's happening with floor and decor. It's a very strong management team uh with some new additions and some recent very logical changes for executive management. (41:51) So I think everything's good in the company if you know what I mean. And so we just let the noise of the market wash over us and we take advantage of that noise to to do somewhat better than a long-term buy and hold. What we know is that the long-term buy and hold for us on Floren Decor is going to be really good. (42:13) Just don't know the pathway if if you know what I mean. >> So as you mentioned, you're a very valuation focused investor. I believe uh the typical stock in your portfolio is around a PE of 11 or so and uh you know you love cheap stocks but when you look at floor and decor its headline PE is actually around 30 which leads me to believe that there's going to be some adjustments that need to be made here and uh you could also probably make the case that this might be a higher growth name relative to some of your other holdings. How do you think about you (42:42) know making adjustments to you know the earnings of a company like Floren Decor uh if any in this case? >> Yeah I mean it's company by company and in the case of a pure organic growth company under US GAP it's not bad right there are some of our companies we own a lot of what we call platform companies that where they they make acquisitions and then the accountants under the accounting rules you you no longer amvertise goodwill, but you put them in buckets of, you know, customer lists and things and tangibles, (43:17) which doesn't make any sense to me. And then that impacts earnings per share. So there are some companies that you really have to make some sometimes some pretty material adjustments to the gap earnings or in in our case in Canada, IFRS. But in the case of Flor and Decor, it's the gap earnings are not too bad in terms of a in terms of a number. (43:44) And it's it's funny you mentioned 30 times. I had it in my head that it's more 40 to 45 times. So you're right. you've got a high growth company uh and we have a lot of high growth companies but then we own some 10% earnings growth companies over the next 5 years plus and we own them because they're trading at a singledigit price earnings multiple and so it is a mix but if you recognize that the earnings for Florida core they're obviously depressed at this point in time so so if thought about a normalized number, it's lower. (44:24) And then if you think about the growth they have for probably for decades, it ends up being cheap. But we never think about the multiple in terms of our decisions. We we do have these large financial forecasts and financial models. And so when we quote 10 or 11 times for the portfolio, we're just trying to find a way to communicate to our investors, you know, how attractive the portfolio is as opposed to saying that's how we value companies, if you know what I mean. (45:02) >> Excellent. Well, let's get to Kenzel Capital here. This is another stock in the portfolio that's fairly well known by our listeners. So this is a specialty insurer that's been successful in its strategy to grow in the excess and surplus market. They only have around 1 and a. (45:21) 5% market share in their industry and that share has doubled over the past 5 years. And one of your statements that stood out to me in one of our first interviews was how you're looking for one-of-a-kind unique companies. And I think Kenzel certainly fits that description. actually uh previously worked in the insurance field. So I saw firsthand how slow and archaic some of these companies in the space can be even when a highly disruptive player like Kenzale steps into the industry. (45:48) And you know this is another very high growth company. You know you look back at uh previous years many years they grew top line by over 40%. Currently they're growing around 20%. How has the story and thesis on Kenzale developed since we last spoke last year? Well, you know, I don't in terms of develop just everything is as we expected and the you know it is as we get to know companies better um we either rate them higher or we derate them and it goes both ways right the more time you spend with management in the case of kinsale (46:32) you know I I sometimes joke. We deal with companies. We follow them. We try to follow them closely. We speak to them when we can, trying to be respectful with the fact that they're running a company in almost in a way of waiting for them to say something stupid. Kinsale has never said anything stupid to us, right? And so that idea of it is what we look for a highly intelligent company in a fairly mature market. (47:06) although uh especially in excess is is that share is growing from the regulated market and as you mentioned they're taking share in that market but they're also it's not just that they have a profound cost advantage which they do I mean you can think of it as much of as a technology company as it is an insurance company and it's tough to imagine their larger competitors saying, "Hey, we should rip out our systems and uh and do what Kinsale did from scratch. (47:45) " It's really hard to imagine that happening. And so, they do have a meaningful cost advantage, but also I think as an organization, they're just really good underwriters. They're thoughtful. they um you know recently and I'm not an insurance expert by any means. Our our approach is to find a highly intelligent company and then you learn the industry from them. (48:12) Now we we know insurance a little bit at times. We've owned Fairfax Financial which uh many people would know terrific insurance company based in here in Toronto. So, but we learn from the company and when you watch how they, you know, dial back their exposure. When you ask them about large policies like multinational corporations, what they explain is you probably don't want to underwrite that because they're big enough to self-insure. (48:48) And so they're they're really just testing are you willing to give them a pol like a policy at a cheaper price than they're willing to write internally. So their focus is small and mediumsiz businesses. It's just we've learned so much from them about their industry and it just continues to impress us. So you know as I mentioned we have all these aspects of a company that factor into our waitings away from just the intrinsic value and you whether it's management business quality which often is the management team has created