Episode #507: Thomas George, Grizzle – Disruption at a Reasonable Price

Episode #507: Thomas George, Grizzle – Disruption at a Reasonable Price

Guest: Thomas George is the President of Grizzle and Portfolio Manager of the DARP ETF.

Date Recorded: 10/25/2023  |  Run-Time: 50:37

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Summary:  In today’s episode, Thomas talks about investing in disruption at a reasonable price. Key word: reasonable. He talks about the sector and thematic focus of the ETF and takeaways from the 2022 sell-off in the growthier parts of the market. As we wind down, he walks through the performance of Amazon since its IPO and why it makes for a perfect case study for disruption at a reasonable price.

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Links from the Episode:

• 1:23 – Welcome Thomas to the show: For more information, prospectus, risks and holdings of the Grizzle DARP ETF, click here
• 2:07 – Thomas time working on portfolio analytics
• 7:39 – Transitioning from portfolio analytics to quantitative investing
• 10:22 – Founding Grizzle in 2018
• 13:44- How to think about disruption at a reasonable price
• 18:25 – Themes Grizzle is focused on in late 2023
• 28:00 – Thomas approach to position sizing
• 31:42 – The benefits of using a fundamental & quantitative approach
• 33:50 – Investing in natural gas and electric vehicles
• 36:00 – Standout areas in traditional tech
• 40:13 – The lay of the land at Grizzle
• 44:31 – Assessing the Amazon case study
• Learn more about Thomas: Twitter; Grizzle Research; Grizzle Investment Management

 

Transcript:

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 co-founder 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:

Welcome my friends, we got a fun episode today. Our guest is Thomas George, president of Grizzle and portfolio manager of the DARP ETF. In today’s episode, Thomas talks about investing in disruption at a reasonable price, or DARP for short, and the keyword in there being reasonable. He talks about the sector and thematic focus of the ETF, including some areas outside of tech, like energy and uranium. He also talks about takeaways from the 2022 selloff in the growthier parts of the market. And as we wind down, he walks through the performance of Amazon since its IPO, and why it makes for a perfect case study for disruption at a reasonable price. Please enjoy this episode with Thomas George.

Thomas, welcome to the show.

Thomas:

Hey, nice to be here. Thank you, Meb.

Meb:

Where is here? Where do we find you?

Thomas:

Toronto. Toronto most of the time. It’s a good town.

Meb:

You’re all over the place. What’s the vibe in Toronto right now?

Thomas:

We’ve gotten extra innings, if you will, or overtime for summer. It’s plus 20 in Celsius here, it’s super nice, so it’s been an incredible… I went swimming in Lake Ontario early October, which I’ve never done in my life. So yeah, it’s been super nice.

Meb:

We’re going to talk about all sorts of fun stuff today. It’s hard to pin you into a certain category of investor because you got interest in a fair amount of different things. I’ve known you for a little bit, but I want to hear a little origin story. Give me the Grizzle origin story, to how you got to what you’re doing today.

Thomas:

I did engineering at Waterloo, it was good, and I’d gotten exposure to Bay Street and stocks through some of my internships, and you catch the bug, and I was like, listen, I need in. But I was doing back office… I started at Citi, I was doing back office for derivatives trading. I’m like, I need a taste of that front office. That classic fight towards it. Right? Anyways, I ended up graduating, it was in ’02 recession. Nobody was offering any full-time jobs.

I had a lot of good friends at TD. I got a gig as a tech assistant on, basically, servicing the front office, and it was a six-month contract. If this is my pitch, I got to go, I got to swing here. Long story short, six months, I ended up turning that into a full-time gig. My role was portfolio analytics. Being on a trading desk was so much fun. I’d come in, and the whole standup comedy of the markets, if you really want to make it as a player, in terms of nobody can say another word, you start off on a trading desk. And literally, it was a jungle. It was the best.

Meb:

We recently rang the bell at CBOE a couple of weeks ago to celebrate 10 years on ETFs. And [inaudible 00:03:17] an actual bell, and there’s probably, I don’t know, 100, 200 traders still on the floor, it’s a pretty cool room. And you ring the bell when it turns green, don’t do it before, because literally they’re trading, and so everyone will get furious at you. They had a timer that said 1:00 PM, whatever it is in Chicago. Or no, excuse me, it’s the CBOE, so it’s actually later. So, whatever it is, 15, 30 minutes after the hour. I can’t remember, it was only a couple of weeks ago.

But they’re like, “The traders are going to place a bet on you on how many bell rings you get, there’s an over or under. And I was like, “Well, what’s the over or under?” He’s like, “I’m not telling you.” But I was like, in my head I’m like, I’m going to do 50. I’m up here, I got my shot, I’m not going to be like ding ding, and then see you later. I’m going to ring this for the cows coming home, for a minute. And so, I get up there and sure enough it happens, and I start ringing it, but this bell is so loud that after the second dong, I’m deaf in one ear. And so, I got to, I think, 15 maybe, I wanted to go at least 20. But apparently the over under is only around eight, because most people do it, they whiff the first one because you got to do it pretty hard, and then they come back and then they’re just shell shocked.

Thomas:

That’s commendable, right? You were on the high end of it.

Meb:

Yeah, you would’ve taken the over. But you’re right in the sense that there’s nothing like a trading floor, there’s nothing like, you walk around the bank, there’s an energy and excitement that’s hard to translate. And particularly, you mentioned portfolio analytics, that’s actually a pretty great training ground because it teaches you a lot about position sizing and portfolio math, that I think that it gets skipped over so much on people’s introduction to investments. It’s sort of like, I was telling my wife the other day, I said, I was also an engineer, and how many ever courses in math I took, I said, “The one that I didn’t take, that I use on a daily basis more than anything, was statistics.” So, portfolio analysis is very much like a statistics type of introduction. All right, so walk us forward, keep going.

