Frederik Journals

Hello everyone,

Today I’m happy to share a conversation and written Q&A with Will Thomson and Chip Russell of Massif Capital, a long-short fund in real assets, and particularly the “sectors most important to a low carbon economy: Energy, Basic Materials and Industrials.”

I’ve long enjoyed their letters and white papers and used the Q&A to learn more about their process and worldview. With Russia’s invasion of Ukraine I thought it was a good time to also catch up with Will and discuss how they navigate this environment (Will’s baby daughter was also present for the first half of the conversation and happily commented at times😉 ).

A few highlights from the conversation:

* Will is fairly bearish on the current setup of a stable, globalized world. He believes we’re moving from a highly integrated world to a multi-polar one in which “spheres of influence” play a much greater role and affect commodities and trade. Energy and food are examples where nations will increasingly to protect their own interests and create resilience.

* “What comes next is going to be very different from the past 30 years. And it’s going to be very good, I think, for real assets and natural resources.”

* “We're gonna see a fundamental re-working of trade flows along different geopolitical lines.”

* Political acumen will become more important for management teams. (An anecdote from Disney on its philosophy operating abroad: “We always ask, ‘how does it reflect on the Mouse?’”)

* The collapse of the USSR led to a decline in Russia’s industrial capacity but not in its commodity production, leaving global commodity markets well supplied. That stability has come to an end.

* Europe’s decarbonatization efforts could go into overdrive and lead to attractive long-term opportunities among utilities and industrials.

* Will doesn’t believe he can forecast commodity cycles but his best guess is that we’re in the “first third,” meaning quite early still.

For more reading: Will’s SumZero panel on energy, his conversation with Bill Brewster, and Massif’s Q4 letter:

“We believe we may be at the precipice of a global energy crisis” and “waves of sectoral inflation rippling through the economy appear likely.”

I hope you enjoy the conversation and Q&A.

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

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A few favorite quotes:

* “Roughly 55% of the world’s GDP rests within the vertical value chains of the related companies we focus on. We like the term ecosystem as it captures a flow-based mentality rather than static industry silos. Within ecosystems, resources are continually moving from one use to another use or reuse. Our focus aims to study, value, and capitalize on that flow of material through the economy up until it transitions into the hands of consumer-facing businesses.”

* “We feel like our ability to evaluate a management team’s ability to complete a project is stronger than our ability to predict commodity prices. Importantly, we are not naïve to think that we can completely isolate commodity price exposure, but we think about it as a potential option (do we have headwinds/tailwinds) as opposed to the main drive of an investment thesis in the mining sector.”

* “If we zoom out, we tend to think about return drivers, or opportunities, in basic materials coming from: a) resource to reserve conversions – the ability for a firm to grow production and convert geological promise to reserves and ultimately cash; b) counter cyclical and capital constrained metals – focusing on supply side analysis and industry capital flows to hunt for opportunities in capital starved sectors; and c) asymmetric demand – which ties back to many of the inputs needed for electrification at scale to occur.”

* “For energy investments, we often look for a disconnect between returns on capital and cash flow generation. Cyclical troughs are often characterized by firms with low returns relative to their invested capital. Strong free cash flow generation during these periods can protect a firm’s balance sheet while also providing healthy dividends to investors. As a cycle turns, returns on capital increase, typically followed by a pivot in investor sentiment and an increase in capital flows.”

Q&A With Massif Capital

(Bold highlights by me.)

Q: Will and Chip, thank you so much for agreeing to this Q&A and congratulations on launching your new fund! Tell me a little about your background and the history of Massif Capital.

Certainly. Massif Capital was started in the summer of 2016. Will Thomson, who was working as portfolio manager of credit and political risk insurance products at a Lloyd’s of London syndicate, saw an opportunity to start a public equity investment firm that focused on similar “real asset” businesses. Prior to managing a credit risk portfolio, Will was a strategic and economic adviser to NATO/ISAF in Afghanistan.

I joined Massif full time on January 1, 2018. Prior to Massif, I worked with several startup battery technology firms, building out business development and corporate strategy teams. My background is in energy economics, primarily working in consulting before earning a graduate degree in environmental engineering.

From day 1, we were cognizant that it was important for us to build a track-record and base of investors that could hopefully grow into a more mature pooled vehicle structure that we could then bring to a wider, institutional, capital base. This drove our decision to manage separately managed accounts for the first five years. Just recently, we have converted over into a fund structure following a seed investment in 2021.

It is worth touching on our core philosophy of our firm. We are striving to be an investment partnership, not a fund business. As we note in our pitch deck, institutionalization has driven growth in overhead, growth in overhead has driven a systemic need to increase AUM. The business of institutionalized hedge funds is not generating a superior investment return, it is generating fee income. At Massif, we are really focused on investment returns, not fee income. This may sound cliché, but many decisions we make tie back directly to this belief. For instance, some of our share classes have a declining management fee structure as the AUM of the business grows.

Q: I enjoyed your recent paper on the Advantages of the Real Asset Ecosystem. Can you outline how you define your universe and why you think it is interesting for investors who may be focused on more exciting sectors like technology or consumer?

We invest in three broad verticals: energy, materials and industrials. We are geographically agnostic, and have a minimum market capitalization requirement of $200 million USD. We typically describe our investable universe as the “Real Asset Ecosystem” because we find it conveys a richer and more substantive picture of our opportunity set. As we note in the paper, there is sometimes confusion around the economic breadth of our addressable universe. It is not a niche portfolio. Roughly 55% of the world’s GDP rests within the vertical value chains of the related companies we focus on. We like the term ecosystem as it captures a flow-based mentality rather than static industry silos. Within ecosystems, resources are continually moving from one use to another use or reuse. Our focus aims to study, value, and capitalize on that flow of material through the economy up until it transitions into the hands of consumer-facing businesses.

We think this space is interesting today for a number of reasons, principally because the global transition to a low-carbon economy is going to create a wide range of asset mispricings that we think is a fruitful stomping ground for active management. These areas of opportunity come from several directions. For example, growth and innovation in capital intensive businesses will surprise to the upside. CATL, the Chinese battery manufacturing company, is likely the fastest growing ten-year-old company ever, at scale. It’s top line is growing twice as fast as any technology company in their equivalent 10th year, off of a revenue base that is only surpassed by Google. We think this data point is a preview of what the next decade may be defined by.

The space also is seeing an unprecedented policy coordination that we think will unfortunately give rise to a significant amount of capital misallocation. That misallocation will manifest itself in both persistent material scarcity (which we are seeing previews of today), which may re-define commodity price characteristics, and also faster cycles of capital formation and destruction.

Q: You mentioned in conversation with Bill Brewster that you’re not looking to make bets on the prices of commodities. What kinds of situations do you look for and how do you think about return drivers in the portfolio?

It depends. With respect to your reference on commodities, we often like to look for pre-production opportunities if we are going to invest in the metals & mining sub-sector. In doing so, the most important question for an investment becomes: can the management team effectively bring production capacity to the market, not, do I think the commodity they produce is undervalued and will appreciate.

There are a couple reasons for this. First, there are plenty of ways to invest to get exposure to broad commodity price movement. If an investor is bullish commodities (or natural resources), it does not make sense for them to pay an active manager a management fee if they have numerous index/ETF products that can capture that viewpoint. There is a broader point here about the portfolio at large and not paying for beta (however an allocator wants to measure that), but that is a slightly different topic.

Second, we feel like our ability to evaluate a management team’s ability to complete a project is stronger than our ability to predict commodity prices. Importantly, we are not naïve to think that we can completely isolate commodity price exposure, but we think about it as a potential option (do we have headwinds/tailwinds) as opposed to the main drive of an investment thesis in the mining sector. Our investment in copper producer Ivanhoe Mines is up close to 300% over the same time period that copper has appreciated ~80%. In part because our investment was made prior to the company bringing close to half a million tonnes of copper into production.

If we zoom out, we tend to think about return drivers, or opportunities, in basic materials coming from: a) resource to reserve conversions – the ability for a firm to grow production and convert geological promise to reserves and ultimately cash; b) counter cyclical and capital constrained metals – focusing on supply side analysis and industry capital flows to hunt for opportunities in capital starved sectors; and c) asymmetric demand – which ties back to many of the inputs needed for electrification at scale to occur.

For businesses fortunate enough to be endowed with resources that can enable large scale decarbonization, management teams must push towards maximizing environmental sustainability per unit of growth output. Our investment in Altius Minerals (ALS) in the spring of 2020 exhibits many of these traits. ALS is a diversified royalty & streaming company. The firm assembles prospective geological real estate in periods of market stress that they later sell to junior miners in return for equities stacks and underlying royalties. Countercyclical capital allocation is a pillar to their business model, not just a catchphrase. Earnings generated from prospect generation are recirculated into the exploration business to acquire third party royalties that augment the internally generated royalties held by the business. The geological ‘flywheel’ often creates royalties at zero cost for the future benefit of shareholders. The portfolio of royalties is almost exclusively base metals (which differentiates themselves from their listed peers who focus on precious metals). Lastly, the company has created - and now owns a majority stake in - the first ever renewable energy royalty business that was created from recycling coal royalties that were winding down off their books. The business is incredibly capital efficient.

For energy investments, we often look for a disconnect between returns on capital and cash flow generation. Cyclical troughs are often characterized by firms with low returns relative to their invested capital. Strong free cash flow generation during these periods can protect a firm’s balance sheet while also providing healthy dividends to investors. As a cycle turns, returns on capital increase, typically followed by a pivot in investor sentiment and an increase in capital flows. Our investment in Equinor ASA in the summer of 2020 is a good example. Our investment in the business was on the heels of an historic down move in oil prices and extreme economic uncertainty given the volatile COVID19 situation at the time. EQNR was trading at a >15% free cash flow yield, was paying a 6% dividend and was growing production, and earnings at 3% a year. Leading into 2020, EQNR utilized a downturn in oil prices from 2014-2018 to become more efficient, spending 30% less on operating expenses per barrel of oil production. Furthermore, EQNR at the time, and still today, plans to grow their renewable portfolio base by 10x, a ~30% CAGR, over the next six years. Lastly, their large reservoir of oil production off the Norwegian Continental Shelf has some of the lowest energy intensity per barrel of oil anywhere in the world. EQNR is up 160% and we still believe it has room to grow.

For industrial business we often focus on economic scarcity – investing in companies that produce goods that have a very specific purpose and are difficult to duplicate. The industrial complex is where we will often find more of our compounding type opportunities. Here, we focus particularly on a firm’s ability to maintain and grow gross earnings power per share over time. We also are beginning to find divergent market prices, and opportunities, from intra-industry differences in management teams flexibility (or willingness) to engage in strategic reorientation to tackle decarbonization. Some are forced out of necessity, some are pursuing opportunities they see and some are choosing to sit on the sidelines. They won’t all be correct.

