Page 2 Welcome to Graham & Doddsville

We are pleased to bring ing, and management you the 41th edition of quality and capital allo- Graham & Doddsville. This cation. Mr. Kidd discuss- student-led investment es his early experiences publication of Columbia with the semiconductor Business School (CBS) is industry, which shaped co-sponsored by the Heil- his unique and successful brunn Center for Graham long-term approach to & Dodd Investing and the investing. Columbia Student Invest- ment Management Asso- We continue to bring you Meredith Trivedi, Man- ciation (CSIMA). stock pitches from cur- aging Director of the Heil- rent CBS students. In brunn Center. Meredith We first interviewed Ar- this issue, we feature leads the Center, cultivat- thur Young, portfolio three contest-winning ing strong relationships manager and co-founder pitches. Amitaabh Sahai with some of the world´s of Tensile Capital Manage- ('21) shares his long idea most experienced value ment. We discussed Mr. on DXC Technology investors and creating numerous learning oppor- Young’s investing princi- (DXC). Will Husic (‘22), tunities for students inter- ples and founding of Ten- Harrison Liftman (‘22), ested in value investing. sile, his approach to gen- and Cathy Yao (‘22) eralist value investing, share their buy thesis on idea generation, and Ten- Live Nation (LYV) as an sile’s unique blend of pub- attractive covid-19 re- lic and private investing. covery idea. Finally, Na- Mr. Young also shares his than Shapiro ('22), Le- views on the attractive vente Merczel ('22), Kyle aspects of investing in Heck ('22), Kirk Mahoney software businesses. ('22), and Vineet Ahuja ('21) share their long Next, we interviewed thesis on RealPage (RP). John Huber, Managing Partner and founder of Lastly, you can find more Saber Capital Manage- interviews on the Value ment. Mr. Huber shares Investing with Legends his early experiences with podcast, hosted by Pro- investing, his decision to fessor Tano Santos. Pro- start Saber, and the evo- fessor Santos has recent- Professor Tano Santos, lution of his investment ly conducted interviews the Faculty Director of the style. Mr. Huber is a very with guests including Heilbrunn Center. The thoughtful investor whose Howard Marks, Jan Hum- Center sponsors the Value firm is modeled after the mel, Mohnish Pabrai, Sa- Investing Program, a rig- original Buffett Partner- mantha Greenberg, and orous academic curricu- ship fee structure. His David Marcus. lum for particularly com- thoughts on business mitted students that is taught by some of the quality, portfolio construc- We thank our interview- industry´s best practition- tion, and developing as an ees for contributing their ers. The classes spon- investor are excellent. time and insights not sored by the Heilbrunn only to us, but to the Center are among the Lastly, we interviewed whole investing commu- most heavily demanded Wilmot Kidd and John nity. and highly rated classes Hill of Central Securities. at Columbia Business Central is a closed-end G&Dsville Editors School. fund that’s operated since October 1929. We dis- cussed the evolution of markets during Mr. Kidd’s long career, the im- portance of taking a long- term approach to invest-

Volume I, IssuePage 23 Page 3

SAVE THE DATE

The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School presents

THE 12TH ANNUAL From Graham to Buffett and Beyond OMAHA DINNER

Date: TBD

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The annual From Graham to Buffett and Beyond event is generously sponsored by:

For inquiries, please contact: [email protected] Page 4 Arthur Young, Tensile Capital Management

Arthur Young is the attending or auditing conviction. But I think Portfolio Manager of business school classes most importantly as a Tensile Capital at Haas, than learning litigator, you learn to Management, a firm the law school case respect both sides of an he co-founded in studies. argument. As a lawyer, 2012. Tensile employs it's plaintiff versus an opportunistic value Armed with a law degree defendant. As an approach to investing but also a hefty student investor, it's the bull in the public markets, loan balance, I was case versus the bear managing a fortunate to land an offer case. And whether concentrated portfolio from a well-regarded you're on the long side and working closely firm in my hometown of or the short side, you with management Miami. I learned and should respect both. teams to enhance developed some critical shareholder skills working as a “As a litigator, you Arthur Young, value. Tensile also securities and makes select private commercial litigator that learn to respect both Tensile Capital investments. helped me down the Management road as an investor. sides of an argument. Editor’s Note: This Because you come in As a lawyer, it's interview took place after the problem has on January 6th, 2021. manifested itself in some plaintiff versus form or fashion, you defendant. As an Graham & Doddsville learn a lot about the (G&D): Can you start by consequences of certain investor, it's the bull telling us about your decisions, how the background and how you sequencing of events case versus the bear got into investing? can impact an outcome, case. And whether and ultimately, how Arthur Young (AY): things can go wrong. you're on the long From an early age, I've always been intrigued by You also recognize the side or the short side, numbers, puzzles, importance of gathering you should respect problem solving, and your own facts and game theory. And if you evidence, as you will, to both.” think about it, that's support your case. what investing boils Hearsay doesn't cut it, All that said, being a down to ultimately. It's a so if you think about commercial and complex interplay of what we do as investors securities litigator these elements along in gathering primary doesn't exactly lead to with judgment, research, which our Fidelity knocking on your experience, and process is very heavily door offering you a job. humility. And although I dependent on, that's Fortunately, after paying majored in economics incredibly important. off my student loans and and studied markets starting to look for extensively in college, I Of course, the skills you opportunities, right actually went to law develop in taking around that time school at Berkeley. depositions and cross- McKinsey announced The education, rigor, and examining witnesses that they were opening a structure that I learned come in handy when you Miami office and ramping there had a profound interview management up their efforts to recruit impact on how I analyze teams, competitors and non-MBA graduates. At issues. But it was really experts. You're trained McKinsey, I was able to during that time in law to listen to certain words learn the nuts and bolts school that I realized and read body language. of businesses and how to that my passion was in You learn to identify work with senior investing. I probably when management management teams. spent more time reading teams are being evasive. the Wall Street Journal And you also learn when Shortly after I was and Barron’s, and they have true (Continued on page 5) Page 5 Arthur Young, Tensile Capital Management

promoted at McKinsey, the ideal partner from a are a lot of different Fir Tree Partners, “devil’s advocate” ways to look at founded by Jeff perspective, given his companies, to look at Tannenbaum, opened an experience and natural different securities office in Miami. I was the skepticism. Blum was throughout the capital first, and really only hire also where I joined a structure, to be creative in the Miami office public company board, in your due diligence, during my two years JDA Software – which and to be persistently there, which allowed me was instrumental to my Socratic about every to work side-by-side development in position that you own. At with the late Andrew understanding the Blavin, it was a focus on Fredman, who was importance of corporate deep value and actually a Columbia governance and learning concentration. And at MBA; I believe he was about enterprise Blum, I furthered my one of the best, under- software. recognition of the power the-radar investors of of working with our generation. His G&D: What are the management teams and energy, bandwidth, and principles behind the boards. Thus, when you ability to just distill a origin of Tensile Capital, think about Tensile complicated investment and what kind of value today, we do all of thesis into two sentences investing approach do those, and none of them was amazing. Under his you take? are mutually exclusive. tutelage, I learned to do It's really a value everything from capital AY: Doug and I felt that orientation we call structure arbitrage, to we could combine the opportunistic value, distressed debt best of our shared and combined with investing, to short individual experiences in concentration – and in selling. forming Tensile Capital certain instances, in 2012, and that's really working with Subsequently, I went to the opportunity to invest management teams and a firm, Blavin & Co., on behalf of like-minded boards to drive where I learned the investors and institutions shareholder value. power of concentration in an opportunistic and and truly deep value selective fashion over a investing. long-term horizon. At “It's really a value Afterwards, I led the Tensile, we have two public equity investing classes in our fund – a orientation we call effort at Blum Capital, public-only class and a where I was able to hybrid class, where we opportunistic value, hone my skills in invest in both public and combined with working with illiquid securities. While management teams and the hybrid class’s concentration – and boards in a collaborative commitment is longer – manner to drive seven years versus one in certain instances, shareholder value. One year for the public only – working with of the best things about the strategy and time my experience at Blum horizon for investing is management teams Capital was working with ultimately the same. and boards to drive my now partner and co- founder of Tensile At Tensile, we have shareholder value.” Capital, Doug Dossey, incorporated a lot of the who leads our private things that I've been equity investing at fortunate enough to Tensile. Doug's ability to have learned at my prior G&D: Do you think the negotiate, work with firms and combined that generalist approach is management teams, and with our ownership better than a specialist create win-wins was mentality. Going back to approach? How have you instrumental to our Fir Tree, it's really woven that into Tensile? success at Blum and at casting a wide net and Tensile as well. He’s also understanding that there (Continued on page 6) Page 6 Arthur Young, Tensile Capital Management

AY: In certain areas, value investor, you can advantages to being a particularly regulated appreciate a software generalist, but we also industries, you’d be at a company growing “only” recognize that there are material disadvantage if 10% organic top-line others where it's a you weren’t a specialist. with “only” 30% EBITDA disadvantage. The advantage of being margins and very low a generalist, which is capital intensity – to a G&D: Can you talk to us how we think about generalist that financial about how you approach ourselves, is you can profile is amazing. If idea generation and apply a disciplined you're a technology or sourcing? Given that you absolute value approach, software-only investor, have a relatively lean and you can come at a you’re oftentimes team, how do you problem with a seeking 40%+ growth ensure that you're perspective or proposed and not worrying about allocating your time to solution that the person profitability. Situations the names that really who's deep in the weeds like that enable you to have a chance at making can’t necessarily see cross pollinate not only it into the portfolio? because they're so your research process focused on that but also your ability to AY: Given our particular sector. identify opportunities concentrated strategy, and calibrate them we're really looking for “The advantage of against a broader set. the three to four best ideas a year. Therefore, being a generalist, One of the few industries the strategy necessitates which is how we think we do not invest in is an even more discerning healthcare. And the and disciplined eye, and about ourselves, is you reason is that every thus, we cast a pretty three or four years, we wide net. can apply a disciplined see a healthcare We've reviewed and absolute value company that looks back-tested our cheap. We spend a day performance, and we've approach, and you can or two on it, and then done a pretty good job we realize that given in avoiding errors of come at a problem how complicated the commission. But of with a perspective or regulatory framework is course, we came up with around healthcare, as several instances of proposed solution that well as the fact that passes in situations that the person who's deep we're competing against probably warranted healthcare investors who more work. in the weeds can’t are between 50% to And part of that is a 100% focused on that necessary byproduct of necessarily see sector, we’re really going our philosophy – because they're so way beyond our circle of avoiding the permanent competency. We have impairment of capital as focused on that invested a small amount a starting point. At the in companies that have a same time, you also particular sector.” recurring revenue have to acknowledge stream from their that we've been in a bull In addition, industries technology sales into market going on 11 are always evolving, so healthcare but aren’t years now, and you you may look at one subject to the same wouldn't want to over- industry today that was regulatory risks. extrapolate what's where another one was happened. five to ten years ago, We also don't do early and be able to apply stage technology for the We generate ideas from what you learned there same reason. And so a plethora of sources – as a framework. that's how we think industry contacts, about being a generalist. newsletters, investment One example would be There are areas where clubs, screenings. We software. As a generalist we think there are (Continued on page 7) Page 7 Arthur Young, Tensile Capital Management

also generate ideas from valuation screen, AY: I'm fortunate to our LP base, which combined with a view on work with a very consists of several quality of business, talented analyst team former CEOs with whom probably eliminates 90% and a former we've invested behind, of the ideas where we investigative journalist – former business partners take a first pass. In the Shelley Neumeier – with and other investors. We initial screen we're whom I've worked for will occasionally actually looking for nearly 20 years. generate ideas from our reasons not to own it Notably, if you were to private equity practice rather than to own it. If look at our investment and network. you think about it, our team’s backgrounds, most precious asset is you'd find them to be Finally, given that we our time, and we're pretty nontraditional and have an experienced constantly asking very diverse, and that's analyst team, we've also ourselves throughout our purposeful because of developed an informal process, "Does it merit how dependent our list of 200 to 250 more work?" And what is process is on companies that we're our ROIT (return on fundamental, primary, constantly monitoring. invested time)? “gumshoe” research. We Generally, we focus on Once we believe that the have people with small to mid-cap company is potentially backgrounds as companies in North ownable based on management America, but we also valuation and a high consultants, invest in other countries level view of the quality accountants, lawyers, where we can find of business, we utilize a bankers and companies that are multistage process for investigative journalists. similar to the types of diligence really focused So we're confident that if companies that we'd on the value of the we can focus on an idea invest in in North product to the customer. at the outset that may America. First, these meet our criteria, then foreign companies would “In the initial screen we can do a very good need to have a high job researching the return on invested we're actually company. capital, structural looking for reasons competitive advantages, and a solid management not to own it rather The first stage of team. Second, we would diligence is really need to be able to than to own it. If you focused on determining whether we believe a conduct the type of due think about it, our diligence on the margin of safety against company as we would on most precious asset is permanent capital one in North America. impairment exists. And Third, the company our time, and we're this process starts with a detailed source would need to be trading constantly asking at a substantial discount document review which to a similar company in ourselves throughout begins with SEC filings – North America. we're pretty old school Our main focus when we our process, "Does it there. It then evolves start is valuation with an merit more work?" into reviewing company emphasis on the transcripts, earnings downside case. And at And what is our ROIT releases, presentations, the same time, in industry research and parallel, a dive on the (return on invested trade journals, management team not time)?” conducting calls and only on their meetings with the senior backgrounds, but also on management team, and G&D: Can you walk us interviewing customers, their incentives, through your diligence motivations, and competitors, business process from idea partners, and industry ultimate aspirations. In generation all the way to this market, the capital deployment? (Continued on page 8) Page 8 Arthur Young, Tensile Capital Management

experts. We also start stage, there are doing background checks “We probably reject instances where we'll on the second layer of more ideas because retain industry experts, management, and we'll attend user researching the board of we realize that the conferences and industry directors and corporate trade shows. We really governance, and steps necessary to dig into any thoughts ascertaining the validity gain conviction for a that former employees of the short case. may have regarding the core position are company and the industry. We'll start our We’ll also do product going to be very own surveys or focus demos and embark on difficult, if not groups. Existential risks store and facility visits. are tough to diligence, And then of course we'll impossible to but at the same time, build a relatively high- it's something you have level financial model of diligence, and the to be aware of. And the subject company to company is just not a hence, we do spend a sanity test a bear, base decent amount of time and bull case, based on fit within our circle of researching regulatory the unit economics of and legal issues as well. the business. The competency, more Furthermore, to the granular model comes than a belief that the extent we identify later in the process. potential ways that we company is a short can create long-term, enduring shareholder This phase of our opportunity.” value, we begin to research typically takes explore these avenues anywhere from a few Over the past few years as well. weeks to a few months. we’ve often thought that And along that spectrum things were a little too of time, it usually expensive, but given G&D: Can you talk more concludes with a where interest rates about the role that decision to move forward have gone and given the Shelley Neumeier, the or reject the investment market in general, we Director of Research who idea outright. In looking could respect the was formerly an back at our early-stage contrary argument – and investigative journalist, memos, we probably so we document those plays in the diligence reject more ideas findings in a short process? because we realize that internal memo. the steps necessary to gain conviction for a core AY: Every analyst, position are going to be If we’re revisiting a myself included, has a very difficult, if not company from our watch bias. To deny that you impossible to diligence, list and we’re have a bias means and the company is just considering whether to you're flying blind. And not a fit within our circle make it a starter position Shelley and our other of competency, more because it's hit a certain investigative journalist's than a belief that the price, we really immerse role is to help mitigate company is a short ourselves in further due that bias. She does not opportunity. diligence and analyses really get involved in that are tailored to the developing the initial specific situation. investment thesis or the Ultimately, we may modeling, but instead, initiate a starter she helps us “prosecute” position, which is usually In addition to reviewing our thesis. She is a 1% to 2% position, additional documents, instrumental in while conducting further we'll build a much more researching issues that due diligence—or we granular model. We'll could undermine our could place the company conduct a lot more store on our watch list. and facility visits. At that (Continued on page 9) Page 9 Arthur Young, Tensile Capital Management

entire thesis, without a How do you judge become more significant. bias, because she's not management teams and So we found people with influenced by the determine if they are whom he knew or weighting of the people you want to worked, going back to different parts of our back? high school, and learned investment thesis, per about him as a person. se. We learned through AY: I’m not sure that it talking to those people has helped assess and others that he had We have a great deal of someone’s character so started at the bottom respect for the training much as identify and had worked his way that journalists undergo. inconsistencies or holes up the corporate ladder, They are very open- in a statement or step-by-step. If minded, curious, and are projection that gives you anything, his father-in- not afraid to pick up the pause. You're never law probably made it phone – rejection does going to have a 100% harder on him and gave not phase them. They hit rate, and you have to him an appreciation for know how to ask the acknowledge that you're the culture of the right follow-up ultimately making a bet company. questions. They know on your perception of how to read people. And that person. We also that experience is critical tend to invest in And so that type of to the way we invest. businesses that do not research is not going to necessarily need the make your investment, best CEOs to make the and you don't “We have a great deal investment work. necessarily invest Having said that, because that is your of respect for the reference checks and an primary thesis, but it does give you a little training that understanding of the company’s culture are confidence in thinking journalists undergo. crucial. For instance, about how the person there was a company we will act in difficult They are very open- were researching that situations. Are you really prepared to have him minded, curious, and had a Chief Information Officer who happened to steward $50 million to are not afraid to pick be the son-in-law of the $100 million of your CEO. Shortly after we investors' capital for up the phone – invested, the CIO was you? rejection does not promoted to CEO – so obviously, that begged In addition to reference phase them. They questions about checks, we also like to nepotism. know how to ask the focus on the report card rather than the student, right follow-up Fortunately, we had met i.e., the track record in questions. They know him previously while he terms of creating was the CIO during a shareholder value, how to read people. product demonstration profitable revenue growth, capital And that experience is at the headquarters, and were impressed by his allocation, and stock critical to the way we knowledge of the price performance, as business well beyond well as secondary invest.” just the technology. metrics such as Nonetheless, though we customer satisfaction, had a file and notes on employee turnover, him, in researching his safety, etc – all those G&D: You mentioned metrics that you would your law background has background, we had to “re-underwrite” him, look for that you would helped you develop your say are indicators of an ability to assess because obviously his someone’s character. role had changed and (Continued on page 10) Page 10 Arthur Young, Tensile Capital Management