Thomas:

That’s exactly what it was. I had this brain that could do the math stuff, I wanted to get into the other side of investing, but it was a perfect marriage, and if I look at it now, that starting period of portfolio analytics ended up becoming my bedrock, where I’m still like that is truly the one sustaining thing that I just really think it’s an incredible skillset that you develop through time, it becomes this innate… Math, statistics, it’s that idea of, coming back to what you said, position sizing. That’s what they don’t teach you. I can be a doctor for a lot of portfolios when I can see immediately that this PM doesn’t know how to position size.

Twitter’s amazing, and obviously that’s how we connected, and there’s a lot of great luminaries on Twitter, but there’s a lot of short sellers, legendary ones. And I knew one that, won’t say his name, but very vocal on a particular stock. You’d be like, this guy has a lot of knowledge about this, and he’s got express it in a certain way. Guess what his position size was? I finally asked him out loud. I’m like, “What’s your position size in this? Just curious.” “13 beeps.” I’m like, the fuck? 13 beeps, for all of this gas, all of this huff and puff, 13 beeps?

Meb:

For the non-beeps crowd, that’s 0.13%. I have a similar story, I remember talking to a very, very wealthy friend of mine, hundreds of millions, if not billions, and I was watching him give a speech, and he’s like, “I’m going huge into…” whatever it was, let’s call it gold. I don’t know. I pulled him aside after, and I was like, “Hey, when you say huge, what does that mean?” And he was like, “I took it from 2% to 4%, so I doubled,” and I was like, “Yeah, but to be clear, it’s still only 4%. There’s people in the audience that heard that and thought you’re like 95%.” It’s like all my crypto friends, there’s either zero or 100, that’s it. Or 200%, if you’re leveraging it. Anyway, you always got to ask because their approach to position sizing is very different.

Thomas:

I always think about it is I’ve got a certain amount of information insight into the market, my value add is how can I then project that onto the portfolio that brings the most added value to the investor in our product? So, if I’m finding I’m spending an inordinate amount of time on a particular idea, and I think I’m only going to keep it at a small position, that doesn’t make sense. I should be spending a majority of my time percentage weighted for the most part.

Meb:

All right, so what was next? What point did you get into resources? Was that next?

Thomas:

You’re getting the extended long version of the origin story. I usually have an elevator pitch for this stuff. But I was on the desk, I was very fortunate to get an opportunity to go to London, England, to join the international equities team as a portfolio analyst there. It was a small team… That’s when I transitioned from portfolio analytics to quant. The whole idea is we were covering EAFE, which is Europe, Asia, Far East, huge geography, unless you have a system to whittle down the universe. If you’re a fundamental portfolio manager, you’re kind of lost at sea, if you will. It can be very, very hard, so you need a framework to put it all together, and that’s where I met my mentor, Charles Edwards Kerr, who was a Japanese fund manager, one of the best. He’d oscillate between one and two globally. He really taught me a lot about momentum investing.

Japan was the original momentum market in momentum and growth investing. I was there, and that was really my spark, that’s when I made the transition from portfolio analytics to equity research. At this whole same time I was doing my CFA, obviously, to augment my engineering background with finance. So, I was in the UK doing this, and then my first pick there, which, my most memorable investment, I was just looking it up, it ended up being a 21 bagger today, but literally it was… My first thought, I was reading Investors Chronicle, the UK had all these magazines, I was reading, I was like, Aveva, these guys were doing 3D engineering design software, I thought it was super interesting. I told, at the time it was portfolio manager, now he’s head of TD Asset Management, Bruce Cooper, I said, “Hey, listen, this is interesting…” I was just trying to make my nudge into stock picking.

I said, “Listen, this is an interesting stock here,” and it’s something I know about, I know about engineering, it was like AutoCAD, but these guys were doing 3D AutoCAD. I’m like, “This seems super cool.” Their office was in Cambridge, England, and we ended up taking the train to meet the CEO, there couldn’t be a more textbook first opportunity to stock picking, to put in an institutional portfolio. It was a fairy tale. Ends up going up 150% in the following year. It was an incredible story, and it was an incredible company. I hadn’t kept pace with it, it had remained in the portfolio for years after, but looking at it now, it just comes back to that classic, when you find a great business, just don’t sell it.

Meb:

That’s the hard part, man. I was going to make the joke where I was like, congrats on the 21 bagger, and now it’s 100 bagger so… That’s whole key is the [inaudible 00:10:08], right?

Thomas:

Exactly. And 21 bagger, from the point we identified it, I think we probably sold it in a five bagger or something [inaudible 00:10:14].

Meb:

Yeah, totally. A bunch of pikers. Where in the timeline are we now? Are you ready to start your own shop, or do we still got a little more in between?

Thomas:

So anyways, come back to Toronto, I’m a full analyst covering international energy, materials, utilities, anything that is physical. My background was environmental engineering, so it was a good mix, and there was a big revolution in Europe with renewables, I was covering that on the utility side. I ended up then taking over the flagship resource portfolios at TD, which, in Canada obviously a big resource investing market. The precious metals fund would’ve been one of the largest in the world, and we had an energy fund that was quite big, and a resource fund. It was phenomenal, and at the same time, obviously, I’m looking at, we were investing in growth as well. And then I met Scott Willis, my partner, at TD, and my good friend, Chris Wood, who was at the time chief strategist at CLSA, we forged a friendship through the years, and the three of us, myself, Scott, Chris Wood, decided we should take a shot here and start something different.

And that different was Grizzle, that was started in 2018. And the explicit goal of Grizzle at that point was just, listen, obviously our net end goal is to put our flag in the ground for asset management, and hit the dingers out the park, if you will. But before we do that, we got to prove our credibility to the street, and we were just in a very unique period in 2018, social media ended up just really accelerating. And our first piece we put out, Scott authored this incredible piece, Up in Smoke: The Overvalued Haze of Canadian Pot Stocks, that was early 2018. The hype around it, social media, and all those sorts of stuff, I literally thought we were going to get a Molotov cocktail through the front of our office. I said, listen, take the office address off the website.

