#18 - Building Calisthenics Programs and Learning about Josh Tarasoff of Greenlea Capital Partners
May 29, 2020: I spend most of the day learning about calisthenics training and trying to incorporate powerlifting program disciplines into. It resulted in the base version of my first bodyweight strength training program and specific strength/skills goals the program is focused on achieving. Then, the day was spend learning about a unique value investor: Josh Tarsoff of Greenlea Capital Partners. Josh has an investment style that looks at compounders, company culture, mission-driven businesses and a contrarian look at company valuations that I love
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Episode Notes:
Learning about Josh Tarasoff:
2017 Interview at the Ben Grahman Centre
Started Greenlea with $2M of capital in 2007. Didn’t want to go down the route of an asset-gatherer. Based in Manhattan but.. "One thing is that I don’t have an office, and I work from home most of the time. I think that helps a lot and filters out the noises"
"I think that most people, whether they admit or not, or whether they know it consciously or not, are making compromises on what they do to make what they do salable. Whenever you do that, you’re trying to appeal to the lowest common denominator to the prospective investors, and by definition, you’re becoming a consensus investor. You can’t do that and expect to have good results. I think that there’s almost literally a direct conflict between salable as an investor and being good as an investor. That’s what it is."
Find like-minded people who should be investing in your fund. Not going out trying to get people to invest in your fund
3 areas he is different from traditional value
Betting on the constance of change: A “win-win” product where everyone in the ecosystem prospers as a result of the service/product of the business. If there is an opportunity where change can create such a ‘win-win’ environment for everyone… then that can be more powerful than constance of a past structure.
Not looking for statistical cheapness. In 2011 he bought Amazon for 200x P/E. By his calculations, it was 30-40x normalized FCF
Holding businesses for a long, long time: "number 1, the most exceptional compounders are by definition doing something idiosyncratic and weird, and people are fundamentally not super comfortable with that; number 2 is that, they usually look statistically not cheap…..number 3, what’s special about these companies is the long- term excess returns. It’s the returns that you’ll get from owning them for 5 years, 10 years, or 20 years, which are irrelevant to most market participants who care only about a shorter period of time"
“Sometimes there are some companies that are systemically undervalued for decades. You can look and see what they are. Just look at Walmart, Berkshire Hathaway, Amazon, Netflix, a lot of these really amazing compounders."
Culture
"I have 11 companies, 9 of them are founder-led, and the other 2 are basically founder-led with the CEO being there for 20 years and is fully married to the company."
"The hardest thing for me and the places where I’ve made the most mistakes is where it’s a border-line case that it looks like a good culture but I didn’t have high conviction about whether it’s really up to the bar that I want. I would spend too much time on it, or I would buy it and then later I thought I was really just compromising"
On speaking with management: "If all that you care about is that the company earns this much within the next 3 years, then that’s different from “are they going to be this great company 10 years from now?”. The kind of information you need is just different."
His strategy in a nut shell: “….it’s basically buying these companies at high multiples and holding them forever"
Process for overcoming weakness of compromising on research because of emotions: "I built into my process a phase where after I finish my work, I don’t make a decision and I don’t think about this company for a certain amount of time. It actually has another advantage as a by-product, which is that when you don’t think about something and your mind works on it subconsciously and you come up with things you wouldn’t come up with if you were consciously thinking about it."
Korean investing blog: 2018 - Guest lecture
Circle of competence: Volume-Price Virtuous Circle
Reminds of Nick Sleep’s economies of scale shared. The cost advantage of the business being shared with the consumer.
Quality companies => add value to the system. Not to exploit the system. They are also mission-driven companies
Looking for company leading an inevitable change to an industry/behaviour and is in the position or is already at scale. These companies are purchased at high multiples, hence a lower multiple will impact the price in a major way. One can mitigate some of this risk by seeing if the business and management has a track record of executing as that will be crucial for the growth thesis.
Tie-breaker Brands
There is a mental model for investing that makes two mutually exclusive buckets for companies: 1) Franchises 2) Commodities
But they can actually be combined. In a commodity environment, a trusted brand will win business and will be able to charge a premium (i.e. AWS in cloud service, Deloitte in professional services).
Spotify
“Win-win” business that helps record labels and consumers.
Record labels make more money distributing through Spotify than they did in traditional channels.
Microcap Club article on thinking different to be better:
“We [the financial industry] have these rules of thumb that say 15x is a middling multiple, 10x is getting cheap, single-digit is really cheap, 20x is not cheap, and over 20x is really expensive. We have these rules of thumb for a good reason which is, on average, they are right. The market as a whole is an average of all businesses. If all of the companies in the market are homogeneous with respect to their future earnings growth and returns on capital, then you can apply these rules of thumb to every single company. But, in realty, companies are so ridiculously different from one another. What I’m looking for is the outliers in the 99.9 percentile of great companies, and what is cheap for those companies is so far from these rules of thumb. I invested in Amazon in 2011, and it was trading at 200x P/E, but actually the multiple of what I thought was normalized sustainable free cash flow is in the 30-40x range. And I thought that was cheap! That’s very different from what most value investors do. This might not be accepted by many people. I’ve had phone calls with prospective investors where I actually would explain the Amazon thesis and I would say “I think it was at 30-40x free cash flow when we bought it”, and the other guy was like “13-14?”. And then I said “no, no, 30-40”. And then it’d be a weird pause, and I knew that the conversation was over. There’s a lesson in that we are getting back to one of the things I said about the advantage of not telling your investment strategy to something that you can sell to other people. I think that most people, whether they admit or not, or whether they know it consciously or not, are making compromises on what they do to make what they do salable. Whenever you do that, you’re trying to appeal to the lowest common denominator to the prospective investors, and by definition, you’re becoming a consensus investor. You can’t do that and expect to have good results. I think that there’s almost literally a direct conflict between salable as an investor and being good as an investor. That’s what it is.”
“..the most exceptional compounders are by definition doing something idiosyncratic and weird, and people are fundamentally not super comfortable with that; …they usually look statistically not cheap.”
“You generally won’t find misunderstood business with revs growing double digits, no debt, +20% roic’s, insider purchases, etc.; and a misunderstood business is the one I want to own. One thing that screeners are good for is screening for those excellent traits I mentioned earlier and then going to the first 10 years of financial statements of that company and seeing where the growing pains were, when it was misunderstood, and when one should have gotten involved… I’d even rather screen for undesirable traits and find the needle in the haystack than look at the same list as so many others (filtering for good traits).”