effective management first researching a But in terms of making it team or CEO and CFO company and reach a a core position, it's really that has built a great preliminary conclusion an iterative process. culture. That's actually that it’s a good business Businesses are dynamic the easy part. I think the with a great value and face new challenges difficult part, is really proposition to the every day. In managing when you're sitting customer, trading at a a concentrated portfolio, across the table from significant discount to we have both the benefit him or her, asking the intrinsic value, we will and the responsibility of right follow-up often put on a starter knowing our companies questions, trying to think position. And the way we very well. And as a through why he/she think about it is: just result, we are always answered a question a because you're utilizing looking at where it's certain way and trying to a private equity trading on an absolute understand the approach—investing for and relative basis. That competency and motives the long term and in a doesn't mean we just sit of the CEO and CFO. concentrated fashion— in front of our screens, Every time we leave a doesn't mean that you but we're very much meeting and we say, shouldn't avail aware of the valuation "Wow. That was a really yourselves of the multiples. good meeting. The CEO's advantages of the public markets. great," we take a step Therefore, in terms of back, and we remind If you like a stock you increasing a position ourselves, "If the CEO can just buy it. And so from a starter to a core didn't sound great, he or we'll trade around the position, our confidence she wouldn't be the edges of certain in the thesis and in the CEO." There's a reason positions and initiate a downside protection at why that person is the position where we're the beginning will dictate CEO, and so we go back expressing a view that how aggressive we are to the report card – can't necessarily be going into the position. you're balancing the found in our current In this market, obviously report card against your portfolio, or where focusing more on the assessment of the there's a near term upside has generated person. catalyst. better returns, but as “Just because you're value investors, we want G&D: Once you decide to sleep at night, you like a certain utilizing a private understand the downside and make sure that the company, how do you equity approach— determine how large of a position is protected. position to take and how investing for the long long the hold period is? term and in a We'll scale up when And how it fits in relative there's a material to the other ideas that concentrated positive change to our you have? thesis, or when there's a fashion—doesn't price dislocation AY: Typically eight to mean that you whereby the discount to twelve positions intrinsic value is comprise up to 90% of shouldn't avail substantially greater than when we initiated our invested capital, and yourselves of the we look at every the position. Selling is investment on at least a advantages of the the exact mirror three-to-five-year time opposite of that in most horizon. public markets. If you cases. like a stock you can At the same time, we just buy it.” G&D: How you think have starter positions, about cash in the portfolio? How does that which are usually 1% to 3%. And so when we're (Continued on page 11) Page 11 Arthur Young, Tensile Capital Management

play into portfolio and you'll trim it back? For example, a couple management? Are you years ago, Crown always fully invested or Holdings, a leading do you scale cash up or AY: That's a great beverage and food can down based on where problem to have! We manufacturer, went out you think you are in the limit ourselves to 15% of and acquired a cycle? cost for any one transportation packaging position. We wouldn't company, Signode, have a problem if it which was arguably a AY: We view cash as more than doubled, pretty cyclical company. both a hedge and as a particularly if something weapon. As absolute in the fundamentals has return investors, we changed for the positive. The existing shareholder judge our performance base was outraged on a security-by-security because it was contrary basis, on return on So, we don't have hard to their purpose for invested capital. And so, and strict rules. But, holding Crown – most ideally, we'd probably that's where we'd people who owned have a 5% cash position, probably say: even Crown Holdings at that because we don't use though it's really time did so because it leverage either – that's attractive, let's consider was a defensive, non- another consideration. if it's becoming a little cyclical stock. Beverage overweight here and cans basically grow in- either trim it or hedge it, line with GDP. We've been as high as subject of course to the 20 to 25% but reason why the stock ultimately, our cash has appreciated. We've We looked at it and said, balance has not been a never run into those "Well, if I was a reflection of our view of limits to date at Tensile. shareholder, the first the market per se, but There are instances thing I'd ask is why did rather just our bottoms- where it has run up well they do it." I could agree up view of a current beyond our estimate of or disagree. But the situation or company. intrinsic value and we'll second thing we looked The luxury we have of sell it during that rally. at was the valuation, being long term and what happened was investors with committed the market cap collapsed capital is that we can G&D: Let's say you've to a point where you look for those held onto an investment could actually buy the investments we think for a year or two and stock of Crown Holdings that are going to double there's a new and create the over the next three to development that is acquisition that they just five years, even though pretty contrary to your made for half the there might be original thesis, but multiple that they had significant volatility in maybe there's other paid. In addition there between. points that have paid off were secular trends, that you didn't consider such as sustainability or something else that and a favorable supply/ We like to be went right. How do you demand imbalance, opportunistic with our think about events that which we felt were being cash and though it has are very contrary to your overlooked due to the diluted our returns since thesis with regards to angst around the deal. inception, we believe selling out?

that it is a good risk management tool. We feel fortunate in that AY: It's very situation we haven't had too specific, and as always, many surprises like that. G&D: Is there a certain we think about it in the We've had some positive threshold at which a well context of valuation. developments over time. -performing company How contrary the events For example, our becomes too big a are to your thesis may portion of the portfolio be a matter of degree. (Continued on page 12) Page 12 Arthur Young, Tensile Capital Management

investment in Euronext, unexpected development struck by the power of a pan-European does impair your thesis, the business model—and exchange group with the action itself may not mainly the fact that the operations in 16 be what undermined customer relationship countries. When we first your investment thesis. and high switching cost invested in 2014, the It was your assessment of the product for a thesis was largely of the management mission critical software predicated on an off-the- team. company is ultimately run, under-the-radar the asset. “Thesis creep is a spinoff that would benefit as an matter of degree and independent entity in We've invested in driving margins through something that we’re several software cost-cutting and other companies over the last efficiencies. Since then, hypervigilant about… decade. Though we've had a few that would be the company has Ultimately, if an demonstrated an considered high-flying aptitude for expanding unexpected SaaS companies, we've its platform via really had three eras of acquisitions and has development does investing in software. consistently delivered impair your thesis, synergies above I'll start with what I call expectations. the action itself may our 1.0 strategy in not be what software. These were In terms of facing companies that were developments that are undermined your simply great businesses, really contrary to our investment thesis. It not ascribed proper theses, we want to multiples, and were approach management was your assessment dislocated for one reason with a very open mind or another. We invested and hear their rationale, of the management in two of them at my while also wearing that team.” prior firm: Tyler prosecutorial hat. And I Technologies, which think the times where an drew down due to an unexpected development G&D: Can you talk analyst’s prediction of a resulted in us selling about your views on looming municipal bond were more because we software investing? crisis, and JDA Software, didn't believe the which was hit with a jury management team. verdict for damages AY: I started studying equivalent to nearly software around 2009. twenty percent of their Thesis creep is a matter At the time, it didn't fall market cap. under the traditional of degree and something that we’re hypervigilant value bucket due both to about. At the same time, the stigma around The next iteration of if we have invested in a technology in the value that, our 2.0 strategy, company after the investing world, as well was around the 2012 to amount of research as accounting 2015 timeframe. That's we've done on both the conventions that didn’t when we found many company’s strategy and really express the companies that were management team, we efficacy and scalability of growing 30% a year and do want to give them a the business. spending a ton of money little leeway in on marketing, suddenly hitting a wall in growth. explaining why an After spending months acquisition makes sense, studying software They were growing why they decided to companies, largely by “only” 12 to 15% a year. divest a certain division, interviewing several Despite the slowdowns, or why they entered into people in the software often these management a certain partnership. ecosystem, I was really Ultimately, if an (Continued on page 13) Page 13 Arthur Young, Tensile Capital Management

teams would continue included Informatica. unpenetrated TAM, and plowing money into S&M was continuing to widen and R&D with no real its moat by leveraging return, trying to grasp at Our software 3.0 its content base and vast what had become an strategy started in 2014. network of partner ephemeral 30% growth Obviously, there's a little integrations. overlap with 2.0, but our rate. Oftentimes that growth isn't realistically 3.0 strategy is based on achievable due to transitions from a We initiated our position competition, a shrinking perpetual license model shortly after the IPO due TAM or a simple law of to a subscription model to two things. First, large numbers. Also, by as well as long-term there was a short report proving out a market, a compounders. Examples that came out that led to company may not be of the former include a drawdown in the stock. able to quite capitalize Aveva, PTC and more Second, the Supreme on that first mover recently, Software AG. Court issued a ruling, advantage since it When you successfully South Dakota v. Wayfair, actually attracts more execute that transition, which basically redefined experienced and better- the economic value of the term “economic capitalized competition. this recurring revenue nexus”. The decision stream is tremendous. overturned a 1992 ruling, Quill v. North “By proving out a Dakota, thereby G&D: Can you walk us effectively enabling market, a company through an example of a states to collect income high conviction software may not be able to tax from out-of-state idea? sellers. quite capitalize on that first mover AY: Sure, let’s talk Prior to the Wayfair about Avalara, which is decision, if a company advantage since it currently our largest was selling online to holding. Avalara actually attracts more residents in 45 states essentially solves the with headquarters in experienced and better problem of tax collection Washington and only and remittance for small one distribution center in -capitalized and medium businesses Nevada, the company competition.” through software and only had to file and pay automation. We see it as sales tax in those two more of a service states, because Quill had In this case, as a value business than a effectively defined investor, you're seeing technology business. economic nexus as a zero profitability, and as Though they started in a physical presence. But a high growth software specific niche – sales tax Wayfair redefined that investor you see the calculation – the and said a state can ultimate death knell in company is now actually collect taxes your framework – positioning itself to be a from an out-of-state slowing growth. So these full-blown platform for seller, regardless of a “orphaned” software compliance across the physical presence, based stocks fit neither the globe. on a reasonable growth nor the economic threshold, traditional value whether it's the number We studied Avalara pre- investing bucket. But a of transactions or the IPO and were impressed lot of these companies dollars. In fact, in by the fact that the could easily get to 30 to delivering the majority company addressed the 40% cash flow margins opinion, Justice Kennedy increasing need for mid- and maintain up to 12 to even referenced market businesses to 15% growth, which is a software as a practical automate transaction tax terrific business, so that difference between was really our software compliance, had a large, 2.0 strategy, which addressable and (Continued on page 14) Page 14 Arthur Young, Tensile Capital Management

today and 1992, when they were ultimately that it's a very high Quill was issued. competing with paper- gross margin business So once we saw that based systems. with a very sticky occur, we realized that And so, from a downside product and a large and this was going to perspective, we were underpenetrated TAM. exponentially expand the very comfortable We did a lot of work company’s TAM over initiating our position at calling different several years due to the about $30 a share. It's departments of revenue time it would take for run up substantially and around the country, states to roll out we've done some attending sales tax programs and implement portfolio management conferences, and enforcement. At the around the position, but immersing ourselves in extreme, you would we think it's one of these this ecosystem of sales have a company that compounders that's tax accountants and originally only had to file going to be here for the compliance experts. As a in one state eventually next decade and result, we felt that this having to file in every continue to grow over management team was state that calculates 25% for the foreseeable making the right move sales tax. future. in reinvesting every dollar in sales and marketing, and R&D, In addition, shortly after given it was essentially a investing, founder Scott “As a margin of land grab. McFarlane hired three pedigreed and safety, the company’s As value investors, we experienced senior retention rate was in executives. With founder looked at the company -led software companies the high 90s due to and thought about their you often have a founder sales and marketing and and core team that grew the mission critical R&D as essentially growth capex given the the company to 250 nature of the million in revenues. But high switching cost and as a company tries to software and the value to the customer. scale up to a billion in Essentially their revenues, it needs a difficulty in switching investment capital sat on the income statement different skill set. A as they were founder (and the board) rather than the balance isn't likely to replace ultimately competing sheet. himself or herself, but with paper-based you'd at least want him/ And so, as we got her to hire great people, systems.” comfortable with the and that's what Scott product, we surmised (CEO & Co-Founder) did. that we have a company G&D: With a company that three to four years So, because of that, we like that, that still has from now should do felt that the company plenty of runway left $600 million of revenue, had a much longer trading at >20x NTM and it could continue to runway, and they were revenue, how do you grow at ~30%. With a really planning for the think about valuation? lot of favorable tailwinds, long-term and an even How many years out are even if they choose not greater opportunity you looking? to aggressively spend to grow 30%, they could going well beyond sales tax. As a margin of grow 15% and given the safety, the company’s AY: There's certainly a high gross margin – retention rate was in the difference between which incidentally should high 90s due to the Avalara today and when improve due to the mission critical nature of we first bought the integration of an AI the software and the stock. When we first company that they had difficulty in switching as looked at the company, we focused on the fact (Continued on page 15) Page 15 Arthur Young, Tensile Capital Management

acquired – print 40 to on what we think the done as much work on 45% cash flow margins company should earn or Avalara as any company almost in perpetuity. It what type of free cash in our portfolio, and was a no-brainer, flow they should we've had plenty of valuation wise. generate if they were interaction with the growing at various rates, senior management. But i.e. what should the at the same time, we’re Now, in terms of where multiple be if they chose pleased to watch them it sits today, it is to turn off that growth execute their plan absolutely more spigot. Again, we look against that long runway expensive. Part of the at it on a three to five they have ahead of multiple expansion is year horizon and we them. justified because they've think it will continue to actually grown faster generate a solid IRR than they've guided, but over that period. G&D: Can you walk us more importantly, through a non-software they've really expanded name in your portfolio? their TAM and they’ve G&D: Does Tensile do also made a couple very any sort of constructive good acquisitions, as activism with Avalara AY: Sure. Valvoline was they position themselves given that you own a a spinoff from Ashland in to be the leading multi- sizable minority 2016 and would fall product compliance as a position? under more of the traditional value bucket. service platform. They’ve not only increased the Today, it's trading at number of integration AY: Avalara's an around the same price at partners, but they’re example of how we are which it spunoff, despite starting to go up-market selective in our what we think has been to the enterprise space, approach, as there's terrific operating while also expanding really no reason to do so performance. It's into other types of in this case. The headquartered in compliance such as management team's Lexington, Kentucky, insurance tax, done exactly what we and does over $2.4 certificates and e- would want them to, as billion in annual sales invoicing, and they proactively went with a 20% adjusted internationally as well. out and made senior EBITDA margin. It has a management hires in market cap of anticipation of approximately $4.3 Their profitability from a opportunities, reinvested billion. The company long-term perspective in the company and trades today at will be greater than we expanded into adjacent approximately 9x originally modeled, and markets that are forward EBITDA and 14x their white space is synergistic and earnings. wider than we first accretive. The way their looked at it. And so, as strategy has evolved we sit here today, it completely makes sense Now, when you think of looks like it’s trading at to us. I remember a Valvoline, you think of 15x FY2022 revenue (2 conversation with Scott the brand that you see years out) which is still (CEO & Co-founder) a on TV, in stores such as expensive in vacuum. few years ago where I Walmart and Advanced But in a high growth said, "I'd probably sell Auto Parts, and now the company like this – half the companies in DieHard battery with where the market our portfolio if I could Bruce Willis. But the opportunity is virtually get a 50% premium on crown jewel of the assured – you're buying them tomorrow. But if a business and what our down that multiple, and PE firm or strategic came thesis is predicated on is while we use EV / in tomorrow and offered the quick lubes business, EBITDA – Capex and a 50% premium on or VIOC (Valvoline EV / FCF for all of our Avalara, we would not Instant Oil Change). companies, we also want you to take that make adjustments based deal." We've probably (Continued on page 16) Page 16 Arthur Young, Tensile Capital Management

We're fortunate to be with about 30% cash retail”. Typical growth able to study these IRR, and we estimate 4- retail peers trade at businesses via our wall EBITDAR margins about 21x EBITDA, with private equity network start in the low-twenties. an EBITDA margin of given the sheer amount ~18% and same store of mom and pop sales growth of ~12%. Now since the IPO, businesses that are involved (most of them they've had a revenue are privately held). CAGR of 15% and So you have this terrific they've added over 400 business that's buried stores. We believe within Valvoline today. “We're fortunate to be there's a lot of runway The question is how do able to study these as well despite the you catalyze the value? obvious and looming Even though there are businesses via our threat of EVs. In the synergies, you could spin United States, there's off or sell Core North private equity about 450 million DIFM, America to highlight the network given the or “do it for me” oil value of VIOC. You could changes per year—VIOC also focus more on sheer amount of mom is number two, but they franchising, rather than still only have a 4% owning, the VIOC stores. and pop businesses market share, so it’s a Moreover, Driven Brands that are involved very fragmented market. just recently IPO’d. Driven Brands’s numbers (most of them are are not as good as When you put it all Valvoline Instant Oil privately held).” together, we believe it Change—lower comp compares very favorably stores sales and lower to retailers that trade at margins and VIOC The VIOC business is significant premiums to outperformed Driven approaching 50% of the the implied multiple of Brands during COVID. company’s EBITDA. The VIOC. Auto retail peers However Driven Brands company entered this such as O'Reilly or is currently trading at business in 1985 and AutoZone, comp at low >20x PF EBITDA. And today services about 18 to mid single digits with thus, the IPO and million customer visits 17 to 22% margins, resulting increased per year across its 1,500 while VIOC comps in the coverage should stores. When VIOC was high single digits with highlight the significant buried within Ashland, higher margins. While discount to intrinsic they hardly grew it, the entire Valvoline value at which Valvoline despite the fact that it company trades at 9x, is trading. was a really good even if you ascribe a 6 business. VIOC has to 7x multiple to the never had a down year other cash cow business The other reason why it in same-store sales: lines, the Core North trades where it does is they did 4.4% in 2008, America and due to sell-side 6.8% in 2009 and they International segments coverage. You have did 2.3% this past fiscal which produce and analysts whose primary year, even with COVID. distribute the Valvoline sector coverage range oil brand, the VIOC from hardline retail to segment is very cheap. chemicals to consumer A VIOC box has terrific packaged goods unit economics—it does companies to auto retail. over 45 transactions a But you could go further I've never seen such a day with an average and say, "Well, their hodgepodge of analyst ticket around $80, and numbers are not only coverage. typically an owned unit better than auto retail investment of 1.5 million peers, but even other creates high teens cash retail peers." We comped A lot of these analysts IRR. A VIOC franchise VIOC against what we costs about $150,000 would call “growth (Continued on page 17) Page 17 Arthur Young, Tensile Capital Management

