TIP674: Outperforming the Market, Managing Risk, & Market Inefficiencies w/ Andrew Brenton
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You're listening to T, I, P. On today's episode. I'm joined by Andrew britton to discuss his biggest investing lessons from beating the market over the past twenty five years.

Andrews, the C E, O and cofounder of turtle creep asset management S S. Inception in nineteen, turtle creek has achieved an average any overturn of twenty point three percent versus just eight point three percent for the S. M. P. 5 ten thousand dollars investing into their fund at inception would have grown to over one point two million dollars as of september thirty four。 And have that money been invested in the s MPI funded IT would have been worth around seventy five thousand dollars during this conversation will cover the fundamental drawbacks of a bin hold investment strategy, why the stock market in the us.

Is becoming less efficient over time, how we enter your thinks about allocating to A I and software businesses and its portfolio, how turtle creek manages risk investing in the stock market and why they added kinsell capital to to their portfolio this year? And what keeps ander going after thirty years in the investment industry? Andrews, one of the more impressive investors i've had the pleasure of bringing onto the show.

So I really hope you enjoy our conversation. Celebrating ten years and more than one hundred and fifty million downloads, you are listening to the investors point cons network since twenty fourteen. We study the financial markets and read the books that influence self made billionaire most. We keep you informed and prepared for the unexpected. Now for your host, clay, think.

Welcome to the investors podcast. I'm your host, clay fink. And today, we welcome back Andrew brinton from turtle credit management. Andrew? It's great to see again, it's great to be here clear.

So it's bit about a year since we last spoke and since then, you've crossed the twenty five year with your fund and you've put up returns of twenty percent per ana, while the S P. Five hundred has had a total return around eight percent. And i'm not sure what the statistics are on how many investment firms last twenty five years, but my guess is the numbers quite low.

So our show is called we study billionaire. So we like to discuss billionaire like buffet, Howard Marks and berna. no. But we also like to end of be very successful fund d managers like yourself who happen, have buffs like returns. Now buffer, of course, is well known for his buying hold strategy as his health companies like these Candy and poco a for decades as well as a number of holy oil businesses. I was curious ly figure, just talk a little bit about some of the shortcomings of this bin hole approach.

Warn buffet has a problem that I don't have, which is he is constantly building more cash. He has a business, the insurance business, with the float, of course, any compounds that problem by having good investment returns. So I get IT when he says i'm never going to sell.

Now lets be clear and I will actually talk about a situation where they ended up investing in one of our companies and then two years later, they in fact sold. So it's not as if picture never sells anything. So that's a misunderstanding.

But he has a problem. He has lots of cash, and he wants to put this to work. And its fundamental philosophy, I think, is it's always Better to own companies than sit in cash.

And if you look at the long term history of having money in treasury bills, this is having money in the stock market. Even when the stock market is above average valuations like IT is today, it's still Better to be in equities than to be in cash. And so in a sense, we have the same philosophy.

But because we don't have a problem of just massively building cash all over the time worth striving to be fully invested, almost always, it's rare that we have any notable amount of cash in the strategy or in the portfolio. So I think the shortcoming of a bion hold is it's very simple. If you own public companies and the share Price of one of your companies doubles, and that does happen with us over time.

And you look at IT and you say, well, we have an intrinsic value. We've done a lot of work. We have a present value of cash flows where the classic D C F investor, if you look at that and say, well, the share Price is doubled, the intrinsic value really hasn't changed.

We have a very long view in each of our companies. If you say I don't want to sell any shares, then really the thought experiment is you should have earned a lot more at that lower Price. And that's how we think.

And that's when we first started turtle create. We thought again, IT was that would happen sometimes in the early years that the share process to go up a law and we might not feel like selling shares. And I would press my partners to say, well, we should have known a lot more shares at the lower Price.

So think of us is to the best of our ability trying on the right amount of each of our companies today and again tomorrow and our views on our companies don't change that quickly. As you know, the fundamental intrinsic value of a company moves around, but IT moves around. Not that much compared to the share Price.

And so it's just a it's a common sense perspective. That is what I just said. If the share prize doubles and nothing change your margin of safety as much less so the city just watched and see if become a double waiting in your portfolio. Us, that just doesn't make any sense.

And I like the wave. Put IT in the pastas instead of buying all it's by an optimize. So by and reevaluate each of your holdings.

I'm reminded of Peter lunch. He won't said that selling your portfolio winners to buy the losers is like cutting your flowers to water your weeds. And I know for a fact you aren't going out and trying to buy bad companies by any means. Know you're well known for increasing your stake when share Prices are down and the fundamentals haven't changed and then selling down your stake when the share Price rises to a large extent. Is that ever the case where maybe the fundamentals are improving faster than you and originally anticipated me that you should continue to add that type of position?

absolutely. I mean, we've oed a canadian company, although it's listed now in the new orkis stock exchange IT listed three years ago. It's in the transport industry. There's nothing particularly notable and differentiated. You would think about trucking or transportation, but some companies are truly differentiated, and this is one of them.

