Episode #329: Samantha McLemore, Miller Value Partners, “We’re In Optimism With Pockets Of Euphoria”
Guest: Samantha McLemore founded Patient Capital Management, LLC in 2020 and serves as the portfolio manager of the Patient Strategy. She has served as a portfolio manager for Miller Value Partners since 2008, managing Miller Opportunity Equity, a multi-billion dollar strategy across mutual funds and separate accounts. Prior to that, she worked as an analyst for Legg Mason Capital Management.
Date Recorded: 6/30/2021 | Run-Time: 1:03:42
Summary: In today’s episode, Samantha shares how sending her resume to someone by the name of Bill Miller led to her starting as an analyst at Miller Value Partners 20 years ago. We hear how the firm defines value and thinks about its edge in the investment process. Then Samantha walks us through some names in her portfolio and the thesis behind them, including ADT, Stitch Fix, GM, and even some SPACs.
As we wind down, we go back in time and have Samantha walk through what was going through her mind as she navigated 2020 and the lessons learned from that experience.
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Links from the Episode:
- 0:39 – Sponsor: Masterworks – Use Promo Code “MEB” to skip their 15,000 person wait list
- 1:13 – Intro
- 1:57 – Welcome to our guest, Samantha McLemore
- 2:32 – How meeting Bill Miller launched her investing career
- 8:16 – Where Sam thinks we are in the current bull market
- 10:36 – Sam’s investing framework
- 14:03 – What is Sam’s edge in the market?
- 17:07 – Themes Sam is loving in their current portfolio
- 21:55 – Stitch Fix and the potential value unlock of subscription goods services
- 29:43 – The benefits of failing
- 34:15 – Monetizing volatility and the psychology of handling drawdowns
- 38:16 – Sam’s framework for analyzing SPACs
- 43:17 – Why Sam finds legacy value companies like GM attractive
- 46:11 – Sam’s thoughts on the cannabis sector and her position in GreenThumb
- 49:23 – Areas where Sam and Bill differ
- 55:53 – Sam’s most memorable investment
- 58:11 – Learn more about Sam; millervalue.com
Transcript of Episode 329:
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Meb: Welcome, my friends. Today we have a great show. Our guest is the founder of Patient Capital Management and a co-portfolio manager at Miller Value Partners. In today’s episode, our guest shares how sending a resume to someone by the name of Bill Miller led to her starting as an analyst under him 20 years ago. We hear how the firm defines value and growth and thinks about its edge in the investment process.
Then our guest walks us through some of the names and portfolio and the thesis behind them including ADT, Stitch Fix, GM, and even some SPACs. As we wind down, we go back in time and have our guest walk through what was going on in her mind as they navigated 2020, the pandemic, and the lessons learned from that experience. Please enjoy this episode with Patient Capital Management and Miller Value Partners’ Samantha McLemore.
Meb: Sam, welcome to the show.
Samantha: Thanks for having me.
Meb: Where do we find you today?
Samantha: I am right outside of Baltimore, at home.
Meb: I miss the East Coast. I was just there, South Carolina, North Carolina. And I had a tweet the other day where I said, everyone’s super worried about inflation and inflation happening. And I showed a photo from a bar in South Carolina where the beers were still two dollars and wine was four. So no comment on the quality of the wine. But I said there’s no inflation here, but the place was also packed so who knows?
Samantha: Sounds like a good trip.
Meb: We’re going to talk about all things stocks and investing today. But you have one of the cooler origin stories with getting started that I’m sure you’ve told many times. But I think it’s really instructive and particularly for the younger crowd who’s always nervous to ask or to sit down. But tell us how you met Bill?
Samantha: I won the job lottery. I got really lucky. And so I went to Washington and Lee University, which is where Bill went. And I graduated right after the tech bubble burst, in the early 2000s. And I thought I was going to go into investment banking, and they were big recruiters at my school, and everyone said, “You know, you can’t get a job in investment management. It’s impossible, so don’t even try.” Bill happened to come back to speak the fall of my senior year, and he, you know, gave a presentation, he attended some investment club. I was in the investment club, we managed some of the endowment.
So he attended some presentations, I met him, and I ended up asking him if I could send him my resume. And so you know, lo and behold, I got a job offer and joined him right out of college. So I love to tell new undergrads just try. Time and time again, I’ve heard people say, “This is impossible, it can’t happen.” You know, you lose nothing from trying and sometimes you get really lucky. I had my whole life planned out at that time and I thought I’d be there two and a half years and go get my MBA, and lo and behold, I am still working with Bill 20 years later.
Meb: You know, it’s funny, I mean, I went to school right down the road from you, and you’re a little bit younger than I am, similar story. But it’s so interesting. And to fast forward now to our company, probably, and I’m not exaggerating, 90%, if not all of the employees, I’m trying to think including a couple we’re getting ready to hire, have been this sort of opting in, reaching out to where it got to the point almost where you just could not hire that person and say, “Hey, look, I’ve been following you. Here’s what we’re going to do.” And then like ignore them and they keep emailing and keep sending stuff and, eventually, I’m like, “This is so good I cannot hire you.”
But so many people are scared to kind of do that for the fear of rejection or fear of… The opposite side of that is just, “Hey, here’s a resume.” And then you know, that’s never going to get you…
Samantha: And then it just falls off. Yeah, I mean, follow up, follow up a lot. Do not take it to heart if you don’t hear back or if you don’t hear back a lot. Opportunities might pop up and if someone thinks of you, because you’ve been sending a lot of your stuff, I agree with you 100%, Meb.
Meb: Great example and love him or hate him, Jim Cramer had this article many, many years ago on the street that had a big impression on me. And he was like, “Look, here’s how to get a hedge fund job.” And he’s like, “Show up at the office at 5 in the morning, or whatever time people show up, I’m West Coast so maybe earlier, with a dozen Krispy Kreme doughnuts.” Now today that maybe, I don’t know, green shakes, or coffee, or whatever.