are good, but Valvoline difference to the car booth, fill out a form, is being comped against parc, it's going to be wait in the waiting room, everyone from Advance several years. If and then they put your Auto Parts to Ollie's Valvoline had 50% car on a lift. You may or Bargain Outlet, Clorox, market share, you'd be a may not leave for a few Helen of Troy, Estee lot more worried. But hours with a loaner. With Lauder, Berry Global and given their inherent Valvoline’s drive- Ashland. You'll see a advantage against the through, you stay in the chemicals analyst small players, we think car while they change saying, "Why would I they have a long the oil from a pit invest in Valvoline when runway, even with EV’s. underneath the car, I could invest in this rather than on a lift. The chemicals company for benefit of this during six times EBITDA?" They “We invest in COVID is, they already would be overlooking the have a process in place crown jewel of Valvoline disruptors, but not where you don't need to Instant Oil Change. that frequently. The get out of the car – the You'll see another employee approaches analyst saying, "Why times we have, the the car wearing PPE, you would I invest in lower the window, pass Valvoline when they disruptor has him your credit card, have this really boring probably been further have the oil change supposedly cyclical oil done, and then you go. business, when I could along in maturity During the height of be investing in Ollie's than an early stage COVID, the last thing Bargain Outlet?", while you are going to do is ignoring valuation. It's in growth investor get an oil change at a no-man's land. But we place where you're think the Driven Brands would invest in it. The unnecessarily put IPO, along with disruptors that we've yourself at risk. continued execution of the Valvoline Instant Oil invested in usually Change business and G&D: It seems like with better capital allocation have a business model EVs there's maybe some disruption in the industry should ultimately be where it's not positive for the stock. that investors are necessarily overemphasizing. You also invest in disruptors G&D: How do you think dependent on yourself, so how do you about their competitors balance that analysis of in the market? Is underlying investing in the disruptor Valvoline doing some technology, but vs. looking at a space sort of roll-up strategy? where perhaps the And how do you think rather the ability to threat of disruption is about disruption from leverage a service.” overstated? EVs? AY: We invest in AY: They're the number In terms of store growth, disruptors, but not that two player in the market they’ve made two large frequently. The times we with 4% share. Number acquisitions recently and have, the disruptor has one is Jiffy Lube, and are guiding to acquiring, probably been further their market share is building or franchising along in maturity than only slightly higher than 140-160 this year, which an early stage growth Valvoline’s; it’s a very we think is actually a bit investor would invest in fragmented market. light. Valvoline it. The disruptors that essentially offers a drive EV's are accelerating no we've invested in usually -through oil change. The doubt, but if you look at have a business model typical process of an oil how long it will take for where it's not change is such that you EV’s to make a material drop off the car, go to a (Continued on page 18) Page 18 Arthur Young, Tensile Capital Management

necessarily dependent contrarian by nature, we particularly for a on underlying find companies that are company that is technology, but rather supposed to be disrupted presumed to be the ability to leverage a but are actually disrupted, gives some service, more than positioning themselves comfort. anything else. to not only bolster their The other thing that we position but capitalize on liked about Dick's the very trends that are Sporting Goods was we If you think about supposed to impair their Avalara, it's really a had seen this movie business – for example, before.. Best Buy had service business – it's Dick's Sporting Goods. very understandable to actually fended off We invested in Dick's a Amazon in consumer us and the unit year or so after Sports economics are sensible. electronics at that time, Authority had liquidated, and had laid out a They calculate taxes for so Dick's was coming off you, and then they do playbook where a brick what was perceived as a and mortar in a the filings. The reason one-time boost and why it's a disruptor is particular category could analysts were worried succeed. So Dick's had the need is already that Amazon would there, they're not the advantage of disrupt the sporting learning the plays that creating it, and taxes will goods industry. Though be around forever. You worked for Best Buy that had been the case such as price matching, can absolutely have a with a lot of brick and great company that as well as the plays that mortar retailers, we had didn't work. creates a new need and a completely different capitalizes on that. But perspective based on for us, when the need is several research As we reviewed all of the already there, it is easier observations. old 10Ks, we noticed to understand and that they started forecast as a value changing their lease investor. First, we mapped out the terms probably about 10 industry – literally with years ago, which “Being on the other regard to store footprint. suggested to us that And the fact that the there were a lot of side of that, because Sports Authority had leases expiring between gone out of business, we're contrarian by 2019 and 2021 Given and the fact that their the duration of those nature, we find number two competitor leases, we realized very at the time was over- quickly that they were companies that are leveraged bode well for probably signed at the Dick's Sporting Goods – supposed to be top of the market which they would be the was confirmed by our disrupted but are survivor. The second bottom-up analysis of thing we liked about their properties which actually positioning Dick's at the time was included calling local they had a rock solid themselves to not commercial real estate balance sheet. Now, agents. So they had this only bolster their having a strong balance margin cushion, just sheet over the last based on renewing the position but decade has not been leases, or being able to rewarded as an investor, capitalize on the very leverage their position but given our ethos, it with struggling trends that are gives us the ability to landlords. sleep at night, and we supposed to impair recognize that there's always going to be their business” We said, "Okay, the unknown unknowns and space is being disrupted also existential risks that but actually, Dick's Being on the other side you can't diligence, so Sporting Goods is going the balance sheet, of that, because we're (Continued on page 19) Page 19 Arthur Young, Tensile Capital Management

to be the survivor and periods of volatility that We're not macro should ultimately be the you've seen throughout economists, but we 800 lb. gorilla in the your career, and how obviously follow global space." Dick's has done has that affected your macro and political well ever since, because views on portfolio developments on a daily their CEO acknowledged construction? basis. The extreme that they were behind on outcomes of our their e-commerce and he macroeconomic view are also acknowledged that AY: When you're in the factored into our they had to move fast. If moment, whether it was analysis. But for the you looked at Edward the 2015 Greek financial most part, we think Stack (the CEO), you crisis or other bouts of about the macro more might put him in this volatility that have from a top-down bucket of, "Oh, this is a occurred over the last portfolio construction person who doesn't get several years, you think, perspective than we do it. He's been around "Oh my goodness, this is from a bottom-up since the 1980s." And unprecedented." And company-by-company you'd almost use that this heightened volatility basis. bias against him, given is something that is his age. But the fact that difficult to wrap your “The question you he was so open-minded arms around. and recognized both the have to ask yourself threat and opportunity in But then when you take front of him, was a good as an investor is: are a step back, and you indicator as well. reflect on the last there companies in decade you realize, that second bucket And so now, they've "Well, there really hasn't thrived during COVID been that much that will thrive in a volatility." When you because they had post-COVID recognized their view it top-down over shortcomings in e- the last decade, environment? These commerce a couple of obviously March 2020 years ago and were very was very volatile. This are companies that period is very unique, well-positioned when may not have had COVID hit. Their e- because I've never seen commerce sales, which such a bifurcation four years of growth now exceed $2 billion, between markets and was up 95% in the last the economy. and adoption pulled quarter, and they have a forward.” thriving, high gross Just like the underlying margin private label economy, in terms of business. They're really We're evaluating each stock price performance, capitalizing on the buy- security and investment you basically have 1) the online, pickup-in-store on a standalone basis, disruptors – the digital model, and they should but we also don't want companies that have see a bounceback with to end up with a thrived, and 2) nearly team sports as we come portfolio where, because everyone else. And the out of COVID. we think home builders question you have to ask are great, we own six yourself as an investor home builder companies. is: are there companies G&D: How do you view the current macro in that second bucket environment of the that will thrive in a post- From a risk management market, especially now COVID environment? perspective, having a that there is promising These are companies concentrated portfolio news on COVID that may not have had for a long-term period, vaccines? How has this four years of growth and we're able to do period in the markets adoption pulled forward. overlapping analyses in terms of industries – not been similar to or different from other (Continued on page 20) Page 20 Arthur Young, Tensile Capital Management

the traditional SIC code what happens is and a traditional private overlap, but literally on a consumers spread out equity fund is that once segment-by-segment, their purchases. The we make the geography-by- consumer, instead of investment, it is side- geography and market- shopping only at pocketed – there's no by-market basis. Safeway or only at pressure to deploy Whole Foods, is now capital in private suddenly buying their investments to raise What that leaves us with paper towels and milk at another fund, as the is a portfolio that has a Walmart, their meat at hybrid fund is evergreen. few very macro sensitive Safeway, and their liquor Thus, we can wait for companies – though with from Bev-Mo. that fat pitch while our strong balance sheets – capital is working in the as we are constructive public markets. on a sharp, post-COVID We also learned that in bounceback in travel and downturns, the revenue experiences in particular. base of state and local We own an airline that governments declines “We think that being obviously had a tough due to lower income tax 2020, but it's actually and property tax able to invest in the the best capitalized receipts. And as a result, airline, with latent they need to pull more private markets and earnings power from its from sales taxes, and anywhere in the frequent flyer program. they actually increase capital structure their enforcement of sales tax collection, makes us better An example of how we which is one of the factor-in the macro triggers for somebody to investors because we environment on a purchase sales tax company-by-company software and start filing want every single basis is Avalara. When returns. Ultimately, investment in the we first underwrote it, when we looked at we thought that the Avalara we spent a lot of book and every Street was time on that from a overweighting the macro perspective and if prospective cyclicality of the anything became even investment to company: presumably, more constructive on the since Avalara is tied to company. compete for capital.” the collection of sales tax, it should suffer in an economic recession since G&D: How does the people spend less private equity side of We think that being able money. your business influence to invest in the private markets and anywhere your thinking on the public side? in the capital structure What's interesting makes us better

though is Avalara gets investors because we paid roughly on a per AY: Our private equity want every single transaction basis, in side has a very accretive investment in the book tiers. We had a and valuable impact on and every prospective completely opposite our public equity investment to compete view: we studied credit investing. While our for capital. We want card data over the last strategy is primarily them to compete for the several cycles and public equity-focused, precious capital that our recognized that in a we have the flexibility to investors have given us downturn, consumers do execute private equity the privilege of spend less money but investments and invest stewarding, and by the number of up to 50% of our hybrid having that window into transactions actually class in such private equity, that doesn’t decline investments. One big substantially because difference between us (Continued on page 21) Page 21 Arthur Young, Tensile Capital Management

enables us to raise the And so we have those there are some common bar. instances where we're themes. looking at a public One is to eliminate company and see it’s A great example of this distractions and block trading at a lower out the noise. A lot of was our investment in multiple on the private Keraben Grupo, a firms that struggle do so side and we have not because of their leading family-owned relevant industry manufacturer and investing but because of expertise from our public everything that's going distributer of floor and company experience. On wall tiles headquartered on outside of the the flip side, for a public investment process – in Spain. We had over a company investment like decade of knowledge firm politics, status, Valvoline, most of the envy – don’t get caught and experience in the field work that informed industry from our prior up in any of that. Just our view on unit put your head down, public equity investment economics was through in Mohawk. focus, and work on your private equity. self-development.

That helped us get up to speed and position us “Given the bull Second, develop an investment philosophy well versus some of the market we've been in, competing bidders, but it that not only capitalizes was ultimately my I can't tell you how on your skills but also partner Doug’s ability to fits with your personality work with the family and many pieces I've seen and psychological makeup. If you’re lead a highly complex regarding how to find restructuring of patient, love to dig, get Keraben's debt and a successful multi- excited when you have a equity that created a contrarian view in great entry point, bagger or a anything (whether it's politics, sports teams, or valuing the company for disruptor. Those are approximately 4.9x stocks), you should EBITDA. By contrast, at terrific, but you probably gravitate towards being a long- that time, Mohawk was should also be trading at 11.5x. Though term value investor. If we weren’t going to buy focusing on mistakes you love watching the Mohawk anyway, markets on a constant Keraben had to and why investments basis, you're intrigued by geopolitical essentially “compete” for didn’t work out. And that capital. developments, then in this bull market maybe macro is better. But just be honest with Over the ensuing two that we've been in, I yourself. years, we led an aggressive turnaround think there's been a Third, study bear plan and sold non-core lot lost there.” assets, and the markets and management team grew unsuccessful investments not only as revenues well above plan. EBITDA margins much as, but more than G&D: What advice do expanded from the mid- your successful case you have for students 20s to the mid-30s, and studies. Given the bull interested in a career in so we exited just short market we've been in, I investing? of a three-year holding can't tell you how many period. And between the pieces I've seen increase in EBITDA and regarding how to find a AY: When I reflect on successful multi-bagger multiple expansion, we my career and those of yielded a >6x return. or a disruptor. Those are others whom I've been terrific, but you should fortunate to meet and know through investing, (Continued on page 22) Page 22 Arthur Young, Tensile Capital Management

also be focusing on can make a good living mistakes and why being average or maybe investments didn’t work even subpar, in this field out. And in this bull that won't cut it in the market that we've been long-run. You're going to in, I think there's been a get kicked out if you're lot lost there. subpar or even average. If you view it as work, you shouldn't be in this Fourth, expand your field. It should be fun horizons beyond and it needs to be your traditional investing. passion because those Whether it's taking a people that you're history class on World competing against on War II strategy, doing a the other side, it's their stint as an Uber driver, passion. getting a master's degree in philosophy, reading Ben Franklin’s G&D: What do you like biography, the beautiful to do outside of thing about investing is investing? that it's a discipline where not only is knowledge power, but AY: I've always been one where a unique involved in coaching my perspective, assuming kids' sports teams. By your perspective is next year I'm going to correct, can lead to have two of my three in exponential returns. college, so that should free up some considerable time. I And you find that a lot of have done some those perspectives, the philanthropic work and ones that are truly served on a few charity unique, come from boards in the past, and I outside the field of recently joined a board traditional investing. I at my alma mater. also believe that as a long investor, having experience shorting and I also enjoy exercising having experience being and like to hike with my on a board or even as an wife Stephanie. I also observer or at a private like to read – when I company, is very helpful. was younger I'd assiduously seek out and devour virtually every Bringing this full circle to investment book I could the legal side, there's a find. Recently I've been reason why a lot of the going farther afield. most successful defense attorneys started their careers as prosecutors. G&D: Thanks so much for a great interview!

The last thing is to make sure you're truly passionate about investing. Investing is a highly competitive field, and unlike a lot of professions where you Page 23

DXC Technology (NYSE: DXC) - Ongoing Turnaround - LONG 2021 Artisan International Value Stock Pitch Challenge - Winner

Amitaabh Sahai [email protected]

Trading Stats (as of 12-Feb-21) Financials (FYE Mar) FY20A FY21E FY22E FY23E Share Price ($) $25.71 Revenue ex-HHS 18,063 16,783 17,425 17,743 Market Cap ($ Mn) 6,541 Growth % (6.8%) (7.1%) 3.8% 5.7% Net Debt 2,639 Adj. EBITDA 3,041 2,222 2,556 2,759 EV ($ Mn) 9,180 EBITDA Margin % 16.8% 13.2% 14.7% 15.6% 52-Week High $31.00 EV / EBITDA 3.02x 4.13x 3.59x 3.33x 52-Week Low $7.90 Adj. EBIT 1,739 823 1,358 1,599 Amitaabh Sahai ´21 1-Month ADTV ($ Mn) 91.1 EBIT Margin % 9.6% 4.9% 7.8% 9.0% % Free Float 99.2% Adj. EPS 5.61 2.27 3.67 4.36 Amitaabh is a 2nd year Short % of Float 2.9% Price / EPS 4.6x 11.3x 7.0x 5.9x MBA student at CBS and a EV / NTM EBITDA 3.65x Levered FCF (LFCF) 1,765 770 886 1,322 member of the Value Investing Program. Over Price / NTM EPS 8.11x LFCF Yield to Equity 27.0% 11.8% 13.5% 20.2% summer 2020, Amitaabh interned at Citadel cover- Investment Thesis: ing technology stocks. Recommendation to long DXC Technology (“DXC” or the “Company”) with a 3-yr target price of $70 (2.72x Prior to CBS, he worked at Baring Private Equity Asia money multiple, 39.6% IRR), due to (a) ongoing earnings stabilization led by the new CEO appointed in Sep- covering buyouts in the tember 2019, (b) undervalued Luxoft segment which represents a $5 Bn valuation opportunity, and (c) at- global technology and tractive current valuations given DXC’s earnings stabilization and asset-light, cash generative operations business services sectors. Prior to Baring, he worked Business Description: in investment banking at Greenhill & Co. DXC is a provider of outsourced IT services to clients primarily in the US and Europe. Key services include IT in their M&A teams in New infrastructure outsourcing, IT applications outsourcing and software engineering services. The Company was York and London. formed following a merger of CSC and HPE (HP Enterprise Services) in April 2017, and subsequently renamed Amitaabh is currently DXC. Following the merger, the Company faced three years of sequential decline and the share price plunged interning at Coast Capital, from its highs of $107.31 in Mar-18 to $32.48 in Sep-19. The Company appointed a new CEO in Sep-19 an activist and event- (Mike Salvino) who is catalyzing a turnaround, led by stabilizing earnings, streamlined operations and a driven hedge fund. healthy balance sheet (by divesting three non-core businesses and using proceeds to pay down debt).