So think of the over the years, the share Price has been as low as three dollars that was in the credit crisis, and IT became our biggest holding and IT has traded north of two hundred dollars. And today, it's just a little below two hundred dollars. About three years ago, after they listed IT in new york, they made a significant acquisition of lessons truckload Operations of ups.

fraid. IT was very large for them like this. CEO was extraordinary, and they've made over two hundred acquisitions, Frankly, probably over three hundred acquisitions over the years.

And some of them big, some of them small. This was a big one, and I was highly a creative. And so our Normal reaction would be the stock, when up a lot IT, actually reacted positively quickly and we Normally would be have been trimmed.

So think around one hundred dollars. And instead, we did a fundamental reset of what we thought the company was worth because this one acquisition was so potentially a creative, and so we didn't sell. And in fact, over time, we call IT hit the reset button, right? I like no.

In fact, we're gone to buy stock at one hundred dollars that we sold at eighty a year ago. So we do reset when something fundamentally positive has happened, and that does occur across the portfolio. But a really important thing understand about our approach is that we're not being conservative in our forecasts.

So if you find a good company or an area, you find a great company and you add A D to your portfolio, we will size IT based on the present value of all future cash flows. Going out thirty, forty years or longer and not be conservative in that step of our process. And if you do that, we haven't found yet that we trim out of a position.

And in fact, IT just keeps going up and we never get to own the game. That hasn't happened. I should say IT differently so far. It's happened. We have some canadian companies that used to be in our portfolio that today aren't.

We're still closely following them, but it's not like I look at what what was our forecast ten years ago, what's they're actual and we're willfully below that forecast like the one i'm thinking of. Remarkable how bang on we were. They did a little worse in the us than we were forecasting, but they did Better in canada.

And today, they're making what we were projecting them to make from ten years ago. The thing is the stock is trading at a premium multiple. And if he continues to always trade at a premium multiple, we won't owit IT won't make IT into our portfolio.

But when you look at the stock return in the last ten years, it's positive, but it's not terrific. The risk in investing in the public market to a large degree, is overpaying for companies and looking at your portfolio ten years later and say the company did really well, but the stock hasn't done really well. And so we're constantly trying to own the companies whose stocks are the cheapest today about within the framework of a full some forecast.

We on A U. S. Company called fLorin, the core, which is a category killed retailer, and we got the opportunity.

You mentioned twenty, twenty two. I didn't think we'd ever get the chance to owe IT. But with the fear of a recession in the us, investors punished consumer facing companies. And this is definitely a consumer facing company.

But our change to our value as a result of modeling and economic slowdown or recession that we're in, not saying we're in a recession, but we're in an economic slowdown. The impact on long term view of value is really quite small. There is an impact, but we have to changed our view as to how many stores do they have in ten years and in twenty years.

And so that meant that we said, hey, this is really cheap, cheap enough to get into our portfolio, but it's treating at fifty times current eries. I mean, it's not a low pe stock. So you have to believe the right now their earns are depressed and then you have to believe in lots of growth for IT to look cheap enough to make you into the portfolio.

Yeah, that example with foreign core reminds me of a youve mention carmax. In the past, they had a short term slowdown in the share Price dropped by some are north of sixty percent. You mentioned that, you know, the idea that the intrinsic valley changed by sixty percent over one year less is just a rous idea.

I think IT is in well with my question here regarding market inefficiencies and how that varies over time and taking the opportunity to add to a company like fLorin the core when share Prices are unfairly punished. I like your returns over the past few years. I see positive twenty eight percent and twenty twenty one neck twenty two percent in twenty twenty two, and then positive thirty three percent and twenty twenty three. So I was curious you talk about how these efficient very and here, like twenty, twenty two or everything just seems to be dropping. And then the years that follow, you're still making changes your portfolio, but it's the other way where a lot of but these share Prices just have a tail wind behind them.

It's really hard when you look back over the time you've been in the public market and i'm speaking about yours to try to say what's changed, I think the market has become more inefficient. And if you think of what drives inefficiency, there have been a lot of work in behavioral finance. Of course, that explains a lot of human biases that we have, and those have always existed.

And that includes short term ism and includes, you know, the endowment effect. All those biases, loss aversion. We try to not have those creep in to our process. That's part of my job to make sure that, you know, we don't say, well, what's the cattle is to make someone like a stock go up. We really try to avoid that part of the discussion, trying to read the mind of the market.