And just like, relentlessly be like, “What can I do? How can I be of service value for free?” And I thought that was such an accurate, thoughtful idea, just like this work hard. We had Mario Gabelli on the show and he’s like, “We work from 5 to 9 here, not 9 to 5, 5 to 9.” Anyway…
Samantha: And the hardest thing is getting your foot in the door. So whatever you can do to make that happen and being of service and being there is important.
Meb: Yeah. The last one I’m going to mention is like the Theo Epstein of the Cubs was talking about like, “Go to your superior.” In this case, go to a job that you want, and be like, “What is the 20% of your job that you hate that I can take over?” And it’s like a triple win because you take things off your boss’s plate that they hate doing, you learn their job, and you also get, like, involved in the whole… Anyway, we could do a whole show on how to get a job in investment management.
Samantha: And that sits so well philosophically with how we think. And you know, I was definitely trained by Bill, and we used to have to listen to these tapes. And it was literally cassette tapes, and we would listen to hours of these things, like over 12 hours. And it was all about how to take work from your boss and take monkeys off your boss’s back and do them and how you add value that way. And I think it is definitely a way to be successful, and I think a lot of people could get what they wanted more if they started thinking more like that.
Meb: Now the takeaway, listeners, is for not all 100,000 of you to go show up at Sam’s door tomorrow because she’s working from home or mowing her lawn or anything. Go to the office, email her. All right. So you guys started working together, fast forward over a decade later, give us a sort of landscape of what you guys are up to today. What’s going on?
Samantha: Yeah, it’s really exciting time. One of the things I love about markets is it’s always changing, it’s always dynamic, it’s always learning. Obviously, there’s a lot going on in today’s market. We’ve been through this period with record issuances. If you look at a year ago, or a little over a year ago, you know, we had the COVID crash, which was the fastest 35% decline in history.
And so those sort of periods of volatility creates a lot of opportunities. We tend to be more active during that time. And now we’ve had a huge rally that I think has surprised really a lot of people and a lot of people are wondering how much more is left. We still find a lot of opportunities. We’re value managers so we’ve been through a period that was a little rough on value managers. But now, it’s value names have done better, and we think that that’s likely to endure. So we’re definitely busy. There’s a lot going on every day.
Meb: So we’ll get into some themes and names in a little bit and process. But while we’re on the kind of investment landscape, I know you love a particularly accurate Templeton quote. You want to give us where do you think we are in that four-part? Because I have input on where I think we are. Where do you are right now 2021?
Samantha: Yes, so my favorite quote, we use it all the time. I mean, whenever we’re talking about the market, Sir John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” So we do talk a lot about where are we now and obviously, you can’t be that precise.
I think the interesting thing is from the lows of the financial crisis, obviously, we’re in a really pessimistic period for a long time. And I think we remained in an environment of skepticism for almost the duration of 10 years, which is pretty unusual. And now, I think we’ve moved more into optimism. And I would say overall, we’re in optimism with pockets of euphoria.
So there are pockets of the market where I think there’s a lot of speculation and valuations are really high, a lot of optimism. But there’s a lot of areas of the market that I don’t think are like that. So I would say overall optimism. But I’m interested in your view, what do you think?
Meb: I definitely think we’re in pockets of euphoria, but I’m also not certain that it’s like the end stage of the euphoria. You know we’re at all-time highs in many markets. I was tweeting today because I got an Instagram ad. And meanwhile, I buy like 90% of Instagram ads I see. I’ve never clicked on a Google Ad in my life, but Instagram, guaranteed 12% returns. And I said, “My goodness, there was a Texas study that came out recently that said that investors expect 17% returns.” So getting a little, whether that’s optimism or euphoria, pick your word, I’m not sure.
Meb: Pretty good, right? Seventeen percent real.
Meb: Not nominal, 17% real.
Samantha: I hope they’re right you know, the odds are very low, but maybe for the next year, it’s possible.
Meb: So okay, tell us a little bit about your framework. You mentioned value, what does that mean to you guys? How do you guys look at picking investments? How do you build a portfolio? Dig in.
Samantha: So we are long-term value investors. We talk about taking both of those terms seriously. So we really are trying to value businesses and understand the underlying fundamentals, and we’re investing for the long term. And I think we think carefully about why we might have an edge in the market. We might get into that more, what the market is getting wrong. The market is really, really tough to beat.
And so whenever we’re making an investment, we’re trying to understand why is the market getting this wrong, and there are a number of things that tend to lead or are more likely to lead to market mistakes. But we’re doing a lot of work on the fundamentals of companies and everything that goes into what drives an underlying business value, you know, whether it’s capital allocation, and competitive strategy, and competitive landscape, and returns on capital, all those sorts of things.
And then, more importantly, and I think this is where we might differ from a number of other fundamental managers, is we’re also spending a lot of time trying to understand the expectations baked into market prices. Because obviously, the higher those expectations are, the more difficult it is to exceed them. And so we’re looking for big disconnect between what the expectations baked into the market versus the fundamentals of stocks.
So we tend to be contrarian, we like entering things after big down moves in the price because we know that stock prices can move more than underlying fundamental business values. And so that’s an area that’s ripe for maybe the market to make a mistake. And so I would say that’s sort of the core of our approach.
And then we have a lot of flexibility to go where we see the best values. And so we’re value managers but we’ve always had a portion of the portfolio in names that we call secularly mispriced, names that can drive value by compounding over long periods of time. Many people consider those growth names. Those names can be mispriced as well and so value is the lens through which we view the world, but we look at a wide variety of sorts of opportunities to that valuation lens.
Meb: Talk to me a little bit about how you guys broadly structure the portfolio, how many names, are you guys doing shorting too? I know you do some derivatives.
Samantha: We consider ourselves to be concentrated managers. We tend to have between 20 and 50 names in the portfolio, but there’s more concentration, sort of at the top end. The largest weights in the portfolio can be you know, 30% to 50% of the portfolio so there’s a lot of concentration up there
We tend to be mostly long only. We do have the flexibility to short, but it’s not really a core part of what we do. And then when we’re doing our analysis, we’re looking at, if we’re doing work on a company. If we’re doing work on Tesla, if we think it’s attractive, we’ll look at the best way to make the “bet.” So we’ll look at the equity, we’ll look at up and down capital structures, the debt, the converts, we’ll look at options.