Key Investment Factors: Global spend on IT services is vast at $1 Tn growing at ~4%; market is overly bearish on core TAM • Global spend on IT services is vast at $1 Tn and growing at ~4- 5% p.a led by strong demand for digitization and tech- enablement • DXC’s core services of legacy IT infrastructure outsourcing is a mature and declining industry (as clients move to the cloud and automated solutions which require less manual labor) • However, the industry is declining at low single digits as com- pared to DXC’s historical decline of high single digits (which was due to DXC-specific issues around poor client service delivery) • This greater-than-market decline is fixable by DXC, and the new CEO has focused on improving client relations and winning new business (which are both showing strong greenshoots of a recovery)

New CEO (Mike Salvino) is catalyzing a turnaround and earnings stabilization • Mike Salvino comes from a background at Accenture (where he stabilized their Operations business) • At DXC, Mike has divested three non-core assets for total cash proceeds of $4.1 Bn (at ~12x EV/ EBITDA) and used the proceeds to paydown ~$3.5 Bn of debt • As a result, the Company ‘s net debt / EBITDA ratio has decreased from 2.4x in Sep-20 to 1.2x in Dec- 20 • Furthermore, he has renewed client relations with 38 of the 40 most troubled accounts by making per- sonal visits to the CIOs and ensuring high service quality through any disruptions caused by COVID-19 • Since his appointment, the Company has maintained a book-to-bill ratio of 1x+ in the last three quar- ters and earned its first quarter of sequential revenue growth in QDec’20 (growing ~4% QoQ) Page 24

DXC Technology (NYSE: DXC) - Ongoing Turnaround - LONG

The market is not valuing the Company’s rapidly growing and highly valuable Luxoft segment ($5 Bn opportunity) • Luxoft is an Eastern Europe based provider of high-end software engineer- ing services (clients include DB, UBS, Mercedes Benz etc.) • The TAM for Luxoft’s services is sized at $150 Bn and growing rapidly at 15% due to strong client for software enablement, digitization and technol- ogy enablement; between FYMar’14 and LTM Dec’18, Luxoft grew at a 20% CAGR • DXC acquired Luxoft in January 2019 at ~15x EV / EBITDA • Luxoft’s peers (EPAM, Globant, Endava) are currently trading at ~33x EV/ EBITDA; assuming a ~$150 Mn EBITDA for Luxoft (6% of DXCs total EBITDA), this would imply a valuation of ~$5 Bn for the segment alone (for reference, DXC’s total EV is only $9.2 Bn)

Current valuations are highly attractive for a stabilizing company with asset-light, cash generative operations • Following the debt paydown in October 2020, DXC is now trading at 3.7x EV / NTM EBITDA and 8.8x Price / NTM Levered FCF • This is at a deep discount to both (a) trad- ing peers and (b) intrinsic / historical valu- ations • My base case valuation for the Company is at 6x EV / EBITDA (in-line with low-growth peers such as Atos, IBM and NTT Data)

Returns Overview:

Exit Date: Dec-23 (~3-yr holding period) NTM EBITDA: $2,781 Mn (NTM as of Dec-23) Base Case Exit Multiple: 6x EV / NTM EBITDA Base Case Price Target: $70 Upside Case Price Target: $110 Downside Case Price Target: $29

Risks and Mitigants:

Decline in core IT infrastructure outsourcing (ITO) business • DXC’s core IT infrastructure outsourcing services is a mature and declining industry • However, the industry is declining at low single digits as compared to DXC’s histori- cal decline at high single digits • High single digit decline for DXC was due to company-specific issues under the previ- ous CEO that are now being rectified by the new CEO: client traction is improving as evident in strong recent deal wins (especially within DXC’s ITO segment) • Lastly, IT infrastructure outsourcing accounted for ~30% of DXC’s revenues in FYMar’20, down from 50%+ in prior years when DXC’s share price decline began; my base case expects this segment to decline to ~25% of revenues in the next four years

Key man risk around new CEO • New CEO’s compensation has been structured with ‘golden handcuffs’ • 91% of the new CEO’s salary is based on performance-based incentives: • 51% in performance-based RSUs • 22% in time-based RSUs to ensure longevity • 18% in cash incentives based on meeting EPS and free cash flow incentives

Leverage risk: high debt balance can result in declining FCF and potential Ch. 11 • This was historically a risk for the Company • Post $3.5 Bn debt paydown from recent sales, total debt / EBITDA has decreased from 3.5x on Sep-20 to 2.6x on Dec-20 • DXC now has a net debt / EBITDA ratio of 1.2x and total debt / EBITDA ratio of 2.6x • Base case assumes that debt balance will continue to decrease as the Company generates levered FCF (~10% yield currently), and that management will soon reinstate its shareholder return policy (expected in mid-2021)

Quality of earnings risk: large bridge between adjusted and reported numbers • Base case assumes that certain cash charges continue into the medium-term as DXC executes on its turnaround plans • Base case valuation and returns are calculated on reported levered cash flow basis, net of all cash adjustments Page 25

Live Nation Entertainment, Inc. (NYSE: LYV) - Long 2020 Darden at Virginia Investing Challenge: COVID-19 Recovery

Will Husic Harrison Liftman Cathy Yao, CFA [email protected] [email protected] [email protected]

Will Husic ’22

Will is a 1st year MBA Recommendation: student at CBS. Prior to LONG LYV for 69% upside with an 18-24 month price target of $96 and a Base/Bear Risk/Reward of CBS, he worked at Point72 Asset Management cover- 1.5x based on a DCF with a TGR of 2.5% and WACC of 8%. ing healthcare equities. He started his career as an Business Description: Investment Banking Ana- LYV is the world’s largest live entertainment company comprised of three business segments: lyst at Deloitte Corporate Finance LLC (formerly • Concerts: (~80% of rev, lower-margin) is centered on global promotion of live music events in McColl Partners). owned or rented venues. • Ticketing: (~15% of rev) is served by Ticketmaster providing services to primary/secondary markets for 12,000+ clients. • Sponsorship & Advertising: (~5% of rev, high margin) allows businesses to reach customers through performance assets (i.e. AMEX pre-sale). • Competitive position: LYV US concert and event promotion share is ~23.5% (next biggest play- er AEG has ~6.9% share) and its US online ticket sales share is ~32% of the primary market and ~17% of the secondary market. Investment Thesis: I. Outsized Winner from COVID Recovery: • Street estimates and expectations are at the Harrison Liftman ’22 low end of Mgmt.’s guidance for an uncertain Harrison is a 1st year MBA environment. student at CBS. Prior to • Channel checks with ex-LYV Mgmt. and custom- CBS, he worked at L.E.K. Consulting, focusing in the ers indicate higher-than-expected event count private equity practice. and attendance numbers as soon as 1Q/2Q20 Harrison graduated magna similar to the strong recovery in other geogra- cum laude from Brown phies such as Japan, Taiwan, and mainland University with a BS in Applied Mathematics - China. Economics. • LYV’s flywheel model supports a strong rebound across all three core business segments creat- ing EBITDA upside. II. Status Quo Case Provides Support and Up- side: • Upside to Street estimates using midpoint of Mgmt.’s verbal guide of 70-90% of ’19 levels by Summer ’21. • LYV’s balance sheet is strong with $1.8bb of free cash and a ~$1bb revolver (~15+ months of cash). • 2020 OpEx cuts are not reflected near-term numbers. III. Attractive Valuation and Risk/Reward: • LYV’s near-monopolistic business model, pricing power, and the long-term MSD-HSD% indus- Cathy Yao ’22 try growth creates a long tail supporting an attractive DCF valuation with implied forward mul- Cathy is a 1st year MBA tiples in line with pre-COVID levels. student at CBS. Prior to CBS, she worked as an Situation Overview: M&A banker at UBS Securi- • Performance: LYV was down >(60%) from pre-COVID highs to March lows, and has recovered ties, and later as a strate- gic investor at KE Hold- almost ~100% from the $30 close price low to 10/23/20 close of $57. Prior to COVID-19, LYV ings, Inc. (NYSE: BEKE). was considered a “consensus long” and the recovery off the March lows is in part to early se- cured financing and a positive view on LYV’s business model. LYV is covered by 17 sell-side analysts, with a price target of $54 (11 buys, 5 holds, 1 sell). • Bull Case: Bulls believe in LYV’s scale and long-term growth rates (HSD%). Bulls also point out pent-up supply from artists needing to perform and potential industry consolidation benefitting LYV. • Bear Case: Bears are playing for a re-opening delay, noting LYV will need to raise additional capital if shutdowns and significant capacity constraints are pushed beyond Mgmt.’s Summer ‘21 expectation. Bears also prefer more predictable B2B exposure in the current environment vs. LYV’s consumer-driven business. • Catalysts: Positive news on vaccines, treatments, and re-opening the economy and LYV deliv- ering strong financial performance in ’21 and ’22 will drive share price up. Our implied 14.4x 2023 EV/EBITDA multiple is in-line with the 2yr forward multiple pre-COVID. Page 26

Live Nation Entertainment, Inc. (NYSE: LYV) - Long

Scenario Analysis/Valuation: I. Base Case (PT: $96, 69% upside): • A “recovery” scenario would pull Street expectations forward >2 years. Our FY22 revenue is close to Street FY24 (~$14.1bb vs. $13.7bb). With upside to numbers and an attractive long-term DCF valuation, we see potential near-term price appreciation and multiple expansion to pre- COVID levels. • Channel checks with ex-LYV Mgmt. and current LYV partners point to stronger and faster than expected rebound. Ex-LYV President of On-Site Products believes attendance could be 5k-15k in ~1H21 which is signifi- cantly higher than expectations. This is supported by the SVP of Revenue and Marketing for the New York Jets, noting when arenas such as MSG open up, >20,000 fans are expected to attend. Per ex-LYV Mgmt., food and beverage is high-margin and higher capacity would drive significant AOI upside. Per ex-Ticketmaster ED, Ticketmaster/LYV dominates the arena business and should see a strong bounce back in ‘21, supporting our estimate of LYV selling ~97% of tickets in ‘21 relative to ‘19. • Relevant analogs imply LYV will be one of the first to recover. Mainland China recovered robustly following issued guidelines for venue reopening. Since July, tours and festivals re-emerged and sold out immediately at higher prices. The Strawberries Music Festival has ~70% of ‘19 sessions this year with ~9% higher ticket prices, >10,000 fan concerts were held in Aug. ‘20 in Taiwan, and baseball games drew >13,000 fans in Japan with relaxed of crowd size limitations. • LYV’s scale and flywheel model set-up a disproportionate recovery re- bound. LYV Mgmt. highlights artists pushing album releases given tour success is connected to album release timing. Artists make ~70% of in- come from tours, and post-COVID artists will rely on LYV’s logistics and scale to quickly set up tours. In a recovery, LYV will have ample cash flow and can make acquisitions of distressed promoters/ venues that will be accretive in a recovery. II. Status-quo Case (PT: $71, 24% upside): • Industry data points imply 2021 is within Mgmt.’s verbal guide of 70-90% of ‘19 levels. In 4Q20 LYV’s Spark Arena in New Zealand will be at ~73% of 4Q19. As of 2Q20, 86% of fans kept tickets for 2021 rescheduled shows, and 2/3 of fans kept tickets for canceled festivals. Mgmt. notes ~95% of ‘20 cancelations were rescheduled for ‘21 and 60% of amphithe- ater inventory is a social-distancing friendly lawn. • Cash burn, cost cutting, and liquidity guidance not reflected in Street numbers for ‘21 and ’22. Mgmt. guided to reduce costs by ~$800mm in FY20, we estimate ~$598mm in direct cost reductions and are $70mm ahead of ‘20 Street EBITDA estimates. Mgmt. expects ticket sales to ramp in quarters leading up to Summer ‘21 shows and conservative assump- tions imply that LYV will have ample liquidity and only need to draw ~$287mm from their $965mm available revolver. III. Bull Case (PT: $125, 119% upside): • Pre-COVID long-term thesis remains intact. Mgmt. laid out a path for an incremental $730mm of AOI from ‘19 levels and these long-term goals remain attractive with potential room for upside post-COVID. These include: higher pricing ($100mm), 25mm new fans ($80mm Concert, $100mm Ticketing, and $150mm Sponsor & Ad), growing on-site ancillary revenue per fan across venues ($125mm), growing Ticketmaster global share ($100mm), and growing sponsorship market share ($75mm). • Superior technology, data, and analytics support continued price increases beyond AOI guidance. The SVP of Revenue and Marketing for the New York Jets noted that LYV has the “largest and best” dataset and Price Master’s ~$10k cost is easily recouped when tickets go on sale. Primary and secondary ticket market ownership creates stronghold for Ticket- master. LYV has the ability to accelerate pricing growth given pent-up demand for live events. IV. Bear Case (PT: $32, 35% downside): • Prolonged restricted indoor event activity. Per an ex Marketing & Events Coordinator for LYV, concerts now are on aver- age at 15-20% capacity. LYV could incentivize artists to perform more events at lower capacity with higher pricing, but in the near-term, events would be breakeven at best. Continued shutdowns will result in industry consolidation. LYV is one of the only scale players able to withstand longer shutdowns and artists would further rely on LYV to arrange tours and sell tickets. Given LYV’s scale and flywheel model, sponsor and advertising revenue will continue to maintain high margins over time. Ex-LYV SVP of Finance noted even if there is less traffic, LYV owns eyeballs and sponsors will contin- ue to come. • LYV liquidity will be constrained with delayed re-openings. The bear case model assumes LYV maxes out their $965mm revolver and has to raise ~$1.3bb of equity. Dilution is included in DCF valuation. • Qualitative, thematic risks include live streaming popularity increases or shifts in consumer demand; lawsuits, i.e. LYV as a monopoly. and other COVID-related risks. Page 27

RealPage (NASDAQ: RP) - Long 1st Place—2020 MIT Sloan Investing Series (November 4, 2020)

Nathan Shapiro, CFA, CPA Levente Merczel, CFA Kyle Heck, CFA [email protected] [email protected] [email protected]

Kirk Mahoney Vineet Ahuja, CFA [email protected] [email protected] Nathan Shapiro ’22 Nathan is a 1st year MBA student at CBS. He was previously an equity re- search analyst at Berenberg Capital Markets and a con- sultant at EY.

Recommendation At the MIT Sloan Investing Series Stock Pitch Competi- tion, we pitched a long position in RealPage (RP) with a 1 -year price target of $85, reflecting 41% upside and a15% IRR over a 4-year investment time horizon. We believed that RP’s stock price did not reflect (a) its ability to gain share in a un- derpenetrated and fragmented property management market; (b) an accretive M&A strategy Levente Merczel ’22 that has rapidly expanded the breadth of its servicing capabilities; and (c) strong business Levente is a 1st year MBA moats that enable client acquisition and retention. student at CBS and worked previously at IB and PE Business Description firms in Hungary for 7 years. RP provides software, data & analytics and tech enabled services to the property manage- ment sector within the US. RP focuses on managers serving multi-family residential proper- ties, as opposed to commercial or industrial properties. RP has grown both organically and through M&A to expand its product offerings beyond its initial core ERP focus and enter adja- cent verticals beyond mid-market property managers. RP’s core ERP system serves as the system of record for property managers and as such is extremely sticky, with ~97% historical annual renewal rates. Relative to its primary competitors (Entrata and Yardi at the enterprise level, AppFolio at the SMB level), RP is differentiated by its open architecture model, that en- ables integrations into third party applications, and its focus on ancillary services beyond ERP, such as rent payment processing, analytics for pricing benchmarking, and marketing soft- ware. Kyle Heck ’22 Investment Thesis Kyle is a 1st year MBA I) RP is gaining share in a fragmented and underpenetrated market student at CBS. He was previously a senior econom- Management estimates the TAM to be $18.9bn which we view ic litigation consultant and senior financial analyst for a as slightly aggressive as it assumes 100% market penetration and 100% product adoption. Our research suggests a more realistic serviceable addressable market of $7bn based on more conservative assumptions regarding unit penetration (35mm vs 65mm) and RPU ($200 vs $292) supported by an analysis of RP’s product segments. This results in a penetra- tion rate of only 15%, leaving significant room for expansion. The company has driven significant revenue per unit (RPU) growth through a well-executed land and expand strategy. Over the past 10 years, RP has grown their units and RPU Kirk Mahoney ’22 significantly faster than the market. The revenue per unit has compounded despite a massive large credit union. increase in units which demonstrates the success RP has with cross-selling and up-selling its Kirk is a 1st year MBA stu- products. This is more pronounced in the top custom- dent at CBS. Previously he ers where product adoption accelerates and customers was an associate at Catalyst Investors, a growth equity utilize more of RP’s solutions. firm focused on technology II) Accretive M&A expands servicing capabilities and market size Since 2015, RP has spent an average of $343 million annually on M&A and closed 21 deals at an average purchase multiple of ~6x EV / Revenue. We believe these acquisitions have strengthened the breadth and value proposition of RP’s property management soft- ware. RP has primarily focused on buying ancillary property management solutions that it can quickly Vineet Ahuja ’21 integrate into its unity platform. This has created a unified user experience and enabled lucra- firms. tive cross-selling opportunities. Historically, RP has acquired businesses with niche property Vineet is a 1st year MBA student at CBS. Previously management applications that have limited customer bases. RP then quickly integrates these he was an investment ana- companies and cross-sells these ancillary applications across its portfolio of over ~19 million lyst in the New Delhi office units. This has led to an impressive return on investment. Our proprietary analysis suggests of Caisse de dépôt et place- ment du Québec. that RP has been able to achieve a 40%+ IRR over a two year time horizon across its 2017 and 2018 acquisition cohorts exceeding the 25% IRR hurdle rate that the company targets. Page 28

RealPage (NASDAQ: RP) - Long (Continued from previous page)

In November 2019, RP announced the acquisition of Buildium, a competitor operating in the SMB market. The result- ing 11% drop in RP’s stock price suggested that the market was skeptical of RP’s ability to successfully acquire and integrate a competitor. However, the acquisition allowed RP to expand into the SMB market. Through our discussions with several property managers, the SMB market is primarily paper-based and penetration rates will quickly scale as generational demographics evolve. As a result, we believe the Buildium acquisition will provide a critical source of future growth. III) Strong competitive moats protect returns RP has a virtuous cycle of moats that leads to ever improving unit economics. Virtuous cycle of moats: RP has sticky and customizable products that are easy to sell and hard to get rid of, leading to their market dominance of 18.9m units. Their market dominance led to high brand awareness, also gen- erating a strong data cycle. The more clients they have, the more data they generate, the better analytics they can sell. This virtuous cycle leads to strong network effects and high switching costs. Clients report 2-3% immedi- ate revenue growth as soon as implementation happened. Given the high switching costs and strong value proposition, RP has a 97% retention rate. Good and improving unit economics: The positive feedback loop leads to good and improving unit economics – increasing margins and improving organic LTV/CAC ratio. We estimated the ARR and backed out inorganic growth by each product segments, factored in the specific product life cycles, and the different gross margins, resulting in 4.3x LTV/CAC in 2017 that increased to 5.9x in 1H2020. RP has established a dominant position in the corporate and enterprise markets and is expanding into the SMB market. RP focuses on customizable, ancillary products for enterprise clients, along with its closest competitor: Yardi. Alt- hough RP dominates this segment and there is no other real competitor, RP’s biggest threat is AppFolio (APPF). For enterprise accounts ERPs are important. According to testimonials of clients and ex-employees ERP systems can only be changed if the organization is prepared to endure significant data loss, therefore ERPs are very sticky. RP’s ancillary products can connect to any other competitor’s ERP, acting as a door opener for RP. As most enterprise ac- counts have ERP already, this is a potential avenue to slowly convert their core ERP. Yardi is stuck as an ERP provider with a strong accounting focus. RP on the other hand is very much focused on the data and supporting services. AppFolio is trying to enter the enterprise market, but they have a closed, one platform system. This is less compatible with the enterprise accounts as they are sophisticated users of proptech software products and have their own estab- lished ways. RP, as mentioned above, acquired Buildium recently, directly threatening APPF from the lower end of the SMB market. Valuation Our valuation was based on both a relative valuation and a returns analysis. For our relative valuation, we comped RP to other vertical SaaS public com- panies and take privates. We ran a regression on the relationship between LTM revenue growth and EV / LQA Revenue. We then applied a multiple of 7.0x LQA based on a discount to the 9.0x supported by RP’s ~10% annual organic growth. In our returns analysis, we forecasted the business to 2024 and modeled an exit at a 30.0x trailing EBIT, reflecting the valuation of a ma- ture software business. We then discounted the business back to the present at a rate of 10%. Both valuation methods supported a valuation of $78 per share. Key Risks COVID-19 Pandemic: The Pandemic has significantly impacted real estate markets and created uncertainty around leasing velocity, vacancy and renewal trends. However, RP’s SaaS-based business model has proven resilient and led to significant increases in platform usage and adoption. We believe the Pandemic has accelerated discussions around digital innovation in real estate markets. Competitive pressures could impact client acquisition trends: Given the stickiness of RP’s highly customizable ERP platform, we believe that RP has a strong competitive advantage. We expect that both RP and its primary com- petitive threat, APPF, will benefit from continued digital innovation and the accelerated adoption of property manage- ment software solutions. A sustained low interest rate environment could create a shift towards home buying: While this is a risk, there has been little evidence to suggest that the recent low interest rate environment has led to de-urbanization and increased home buying.