We are not investors in the business, but we wrote an article on ArcelorMittal (MT) in 2020, that walked through the ramifications of the costs associated with the European Union’s carbon goal. The article explores not only the ramifications on MT’s unit economics, but also the downstream effects on the cost of steel and the geographic competitiveness of European exports. A strategic reorientation may be possible for a company like MT, but it might cost them 4x their market cap in CAPEX, a 50-80% increase in production costs and € 200 billion in supporting clean energy infrastructure elsewhere in the economy.

Lastly, independent of sector specific sign-posts, we sometimes find opportunities that are market structure related. We are growing increasingly cognizant of the marginal buyer and seller of securities that we are evaluating and, of greater interest, forced buyers and forced sellers. For example, some smaller companies that may be experiencing a rapid change in growth (warranted or otherwise), may find themselves in an index that increases the capital flow into (and out of) their business by an order of magnitude difference.

Q: Do you believe the portfolio will act as an inflation hedge?

We do not build the portfolio to act as an inflation hedge. Insofar as we have built a portfolio that has a collection of businesses that are further upstream of alternative portfolio’s, it’s very possible that we outperform on a relative basis during inflation periods. This argument however is about as loose as the term inflation itself. It’s entirely dependent on the type of inflation, the causes of inflation and the period of time the price pressures may be exerting themselves on businesses and consumers.

Q: What do you think investors misunderstand about your space?

We think there is an underappreciation for the heterogeneity in the space. “Cyclicality” is a good example. Some sub-sectors are cyclical, some are not. Those that are, can be on very different timelines and can impact things like margins and operating leverage in very different ways. Moreover, in industries that are experiencing fundamental change, the predisposition to assert cyclicality, in part relies on some form of mean reverting tendency (observed historically) that may not hold in the future. In fact, one of the ways in which you can define and/or measure “fundamental change” is to test for the breakdown in those historical relationships.

Importantly, there is always a ‘secular’ trend that some cyclical trend may oscillate around. For ‘cyclical’ equities, it is often a function of ‘what trend matters on the margin’. Most ‘cyclical’ equities find themselves on a secular growth trend pattern that is +/- 4%. On a short time horizon, effectively flat. So cyclicality matters. The secular (long term) trend may change though, making the cyclical movements around that trend less impactful. 

Electrification may be a good example. Annual rates of growth in electric demand are quite muted, given their close tie to productive labor rates and demographics. Over the last 15+ years, total electric demand has actually fallen due to energy efficiency measures and hardware in many developed nations. Looking ahead, electrification (as a broader strategy for decarbonization), may lead to a 50% increase in power demand by 2030, moving from 20% of primary energy consumption today to 50% of primary energy consumption. That rate of change has potentially profound implications on both what electrification is replacing as a primary energy source and the industrial complex that needs to scale to allow for electrification to scale to that degree.

Q: You’ve written extensively about the transition to a low-carbon economy and the massive investment required. In your latest letter you wrote that we “may be at the precipice of a global energy crisis” and that the “structural undertones that are defining this energy crisis will persist.” Can you explain how this transition is different from historical ones? What kind of opportunities do you think it creates for investors in public markets?

With regards to the differences, we outline three big ones in our 4th quarter letter:

* The current transition is both a replacement transition and an additive transition. Historically, energy transitions have been primarily additive.

* It is the first transition to move down the energy density ladder rather than up. This also means it is the first transition to move from lower capital intensity energy processes to higher capital-intensive processes.

* Lastly, it is a timed transition. It is a transition we have chosen to undertake now and a transition we have decided needs to be completed within a particular time horizon. All previous transitions have been untimed, organic, and unplanned.

The best way to perhaps summarize the potential opportunity set is to point out the (perhaps simple) observation that this is having (and will continue to have) profound implications on industries that most investors have never seen change. The implications for public equity investing is interesting. For example: an industrial company might be worth the free cash flow it can produce, discounted back to the present at some rate, with a terminal value that is pretty closely tied to say GDP. Granted, an unknown number, but a pretty tight band around say 0-4%. Almost no option value in the future – demographics and labor productivity do not have fast changing expectations. The unit economics have effectively zero expectation to change, and the pricing multiple on earnings is both low and not going to deviate too far from its sub-industry and competitors. It’s not terribly interesting, and the whole “game” is really just a function of, can I get it for a decent price

In this hypothetical example, what happens if the market for the product is expected to 10x in a decade? What happens if there is an expectation for a carbon price? All of a sudden, an investor has an entirely different set of questions now to ask. First, do I really think the product is going to see a 10x increase in a decade? It doesn't matter what the number is, the point is the range of expectation of future market size is dramatically higher than when it was tied to GDP/demographics. Second, if I do, clearly there is a new buyer in the market – at scale – do they have different specifications for the product based on their need? If yes, are we going to see new competitive advantages take hold? Do the unit economics of the business change if my feedstock is suddenly 3x the cost from a policy driven mandate? If the business has the flexibility and balance sheet, can it change geographies to alter its energy cost? If the end market for my product is new, can I provide new services to my buyers? If my buyers are in a different industry, with different unit economics, has my pricing power now changed? What type of company does the public equity market think I am now considering I may be selling to new customers, growing at different rates, have changed my unit economics and the range of possible outcomes for my addressable market in a decade from now has tripled?

To echo sentiments made in previous questions, we find the space to be rich with optionality. Disruption is quite literally the stated goal of policy makers.

Q: What would be an example of a company or industry in which the market is suddenly expanding? And if this is driven by public policy, won’t the market either quickly reflect this new expectation or will capital compete away any excess return?

Lithium is a good example. Prior to 2014, Lithium was primarily used in the pharmaceutical industry. From 2014-2019, demand for Lithium doubled, with EV penetration growing to only ~2% of the market. Lithium supply needs to roughly triple to meet mid-century forecasted demand. The rationale to bring new lithium supply to market, at scale, prior to 2014 was probably not a great investment thesis. Two years ago, we made an investment in a pre-production mining firm, Lithium Americas (LAC), that we think is going to be a top tiered producer by the end of the decade with annual production on par with Albermarle Corp (ALB), a company that, at the time, had a market capitalization 15x that of LAC. 

On this issue of public policy and forward expectations, yes, it is possible that new expectations are priced in immediately. It does not suggest that the new expectations are correct. There is a wide range of future outcomes here, and the notion that capital intensive industries are getting differing sets of future expectations more frequently, lends itself to more (efficient or inefficient) price discovery as policy, new technologies and/or the consumer zeitgeist of the day changes. That pace of changing expectations is not something the resource industry, for instance, is accustomed to. 

A good example is hydrogen. From 2018-2020, public company’s use of the phrase “green hydrogen” (in all public filings), increased 400%. We wrote a blog about this in June of 2020, which can be found here. The issue at hand here is that while hydrogen will play a role in decarbonization, it will not be a solution for every problem people have claimed it might solve. Knowing where the gap is between the two requires an understanding of hydrogen. For a period of time in 2020 and 2021, companies that had a hydrogen segment saw immediate re-ratings. The effect was so strong that companies that had zero hydrogen in their business models began talking about their hydrogen plans as a response function to what they saw in the market. 

You could argue that expectations were priced in. You could also argue that a majority of the pricing was based on inaccurate market size assumptions, market fit assumptions, time to build scenarios and completely unknown unit economics. Insofar as there are companies that develop the technical competence and market demand for their product, capital will indeed likely be competed away with excess returns, but with a significant time lag. 

Q: Can you talk about a couple of ideas that recently made it into the portfolio and why you think they are compelling?

Certainly. We initiated a position in RWE in 2021, a full investment report can be found here. In short, RWE just completed a major asset swap with E.ON that cemented the firm’s transition from a carbon intensive, fully integrated utility, to a top three renewable power producer in Europe. Pre-swap, RWE used Innogy’s dividends to pay for loss-making nuclear and coal mines. Any excess FCF from the core business, when it occurred, was paid out as dividends. This business model was based on a free cash flow maximization strategy that depended on the firm running existing thermal coal assets as efficiently as possible and with the lowest possible maintenance CapEx. Capital appreciation potential was limited; growth potential was tied to European electricity demand. Via the asset swap, RWE traded Innogy sourced financial cash flows for renewables generated operating cash flows. We believe the swap primed RWE for further growth inside and outside core markets, an equity driver not previously present. We do not believe this transition is being reflected in the equity price of the firm.

Q: What has been your experience running your own firm so far? What does a typical day look like? What takes up most of your time?

It has been humbling and rewarding. The dynamism in markets is, in part, what makes it so fascinating to be a part of; an ever-evolving system that you’re trying to wrestle with. Building a business feels similar – the freedom and responsibility of your own decision making is a double-edged sword.

We have had a slightly abnormal few weeks leading up to our fund close, but typical days are almost exclusively focused on studying businesses. I would say 50% of our time is spent reading and writing, 25% spent talking to companies, industry contacts, market participants and 25% building out new models and processes; either coding or internal processes by which we review research and edit internal databases.

Q: How do you think about gaining an edge as a small shop in a complex and global market?

I’m reminded of an interview of Steve Martin by Charlie Rose (15+ years ago I believe), where he said something to the effect of: “be so good they can’t ignore you”.

I think that’s an important point for young/aspiring asset managers to be cognizant of. This is a very competitive industry, and one where absent some strand of that unrelenting, almost unbashful, drive to be very, very good at what you do, it will be hard to persist.

“So good” of course can come in, and perhaps needs to come in, lots of different flavors. Maximizing returns is certainly one of the optimization functions, but we think a lot about how we can be better at communication with our investors, how we can build a business that inspires people to want to work here, how we can contribute more thoughtfully to research efforts in our fields of study.

It’s an excellent question. I would say the most important thing is to recognize that edge is both one of the most important things to figure out and that it is likely to be an ever elusive, moving target. Persistence in the pursuit of edge, wherever that may be, is our job.

Q: Which CEOs, investors, or publications do you follow closely in your space?

For those interested in studying energy transitions, we would recommend consulting the work of Thunder Said Energy. It is highly pragmatic and breaks down the world of complex energy systems into bite size research pieces. It is an excellent launching pad for those constantly returning to the question of: “how does this technology work?” or “can I get a straight answer on the physical, unit economics, of this energy process?”. It is a research solution set to the problem of industrial literacy that we contend is a major problem in society today. As a motivation to dive into the work of Thunder Said Energy, we would encourage readers to browse the Roots of Progress platform which outlines this theory nicely. 

Q: What is your vision for Massif? What would you like your firm to look like in the long-term?

Our goal over the next several years is to diversify our fund offerings in an effort to reach a broader and more diverse investor base. This may include an extension into private markets for earlier stage technology investments, as well as public equity retail product.  

Thank you so much for taking the time! Where can investors learn more about you?

Our website is a good repository of all of our published material. We also have a small, but increasingly active presence on Twitter at @MassifCap.

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This is a re-upload of the episode at higher volume after some feedback that the conversation was difficult to understand on some devices.