We don’t do a whole lot in derivatives. We are active on long-term call options, you know, where we have a high degree of conviction in our view, and where there’s a really attractive skew. So if we’re right on the stock, you can make…and it’s up, call it 50% to 100%, you can make 4 to 5 times in the options. Typically, you don’t make that much, you make two to three times as much money. So when those things get out of whack, we will consider something on the option side.
Meb: I know this is like question number one, institutions, you’re probably exhausted answering it. But when people love talking to stock pickers, or hedge funds, or investment managers, they love saying, “What’s your edge? You know, there are 10,000 funds out there, Sam, what gives you the right magnifying glass microscope, telescope, whatever it may be. What’s y’all’s edge?”
Samantha: We don’t get sick of talking about that. We like that question because I do think it’s so important to think about it. It’s so difficult to beat the market and so we want to be thinking about it, we want to be crisp and clear on what is our edge. And so we think the market is a complex adaptive system, it’s pragmatically efficient, which means it’s mostly right, most of the time. And it’s very difficult to beat, but it does have breakdowns.
And so we think that there are three edges one can have in the market and those are informational edges, so you know something others don’t know. That’s mostly illegal with Reg FD, and especially in this day and age, where there’s so much information and it’s priced instantaneously with algorithmic trading. So we don’t really try to compete there, we just try to not be at a disadvantage there.
And then the two areas where we compete more are analytical edge. So you don’t know anything but it’s classic mosaic theory. You put the information together differently or you weight information differently to come up with a different answer.
But really the last one is where we, I think, developed most of our edge is which is behavioral edges. So we know that big groups of people have the tendency to behave similar ways over time. So this relates back to the Templeton quote, extremes and fear and greed. We have behavioral pitfalls that we all individually make when we try to be students of behavioral finance in ways that might manifest in the market. We know that in certain times, the market is less likely to be right, so spin-offs where there’s not a lot of great information, new business models, where they’re not well understood. So those are all areas.
And then you know, again, I mentioned it earlier, time arbitrage. So the market has increasingly become shorter and shorter-term time horizon with people aiming for the next month and quarter and really consistent returns. We’re willing to withstand more volatility in the pursuit of higher longer-term returns. And we’re willing to be patient and focus on, call it five years, rather than the next month or quarter. Those are all areas where we think we can get an edge versus the market.
Meb: Five years, my goodness, that’s a lifetime for this day and age. We talk a lot about that though on this show. Investors ask us how long they should give a strategy, and I used to say 10 years, and now I say 20. Now no one…like they kind of laugh awkwardly but I’m serious in sort of that response. It applies to holdings too. Some of these big compounders, you want a 100 bagger. Well, you may hope it’s going to come in a year, but reality is probably a decade-plus.
I love reading y’all’s writing. You have a refreshingly candid writing style. And one of your quotes, when you were talking about sort of investment opportunities everything else going on, I love you kind of sprinkle in different quotes, but you were talking about the adaptive markets. By the way, can I get an invite to the Santa Fe one of these days? I’ve never been.
Samantha: Oh, yes, you should totally go, it’s amazing. They do amazing work.
Meb: Cool. I’m going to hold you to it. But all right, so one of your quotes is you said, “We really love the current portfolio.” I love that statement you said. It trades at a pretty steep discount, just the overall market. Talk to us a little bit about some of the themes in there. What do you really love that’s in there here in summer 2021?
Samantha: My passion and what I love, and when you have these big drawdowns, it’s harder for I think folks who are one step removed. And if you can get in with the companies and really get confidence in their underlying fundamental business values, it makes that volatility easier to handle.
And so, again, when I just talk to my companies and go through what they’re doing, and what I think the value is, it does make me really excited. I do love the portfolio. There are lots of names to talk about. Our biggest name right now is ADT. I think ADT is really attractive, really interesting, particularly right now. ADT, you know, is the home security company. And they were taken private by Apollo a number of years ago, and then came back public, I think it was in 2018.
They’ve been public a couple of years and the stock really hasn’t done much. They tried to bring it public at $18 a share. They weren’t able to do that. It came lower. And then, it traded you know, maybe 16, and it traded down, hit $4 a share in the depths of the crisis last year. Now, it’s backed up to 10.77 right now as we speak. But we think this company is worth 18. I think that it’s really misunderstood.
One of the areas of the market that’s struggled a lot is anything that’s been sort of secular decline or feared to be in secular decline. And so as there have been a number of new competitors that sell home security equipment, these video doorbells, video cameras, and that sort of thing, the perception is that ADT is at secular risk.
And I do think it’s a perception. I don’t think it’s a reality. I think it’s one of the things that are creating an opportunity. It’s been really hard for the market to see that. So first of all, they have a great team here, Jim DeVries is the CEO. They had to fix a number of things within the business to improve retention and improve how they operate. They’ve done that and they’re just now embarking on more growth. But even in this sort of environment, they sold their Canada business, they did an acquisition that had some messy accounting stuff.
So you can’t see the underlying fundamentals of the business just in the big overall numbers. So people just say, “It’s too much work, I’m not dealing with it.” But if we look forward, so they had a couple of things that I think are really exciting in terms of driving the future results. One, they were a big leader in the commercial space back in the day as part of Tyco. They exited that. They re-entered it a number of years ago. They’re doing really well. That market was hit last year but I think they have a great competitive position, I think they’re going to be able to drive double-digit growth there.
And then in the core residential business, they’re too, they now have whole product line, including equipment. People want a do-it-yourself solution, but that really is a separate market that’s growing the overall market, not eating into the monitored security business.
And then, Google, maybe most importantly, they just entered into a partnership with Google late last year, the Nest division. And so they’re going to come out with a fully integrated smart home line with Nest later this year. And they’re working on all the products integration now. And I think that that’s really exciting and that can really help drive growth.
And so next year, I think you’re going to really see it, and you’re going to see double-digit, top-line and even better bottom-line growth here. And I think it’s going to change the overall perception of the company. And again, it’s really quite cheap if we look at what we expect for free cash flow next year. It’s trading at about a 9%, free cash flow yield. And again, we expect that to be able to grow double-digits. That might get someone to the, you know, high teens compound rate. So ADT is a name that we think is really attractive in here.