Investment Update On December 21st, 2020, Thoma Bravo announced that they would acquire RP for $88.75, representing a 31% pre- mium (prior day close). The deal valued the company at $10.2 billion which equated to a 8.1x EV / forward Revenue and 28.7x EV / forward EBIT multiple. Page 29 John Huber, Saber Capital Management

John Huber is the geopolitics and current wanted to get into Managing Partner of events. And finally, I business as a way to Saber Capital love studying human make money so that I Management. Saber achievement and could invest and maybe manages an observing and learning form a partnership along investment fund from people who excel at the lines of what Buffett modeled after the their craft, not just in set up in the '50s. I original Buffett business, but in other spent about seven or Partnership fee walks of life. I think eight years investing in structure. Investors in business and investing real estate prior to the fund pay no are at the intersection of setting up my management fees, all of those things. partnership, and that and Saber only gets was a great learning experience and a way for compensated for Initially, I didn't think I'd returns that exceed me to build up capital actually pursue investing that I used to seed the John Huber, 6% annually. John as a career because I and his family have investment firm that I Saber Capital went to school for wanted to set up. By Management nearly all of their net journalism; I thought I'd worth invested right about 2013, I had felt pursue investing as a like I had enough alongside investors. hobby. My dad was an Saber's approach is personal capital saved to engineer by trade, but launch the partnership. based on the simple he was an avid investor observation that in That's when I started for his own account, and Saber Capital. the long run, the best I thought I'd follow that investments come path. But I picked up a from the best book called “The Warren “...a stock shouldn't companies. Our Buffett Way” at the be thought of as a strategy is to carefully library one day in study and selectively college, and that was the number on screen, invest in high-quality first time I'd ever read businesses that we anything on Buffett's but rather as a piece believe will compound approach, and it was of a real business run value over time. Prior just one of those game to forming Saber in changing moments. by real people with 2013, John spent nearly a decade real assets, and real investing in real That book articulated a estate. concept that I cash flows. superficially understood A stock is a pro rata Editor’s Note: This but didn't fully have interview took place ingrained, which was the share of all of the on January 15, 2021. idea that a stock future cash that that shouldn't be thought of as a number on screen, business will Graham and but rather as a piece of a Doddsville (G&D): How real business run by real generate.” did you become people with real assets, interested in investing in and real cash flows. A the first place? stock is a pro rata share G&D: While you were spending those years of all of the future cash investing in real estate, John Huber (JH): I got that that business will were you still keeping a into investing because generate. pulse on equity markets, it's the synthesis of a still doing equity number of subjects I This is the simple logic of investing on the side? really enjoy. I've always value investing. This led Were you still developing loved math, statistics, me to study Berkshire and learning as a public and numbers generally. I Hathaway, and it market investor love sports and games motivated me to get into involving strategy. I love business. I actually (Continued on page 30) Page 30 John Huber, Saber Capital Management

throughout this time? advance my learning The other thing he curve at the maximum taught me is the value of JH: Yeah, absolutely. I rate possible by studying being concentrated. got into real estate in the things I wanted to Great ideas in all walks 2005, right at the peak study and working on of life are very rare, and of the bubble. But I got the projects I wanted to that definitely applies to lucky because by the work on and so forth. the investing world. You time I cobbled together I was actively learning have to seize those great enough capital to do and engaging in the ideas when they come anything to speak of, it markets during those along. You can't dilute was probably 2007, years, studying business those great ideas with which was the beginning models and reading lots of other mediocre of the foreclosure boom. financials and just ideas. That gave me an growing as an investor opportunity to really while also trying to build Outside of my Dad, I've capitalize on a once in a up capital. learned a lot from all of generation type of a the great investors in market. the value investing “Great ideas in all community. Like so Most of my personal walks of life are very many others, Munger and Buffett have been capital was getting rare, and that plowed into real estate the inspiration behind investments that I definitely applies to my general investment thought were severely philosophy and the way discounted. There were the investing world. I've structured my firm. There are some key a lot of forced sellers; You have to seize we went around to takeaways you get from different banks and those great ideas every investor. Buffett picked up assets for 50 taught me that a stock cents on the dollar. Our when they come should be thought of as a piece of a business and investments were all in along. You can't the single-family and the importance of having multi-family sectors. dilute those great a long-term time horizon. Charlie Munger ideas with lots of taught me the But during that period, I importance of patience, also spent a lot of time other mediocre really waiting for the studying the markets ideas.” obvious ideas and doing and learning. I debated nothing in between. going back and getting Peter Lynch taught me an MBA, but at that the importance of point, I really valued my G&D: Who were some of focusing on great time and the autonomy I your biggest mentors, businesses that can had. Once you get used either personally or from compound over time. to having autonomy, it's afar? The simple idea is that if hard to give it up. You you can find one or two realize how extremely JH: My dad was the big winners, they can do valuable it is. So, I didn't biggest hands-on mentor a lot of the heavy lifting want to give that up. in terms of somebody for your portfolio over time, and they can make that I had contact with. He was an engineer and an enormous difference. I was here in North was never a professional Those are all Carolina, and I didn't investor, but was still philosophies that are want to move to New one of the best investors core to my approach York or uproot my I knew. He taught me today. family. I liked where I two key things. One is to was at, and I thought think independently, and G&D: Early in your that with the autonomy don't be concerned with investing career, it that I had, I could conventional wisdom. develop my skill set and (Continued on page 31) Page 31 John Huber, Saber Capital Management

seems you were more changed. As an investor, capital, but I knew very attracted to cheap stocks I think you have to be early on that I wanted to and the methodical cognizant of that and set it up in a way that Graham / Walter Schloss you have to be willing to would maximize my approach, but over the change your views and chances of reaching my years your philosophy change your mind as you two goals. One is to has changed and has go. become the best become more oriented to investor that I can be, quality. Can you walk us “The speed at which and to reach my full through that transition? potential as an investor. information travels is The second is to produce JH: I definitely have a so fast. Competitive superior results for the transitioned towards the investors that have great businesses. I think advantages that used entrusted their capital to every investor goes me. I wanted to set my through periods of to be very durable firm up in a way that evolution where you and very long term in would maximize my learn new things, and chance of reaching those the world changes, and nature are now goals. you have to adapt. You have to, I think in all getting attacked and I'm a big sports fan, and fields of business, in all disrupted. I think a I love learning about walks of life, you're great players and trying to improve over lot of the techniques coaches, their practice time and get better at habits, their work ethic, what you're doing. that statistical value how they go about My empirical observation investors used to use getting better at their at the core of my craft. I'm a Buffalo Bills philosophy with Saber is are no longer fan. As a Bills fan, I've that the best unfortunately had a front investments in the stock relevant.” row seat to the brilliance market will come from of Bill Belichick, the head the best businesses over G&D: What was it like coach of the New time. I like the actually starting Saber? England Patriots. Of all methodical nature of You said you'd saved up the great decisions some of the investors enough capital and Belichick has made, my like Ben Graham and raised external capital as favorite of all time was Walter Schloss, but I well. Were there any one that most people think the reality is the unique challenges to that would describe this as a world is dynamic and process that you didn't relatively insignificant ever-changing. The expect, and can you talk play, but to me, it was a speed at which a little bit about why you game changer. It was a information travels is so chose the structure you 2009 mid-season game fast. Competitive did? against the Colts. advantages that used to Belichick decided to go be very durable and very JH: I started Saber with for it on fourth and two long term in nature are the goal of compounding from his own 30-yard now getting attacked my own capital, for a line with just a few and disrupted. I think a very long period of time. minutes left in the game, lot of the techniques that I've always viewed even though the Patriots statistical value investors Saber like a family had a six-point lead. used to use are no partnership, initially longer relevant. For comprising my own This was highly example, price to book is capital and some from controversial, because if no longer relevant family and friends. My you don't get the first because most of the idea was that if I do down, you give the Colts assets on a company's well, other investors the ball with a short field balance sheets are might want to join me. I and a chance to win. So, intangible assets now. didn't necessarily have a The world has just strategy for raising (Continued on page 32) Page 32 John Huber, Saber Capital Management

the conventional decision think the learning lesson moat. with a six-point lead on is to be successful in fourth down late in the such a competitive game is to punt the ball. business, like investment The great thing about Most people would view management, I had to the stock market that that as the safe decision. put myself in a position stock prices fluctuate to Punt the ball and make where I had the freedom a much greater extent the Colts go the length to disregard the norms if than the underlying of the field in a short need be and make the business values. This is period of time. But decisions that I thought common knowledge, but Belichick decided to go were best, not it's worth pointing out. I for it. In fact, the necessarily the decisions have a chart that I've Patriots did not get the that someone else thinks updated over the years first down, the Colts got are best. that has the top 10 the ball back with a mega caps in the S&P short field and “stock prices 500. It shows you that in any given year, even the eventually scored a few fluctuate to a much plays later, and the largest stocks in the Patriots lost by one greater extent than market, the top 10 most point. valuable and most well- the underlying followed companies, have stock prices that I’ve never forgotten that business values. This fluctuate by 50% or so. play because it told me is common three things about Belichick. First, he didn't knowledge, but it's That tells me that stock outsource his thinking. prices move around Second, he cared about worth pointing out. much more than making the correct This is common underlying values do. decision, even if it was Therein lies the highly unconventional. knowledge, but it's opportunity as value investors; there will be Then finally, I think the worth pointing out.” most important thing times where you can buy that I learned about Bill these great, mature, Belichick from that G&D: Could you talk a well followed businesses particular play is that he little bit about your at a discount. Those had no career risk. There portfolio construction at tend to come around are 32 head coaches in Saber? every so often, and I the NFL and 31 probably have a watch list of would have punted on JH: As I said before, companies that I follow. that situation, because Saber's philosophy is From time to time, they'd be too concerned really simple: invest in you're able to buy these about failing great businesses. There great businesses at a unconventionally, and are two main categories discount. If you can buy possibly losing their jobs of investments that I a dollar for 70 cents, and as a result. think my portfolio has the dollar is growing at 7% or 8%, that can be a had over time. One is what I call dominant nice investment over the By that point, Belichick moats. These are really medium term, as the had won three Super durable, high-quality, market tends to revalue Bowls. So, he had no strong businesses with that over time. career risk, which gave great balance sheets and him the freedom to very entrenched Then the second make the right choice business models. They category are what I call even if it was an odd also tend to be mature. emerging moats, and choice. I really They're not necessarily these are the immediately realized the growing at fast rates. compounders. These are significance of that play But these are businesses the companies that have call and I always kept that have what Buffett that in mind when would call a really strong forming Saber Capital. I (Continued on page 33) Page 33 John Huber, Saber Capital Management

really high returns on JH: My biggest positions business that still can capital, long growth tend to be the ones grow very fast. runways, and are where I think there's the Obviously, that's the developing a strong lowest likelihood of home run type of lead. Oftentimes they permanent capital loss. investment. But exhibit characteristics The positions that I have typically, the emerging like a network effect, or highest conviction on moats, there's more some sort of feedback tend to be the largest uncertainty. When loop that grows stronger positions. It doesn't there's more as the business grows, necessarily mean that uncertainty, I tend to and, they have a long emerging moats are have slightly smaller runway for always smaller, because positions. reinvestment. Classic sometimes you can have examples of this are a business that has an G&D: How high are you stocks like Walmart, enormous amount of willing to go with a Home Depot, Starbucks, growth potential, but is position as far as a back in the '70s, '80s, uncertain – in some percent of your and '90s, where they ways, those can be like portfolio? could reinvest capital call options. But the into new store locations current business might JH: I don't have any at 30% returns for a be valued at a level constraints. It goes back very long time. That where you have a huge to the career risk point I leads to a very high rate margin of safety, and made earlier - I try to of compounding over the you get a lot of that structure my firm in a long run. growth for free, or way where I don’t face you're not paying for a career risk. I have lot of that embedded certain soft guidelines Today, the examples value of that call option. might be companies like for position sizes, but I Copart, Etsy, or can say my portfolio Facebook. One key “The positions that I typically has between difference with many of have highest five and 10 stocks. I today’s compounders are think the average that their products are conviction on tend to position in my portfolio is probably around 10%. often digital, which can be the largest be created and I consider a double replicated instantly at positions. It doesn't position, or a very high very low marginal costs. conviction position, to be Returns on capital of necessarily mean that upwards of 20%. If the business continues to these companies aren’t emerging moats are tethered to constraints perform well, and the of the physical world, always smaller, fundamentals continue and this means many to move in the right internet businesses can because sometimes direction, I tend to let those businesses grow to global scale very you can have a quickly and can become continue to compound much larger than we business that has an over time. would have previously enormous amount of thought possible. I think That's one thing I've of the portfolio like a growth potential, but learned – when you have barbell and it's filled with a great business, the companies that fit into is uncertain – in some best thing to do is sit on one of those two main ways, those can be it and don't touch it. The categories. natural outcome of this like call options.” is that the best G&D: How does position investments in your sizing differ between the Sometimes that can lead portfolio become a two categories? to an attractive situation bigger percentage of the where you can have a pie and become more

very big position in a (Continued on page 34) Page 34 John Huber, Saber Capital Management

meaningful over time. JH: Apple is an example year, up 150% from I've written about this of a concept I talk a lot $600 billion. All of this idea called the “coffee about, and it's how you was before COVID. can” portfolio where you don't need an stick stocks in the coffee informational edge to can and you just let gain an edge in the stock It just goes to show you them do their work. I market. I think there are how the largest, most don't necessarily hold a few different ways to well-followed stock in positions forever, but I gain an edge. One is the world can fluctuate have that mentality informational, but the far more significantly when I go into a new internet has changed the than the underlying investment. I view it as game to where value of the business. a business that I plan to information is now a Why is that the case? hold indefinitely, and I commodity. That edge is Why is there an want to let that business very difficult, especially opportunity with Apple? compound until I find for an investor like me, I think one reason is maybe a better idea, or I and I'm never going to time horizon –some discover that I made a be able to compete with people didn't want to mistake or that the resources of some of own Apple because they something the larger funds out were worried about the fundamentally has there in terms of getting next quarter. changed. information faster than they can. But I don't In 2016, the word was think that type of iPhone sales had information is all that “I have that mentality peaked, and there was valuable anymore, or competition coming from when I go into a new certainly not to the Samsung and other extent it was in decades places, and people investment. I view it as past. worried that the next

a business that I plan quarter was going to I think the best edge look bad. But most to hold indefinitely, today is to have a long- people acknowledged term time horizon. This that the long-term future and I want to let that goes along with the idea was bright for Apple. that I spoke about business compound There wasn't a lot of before, to be able to act disagreement that Apple until I find maybe a unconventionally, to be was going to be fine, it's able to act without better idea, or I a great company. But career risk. I think this is even the people that what causes mispricings discover that I made a agreed on Apple's long- in some of the largest, term prospects, still, in mistake or that most well followed some cases, wanted to companies in the something wait it out for a few market, and Apple is an quarters and didn't want example of that. fundamentally has to get in the way of a changed. bad earnings report. If When I first invested in enough people share this Apple in 2016, it had a view, it can create a mispricing. G&D: We wanted to talk valuation of around $500 through an investment billion. In two years, it went to a trillion. Then that we know has been I think there was also an inside of three months, highly successful for you analytical edge with in late 2018, it went that you've talked about Apple; this refers to down 40%, shedding in the past, which is looking at things through about $400 billion in Apple. Can you walk us a different lens than value in just one through your thesis others. In this case, I quarter. Then from there and what created think some people were the opportunity? there, it went back to $1.5 trillion in just a (Continued on page 35) Page 35 John Huber, Saber Capital Management

looking at Apple like a on the market. And the JH: When I first invested computer hardware same applies more in Apple, all of that stuff company. A computer recently to the M1 chip that I just spoke of hardware company sells that they're developing. made me question why a commoditized product, There's an incredible the business was trading margins will revert to amount of human capital at 10 times free cash the mean over time, and inside that organization, flow. One of the greatest any excess returns on and the collective value businesses ever created capital will be fleeting. of that asset is with one of the most They'll revert to the sometimes valuable brands and the mean, and you'll never underappreciated by the most powerful moats, produce any excess market. should trade at 30 times. profitability. So the Apple thesis for It eventually did get The other way to look at me, in a nutshell, was revalued to that level Apple was to view it as a that it's a great brand, and is somewhere consumer brand, along it's a highly sticky around there today. I the lines of a Starbucks ecosystem, and the high think Apple is probably or a Nike. Nike makes a retention rate in the more fairly priced now. I product from commodity hardware is very do still own Apple, but I inputs, manufactured valuable, like a have trimmed it. It was overseas. Most of their subscription software my largest position at products are essentially business in terms of the one point. It's no longer replicable commodities, recurring nature of the a large position. The but they get a 75% revenue. The hardware tricky thing about markup over their costs isn't one-time revenue, investing is when to sell. to make those products, it's actually recurring. If I don't have a good and those gross margins you own an iPhone, your answer for it, but I've exist because of the next phone will be an learned over time to be brand that Nike has. iPhone. Same goes for very patient with my investments, because Mac and Apple Watch and iPad, the Air Pods I've made a lot of I thought Apple's brand and the rest of the mistakes in selling a was more valuable than product lineup. great business too soon. Nike's, I thought its products are more differentiated. I've never I think the combination The nice thing about understood why it traded of short term time great businesses is that at such a discount to the horizons and thinking they tend to compound market, or to these about Apple in a over time. Apple is not great brands like Nike different way created an compounding its intrinsic for so long, because I environment that value at a very high rate thought the brand was resulted in a stock that anymore, but it's still a probably more valuable, was significantly great business. It's got a and I thought the undervalued, even strong moat, it's got products were actually though it was the most enormous free cash flow, more differentiated. The widely followed company it's buying back shares, innovation at Apple is so in the market. and so the value is still great. compounding, just at a lower rate. G&D: Today, it seems