the business quality. Pinsale gets (49:28) really high marks frankly across the board and so uh yeah it's better than than when we last spoke I guess is the way I would put it from from our standpoint. >> Mhm. And you mentioned you know looking out at least five years. I mentioned the market share today uh here in the US they have around one and a half% market share. (49:55) That shares doubled in the last five years and they have around two billion in revenue in a $130 billion market. So certainly room to continue to capture more share. Do you have a a level of market share in mind that either the management team is looking forward to capturing or uh you guys are looking at or how do you think about you know how much room there is to for them to grow into this market? I mean that is the key question right with a high growth company with that kind of structural self-created structural advantage. I mean their expense ratio is (50:27) much lower than the competition and as I said they're really good underwriters so it's a terrific combination. Um you know are they will they be 5% market share at some point? I think it's inevitable. Will they ever be like Lloyds of London that our best guess is at 17%. I think Kin would say that would be a bad thing. (50:53) You don't want to be that much of the market. So again, it's a thoughtful approach from management, but they may not if the market is soft because we had a hard market and as you say, they were growing topline premiums, written premiums at 40%. It's lower now. That's that's self-induced because they're not going to write bad business. (51:22) And as an example, that in the commercial property space, at least in certain regions in the US, they drastically reduced their policies written a couple of quarters ago because they said like there's new competition who are going to lose money on these policies and we won't compete on that basis. So I think part of it is that, you know, the market share will partly be determined by the competition. (51:48) So they're not saying, "Oh, we want to be 10% or 6% or 5%." They just want to write good business. And last year they announced their first ever share buyback authorization. And people in the insurance industry when we talk about kinsale say, "Oh my god, they're they're looking at buying back shares at five times book and they think the way we do. (52:16) " Well, by the way, they haven't they bought very little stock so far. Um, but they say, "Well, there's book value failing, then there's intrinsic value. And if we can buy our stock at a discount to the intrinsic value, that creates value for our shareholders. And so they're at the point now where because their returns on equity are so high when they're not growing at 40%. (52:42) They end up generating surplus capital. And that just adds another, you know, arm to the story, if you will, from being overwhelmingly uh fixed income in their float to now feeling like they can have an increasing amount of equities at the right time. Not sure right now is the right time um in terms of, for example, the S&P 500, but also adding the idea of buying a bit of themselves if the share price is attractive. (53:14) Look, if you can find companies like that, you know, the share price is going to be higher in 5 years and in 10 years. And from our standpoint, I hope the path is jagged. So far, we've only owned Kinsale for 2 years. It's been a very jagged journey in terms of the share price if you if you pull up a chart. (53:34) Um, and that's good for us. Like we what we love our low business value intrinsic value volatility and just a bonus is high share price volatility. I remember the first two quarters after we owned the company the first quarter they reported for us kind of what we were expecting the stock was down 20%. (54:01) I don't know why uh we bought more stock and then the next quarter uh the results were for us in line and the stock was up 20%. And so that's a nice thing for us. We embrace that as opposed to like a steady Eddie share price. Mhm. I think you hit on a couple of really important points in relation to Kenzale and the insurance industry overall. (54:31) So, uh, you know, insurance can have some very irrational players. Buffett and Munger have talked about this for years where, you know, some insurers will for whatever reason get excited and want to write unprofitable business just to grow the top line. And you know that's when a company like Bergkshire, a company like Kenzale is going to take a step back and let them you know pursue some of that unattractive business. (54:52) And then there can be periods where there's just opportunities everywhere to write business and that's when they can step in and um you can just really appreciate a manager that you know recognizes opportunities when they present themselves and not getting not chasing the playing the quarterly EPS Wall Street game right of oh we need to hit our quarterly numbers so we need to write this this business to uh grow the top line or grow the EPS shortterm and the repurchases I think is also worth highlighting there their first time (55:22) they're doing uh share repurchases and as we know the management team knows the business and knows the intrinsic value as well as anyone. So share repurchases are certainly a very good sign for a company as well as this. >> Yeah. Look, I mean at the end of the day it's what I mentioned earlier. We own companies that are never going to issue equity. (55:46) And that in a funny way maybe is the we started this conversation talking about efficient markets and the purpose of the you know why is it important that markets are efficient? It's capital allocation. But the other thing to understand about the public market is that most like good companies are public for a bunch of reasons. (56:11) often the original owners, it was it's a route for them to diversify their own portfolio, whether it was a family business. And so we own companies that are selfunded companies. They just happen to be public. And Kinsale's a really good example of that. They are so profitable. Uh the debate as we go forward will be well how much capital do they have that will get returned to shareholders. (56:42) I think of companies like that as slow motion management buyouts. The number of companies that in our portfolio over the years uh who have said to me either the share price is a lot higher in three years or you and I are going to own the whole company. So if you have