But if you think about some things that have changed, whether it's the institutional ization of the market where you have investment managers worried about their business in addition to act in as a social for their clients, and that's a big shift over a fifty plus year period. But the more recent changes, whether it's social media, and I think back to the dot com bubble because we were around them with the chat rooms, that was the first social media and the impact that had on share Prices. And now you add in the quant strategies and the trend following and A I, there are definitely really smart people spending their time on things that we don't even think about and running very, very different strategies than us.

And I don't know whether that makes money or not in aggregate. I'm skeptical, but I don't know. But what I do know is that, that's driving very large share Price reactions in both directions.

And IT definitely is the case in the U. S. More so than canada as we've in the last fifteen years moved into only U. S. companies.

That is something we see, but I think it's becoming more extreme and creates shorter term, greater inefficiencies in the stock market, which I like. But you still then have to believe that in the long run, the market is a waive machine. And I don't think that's changed, but we'll see how long things I can stay mess prize. Let's take a quick brick.

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But IT was quite a bumpy ride for the stock because you way up at times and way down at times. So quite volatile boat to the upside and the downside. So you're, by an optimize approach, actually generated around to fourteen percent return owning stock.

So if we assume that, that companies in transit value was compounding at eight percent on average, is that the type of investment that is attractive to you? Because IT seems that in order to achieve outsize returns that you did, you're almost needing that volatility and that short termism and that inefficiencies. Ebel ded in IT.

before I talk about home capital, use another example of a company in the portfolio that now been in for maybe eight years, and that's the U. S. Company, service corp, the largest funeral home company in the us.

In north america. They're also in canada. I often use that as an example. I say, look, IT was cheap enough to make you into the portfolio. The bian hold return has been pretty good.

The problem is, as a bonus, we would like IT if the stock moved around. Well, I would say to earn mid teens returns over the long term, which is our bogue the way we think. I don't know that you could do that with a buyin hold.

Could you find enough companies that are actually gonna w their share Price at twelve, thirteen, fourteen percent a year? There are some. But as you know, there aren't that many over the very long term.

We have a few canadian companies that we own. I mention the trucking company. He's grown to share Price close to twenty percent over the seventeen years we've on.

So there are examples of that, but there aren't that many. And they come back to face score when i'd looked recently had the buying hold. I think it's around eleven percent, but we actually added five hundred basis points. Like I was surprised to see how much because if you look at the stock chart of service, corbit really hasn't been that volatile. And yet, of course, IT has moved around over the eight years.

So I was surprised, and we do track that holding by holding because the way to think about our approaches when we add a company to the portfolio, we think that the long term bian hood should be pretty good. Like we've added four companies this year at each time we did that, the discount two hour in transit gi was greater than fifty percent. So you kind of say, look from there owning this and doing nothing.

If our forecasts are reasonable, then that's gonna really good over a five, ten year period. And then we simply say it's back to what I started with him on the podcast. If the share Price of one of them goes up a lot and thing's changed, we're not selling that out.

We're this is around the edges. It's just trying to in hands a core fundamental bian hold strategy. And even with companies that were in the portfolio and then we're out of the portfolio and then are back into the portfolio, actually our longest time holding when we met the then new CEO, this was eight or nine years ago.

He asked, like, so how long have you been in a shareholder and I said, we have we've been a shareholder for fifteen years almost. But I didn't mention there were times we didn't know any shares because even when we didn't, I fully anticipated that the shared post would come back to us, which he did, and we became a shareholder again. So it's really thinking about we're going to only these companies for a very long time, but sometimes it's going to be small amount and sometimes it's going to be a large amount.

And the best recent example is a canadian company called A T. S. CoOperation, which is now listed in new york as well as torto IT did last year and that they had their first investor day in new york last fall.

It's a really great story. It's a world class company. And so part of the reason why the share Price went up a lot last year was, I think, just brought in the invest base and U.

S. Investors getting to know this company. But also they had massive bookings from general motors in gender motor's panic and push to get into electric vehicles in the last few years.

And we all know that, that adoption has slowed. And so gm has slowed their building of electric vehicles. And as a result, some of these big bookings for A T, S.

Have been delayed and some of them may not happen. The thing understand is they didn't have any business and transportation a few years ago. And recently, it's thirty percent as they revenue these bookings that they're doing.

Battery pack assembly lines automation, global automation company. And as a result of that, it's funny last fall. This is a company we went for sixteen years, and i'm really impressed with the CEO.

He's been there, us most recent CEO, he's been running the company for six years. He comes out of day or her. I just don't really superb CEO.

And then what happened is with this delay in the evy slowdown, even though that part of the business you do a long term forecasts, there's almost no impact, is a bit of a one off their core businesses. Life science is more than fifty percent of their revenue. And last counter, they had record bookings ins in life sciences, and that's a recurrent, repeatable business line out decades.

Evy battery pack assembly is not at some point G M will in source that and in ten years, they probably would be back to zero revenue on the transport side. But it's very good business for them right now. And as a result of doing a long term forecasts, we didn't reduce our view on the company's value.