If you think about the like more people first time you picked up appreciate Apple’s brand Unless you have a better an iPhone, it was and appreciate the idea, you're almost probably a life-changing transition to the services always better off holding experience, right? Same business model. How these great businesses, thing with the Air Pods – has your thesis changed because they work for they’re head and and where do you stand you over time. I've shoulders above any today? learned that you have to other product out there (Continued on page 36) Page 36 John Huber, Saber Capital Management

be very careful with that. land themselves. The company requires no Opportunity cost is a big business model reduces capital, and uses all of factor in investing. a lot of the risk that's its significant free cash Sometimes you make a inherent to the flow to buy back shares. mistake when you buy a homebuilding industry – stock, but the most risk is amplified when costly mistakes can be you have a lot of assets This monopoly on dot when you sell something your balance sheet in a coms is a great asset to that you should have highly cyclical industry. own, but the company is kept, because the So, NVR removes a lot of not growing very fast. opportunity cost of that. It's very well So, this would fall into forgone profits can grow managed, it's got a great the category of mature, to become many times culture, and it's a very dominant moats. So, I the size of a loss cost-efficient, well-run sold when I thought it incurred by making a business. We do own reached a fair valuation bad investment. NVR now, but I watched level, but both my analysis of the business NVR from the sidelines for years before quality and my valuation So the key is to investing, despite being have proven to be too minimize those well aware of these conservative. opportunity costs, which advantages. I view as real costs that impact long-term results One of the mistakes that as much or more than “You should demand I've made over time is being too conservative, I actual losses. When you a margin of safety own great businesses, think. Conservatism, for like Charlie Munger, you over an accurate good reason, is just sit on them and let considered a virtue in them do their work. assessment of the the value investing community. I'm a business and its G&D: Are there any conservative investor by examples of that come value, but your goal nature, but there are to mind of times where drawbacks to being too you've sold too early in should not be to conservative. I just read the past or any conservatively a note by my friend, Rob businesses that you Vinall who runs a firm studied and really liked, analyze the business, called RV Capital. He but passed because of made a great point – valuation and regretted? your goal should be banks that are to accurately analyze aggressive when JH: Yeah, too many. underwriting loans end NVR has a great the business.” up going bust, but so do business model and is an banks that are too example of one of the conservative over time, things I look for in a As far as selling too because they’ll miss great business, which is soon, one example that writing the loans that what Buffett would call comes to mind is are most profitable, the royalty on the VeriSign. VeriSign is a which is needed to pay growth of others. NVR business I owned in for the inevitable gets high returns on 2016. I call it the toll mistakes. As investors, someone else's capital. road of the internet. our goal should be They collect an annual accuracy when registration fee for every evaluating a business. The third-party land dot com and dot net You don't do yourself developers put up the domain. It's recurring any favors by being capital, do the heavy and very high-margin overly conservative at lifting, and take a lion's revenue, and since they the expense of being share of the risk, and have exclusive rights on accurate. these domains, the NVR gets to extract high returns on that capital business has monopoly- instead of owning the like economics. The (Continued on page 37) Page 37 John Huber, Saber Capital Management

You should demand a I have another friend, invest in more locations, margin of safety over an Connor Leonard, who which were capitalized accurate assessment of coined the term and amortized over the business and its reinvestment moat. The time. Today, internet value, but your goal classic example would be companies are growing should not be to Walmart in 1975. They by investing in product conservatively analyze focused on being more development and the business, your goal efficient than through sales and should be to accurately competitors, passing marketing, which are analyze the business. savings to customers expensed on the income I've noticed that a lot of which naturally led to statement as they are my mistakes have come volume growth, and they incurred. They don't from when I've been reinvested all profits into need to lay out money conservative at the building new stores in for new equipment, new expense of accuracy, adjacent markets. They factories, new stores, or and this has carried a had a small footprint in new physical assets. But, heavy opportunity cost Arkansas but were just like the over the years. expanding across the reinvestment moats of country by replicating yesterday, these G&D: You wrote a post a this simple business companies should few years ago on how to model. Walmart had continue to reinvest if think about the very high returns on they're earning high compounding of the incremental capital, and returns and if the intrinsic value of a it could reinvest 100% of lifetime value of the company, and you its capital back into the customers exceeds the emphasized the business. I estimated cost to acquire those incremental the incremental returns customers. reinvestment on capital were 30% on average, and since they opportunity and the In any case, you want to ROIC on that could reinvest all of those earnings back into understand the returns reinvestment. At the that any capital outlays same time, many of the the business, the earning power, and the are achieving and what mature, dominant moat the prospects might be. companies you've underlying value of the business, was growing at When a business gets to mentioned here are a certain maturity level, deploying capital more 30%. Those are obviously great the smart thing to do into share repurchases would be to return as opposed to businesses to own if you can find them. capital to shareholders reinvesting. How do you through buybacks or think about those uses dividends. But if a of capital in a business? I think the great business can create reinvestment moats of value by reinvesting JH: I think the best today are companies back into the business, businesses are the ones that are investing in regardless of how those that can grow without ways that show up on investments are capital. That's the their income statements accounted for, then they royalty on the growth of in the form of sales and should make those others idea I mentioned marketing expenses or investments. In other before. The next best product development words, a lot of situation is when a costs, and much less companies today are company can reinvest its through their balance showing losses on their earnings back into the sheet in the form of income statements just business at high rates of capitalized physical as Walmart was showing return. The intrinsic assets like store losses on its cash flow value growth rate of a locations and inventory. statement, but the business is going to Walmart showed GAAP steady state profitability compound at the rate of profitability, but negative of their model could be the incremental return free cash flow, because quite profitable. on capital, multiplied by it was taking on debt to the reinvestment rate. (Continued on page 38) Page 38 John Huber, Saber Capital Management

G&D: What are your businesses that can been priced at a much thoughts on just the compound at higher higher multiple than general stock market rates than cash in the that, even. I think environment today? And long run, so I tend to be there's a similar dynamic how do you think about fully invested. playing out in the stock cash in the portfolio in market today with a this environment? select number of “I think you're better companies where the JH: The way I think off owning great market is directionally about cash allocation is correct but off in American business is the businesses that can magnitude. best asset class I can invest in over the long compound at higher run, given my circle of rates than cash in the “When it comes to competence. It doesn't mean it's going to be the long run, so I tend to companies that have best asset class every be fully invested. benefited from year. But the S&P 500 produces 12% or 13% COVID, there's two returns on capital and it I don't really have a main categories; retains and reinvests view on the current about half of its market. I do think that those that have pulled earnings, and so that there are a lot of forward demand, and should generate 6% or opportunities and this is 7% earnings growth a stock picker's market. then those that have over the long run. I think the opportunity set is going to be rich for borrowed demand Then the rest of the some time. It doesn't from the future, and earnings can be returned mean the market is to you as dividends and cheap, or even that have to pay it back.” share repurchases. If stocks in general are you can get 6% earnings cheap, but I think there growth in the long run, are a lot of When it comes to plus a couple percent opportunities. companies that have from dividends and benefited from COVID, there's two main buybacks, then you're COVID has been going to achieve a high categories; those that obviously an Earth- have pulled forward single digit rate of return shaking catalyst that has by owning that asset demand, and then those unlocked an enormous that have borrowed class in the long run. amount of value in Obviously, it's going to demand from the future, certain companies. In and have to pay it back. be very lumpy, but if some cases, the market you have a long term, has been too generous 10-year plus time and many stocks are The latter category horizon, that is the rate way overvalued. In other might be something like of internal compounding cases, I think the market Lowe's or Pool Corp. You that I think American is directionally correct, might install a deck this business will continue to but not correct in year or put in a pool, but achieve over time. magnitude. This happens if everyone that was many times in the planning to do this over And so I think American market. For instance, the next few years does business is probably the market was it all this year, then going to outperform all directionally correct there's going to be some of the asset classes, about Google when the value that is created by including real estate, stock price soared after getting paid now instead commodities, gold and its IPO. The shares were of later. But there isn't oil, bonds, and certainly priced over 100 times necessarily a step cash. I think you're earnings at that point, function change in value better off owning great but Google should have (Continued on page 39) Page 39 John Huber, Saber Capital Management

creation. impaired companies and and a global platform. COVID has hastened But when you buy their demise, and those something at Etsy, On the other hand, if are obviously the you're supporting a you have a two-sided situations that you want small individual marketplace, and you to stay away from. But I producer. I think that pulled forward five years think there are other, trend is in Etsy's favor of demand, then all of a very high-quality and provides a nice sudden, you’ve fast businesses that have tailwind. The other big forwarded into 2025. taken a hit this year, but trend benefitting Etsy is Your business took a will be fine long-term. In the long runway ahead giant leap higher, and some cases, they might for eCommerce now you will grow off of actually be able to generally. Etsy's got a a much higher and capitalize on the turmoil very small piece of a stronger base. That that exists in their very big market, and it's growth rate might not industry by buying developing a strong necessarily slow down. It competitors or taking moat. might be lumpy for a share. Overall, there are year or two, but some real opportunities across businesses have seen the landscape for stock Two-sided marketplaces their moats and the pickers right now, and I are perhaps my favorite returns on capital think it's an exciting business model, for four expand, and the nature time to be a curious main reasons. First, of many of these investor. these businesses tend to businesses are that the produce high returns on strong often get someone else's capital. stronger. If your G&D: Can you walk us Etsy's sellers put up network effect has through a recent idea their own capital, they gained the equivalent of you’re excited about? make their own five years’ worth of products, they fund their strength in one year, JH: One relatively new own inventory. FedEx then not only will your investment we made last and UPS pay for the revenue growth be much year is Etsy. Etsy is a trucks, and the faster, but your business two-sided marketplace distribution centers that has also achieved a that provides a platform ship and store that much more solidified for individual inventory. Etsy simply position in the market. entrepreneurs to make takes a cut of all the money from their labors business that occurs on of love. The platform has the platform. It collects If you've acquired five 3.7 million sellers, 69 cash upfront from years-worth of million buyers, and 80 buyers, it keeps about customers, thanks to million listings. Etsy's nine cents of every COVID, for very little niche is specializing in transaction dollar for cost, you've created handmade products that itself as a fee and then enormous value because were manufactured by passes the rest along to those habits have these 3.7 million sellers. the sellers. This is a very changed, and that would They're very unique valuable asset because have taken many years products. Etsy is growth has very low and much marketing benefiting from a few marginal costs, which is expense to achieve key trends that I think a big reason why Etsy is those same changes that are gaining strength as highly profitable with have occurred. time goes on, including a 30% plus free cash flow trend towards margins. individualism, a desire to A similar dynamic exists be unique and a desire at the other end of the to support small The second thing I like spectrum, where businesses and local about the marketplace companies have been merchants. business is network beaten down because of effects. The more people COVID. In some cases, these are permanently Etsy is a global business (Continued on page 40) Page 40 John Huber, Saber Capital Management

that join the network, business model to pass with each and every new the more valuable it is savings along to customer. When you for everyone else. In customers in the form of combine these forces Etsy's case, the more lower prices. It kept its with the economics of sellers on the platform, gross margin constant, internet companies, the better and wider the but as volume increased which can deliver digital selection for buyers, over a fixed cost base, it products with no which brings in more would lower the unit marginal costs, you get buyers, which attracts prices for the products really powerful more sellers, and so on. that it sold. businesses that get more COVID has supercharged profitable as they grow this network effect. The and can reach global network has grown from I think concept also this scale in very short 46 million to 69 million applies to digital periods of time. I think buyers in just the last companies and the use that’s one reason why year, which is a 50% of data. A company like companies have become increase but an Etsy is using the data much larger and much exponential increase in that they collect to more valuable than we what I think the improve the products would have predicted durability and future that they're offering using prior paradigms. earning power of the customers. The more network will be. people that use the “Network effects and product, the more they can invest in R&D, and data feedback loops The third thing that I like spread those costs in marketplaces is what I across an ever growing strengthen the moat call a data feedback amount of customer of a business as it loop. In the world we base. That leads to live in today, customer better products that grows...When you data is one of the most benefit all of the existing valuable assets that a customer base. combine these forces company has. Data helps with the economics of you understand your customers better, There are billions of internet companies, allocate your resources events that occur on more effectively on Etsy's platform every which can deliver product development, single day, which digital products with and that helps you make generates an enormous better products, which amount of data. They’re no marginal costs, attracts even more improving their search customers. relevance and reliability, you get really which leads to better powerful businesses user experience and also That feedback loop is improves their that get more very valuable, and the advertising business. profitable as they more data you can collect and analyze, the grow and can reach better your products get. The fourth characteristic This increases the value I like about two-sided global scale in very you can offer your marketplaces is that customers, and this can these businesses tend to short periods of get better and stronger help grow your business. time.” There's an investor as they grow. Network named Nick Sleep who effects and data coined the term “scaled feedback loops Etsy’s market today is, economies shared”. strengthen the moat of a by my estimates, around Sleep used Costco as an business as it grows. $150 billion. The example of this mental These forces act like a company thinks it's model. Costco used the magnet, attracting more going to be $400 billion economies of scale customers and the inherent to the retail magnet gets stronger (Continued on page 41) Page 41 John Huber, Saber Capital Management

over time, and Etsy's about 30%. Again, JH: It's a great question. platform did $10 billion there's some benefit There are two key things in gross merchandise they've achieved to the I’m watching with Etsy. sales. Etsy’s business rapid growth they've One is the size and the grew 117% in the most witnessed this year strength of the network recent quarter, but it's because it’s a negative – the number of buyers, got a very small piece of working capital model. sellers, and listings. The a very big market that The growth means cash other is the inherent itself is growing fast. I comes in from buyers conflict that exists think those tailwinds in faster than it goes out between the business, combination with the for payables, and so the customers, the profitability of the their 30% free cash flow employees, and the business model and the margins are higher than suppliers. There's a moat it's developing will their 26% EBIT margins certain amount of value lead to a lot of value currently, but given the that a business creates, creation over time. fact that incremental and how that business growth has very low shares the value with its G&D: One thing about marginal costs, Etsy ecosystem is always a Etsy that’s interesting, should become more tricky situation. We compared to a lot of profitable over time. mentioned Costco, which other very high growth shares an enormous businesses that you see amount of value with its I think they can achieve customers, and in the market today 50 billion in GMS in the trading at high prices, is obviously keeps a fair medium term, and that share of value for itself. that Etsy is very would still be a very profitable and generates But in that particular small piece of a very big business model, whether a lot of cash flow. How market. Their take rate do you think about the it's Costco or Walmart, right now is 16%. I think or even Amazon, you margins of that business the take rate will tend to and what it will look like could argue the suppliers rise over time, as get the short end of at maturity? Are there advertising grows, and any other two-sided value distribution. as some of the other marketplaces that you service revenue grows. compare it to that it I think how Etsy It's possible that Etsy balances that will go a might look like one day? does $10 billion in long way to answering revenue in five or six the question of how JH: Facebook is the years, at which point poster child for the value valuable and large the they could be generating network becomes. There that a platform business $3-4 billion in free cash and network effect can is a risk that if they flow. The current continue to increase the create, but it is unique. I valuation is around $25 don't think there'll be take rate, the sellers billion. I think if the would migrate to Shopify another Facebook, but company continues to just a couple of years or would leave and try to execute well, there's a set up their own shop. ago, Facebook had 50% lot of potential upside. operating margins and Etsy’s take rate is still 80% gross margins. below eBay's, and G&D: You mentioned although it's hard to Going through the take rates – how do you calculate Amazon's exact drivers of margins, I think those will evolve, third party take rate, I think Etsy's gross especially with more think Etsy’s is well below merchandise sales could competition from Amazon's take rate as be many multiples the Amazon or eBay. Do you well. size it currently is. If the think if Etsy increased its network continues to take rates, it would make them less I think there is upside in grow, then I see no Etsy take rate, but it reason why the free cash competitive to those other platforms or wouldn’t be smart to flow margins couldn't increase their 5% equal or exceed what increase seller churn? they are now, which is (Continued on page 42) Page 42 John Huber, Saber Capital Management

collection fee at this think of it like a workout always been a way to point. They have said and I track my deep clarify my own ideas, it that they might raise it dives on a spreadsheet. helps you solidify things on different product you understand, it helps lines, but on the core identify weak points and business, I think the 5% “I think it's great to areas that you don't will probably be static for quite fully grasp, and it some time to come. be passionate about helps sharpen your focus. I have no doubt things. But I think that it makes me a Etsy also has other passion is actually better investor. So that's potential monetization a central part of my streams. They take overrated. My advice process. Then the rest of roughly 3.5% as a my day is what I call flex payments charge for on that would be to time. what they call Etsy payments and then they pick a general field have advertising and that you think you'll I spend a lot of time additional services. Once talking to people when again, due to the data enjoy, and then don't I'm researching a feedback loops, business, sending advertising should worry too much messages, emails, phone monetize more over time about the specific calls. Flex time is when I as they offer a better read the news, catch up return on investment to position you start in on blogs that I follow, or sellers. Etsy's and don't focus catch up on earning advertising revenue right reports – I call that now is growing at 95% initially on ‘following “maintenance CapEx”. It and I believe that might also involve growth will continue to your passion’. listening to a podcast or be robust for some time, Instead, focus on maybe even going for a and this is very walk and thinking. It's a profitable revenue that becoming great at less structured time... will increase take rate My daily workflow is like and free cash flow whatever you find an interplay between margins. yourself doing.” very focused, very deliberate work with a G&D: Given the larger amount of unstructured time for autonomy of your role at I list what I did each Saber, how do you more thinking and more day, and I categorize the serendipity. You need to structure your days and sessions. They're either your process? have both of these company specific work, categories working in general education, or JH: I'm a process- concert with one another writing. Most of the deep to produce the quality oriented person. My work sessions that I do process is very insights that you need to are company specific make great investments. methodical and work, but writing has replicable. The The underlying goal of always been a very all of this is to slowly foundation of my day is important part of my what I call a daily deep build up a web of process. There are knowledge and dive session. That's a basically four ways to very focused, intense understanding about learn; reading, writing, great companies that I time for work without speaking and listening. I interruption. This is like might want to invest in think it's important to one day. a two or three-hour use all of those to fully block of time – it can't understand challenging go much longer than subjects. G&D: What advice that, because your mind would you give to MBA needs a break after an students interested in intense period of focus. I Writing for me has (Continued on page 43) Page 43 John Huber, Saber Capital Management

pursuing investing as a you're going to really career? enjoy it.

