Episode #165: Chris Mayer, Woodlock House Family Capital, “I Do Think The Biggest Challenge…Is Keeping It, Holding On To It”
Guest: Chris Mayer is the Portfolio Manager of the Woodlock House Family Capital fund and co-founder of the firm, as well as the author of the Woodlock House Family Capital blog. He has also authored a number of books, including, 100 Baggers: Stocks That Return 100-to-1 and How To Find Them, and How Do You Know?: A Guide to Clear Thinking About Wall Street, Investing & Life.
Date Recorded: 7/8/19
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Summary: In episode 165, we welcome our guest, Chris Mayer. Meb starts off asking Chris about his background, then shifts to the subject of 100 baggers. Chris provides insight into his work on analyzing companies that have returned 100-to-1. He discusses the broad characteristics of 100 baggers, and the patience required to get through the challenging journey of the roughly 20 years he expects it to take for those kinds of companies to earn that return.
Next, Chris talks about the Bonner family, the founding of Woodlock House Family Capital, and the fund he’s running.
Meb then asks Chris to walk through his world view. Chris talks about resisting trying to create some type of narrative, and picking through opportunities as they come. He discusses his current regional exposure, as well as a few names he’s written about recently and the opportunities he’s seeing there.
Chris then expands on his process, and how he doesn’t rely on screens as much as a watchlist he has built and his own research.
As the conversation winds down, Chris covers transparency, the process of writing, and how it has forced him to organize his thoughts.
Hear all this and more in episode 165, including some recommended resources, and Chris’s most memorable investment.
Links from the Episode:
- 0:50 – Welcome to our guest, Chris Mayer
- 1:57 – Inspiration for 100 Baggers: Stocks That Return 100-to-1 and How To Find Them (Mayer)
- 2:50 – 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities (Phelps)
- 4:44 – Invest Like the Best – Chuck Akre – The Three-Legged Stool – [Invest Like the Best, EP.135]
- 4:50 – Characteristics of 100 baggers
- 8:01 – Why patience is so important in finding 100 baggers
- 12:48 – Coffee can portfolio and getting investors to follow this strategy
- 15:58 – Characteristics of stocks focused on in the 100-bagger study
- 19:46 – Background working with the Bonner family and Chris’s transition to investing
- 22:34 – The origins of the name of the firm, Woodlock House Family Capital
- 24:14 – The portfolio
- 26:31 – World Right Side Up: Investing Across Six Continents (Mayer)
- 26:45 – His perception on the markets and where they sit today
- 31:21 – His investment in AirLease and what they do
- 34:19 – Process for digging up new ideas
- 36:25 – Clarity of simplicity
- 39:51 – Benefits of being transparent
- 42:43 – Resources he finds valuable
- 44:27 – Most memorable investment
- 47:35 – Interest in Europe
- 48:43 – Best way to connect with Chris: woodlockhousefamilycapital.com, @chriswmayer
Transcript of Episode 165:
Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Cofounder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hey friends, welcome podcast listeners. Happy July 4th, we’re recording this the week after. We have a really fun guest today, one of my favourite writers of all time, and authors one of my favourite books. He’s also the co-founder of the Woodlock House Family Capital and PM of the Woodlock House Family Capital Fund. His background includes a stint as a corporate lender, for a long time wrote his own investment research newsletter “Capital in Crisis.” And written a bunch of books, including the aforementioned “100 Baggers.” And also “How Do You Know: A Guide to Clear Thinking About Wall Street, Investing, & Life.” Welcome to the show, Chris Mayer.
Chris: Hey, thanks for having me, Meb.
Meb: Chris, it’s great for you to be here in my old stomping grounds of Gaithersburg, Maryland. Listeners would appreciate this that my very first house out of college, I remember found my roommates, one of which is one of my best friends now, off the classifieds in the newspaper. That was like pre… all my young millennials don’t know what the classifieds are, that’s like, may not even know what Craigslist is. It’s like the pre of both of those. Fond memories of that neighbourhood.
But a lot of talk about today, you’ve done a lot of things. First, I feel like we have to, I’m sure you’re tired of talking about it. But you wrote one of my favourite investing books of all time “100 Baggers,” why don’t you talk to me a little bit about the inspiration for that. And we’ll walk through the book, talk about lots of ideas there. But what is the idea and what is 100 bagger?
Chris: So 100 bagger is the stock that goes up at least 100 times. And the inspiration for that came from Chuck Akre actually, who is a very successful money manager. He’s been doing it for a very long time. I think he’s probably in his 70s now. And he gave a very good speech, I think it was in 2011 or so. And it was called… well I forget what it’s called. Something about his investment odyssey. And in that book, he talked about a book called “100 to 1 in the Stock Market” by Thomas Phelps. And this was an investment book that came out in 1972. And he read about in Barron’s, he read the book, and he loved the book.
And I’d never heard of it. I’m a reader myself and I thought I had read all the obscure investment titles out there. And so I went and got this book, and I loved it as well. Well Thomas Phelps was a guy who… he had a varied career too, he was a journalist, and then he was a broker of some kind, and then I think he worked as an economist for a company. He had a varied career, but he did this study, where he looked at all the stocks that had gone up at least 100 to one from… his study began in 1932, and carried forward to when he posted the book in 1972.
And he found all these interesting stories, and companies they’d gone up 100 to one, and from that, he introduces a variety of different principles. So he’s also a very good writer. He’s kind of very folksy and there’s lots of quotable passages and things. So I love that book. When I was writing my newsletter, I would quote from it, I would tell people about it. And then one time, I had a reader who gave me a new idea and said, “You should update that book.” And I was like, wow, lightbulb, that’s a great idea. And so that’s what I did. I started to take the spirit of that book and to basically update it through… that was 2014, that book came out in 2015.