It was a great way to get our name known, but we were like, listen, the valuations here simply don’t make sense. If you think about it, that was kind of the origin story of DARP, disruption at a reasonable price, as we applied it to cannabis. We said a lot of these stocks have 90% downside, and the pricing went through that itself. For us, that was our first foray into DARP, but obviously you can be short stuff. It’s [inaudible 00:12:15], it’s overvalued, overvalued… You can see things are overvalued everywhere, the harder part is to say where do you want to go along that really can sustain that? We’ve had our pulse on every facet of growth, disruptive growth, back to our hallmark commodities as well, through the last five years, and then we started the Grizzle growth ETF DARP in that period.

Meb:

Let’s dig into some of the Grizzle growth ideas. Listeners, for full disclosure, my firm owns this ETF, and also, we liked the product so much we reached out to partner up with the Grizzle crew on this, and maybe potential new funds. But what I was attracted about what you guys are doing, when people say disruption so often in my head it means one thing, and they think tech. And tech at any cost, any price, and there’s certainly some of your competitors that I imagine the listeners will conjure an image of, when you think of the last handful of years.

What was interesting to me about y’all in particular, in addition to your research, which, you put out a lot of great content, was some of the themes and ideas seemed quite a bit different than what I think of when I think of someone talking about disruption in tech, and more importantly the phrasing of DARP, which is disruption at a reasonable price. Which, to me as a value guy, certainly resonates. So, give us a little bit of the broad framework of how you think about this strategy, and then we can dig into all sorts of different pieces.

Thomas:

Nice to be part of the family. Thanks for seeing the magic here. Big picture, when I think about disruption, this is the new reality, and you’re seeing it both on a consumer level and on the… Technology obviously is an accelerant for disruption. It is the new reality. So, when I think about evolution, there was GARP, which is growth at a reasonable price, but that was at a period where things didn’t change that dramatically. A value investor would say, that’s kind of crazy, you’re looking out two years there, get forward two years [inaudible 00:14:16]. And now, you’ve got to take that bet on a forward five to six years. It gets a little harder. So, the way we think about it, and you’ve highlighted it well, is when the current framework of disruption is at this disruption at any price, DAP, for lack of a better acronym, what’s DAP?

DAP is like I’m going to sell you this shiny thing here, this shiny thing there, it’s going to be amazing. Flying cars to the moon… All of it is very sensory overload, great, phenomenal, like dude, yeah, sign me up. But it’s not tethered from a financial basis, the whole idea is I’m giving you a picture 10 years out into the future, it’s going to be amazing, you’re going to love it, the portfolio is going to rocket ship. To predict ideas 10 years out in the future is so damn hard, things change so dramatically, especially when you have no valuation basis, it becomes very hard thing to do. When we thought about our DNA and how we look at things, obviously our view is very different, where we believe a great idea is phenomenal in itself, there’s a ton of great ideas out there, but you have to inherently link it to cashflow.

You have to. There has to be a link to how do I get paid as an investor? Because if I can’t think through the business model, and say, okay, yeah, actually, this can be a cashflow juggernaut, I get it may not be a cashflow juggernaut today, but they’re laying that foundation for five to six years in the future to really rip it. And it could be anywhere between now to six years. But the main point is, beyond six years, it gets very hard. It gets incredibly hard to really vision that. And so, when you think about where DARP is, so we’re not DAP, which is disruption at any price, and I call that science fair disruption, it’s the kind of stuff, you walk through, you’re like, oh wow, that sounds like a really interesting idea.

It’s allure of the magic of disruption, versus, we’re the tangible side of disruption, where this is a real product that is going to change the world you’re living in, in the next six years, and we know the business model can support a real cashflow inflection in that timeframe, and we think that now on a valuation adjusted basis, it’s an attractive investment, and that really is DARP. It’s that looking for opportunities with cashflow inflection within six years.

Meb:

The nice thing about your background and training in the resource world is the resource world, if there’s ever any place that’s good training for this area, it’s resources. Because my God, how many companies out there say, you know what? I got promise of a bunch of gold down in this hole, or my goodness, this mine… And of course, they throw a bunch of money in, and then nothing comes out, and vice versa. But that Canadian education you got, and resources, I think is very fertile training ground for looking… Same thing, a lot of these tech companies or other type of companies and saying, okay, there’s some sizzle here, but actually, is it turning into cash flows, or is it just going to a bunch of the CEOs, as stock-based comp or something?

Thomas:

100%.

Meb:

Let’s talk about a few of the themes you talk about.

Thomas:

Resources have a lot in common with high growth and disruption. It’s the promise of a multibagger, the proof is always in the pudding. Where is this thing out? And so, in resources, there are sweet spots, there’s points where it’s far riskier, and you’re always trying to think of how do I de-risk this? Are all the elements of de-risking here, and if there are, and hope and a dream and a good drill result, you’re going to be in some trouble.

Meb:

So, when I’m looking at the portfolio, and I’ll let you take it from here, number one, holding Microsoft, which had a good day today, congratulations. So, that’s traditional tech. But I’m looking at some of the themes on your website, and they’re not necessarily traditional tech. So, maybe let’s walk through some of the themes that you guys are particularly focused on here in late 2023. Not cannabis.

Thomas:

No, not…

Meb:

Which, by the way, it’s funny you identified at 2018, because we did some old research looking at sectors and industries and it’s almost extremely rare to see an industry that goes down six years in a row, which is where cannabis is in, since you guys were talking about it 2018, so six years in a row. I think coal may have the record, it was around six or seven years, we wrote about it. And uranium was also in there, which I know you’re a fan of, but give me some themes.