I’m very excited to share with you all a conversation with my friend Dan McMurtrie of Tyro Partners. The entire interview is about a topic that I believe is under-discussed but of vital importance to any investor: resilience and recovery when dealing with sustained pressure and stress. I believe this is crucial to longevity in investing.

A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue.

You can find detailed show notes, examples, and a transcript on my substack - neckar.substack.com.

"The goal of investing under stress is serenity. If you can, in times of extreme stress, get your life to be mundane that's a victory."

"You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

"When things go wrong, you're short a put on your own time.”

"Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

[00:01:00]: Introduction. Why is resilience important?

[00:07:00]: Where to find good advice? How to broach the subject?

[00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

[00:37:00]: Which non-investment areas offer useful insights?

[00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe

You can listen to the episodes at: Spotify, Apple, at anchor, and via RSS. Find Transcript here.

Hello everyone.

I’m very excited to share with you all a conversation with my friend Dan McMurtrie of Tyro Partners. The entire interview is about a topic that I believe is under-discussed but of vital importance to any investor: resilience and recovery when dealing with sustained pressure and stress. I believe mastering this challenge is crucial to longevity in investing.

A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue. I will share a few examples below to illustrate the point.

However, I also believe that the topic is uncomfortable to discuss for many professional investors. It requires an openness that could be interpreted as weakness by peers, LPs, and other stakeholders. For that reason I am especially grateful to Dan for sharing his perspective.

Dan credited a mutual friend of ours, Alix Pasquet of Prime Macaya Capital, as a “mentor, great friend, cherished collaborator, and invaluable teacher” on this subject and many others. I look forward to recording a conversation with Alix as well.

I hope you find this conversation as insightful and valuable as I did.

You can listen to it at: Spotify, Apple, at anchor, and via RSS.

I will also send out a full transcript to premium subscribers.

Why this matters.

George Soros on the stress of managing his fund before hiring portfolio managers to do it for him:

“It turned into an internal conflict where I felt the Fund was an organism, a parasite, sucking my blood and draining my energy. I asked myself, who is more important, the Fund or me? Is the Fund a vehicle for my success, or am I the slave of my Fund?” Soros on Soros

Peter Lynch retired early, at age 46 in 1990, and openly discussed his workaholism and the toll it took on his family life:

Early in his career, Bill Miller asked Lynch for advice. Lynch told him that the investment business is so rewarding financially and intellectually that it attracts an overabundance of intelligent people. “The only way you can beat them is to outwork them,” said Lynch, “because nobody is just so much smarter than the next person.” Lynch told Miller that he stayed ahead of the pack by reading investment research while he carpooled to the office at 6:30 a.m., working after dinner and on weekends, and taking no vacations for years. When Miller asked if it was possible to slow down as you got older, Lynch replied, “No. In this business, there are only two gears: overdrive and stop.” Richer, Wiser Happier

In a profile in Financial World, months before he announced his early retirement:

“I've worked every Saturday for seven or eight years - I mean seven in the morning. In the last six months I've started working some Sunday mornings at home. … I haven’t gone to a Celtics game in five years. … You think I enjoy coming in here on Saturday mornings? Don’t you think I’d rather be playing with my kids or doing something with my wife?”

From a Barron’s piece covering his retirement announcement:

“It's like - one hot fudge sundae is great, two are okay and five just makes you sick. I love this job. I love outside activities. I love my family. There's just too much of it.”

Stanley Druckenmiller looking back at the moment he bought back into technology stocks at the top of the dotcom bubble, a bet that led to his departure from Quantum shortly thereafter (and a story I will discuss in greater detail in my profile on him):

“You ask me what I learned - I didn't learn anything.  I already knew I wasn't supposed to do that. I was just an emotional basket case and could not help myself.” Speech at the Lost Tree Club

Julian Robertson also retired near the top of the dotcom bubble:

“One former cub recalls that when he joined Tiger in the 1980s, he admired how Robertson rarely worked on Fridays and took plenty of time off to spend with his family at their home in the Hamptons. ‘He had a good lifestyle,’ the former cub remembers. But as the fund and the company grew larger in the 1990s, he says, Robertson ‘started working like a dog.’”

Institutional Investor: Do you ever regret that you decided to close down your funds?

“I really don't. I can't do this forever. I'm not on the phone for an hour early in the morning from New Zealand [his second home]. I just couldn't wake up at age 95 worrying about my partners' money. I love my life so much now. In hindsight, I might have been better off closing two years earlier.” The Tiger in Winter

Scott Bessent on investors flailing under pressure (losing their “distance” as Dan might describe it):

"George [Soros] wasn’t bothered when people started losing money, but he was always worried they weren’t feeling the pain because it was his money and not theirs. If people managing his money were down and he saw their trades getting bigger, he’d pull the money immediately. If the manager was down and their trading volume picked up dramatically, he’d pull it. The worst thing you can do when you’re having a hard time is flail. In trading, when there is nothing to do, the best thing to do is nothing.” Inside the House of Money

Paul Tudor Jones on the impact of divorce:

“Like, one of my No. 1 rules as an investor is as soon as my manager, if I find out that manager is going through divorce, redeem immediately.  Because the emotional distraction that comes from divorce is so overwhelming. The idea that you could think straight for 60 seconds and be able to make a rational decision is impossible, particularly when their kids are involved. You can automatically subtract 10 to 20% from any manager if he is going through divorce.”

“We find that marriages and divorces are associated with significantly lower fund alpha, during the six–month period surrounding and the two-year period after the event.” Limited Attention, Marital Events, and Hedge Funds

Bill Miller on working through a severe drawdown during the financial crisis, as recounted in Richer, Wiser, Happier:

“Miller … describes himself as “very emotionless.” When stocks sink, his default mode is to remain calm and cheerful, actively welcoming the opportunity to profit from other investors’ emotional disarray. But the pressure was so unrelenting during the [financial] crisis that he gained forty pounds. “When I get stressed, I eat or drink,” he confesses. “I wasn’t about to eat salmon and broccoli every night and drink mineral water. … There’s only so much pain I can take, and I drew the line there.”

Paul Tudor Jones risk control memorandum to his traders from 1994:

“When a trader draws down from peak, a series of proactive pre-determined measures will be implemented to assist the trader in regaining profitable form. A self-evaluation process will be required … Additionally, drawdowns will be accompanied by reduction in trading size, trading for liquidation only, and vacations.”

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A few of my favorite quotes:

* “You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

* “Nobody wants to admit that a physical problem could inhibit a firm because the firm is supposed to have process and procedure and all of these things. But the issue is when everybody in the farm is facing these same stresses at the same time, all of a sudden you have individual capacity decline and simultaneously you start to have more committee effects where people start making lowest, common denominator decisions, and people start looking for plausible deniability, or they start looking for cover for the decisions.”

* “I operate on what I call the ‘yes principle.’ Your day is a series of things you said yes to. I said, yes, to getting on this call. I said, yes, to reading an email earlier. I said yes, to responding to that email. I said, yes, this, this this. The things I'm saying no to, they don't really exist from a certain perspective.”

* “When things go wrong, you're short a put on your own time.”

* “Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

* “One of the things that I've talked to you about is when I studied really great investors people who have outside track records of 20 or 30 or 40 years plus there is a habit of, I’d be slightly hyperbolic to call it laziness, but I think about it as a certain sort of tactical laziness. So it's really more an economy, an economy of motion where a lot of them have this ability to sort of calmly sit and observe and not expend very much energy for long periods of time. And then strike very aggressively at a certain point in time. It’s not that they're doing nothing during the observation periods. They're just slowly accumulating information and observations and they're gaming things out in their head, but really, really low sort of metabolic clip. And it reminds me a lot of looking at any real large, physically large predator in the animal kingdom. They all like just don't move for a lot of time.”

* “So many of these people who are great investors, you know, there's a lot of investors who had great track records and then there's a big crisis or something like that. And they do well in it. But at the end that the other side of the crisis, that's when they hang up the gloves, they go, look, I just can't anymore. I'm toast. There's a real cost to be paid for this.”

* “I think a lot of people are very angry at themselves and angry at others because they miss something or because somebody else had to trade on that they make money on, you have to detach yourself from that. Because as long as you're festering on the Fed or the growth guys or the commodity guy, whatever it is, as long as you have of somebody you think you're fighting against in markets, you're, you're not seeing things clearly, you know, your brain is reformatting all the information to that. And that's something that really a lot of people fall prey to is they create a nemesis in the markets and under times of stress.”

Books and coaches mentioned:

* The Intelligence Trap, David Robson

* The Score Takes Care of Itself, Bill Walsh

* How Champions Think, Bob Rotella

* The Money Game, Adam Smith

* Education of a Coach (about Bill Belichick), David Halberstam

* The Art of Learning, Josh Waitzkin

Questions, time stamps, and highlights:

* [Time] – [Question]

* [00:01:00]: Introduction. Why is resilience important?

* “A lot of people can look good for one to three years, maybe five years. But the number of people who can really continue to perform for 5, 10, 20 years is fractions of that. And so many people who are genuinely brilliant and great across the board, they simply burn out in a way they can't recover from. This has been the end of so many careers it's just, they get into a position where almost they can't function. And if you talk to anybody who has serious experience in money management, they've seen this happen or they've experienced it.”

* "What almost no one in the market right now has experienced is an extended period of pain. And, you know, there's a lot of evidence across over fields that isolated periods of stress impact, and individual very differently than extended periods of stress. Extended periods of stress start to wreak havoc on your neurology, your hormone system, everything about how your mind and body function are damaged there."

* [00:07:00]: Where to find good advice? How to broach the subject?

* “It's not about how you function most of the time is how you function in the 10ish percent of time when things are bad, it's kind of the same thing in relationships, in other areas of your life. Most people are fine most of the time. The question is how are they when things get bad.”

* “A lot of times you have to go through some of those periods in order to sort of unlock those conversations with other people. I think it's, it's not that people don't want to impart that wisdom to you. If you're a younger person, it's just that their brain blocks that information from them as well.”

* “A lot of times when the market's crashing, people are also getting divorced people whose kids are having behavioral problems at school. All these other things are happening. And what happens there is that the way the firm and the portfolio manager and everybody around the ecosystem, the LP, et cetera, the way everybody was interacting and acting within themselves and acting with other people, all of a sudden stops working. … These periods of extreme stress that come along where a lot of things you take for granted on a given day stop working and the decision-making ability of the firm, not the quality, but the ability to make decisions, collapses.”

* [00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

* “I operate on what I call the ‘yes principle,’ which I think, like at the end of your life or at the end of your day, really, not need to get morbid about it. At the end of your day, your day is a series of things you said yes to. I said, yes, to getting on this call. I said, yes, to reading an email earlier. I said yes, to responding to that email. I said, yes, this, this this. The things I'm saying no to, I'm not, they don't really exist from a certain perspective. It's just the things that I am saying yes to passively or actively. And so I think you have to begin with looking at what are the things you want to be accomplishing and you want to be doing.”