And so I found another set of 300 or so plus 100 baggers from… I went back as far as I could go was 1962. So it covers about 50 years. And I tried to see well what similarities do these companies have, what kind of things could we learn from the journeys they took. And that’s really how the book came about.
Meb: So I reread the book this weekend for probably the fifth time. And I’m serious this is a fun book. One, because of the study. But two, because some of the storytelling that you weave in through and first talking about the old book “100 to One” and some other ideas. And Chuck… there’s a great interview with Chuck on a Patrick O’Shaughnessy show recently wired to the show notes where they talk about some of these ideas.
But let’s drill down into this concept of 100 baggers because I think there’s so many lessons involved. Why don’t you talk to us a little bit about some of the characteristics of what you found, some of the takeaways? I think, a lot of people listening when we’re talking about 100 baggers, we’re talking about not 100% return, but 100 times your money. So putting that into context, 10 grand turns into a million, which is a very life-changing sort of investment for almost anyone. So talk to me a little bit about what you found, what the characteristics were, and any other insights.
Chris: Well, I mean, first thing that you learn is that being 100 bagger, or becoming 100 bagger really, it’s a math problem. And if you compound that at a certain percentage for a certain number of years, you’re gonna get there. So say 20% return for 25 years is a 100 bagger, or if a 14% return, it would take you about 35 years is rough math on that. And most of the 100 baggers that I found kind of fell in that range and in the kind of the middle 20 something years is what it takes. And what I found is that there were a variety of industry.
So I had sort of expected that maybe that might be an area where you might see some insight that some industries might predominate. But it was really all over the place. I mean, you had conglomerates, you had retail stores, resource companies, even airline Southwest Airlines in the list. There’s a whole bunch of different companies. And so what I did, when I looked at these, there’s a number of them I pull out for case studies and I talked about in the book, and those make kind of interesting stories too where you can just sort of see specifically how certain companies got there.
But I kind of tried to draw down some very broad principles. And I would preface this by saying that at least in the beginning when I was working with a guy, an analyst who was helping me churn through all the statistics, where we have this massive spreadsheet with all these financial numbers in it. And I had expected maybe to see a little more in actual numbers that I could point to. Maybe a return on equity would be important. Or maybe it’d be margins would be the critical number, or we would come up with some sort of variables. And that really wasn’t the case, there’s lots of ways to climb that mountain.
But I’d say some of the most important principles would be… I guess, if I had to distill it to one, it would be the same lesson that Chuck Akre always pounds away at too. Which is that the ability to invest capital at a high rate, and then take that return and then reinvest it again, and again, and again, and repeat, repeat, repeat. Because again, if becoming 100 bagger is mainly a math problem, then you want a company that’s gonna be able to basically solve that math problem and do it for a very long time.
So when you start thinking about it that way, it becomes more of a manageable problem. Then you’re not thinking, gee, I gotta find stocks that are gonna return 100 to one, which sounds impossible. What you’re really looking for is you’re looking for companies that generate a high, meaning something like 15 to 20% kind of return, and are able to continue to invest and do that again and again. And so it’s all you can do in searching for 100 bagger is to sort of create a portfolio of those kinds of companies. You’re not gonna get them all right, of course, but hopefully, you’ll get one or two. Chuck Akre has two to his credit. And since I’ve written this book, I’ve met a number of other investors who have shared stories with me about how they’ve had 100 baggers.
Meb: The biggest challenge in my mind… and we’ll come back to some of the characteristics in a minute. The people listening to this that I wanna really impress upon the listeners. Even if you’re doing 20%, which is Warren Buffett territory, listeners, over time, it still takes 25 years for that 100 bagger to happen on average. And most people will just sit there and do the math, think about 25 years, that’s a really long time. And the challenge of looking at your statement every quarter, every month, year, whatever it may be, 25 years, it’s not like most of these go up 25% per year.
Chris: That’s exactly right. And that’s an interesting point, too, because when I think about even since the book has come out, and other people have written to me about their stories, many of those stories are something like, “Yeah, my grandfather had XYZ stock and he just sort of left it there forgot about it or whatever.” It’s almost like there’s a benign neglect going on where people discover these stocks well as after the fact, and they’ve multiplied by some huge number. I do think the biggest challenge, and maybe even bigger challenge than actually finding one is keeping it, holding on to it because there are tremendous roller coaster rides. And I go through some of those in the book.
Amazon had some monsters horrific drawdowns. Apple’s had massive drawdowns, and I’m talking big, I’m talking 50% or more. And it’s tough to sit through that. So you have that. But then you also have long periods of just boredom. Berkshire Hathaway was the number one performing stock in the study. But even that stock I think that it was a seven-year stretch where it basically went nowhere.
And that is a long, long time to hold on to a stock and have it go nowhere. Especially if you’re people like us, where you’re reading about the market all the time, you’re looking for things all the time you follow it. And you know, bunch of other stocks that are zipping by you and you’re holding on to this thing. It hasn’t gone anywhere for one year, two years, three years, four years, nowhere five years. And yet this is a stock that was gonna go up something like whatever it was, it was just kinda an absurd amount over time. So those are definitely the big challenges.
Meb: I think in the book, you had it down round as 18,000 bagger.
Chris: I was thinking 18,000 but sometimes I always hesitate because it sounds so absurd.