Meb: I like it, a big cash flow generator, you know, in this sort of market. I mean, in any market, cash flow kind of rules everything. And this company, 5 billion-plus in revenue is certainly one that’s gushing a bit. I know you guys also like some of the…I don’t know if you still hold them or not, but I saw you writing about them. Some of these consignment sort of Stitch Fix subscription sort of models. Talk to us about those, because there’s nothing I love more on the planet than subscription boxes. Tell us about some of those names, that thesis?
Samantha: We own Stitch Fix. We’ve been holders of Stitch Fix since the IPO. And so I think that’s a great team there. That company’s been extremely misunderstood. I think it came at $15 a share and today it’s at 62. Bill Gurley is a member of the board there, and he’s a venture capitalist, one of the top venture capitalists in the world. One of our joint friends has told us that Bill’s only recommended three stocks to him in his life, and it was Amazon, Dell, and Stitch Fix. So that’s good company, that’s a good company to be in.
People really misunderstood, and the IPO was a little bit disappointing to the company. People really misunderstood this because it’s somewhat like a subscription, but it’s a little bit different. And so customers will…sometimes they’ll need to refresh their closets, and then they won’t, and so it’ll look like churn but then they reactivate a while later.
Anyways, I think that that’s why this company has never gotten…unlike many of the growth names we talked about. It’s never gotten to some nosebleed areas. And they’ve been consistently cash generative and able to self-fund and earn a profit and even now trades at three times revenues. And they’re going through this exciting transition.
So over the past number of years since it was launched, it was just purely this box, this monthly box where they’re really good. And they talk about personalization and understanding. They have data, they have algorithms, they’re predicting what you like, what fix fits you. Katrina says she always wondered when she went to a store, why does it make sense to shop for jeans this way, to try a bunch of jeans, search through racks. And wouldn’t it make a lot more sense if I just had a pair of jeans and it was delivered to me and it was what I wanted? And they’ve really invested a lot in AI and machine learning and personalization.
And again, they’re just now expanding out to make their offering available outside of the core monthly fixes. So that if you’d assert and you want a pair of jeans, you can actually purchase from Stitch Fix. And that is just happening now, you haven’t even seen that in the business. And that obviously, really opens up the total addressable market for the company because that’s how most people shop. Most people don’t do the monthly sort of fixes.
So again, there’s a huge apparel market and this company is still relatively small. They’ve innovated a ton in the past year, and you can see that in the overall numbers. And so this is sort of a classic compounders. If the business is being managed well and they’re executing on the market opportunity, I still think it has significant upside.
Meb: Is the same thesis for the RealReal and that same sort of genre or is that a totally different concept?
Samantha: Yeah. I mean, we ended up with a number of these e-commerce plays not because we thought from a top-down perspective, let’s go look here. We bought each of them on weakness. So as I talked about, you know, when the market price breaks down, and we can make a clear case that there’s a disconnect between fundamentals and expectations. So we bought the RealReal in March of last year, was when we initially purchased it in one of our funds.
And so we’ve been following it, analyst Christy Siegel, who works with me who’s wonderful, she’s followed this space for a long time. We had bought Farfetch late last year, after doing a lot of work. We had followed the RealReal and Farfetch since their IPOs. And the RealReal was trading at close to 30 bucks a share entering the year, entering 2020, and it hit 5 in COVID. And at that point, we just thought this environment might be really bad. And it is really bad for a lot of companies. And there might be an impact on RealReal because their supply was really hindered.
But they had adequate capital on the balance sheet. And there is this movement, the RealReal focus is on consignment. There’s a lot of focus now on the circular economy and how beneficial that is for the overall environment. And so there is a tailwind there. They’ve done a great job growing this business. So when we bought it, we initially thought, you know, it was worth 30 bucks a share and so we thought that there was significant upside. And then as things have evolved, we’ve continued to believe that. They’re now starting to get that supply back and growth is really accelerating, recovering from last year.
Again, I think here people have a question about the economics, the long-term fundamental economic business model, which makes the market expectations lower. So again, it’s not one of these growth companies that has a really high valuation, and we have a lot of confidence that they can reach their long-term target margins, and that will gradually make progress towards that going forward.
And again, their market is growing, they’re growing a lot and taking share within their market, they have a good team here. And so we continue to think that here at 20, it’s attractive. And now, you know, our estimate of what it’s worth has come up a little bit and so we think it’s worth roughly $35 a share.
Meb: I got an idea for you for this, and you can pass along to the CEO and take credit for it. Where it’s a 10 bagger, are you ready? Now, this may already exist so I’m going to show my ignorance. But I tweeted about the other day and got zero responses, so I’m hopeful. I’m a cheap bastard, I say that lovingly as a compliment, as a dyed-in-the-wool value guy. So my idea was I said, “I don’t understand why any of these sites that do the consignment or Stitch Fix could probably do it and say, but I want a monthly subscription but with used like new clothes.
So consignment, where I can spend RealReal, “Here’s my budget, 50 bucks, 100 bucks, 200 bucks, and just send me some used clothes that are like new under my specific brands.” What do you think, good idea or terrible idea?
Samantha: I think that there’s going to be a lot of iteration around those sorts of ideas. I mean, Rent the Runway has sort of moved their model in that direction. They started with just one-time events and now, I’m a consumer and it’s like, I get a monthly subscription and you choose as much as you want. And so that’s still high-end of the market, the brand sort of end of the market. And again, I think they’ve had a little bit of trouble with the economics there, they keep tweaking the model, and so getting the economics to work.
But again, I think that there’s going to be a huge push into those sorts of things as people become more conscious about just their environmental footprint. And Katrina Lake at Stitch Fix, who I think is wonderful, and she just became executive chairman, Elizabeth Spaulding is the CEO. But she said now she’s excited to spend more of her time on those sort of things, how tech meets ESG considerations, and how to push it forward.
Meb: Well, very polite of you. I love when people say here’s my idea and they’re like, Uhm. So, it’s like, you don’t have to throw it under the bus. But I would totally be the first subscriber.