JH: I think it's great to G&D: How do you spend be passionate about your time outside of things. But I think work? passion is actually overrated. My advice on that would be to pick a JH: My hobbies are general field that you somewhat related to think you'll enjoy, and work in the sense that then don't worry too when I have my own much about the specific free time, I spend a lot position you start in and of time reading. But we don't focus initially on have five-year-old twins, "following your passion”. so outside of work, I'm Instead, focus on quite busy with family. I becoming great at also spend time whatever you find volunteering at my yourself doing. church and I’m a board member of a local charity we like to The common support. denominator that we're all looking for in a career is satisfaction. For me, I also love sports in the best way to achieve general, and I’m an satisfaction is to focus active runner. I run 50 on continual or 60 miles a week. improvement. That's That’s another area of what drives me, that's my life that I get a lot of what gets me out of bed satisfaction from trying in the morning. My to improve, although ultimate goal is become running becomes harder a great investor, but the and harder the older I motivation to get better get! at my craft is what I find

most fulfilling. The nice thing is, you can do that Running is also a great in any position you're in, way to take a break, any job that you have detach from the office right out of school, you and spend time thinking can start trying to about ideas and become great at challenging problems I'm whatever it is you do. working on. When I come back, I'm

refreshed and ready to I think if you approach get back to work. work that way, you'll

find yourself in a much more fulfilling career, G&D: Thanks very much whatever it is you find. for speaking with us. My general advice is don't worry too much about getting the perfect job or pursuing your passion, but instead focus on self- improvement. If you become great at whatever you're doing, Page 44 Wilmot Kidd and John Hill, Central Securities

Central Securities Graham & Doddsville the syndicate Corporation has since (G&D): How did you get department said to me, October 1, 1929, into investing? What "Well, you should call operated as a closed- attracted you to it? Don Stroben, who runs Wilmot Kidd end investment our corporate finance and John Hill, company with the Wilmot Kidd (WK): I department.” So, I put in primary objective of got attracted to a call and eventually got Central growth of capital. As investing because it's hired. Securities of December 31, the area where all of 2020, the firm commerce comes John Hill (JH): Wil, you managed $1B. together. The markets were involved in Central’s common have a future corporate finance and stock is traded on the orientation, and I think investment banking at a NYSE American under they offer opportunity fascinating time. Could the symbol CET. for young people to build you comment a bit about capital and do well. your experience working Wilmot Kidd is CEO Investing also provides a with the semiconductor and Chairman of lot of flexibility. industry? Central Securities. Mr. Kidd has been a WK: Hayden Stone's director of the “Investing [is] the CEO, Bud Coyle and Corporation since Arthur Rock had done 1972 and served as area where all of the original Fairchild President from 1973 commerce comes Semiconductor deal in to 2018, when he was the late fifties. So, named Chief together. The Hayden Stone was there Executive Officer. Mr. at the very beginning. Kidd is primarily markets have a Fairchild’s management responsible for the future orientation, were the guys that spun Corporation’s out from Bell Labs and investments and and I think they offer moved to California with research. William Shockley, which opportunity for was really the beginning John Hill is President young people to build of the semiconductor of Central Securities. industry. Arthur Rock He joined Central capital and do well.” had moved to San Securities in 2016 as Francisco and started a a Vice President. Prior partnership called Davis to joining Central, he I came to New York in & Rock, which raised the served as an January of 1966 and original funding for Intel. Investment Analyst started interviewing with Hayden Stone with Davis Selected Wall Street investment participated in that Advisors LP for seven firms. It's interesting round of financing and I years. Previously, he how you remember was involved as the was a Vice President those early interviews. I “numbers guy”, the at Quadrangle Group wanted to get into youngest person on the LLC and an analyst investment banking, and team. and investment I was interested in, as banker at Soundview we called it then, the I felt at the time that Technology Group. Mr. Buying Department. So, you had to work on IPO's Hill graduated from I interviewed with a or public offerings to Princeton University great number of firms, really understand the in 1996 with an A.B. many of which don't company. You'd sit in Politics. exist anymore. around a table with Eventually, I ended up at lawyers and company Editor’s Note: This Hayden Stone, an old- executives and write a interview took place line brokerage and prospectus. And it was a on January 20, 2021. investment banking firm. situation where the A college classmate of company management mine that had worked in (Continued on page 45) Page 45 Wilmot Kidd and John Hill, Central Securities

was telling the truth Life Insurance company, By 2000, Dai-Ichi began because their lawyers cleaning up a portfolio of to recover most of the were there telling them real estate investments value that they had lost. they had a lot of liability that they had made in They began to liquidate if they didn't. It was a the late-80’s. They had, the portfolio, and I great experience. on a mark-to-market thought that investing Gordon Moore told me basis, lost in excess of a was something that I one day, "Oh, make a billion dollars unlevered would want to do longer computer? Of course, we in the real-estate crash term. Like, Wil, I took a can do that." I think of the early nineties. turn through investment they were making They responded by banking as well memory chips at the buying 20% of LaSalle afterward, but eventually time. It was about then and getting a team of I ended up on the buy that he pointed out that people into their office to side too. the integrated circuit make the most of the was going to be the situation. It was a great G&D: You both basis for many new experience. One lesson mentioned some really businesses. It's only in was that you can interesting experiences retrospect that you can overpay for literally that have stayed with see how this really anything, because a lot you throughout your provided the basis for of these buildings were career, do you have any the personal computer, among the very best in other experiences that the iPhone, and then the North America. Another stayed with you and internet, and now e- was that you should shaped your investing commerce, social always focus on cash philosophy? networking, et cetera. It flow. I can't recall a time has been absolutely when we ever looked at WK: I think the fascinating to observe the GAAP financials. We philosophy gets the revolution that has focused solely on cash developed over time, but occurred, the wave of flow. And that became a I guess looking at the which we're still on, if big part of my history of Central we're careful about it. investment process. Securities and cross- referencing, G&D: What an amazing A third takeaway was, understanding the long- story. Being able to speaking of Graham and term nature of quote a personal Doddsville, Wil's integrated circuit commentary from daughter, whom I knew development led me to Gordon Moore is pretty in college, had given me see that thinking long- remarkable. John, it a copy of the 1937 term forced you to make would be helpful to hear edition of Graham and the best investment from you as well about Dodd when I was decisions possible. how you got into working at LaSalle. It Otherwise, it was more investing. seemed to be just a or less playing the game running list of mistakes, of musical chairs, trying JH: It really was an and, unfortunately, Dai- to buy something you accident for me. I had Ichi had made most of think you can unload to considered a lot of them. One of the things somebody else for a different careers coming that stood out at the slightly higher price in a out of college, but time was that Graham short period of time, investing was not one of and Dodd said that the which doesn't provide a them. I studied politics form of security doesn't sensible way to invest. and economics in college matter if the person on So, thinking long-term is and had written a thesis the other side doesn't the most important about Japanese politics have the ability to pay thing. that eventually led to a you. That was a very job with what is now poignant lesson given But it’s been interesting called Jones Lang some of the situations to see that different LaSalle. The job was that we were in, mostly philosophies could working in the New York with American real produce results that offices of Dai-Ichi Mutual estate developers. (Continued on page 46) Page 46 Wilmot Kidd and John Hill, Central Securities

were also very good. to recognize a trend or healthy debate amongst Another interesting part uncover a piece of analysts following media of my history of working information, as much as and telecom companies at Hayden Stone we try. about whether things occurred in 1970 when it like traditional was taken over by newspapers or radio Cogan, Berlind, Weill & companies were going to Levitt. Sandy Weill went “Coming out of the have a rebound or could on after many mergers tech wreck in the be good value. The to be CEO of what is now financial crisis cemented Citicorp. But what I early 2000s and then the secular trend, which remember most was that those were distinctly about Sandy the financial crisis, very challenged was that, as opposed to one thing that became businesses. A few of taking a long-term view, them were going to his view was every day clear, particularly in survive, but very few of is a new day. He looked them were going to at how much money he the financial crisis, is thrive in the medium to made each day, and that long-term trends long-term. I expect in then the next day was retrospect we will say going to be a new day. almost never reverse. the same thing about But there must have some of the effects of been more to Sandy There are cyclical the pandemic. than that because he did businesses that go get involved in this Wall Hopefully taking a long- Street consolidation of through ups and term perspective about brokerage firms that businesses can help lasted for many years. downs, but the clarify our thinking about secular trends almost where we really want to Now there are people be positioned and help that make investment or never reverse.” us avoid what can market decisions in quickly become a value seconds, days, and trap instead of a value weeks. Maybe the most investment. successful investor has The other thing about been Renaissance taking a long-term view, Another thing we try to Technologies. So, people which we say in our focus on in addition to have different time annual letters is at least taking a long-term view horizons, and I think 5 years, is that it is to own good you've really got to work clarifies our thinking. businesses that produce with the time horizon You asked about specific good returns on capital. that fits your capabilities experiences that And particularly, we tend the best. informed our philosophy, to focus on management and I would say that that is working in the G&D: John, anything to coming out of the tech interest of all the add on your end? wreck in the early 2000s shareholders. That goes and then the financial hand in hand with our JH: I think Wil's point crisis, one thing that time horizon, because if about taking a long-term became clear, you're going to own a perspective is really particularly in the company for 10 years, important. I'm not sure financial crisis, is that then management is it can be long-term trends almost likely to have the overemphasized. We're a never reverse. opportunity over that small firm in the context There are cyclical time period to reinvest of the industry, so we businesses that go most of the market cap don't view ourselves as through ups and downs, of the company. How being competitive on but the secular trends they decide to allocate shorter term ideas. We almost never reverse. that capital is ultimately don't believe that we're Before the financial what's going to ever going to be the first crisis, there was a very (Continued on page 47) Page 47 Wilmot Kidd and John Hill, Central Securities

determine our outcome. market specialization G&D: Do you think the has been a big change. institutionalization of VC G&D: Wil, how have Cambridge Associates and PE has made the markets changed since came along, and they stock picker’s job easier you took over Central took over control of or harder? There are and what learnings do capital allocation, and fewer companies around you have from that? the generalist became but perhaps the less and less able to remaining public WK: The markets have attract capital. That was companies are better? gotten more efficient huge. The other big since I've been at change has been Jack WK: It is harder. Central and we can look Bogle's idea about index Today's venture at history too. Back in or passive investing. capitalists have been the seventies, there Whatever we think about flooded with so much were really no separate, that, it's had a money that they want to private equity tremendous effect on the hang on until the businesses. The industry. employees demand Rockefeller and Whitney liquidity. And so that families were the deprives the public venture capitalists. And “I would say market of these you could say that efficiency, private opportunities. private equity in the The venture capital and 1950’s and 1960’s was equity, and passive private equity business done in the public seem to be affected by market. investing are the Andrew Lo’s adaptive really big trends. And markets. There's an First, I would say that awful lot of capital venture capital became a lot of this is fostered chasing startups, and institutionalized. And in part by the amount the investors are not eventually you ended up getting great deals when with a few the truly of money. We've the founders can successful venture demand 50% of a capital firms, and then basically had an company. the followers, many of inflationary whom were quite JH: The amount of successful too. The same environment if you money that's followed thing happened in Swensen’s very private equity, although look at it long-term, successful Yale model of it's easier to enter the aside from the big focusing endowments on private equity business, private markets has because it really only Volcker period where brought the same thing requires capital. The that happens in any venture capital business we killed inflation for market that is flooded now requires an a period of time. ” with capital. Returns institutional presence. eventually go down. For example, a lawyer There are relatively few from a law firm like I would say efficiency, VC funds that have Wilson Sonsini that private equity, and generated truly outsized would introduce the passive investing are the returns. graduate students at really big trends. And a Stanford that were lot of this is fostered in I don't think there's any starting the promising part by the amount of question that the new company. And if money. We've basically markets have become you were Sequoia or one had an inflationary significantly more of the other top venture environment if you look efficient over the last 20 capital firms, you might at it long-term, aside years. In general, retail get the first shot. from the big Volcker stockholders invest more period where we killed of their wealth via index I also think that the inflation for a period of funds and many fewer institutionalization of time. (Continued on page 48) Page 48 Wilmot Kidd and John Hill, Central Securities

individual stock side, but it's probably very unique. And from positions. So, the the most interest rate that I wonder, what majority of trading sensitive stock in the insights you have from volume in most stocks is world. And as a result of the fund’s long track a combination of quants, that, one’s view on record? index funds, and interest rates, or a lack professional investors, of such a view in our WK: Central was started all of whom are smart. case, determines your in 1929 in Chicago by That's another reason level of interest. If you the Central Banking why we try to focus on look at the tremendous Trust Company of the long-term. In terms move in the stock over Illinois. Central was a of uncovering the last six months, securities affiliate of the information or even that's purely a result of bank and invested in having a differential view Mr. Market’s impression public utilities, which over the shorter term, of what interest rates were a popular growth it's unlikely that we're are likely to be in the industry in 1929. What’s going to outsmart those future. When we were interesting is that very talented people. We adding to Schwab last Central started in believe there is less year, we didn't have a October 1929, so they competition over the view on where interest didn't lose any money in long-term because most rates could go. We just 1929 because they didn't professional investors thought they were have it. They also didn’t have to worry about unlikely to go a lot lose any money in '30 or short-term performance lower, already being at '31, but lost half of it in because of the threat of zero; but they could go '32 and proceeded to redemptions and higher, and that the lose more money. They compensation incentives. marginal returns from started with $15 million them going a lot higher and reached a nadir of would be high. $3-4 million. In 1936 the “We believe there is bank reorganized and less competition over We've found that the Central repurchased a timing of returns has large block of its stock the long-term because compressed. which had to be sold. So, if you wake up one So, there was a huge most professional morning and decide that buyback of 20% or more investors have to your view on interest of Central’s rates has changed capitalization. Central worry about short- because Biden won the stabilized there, and election or the two after World War II, the term performance Georgia runoffs went to company was very because of the threat the Democrats, it's too successful when new late. The market has management came in. of redemptions and already adjusted. You have to decide whether Christian Johnson ran compensation or not you want to be the company from 1948 incentives.” there or whether you until 1962. He had don't. So, we tend to recognized that after look for situations with World War II with the We look for situations asymmetry and soldiers returning, the where things are optionality that could public was misunderstood, or things work in our favor, rather extraordinarily liquid are relatively unwanted than situations with because of the financial because of specific certainty, because that repression during the events or the duration certainly would already war. Much of Wall Street required or uncertainty. be priced in. was bearish, feeling that A good example of we might have a uncertainty would be G&D: Before we move depression after the war Schwab. It's a very well- on, it would be great to like we had after World regarded business, both get a quick overview of War I. Mr. Johnson was by the sell-side and buy- Central because it is (Continued on page 49) Page 49 Wilmot Kidd and John Hill, Central Securities

very bullish and saw the the game” and it worked participating in the opportunity for Central. out. That's the biggest markets at the same Investors bought the lesson, and I think that's time, it's different. stock at a value of about sort of overlooked during a dollar a share, and, I the heyday of the The investing education was told, made, over 50 mutual fund businesses. that you are getting is times their money in the I think largely, it's far superior to what I 1950s. overlooked today. But got. Although one thing the closed-end business that sticks with me from After he died, a is not a very big back in the '60s is that successor management business and doesn't one of my professors team ran it until 1970, really provide a lot of said you really have to and then there was a opportunity for Wall go visit companies to get dispute about how the Street to make money, to know them. I think company should be run. other than raising new that's something that The management group ones, which these days over the years has left feeling that they are mostly ETFs. And it's proven to be very were not going to be debatable whether that's important for me. It’s able to get control. permanent capital or more difficult these Central was then run by not. It's not really, but days. But I still think it's an outside bank for a it's semi-permanent, so doable, and I think that few years, and assets to speak. your contacts, getting to had declined at one know people, that all point to about $35 leads to getting to meet million. I was asked to “The big lesson from more managements and go in and look at the all this is permanent know them. I have situation. In retrospect, colleagues who just it was an opportunity to capital. I mean, if you wouldn't invest in a do a restart. It was clear company where they that things were at a don't have permanent didn't know the very low valuation, so capital, you don't get management. I would from starting there, we say that's very started taking a long- to take a big important. term approach and kept our expenses as low as drawdown and G&D: Those are great possible. Eventually we continue investing.” principles, but how do were fortunate enough they influence your to benefit from the bull philosophy for investing market of the '80s and G&D: What’s your over the long-term? Do then the bull market of investing philosophy and you tend to be more the '90s, in large part how has it changed over value focused or more based on the integrated the years? growth focused? circuit industry. We also had some contacts in the WK: Well, one of the WK: I've always said oil and gas business, and most interesting things there's no investor that that was very successful is even after 50+ years, doesn't want a value. in the late '70s, early I find that I am still It's really the fact that '80s, maybe due to the learning. I learn a lot growth is the biggest origination of corporate from John and Andrew factor in the value activism in a big way O’Neill at Central. John equation. That's the way with Boone Pickens. mentioned that he I used to say it. But it's The big lesson from all focused on cash flow. I made even more clear this is permanent think we always had by that professor of capital. I mean, if you some focus on cash flow, yours up at Columbia don't have permanent but John has caused me who recently wrote a capital, you don't get to to raise that to a totally piece about value take a big drawdown and new level. I think you investing. It's really continue investing. So can understand it future cash flow. here the shareholders intellectually, but when Buffett's also made it so got a chance to “stay in you understand it from (Continued on page 50) Page 50 Wilmot Kidd and John Hill, Central Securities