* “When things go wrong, you're short a put on your own time. So there are certain types of investments where if something goes wrong or the thing is down, you go, okay, maybe I need to spend an hour rechecking something, or maybe it's a buying opportunity, something like that.

But there's other things where if you wake up and it's down 20% or something. It probably means something really serious has changed. You may have to go have an analyst or yourself go spend tens or hundreds of hours re-underwriting whatever, but you're gonna have to do that at a time of stress at a point when the, when the forward returns of everything else are going up.”

* “And so you need to be thinking about under the position of stress. Do you want your investment team running the exact same process or do you want to simplify it? So one of the things we try to do is at the portfolio level, we want to ensure that in times of stress, the portfolio structure is simpler and that the liquidity is higher, which are two constraints we're imposing ourselves on ourselves in normal times that benefit us in stressful times. But also in the investment process, we actually have a dashboard that shows the entire investment process as a manufacturing process. And I can click one button and it will make 75% of the projects disappear because they are not relevant.”

* “I also want to make sure that in the investment process that we really trim down to having people do things that they're already very skilled at, that they can almost, you know, in, in the military and athletics, you want to get, you want to get most movements down to where people can do them without thinking. And so it's the same thing really here with investing. It’s I want to give people more time to sleep, more time to have good meals, like feel physically comfortable. And I want them to do things they are very practiced at under times of stress.”

* “Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays [00:35:00] at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

* [00:37:00]: Which non-investment areas offer useful insights?

* BUD/S training: “Even in the most harsh military environment, in a training context that I'm aware of, probably their worst, but it's the one that's famous. The constraint that everyone leans on is the human reality of eating food. And I think that's a powerful lesson in, in really everything is that there are bedrock realities that you just have to admit and work around.”

* “You know, one of the things that happens sometimes the day traders and prop traders is they, they can't sleep because they're having adrenal burnout from the stress of trading, all day. And that's just absolutely horrible for your performance. So you need to monitor those things and you need to monitor them without judging them. And then you need to look at, okay, first let's, you know, let's do triage. You go home, you sleep, you eat, you know, and very important you do not threaten anybody's role with anything that you're doing this. And then later you can go in, you can look at how we're gonna prevent that from happening. And usually it's just earlier response.”

* “You had a few bad beats at a table. I mean, I used to live in Vegas and I played cards professionally for a while. And you know, when you're getting, when you have a couple bad beats and you're just pissed off about it and you're tired and you know, you want to beat that guy cause he's gotten two crazy bad beats on you in a row.

* You know, the younger man says, I gotta take that guy's head off and more experienced player says, I'm going to go I'm going to go hop on the stationary bike for 20 minutes and then I'm going to go take a nap and then I'm gonna have a nice salad. And then I'm going to go to a different casino and sit down at a table in there and then I'm gonna play there against completed. And you have to lose the pride of wanting to beat that guy. And you have to let go of the anger of what happened and you have to forgive yourself and you have, you have to have a show. You have to be like a goldfish. It always comes back to Ted Lasso.”

* [00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

* “I break all this stuff down into kind of three categories: ritual, rhythm and distance.”

* Sleep, diet, exercise

* “I really like lifting. I find that for me, personally, lifting heavy weights makes me feel much better. It's what I call a Keystone behavior. I always look for behaviors where if I do this one thing, the probability of my other behaviors being good increases. So if I lift heavy weights, even if I go on for 20 minutes, I sleep much better. I feel much better just walking around. You know, it improves my hormones and things like that. According to my blood tests it makes me want to eat healthier things

So it's kind of addictive in a good way there. So if you can find something like that, that kind of is a Keystone behavior that sort of holds all the other good behaviors in place.”

* “Exercise is good. And specifically anything that’s elevating your heart rate for a period of time, especially when you're very stressed. I think if you've been in markets, you've been in the PM seat, you've felt the, as a Matthew McConaughey put it in Wolf of Wall Street, the above the neck mustard s**t where it just you're sitting in a desk and nothing's happening and you feel your entire body's like feels compressed intense and it's almost like a heat throughout your body where you just feel very uncomfortable and nothing's happened. And it's just the stress building up of your brain, responding to all these stimuli. And the only way I've found to just short-circuit that is to go, just hop on an elliptical or whatever, and just get your heart rate up to, I don't know, 130, 150, whatever your level is for your age and health and whatnot. You know, for 15 or 20 minutes and it is amazing. Like, there'll be, you'll put on some music. You like, you just sit there, retarded, put an audio book, whatever, 20 minutes and your emotional state will completely reset. And it's a superpower.”

* “Rhythm is how all these things are mixing together and you should be able to notice, like we track every product, every he's working on what people are doing, and you can kind of see when things are humming.

What you notice when you have a significant market drawdown or some other problem is you'll notice the rhythm of the firm become disrupted. And so we can see that and you can see that in email traffic, you can see it in like the messages people are sending around. You can see it and how people are posting updates on their ideas, things like that. Like you can, you can also just feel it like, and the other thing is, as a leader of a firm, if you're not in a good place, your ability to sort of feel the force in your own firm is diminished.”

* “There’s this concept in grappling or boxing or any like martial arts of distance.”

* “There's kind of a metaphor or something there about, you know, when you're really engaged with an individual project or when somebody is really obsessed with one particular problem, that same thing happens where it starts to, you know, it's kind of you stare into the abyss and the abyss stares into you. Where it starts to dominate that person's mind and all of a sudden they become blind to everything else. And then their, their flexibility decline similar to being in a clench in a, in a combat sport. Versus, you know, if you're the coach standing on the sideline of the ring, you look at the guy and you go, obviously he just needs to step to the left and he could just do this movement win. But the guy in the, in as close to it can't see. And it's not just that you literally can't have the perception, but it's also that your body and your mind are adapting to that closeness.”

* “When that when you have a crisis or you have some crazy thing that goes down, there's a lot of people who make money in the crisis, or maybe immediately after. And then they're just kind of different people. And after that, and they can't adapt anymore, like, they've become so hardened by this extreme stress. Like a lot of people I think disrespect it and they say, oh, that guy's stupid. Or he can't adapt. It's not what happened. What happened is these, these guys neurologically went through something that most people can't even conceive of.

And you know, it doesn't mean their decision making was correct or a wrong, but you know, what, what happens to their body and their minds going through? I mean, I can't imagine being somebody who shorted the housing bubble in size, who was being ridiculed for three years like that is, you know, so terrible from a neurological standpoint.”

* “Where you are today is irrelevant. The only thing that matters is the change. The rate of change over time, you cannot control where you are today because that already, right now already have. So only you have to focus on is just, you have to immediately make the changes so that tomorrow is better and tomorrow is better and so on. And once you start inserting the ritual you can start to build a rhythm around it. And once you build a rhythm around it, then you can start to look at, okay, how are we monitoring the distance and the team.”

* “And so the goal, this is another money game line is the goal of investing under stress is serenity. The goal is if, if you can, in times of extreme stress, get your life to be mundane. That's a victory. That's perfection. That's where we're going.”

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I’m very excited to share with you all a conversation with my friend Dan McMurtrie of Tyro Partners. The entire interview is about a topic that I believe is under-discussed but of vital importance to any investor: resilience and recovery when dealing with sustained pressure and stress. I believe this is crucial to longevity in investing.

A number of great investors have commented or hinted at the mental and physical strain from a combination of market volatility and personal or business issues. Many retired because they were simply too exhausted and burned out to continue.

You can find detailed show notes, examples, and a transcript on my substack - neckar.substack.com.

"The goal of investing under stress is serenity. If you can, in times of extreme stress, get your life to be mundane that's a victory."

"You'll hear a lot of managers say, Hey, I bought the market in the financial crisis, but they're probably not going to get on TV and say, and I threw up in the trashcan for it.”

"When things go wrong, you're short a put on your own time.”

"Think about it like a team, like a sports team. We need to have players who can execute plays at all times. And in order to have people who can execute plays at all times, some people have to have some Gatorade on the bench and let's just accept that and engineer around it.”

[00:01:00]: Introduction. Why is resilience important?

[00:07:00]: Where to find good advice? How to broach the subject?

[00:20:00]: What are the different dimensions in which this matters (i.e. individual vs. team)?

[00:37:00]: Which non-investment areas offer useful insights?

[00:50:00]: What are specific best practices? Are these idiosyncratic or are there universal themes?

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe

Hi everyone.

Another week has gone by and the war in Ukraine continues. It feels self-indulgent to even write about investing from the comfort of a safe and warm home. Last weekend, I went to Washington Square Park to a demonstration. It wasn’t as big a crowd as I had expected. Some Ukrainian friends went to Washington DC. Many more are active on Instagram, venting their anger, sharing their fears, and raising donations.

As I experience the war through the “reality tunnel” of social media, I constantly have to remind myself that that the sheer quantity of attention-grabbing information is not equivalent to getting a high quality picture. It’s Kahneman’s “what you see is all there is” bias (or availability heuristic?). If my Twitter feed is filled with follies and fumbles by the Russian military (like busted tires, columns stuck in the mud or out of fuel, abandoned vehicles being lit on fire, even the paratroopers not living up to expectations), and yet they’re advancing, then I’m probably getting a biased picture.

We’re witnessing what it’s like to disconnect a modern economy from the rest of the world. Garry Kasparov called it the “technological stone age.” Axios had a list of companies withdrawing and the number of global brands participating seems unprecedented? You can find anecdotal evidence of the impact all over Twitter (helpful thread). For example: without Apple Pay and Google Pay you need cash and paper tickets.

Marc Rubinstein wrote about the ongoing financial warfare: “as a means of inflicting economic pain, targeting the banking system is a good place to aim. The world learned that accidentally during the global financial crisis, and many European countries learned it again several years later.” With payment flows disconnected and trading on Moscow’s exchange halted, Russian stocks crashed in London. There was an offer for Sberbank at stock at literally $0.00. Though I started getting confused when I saw the steep sell-off in Russian energy names.

I was also astonished to discover that I own some 150 shares of Yandex in my personal account. As I looked at the stock, its price frozen, I faintly remembered thoughts like “oh, the Google of Russia, probably oversold, and surely Putin wouldn’t risk his economy on some absurd 20th century invasion.” It’s the kind of braindead trade - no, strike that, mindless gamble - that I unfortunately do from time to time. It was also a mistake that my mind apparently quickly dumped into the memory hole to protect my self image.. Talk about someone studying experts only to act like a complete amateur. It is my hope that by writing about it - by creating a kind of public shaming - I will finally rid myself of this behavior. And I will let Peter Lynch remind us all why compulsive bottom-fishing is treacherous:

I was still confused about the price action in Russian stocks and the Russian ETF, RSX, which seemed to trade at a big premium to its NAV. I turned to Dave Nadig (Chief Investment Officer and Director of Research at ETF Trends) who has written about exactly this issue (and who also appeared on Infinite Loops).