We have a handful of some of the early-stage start-ups in this space that are kind of doing all sorts of ideas, Curtsy and FabFitFun, which recorded a local, totally different business model, but I think there’s a ton of opportunities still. Anyway, that’s why I’m not running a consignment subscription service, but it’s a great business. All right. What else you guys got? What else you looking into?
You talk about as a parent, you got three kids. I have one, which is already enough. You say you preach about the benefits of failing. What does that mean? Like as you think about the portfolio and the last year sitting through that drawdown, having names that don’t work out. How do you guys think about calling the herd? When is it time do you say, “All right, we were wrong, let’s move on, pick something else”?
Samantha: I preach. I preach. Last weekend, my oldest is 10 and my son is 8, and we finally got him on a swim team. And so, 10 is old to be doing swim team for the first time. You know, we kind of knew we weren’t going to do well and we were like, we’re just going to go try it and it’s important to do stuff. We didn’t do that well. But I really celebrated them for getting out there and trying and not doing well. And I said it’s a lot harder to do that.
And so I think as an investor, you just have to get comfortable with that. I mean, the best investors out there, they have batting averages, or you know, they’re right, max, like 70% of the time. Some do it well, and you’re right much less, and maybe it’s more like a coin toss if the market is pretty efficient. And so, you just have to be comfortable with being wrong. And I think trying to recognize when you’re wrong quickly and have some sort of error correction mechanism in there.
And so we really distinguish between the sort of drawdowns where there’s volatility, and you have some short-term losses, I think that’s just a natural part of being an investor in the market. And if you can get comfort with that, and remain focused on the long term, that’s really the way to drive outcomes over the long term.
If you look at what are the mistakes that people make when they try to do well, or when they try to invest, I mean, the biggest one, or one of the biggest ones out there is buying after big runs up at high prices and selling after big moves down. And so how do you correct that? What are some ways that you can correct that?
I mean, no one…you know, I don’t think anyone’s stupid, no one intends to do that. There are good reasons why people are doing that and it’s because after names have had…or after stocks, or markets have had big moves down, there’s some good reason why. And there are some probably big risks out there and there’s some reason to question the future prospects for the market or the company. And so having confidence, one, in what you’re investing in helps that.
And again, I get that through being close to the fundamentals of the companies. Sir John Templeton always talked about investing at the point of maximum pessimism. And again, I think that’s important to keep in mind. But yeah, we still make mistakes all the time, and we try to own those, learn from those. If we cannot make the same mistake twice, then that will be a win, because a lot of times, you know, the risk is you make the same mistake more than once.
So if I think back to COVID, I mean, it was just such a unique period because there’s been plenty of times where you have drawdowns. But most of the time, the overall environment hasn’t basically shifted so dramatically, essentially overnight.
And so in that sort of environment, we had to re-underwrite all our names, or mostly all our names, to try to understand how will this impact this business, what does that mean for the future prospects, and what’s the company’s ability to survive? Because that was in question with names like airlines where, again, you could hardly imagine that overnight, the business would go to zero, which is essentially what happened.
And so, again, if I think back to what I would do differently, I think what I underestimated in COVID is when I started looking at the viruses, the news started coming out, I was comparing it to the 1918 flu and other pandemics. And it didn’t look as bad from just purely the risk of the virus and the damage that it could do. And so I drew some conclusions that I shouldn’t have drawn because I should have focused more on the behavior that was likely to happen from that. And we didn’t really contemplate the idea of shutdowns.
On the other hand, if I had recognized that earlier, I could have gotten defensive a little earlier, which would have been helpful. And on the other hand, a lot of people who did get defensive, that wasn’t the optimal call because again, we had all the stimulus and things bounce back so dramatically. So that’s just a reason why we don’t time and invest based on the macro inputs. And we tend to focus more on the underlying business drivers’ values.
Meb: You hit on a couple of topics that I think are as old as time challenges. You have a great phrase called we try to monetize volatility and looking at the challenge of something like Amazon, which you guys have held. So on one hand, you have the like look, mentality, diamond hands, that’s the phrase this year, a long-term holder, we have conviction, we’re going to sit through the drawdowns.
I mean, Amazon my God, that’s like the poster child. You’ve not only had 50% drawdowns, you had the like 90% plus one, the Amazon dot-bomb back in the day. Now it’s a $2 trillion company or whatever it is, but the wherewithal to sit through that and sustain.
And on the flip side, the whole way down, the challenge of an investor is always like what am I missing? Am I missing something? And this is actually a zero, and I’m going to have scrambled eggs all over my face. And it’s no easy answers on that but it seems to be usually to kind of dig harder and make sure you’re not missing something.
Samantha: There are definitely no easy answers. We’ve been owners since I joined, Bill owned Amazon, so it was before that since the IPO he owned it. And we’ve owned it the whole time. It’s been the single biggest contributor to our performance and the single biggest mistake we’ve ever made is to continue to sell Amazon.
And so if we had just never sold a share of Amazon, it would probably be bigger than the entire fund is. But again, the future is uncertain, and no one knew Amazon, no one knew Amazon would end up doing what it did. And we didn’t know that, we couldn’t know that, you just can’t know that.
So, again, we are always trying to understand the range of possible outcomes and what we think is most likely. And we talk about the right tail, if everything goes right what can that mean for the business? And if everything goes wrong, what does that mean for the business? And what do we actually think is going to happen?
I think just thinking through those things beforehand, helps you recognize how things are evolving. Are we heading towards the best case, the worst case? And then really just continually comparing opportunities to one another and the opportunities that I also think is helpful.
But I agree 100%, we talk a lot about investing being part science, art and science, it’s both. And probably when I was younger, I was more in the science camp. And the older and older I get, I just realize how much of an art it is because there’s all these complicated things. And just as you said, there’s two sides to it and you know both, but when you’re in the moment, you don’t really know, there’s a big fog of uncertainty. And so making sense of information is difficult.