Meb: Because I got 1.8 million percent return. So yeah, listeners, if you plop down 10 grand into Berkshire, you’d now be a 200 millionaire. Which just goes to show… I mean in the recent example that I think that a lot of people can probably relate to now, it started in the private markets, but of course, is Uber. But even then, even the unicorns that are just rocket ships certainly take off in a decade or more. I mean, I think the fastest 200X in your book I saw… I mean, there was a handful of maybe five that were right around five years. But that was pretty rare.
And you think about them… and this is one of the benefits of either having a manager or having someone who, you know, private equity, the lure of the public market siren of always being able to see what your investments are doing, and not letting them have that time. I mean, that’s me having the time-traveling ability to sympathise with my 65-year-old self and say, “Can you let this stock sit for 20 years?”
Chris: Exactly. There’s other examples too that even go outside stocks. I remember one friend of mine told me a great story where he had bought a painting. And he paid… at this point, he’s not really an art collector, I think but he paid really a high amount for this piece of art. I don’t know, let’s say it was 100,000. And his wife thought he was crazy. But he runs a hedge fund, he’s older than me. So he was telling me the story, this was something that happened 20 or 25 years ago.
And he bought and he liked the painting and he just hung it up in his room. And it had been there for 20 years. And then he’s downsizing, and they’re looking to sell and go to someplace else. And he decides I always had this painting all this time, and I wonder what it’s worth. So he goes to Sotheby’s and gets an appraisal and they say it’s worth like $800,000. So he goes, “Oh, well, let’s put it up for auction.” Anyway, the long story short is he eventually sells it for well over $2 million. But the key lesson for that, for me, is always that if he had someone knocking on his door every day, telling him what it was worth, would he have kept it that whole time? I doubt it.
Finally, someone comes in, it’s 250,000, 300,000. All right, well, I guess I’ll let it go. Or what’s worse is when you get a quote for half a million dollars, and then he comes back the next day and offers 250. Well, now all of a sudden, the way you think about it totally changes. So really the lack of having a quote like you say that call the market all the time having your positions marked and knowing what someone will pay for it at all times becomes a real problem when you wanna hold something for a very long time.
Meb: I spend a lot of time thinking about sort of hacks or ways to automate or nudges to keep us from doing dumb stuff as investors. And this concept that you talk about in the book of like this “Coffee Can” portfolio which goes back to Robert Kirby in the 1980s talking about investing and putting something away. I don’t have any good answers, by the way. But I spent a lot of time thinking about ways to try to help investors not muck around and let compounding really do its work. And it’s a hard problem to solve. I don’t know if you have any good ideas there other than say…
Chris: Yeah, I mean, the “Coffee Can” was the one sort of hack that… I like that idea and I know it’s harder to implement it, to flesh it out just a little bit more because the story of how it came about is kind of interesting too. Robert Kirby was a professional money manager at the time for Capital Group that was a big money management firm. And he wrote this paper, this was in ’84 when he wrote this paper. And the way it came to him was that he had this client, and he managed their money. And then I think it was a woman and then her husband died. And then she turned over her husband’s accounts as well to Kirby.
And that was when Kirby found that the husband had kind of been secretly piggybacking on all his recommendations that he made to the wife’s account except that he had one thing that he changed and that is that he never sold. So just anything that Kirby said buy he would put it in there, he would forget about it. So Kirby was shocked when he looked at the size of this estate because the husband had an account that I think there was one position, it was worth more than the entire wife’s account. He had several other jumbo positions that of course, had grown to very large positions. And of course, several others that you know, went down or a couple maybe they’re even worthless.
But overall, it made him think, wow, here he was doing all this work and research and hovering over this portfolio and adding, and trimming, and doing all the things portfolio managers do. And here the husband is all he did was buy what Kirby said buy and left it alone and did far better. And so that’s how the “Coffee Can” concept came about.
And so I think about how you can implement something like that. And I mean, I’ve written about this before and told people it’s not really anything revelatory. But one way is that you have a specific account that you just decide is your “Coffee Can” account and you put things there and you just tell yourself, you’re not gonna look at it, and you’re not gonna make changes.
And have another account where you can kind of scratch the itch, where you feel the need to have to do things all the time. Or even within a portfolio, you could have a certain section or portion of it that you say, well, these names, I’m just gonna leave alone. And it still involves psychological commitment that you’re gonna have to maintain for a very long time. But I thought about that to a lot, Meb, I don’t have any great hacks other than I do like that “Coffee Can” idea, which I write about in the book.
Meb: I mean, one of the things that we spend a lot… I don’t know, I say one of the things we spend a lot of time thinking about is this blurring of lines between private and public markets today. Where it’s on paper, a huge negative on private markets, so you don’t have any liquidity. But at least this concept that you buy something and you literally can’t sell it it’s almost like a forced penalty you’re putting upon yourself to be able to invest in something. I don’t know, that’s something I’ve been exploring. But just like trying to maintain weight, or exercise or have a good diet, it’s easy to say, harder to do.
Talk to me a little bit more about… so as you look through the characteristics. Talk to us a little bit about when you did the study, I know you excluded some micro caps. You talk a little bit more about this and I’m happy to kind of weave in what you guys are up to, would love to hear about it at Woodlock too. But we’ve talked about the code acronym, but what were some of the characteristics of the stocks when you did this 100 baggers study? What do they look like in general? And how did they transition to becoming these 100 bagger returns?
Chris: Right, I remember in the back of the book, I had a lot of the different characteristics. And one of the words I used I would say lower multiples preferred. So some stocks, maybe would trade at say 10 times earnings with the beginning of their run and then later sold for… let’s use an extreme example, let’s say they sold at 50 times earnings. So you get quite a bit tailwind that way. But it wasn’t always the case, some stocks started very high multiple and because their earnings just exploded, so much it overpowered all that.