We actually have taken IT a bit higher this year as a result of talking to the company, even though the E V part is lower than we were forecasts in a year ago. But with the short term results, and this is back to the thought of so much short term m in the market, the share Price fell by roughly fifty percent. And this year, we have increased the number of shares of that company in the portfolio by three times.

So whatever we owned at the beginning the year, we owned three times as much today. And we bought a little bit in, i'm talking canadian dollars pressure now in the fifties. We bought a lot more in the forties.

And then one is lowest thirty four. We bought way more in the third ties than we did in the forties and of course, in the fifty. So it's not a straight line. It's not linear.

And who knows if it's going to go lower? It's up ten dollars so far and were close to the point where we d start that trim process and to come back to home capital eight percent by and hold over eleven and twelve years. No, that's not very good.

That isn't what we're hoping our companies will do, but it's okay when you understand the history of the company in the fact that they had a funding. This is canada's largest sub prime origins lender. So imagine after the U. S.

Housing debacle, what happened? The the hedge funds that made money on that turn to canada and found that there are actually two pure play sub prime mortgages providers in canada. The thing is it's a very different market up here.

And think of IT more is near prime. So it's actually a very good business and their loan losses over their history has actually been lower than the large banks with prime marges. So just think about that lower loan losses and they're only charging maybe two other bases points more.

And then over time, people who can't get a prime mortgage often graduate back to getting a prime mortgage, whether it's new canadians that don't have a credit history, self employee who can't prove up their income on an automated basis. But if you do the work, you're willing to you're able to prove up, oh, they have got a hold co and they have got revenue theyve got earnings here and you can qualify them if you're willing to do the work. The reason that I was an eight percent compounded return, what the key one is, they had a liquidity crisis seven, eight years ago.

Now a classic run on the bag. The longer book was extremely solid, but that worry about a housing bubble in canada and a lot of other noise and my sum mistakes the company made, they were in a crisis period, and they actually survive the crisis. At the time, we were the largest shareholder, and burger, half away, warn buffy, came in to bump us down the second place.

He bought out of treasury on twenty percent of the company. And the interesting thing is he wanted to buy fifty percent of the company, but the second charge got voted down by the shareholders. The company didn't need the first trance.

So they issued equity at not a very good prize, but to the right person to change the tone and accelerate their recovery from that funding crisis. And IT worked really well, but there was delusion and IT. Interestingly, even in that one year, whether was a crisis again, eight years ago, they made a profit.

That year, just not as much. But IT was the issuing evacuation to about IT and then two years later, the purchase in of those shares. So buffet didn't get to fifty percent and he said that was, well, it's not strategic if i'm only at twenty percent a really good business.

I like IT and so he sold his shares is back at a nice profit a couple of years later. And so that delusion, if you were to take that out, which you can, then you'd probably be in the low double digit by on hold return. And that would be fine.

We'd always like IT. It's Better. And then because things move around, we're able to improve upon that. Back to your question, do we need IT? As I said, I think you need IT.

If you target or hope you can get into the mittens double digit type returns over the very long run. I don't think you can do that with a bin hole. And so it's a bonus when we find a company and we say, hm, this is a really good business, but it's different.

It's unique. It's hard for the analysts maybe understand there aren't five cops that you can just simply benchmark everything else trades at eleven times. So this should traded eleven times for us.

It's a bonus if it's a unique one of a kind company because we never try to predict will things get this prize. But our view is odds are things that are unique are more likely to get this prize. You know, we'd like low and trinity c value volatility and high share Price volatility. But the core point is quality businesses like service core. And if they never move around that, okay.

So you mentioned A T S core being a technology name, and ever minds me when I was tuning into your annual meeting. Invariably there is a question about AI during the q, and a session almost goes without failure there. So when we look at some of the brilliant capital allocators, like mark lind from consolation software and brian ellison, the former CEO robot technologies, they really capitalized on these miss pricing and how software businesses are valued when you consider things like their pricing power, customer stickiness, abNormally high margins eta and of course, deliver an exception of returns to shareholder ever really long time periods. So as current of turtle creek is intentionally trying to make an allocation to software businesses or AI type companies, which have shown that these have been some of the best businesses to own over the past, say ten years, i'm curry to get your thought on that.

I will admit that we missed conStellation software almost because we were too close to IT. Before starting turtle creek, I ran the private equity m of one of the big canadian banks, and we put a committed term sheet in front of mark. When the company was private.

He funded with all of his existing investors. And the general rule in private equity is that somebody does that you're supposed to cut them in to the round. And I have did run in the mark some time later and we talked about and he admitted, yeah, I should have I didn't really think about IT and he just was kind of, oh, well.