Meb: You have a writing where you’re talking about Bill. Someone asked him a question, and it mirrors sort of a comment we make, we say it’s the biggest compliment you can give someone…but asked, what is investment success? And you said you were surprised but yet he responded, “just survival, you know, just existing.” And the stat that I love to cite is over a 10-year horizon, half of all mutual funds disappear, which is an astonishing graveyard amount, if you think about it. I mean, I think most people you’d ask them, they say like 10% is half, go the way the dodo bird.
Samantha: Yeah, that’s amazing and I think that’s why it’s so important to just have that flexibility and adaptability. And I like that you tell people that you can’t understand how fund until you know, 10 or 20 years. It takes a long time to sort through whether what you’re seeing is skill versus luck at the fund level, or is it the right company at the right time in a certain environment? Can they sustain it? I mean, the same with fund management.
So again, focusing on what’s enduring and what we know, and that’s why being a value investor is so compelling to me, we know that the value of the business is the present value of the future free cash flows. I’ve never heard anyone debate that. All of the debate is around what will those cash flows be, you know? So if we knew, we could calculate the value.
Meb: One of my favorite things about looking at managers like y’all and kind of the what I’d say is the closet indexers is looking through the positions and always finding some names where I’m like, I’ve never heard of that company or that stock. I recognize a couple. I see you guys got a cruise line and a big car company that you’ve been adding, and would love to hear the thesis there. But would also love to hear are there any names you think are sort of less well known that the audience would scratch their head and be like, “I’ve never even heard of that company,” any thoughts?
Samantha: We’ve invested in a number of new issuances and SPACs lately.
Meb: What’s the SPAC opportunity look like to you guys? Is it a minefield? Is it a fertile garden of opportunity?
Samantha: I think you have to be really selective. And the pace of deals has obviously slowed down a lot and I think that will lead to probably the better deals being able to get done. And it might get an aggregate a little better than it was when everyone could come and sorting through that. You just had to be very selective about what you did. I mean, we’re at a point where we’re not looking at a ton. It has to be a reason why we would even look at those at this point given our view of the overall environment. But there’s still you know, a number of interesting things. And I think it’s good for companies to have options in terms of how they come public.
And I was talking to a company earlier today that we invested in, and they just saw it as one of their options in terms of how to…it’s just a transaction and a vehicle for getting to the market. But I would say you know, being really selective, we focus a lot on the people, and the team, and who are we partnering with here, and what’s the underlying business, and do we have confidence? You know, they can put out these projections, which may be entirely unreasonable or unachievable.
And so sorting through whether we think that those are actually achievable. But Metromile is one. I don’t know if you’ve heard of that one that we invested in, which I think is really interesting. Many of these facts…the ticker is MILE on that one. It’s early stage in the business and so there are a lot of companies that are coming public. But again, they’re coming earlier than we would have typically seen them come and so that can create more risk going forward.
What’s interesting about Metromile again, the team is really excellent here. Dave Friedberg is the founder, and he founded The Climate Company. And what I like about this company, unlike so many new issuances, or so many growth companies is they focused first on getting the economics right. And they didn’t pursue growth until they did that.
So Metromile is a car insurance company, the model is very disruptive. So with telematics in the car, and then they’ve invested a lot on the back-end technology of claims processing to automate a lot of it and improve fraud detection. And then they’re selling insurance on a per-mile basis. The highest mileage drivers drive most of the losses, and then the lower mileage drivers are…
So again, they’re allowing people to pay based on how much they drive, which I think their average subscriber saves 40%. And they’re only in eight states now. And they’ll expand to 50 over the next couple of years.
And so, again, when we did the work, Bill’s first question to them, I think or one of them was like, “When are you going to be in Maryland? You know, I want this.” And they’re like, “You’re going to have to wait.” The incumbents, they’re going to have a tough time responding to this because they don’t want to undercut their overall profit pool by lowering prices for the ones that are subsidizing the higher loss, higher mileage drivers.
And so again, it’s early stage, it’s a really interesting company. I really like the team. And if we look at what we think it can earn you know, just call it 3 years out, we think it’s trading at 10 times sort of an operating profit number for the company. And they actually have the unit economics there now, unlike a number of these other Fintech insurance companies that have come to market.
Meb: Well, you guys sort of have the barbell strategy on this sort of automotive world. You have the new Metromile, you got Vroom. You know, I was trying to buy a car on Vroom recently. This is probably an outlier, but it was during the pandemic, and I think I actually bought the car. But I think then like something happened in the steps to where like someone else also bought it and got it, which is fine because I ended up getting a different car.
But my takeaway was that it’s one of these experiences where you’re like, “Why would I ever go back to the way that it was before?” The world, once you have an experience like this, you’re just like, I can’t fathom going and haggling at…like you’re just miserable, miserable customer NPS. Anyway, but you got Vroom and Metromile on one side, then you got the incumbent of all incumbents, GM, what’s going on there? Is that a similar thesis? Are they just going to plugin across the lineup or what?
Samantha: Yeah, no, GM is really interesting. One of the areas in market again, it relates to ADT, that I think is attractive overall, is these classic value old companies where the market has been pegged as you know, at risk, declining, but there’s something different going on there. And so, GM has a lot of interesting assets in the electric vehicle autonomous space. They’re investing aggressively. They just increase their investment in electric vehicles up to 35 billion I think over the next 5 years. And they have a whole suite of assets that I don’t think gets any credit in this current market.
The company trades at nine times this year’s earnings, eight times next year’s earnings. Paul Jacobson is the CFO and he was at Delta. We were longtime owners of Delta. He’s really excellent and he just joined GM, I think earlier this year so that’s when we really started taking a closer look. And they have a big investment in Cruise, which is the autonomous unit, they have their own Ultium battery platform on the electric vehicle side. They have BrightDrop, which is electric commercial vehicles.
And so if we just look at what are the values of each of the pieces, we can easily get a value that’s roughly double where the current stock is at $59 a share. The Morgan Stanley analyst, he feels pretty strongly and he nailed Tesla early on, that they’re going to start selling some of these pieces. And if they do that, and they actually break it up, then that would highlight the value. I don’t know if that will happen or not, but I know they have a lot of interesting assets in the company that I don’t think are getting a lot of credit in this market.