companies like that, it's the classic, you know, the outsiders, that book by William Thorndikeke, who uh, you know, it's a terrific profile of eight companies, American companies that have just knocked the cover off. (57:18) And one of the attributes they have is really being focused on capital allocation. And it was interesting when I first had dinner with Thorndikeke and this is years ago now. He said Canada seems to have a disproportionate number of these outsider companies. He mentioned Kushtard out of Quebec and and others which may be true and maybe it is the less of a aggressive Wall Street mentality here in Canada uh that allows those companies to be more outsider companies. I I I don't know. (57:54) But um but yeah, if you you find a company that thinks about, you know, that they're not going to try to be a Berkshire Hathaway, they're going to stay as a pure insurance company and they're going to as they have more surplus capital at the right time shrink the share count. Um because it's funny, we think about share buybacks. (58:18) There are a lot of groups or people who can criticize share buybacks versus let's say dividends. We think of it as well why wouldn't you take your surplus capital and buy 100% of the shares from your shareholder who has the lowest opinion of what you're worth. And and that's how we think about buybacks. And and good companies think the same way. (58:44) Mhm. Before we close it out here, I wanted to give you a chance just to talk about some of your recent performance because when we look back at the the history of your firm, you've had, you know, different periods of outperformance and underperformance. And today, you're in a period of underperformance, which really shouldn't be a surprise given the developments with AI. (59:05) And I know that you likely haven't flinched at all with regards to sticking with your strategy. And I'd just like to give you a chance to reflect a bit on, you know, the importance of sticking with a strategy when it's going against you because all great managers are going to go through those periods. It's just an inevitable part of uh being a stock market investor. (59:24) >> Yeah, for sure. I mean, it's funny as you're as you were asking the question, you reminded me of someone, and this is a long time ago, who commented to me when we went through a bad patch within our first decade. And he said, "It's a good thing you had those great early years to know that what you do works, right?" And I said, "I didn't need to have a few good years to know that, you know, owning highquality companies with management and boards that are focused on shareholder value over the long term. (1:00:00) " That I didn't need to have some decent results to know that that's the right approach. And the same thing applies today. So yeah, we're lagging on a mark-to-market basis. It's one of the reasons that we well it's the main reason why we actually print a change in intrinsic value trying to deliver to our investors and people following us how we feel like we're doing uh based on the companies like Floor and Decor and Kinsale. (1:00:33) We didn't take our value up on floor and decor by 100% when the share price doubled. We didn't take it down by 50% when the share price fell back down to where it is. It's been a, you know, never a perfect steady progression, but it's it's company by company trying to communicate, hey, this is how the portfolio is doing. (1:00:52) And it the economy has been a headwind for some of our companies. There's no question with uh a floor and decor that's the case with kinsale. It's not economically cyclical but as you were describing it's industry cyclical. You have a canaba hard market and a soft market. It's not so much the shape of the economy. (1:01:14) It's uh new entrance and then there are three hurricanes that are devastating in one season and all of those new entrance leave. So every company has its own character and so from a you know increase in intrinsic it's it's business as usual and one of the thoughts and or terms statistics in the investment world is something called active share and we have an active share of 97 a.5%. (1:01:46) So we are we look nothing like the indices. I mean if it was compared to the S&P 500 it would probably be an active share of 99.9%. So what we do is we own a collection of highquality companies at any point in time at the most attractive valuation from the companies we follow. And you made the comment it's inevitable especially in the environment that we're in that we're going to lag. (1:02:15) It's it's happened to us before and guaranteed it's going to happen at some point in the future. >> Yeah. Well, uh, you know, not to make a statement about, uh, your future performance, but I think just looking at, uh, you know, in general, when you look at a number of great managers when, you know, the market is just roaring and some of these great investors, you know, aren't fairing as well. (1:02:39) I think, you know, that can be a sign of where we might be at in the cycle. Uh certainly not a forecast, but always interesting to look back and compare and contrast how things end up playing out. But Andrew, as always, I thoroughly enjoy uh having you on the show and appreciate you, you know, sharing your thoughts on the market and discussing a couple of your holdings. (1:02:59) Before I let you go, how can the audience learn more about you and Turtle Creek? >> Well, we have a website, but importantly it's.ca, CA, not.com, because we're Canadian. And yeah, there's plenty of information there, especially if you click that you're an international investor. Not that I'm suggesting that you should do that, but and then if you are on the if you click if it is a US resident, one of someone in the team will reach out and and you get a code and and you have full access. (1:03:33) We've got a we've got a I think a a pretty good website with all of our communications and lots of information. Uh we've written I think some decent stuff over the years and and it's all there on the website. >> Excellent. Well, thanks again, Andrew. I really appreciate it. >> Great. Thank you so much. This was fun. We're really drawn to one-of-a-kind unique companies because our view is if you're going to do all that work and we do do a lot of work over the years, wouldn't it be great to own companies that get more mispriced in both (1:04:08) directions? I think you know to a small extent that is one of the sources of our outperformance over