I hope you enjoy our brief conversation around this topic. For more context and charts check out Dave’s writing and Twitter feed (Eric Balchunas is also good and of course Matt Levine has written about the issue as well).

A few key takeaways:

* There’s precedent in an ETF’s liquid underlying assets turning illiquid (or a permanent liquidity mismatch such as with junk bonds). The local stock exchange being closed is merely a special case. However, there are few precedents for the uncertainty around Russia given the small number of modern pariah states - think Iran, Cuba, North Korea.

* Stock prices collapsing has a lot to do with the uncertainty around the status of the depositary receipts traded abroad. Gazprom’s assets are valuable. It’s equity is probably valuable. But depositary receipts owned by foreigners may or may not be valuable in the future. As Mark Gutman put it: “The value of a piece of paper that gives you rights to nothing is zero.”

* With the underlying market closed, the ETF becomes a proxy for price discovery. But once the creation of new shares is suspended, it becomes disconnected from the value of the underlying, essentially like a close-end fund that can trade at a premium or discount to NAV.

* The removal of Russian shares from emerging market indices (and therefore ETFs) at a price “at a price that is effectively zero” was particularly puzzling to me and Dave walked me through the process. Personally, I think these have at least some option value and it’s going to be interesting to see if at some point in the future we’ll hear about a creative trade.

Meanwhile, Russian traders are left with what the Germans call Galgenhumor or gallows humor:

“Dear stock market, you were close to us, you were interesting, rest in peace dear comrade.”

Personally, I’m encouraged to see that the West is getting serious chasing down the oligarchs. Even Germany seized a $600 million yacht. (Although I’m not quite sure about the legal backdrop of seizing private property of people loosely affiliated with a hostile regime? If someone has a good background piece, I’d be interested). My hope is that pressure on Russia’s elite could become Putin’s undoing (and I could really use more hope when some people are talking about a 10 percent chance of the world ending).

Still, it’s worth considering the long-term implications and downside of economic warfare. Russia is going to move closer to China (worst case: a nuclear-armed vassal state?). The world will experience more sustained inflation in energy and food. And it saddens me to think that there are likely a great many people in Russia who don’t support the war but can’t risk jail or beatings to protest. Who will be fed propaganda and be censored in their speech. Feelings of hostility and bitterness among average people will get entrenched as the hearts harden.

Men in my family fought and died in the German armed forces during WW2. My surviving grandparents, now in their late 80s, were children when the war ended and vividly remember the bombings, artillery shelling, and tense final days of fighting and surrender. These memories never leave. It’s haunting to think that new ones much like them are being created as I write this. I hope this will be the last time I write about the war, but I doubt it.

Stanley Druckenmiller interview with The Hustle in 2021:

On the biggest risks to the equity market:

Stanley Druckenmiller: Without a doubt: inflation strong enough that the Fed responds to it. No doubt about it. This bubble has gone long enough and it’s extended enough that the minute they start tightening, the equity market should go down a lot. 

Particularly with so much of the cap weighted in growth stocks, which would be hit the worst. And our central case is that inflation occurs, but we’re open-minded to something like ‘07-’08 when you never really got to the inflation because the bubble popped. So, inflation never got to the manifestation stage. 

This week

* Letters: Dan McMurtrie on regime change

* War Trades

* Pod: Eric Mandelblatt of Soroban

* Twitter Snacks: Greenblatt, Buffett, Steinberg, Paul Tudor Jones, James Clear

Disclaimer: I write for entertainment purposes only. This is not investment advice. I am are not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

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Letters: Dan McMurtrie of Tyro Capital on regime change

I was planning to highlight the backlog of letters and write-ups this week. In the interest of time I’m going to excerpt just one. Also, be sure to check Dan’s recent podcast.

“After seeing government responses to COVID in 2020, markets began to price in (1) unlimited and (2) effective support from both (1) monetary and (2) fiscal policy. Astronomically high multiples could be mathematically justified under those assumptions, particularly given the demonstrated willingness to directly fund consumer spending under adverse circumstances. … But with inflation rearing its head, those things are off the table, and the market has to price in a massive, top-down regime shift so long as that is the case.

Regime shifts are rarely smooth, as market participants (many of whom are leveraged) are forced to rotate their portfolios and recalibrate to different market and policy conditions.

This is difficult psychologically and mechanically – when is the last time a current portfolio manager had to deal with a serious bout of inflation?

The lack of policy optionality as well as private sector response capability – both of which were able to handle severe risks during 2020 – means the potential severity of both known and unknown risks in the future is amplified. Thus, there is relatively less margin for error in the world right now, and the result is a repricing of assets to reflect that. We think this makes sense. No one wants to be punched in the face, but it is a far more serious matter if your blood cannot clot.”

War Trades

We’re trained to think of the stock market as long-term wealth compounding machine. All we have to do is endure an occasional bear market. But war and regime change can destroy an enormous amount of wealth. Source: Credit Suisse Global Investment Returns Yearbook 2015

War and political upheaval also occasionally lead to unique trades. I collected a few examples in this thread, from Templeton to Baruch, Keynes, and Rothschild. If you know of other examples, would love a comment or email/DM.

Pod: Eric Mandelblatt of Soroban

On Invest Like the Best (my notes on Twitter)

This was recorded before the invasion of Ukraine and the spikes in many commodities and related stocks. It’s a very engaging deep dive that connects the big theme of decarbonization with existing structural imbalances and an analysis (or pitch) of specific businesses - US railroads and Alcoa. Could this episode simultaneously be an indicator of a long-term opportunity and a short-term signal for caution? We’re a long way from late 2020, when investors didn’t want to touch energy and materials with a ten foot pole.

“The royalty company sitting on top of this resurgence of industrial production ... the picks and shovels way to get leverage is the US railroads. … What are the businesses we'd be comfortable buying a 100-year bond from? Because it's almost the definition of incumbency, barriers to entry longevity. The railroads are my number one. They have 100-year bonds that yield 4% today.”

“Almost every market we're looking at is in deep structural undersupply. In some commodities we're seeing spiking demand. It's a backdrop I've never witnessed during my career.”

Twitter Snacks

Buffett in 2010 on Pricing Power (Financial Crisis Inquiry Commission)

“The single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

The example was Moody’s:

“They have done very well in terms of huge returns on tangible assets, almost infinite. And they have –- they have grown along with the business that generally the capital markets became more active and all that. So in the end –- and then raised prices –- we’re both — we’re a customer of Moody’s, too, so I see this from both sides, and -– we’re an unwilling customer, but we’re a customer nevertheless. And what I see as a customer is reflected in what’s happened in their financial record.”

Interestingly, when asked about management he punted, explaining that outstanding management was not necessary to make this a great investment.

“I knew nothing about the management of Moody’s. The –- I’ve also said many times in reports and elsewhere that when a management with reputation for brilliance gets hooked up with a business with a reputation for bad economics, it’s the reputation of the business that remains intact.

If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station — I’m talking of the past — you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference. I mean, it makes some difference maybe in capital allocation or something of the sort, but the extraordinary business does not require good management.”

But notice that he quickly corrected himself: “I’m talking of the past.”

Speaking of Buffett: thread with lessons from 50 years of shareholder letters.

How to navigate big regime shifts like Paul Tudor Jones? “Don’t be a hero. Don’t have an ego.”

Remember your competition (via Ian Cassel):

This one hit home. I have an issue with clutter and letting go. I look around and there are too many stacks of books, piles of notes, and long lists of what I want to do. It becomes a distraction from being fully present and focusing on one important thing right now.

“Look around your environment. Rather than seeing items as objects, see them as magnets for your attention. Each object gently pulls a certain amount of your attention toward it. Whenever you discard something, the tug of that object is released. You get some attention back.”

Enjoyed this piece? Please let me know by hitting the ❤ button. It makes my day to see whether my readers like the content (it really does!) Thank you!

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I'm reading my full piece David Tepper: The King of Bouncing Back and key takeaways from the second part, What I Learned From David Tepper. You can find both pieces with all quotes and sources on my substack: neckar.substack.com.

“For better or worse we’re a herd leader. We’re at the front of the pack. We're one of the first movers. First movers are interesting; you get to the good grass first, or sometimes the lion eats you."

"In the outside world, I’m that easygoing person. But if I’m on the field, I wanna win. And we win a lot.”

Sections:

• Growing up in Pittsburgh


• Republic Steel


• The Goldman Setback


• The Horse Leaves the Barn


• Emerging Market Adventures


• Dotcom Distress


• The Delphi Distraction


• The Crisis Hits


• Inflection


• Epilogue

Lessons:

• Don’t do it for money alone.


• Lazy competitive.


• Be smart enough to get lucky.


• Find your own style.


• Ahead of the herd.


• But don't bet the firm.


• Bouncing back in life and markets.


• Unemotional under pressure.


• Staying nimble.


• Optimists win in the long run.


• Keep having fun.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe

Hello everyone.

Today I’m joined by my dear friend Tom Morgan for a wide-ranging conversation around finding flow, recognizing resonance, the idea of moloch and slack, prophets and truth in the modern world, embodiment, and connecting mind and heart. Tom is one of my favorite writers and idea synthesizers. You can find his work at the KCP Group and on Twitter.

It was a deeply personal conversation because I struggle with a lot of these questions as I’m trying to navigate this new stage of my life. You can tell from the way I wrestled to formulate some of the questions. So, don’t hold it against Tom that we spent a lot of time on ideas such as following your curiosity, being vulnerable, and navigating personal crises.

I hope you find the conversation as interesting as I did. Tom managed to articulate his mission in life towards the end. So it was definitely worth it.

Listen to this episode on: Spotify, Apple, at anchor, via RSS.

🤔 You could be sponsoring posts like this one if you’re looking to reach nearly 8,000 thoughtful subscribers and many more readers on Twitter.😏

A few of my favorite quotes:

The tension between following your curiosity and the friction of giving up your position:

* “I've noticed that when people stop getting interested in things, it is a signal that there's no more growth left for them in a topic, and they need to move on either professionally or personally onto a different thing. But because the frictions are so great, particularly in finance, people cannot move to a different thing. But your interests and what you're gripped by, and what you're passionate about are much more significant in terms of directing your future growth.”

Find the intersection of what you’re uniquely good at and what the world needs:

* “It's about what you can do plus what the world needs. And you, you can't neglect either of those things because it's a conversation, right? Your flow with the world, you have to be open to feedback from the world.”

The obsession with finding meaning in work:

* “This ruined my life. This whole idea ruined my life decisively for very many years. …. I left Wall Street in I think 2017, started my crisis. And I said that for my second act, it needed to be something meaningful. … All of it was based on what I wanted to do, which was help people in stuck spots. … But every time I tried to do something, the door would slam shut in a really like devastating way. Things would not work out for me. And I was also not intrinsically interested in any of these avenues. I was just telling myself I was because they were meaningful. So I was saying, this is meaningful because obviously it's meaningful to be a social worker, but it wasn't actually interesting. … And it was only when after a series of like catastrophic failures, so massive, massive depression, that I basically gave up and started just doing things for intrinsic benefit and intrinsic pleasure that my employers found me and this role found me in the last year of my life has been an expressively fun, challenging.”