And so when consultations went public, we didn't dig in. So I can't speak the consolation other than to recognize this how incredibly well he's done. We will on software companies and we do on software companies.

And our longest time holding is another classic consolidator called open text. And in fact, mark lanner will say that, you know, he learned a lot looking at what another person Stephen sadler has done. A Stephen has run a software consolidator for years called ange house, A T sx listed company.

We've on that in the past. We just don't today because evaluation. So today, we don't own as much what I call pure software as we have in the past because of valuation.

I mean, he coming back to valuation, there's a really good software company out of ottawa called they do supply chain software that really scales. So it's the holy grail for no knowing where every widget is in real time globally. If you are a multination, that's what you that is the holy grill.

That's what their product does. But in the pandemic, if you recall, when the supply chain was such a big topic, this stock traded through our intrinsic value investment. And by then, we didn't own any of them.

And I kept going. And now recently, they've got some issues. They're doing a CEO search and the stock has come back down to around our estimated and trinity c.

But recall my comment, the companies we've added here to date have all been trading that a little more than a fifty percent discount to in transit. We still follow IT, but it's got a long way to go to come back down to where it's cheap enough. I think for us, what's important is only companies that are intelligently using artificial intelligence, machine learning in, I mention ATS. And one of the last time we spoke to the CEO, he started talking about A I.

And for example, they do food processing equipment and automation and he said, well, we're using machine learning and and cameras to visibly inspect the fresh produce to improve upon the sorting, the grading and he said, I kind of think of IT is it's cheap analytics because I remember when I first came out of business school, there were companies using machine learning in cameras to try to improve upon that quality control sorting process. But A I in his mind, at least at this point, is cheap analytics. So it's company by company that we really want to understand how they're using any new technology, any new innovation were really focused on owning the company in an industry that is embracing any new technology but doing IT in a in a smart way.

And we own ingersol and and half had for many years now. It's not the old in german ell ran. It's a company that was called gardener denver that then bought a part of in yourselves, ran and kept the name in the listing for tax reasons.

But we meet with the CEO. And I can still remember sitting last year in our bedroom, meeting the CEO in the, and my head was spinning after a twenty minute description from this guy on how they're using A I to generate fully qualified leads for their human sales people. And I SAT there feeling sorry for the moment, pop type companies in their industry thinking, IT isn't a firefight.

And you can see IT in the results every order they exceed our expectation. And some of that is because of this applying A I to their business in a smart way. Carmax, the biggest used car retailer in the us. They're using digital assistance. They're using A I in their business.

And when the head of microsoft ai business, when he speaks about A I, one of his common case studies is car max as a customer of microsoft and in his view, how they're using artificial intelligence in a very good way in their business. And what the CEO explained that was recently, they said other companies that are selling use cars, they want to avoid people getting to a human. And as someone who's bot more than one tesla over the years, the one frustration I have that all works perfectly.

It's fine, but when you want to talk to someone sometimes, it's really hard to do that. And what car max wants to do is get you as far down the line in purchasing a used car from them. But when you need to speak to a person, they drive IT to a human. And it's that interaction of using A I in conjunction with sales people in a smart way. I think those of the things were looking for with our companies, but as a result of that, they've cut the number of sales people they have by more than fifty percent in the last couple of years.

So here comment there on one of the managers sort of making your head spin IT just sort of reminds me on how much the success of a company really relies on exceptional people in their ability to vate and do a lot of things. Just a lot of everyday common people just simply can understand, no matter how much they wanna understand that.

And it's sort of LED to me personally just trying to find some of the most exceptional management I can find and put a bit less emphasis on valuation, Frankly, because over the long term, if. Able to continue to do just great things and continue to do what you've done. They tend to surprise to the websites.

So I like free to speak more about this because you're holding, say, twenty five to thirty names. It's like how accurate can you really be in forecasting what cash flows are going to look like five or ten or more years down the line? When you're talking about all these innovations that are happening in the space like A I and all these new technologies that are emerging, you get to speak more to that.

I mean, when we look back because we keep every model, and it's interesting that everyone does now in the financial model for any one of our companies is there is a tab that maps the we use about a nine percent this country. It's arrange, think of IT as eight to ten. And we have never changed that regardless of whether interest rates are high, whether they're low.

And when you map that if your forecast is correct and if they're not paying a divided, most of our companies don't or if they do, it's tiny. Then if you're perfectly accurate in your forecasting, then the value should be going up at nine percent a year, right? So we've got a charge for each of the companies just so I can look at IT.

Okay, what would nine percent be for the last ten years? And what's our actual value, which is going to move around more than a perfectly a creating nine percent a year? It's been pretty good. I mean, to your point, more have been to the upside.

And so what we're trying to do is we don't if I use car max as an example or A T S as an example, yeah, you can make assumptions how much market charity you think they will have in ten years? And in twenty years, will people still buy used cars? And then how will they buy? Well, that's an important question.