Thomas:

We were pretty bearish on the Canadian side. We thought there’d be an uplift on the US side, but as time has come, and I’m talking cannabis here, it’s been a tough go for investors, and I feel for them. Uranium is an interesting one, we can talk later. It’s a small position in the overall ETF. I think there’s an interesting opportunity right now, but again, it’s risk weighted in the portfolio. If it happens, it happens, but if it doesn’t, it’s not going to be a mortal wound.

Meb:

Let’s hear it. Start with some of the themes, wherever you want to go, and we’ll hit on all of them.

Thomas:

Big picture, I just think looking at disruption is two key things going forward. Technology’s clear and there, there’s no question about that, that’s a mainstay of disruption. But the differentiated aspect of disruption for us is our commodity exposure. We believe that, functionally, that commodities are a key input into the disruptive vectors that everyone talks about, particularly EVs and lower emissions future. So, for us, we think the value capture is not on the downstream electric vehicles, the windmills if you will, I think all of the opportunity set is in the commodities themselves. And that’s where we sit right now. So, you have, for us, two key areas, we think in the new environment, higher interest rates, and particularly with AI on tech, we believe that that’s a gain for big companies, and that’s how we’re exposed to that. We think it’s real. This is not crypto, this is not promising, and when I say crypto, I’m saying X Bitcoin, but this is not all the promises of crypto, and what we’re seeing in AI is factual and real.

I’ve never seen anything get adopted this quickly, not just by myself, but seeing my son use it for homework. It’s an absolute game changer, at the enterprise level, I think that’s where it gets significant with respect to the productivity improvements that it drives out, it could be anywhere 20, 30%, I think we’re just starting to scratch the surface of what it means. It’s going to be powered by chips, we’re [inaudible 00:20:25], AMD, Microsoft is clearly at the enterprise. If you’re going to get that productivity out, likely you’ll be using a Microsoft suite of products to do it.

Meb:

We just had to update, for some unknown reason, as you started to go through all these compliance gatekeepers. There’s a really big one at one of the big wirehouses. The number one gateway said, “Do you guys use Dropbox? No, sorry, you got to upgrade to Microsoft.” I was like, “Really?” I was like, “Dropbox isn’t like some tiny startup,” I was like, “that’s a pretty big…” And they’re like, “Nope, got to do Microsoft.” It’s like, okay, well, there you go. So you got a new subscriber. All right, keep going.

Thomas:

From our perspective, that is the one where, right now, everyone’s like, okay, listen, where does this come out? We think Microsoft, the valuation, makes a ton of sense, it’s going to be at the core of this. It’s interesting, when you look at the last growth cycle that basically ended in 2022, just before we launched DARP, that was really a hallmark of a lot of companies, small and mid-size companies, that were driving disruption. That chapter. What happens, an interesting thing happens when you get higher interest rates and valuations start to peel off, is that you realize, wait a minute, especially with AI particularly, it’s a game that’s capital intensive, higher interest rates, all of these hurdles really stack up against that small and mid-cap fertile ground for growth stocks in the COVID era, the COVID boom, if you will. And so, we think that right now you’re in the flip side of that, where it makes a ton of sense. We still look, we still absolutely look, but right now we’re expressing more of our small and mid-cap exposure on the resource side.

Meb:

All right, well, tell us about it. Give us a little bit.

Thomas:

On the resource side, we think natural gas is truly the most underrepresented opportunity in most everyone’s portfolio. So, I joke around, commodities themselves are not in vogue, that’s where you are. Commodities aren’t in vogue themselves. Natural gases are the least liked commodity. There’s tons of oil bros. When I go on Twitter, look at all oil bros. I know a lot of them, good people, good people, great people. Lots of geopolitical chitchat together. You know what there aren’t? There aren’t any natural gas bros. Me and three other guys, natural gas bros, and I love that. We’re literally the only natural gas pros. We’re like, this is the best full stop commodity there is. It doesn’t have the sizzle of geopolitics, there’s a ton of analysts for oil. I know a ton of oil analysts, but how many natural gas, talking the commodity? This is all good stuff.

You have a ton of this analysis on the oil side, everyone talking, [inaudible 00:23:00]. I’m like, I want to be on the side where no one’s talking about it. A lot of the reason is, oh, well, natural gas is cheap. It’s a commodity no one wants to love. I’m like, I don’t know. Right now, when we look at our portfolio, our natural gas names are up 30% this year, and natural gas is $3. In Canadian commodity investing, you learn from a lot of mentors, and they help you frame up. My first CIO, John [inaudible 00:23:24], a great guy. He would bring me to the office, he’s like, “Listen, you’re covering commodities, let me just give you a little advice here. You can never really predict the commodity price, so to insulate yourself, you better be owning the company that’s growing their production.”

But in this case I’d say I don’t know where the natural gas price is going, I just want to make sure that at a high level, volumes are increasing. When you look at a big picture here, global LNG volumes are going to double over the next 10 years, double. And so, from our perspective, I want to be owning that. There are a few scenarios where we could be potentially using less oil, I don’t subscribe to them, but there are pathways here in the probability setup, that you could potentially use less oil, obviously on the EV side. Eating into that, there’s no scenario that I look at, where we’re using less natural gas, none, zero. I say, listen, why wouldn’t I want to use the commodity that just ticks all the boxes? You don’t believe in climate change, I get it, but listen, it already has half the CO2 of coal, so let’s take that off. But, the biggest issue right now is that in the emerging markets it’s air quality.

It really is air quality. So, socks, when you think of the things that come together to make air pollution, socks and knocks, natural gas has 100% less socks than a coal-fired power plant. 60% less knocks than a coal-fired power plant. These are huge numbers. So, you don’t even have to believe the CO2 side of it, but why wouldn’t you want to just take all of it? It’s the ultimate pill. So, from our perspective, cavemen were using wood and all that stuff, we moved on, because we’re bigger people. Humanity moves on. How are we still stuck on coal? This is my soapbox, being a natural gas bro, because I have to. There aren’t a million of us out here, it’s like me.