And Mary Barra has done an excellent job there. And I’ve been so impressed with how they’ve executed in this period that have…with the semiconductor shortage and all the problems and they’ve maintained and improved their expectations for what they think the business can do.
So again, I think, as electric vehicles grow, we just think it’s not going to be a Tesla game. There’s more and more players getting involved in this space, and there’s a lot of share to go around. And GM, some of their new vehicles again, my analyst who’s a millennial when she was doing work on it, and she saw the Cadillac LYRIQ, she’s like “That car looks so cool. I would love to drive that car.”
And I mean, how many you know, young millennials or younger people do you hear saying that about Cadillacs or GM brands? So again, I think there’s a lot of upside in that stock, and it’s not priced in at current levels.
Meb: I’d cut you off on the any other names that are like a little more esoteric. Anything else that…and you can also…this is a two-part question. You can answer that question or you can answer something you guys sold recently and give us an example as to why you gave it the boot.
Samantha: There are lots of names. I can always talk about names that we own that I think are really attractive. I guess one of those names…and then we can talk about a sale if you want. But Green Thumb, I think which is a cannabis company, it’s not very well known. It trades in Canada, and then also OTC. GTBIF is the ticker. That one I think is really interesting and a lot of people can’t invest there because still not legal at the federal level. And there are all sorts of constraints on, especially institutions’ ability to invest in the space.
And there’s also more uncertainty of exactly how it evolves at the federal level. So I think that that makes the valuation more attractive. And again, what you see in most of the growth stocks, but the Canadian companies, people got really excited about them a number of years ago, and it was a complete disaster, and they crashed. And so I think there’s a fair amount of skepticism overall.
But Green Thumb strategy is really sound. So they’re a multi-state operator, and they only operate in limited license states. So again, that preserves the economics and lowers the risk of a proliferation of supply that brings down the economics. And the capital allocation there and the team is just top-notch, first-rate. And they think really sensibly about how to invest and grow the business and their owner-operators.
So the company, you continue every election to get more states approving adult-use cannabis or medical use, the biggest market will be adult use. And so Green Thumb is in 12 states now. We just saw Virginia approve it, and New York, and New Jersey. And again, because that source of revenue is so important for the states, you’re going to continue to see this. So in Illinois now, which is their home state, the state makes more from cannabis revenues than alcohol revenues.
Meb: That’s most of the states where it happens. I mean, in Colorado, I think it crossed that Rubicon a couple of years ago. And there’s nothing more that legislators liked than tax revenue. So it’s like Thanos just saying like, “I am inevitable, this is going to happen no matter what.” And it’s weird that it’s taking this long. My thesis last year was that both political parties were going to try to out woke each other and jostle for who gets credit for clearing the path. But it’s actually been a little slow to fruition, but it seems to be a question of when not if.
Samantha: Yeah, I agree. And if you look out in just two years’ time, Green Thumb is trading at 20 times earnings, it’s growing top line, close to 60% this year. And again, I think you’re just going to…they have so much opportunity that it’s about what do we prioritize for our investments and for our growth? And so again, I think there’s a really long runway here, and this is a company that again, if you want to be long term, and you want to compound capital, I think that this one’s really attractive.
Meb: You guys got a pretty eclectic portfolio. I mean, we’ve talked about cannabis, we talked about car companies, we’ve talked about insurance, Amazon. When you guys look at sort of the Sam, Bill Venn diagram, where you guys come together, what are the areas where you guys are…is it either in process or ideas? Where do you guys differ? What’s kind of like, you’re like, “Look, this is my deal, he doesn’t agree,” or vice versa?
Samantha: Yeah, that’s a great question. We do get that question like, how are you different? I mean, I would start by saying we’re more alike than different that’s why we’ve been able to work together this long. I think we’re psychologically very similar, and we like similar more stuff. And he trained me, and I learned from him, and I was forced to do so. And so he always used to joke about keen to get people when they’re young, and he can sort of imprint them. And so I was fully imprinted by him. But we do obviously differ from time to time. And when that might be I guess, a couple of things.
One, Bill likes to joke that he’s made all his money in growth stocks like Amazon, but he has this sort of fatal attraction to these deep value sort of dirt cheap four times earnings, and he like, just can’t give it up. And I would say, I’m definitely a values person as well but, in this market, certainly over the past decade, a lot of those sources’ names, they’ve been more risks than reward. And so I don’t have that same…I want to think…you can make the math work on the investment rationale 100% for that, even if, and I don’t think if he thinks something’s not going to work, he doesn’t get excited about it.
But on an expected value basis, if you look at how much can I make if I’m right, relative to how much can I lose when I’m wrong, there are portfolios that can work really well by not having a majority of winners but making enough on the winners when they’re right, that that strategy can work. So you can make that argument. I’m probably more sensitive to the risk on those sorts of things if I see that. He says that I have a higher evidentiary threshold, so I want more evidence, investors run the spectrum on how much evidence do you need to believe something? He would say I have a higher evidentiary threshold.
You know, it’s funny when I used to do work and Bill would be like, “Go take a look at this name.” And he’d be like, “I think it looks like to me, it’s worth $200.” And I’d go and I build out the whole model and I, you know, do the scenarios, and I come back and it’s like it’s worth, “I’m getting $200 like how do you do that?” You know, it’s just, yeah, it’s funny.
Meb: So to wind down a little bit. You know, as you guys look to the horizon here in 2021, what are you excited about? What are you worried about? Do you look to the future? Give us a preview of some of your upcoming letters. I’m not going to make you do karaoke with your Billy Joel lyrics. By the way, for the younger listeners, Billy Joel is a singer-songwriter, big piano man. What are you worried about? What are you excited about?
Samantha: I still think this is an attractive and interesting time for the market. Again, we’ve had this huge move off the lows from a year ago, giant moves, but we’re still pretty early. And what is the strongest economic recovery we’ve seen in 40 years because of the stimulus and both fiscal and monetary. Again, we look at earnings expectations for companies have continued to come up and I’ve seen some people who think that there’s a lot more to go there.