Will everything be purely online? In which case car max will have stranded assets with their showrooms. But really, the physical reality of use cars is you have to refurbished.

You have to get them to the person who wants to buy IT. So there is still a physical need and they're always will be a physical need. And then you just simply try to make reasonable forecasts on what can they get to in a marketer.

Well, they have some mature markets where they're more than a twelve percent market here. That's remarkable given how fragment of the industry is, but they just open their first store in the new york area a few years ago. I think IT was prepare delic.

So you kind of look at the size of the U. S. market. You look at how they're done on the more mature markets, the repeat customer experience that they are having, and you try to roll that out over a multiyear period.

The final thing i'll say on this, not all management teams are equally strong. As you have said, IT is an uncertain world out there. You really want to be invested with management team, with companies that are reacting and innovating. You don't want to be in the company that just doesn't see IT coming.

Well, yes, it's a tough baLance between thinking about business quality, managment quality and thinking about the valuation that trades that because companies within a particular industry could trade that drastically different valuations. And I can be tempting to go after some of the more cheaply traded ones. I wanted to ask you question about risk here.

So academic theory would suggest that in order to achieve higher returns in the market, one needs to take higher risk. However, in the value investing space, many would define risk differently. What would be the chance of permanent loss of capital or permanent capital experiment rather than the volatility in the stock Price? And risk is a tRicky term because it's very difficult, if not impossible, to measure. I was curiously to talk about how you determine how much risk you're taking in, out performing the market such a large extent.

yeah. Well, we're definitely in the value investor camp. The idea that one uses volatility to match risk, I think IT was Robert shiller, who said the jump from the markets reacting to every new piece of information, right? Okay, to jump to that then conclude the markets getting IT right, as he says, has is the greatest economic error in thought in the twenty years century.

And if you step back and think about one of the great innovations in a sense of, you know, thinking about investing last century among the academics is to say, well, it's easy to measure returns, but you have to think about the risk of taking. And of course, that's true. The problem is they latched onto because what else can you latch onto the share Price fluctuations, that risk because markets are perfect or pretty much perfect.

And so that share places reflecting value constantly and IT just isn't as we've been speaking about. And so we've always thought of risk gas. Like are you wrong on your forecast? And I stress how a full summer forecasts are.

But the range of outcomes for service corp. Is a lot tighter than for other companies like an ingersol brand or other companies that we own. So we want to have our best forecast, but then we have a factor that we call dispersion, like what's the range of outcomes.

And some of our companies have a much bigger range of outcomes when you think I tend to twenty years versus a service com that is the largest general home company in the us, their business is kind of inevitable, unfortunately. And so as long as they are running their business well and we think they are, it's a tighter band of outcome. So that's how we think of this being wrong.

And then on top of that bad events happening to our companies, there's always that risk. And sometimes it's unexpected. When we talked about home capital in the funding crisis, they had in a calm housing market and a very strong book of business.

Unfortunately, we have IT now in canada. But at the time, we didn't have a fed window where a fully solve and deposited in institution and say, hey, here are some really good assets, can I borrow from you? It's important the fed does that.

And so now we have that in canada. So if that ever happened to home again, although it's a private company, was taken over last year. And so we don't know anymore.

Now there's another company in the industry called equitable bank that's a not a company that today is cheap enough to make IT into our portfolio, but it's a really good company and we are closely following. And if I got cheap enough, we would add IT to the portfolio or so we think about a range of outcomes. And then we recognize the reason you want a portfolio and not just three stocks is bad things can happen.

I mean, we've a long time holding of hours went through a just a fiasco o in the last six months where the board fired a CEO, a founder, CEO, who was sixty three years old, the boy trying to defend themselves said to us, well, you need this succession plan in which point I said, that's like firing that CEO of burke half away thirty years ago because these in is sixteen. I mean, IT made no sense anyway. It's been fixed.

But if I hadn't been fixed, if we didn't have a completely new board and a much stronger board, the chairman of the board is also chair of united rentals, formally the CEO of united rentals. So it's very if you look at their board now, it's business people, very impressive people, but that was a bad event. And if the shareholders had been able to get to an annual meeting finally and have a shareholder vote and completely change the board, that intrinsic value, that company would have been impaired, meaningful.

And so there's always that risk that a company specific event occurs that is negative. It's going to happen, and we stress that to our industry, and it's not that bad things aren't going going to happen to some of your companies is how do they handle IT and then what do we do as investors and IT rather than cut and run on active, where we were quite vocal for the first time in our history publickly chAllenging the incumbent board and IT, as I say, that resulted in a whole cell change of the board just a few months ago. And so things are fine now. But I could have been ugly IT might have been a profound impairment of intrinsic value if the founder CEO, had not been returned to that rule.