Meb:

I was laughing because we had John Arnold, who’s the OG nat gas bro on the podcast a while back, but he’s mostly retired to foundation and charity work now.

Thomas:

Bottom line is, is that we’re looking at a really historic opportunity, where we can upgrade the entire electricity system of the world, particularly in Asia, but definitively in North America as well, where, we can look at this thing called coal, and say, yeah, that’s kind of obsolete. I have a fireplace, but it’s all just aesthetic stuff, it fills my house with smoke, I don’t necessarily like all the stuff that’s involved with it. It’s kind of nice, it just looks nice. There’s not even that for coal, there’s nothing redeeming about it. From a high level perspective, it’s still an important part of the energy mix, but when I think bigger picture… There’s a book Amory Lovins wrote, and he coined the phrase the “Negawatt.” It really shaped the way I think about efficiency, and how something can be really powerful.

If you want to do something, reduce emissions, et cetera, well, the best thing to do is add to negawatt things. Put in an efficient light bulb, et cetera. Those things have immediate ROI, that’s negawatt. What doesn’t have an immediate ROI is solar, is wind, those aren’t on the negawatt scale. Natural gas is the perfect negawatt. You don’t have to incentivize the thing, it just does it. So, when I think about all the subsidies that have been spent in Europe, in America, I don’t know, someone’s done a tally on it, there’s massive amounts of money, with the hopes of building new industries, which we have basically, they just subsidized industries in China, let’s be frank, you’ve got no economic output. This is so far away from a negawatt, it’s crazy.

So, when I think about where we sit right now, we have the biggest, fattest negawatt opportunity in natural gas, and we’re dragging our feet as a global collective, when all it could take is maybe just a little bit of subsidization, which I guarantee you, Shell and Exxon, et cetera, would actually subsidize for free, if we actually cut all the red tape and say, listen, let’s have regasification facilities in India, dot the coast with it. Do that for Asia. Let’s subsidize the regasification, let’s give it for free, make it the most abundant commodity in that scenario, which no one talks about, it’s a Grizzle scenario. Oh my gosh, you’ll look back and say, oh, I didn’t have enough natural gas. This is a commodity, or I’m like, I didn’t have enough of that stuff. So, what I’m calling for, literally, it’s called [inaudible 00:27:39], the Manhattan Project of natural gas.

Meb:

I like the sounds of it. There’s traditional companies that are easy to play that theme, and so as you guys think about a theme, do you start top down, or is it really bottom up, or both? Do the names show you the opportunity and bubble up? Going back to our original discussion, how do you position size the theme in the portfolio?

Thomas:

It is top down for us, we’re looking for opportunities where we think, okay, listen, this will have an above average rate of growth relative to the market, we’re growth so we’re always sniffing around, and then you’re going to do a high level just valuation screen. Is this just really pie in the sky? And that still doesn’t stop us from looking at that, because you don’t want to be just shutting away things, that literally you could be just around the corner of opportunities, that may be super expensive just on where we sit right now, but once you look into the tech, you’re like, okay, this could really, really work. That’s kind of your first sniff. And then from there, we then look at a valuation foundation, we’re like, okay, assess the growth, the health of the sector, the health of the company, just the profitability of where they are right now, and when you look at putting all of those pieces together, we’re like wow, natural gas should have a very significant weighting in the portfolio.

So, coming back to the portfolio analytics side of it, we do a lot of portfolio analytical testing, we look at how the volatility of the overall portfolio is. Something we’re very proud of, obviously, our performance, everyone talks about performance, we’re very proud of our volatility. Not a lot of people talk about being proud of that, but that really is, for us, a testament of our portfolio construction, in the respect of, okay, listen, we know how volatile this is, we know the correlation it is to the other assets, so we think about the overall mix of it. And so, basically, with just around 40 holdings, we’re literally… We have a volatility less than the Nasdaq-100.

Meb:

The volatility becomes important, and I think a lot of people get confused between average or compound returns, and these what we call, volatility gremlins, certainly eat into the difference. We were talking about Dave Ramsey the other day, where he was talking about he gets 13% on his funds, and I said, he actually, I think, probably believes he gets 13%, because he’s looking at the average yearly returns, but because of the volatility, the compound return is probably going to be down around 11, maybe even 10. The more volatile an investment is, certainly, you have the chance for these gremlins to get into your portfolio too. So, lower vol on average is better. But we all like up fall, which is things going up, it’s the downfall we don’t like.

Thomas:

I had a great example for that, a little DARP in a test tube. I don’t know if you want to go through that, but I’m still talking about construction on this. But then we think about, okay, listen, how does the opportunity fit if the valuation’s right? And in natural gas, we did a full piece on it, it’s basically getting paid to wait, in the oil and gas sector, and it’s incredible. So, balance sheets have never been as healthy as they are right now, they’re basically dividending out or buybacks, you’re getting full return of capital, it’s incredible. So, we were looking at names, we were looking at a host of names that were having yields in near double digits, like eight to 10% dividend yields. Chord Energy is a name, it’s a top 10 holding for us, it’s got an 8% yield.

Meb:

When you look at this entire opportunity set on the energy side, and whether maybe you think about it energy in general or just natural gas specifically, what is the position sizing for the whole fund look like, right now? Is it 5%?

Thomas:

So, it’s 17% of the fund.

Meb:

And I think a lot of people when they think disruption would not automatically think this. I just listened to a long great talk on, talking about nuclear, but this is like a value and a growth guy end up in a bar, you and I, a lot of the energy names that have been popping up into our portfolio, because it goes back to the arc process that you’re talking about, which is the cash flows have to be there, and many of the energy names certainly fit that category, whether we end up being right or wrong on a TBD, but it certainly popped up a lot with these big dividend buyback yields, which, to have those, you have to have the cashflow in the first place.