Leaving the local peak of a fitness landscape to (maybe) find your way to a higher one:

* “The point of any organism is to get to the highest global peak. But what happens is you can get to the top of a smaller peak and then get stuck there repeating the same behavior. And so what you then have to do is go back down into a valley so that you can explore an adjacent and potentially higher peak. What takes you back down is never going to be rationality, and it's never going to be competitive and competitiveness. It's never going to be anything that took you up to the top. It's going to have to be something radically different, which is why all turning points work irrational, and all or moves involve the sacrifice of something that was very important to you getting up there, most often money or prestige or status. All of the things that are holding you in a typically the stuff that got you up to the top.”

The modern predator’s tools are language and abstraction:

* “The thing about voices that is very interesting is the conceptualization from McGilchrist that the left hemisphere has language. And sexy language, right? Good syntax, really articulate words. And because those are the things that we use to manipulate the world, like a predator, the predators tools in the modern era are language, right? Because it gives us power. Conceptualization, abstractions, give us power. And you know, the bargain you make to moloch, who is the Canaanite got of child sacrifices, throw whatever whatever you value most onto the furnace and I will grant you power. And whatever you value most often is, your time, right? You will sit there in an office dying in return for your salary, right? And it, that literally is the sacrifice that you choose to make. But that voice often is very loud and incredibly rational and persuasive and articulate.”

Rough transcript.

Show Notes:

* [00:01:00] – [First question] – Integrating wisdom from successful investors.

* "Gurus and Pickleball."

* “You watch the whole like information sphere discard that person because they got into a topic that was unacceptable or they did something that was unacceptable and they just basically get wholesale canceled. And whenever I see that now, I'm just like, oh, you're not exercising discernment. You don't have enough self-confidence to say. There's something in here that's valuable and there's something in here that's idiotic. And I'm actually able to determine what those things are. And I don't need someone else to tell me what that is because, you know, as we both know on Wall Street, negativity sells better and sound smarter.”

* [00:04:00] Believability and understanding what makes people successful.

* “A lesson I wish I’d learned much earlier in life is that a lot of people are not always believable in the same domains that they think they are.” "Articulate & Incompetent."

* “You get into this really weird situation where the luck skill continuum and the ability to give retroactive explanations gets blended and I guess results are the ultimate arbiter, but I think it's one of the great problems in investing.”

* [00:07:00] Tom’s background

* [00:10:00] Finding resonance, how to decide what ideas to pursue.

* Iain McGilchrist: The Matter With Things

* “Our exploratory attention is a better guide of our future growth than our narrow attention. I was in Newark Airport in the security line. And I heard this podcast and the speaker just says, Carl Jung, had this idea that your future self directed your interests in the present to guide your growth. And I was like, well, that sounds mental, but it's also kind of interesting. And at least without believing sort of the present and future aspect to it, it is fairly well known that your right hemisphere is taking in about a million times more information, maybe a trillion times more information than your left hemisphere. It directs your attention towards what you should be paying attention to next. And I believe that we feel the direction that we should be going in next as resonance.

* “If you regard the information landscape as sort of this three-dimensional field around us, we should be navigating that gradient based on how interested we are in topics around us. … One thing that becomes directly relevant to people in finance is that in my own experience and subsequently, I've noticed that when people stop getting interested in things, it is signaled that there's no more growth left for them in a topic, and they need to move on either professionally or personally onto a different thing. But because the frictions are so great, particularly in finance, people cannot move to a different thing, but your interests and what you're gripped by, and what you're passionate about are much more significant in terms of directing your future growth. And so that's like, that's almost a meta comment because that's, that idea was resonant to me. And also it has directed my future growth in a lot of very strange ways.”

* [00:15:00] Moloch and slack, motivations.

* Meditations on Moloch

* “Anytime you target something implicit for its own enjoyment, things go really well. Your life unfolds in this beautiful synchronistic way, but everything has to be done for implicit enjoyment.”

* “When you're exactly on your flow, you move at the same speed as the world. So it feels like time is not passing because you're moving at the same speed as the world. If you're out of your flow time, feels like it's grinding, right? … And there's all these really weird accounts of how that feels the most desirable thing is to be like exactly on the center line. And almost everyone knows when they're on the center line because they just have this intrinsic feeling of meaningfulness, which we describe as the flow state.”

* “The Shaman is a guy in a community, you can use, you know, hero, prophet, comedian, visionary entrepreneur for the same time. And it's someone who uses the flow state to go into a different experience outside of their existing paradigm and see something else. The shaman would get themselves into a trance state and they would experience the world from above and it would give them a completely new framing on an issue, but then they could come back and speak to the rest of that tribe in a way that would heal them and reorient them back in the right direction.”

* “The thing that kind of blew me away, because I'd never thought of it this way is people that spend more time in flow are more likely to have insights that allow them to reorient their life in the right direction.

So Vervaeke says like the more time you spend in flow, the more of an insight cascade you have, right? The more insights you have, the better you are at calibrating your life towards that meaningful thing.”

* [00:22:00] Danger of optimizing life for flow.

* Soul (Pixar)

* “Here's the area of lost souls, the people that haven't found meaning in life. But also people that get addicted to flow get lost in here as well. Right? The people that spend all of their time in the zone and it just bliss junkies. Just chasing it. And at the end of the movie, he has this, this peak experience performing jazz, and he walks out and there's Dorothy Williams, this jazz singer, who's recruited him off the street to have his like life-changing moment. And he says, well, what happens next?

And she says, well, we come back and do it tomorrow.”

* [00:26:00] Do you have to find fulfilment and flow in your work (always)?

* “This ruined my life. This whole idea ruined my life decisively for very many years, which was that basically I had an intellectual understanding of all of these things, but my intellectual understanding got in my way

I left Wall Street in I think 2017. Started my crisis. And I said that for my second act, it needed to be something meaningful. … All of it was based on what I wanted to do, which was help people in stuck spots. … But every time I tried to do something. The door would slam shut in a really like devastating way. Things would not work out for me. And I was also not intrinsically interested in any of these avenues. I was just telling myself I was because they were meaningful. So I was saying, this is meaningful because obviously it's meaningful to be a social worker, but it wasn't actually interesting. … And it was only when after a series of like catastrophic failures, so massive, massive depression, that I basically gave up and started just doing things for intrinsic benefit and intrinsic pleasure that my employers found me and this role found me in the last year of my life has been an expressively fun, challenging.”

* [00:30:00] Finding the match between interest and what the world needs.

* “It's about what you can do plus what the world needs. And you, you can't neglect either of those things because it's a, it's a conversation, right? Your flow with the world, you have to be open to feedback from the world.”

* “And that is the biggest conceptualization that I think is missing from Western culture is that requires vulnerability and an openness to feedback, but also an awareness to the synchronicities and coincidences that are going to show you that you're going in the right direction.”

* “The way that I see my niche, which is still evolving. And I don't think I've mastered it, is sort of finding perennial concepts and relating them back to investing, you know, building this Trojan horse from rationality to spirituality.”

* [00:35:00] Finding important ideas that recur across domains and selling research to hedge funds.

* “You get 50 to a hundred emails every morning from your analyst team.

And then you have to call your clients and relay the most important insights from those 50 or a hundred emails, knowing that everyone else on the street is doing the same thing at the same time. So it has to be relevant to your clients. It has to be what the world needs, right? Like it is sort of weirdly it's coming to me now. It is kind of this Taoists combination, right? It has to be what they need and it has to be what you're interested in.”

* “And then after the crisis I'd moved to sort of a more synthesis stage. Get all the ingredients that I've assembled from my career to date and from inhaling the internet. And I'm trying to synthesize them all into something that communicates something of reasonably lasting value.

Because if you're just talking about market moves that week, that's a massively commoditized piece of information that I'm not very good at it. So it's sort of leaning into what I felt I was good at, which was pattern recognition, but all pattern recognition is fundamentally creative.”

* “The act of synthesis is fundamentally creative. You're bringing something new into the world that was not there before, because it's a completely new combination of ideas and the world will respond to that if it's useful.”

* [00:39:00] Identifying high-ROI information.

* “The best sales situation is when you're selling something, you know, is true, you know, your client needs and you know, will add value to them. Then it is the best job in the world because your conscious and your unconscious are aligned. The worst job in the world is when you have no alignment with what yourself. You know, the other person doesn't want it, you're completely out of integrity and it will eat your soul.”

* “So when I heard the analyst speak and I knew what the analysts was saying was true or likely to be profitable or wildly different from what everyone else was saying in the market. I had enough reps that I could pick that up and communicate it. And I'm not saying it was right. I'm not even saying it was always true. It just has a higher return than other things.”

* [00:42:00] Recognizing when someone is in resonance.

* “If you lie there’s this momentary, microscopic dissonance either in your voice or in the way that you're behaving with other people. And by contrast, when someone is completely embodied, you can just hear it.”

* “There's this crazy idea that when you're hearing a prophet or a shaman speak the truth to you, it snaps you back to that frequency, right?

It snaps you back to the truth rapidly and that can heal you. And that's something that Joseph Campbell talked about that took me years to understand, which was that myths were there to harmonize the mind and body, which could, you could see this as the left and right hemisphere.

And it's this really weird idea that I couldn't contextualize for a really, really long time, but it's basically this idea that if you, if you're told a story that reflects the outside world or reflects your own reality accurately, it brings you back into harmony with the outside world. And we can get stuck off in our heads in all these abstract concepts that have no bearing towards the truth. And we can tell ourselves stories about ourselves that aren't true at all. And it takes someone coming back to us and telling us the truth, however unpalatable that is, that will snap us back to that frequency.”

* [00:47:00] Where to find mechanisms for truth.

* “I think a lot of us do not have harmonious relationships between our heads and our heart. And often I think of the distance between our head and our heart as the mile of crap that Andy Dufresne has to swim through in the Shawshank redemption, it's all our traumas, all of our protections, all the things that prevent us from seeing the world clearly.

But every time I see like a massive debate. Like spring up around cancellation of people or misinformation or disinformation. All I think of is that this would not be a problem if most people would, were much more grounded in their own bodies and able to determine for themselves what they felt was true.”

* [00:52:00] Finding aha moments.

* “For me, the boundary period between waking and sleeping. So at night I had no productivity at all, but what I do is I now assemble the ingredients. I'm like, here are the things that I would like answers to.

And I think it was Edison who said, never go to sleep without a request to your unconscious. And then I'll wake up in the morning, often, incredibly annoying the earlier like 5:00 AM and have a bunch of solutions, all of which seem completely obvious at the same time. And so there are things that you can kind of program.”