I mean, I don’t remember this specific anecdote, but somebody… and I think I tweeted this. That Starbucks traded at something like 45 times earnings however many years ago. And from that point still is up, you know, 100x times or more than that. So sometimes you get these companies just completely overpower the valuation thing. But in general, there are quite a few where you would start with a lower multiple earnings, and then they kind of get that tailwind as the earnings would expand, they’d also get the added benefit of getting a big lift in valuation.
So that’s one that he’ll like and in fact in the book I call it the twin engines, when you have a lot of growth and then you also have multiple expansion. That’s one universal thing is that they almost all grew and just grew and grew and grew. There were some maybe exceptions where the company did not grow that much. But there was some extreme capital allocation going on, say where somebody was doing massive amount of buybacks and shrinking the stock. Where you can have a very powerful stock return even though the business itself didn’t necessarily grow 100x or anything close to it.
So those are a couple of things. Another thing is maybe obvious is that most of them started off fairly small, but as you say, I exclude some of the micro caps. And the reason I did that was because I didn’t wanna have this little penny stocks that just explode and go up 100x then collapse, you know, 99% again. And I wanted to have a population where at least in theory, I might be able to come up with some predictable attributes. So when I say they’re small, they weren’t that small, I think of the names in my study, the median sales figure was almost $200 million. So we’re not talking tiny companies. But that’s one way also to sort of help focus your lift, your search is to stick with companies that are generally smaller.
Another attribute that I always like to talk about, but again, I put this in the category of preferred, not necessarily you have to have this. But many of these great companies were associated in some way with some entrepreneur. So obviously Walmart, you think of Sam Walton, we talked about Berkshire, you think about Warren Buffett or Apple you think about Steve jobs, or Schwab is Charles Schwab and on and on it goes. There’s always… not always, but often an entrepreneur and someone who really drives it. But there are always exceptions there. Companies that just had great models and relatively faceless CEOs or time and made that return. So those are some of the key ones that come to mind.
Meb: I think those are important. Listeners, I mean, you could have a great large company, if you look at the biggest ones today, whether it’s Apple, Google, Microsoft, but the chances of a company going from say 1 trillion to 100 trillion, just the mathematics of that is a lot harder, of course than something that’s at 100 million going to 10 billion, etc. And the rocket ship of that growth compounding, it hearkens back to the… reminds me a lot of the Peter Lynch sort of investment methodology and ideas.
Why don’t we walk through a little bit… you’ve transitioned a bit from research and writing about this for a long time. Talk to us a little bit about your background of working with the Bonner family and then now transition to the dark side, being on the buy-side and managing money. Walk us through that kind of transition. And I’d love to hear where you’re seeing opportunities today and everything else.
Chris: Well, it’s interesting how it came about because I did the newsletter for a very long time. And it had a model portfolio. And Agora had an audit of those track records. And my newsletter was the best of anything that they’d published. That naturally led to some, I guess, interest on the part of the Bonners. But I had been working with them for a long time and I got to know them pretty well. And really the way it came about was almost accidental.
I remember I was at a conference with Bill, and we were on a… it was like a little cruise that the organizers had put on for speakers. And this was in Vancouver, and we went around a harbor. And on the way back coming back, it was just Bill and I talking about this. And he was telling me about how his family office hadn’t done very well, and he’s getting ready to turn it over to a money manager. I said oh, Bill, don’t do that, you know, I’ll help you. And so one thing led to another I mean, we actually shook on it and wasn’t really sure that anything would come out of it or not. And I didn’t see him the rest of the weekend for the conference.
And I remember I was having breakfast with a colleague and I was telling him the story. And he’s like, “Yeah, that’s cool. I don’t know if anything will come of it, but it’s a good story.” And then one day, I got an email from Bill Bonner, his oldest son, and he was like, “Hey, I heard you were talking to my dad about helping with the family office and I’m here to make that happen.” So that’s how that transitioned.
And so I joined or started to work for the family office in 2016 and helping them out with some of their different investments. And then last summer, I had the idea of well, why don’t we just start our own fund. And I asked if the Bonners would seed it, and they did with $25 million.
And so the long story short there it was started in January, with the Bonners there as anchor investors. And it was good timing, really, because we avoid that fourth quarter of slaughter and started in January. And yes, now here I am running Woodlock House kind of really with the same basic principles that I used when I wrote my newsletter all those years. The same kind of focus on stocks that I perceive to be undervalued that have an owner-operator, those are kind of key elements.
So far, it’s been a lot of fun to do. I really like it. You know, it’s interesting, because my daily existence isn’t that different. I still spend a lot of time reading and researching stocks and ideas. The difference is that I don’t have any deadline or have to crank out anything on a monthly basis or any pressure to come up with any ideas. So yeah, it’s been interesting.
Meb: What’s the name of the firm? Talk to me a little bit about that, that seems like that would be intentional the wording of it, where did that come from?
Chris: Yeah, so Woodlock… So the Bonner family owns a property in Portlaoise, Ireland called the Woodlock House. And I think it’s 1864 is when it was finally finished. And it was originally a family home. And then it became a convent. And then it was a nursing home. And then they bought it and it was empty. And now it houses several of the Bonner’s publishing businesses there. Since we kind of struck the deal in Ireland, and we wanted that sort of theme and Woodlock House seemed like a good name for the firm.
I mean, on the one hand, that’s kind of where we made the deal. But also, I liked the idea of it, because the house itself, metaphorically sort of speaks to a kind of staying power and has a lot of history. And it’s the same basic structure, but it’s been able to adapt to all those changes over time and I think it was a good name for a firm. And then the family part was Bill really wanted to include that because he thought it was Bonner family money and he has an idea which I agree with him. That families have a different kind of view when they invest versus most management firms.