Thomas:

There’s that aspect, okay, listen, this is a huge opportunity, then we take it down to the next level, which is basically, we then apply fundamental quant… I was head of fundamental quant at TD. So, basically, our fundamental equity team. So, this isn’t quant team, but this is, within the fundamental equities, I was running fundamental quant, we were basically helping to whittle down the universe to stock selection as it matched every portfolio manager’s style. And so, for us, we’re growth, so one of our opportunities we believe, big picture general quant can’t capture growth. Growth is much more specific, it’s much more bespoke, so most say it’s well it’s unquantifiable, it’s harder to quantify disruptive growth. We take a different view.

It is quantifiable, but you just have to do a lot more legwork on it. So, for us, then the next part of the process is basically creating a fundamental quant process, screen if you will, then that basically guides how we think about the sector. We publish that openly in terms of how we think about it, and that’s how we land on names. When we think about natural gas particularly, we’re truly blessed on the oil and gas side, generally, you have these characteristics where we believe the growth will be disruptive, significantly higher than the market, but you’re getting paid right now. That’s just incredible. From our perspective, it’s an incredible anchor for our portfolio, along with the Microsoft’s as well.

Meb:

That’s a portion of the portfolio, what else do you want to talk about? You got a thing for health, what else is in this portfolio type of themes?

Thomas:

We historically had some names in there. It’s not the right point in the cycle right now, and as you can imagine that’s on the further end of DARP. We are a genuine believer. We’re in a world where health matters, and obviously, we’ve covered cannabis, we know what cannabis can do, psychedelics, an incredible emerging sector as well. But again, in the current interest rate environment, it’s not as exciting for us in the here and now. We’ll come back, but it’s not an opportunity we’re adding to the portfolio.

Meb:

What are some of the things, anything else you’re particularly thinking about, that you’re excited about, in the portfolio, whether up, down, in between, anything that’s setting off some alarm bells in a good way?

Thomas:

So, covered off the natural gas bros. So that I think is truly one of the most undercover opportunities, it’s going to be huge. $3 natural gas in North America, you add $1.50 to send it to Europe. It’s cheap, cheap to send it to Europe. You add $4 LNG to send it to Asia. North America can supply the world, you have it in a world that respects your right to extract the commodity, and get paid for it, that doesn’t exist everywhere. So, all of it really just spells a great opportunity there. The other side that for us is intriguing as well, it’s that idea is, we don’t own Tesla. We may in the future, but we don’t own any electric vehicle car companies right now. If you think about it, that’s the antithesis of a lot of the disruptive funds out there.

Someone will own it at a very high percentage. We know competitors that are owning anywhere from 10 to 25 plus %. For us, that feels like a crowded trade, and the multiple doesn’t make sense for us, but we think, okay, listen, we’re not bears on electric vehicles by any means, but we think that the competitive landscape, particularly downstream, is going to get more intensified, Elon’s just said it, you can see that in the pricing of his cars as well. The car business is a tough business, not to take anything away from Elon, he’s obviously a masterful innovator, but you’re going to get to a harder place for Tesla to win in that environment, the way they have been winning.

What we do believe is exciting is the electric metal side of that, which the general disruptive investor has not caught on to the fact that the outsized returns in the electrification of the world will be on the commodity side. And I’m talking copper, lithium, whole host of other metals, nickel, vanadium… The smaller ones. We cover them all. But, for us, we take a risk graded view there, but we do definitely see opportunity there as well.

Meb:

We come full circle to the final area, which I feel like other than Microsoft was the one that seems most obvious when you think of the DARP idea. Are there any particular areas of traditional tech that stand out for you guys? I see you guys mentioned cloud, but I see a few credit card companies in there. Any areas that you think are particularly interesting for right now?

Thomas:

We own Airbnb, we were a big believer off the bat. From that IPO class, call it the COVID IPO class, it was truly the one that stood out. They had free cashflow out of the gate. I’m a big user of Airbnb… I know there’s a lot of haters out there, but. When I think about true disruption, and I think about a phenomenal user experience and how an ecosystem can get built, Airbnb does it right. And it’s an incredible business model, it’s a top 10 holding for us. When I look at traditional disruptive companies, and I say, listen, this is what you should aspire to, aspire to Airbnb. That gets lost in the conversation. You guys are in all these different places, but Airbnb is a true company that, if we could have five more Airbnb’s, we would, type businesses.

Meb:

I ended up as an Airbnb shareholder, but because of I’d been an investor in Hotel Tonight, which, as a cheap bastard, fit my budget when I was traveling, I love Hotel Tonight. They were acquired. I don’t think I made any money on the hotel tonight part, but Airbnb, I’m a huge fan. Host back in the day, not as much anymore, and then guest, I think it’s a pretty amazing company.

Thomas:

You really have a great ecosystem when you enjoy both sides. I’ve met some phenomenal hosts, and the places have been spectacular. When you look at the generation millennial and adjacent, it really is about experiences. Whenever I hear about, all right, I just got to get a hotel, I’m like literally my fastest litmus test of how boring you are is you’re like, I’ll just go to a hotel. You can’t even conceptualize that Airbnb has a place, and experiences matter. It’s just like Boomerville. It just really is like, just put that right in my veins, that boomer right in your veins kind of [inaudible 00:37:38].

And listen, there’s a lot of great boomers that love Airbnb, it’s just that inability to see that the hotel model for an entire demographic cohort has been disrupted, and especially with work from home. This concept of we’re potentially thinking of an extended stay, and we can do that now. Winter gets pretty harsh here in Toronto, in January, and we’re like, listen, I can go for a month and it’s not going to really be a huge dent. I don’t want to live in a hotel, I got kids, I need a stove, I need all that sort of stuff. It’s really opened up so much.