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One of the other things that sort of stuck out to me when I look at sort of how your funds evolved over the years starting out here, this toronto based firm focused primarily on canada in over time, you've made a shift towards focusing more on the U. S. So as of today, IT seems that your readings are now around two thirds us.

In one third. Canada focusing on the makeup p. space. What are some of the things that you'd like about U. S. Listed companies? And i'll heavy out this question by saying other than the valuations being more attractive.

So this was always the plan, right? The plan was always okay where x private equity, the three founders, as I mentioned, we set up and around on the private equity ARM of one of the canadian banks. And so we thought, before we look anywhere else, let's look in canada.

And that was the first decade. And then about fifteen years ago, we thought, okay, like the world was going to find new companies, that the management proxy fight and management changes and ips. So we're not going to not look in canada, but let's do the same thing in the us.

And we're still in that process. But there could easily be a time we say, okay, let's do the same thing in europe, but we haven't gone to that step yet as we were looking in the us. There were a couple of things I didn't know.

And one evaluation, to your point, is the U. S. Market more efficient.

And therefore, we wouldn't be able to find companies that are as misPriced well in our experience. So far, the U. S.

Markets not any more efficient or efficient than the canadian market is very similar from evaluation standpoint at times. I think there's a higher velocity in the us. There's just more people jumping all over something if the stock gets head or there's an event. So I think there's a you can see IT with our canadian only listed companies.

Even the cross listed are move around more, but especially the us companies move around more regardless of whether at is listed in new york, which IT is now or the transport company is listed in new york, they will never be in the indexes in the us. The S M P five hundred or the four hundred midcap. You have to be a us company.

You have to be headquarter in the us. To be a candidate to get into those indexes. And if there is a lot of flow because of the indexes that's not affecting our companies.

So for example, we had our thanksgiving couple of weeks ago because our harvest is much earlier than yours, and that's a day when we have a holiday, but there is full trading in the U. S. What struck me that day was how little stock traded in a ts and the transport company, the versus a typical day.

And so there are a lot of U. S. Shareholders and they might have been transacting, but all of the passive money, the index related money, was not touching those canadian cross listed companies.

So valuations though, are similar away from the velocity point. The other thing we didn't know is, hey, with reg F, D, will U. S.

Companies be as open to talking to us the way we talk to our canadian companies? And IT turns out there's no difference at all as long as you're not bugging about the quarter, there is open and for some, as we've find with canadian companies. So those are the two things I wasn't sure about.

And you're right, we are now the portfolios, roughly two thirds us IT may even creep up to more. But if you think of the two countries as ninety ten, I would be surprised if I was ever that kind of mix because as you mentioned, we are toronto based. Maybe there's a homefield advantage just in terms of the ease of talking to our companies.

So I maybe you lend up being eighty twenty, but i'd really be surprised if it's ninety ten at any points time in the future. We've identified a few hundred companies that meet our quality native criteria. And then today, we have that full working financial forecast on over one hundred companies from which to construct the portfolio. And so if we never found another company that matter criteria would that would be okay. But i'm pretty sure we're going to find more.

So in your q two letter from this year, I believe shared that your portfolios treating at nine times next year's earnings with those earnings projected grow around twenty percent per year over the next five years. And you've also shared that one of the biggest risks and investing is over paying. And you've been quite good at not overpaying as over the past fifteen years, you've only lost money on three stocks.

And whenever I look at someone's portfolio, there always seems to be a me or two that just sort of sticks out to me as being a bit different from some of the others. And when I looked at your portfolio, I looked at your recent edition of kensal capital, is the insurance company demonstrating around thirty times earnings. And i'm looking today here, they just reported there quarterly reporting the stocks down eight percent.

So it's slightly under thirty times earnings now. And they've just shown an unusual ability to grow really high rates for a really long period of time. And then the return on equity has continued to increase as as well. So they seem to be carving out their niche quite well in the excess and surplus insurance space, ensuring some of y's special cases. I was curiously, you can talk about what gave you the confidence to pay up for a company like this.

So I as you mention, I hadn't look, but i'm surprised that it's down today because they actually had really strong results. They beat our expectations both on the losses and on Operating cost. They have low combined ratio versus the industry. It's know it's almost like you look at and say, how do you do that?

And that's another company that is utilizing technology in what they do and leverages kind of there a lot of their competitive advantage from what i've guardedly.

That's exactly right. This is found the run an individual who was at one of the large, specially in excess insurance companies. So think of the loads of london. And it's so interesting. I was at a conference in london just a few weeks ago and someone came up to me and he actually knows us pretty well and he's actually an investor, IT turns out.

But he's also in the loyd syndicate or his family as and he just chest eyes lloyds for their old fashion ways and either on the outside or just how they run their business. And he knew about cancel and he said, that is a remarkable company. So what this individual did with a team has built up, it's in a sense of a software company has built the ability to generate a spoke policies for small and medium enterprises really fast.