A family is really looking to preserve and grow their wealth over a long period of time. And can really afford to think like owners and think long term. And so that was gonna be an important part of the… you may call the ethos of the firm. And we didn’t wanna be chasing performance on some quarterly or annual basis. So we were going to follow these principles and grow and preserve this wealth over time. And so that’s really the ideas behind the name Woodlock House Family Capital.
Meb: And so talk to me a little bit about what you guys look to invest in, and is it something… I know you’ve talked a lot about concentrated investing benefits of that. What does the portfolio look like?
Chris: The portfolio is concentrated, right now there’s 12 positions, 12 stocks, and that’s about 95% investor or so. I’d say the biggest positions may be around 12 or 13%, and then there’s a couple of 10%. So it’s kind of chunky. It’s a global fund so we can go anywhere. I do have several stocks listed in Europe. So we have ultimate flexibility to go anywhere and really do any anything we wanna do. Market cap size, we’re not under any of those restraints, only the self-imposed sort of restrictions that we put on ourselves, that I put on myself as an investment manager. Meaning that I’m looking for things where there’s some… I like insider ownership, I like aligned management teams. So when you look at the portfolio, it’s all things like that.
Meb: I know you’ve written a lot about… one of your books talked about investing all over the world. And I know that Bill also has talked about investing in all sorts of other assets like gold, etc. I assume your mandate is largely long-only, fully invested or is it something that you get into other assets or other strategies as well?
Chris: No, it’s long-only. And we talked a lot about that in the beginning. But it’s like I told Bill, you know, I think it’d be better to keep the fund more focused on owning equities for the long term and let people decide how much they wanna put in gold. Rather than try to mix and try to say, well, this fund is gonna do some gold and some fixed income, and then also have stocks. And let’s let people decide how they wanna allocate their own capital. And this is that sleeve where they wanna go for long term owner-operators, and then buy into that style of investing. So that’s how we set it up.
I mean Bill does have… the Bonner family does have quite a bit of gold. So they, you know, just talk about that and they’re not invested. Anybody who’s read Bill Bonner stuff knows he’s a huge fan of gold, and he’s got quite a bit of gold. And they have real estate all over the world and businesses all over the world. So that global outlook have reflected too in the fund. And when I wrote my letter all those times I did… one of the benefits is I got to travel all over the world on my publisher’s nickel.
In fact, I wrote a book about that too, called “World Right Side Up,” which has a lot of my travels. I mean, I went all through Asia, I went all through South America, and I got to poke around and look for interesting ideas and learn about markets in different places. So all that carries over into the fund.
Meb: Talk to me a little bit about your worldview today. Are you optimistic on opportunities? Are you finding them hand over fist? Maybe talk a little bit about where they could be allocated across the world? What’s the globe look like to you today in 2019?
Chris: Well I sort of resist trying to create some sort of narrative so I don’t have some sort of giant macro overview or big-picture view about how things are gonna develop. It’s really more picking through opportunities as they come. I think just looking at geographically I have a lot of exposure in Western Europe. And part of that is there seems to be a number of companies there undergoing different restructuring and change where the price is right. I’ve written about some of these on my blog as well. I’ve written about Exor which is a stock we bought earlier in the year.
And they own pieces of Ferrari, and Fiat Chrysler, and CNH Global. It’s a holding company, it’s partly owned by the Agnelli family, or I should say, I think they own little over half the share. So it’s their sort of family hold co-vehicle, it’s been very successful. So that’s an idea it doesn’t really fit in any sort of global macro point of view. But it’s this interesting vehicle, it’s been very successful, it happens to check a lot of different boxes I look for.
And so partly what’s in the fund also just reflects my own background. So I have a lot more expertise in things like financials and real estate manufacturing process, things like that, versus I’m not gonna own a lot of biotech or tech stocks in general. So that’s the basic list gist of it. I mean, maybe I didn’t answer your question very well…
Meb: No, I think it’s an accurate representation. Are there any other names that you feel comfortable talking about at all, either that you’re currently holding or researching that you think would be a pretty good representation of what you think is interesting today?
Chris: Yeah, so I mean, one of the stocks that I’ve written about too on the blog was Howard Hughes Corp. This is a company that owns a variety of real estate, they own The Woodlands, which is a development in Texas. They own Summerlin, which is a prominent development in Las Vegas. They own Ward Village, which is in Hawaii, and they own South Street Seaport, New York, and some other things as well, properties in Columbia, Maryland. And this is one of those where I really love the alignment.
The CEO had put up a lot of his own money and long-dated warrant. And Bill Ackman is the chairman so the incentives that he set up there were pretty favourable for investors. And in January, we started trading, I think, got under 100 for a while. I bought… I think the average price was around 102. And it’s more of a story that is okay, so it was undervalued but we had really good incentives there with the CEO and the people in charge. And then we’ve got big news in June where they’ve decided to… or they’re looking into possibly selling the company or part of the company, and it went up 41% in one day. And that now is at least the moment the fund’s largest position.
So that’s something that… and I still think it’s a good value here. Because even at $130 or so it was trading at $145 or so last year around this time. And if you do an NAV, it’s not hard to get 170 or above. That’s kind of an interesting opportunity that reflects certain things I look for. Again, that alignment and the combination of having an undervalued stock led to a pretty quick return there.
Meb: I was smiling as you described the fortuitous timing of the firm and fund. I think one of the largest amounts of alpha I’ve ever generated as an investor was transferring an IRA account last fall where it took like three months to transfer. I had to liquidate it and then reinvest it. And I was just laughing because it could have certainly happened the other way too.