* “But the, the irony of slack and the Greeks called is Kronos time and Kairos time and Kronos time is moloch, which also, ironically is the other name for moloch in these traditions, Saturn, Kronos and Moloch, they've all been equivalently the same God, the God of time. And then there's Kairos time, which is sort of the inspiration time, which you just can't control when it comes. You can create the kind of circumstances where it shows up, but you can't force it to show up. Cause it just, it just doesn't play by the same rules.”

* “And the thing that I think is, is most neglected in our circle and really is I think really quite important is the idea that nothing, nothing will emerge into a space that's full, nothing grows into a space, nothing. You know, if the womb is full, a baby will not grow into it. Right. But that space is often created by a breakage, by a vulnerability. And a lot of people who I talk, I tell about my story. They're like, wow, you lived through, you know, two years of constant suicidal ideation. You must be so resilient now. And I'm like, absolutely not. I am not resilient at all. I am much more vulnerable than I ever was and I feel the world much more keenly than I ever did.”

* “And I think a big reason for my crisis was having a son, something I haven't contextualized. Right. But when you have a child, you make a bargain in that your life is going to be destroyed if that child, that child dies right. You, you, will, you will mourn that child with the same intensity with which he loved them. You create a spot of vulnerability in yourself that would actually ruin your life. Right. And that, that is the shadow side of the love that you feel for that person. And so like, when you think about the slack in your day, that slack has to include some kind of conception of vulnerability.”

* [00:58:00] Vulnerability and authenticity on the internet.

* [01:01:00] Dealing with envy (but poorly articulated). Opening yourself to feedback.

* “When you're chasing something intrinsic, you'll never get bored of it because you're on the path. You'll never get bored and you'll get rewarded for it one way or another. But again, like it's the nuance that it has to be something that the world needs, right? Like if I was, if there were no constraints on my process, every article I wrote, I wrote would be like a million times more pretentious even than what I write now.”

* [01:05:00] Finding role models, being discerning.

* “That is again the same principle, which is that you never, ever, ever, ever worship the prophet. Right. Think about all the times that human has put themselves at the apex of a system and how utterly catastrophic it's been almost every single time.”

* “Think about your, your own parents, right? You go through this stage of like unquestionable adulation. Then when you're a teenager, you're like, oh my God, they're the dumbest people in the world. And then you just learn to integrate the best and worst of them.”

* [01:08:00] How does Tom think about his own mission?

* “I woke up two days ago and realized what I wanted to do in my life. And I think this wonderful poem from David Whyte where talks about like the, the point where you meet the world is actually pretty small.

And most people get blinded by the fact that it's pretty large and they got an infinite number of options. But the thing that you can do, that's uniquely yours, that the world needs is actually a pretty small point. You just need to find it. And I say, just finding it's like the hardest thing in the world.”

* “Because often it just, it involves destroying yourself to find it right. Oh, he's destroying the ego, right? Letting that unconscious charisma flow through, you often have to get the ego out of the way and it kills you. Right? At least that was certainly my experience. Right. What I want to do with my life is help people out of moloch into slack. Help people out of stuck places and into a different stage where they can get themselves out. Because I saw the wasted human potential. I saw from people at the top of their fitness landscape, just going around in infinite loops that couldn't get themselves out because they didn't know how to trust and trust their hearts effectively.”

* “You actually realize that is sort of the meaning of life, which has helped help people find their way out of this kind of egoic, very abstracted form of existence into something where they can finally co-create and I believe that's the purpose of every human life. And in fact that is right-left-right. So right left right, certainly McGilchrist thinks that you take information in from the outside world on the right hemisphere. You cut it up into categories on the left, and then you place it back into its global context with the right hemisphere again. So he says, you listen to a piece of music, you learn the notes and then you play it creatively and intuitively that's literally how you learn anything. That's the definition of intuition. You take, you attend 3000 management meetings. You unconsciously work out where all the patterns are. And then you gain this intuitive ability to determine what's true when you're interacting with another person, but it's also in this sort of weird fractal sense, the trajectory of a human life that we go through this stage, where we're uncritically in the farmers' children, we're completely in the moment.”

* [01:13:00] Leaving the local peak of a fitness landscape is scary as hell.

* “What happens when you're at the top of the landscape, but as it did for me was your unconscious starts to give you signals. You want to get out, but because our culture disregards them. And because of the terror that involves, I started getting all these psychosomatic illnesses that were unsolvable, but then the reason why they were unsolvable was because I needed to actually move. Right. Like I needed to move away from the thing that was stressing me. What it was is often listening to a couple of things and reading a couple of things that, cause that tiny little mind fracture where you're like, ah, s**t, that's true. And that's true and it's gonna, and it's gonna break something open and when you hear it, you follow it because you just know it's true.”

* “The point of any organism is to get to the highest global peak. But what happens is you can get to the top of a smaller peak and then get stuck there repeating the same behavior. And so what you then have to do is go back down into a valley so that you can explore an adjacent and potentially higher peak. But the problem is you can tell is, is if it's moloch, that takes you up to the top of the peak, the evolution of cooperation that we understand as you know, nature red in tooth and claw.

What takes you back down is never going to be rationality, and it's never going to be competitive and competitiveness. It's never going to be anything that took you up to the top. It's going to have to be something radically different, which is why all turning points work irrational, and all or moves involve the sacrifice of something that was very important to you getting up there most often money, right? Or prestige or status. Right? All of the things that are holding you in a typically the stuff that got you up to the top.”

* “You turn into sort of this unformed human being that, hates himself, and everyone hates with the dead soulless eyes. Or you sacrifice everything and take enormous risks and risks, but it actually doesn't work out, but to explore the adjacent possible, right. And to follow the voice that's telling you that it's time to move.”

* “The thing about voices that is very interesting is the conceptualization from McGilchrist that the left hemisphere has language. And sexy language, right? Good syntax, really articulate words. And because those are the things that we use to manipulate the world, like a predator, the predators tools in the modern era are language, right? Because it gives us power which is really interesting. Conceptualization abstractions, give us power, abstractions of moloch. And you know, the bargain you make to moloch, who is the Canaanite god of child sacrifices, throw whatever you want on there, through whatever you value most onto the furnace and I will grant you power. And whatever you value most often is, your time, right? You will sit there in an office dying in return for your salary, right? And it, that literally is the sacrifice that you choose to make. But that voice often is very loud and incredibly rational and persuasive and articulate.”

* “You have this conceptualization of the voice of conscience, which often is like a physical sensation because your right-hand spirit is also connected to your heart center and is connected to your body in a different way. And then you'll start to get signals from your body and this tiny little voice that nags at you being like you're in the wrong place, you're in the wrong place. It's very easy for the, for the voice, with a million times less information to be like, here are these incredibly well-rehearsed rationalizations for why you should, why you should not do that, which is another reason why these slack practices are useful, because anything that puts you in your body gives you a, just a higher probability of getting clear signals.”

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This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe

Today I’m joined by my dear friend Tom Morgan for a wide-ranging conversation around finding flow, recognizing resonance, the idea of moloch and slack, prophets and truth in the modern world, embodiment, and connecting mind and heart. Tom is one of my favorite writers and idea synthesizers. You can find his work at the KCP Group and on Twitter.

It was a deeply personal conversation because I struggle with a lot of these questions as I’m trying to navigate this new stage of my life. You can tell from the way I struggled to formulate some of the questions. So, don’t hold it against Tom that we spent a lot of time on ideas such as following your curiosity, being vulnerable, and navigating personal crises.

I hope you find the conversation as interesting as I did. Tom managed to articulate his mission in life towards the end. So it was definitely worth it.

You can find full show notes on my substack.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe

Hello everyone.

I’m very excited to share my conversation with Rob Wertheimer of Melius Research and one of the co-authors of Lessons from the Titans (my notes)

I really enjoyed digging into the book’s big themes around the culture and business systems of some of the most successful industrial companies. Rob shared his lessons on finding other compounders, evaluating leaders, digging into incentive structures, touring factories, and the best research note he ever wrote - but never published.

I hope you’ll enjoy this conversation as much as I did!

Rob is a Founding Partner, Director of Research, and the lead research analyst for the global machinery sector with additional coverage responsibilities in industrial tech. Rob was the lead machinery analyst at Barclays, Vertical Research, and Morgan Stanley, and began his career in the Peace Corps in Niger, West Africa.

Listen to this episode on:

* Spotify

* Apple

* RSS

* And at anchor.

I also have a very rough transcript for this one.

Disclaimer: this podcast is for entertainment purposes only and not investment advice. It does not constitute an offer to sell or the solicitation of an offer to buy any securities mentioned or discussed. Seek your own financial, tax, legal, accounting, or other advisor’s advice before making any investment decisions. Do you own work. I am are not your fiduciary or advisor.

Today's post is sponsored by Tegus. Tegus is an on-demand digital research platform on which investors share their expert calls. Their library currently has some 23,000+ calls covering many public and private companies and it's growing every day. It's a beautiful business model (I wish I was an investor!) and I could see it scaling up to cover any company and industry you can imagine. I think of it as being able to tap into a library of conversations between industry insiders. I'd encourage you to check it out - they offer free trials.

Show Notes:

* [Minute 1] Question: Background on Melius.

* [2] Question: Key themes/takeaways from the book.

* “The reasons for failure and the formulas for success haven’t really changed at all. Whether it be 1950, 1980, or 2020, they are pretty much exactly the same.”

* “The truth is that their secrets are hardly secrets at all—continuous improvement, rigorous benchmarking, disciplined investment, principled leadership, solid business systems

* [3] Question: Assessing culture as an outsider.

* “Does it drive your daily actions?”

* “Danaher or Ingersoll Rand they'll do weekly meetings where you have a weekly meeting, you have like 20 minutes, you get two minutes to state your problem a minute to ask for feedback, you move on. That's an example of a daily or a weekly feedback loop that comes around. I think the best cultures have that sort of process ingrained in them.”

* [5] Question: Importance of leadership.

* “You make either a good allocation to capital or poor ones. And obviously that drives a ton of shareholder value differentiation, but there's also need for sustained commitment to a system. You can see lots of management teams that have sort of laid out goals, but if you don't get everybody motivated and incentivized the right way, then they can fade away.”

* [6] Question: what are you paying attention to to see whether culture is changing or whether the arrogance is creeping in?

* “The value gets created everyday throughout. And so, you know, if you have a culture that's spending too much time on big ideas and not enough time on generating the cash that, that allows you the flexibility to do things, if you have a culture that's veered into being a little bit PowerPoint-focused, if it's projecting yourself internally focused as opposed to executing on the daily task that can be a real red flag.”

* [9] Question: Have you seen aspects of great culture that are universal or is it very specific to the company? How much room is there for bringing in ideas from the outside?

* “Having clear goals, having reinforcement loops and having the ability to course correct is universal. One of the points we try to make in the book, a lot of these companies have been innovative and a lot of companies have created categories. How do you analyze caterpillar? Well, I don't look at them as the best bulldozer, and they do, but, but they might not have the best in everything. The competitive advantage doesn't always last on innovation, but it does last on getting everything, fixed, getting everything right.”