Meb:

Come on down to LA, we got a desk for you. Airbnb is a good example of even post-becoming public. It was down, what? 50, 60%, and gave you really two shots at the plate in 2022, when it bottomed out, and it seems to be rebounding nicely from there. But it was a good example. A lot of these companies, not just tech, but anything really, people think you got to buy them at any price, but so many give you that opportunity to buy them. Like Apple, I think the classic case study was down at least half in every decade, except for the past one, or down even maybe 75% or something. You wait around long enough and your buy list eventually gets checked off.

Thomas:

You just need the fortitude to buy then. That’s the harder part. We owned Meta, I’d be lying to say I wasn’t close to getting shaken out of my position. Obviously, I had to have some belief in Mark, but I was getting shook, man, he was talking a lot of crazy talk about the Metaverse, that first cartoon. I was like, oh, man, we’re in trouble. But we knew the cashflow generation of this. Let’s be frank, Mark’s not Jack Dorsey, he truly built something that was monetizable, jack simply couldn’t with Twitter. It’s kind of the classic, like Rocky, the snuff that he had to take to get back in the ring and come out swinging in the eighth round. That mindset came back, and shares are up $1.40 this year. But again, that’s a classic DARP, where, when disruption at a reasonable price, Meta is more mature, but truly they’re going to be a part of a disruptive world. But when devalue DARP hits you in the face, a lot of times you don’t want to take it, that’s the harder part.

Meb:

At least through this cycle, are you finding a lot of names and opportunity right now? Are there, over the past few years, I think 2021 was a pretty wonky time for a lot of stuff going on, but is this pretty fertile? Some of the stuff you guys are doing is a little off the beaten path, on a traditional, I think. Give us the lay of the land, how are you feeling?

Thomas:

I think pretty good. You’re not in a totally bubbled out place, and with the large caps you do get the protection, like these guys are sitting on a heap of cash, valuations aren’t stretched. You have this nice barbell. You can own really safe stuff that’s going to be at the heart of disruption, which, when you think back, in the COVID era, the bubbly era, I’m taking all these runners on things that potentially could work out, your phishing pool was much more higher risk. AI has actually dropped the risk down, because it’s a big company game, it’s going to be enterprise driven, it’ll be the companies that you know. Is it less sexy? Yes, from a name brand perspective, it’s not like some sort of mid-cap thingy jingy. But will it deliver risk adjusted returns that will crush any of those mid-caps? Absolutely. So, from an investor perspective, absolutely.

And then, when I look on the resource side again, natural gas bro here, I’m getting 10% yields to sit on structural 10 year growth. Incredible. We have this one copper name that, it’s got a 9% dividend to yield. It’s a unique one, they’re downstream from the largest copper mine in the world, Codelcos plant, they basically treat the wastewater and they get copper out. Which, it’s enough copper to actually make them a midsize producer of copper, relative to another midsize producer in the world. Incredibly well run, it’s a no-brainer, cleaning up the water and you get copper out of it. And they just do it [inaudible 00:41:33]. So, for us, that’s a super exciting thing, we’re bullish on copper. From our perspective, that’s a huge opportunity where, okay, listen, I can take that company as my core, it’ll give me a good yield, and I’ll get the pricing upside of copper.

Not necessarily the production side of it, at least I’ll get the pricing side of copper, and then we own one of the best in class, I think, next development projects in the world. You manufacture the perfect little copper thing that I want. And then, when you average area, you’re like, oh yeah, that’s really value, but it’s the way you put it together as opposed to buying… Not to pick on any copper stocks. There’s a lot of copper stocks in tough jurisdictions that screen value, and they’re mid-size or whatever, but you’re not going to get the same production upside, dividend yield that I’ve manufactured with these two companies. If that all makes sense. I think about how I can Frankenstein some unique opportunities in the same commodity.

Meb:

I was going to ask you what the most unique name that is in the portfolio, that people would be, not surprised at, but might not even recognize, or even the story, but I think that might win. Is there something that’s more unique than that? Because that’s a cool stock story, I don’t think most would’ve predicted, or seems like a pretty good business model, defensible business model. Is there anything else? That when you sift through, people are like, huh, what’s that? What’s going on here?

Thomas:

It’s usually on our energy security side. Again, highlighting how cheap things are, lithium names are down 30% this year. Albemarle is down 30%, [inaudible 00:43:00] 7X PE. They do a ton of great work on the lithium market. We own it in size. This isn’t like bubbly Tesla, they’ll have to buy it from these guys. And I like lithium for one reason, and it may not match your entire criteria. But again, these things fall out of favor, but I like lithium for one reason. It’s really controlled commodity, so the Albemarle of the world, the SQMs of the world, they will ultimately be the volumes that get sold, and so that’s super attractive, and you’re not seeing that the value that I’m seeing is pretty impressive. Our natural gas names really do stick out, those are the interesting ones. And we take them in size. Chord Energy, top 10 position. Amerigo is a top 10 position as well. If things stick out to us, we believe in the value proposition, we’ll own it in size.

Meb:

I think that’s part of what attracted me to you guys. There’s not a lot of funds or strategies quite like what you guys are doing, and certainly, if you’re going to wait around in the large cap growth space, so many of the funds just look like twins of each other, and certainly, you’re not going to find as many 9% copper yielders in those funds.

Thomas:

And all of that put it all together in the DARP framework, that the idea is to protect downside, and reduce the overall volatility of the fund, and I think that’s what we achieved. For us it’s that, how do we capture DARP, the trend, over a decade, with as smooth of a ride as possible, with as less significant drawdowns as possible as well. And it leads me to that little case study here, that I wanted to share about Amazon.

Meb:

Let’s hear it.