Chris: Absolutely. Well, that’s the other thing is that the timing seemed good but then it was really hard to… It’s like I didn’t put all the money out on day one. So it’s actually pretty hard to keep up with the market when you started in January. Because it wasn’t like I just boom went 100% invested on January 2, which was the first trading day of the year and away I went. It really took a little while to get fully invested.
I wasn’t really fully invested until end of March by which time the market had already gone up something like…the S&P had already gone up 12 or 13% or something like that. So it was good because I’d rather be up than down, certainly the fund is up. And I’m happy with the start. But man, I’ve never seen a market quite like that where, in just two months time, straight up.
Meb: You talked a little bit about another idea. I would love to hear you kind of expand upon it from the blog. Where you talked about a company that’s involved in the ownership and leasing of airplanes. Would you mind expanding on that one?
Chris: Yeah, so that’s Air Lease. Air Lease was one of my favourites, especially when I started because it’s a stock that had… well first let me say basically what it does. So Air Lease just buys planes directly from Airbus and Boeing. And then it turns around and leases those planes to airlines. Not all airlines buy their own planes. In fact, close to 40% of the global fleet is leased. Some airlines buy all their own planes like Ryanair buys all their own planes.
But for a lot of these small carriers, discount carriers overseas, for them to get a new Boeing 737 or something like that, it’s almost impossible because those planes are spoken for and the big buyers come in and there’s like a waitlist. And so Air Lease is a big buyer of these planes as are the other leasing companies like AerCap. And that’s where they kind of bring value to the market. That and then they lease the plane so they’re able to shift around those assets in a more efficient way than having an airline own them.
But anyways, it’s a decent business and they get like a mid-teens ROE. I particularly like Air Lease because the chairman there is a guy named Steven Udvar-Házy who basically invented the industry back in the ’70s. And I feel like I can trust them. They’ve successfully run airline leasing companies before. ILFC was originally part of AIG, which they ran very successfully for a long time. So this was a company when I started in January was trading well below book. And again, even though you had that mid-teens ROE, you have a long term contractual cash flows. A lot of these… not a lot of them, all these leases that they signed with airlines are for periods of 10, 12 years.
And the other part that I liked about Air Lease specifically is they have a large order book. So they were going to… basically, you have baked in a path for the company to double in size over the next five years. So when you factor that all in, I thought it was a really compelling situation. So we bought a lot that early in the year, on average cost is somewhere around 33. It’s another one of those really interesting stocks because the stock is way more volatile than the business itself. And if you look at the business over time, and if you look at things like the average lease yield that they enjoy, and their plane just remarkably steady.
I mean even though the airline business itself is volatile. And even though you have oil prices go all over the place, interest rates go up and down, the actual business of what they have is very steady. It’s almost just like, you can imagine just being a landlord, except in this case, you’re leasing planes instead of apartment rooms or buildings. I think when we were originally purchasing the stock was trading at something like six and a half times earnings. And it’s moved a lot since then. And now it’s over $40 but still a pretty good deal, still trade well below book, still growing. And so yeah, that’s what I like a lot.
Meb: What’s your process like these days? So is it you sitting in Gaithersburg running a bunch of quantitative screens? Or are you still hitting the road racking up sky miles and travelling all over the world chatting with managers? How do you kind of dig up new ideas, is it going to conferences, what’s the process look like?
Chris: I’d say it’s kind of like a smattering of all those things. I don’t actually use screens much, because I’ve been doing this for a long time so I have my own watchlist of kind of names that I like and that I follow loosely. Like everyone else, I read a lot. And I did go to a lot of conferences, I haven’t gone to as many now. But that’s certainly part of it, you get exposure to a lot of different ideas, and other investors are thinking and that can be helpful. But my way of coming up with ideas is pretty eclectic.
But then once I get an idea, a lot of the research that I do is just based off what’s publicly available. It’s the publicly available documents, and I don’t feel like I need to go off and meet management all the time. In fact, this is something that’s kind of changed. I’ve done it both ways. So when I wrote my newsletter, when I was writing a small-cap letter, I would try to talk with management almost all the time or try to visit. And as I’ve gone on, I’m not sure that adds value. I know that’s gonna sound weird, because it seems like it’s part of everybody’s due diligence, they wanna talk to management and visit.
But I think that also brings some powerful biases with it. One I call like visitee bias. Like if they immediately sort of favour companies that you’ve already met and you’ve seen over companies that you don’t. Even though there may not be any other rational reason for that.
And the other thing I’m always leery of is that a lot of these CEOs, they’re there for a reason. They’re charismatic people, and they’re persuasive, and you can’t help but like them, and I think that then makes it harder to be impartial. So I would say meeting management is not a regular part of it. But it sort of depends. I have Fairfax Financial, I go to that annual meeting all the time. Don’t own Berkshire in the fund at the moment, but it was something that we had in the Bonner family office for a while, I would always go to that annual meeting. I’ve been to the Interactive Brokers annual meeting there’s a stock that we own. I kind of maintain a relationship there. So it sort of depends. So anyway.
Meb: It’s interesting about the process too because you wrote about this in the first quarter, where you talk about are you trying too hard. You had a quote that “People rate complex research higher than they do research that is simple and clear. 100-page slide decks and press and easily grasp the idea one can express in a napkin, not so much.” Talk to me a little bit about that clarity or simplicity or why people favour such complex explanations.
I mean, I think a lot of this ties into people feeling like they have to be active. This cult of I have to be busy, or I have to be working 80 hours, 100 hours, 120 hour weeks just to really prove that these ideas are fully vetted and worthwhile. Versus kind of the last step we talked about earlier in the beginning, which is people forgetting… not forgetting, but just never selling. Feel free to expand on that any way you like.