clear. I mean, investors G&D: How do you think management team that are much smarter now about businesses that has been exceptionally than they were, and that generate a lot of cash good at allocating capital has been an evolution flow but have seemingly over a long period of that I've gone through. run out of things to do time. They've recently I've become smarter with the cash? undergone a over time. management transition, WK: That's a problem and it remains to be We inherited an because the investment seen if they can continue investment in the '70s at business is a capital their amazing track Central, one of the big allocation business. And record. But their model old meat packing you must have to have as Wil said is very companies, Swift and opportunities to reinvest specifically focused on Company. Central’s it and for years Intel did taking cash out of management had until their recent businesses in the learned it that was missteps. A free cash portfolio that they select dramatically more flow model that we've specifically because of valuable as a sum-of-the been very impressed the high gross margins -parts. They were with involves and the ability to take generating huge cash acquisitions. One of my cash out of them; then, flows, and if colleagues over the they redeploy it into management reinvested years was involved with acquisitions. those cash flows companies like Dover correctly, they could and Carlyle and Roper We have a couple of make a huge gain. But it where they have run other businesses, Cogent was going unrecognized businesses solely for Communications and by the stock market at cash flow and then taken Star Group, that cannot the time, The Crown the money and redeploy all of FCF back family had taken a big reinvested it in sensible into the business. interest in the company acquisitions. And that's Cogent does generate to protect them from sort of a business model organic growth over some activists from that is, I would say a time, but they don't Texas. The CEO retired model for all seasons. have the ability to and the CFO moved up, That is one of the deploy all the cash they and under his leadership wonderful things about generate back into the they increased the value investment. You can business. They have, we of the company by six or continue to learn, and think, a very unique CEO seven times by different opportunities who owns 10% of the reinvesting capital and come up at different company and is laser spinning off companies, venues. focused on getting all and eventually, all the the capital out of the businesses were sold. JH: Philosophically, it's a business that can't be really important deployed at very good That was really a capital question. We've found returns inside the allocation cash flow that it's really difficult to business. Star Group is a reinvestment story, but make money when there similar situation. It's a not under the guise of isn't at least some fuel oil distributor and today's looking at a organic growth in the does not have positive unique company that is business. It's possible, organic revenue growth, producing lots of cash but it has to be a really but it has a management flow and well-managed. special management team and a shareholder So, I suppose cash flow team and a really special culture that's very investing has always situation. Wil mentioned focused on improving been understood by Roper and Dover and cash flow per share over investors. Of course, in Carlyle. Of those we only time. We think these are the case of Swift, it was own Roper at present, pretty unique situations. necessary to get but that's been a If we look back at management to make it situation where they painful mistakes made work. have a unique culture over the years, usually it and a unique (Continued on page 51) Page 51 Wilmot Kidd and John Hill, Central Securities

involves a company TJ Maxx. I'd never really which is the lithium where there wasn't looked at TJ Maxx and I company riding on the positive organic revenue don't own it now, but his Tesla wave at the growth, or the outlook point was that the moment, which just goes for organic growth was apparel producers and TJ to show that there are poor. Maxx have a symbiotic just so many different relationship. The apparel ways of using cash flow. G&D: How do you go companies have got to about idea generation? overproduce so that they G&D: Would you say do not get stock-outs. that is the biggest area WK: I can say that's They eventually must you focus on at Central? been a perennial get rid of the remnant What is the cash flow question as long as I've inventory, and TJ Maxx profile and what’s the been in the investing is the most efficient way opportunity for deploying business. There is no for them to unload the it? specific model. If there stuff that they cannot is, at any moment in sell. They need to keep JH: I think that the cash time it will immediately TJ Maxx around because flow statement is usually get overused. they really give up a a disqualifier rather than What you are as an huge opportunity if they a buy signal. If there's a investor is a person with run out of merchandise big discrepancy between intellectual capital, with at the end of the year or the income statement experience, at any time. and the cash flow understanding of statement, it’s rare that businesses and contacts So, it's getting to the discrepancy is good that allow you to get in understand those news. more insightful or inside insights into business views of situations, learn that just aren't in the Uncovering ideas as Wil what's really happening public press and often said, is a question in a business. aren't in Wall Street everybody asks and research. But I think it's there's never a good somehow getting to answer for it. A lot of it “What you are as an where you understand is serendipity. Wil talks a investor is a person situations. John had lot about trying to mentioned Star Gas, expand our network and with intellectual well, we don't know that expand our circles of it'll work out, it’s a competence over time. capital, with declining business. I'm And those two things are experience, reminded of the first related. Some of the LBO, when the Gottwald best ideas that I've ever understanding of family bought Ethyl come across have come Corporation, which had from talking to businesses and been the company that executives in the contacts that allow made tetraethyllead. In technology industry the fifties it was banned about how their you to get in more and then use of customers use tetraethyllead was technology, and vice insightful or inside discontinued. So, the versa. Some of the best views of situations, company was going to tech ideas I've had, have go out of business, and come from talking to learn what's really they bought it from a consumer product consortium of oil executives about how happening in a companies with they use software. I've business.” borrowed money and been very surprised used the cash flow to about some of their pay off the debt. Over answers over the years. I just learned this the years, they've recently, from an produced four or five Wil mentioned that good investor who was different companies, ideas always attract explaining the theory of including Albemarle, (Continued on page 52) Page 52 Wilmot Kidd and John Hill, Central Securities

capital and one very deal was announced, I suppose the answer is fertile area for a long and we loved it even there is no answer. If a time was sort of the Joel more after company’s fundamentals Greenblatt book, “How announcement. We start to deteriorate, I to Be a Stock Market thought the valuation think it's probably smart Genius”, which focused had declined from, 17- to recognize that early. on corporate action and or 18-times free cash And we've been recently spins and such. Spins flow, to 14- or 15-times at fault in not seem to have gotten to while improving the long recognizing some things be a somewhat less -term complexion of the early, I'm thinking fertile area to look, business. The market particularly of Intel's although they can still at just thought that Analog stumbles, where of times be quite good. was dead money course it's always easy When Bristol Meyers because it would take a to look in hindsight. spun off Mead Johnson, year to get Chinese Also, when you're its infant formula regulatory approval to getting tomorrow's price business, it didn't look close. We added to the today, it's probably a particularly cheap, but it position. good idea to at least was a great idea. And trim your holding. Which when HP spun off Another similar and reminds me, I think that Agilent, and then Agilent more recent situation is some of the more spun off Keysight, Wil Aon, the second largest successful sales we've had the wisdom to keep insurance brokerage had is when an Keysight. It's been a company, which is investment grows from great investment for buying Willis Towers say, four percent of your Central. Watson, the third portfolio to seven. You largest. We've wanted to might say, well, I'm just I went up to see own insurance brokers going to trim it down to Keysight in Santa Rosa for a long time; they're five. So, trimming your when I started at Central great cash flowing winners. However, that and concluded that we businesses. Aon more or goes totally against the should keep the position, less treaded water for theory of watering your but not add. Well, it's up some time after the flowers and pulling out five times since then. announcement, which your weeds, and I think So, I was quite wrong. gave us time to do due it's very important if Spins historically were a diligence. We are you're a long-term fertile area, but they hopeful that cost investor to try not to get seem to have become synergies could be out of your flowers too less fertile than they significantly greater than early. may once have been. management’s initial Meanwhile, we have estimate and that free “I think it's very found that other forms cash flow per share of corporate action, like could at least double important if you're a M&A seem somewhat over a four-to-six-year more fertile because the period. long-term investor to time horizon for most try not to get out of investors has gotten so G&D: When or how do short that they don't you decide when is the your flowers too want to look past the right time to sell? close date to see early.” whether or not they WK: Well, the answer is want to own the new you want to own JH: Tomorrow's price company or not. When companies. Someone today is the hardest Analog Devices, which is asked Sandy Gottesman, thing to manage our biggest public a director of Berkshire appropriately. The reality position, bought Linear Hathaway, who has been is that in the short-term Technology in 2016, the with Buffett since the stocks can go far past stock declined on the very start, what the right your most generate announcement. We time to sell was? He estimate of fair value. loved Analog before the said, never! (Continued on page 53) Page 53 Wilmot Kidd and John Hill, Central Securities

We eliminated a position Intel because we still believes that being a in an insurance company think it's an important privately held company called Kinsale last year. company long-term, allows them to take a We think the founder potentially with national long-term viewpoint that and CEO, Mike Kehoe is security implications, they could not take if among the very best and it's certainly they were a public executives we have met. inexpensive. But we felt corporation. And I think He owns about 5% of the competitive position that probably the reason the company and has had changed and that we think highly of it right done a magnificent job we should reallocate now is that they in every aspect of the some of the capital to recognize where the business. They've used positions like Alphabet, personal lines market is IT to achieve a much where we felt that there going. They are working lower cost ratio than were some areas where as hard as they can to most of their the company was under- take advantage of it. competitors in the E&S earning due to cyclical There is a massive shift insurance market. factors, like travel, and to the online acquisition They're likely to gain investment through the of business. When you share for a very long income statement, such have an investment like time, but we felt that the as Waymo and Verily. this, where you know stock was starting to the company well and price that they soon G&D: Could you walk us are on the board, you would be a bigger E&S through one or two get to see a business insurance underwriter recent ideas? What’s the from the inside and you than say Markel or RLI high-level thesis or what get to see what's really or W. R. Berkley, all of do you think is going on in the industry. which have been around misunderstood by the It’s a huge $2+ trillion for decades. market? business, so a huge addressable market. Furthermore, they would JH: Plymouth Rock is a have to raise capital in very important part of JH: It's a huge market, order to support that Central. It's about 20% and it's also still an much greater level of of assets today. It's a extremely fragmented premiums. And so, we private company in market. There are at sold the position and the which Wil invested in least 20 companies that stock just kept going. 1982 at its inception. sell car insurance in It's a humbling business. The founder Jim Stone, every state in which we Wil mentioned Intel. I Wil had known from his operate. And most of think another reason to time at Hayden Stone. them are not well sell in addition to Plymouth Rock known. Most of them are tomorrow's price today underwrites auto and not terribly competitive is just if we have a very home insurance and or profitable, at least on clear sense that the smaller lines like an underwriting basis. competitive position of umbrella in the Most of them rely on the the company has Northeast. Plymouth investment income to changed. In the case of Rock has an extremely support the underwriting Intel, our research entrepreneurial culture operation. Investors uncovered that for the while also being quite tend to think of customers that are able risk averse. Progressive and Geico as to fully optimize code to Wil, what would you say really the dominant the way that AMD about Plymouth Rock forces in the market, addresses memory and and the investment and to a large degree, other aspects of the way thesis and its importance that's true. But it ignores their chips process to Central? the fact that there are instructions, AMD server still 15 to 18 other chips today can do WK: It's a company companies from which significantly more work that's owned by the we can gain share over on the same power shareholders and run for the medium to long- budget. We didn't the shareholders. term. That's extremely eliminate the position in Management firmly (Continued on page 54) Page 54 Wilmot Kidd and John Hill, Central Securities

important. G&D: Do you think your the 20% area over the involvement with long-term. Another aspect of Plymouth has made you Plymouth Rock that is better investors? I would say it's having unique is that they've skin in the game. And been extraordinarily WK: I think the first that's part of what's good capital allocators answer to that is that it's really important to us, and investors over the made us understand the which is knowing long-term. We think of insurance business management and having Progressive as a better, and we should management that's company that is have understood it working in the long-term primarily an better earlier, because interest of stockholders. underwriting profit- Progressive has been an It's the agency problem, driven company. While extraordinarily good as they say in Plymouth Rock has investment over the economics. It's really generated underwriting years that we should important to have profit over time, its have owned more of. management that is success has been driven But, yes, it has provided shareholder-friendly, primarily by very strong insights into investing, honest, and capable. investment results and as well. outstanding capital G&D: Has there ever allocation. Acquisitions G&D: How does been a situation where have played an Plymouth Rock think you really liked a important role in about the capital company, you thought Plymouth Rock’s growth, allocation piece? What the stock was attractive, particularly of our are they looking for? but didn't invest because business in New Jersey, What do you think they management didn't pass which is a reciprocal can do differently? your sniff test or didn't structure. If you're not own enough stock or had familiar with what a WK: Well, in public been selling recently? reciprocal is, I think Erie companies, many is the only public managements have low WK: I think I can think company that has a hurdle rates for of plenty of situations reciprocal structure. In a acquisitions. They've where the management reciprocal the capital of simply got capital and didn't pass the sniff test. the insurance company they want to do And I think one of the is owned by the acquisitions. And, I things I learned is that policyholders, and then mean, I've seen this the sniff test doesn't there is a management time and again over the always work. I mean, I company that receives a years. Plymouth Rock's think that one of my fee to manage all the management are big misses was not investing operations of the stockholders of the with Sandy Weill insurance company. We company, and they have because I really didn't own the management got a very high return think that Sandy passed company for that threshold for allocating my sniff test, basically business, and it accounts capital. Otherwise, because he was so short for slightly more than they'll give it to the -term. But he made a lot half the premium of stockholders to allocate of people an awful lot of Plymouth Rock. So, the themselves. That is the money. profitability of essentially primary thing I've seen. half of Plymouth Rock is I've been involved with G&D: What advice would really determined by companies that convince you give to MBA that fee-driven business themselves that they're students interested in model, and the other making great investing? half is the combination acquisitions when of the traditional they're barely in excess JH: For people who want insurance companies of their cost of capital. to pursue a career in and the holding Plymouth Rock is making investment company that holds acquisitions where their management, I'll give investments. returns have been above (Continued on page 55) Page 55 Wilmot Kidd and John Hill, Central Securities

you the advice that Wil industries. I think that and the opera. And gave me when I was it's really important to Broadway shows. young, which is that involve yourself with a when you're early in company with high- your career, the most quality people. Many “If you find a career important thing is to get years ago, I served on exposure to people and the University Club that is interesting to to companies and Board of Directors, and you, it's not work. industries that can raise Rick Cunniff was on the your level of play, help board, too. And he liked And that may be the you build a network and to talk a lot about his build out your circles of experiences at Ruane most important competence. Cunniff, and he pointed thing.” out that they had a wonderful young guy “When you're early in there, and the guy had Being involved in sports come to work at Ruane is very important, your career, the most Cunniff and said he because it's very good to important thing is to wanted to work there stay balanced. And even without a salary. certainly, you really get exposure to He just wanted to learn. want to focus on health, And so, I think the idea finding sports that you people and to would be really look for are good at and pursuing companies and the company where them. I played squash you're going to learn the for many years. I was industries that can most. Life gives you a never particularly good long career and going for at it, but I got to meet a raise your level of the highest initial buck is whole lot of people in play, help you build a not the smartest that universe. And I approach. So that would probably got a lot of network and build be really it. It's people ideas and made a lot of you want to associate friends and contacts just out your circles of with, a company that from being involved in competence. Working you would feel good sports. about. in investment Central has a large G&D: How do you spend stockholder, The management is a your time outside of Endeavor Foundation, lifelong exercise in investing? which my wife runs, and so I've sort of considered learning, which is a WK: If you find a career that my avenue for wonderful thing. ” that is interesting to philanthropic work. you, it's not work. And That's a nice thing to be that may be the most able to do. I would say important thing. The maybe most importantly, Working in investment goal should be to have some of the greatest management is a lifelong what you are doing at experiences I've had are exercise in learning, work be something that being on nonprofit which is a wonderful is so good that it's not boards or where you're thing. The more work. I've probably really doing it for other exposure you can get to spent too much time people, so doing great people early in working, which, of something for people your career, the more course, I never outside yourself is, when beneficial it is. considered work. And you look back on it at outside, I was pretty my age, it's one of the WK: You want flexibility. standard. I was more rewarding parts of You want to, if possible, fortunate enough to what you spent your life be more of a generalist marry a young lady who doing. so you get a lot of introduced me to the exposure to different ballet the philharmonic (Continued on page 56) Page 56 Wilmot Kidd and John Hill, Central Securities

JH: Wil has showed me that when you find purpose in the work, it changes your attitude about work, your engagement, and the length of career that you'd like to have. Coming to Central and working with Wil has been really great for me in that respect. I also think that, to me, personally, there's a lot of purpose and meaning in trying to help the Endeavor Foundation make the grants that it does. They own about a third of the company. And knowing that if we do a good job, that we increase their grant potential is something that's really important to me.

Wil has also encouraged all of us at Central to, as he said, be physically active and physically fit. It helps our focus at work and it also extends the duration that you'll be able to spend working. And so that's something I've really taken to heart, as well.

G&D: Gentlemen, thank you both so much for your time.

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Rodrigo de Paula ’21 Rodrigo is a second-year MBA student, a Meyer Feldberg Fellow and a member of Columbia Business School’s Value Investing Program. During the summer, Rodrigo worked as an equity ana- lyst at MFS Investment Management. Prior to Columbia, he worked at Clayton, Dubilier & Rice as a private equity associate. Rodrigo graduated from the University of Pennsylvania with a B.A. in Philosophy, Politics and Economics. He can be reached at [email protected].

Matt Habig ’21 Matt is a second-year MBA student and a Columbia Fellow. Dur- ing the summer, he worked in the Restructuring Group at PJT Partners. Prior to Columbia, Matt worked for six years in the Institutional Equity Division at Morgan Stanley, most recently spending three years in their Special Situation Group. Matt graduated from Dartmouth College with majors in Economics and Engineering Sciences. He can be reached at [email protected].

Alison Tien ’21 Alison is a second-year MBA student and a Columbia Fellow. During the summer, Alison worked in the Equity Investment Group at T. Rowe Price. Prior to Columbia, she worked in port- folio analytics at Capital Group in their Los Angeles office. Alison graduated from the University of California, San Diego with a concentration in Economics and a minor in Accounting. She can be reached at [email protected].