* [11] Question: “Undisciplined operations don’t work” - elaborate on this.

* “What do you look for when you go in a factory? Well, it's not actually all that hard. You walk into the factory, you see if the sight lines are clear, if there's a bunch of inventory stacked up and piled up there, that's something wrong.

That's waste. That's confusion. That's a disruption. You look to see that there an employee sort of idea board, and that there's lots of ideas flowing through because workers are the ones who see problems and they surface them. Right? So that's a mechanism for surfacing problems.”

* “I went to a mining facility once, and they're these little disks that were used for smoothing or buffing the metal. And they just did a simple thing, a shadow board. It's called you paint on a, you know, on a cardboard wall. Like here's a picture of the disc. So when you're done with it, you stack it here. They found like 70 of these things, you know, they found like a million dollars of equipment. There's a picture of the broom there to hang the broom up. Right. So very, very simple things.”

* “The essence of lean is stop and fix, get things, right. Surface problems. And that's a factory floor issue. But as we kind of talked about earlier, that applies to the whole company as well. If you see a problem, you can fix it. If you don't see it, then it grows.”

* [15] Question: How do you weight insights from site visit in your assessment of a company?

* “It's critical. And honestly, I missed it. I was a pretty new analyst on Caterpillar. When I saw some of these issues, I think I saw three or four factories in the first year, the first 18 months. And one of these visits I walked down and there's there's bins, just bins of things, labeled rework. I was like, what's rework. Well, it didn't come out right the first time. So we're going to do it again, you know? And, you know what I did, I kept writing about the end markets cause that's what I understood at that time. I kept writing about, oh, I think mining's going to be good or bad. I thought oh, well, this doesn't feel great, but I haven't seen that many factories and probably they'll fix it. And in fact that was a, you know, it was a terrible sign. Caterpillar was struggling with production not with the equipment quality, the equipment still great, but they weren't able to crank up production.

* “That was actually a huge problem, a huge cultural problem, business system problem. And managers and leaders fixed it. But as I mentioned earlier, sometimes Lean takes a while. So if you've got a workforce who isn't used to it, it might take me five years to get the new system in.”

* [17] Question: If it’s so useful why wouldn’t everyone do Lean?

* “One answer to your question is continuous improvement is a compounding process, right? And Danaher is maybe the ultimate example of that, but you fix something that gets better and then you fix something else and it gets better and you keep going.”

* “It takes a very serious commitment from senior management and it takes years, you know, maybe it takes five years to get everything kind of, you know, where everybody knows that their first job is to stop and fix. The first job is to reduce, you know, inefficiency. It can be tempting to say, well, let's just buy a few hundred extra hoses and just have them there, you know?”

* [19] Question: Implementing Lean - like Danaher’s visual management.

* “It's not rocket science, right. But it is hard to do.”

* “Very easy stuff, but in our day-to-day it can be hard to stop and focus on process.”

* [20] Question: Is there a disconnect between analysts and management?

* “You know, my job is a tricky one. You have to be arrogant enough to have an opinion, and humble enough to to know you're probably wrong most of the time, you know, close to half the time.”

* [22] Question: Forecasting volatile markets.

* “A lot of people in this job like thinking about things. So you get a lot of data points. You'd like to think about it. And some of the cultural stuff is harder to think about.”

* “Melius uses two year forward price targets. Partly as a mental trick to try and get yourself to focus. Partly because these things show up more over time, right.”

* “If you're trying to forecast a quarter, okay. You can say, well, what was, you know, what was demand of iPhone shipped this quarter or something.

But if you're trying to focus on how Apple created value over the last 10 years, I mean, it's innovation and supply chain, you know? So those two things, you know then they switch and relative performance as your timeframe goes out longer.”

* [24] Question: What have you observed in terms of what people do well or poorly with, with incentivizing the organization?

* “If you have all your incentives structured around raising margin, that might be a phenomenal thing if you're underperforming, if your margins are low. Let's work on pricing, let's work on factory efficiency and et cetera. Eventually that playbook may come to an end. And if you're a person who's grown up in that system and you step into a leadership role it's hard to say to wall street to say all the analysts, you know what, they, we're just going to stop all that, you know, and we're gonna do something else entirely, right? Because investors invest on a certain expectation of future earnings and anything that changes.”

* John Deere: “Under the current CEO, John May, they basically shifted their strategy. I think with the endorsement of the prior CEO as well, but they had tried to be a global manufacturer who was leading in all sizes of tractors and they started to look around and they said, well, the technology is changing so fast that we can actually create more value by focusing on large, we're going to try and serve all our customers. We're going to focus on investing in large farms where we can do autonomous tractors, or we can do, you know, actually they're, they're doing AI pattern recognition.”

* “One company I follow United Rentals where incentives were a huge portion of the transformation. So they had different branch managers. Let's say, let's say you're a local McDonald's and you're incentivized on beating out the McDonald's down the road. That's kind of crazy. Right. And so, you know, one of the things that, one of the very simple, the powerful changes made it United rentals under a new CEO was let's shift the compensation to focus on regional or district results rather than on your own.”

* “And that's a capital intensive industry. So let's charge people for the capital. You know, if you want to buy 10 more pieces of equipment to rent, [00:27:00] you know, that that's part of your compensation. You have to make a return on that. Bizarrely it had not necessarily been that way before.”

* [29] Question: What metrics to track?

* “Danaher and Roper they do the same thing, a very simple sort of cash return on cash invested. It's simplicity again, right. You know, if you have hundreds of metrics, it's hard to track them. It's hard to know where you're supposed to be doing.”

* [30] Question: Assessing new CEOs.

* “This is one of the great things about being in this industry is you get a chance to meet a lot of different management teams and you'll probably be wrong about many, but you at least have a basis on which to sort of judge.”

* [32] Question: Trade-off of having access to CEOs: gaining insight vs. being subjected to selling.

* [34] Question: Assessing big decisions like M&A.

* “The ones that have gone wrong. And I write about a couple of them, you know, and again, a self-critical way, I thought the mining market would do X and it did Y so if you're basing an acquisition off of that, that can be very challenging.

Versus if you're saying, hey, you know, I took the margins from 7% to 21% because of these processes and this company doesn't have this culture of process. And we can approve them. Then you're making more of a bet on your internal capabilities. So at least in our world that a lot of value has been created by the quote unquote compounders, like Roper like Danaher or like TransDigm. And they're able to use that to make relatively small bets that play to their strengths and they all have different strengths, let's say, but they all have a systematic way of approaching that strength or consistent way of approaching that strength.”

* “If you look at Dave Cote, again at Honeywell, I believe you mentioned in his book that, you know, one of his jobs is try and create enough space for him to just sit and read and think … just finding time because being a CEO is a massively difficult job.”

* [37] Question: Tell me everything you know about compounders, basically.

* “They get their margins flowing, their cashflow going. They have often a fairly diverse set of businesses and they find it relatively easy to find new opportunities where they buy them and they, they run the same playbook again. So you buy a company, the margins are 10% and you bring them up to 20. All of a sudden that's generating cash. And as you do that more and more, your base gets bigger and you can compound it and ever accelerating rate. It's exponential growth. You know, an exponential growth is maybe slow at first and then very, very powerful over time.”

* “I cover a few in Ametek and IDEXX, which do niche, industrial applications, Ingersoll, Rand. I think there's going to be a wonderful compounder over time that has a great system. So it's huge value creation and it's steady and it's repeatable.”

* “And that's part of the idea of the book. We know what happens after innovation matures, you know, fades, it's culture, execution, and some of these things we've been talking about. So the answer is there's amazingly fruitful avenues for capital deployment. Cause not everybody has gotten these lessons and the lessons sounds simple, but they're not easy to execute always consistently.”

* [40] Question: Evaluating compounders early on.

* “There are companies that put up what he called a movie set. You know, it looks like lean. It looks like, you know a functioning system.

And obviously they're trying, it's not meant to be, but it's not there.”

* “You watch those metrics very closely. You see the steadiness, another answer to your question is what's the input, you know, so, you know, what are the daily management processes that you're doing? What are the daily cultural attributes of your company that are, that are there, right?”

* [43] Question: Examples where it doesn’t work?

* “Illinois tool works had a decentralized system. … And in roughly 2006, seven, they had, I think 550 business units. And the idea was, you know, every business units can do a deal every year or every four years or whatever, and we'll compound it in a way, right. … I actually did a note that I didn't publish. That was one of my best notes ever, and I didn't publish it because I went back. I was like, all right, let's show how … each of those little divisions can do a deal every year and how that can drive compounding growth. I did the analysis and it looked like, well, gosh, actually it looks like they do a couple of big deals here and there.”

* [46] Question: Value of CFOs.

* “Sometimes we think a high-quality CFO can be, you know, under-priced in some ways. … we found that the CFO role can be going to be dramatically important.”

* [49] Question: Managing relationships with companies.

* “If you're an analyst and your job is to not just say, okay, that looks good, you know, but to actually create some value. There can be a desire to say something interesting, intriguing, provoking, different, right. To push them. And when that's done best, it's, you know, you're right. But I've spoken of arrogance before. I mean if you're covering Caterpillar and you have toured seven factories, but that's not that many, do you really say their production system is totally hosed? You know, is that right? Would that have been the right call for me?”

* [52] Question: Smooth vs. volatile earnings.

* “The CFO of Danaher's gave us this, the lesson, like, how do you think about volatile business as well? Let's say you buy something and revenues fall 20% and you apply all these fixes and you're, you know, you're applying maybe fixes for a down cycle. It'd be different for a steady business. And eventually you, you know, you get it back up and revenues, bounce back cause they're cyclical. And then now they're at 110% of where they were the effort and the lost time and compounding that you've lost during those two years of down cycle. Versus if it had just grown five percentage and you improve everything and then you've created cashflow and you can compound it. You've lost time and you've lost energy. … I think Warren Buffett has said, I'd rather have a, I don't want to misquote, a volatile 25% return than a steady 10. I think Danaher might say, well, we can do a lot with a steady 10. You know, we can sort of crank that through and compound it, whereas a volatile 20 or a volatile 15 or whatever the break point would be less valuable.”

* [52] Question: Evaluating long-term investments and R&D.

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I’m very excited to share my conversation with Rob Wertheimer of Melius Research and one of the co-authors of Lessons from the Titans (my notes)

I really enjoyed digging into the book’s big themes around the culture, business systems, and leadership of some of the most successful industrial companies. Rob shared his lessons on finding other compounders, evaluating leaders, digging into incentive structures, touring factories, and the best research note he ever wrote - but never published.

Show notes, quotes, and transcript on neckar.substack.com.

“You know, my job is a tricky one. You have to be arrogant enough to have an opinion, and humble enough to know you're probably wrong most of the time.”

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.frederikjournals.com/subscribe