Chris: I think that’s a really interesting point because you see this all the time too with investment decks and pitches that get passed around. And somebody does an 80-page slide deck on a name. And you’re like, wow, you know, that’s really impressive research, they did all this research. But I wonder does that mean the returns are as good or better than something that comes across your desk and it’s only a couple pages. But that, you know, there’s some beautiful simplicity to the idea that’s based on a few firm things that matter and it screens out everything else that perhaps isn’t as important.
One of my favourite writers is a guy named Martin Sosnoff, and he wrote a couple of older books, but they’re good books. They’re fun to read, I’m not saying I necessarily agree with everything he does in his approach. He’s actually quite a different kind of investor than me. But one of them is “Humble on Wall Street.” And he has a rule in there where he calls it Sosnoff law, which is that investment returns vary inversely with the thickness of the research file. As the research gets more involved, and more detailed, the returns goes down and the simpler it is, the better. It’s what he found in his experience.
And I have to say, I’m not so sure, I haven’t done any systematic analysis of my own track record over time. But I have this feeling that sometimes those best ideas are the ones where they’re just really simple. And you have to say like, for example, Air Lease a company we talked about before, is a company I’ve known about for a long time, but I’ve never met the managers. I’ve never visited their office, I don’t know anything. I don’t have any inside baseball knowledge to tell you about how aircraft leasing works.
And yet… And I’ve always had good experiences with that stock, just because there’s some more simple aspects to it that if you just focus on those things, you know, you can make some really good money and then when it… it’s almost like it goes to these periods where it’s hated. And they’ll trade for 80% of book value or something. And then eventually the market will come around, it’ll trade for a book or a premium, and then you can lighten up on it. And then it’ll come back down and then it goes back up. There’s all those kinds of rationale imposed after the fact as to why it traded where did when it did. But if you look at the basic business hasn’t really changed that much.
Meb: We talked about this in one of our older books about following some of the top investors through 13fs. And we talked about Buffett and we said like, “Look, there’s very little turnover, you can track his top picks for no cost, tax manage them, takes five minutes a quarter.” And I said despite that, does anyone actually do that? Of course, no, no one does that.
But I was laughing because I’ve been to some of those presentations that have the 80-page slide decks. And my problem… and this is why I’m a quant is that every time I listen to one of those presentations, I’m like, I’m sold. I’m like, man, that’s the best idea ever, I would just buy everything, that’s my problem. I think everything…every pitch to me sounds good.
One of the nice things you do that I think is rare, but would love to hear about some feedback is, you’re pretty transparent too with your thinking and what’s going on. I mean, we were reviewing some of the articles and you’re talking about positions on the blog. And, listeners, we’ll add links to the show notes with all Chris’s writings, etc you can follow along. But you were talking about… you had a funny quote, we were talking about Vivendi and you said, “The sell-side suddenly seems to be taking a liking to some of my names, I mean who’s in on this position.”
Do you get benefits from being transparent or investors out there give you feedback that is useful, or is it mostly a bunch of internet trolls that you may find on the Yahoo message boards or something? What’s the process of writing? Is it something that your network you find beneficial? Or is it more just the production of being a teacher, the production of the ideas helps you formulate some of your thoughts? Talk to me a little bit about that.
Chris: Part of it is that I’ve done it for so long, wrote newsletters for 15 years, which I was very transparent to readers, had to be, they expected it. And I gave regularly commentary on the companies and their portfolio and as things were going on. So I’m more used to it, it’s not like I’m doing something suddenly unusual. But what’s unusual now, of course, is that I’m managing money. And so I’m talking about things that I’m actually doing. And I haven’t sorted out yet if it’s a net benefit or not, honestly. Again, I’ve only started the fund in January, I think it’s a net benefit, well, for a lot of reasons you mentioned.
One is that yes, I’ve already met some people through the blog, who own similar positions, and we’ve shared research and that kind of stuff has been very beneficial. There’s also something to be said for the process of writing anyway. When you sit down, you have to write something, suddenly, you have to organise your thoughts in a way that maybe you don’t if you’re just talking yourself about it. And there’s some benefit to doing that. And you get questions and sometimes the questions are interesting and thoughtful and you have to think about them.
The negatives would be that sometimes you get questions and maybe you feel obligated to answer them, and they don’t really add anything. Just sort of taking time to entertain a blog and you’re not really adding any value per se. And then the other downside… there’s a couple. One is related to that, which is just that anytime something happens to a stock, people write in and they wanna know what you think of the latest weekly move, and I think I don’t wanna get into that. There could also be some negative in taking positions publicly, then somehow you feel you might be anchored to them more than if it was just sort of hidden and you could just flush it out and nobody would know.
Again, I think partly because I’ve done it for so long, I might be more immune to that. I don’t really have a feeling that I can’t get rid of something just because I wrote about it. But you don’t know for sure. It might be some psychological things going on there. So I’m not sure. But overall, I think it’s been a net benefit.
Meb: We’ve kept you for an hour as we start to wind down here a couple more questions. What are any resources that you find particularly valuable in your search these days? You mentioned potentially going to Omaha, you mentioned not as much on the screening side. Is there any managers you love to read? Are there any… whether it’s books, conferences, people, anything that is a part of your decade-plus filtering process of learning and writing. What are some of the best resources?