So again, we just think that you’re in a unique environment. And again, we’re on a bonds of basis finding a lot of interesting and attractive companies. If we look at the prior decade, we went through these risk on/risk off periods that were focused on growth scares. So we were kind of bordering on deflation and anytime, you know, there would be something that would cause people to question the overall macro environment, you’d get the sell-off.
One of the smartest macro people I follow Michael Darda, MKM, he’s pretty convinced that we’ll have these scares going forward, but they’ll be centered more around interest rates and interest rate increases. We’ve always invested in both growth compounders and then classic value. As the valuations on some of the growth names have come up and they’re creating like bond proxies in terms of when rates go up, they’re under pressure. And obviously, they’re very sensitive to discount rates.
So I think that that’s a material risk over the coming years in terms of what does normalization and rates look like? And how does that flow through into equity prices, especially for the higher growth areas of the market? The portfolio has shifted more towards classic value names over time because of that. We still see significant upside overall. We calculate the upside in the portfolio and so we still have, depending on the portfolio, 65 to 85% upside to what we think it’s worth. So we still think there’s an attractive opportunity. And I wouldn’t be surprised over the rest of this year or the next year to see a very strong market.
And then a number of years ago, Bill was asked what he saw as the biggest risks in the market. This was before COVID. And he said “I think the risk is that the market goes up so much. The market just goes up a lot.” And I was like, “That’s the risk, Bill?” And I was kind of tackled, but he said, “Bonds are really expensive now and you can’t make money there. And if equities rise to a comparable level, then you won’t be able to make money anywhere.” And now fast forward, where we are now, I think the likelihood of that happening is even greater.
So you could be entering the future, a time where it becomes hard to make money. But in the nearer term, I still think, as you said, even in the more euphoric areas of the market, you never know when that’s going to end or what the end looks like. And Laszlo, lastly, I won’t go on too much longer here, but Laszlo Birinyi is one of the best you know, market investors out there and he publishes a newsletter. And they’ve divided much like Templeton the market into time periods of the cycle, and they call them a little bit different things.
But I think he’s pointed out the last phase of the market before it peaks, that exuberance phase, is the phase of this four where the market earns the highest returns. It’s sort of the fastest increase in the market. And so, again, I think we could be in that period now but given the economic outlook, I would expect and companies and just the tailwinds they have it to be a good time for the foreseeable future.
Meb: Yeah, well, we may have to reach back into your playbook for that when you graduated that late ’90s, early 2000s. I mean, despite these normal bear markets, we often tell people, some of the best companies get founded, some of the best investments happen during the dark times. 2000, 2003, ’08, very briefly last year, and who knows 2020s, we’ll see what happens.
Sam, as you look back on your career thus far, still got a long way to go, what’s been the most memorable investment good, bad, in between? One, that’s just seared into your brain.
Samantha: You know, I guess one that I’m proud of our work on, maybe I’ll go that angle because I like to be an optimist, is Peloton. And so we invested in that one on the IPO and right after the IPO and it was highly controversial. And a lot of people who said you know, this is a disaster, it’s a fad. You know, there’s no business there. It’s completely overvalued. It’s going away. I think we even had some people inside our own group who had that view.
Part of what got me interested there it’s like old classic Peter Lynch, buy what you know. My husband had asked for a Peloton the Christmas before, and I was like, “Are you kidding? I’m a value investor, you want me to buy this extremely expensive bike?” But being that you know the excellent wife that I am, I got him one and I ended up using it way more than I thought I would. And they kept coming out with new content and it was really good. And I basically, probably haven’t gone to the gym since I bought the Peloton.
And so listening to their view of how they thought they could displace a lot of the gym demand, you could look and see what that meant. And people, much like Apple earlier on, we’re confused I think about the hardware piece versus subscription piece, which is the real gem in the business.
And then we exited that one we did really well. But we actually exited it. And it’s an excellent company. It’s one I’d love to own forever, but we exited it late last year, early this year. Our view there was just again, focused on expectations in the market. At that time, it looked like where if people priced it as a hardware fad when we bought it by the time we exited it, it looked like it needs to achieve Apple level growth for 20 years. And phones are highly addictive, people can’t put them down and it’s the reverse for exercise. People have a hard time sustaining it.
And so if you think rates might increase again, that’s going to be a headwind to these sorts of companies with high valuations. So that was one where you know, I think again, we could be wrong, if we could continue up and we could sell too soon, that tends to be our biggest mistakes that we make. But I think we had independent thinking and we sort of had a differentiated view and it worked out really well.
Meb: Yeah, I love Peloton. We can find Sam at growth and value, that’s her ticker name on Peloton.
Samantha: Do not find me.
Meb: Yeah, I love Peloton, too. There’s a whole category for me. I mean, I’m a quant so half time, I don’t even know what names are on portfolios. But on the private side, that tends to be my approach is investing in companies that Peter Lynch that I love. And I just throw them into a shoebox or safe deposit box and forget about it because you can’t sell the private companies. But certainly, Peloton would have fit that category for me.
Sam, this has been so fun we’ll have to have you back on and check on all the fun names you guys are thinking about in the coming months. But in the meantime, where do people go, if they want to read your writings, see what you’re up to? What’s the best place to follow along?
Samantha: Thanks so much for having me, Meb. And if people want to follow what we’re doing, we have a blog on millervalue.com, www.millervalue.com. And so we post pieces there at least every quarter, and that’s a great place to find us.
Meb: My last question, as someone who recently did our podcast with very famous art that audio listeners won’t be able to see this, but my favorite part about abstract art is I get to see what’s behind you. And I don’t know if this is either a $10 million painting or something done by your 10-year-old or something in between. But that’s the beauty of art, it’s in the eye of the beholder or something in the middle.
Samantha: My kids do joke. This is a print, it’s a Mondrian print, and I got it on Perigold, which is one of Wayfair’s sites. But my kids like to joke, they all like to joke with me that they could have done this. And I said, “Then do it because you can do really well with three kids in the market.” I like this art because it’s very orderly, very much in order.
Meb: Just have your kids be anonymous, create the art call it the NFT, and there you go, college tuition right there. Sam, thanks so much for joining us today.
Samantha: Thanks, Meb.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening friends and good investing.