Thomas:

So, Amazon’s probably the most interesting case study, call it test tube DARP. I know it’s probably [inaudible 00:44:38]… I shouldn’t use that term anymore. But for DARP we can use test tube DARP. In a perfect world, how can I observe DARP and how it works? Amazon’s probably the greatest one. Okay, listen, great company, core company, you should have owned an IPO. That’s how a disruption at any price investor thinks, I should have owned Amazon right at IPO. That’s back in 1997, long time ago. I should have owned it, done incredibly well. That’s one investor. A DARP investor says, listen, I don’t know where this is going, it’s long time, I don’t see anything in the next 10 years. I’m not going to get involved. So, if I had perfect hindsight, I would know where the cashflow inflection happens. That cashflow inflection happened in 2015. So, cashflow inflection, that’s when the cashflow started to go up. That happened in 2015.

So now, if I was a DARP investor, again, this is a test tube DARP example, with perfect foresight, I would be investing six years prior to that. Now, let’s just say I’m a super-conservative DARP investor, I need to actually see the cashflow inflect, then I would buy it. So, now I’ve identified three periods that I would be a disruption at any price investor, that’s right at IPO, put me in the game. Or, I invest six years prior to the cashflow inflection, again, I know when that’s happened, so six years prior, but let’s just say I got it right. Or, I invest at cashflow inflection. You have that quarter, you have that year, that’s, whoa, this is a juggernaut. Now, let me go through the returns of that. If you were at IPO, you would’ve had a 32% CAGR out to today.

Incredible. There’s no question about that, you wouldn’t want that. A DARP investor who bought six years prior, so that would be January 2009, six years prior to cashflow inflection, they would’ve had a 27% CAGR. That’s not terrible. I mean different, I don’t care about what’s happened in the past, I really care about my CAGR. That’s still a very good CAGR. Then I think, okay, well, listen, what if I invested right at that cashflow inflection point in 2015? I would’ve had 24% CAGR. All of those are incredible numbers, you would normally say just pick the highest one, easy. But then here’s where DARP really comes through. The difference in buying between the IPO is volatility and drawdowns. If you were an IPO investor, getting shook out is the number one thing that happens in disruptive investing. If you were an IPO investor, you had six periods of 50% drawdowns including 2022. 6 periods of 50% drawdowns, and your volatility was basically 60%. It was a huge volatility. If you were a DARP investor, you would have had one, and that was in 2022.

Meb:

Not to mention just the greater than 50, you also had a 90 plus percenter. The haymaker of all haymakers, not many people sit through the 90+ %. It might’ve been 95%.

Thomas:

Totally. And so, putting it all together, so the volatility is twice, so your sharp ratio, which is your CAGR divided by your volatility, is basically twice that of an IPO investor, or a disruption at any price investor, but you have drawdowns that are so significant that very few investors I know would’ve sat through that. So, when I think about disruption at any price, the test tube version, which is, it’s an incredible example, because everyone’s like, I want to own the next Amazon, coming back to the probabilities of portfolio analytics and everything, why wouldn’t I want to stack the deck in my favor? And I’m only giving up five percentage points, on an already ridiculous return, if I get this all right, and I got Amazon. But Amazon’s a great example of DARP. You look at the numbers, and you can see how that sets up.

And we’ve done a lot of other quant work as well, looking at other examples of DARP, looking at back tests and studies, and all of them show the same thing, is that if you have a valuation lens, you stack the deck in your favor every time. And we were fortunate enough with the launch of DARP, our good and bad fortune, but the good fortune was that we calendarized a year in 2022 that was brutal. An absolute brutal market. Our drawdown was basically in line with the S&P 500, and we outperformed competitor funds with significantly higher AUM, by 50%, because they were down 60% that year. So, from our perspective, the nice thing here is all of this is all fine, well, and good, I can take you through all the test tube examples and everything… I don’t know, I still want to own a flying car.

Now, I can show you legit nav, legit fun performance of how that works. And again, this year we’re seeing the same dynamic lagging out the gate. I was okay with it, I was okay with the fluffy disruption running out of the gate in 2023. We weren’t that [inaudible 00:49:10] returns were still good, but all of that has unraveled and more in an upmarket, and 2023 were outperforming, what I call, mainstream disruption at any price. And one thing that we are seeing, and I think investors are getting hip to this, especially with higher interest rates, for the first time, you’re seeing unit selling in some of these DAP ETFs. And what was peculiar is that during the huge drawdowns of 2022 and ’21, of these strategies, there wasn’t selling. You weren’t seeing the selling of the units. So, you’re starting to see some understanding of how interest rates impact disruption at any price, and it’s pretty meaningful.

Meb:

Thomas, what’s the best place for people to find out, follow you, more information on, not just funds strategy, but you’re writing too, where are the best spots?

Thomas:

We live on Twitter. We think it’s the coliseum for investing. We’re in a very blessed period that we can have such great analysis and we’re happy to be part of that. The conversation, the insights, it’s just bar none, the best. Scott and I live there, always dropping little gems and nudges, [inaudible 00:50:15]… It’s Twitter, it’s bare knuckle boxing. That’s great, and then we host some of the biggest industry conferences in commodities. So, we’ve grizzled commodity one-on-one, November 29th, we’re doing back-to-back uranium one-on-one, and then battery metals one-on-one, and then we’re going to do hard money the next day, which is November 30th, which is gold, silver, bitcoin. Our research, you can find that at grizzleresearch.substack.com.

Meb:

And don’t forget etf.grizzle.com.

Thomas:

Oh, shoot. Yeah, of course. How could I forget the main product here. All of this greatness gets synthesized into one thing, and that’s etf.grizzle.com, which is a DARP.

Meb:

Very cool. Thomas, thanks so much for joining us today.

Thomas:

I appreciate it, Meb. Thank you.

Meb:

Podcast listeners, we’ll post show notes to today’s conversation at mebfavor.com/podcast. If you love the show, if you hate it, shoot us feedback at feedbacl@themebfabershow.com. We love to read the reviews. Please review us on iTunes, and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.