Chris: Well, I certainly have some favourite money managers who I like to read. Certainly, I really enjoy Murray Stahl and Steven Bregman at Horizon Kinetics. And I always listened in to their quarterly calls, really it’s just Steve Bregman who does the quarterly calls, but I like the way those guys think. And my friend, Steven Wood at Greenwood Investors, he writes very good letters and research. And he’s interesting to follow. Scott Miller at Greenhaven Road is another guy who writes very good letters and has interesting ideas. And I’m sure there’s a bunch more that I’m forgetting, sorry if I’ve forgotten any good friends of mine.
But you know what, there’s also a lot of just guys who are putting out just good stuff, they’re not very well known. I know there’s one that just started reading recently called “Scuttleblurb – A Value Investing Blog.” He does a good job just sort of profiling companies, every couple of weeks he writes a new one. And you learn a lot about companies that way.
There’s a guy who has a stock spinoff letter that I just started reading. I think it’s just called “Stock Spin-off Investing,” and same kind of thing. He kind of have writes about spinoffs, and he does a good job I think of covering those companies. There’s a lot of things like that, that are good to read. Yeah, I think that’s about it. I’m sure I’m missing a whole bunch, but I mean, you know, this is stuff that comes to mind.
Meb: As you look back over the years, this could be across the newsletter, your personal investing side, what’s been your most memorable investment? Is there anything that sticks out in your mind, good, bad, in between, anything that’s really burned and seared into your memory?
Chris: Well, there’s a bunch.
Meb: Good, we’ll just keep this going another hour. Let’s hear them all.
Chris: Well, there’s one that just pops to mind. Because the volatility was so extreme. But I remember recommending Gulfport Energy was around $16 or so. And had all the things I like, had great balance, he was a big owner-operator involved, he’s not there now. And they had an interest in another company that factored into it. And it was a great value and all this thing, and I bought it like recommended around 16. And this was shortly before the 2008 crisis hit.
And then it got cut in half, and I told people, you know, you should buy more, it’s a good buy, blah, blah. And then it got cut in half again and got cut in half again, I think it bottomed out probably, I think it was… I wanna say it was around $1.44. And then from there went to 75.
So that was one of the biggest roller coaster rides I’ve had, but it reinforced. There’s a delicate balance between having conviction in your research and then just being a fool and writing something down to a zero. So in this case, I was right to stick with it. But I’ve had a couple like that and they all tend to be oil and gas names.
There’s one personally I was involved in called ATPG Oil and Gas, which had a similar crazy ride from I think when I first bought shares was $40-something and then got cut in half, and then it got cut in half again. And I think maybe got down on $2 or $3 and then it went back to 20. And I sold out everything making just a little bit of money, I think, and then eventually it went bankrupt. So [inaudible 00:46:13] on the other side, you can’t really fall in love with anything, you gotta at least watch it.
Meb: It’s funny the resource sector, write the same as you mentioned, the biotech sector is so massively volatile. You still pay attention, the oil and gas world?
Chris: No. That’s what I was gonna say also, one of the things I’ve kind of gotten away from… and this is something probably most investors go through this kind of, I don’t know what you call it, phase. You start off and you’re younger, you’re willing to try almost anything, really gonna do oil and gas, and mining companies, and this and that. You’re willing to try all these different things. And then as you get older then you start to realise maybe it’s not worth it. How many oil and gas names can I recall in my history that I liked that then you know, lost 80% of their value or something? It has been a number of them.
But there’s also been a number the turned out… go up two or three times. So that’s a lure of that kind of investing, it has to be that way. Otherwise, no one would ever invest there if you didn’t have those kinds of lottery ticket returns every now and then. But over time, I’ve just decided it was easier for me to stay with businesses that are a little more stable. And then I don’t have to worry about that sort of violence cyclicality due to macro factors that I have no control over. So I don’t have anything directly in oil and gas right now. And I don’t have anything in mining, yeah and biotech you mentioned, so some preference.
Meb: You said Europe is a bit of a focus right now or an area that you’re interested in. Certainly, with the Deutsche Bank, there’s headlines I feel like every day now whether it’s Turkey or Europe, I mean, we’re longtime European bulls. So it’s interesting to hear from other people.
Chris: So you got five stocks here one two three, five that are high on my watch list that I liked a lot and three of them are in Europe. So that says something.
Meb: Any countries in particular, or is it just…?
Chris: Yeah, western Europe but none in particular. I guess… no none in particular. There’s a couple of UK names, but I would say none in particular.
Meb: UK made it into our bucket of the cheapest… If you look top-down on countries, the cheapest quartile of countries, most recently when we started to look. But so much of this has been going on with Brexit and everything else. And as a market, it’s usually this geopolitical news that helped push things down. I think there’s probably gonna be a lot of opportunity there in the coming years, we’ll see who knows.
Chris: We’ll see, but I think that’s that probably right. I mean, there’s gonna be some macro volatility around Brexit and maybe you’ll be able to go in there and get some steals. Like I said, there’s several things on my watchlist at trade there. So I’m with you on that one, it’s gonna be interesting.
Meb: Yeah. Chris, what are the best places people wanna follow your tweets, your writing, your books, your fund, investing where do they go?
Chris: The website for the fund is called woodlockhousefamilycapital.com. It’s long but easy to remember. And you can sign up for the blog there, it’s obviously free. And then I have a Twitter page that I keep, it’s @chriswmayer. You can reach out to me there or follow me there.
Meb: Chris, thanks so much for joining us today. It’s been a blast.
Chris: Yeah, it’s been a fun conversation. Thanks for having me.
Meb: Listeners, we’ll add Chris’s links and show notes, mebfaber.com/podcast. You subscribe the show on any of the top podcasts apps, Breaker, Radio Public, Overcast. Send us firstname.lastname@example.org. Thanks for listening, friends and good investing.