And he's stressed. He's not going. He saw his former employer stray in the other things like reaching for things that he thought didn't make any sense, and he's not going to do that.

And so whether it's on the Operating costs de versus the competition or the underwriting side, like they had three hundred and eighty basis points of cat losses in the quarter and yet they still beat and we weren't modeling, not because it's a hard thing to model, they still beat our loss assumptions and the streets loss assumptions. So but the stock down, we won't have changed our view on the company of anything, as i've mentioned, is a newer name for us. And we think about context and how long we've known a company in terms of target waitings.

If anything, we're taking our view probably up a little bit. And so who knows why the stocks down? Clearly, people were looking for a big beat and they didn't.

This is a company since we've unit at the first of this year that the first quarter they reported after we owned IT, the stock went up twenty percent and they actually IT was exactly what we were modeling. And I don't know why I went up that much. And then the next quarter in line results, the stock was down twenty percent and now a beat.

And the stocks, at least so far today, as you mentioned, sounds like it's down eight percent and we've reacted to that. But I was interesting when Normally it's what i'd said to earlier, you earned something and the stalk was up twenty percent. If nothing's changed, then we would be trimmed a bit.

And I walked into one of my partner's office that day and I said, what are we doing? Should we trim? He looked at me, said, i'm really worried that and he would specifically identified the person on the team who kind of there's always a prime one person who drives the model.

We all involved with the assumptions and talking about the companies, of course, there's somebody who kind of drives in the model. And he said, i'm worried he's not sure we're capturing all of the future in this company. They have roughly a one percent market share in the unregulated access, especially in access market.

That market continues to grow as a percentage of the overall insurance industry. They've got this remarkable advantage. And so we have a big forecast, but i'm not sure you we fully captured IT because it's a fairly new name for us.

So we do our best. We talk to the company. We've been growing in a hard market.

So what happens when it's a soft market? Do they see any signs of anyone else replicating what they're doing? And the founder, C E O, had a great line.

He said, you'd think in a capitalist society that if you build a Better mouse rap after fifteen years, other people would try to. I see no signs of anyone trying to do this. This is tough.

It's tough with a company like that. We know we're not going to get IT exactly right. We're trying to get IT roughly right.

But I stress that one that's harder than because to think that it's cheap today, you need to believe that they're going to take more and more here. They are going to continue to have a remarkable combined ratio. And IT was interesting in talking to them about the float.

They have very little equity exposure compared to what a berkshires or fairfax financial would have. But their logic is, look, we're growing written premiums at twenty thirty percent the previous last couple of years that I think IT was even forty percent in some quarters. We're highly profitable.

You don't want to constrain your growth by owning too much on equities. And then having a market correction, which prevents you from writing the amount of business you wants to ride is a very logical. But they said, look, when our growth slows down, of course, we're going to move to more of a baLance in terms of how we invest the float.

And for the first time announced not a big but one hundred million dollars share repurchase authorization. It's notable because this is the first time they've ever the boards ever authorized any amount. Of a share we purchase program.

So from always seen so far, IT takes all of the boxes for what we're looking for. But look, it's back to the concept of range of outcomes. It's back to the concept of how long and how well do we know them.

It's different with service corporation in yourselves and is A U. S. Company who we've known for eight plus years then kino, we've only been on for a couple years.

Add one last question here, and I want to be mindful of your time. So in your company's annual meeting this year, you meeting that the majority of your network is in your founders fund and the investment in one of your newly launched funds is through your foundation, which exists for territory purposes. And during that annual meeting, you made statements like the best is yet to comfort total creek.

And IT feels like we're just getting started. And like I mentioned at the top, you have been doing this for over twenty five years. In our previous chat, you said you look forward to doing IT hopefully for another twenty five years here.

I'm always intrigued by individuals who just have a remarkable job of growing a firm, building a great team and just doing exceptional work. I look at someone like you who's presumably financially independent many times over. I was curious if you could just talk about your motivation to keep at this for so much longer. What is the driving force for you on that motivation to keep doing what you're doing?

It's a lot of fun and it's not a majority of my assets. It's all of my assets. And I, I, I know that we're not taking big rise. So i'm very comfortable. You know, once you own twenty five thirty well run companies in different industries, you don't need to be more diversified.

And so when you think about a kinsale to meet and interact with a founder, CEO spend time with them and the team he's built understand how he think and learn about the industry. I didn't know anything about the special and access market or at least not much. We're not industry experts in anything.

I didn't know anything about hard surface fLorin and how you can reinvent, go directed the mountain around the world. As they say, it's a really interesting in business model, but then you need to spend your time thinking about and pushing on IT and why can they outcompete lows and home deeper. And then the other specially stores and interacting with these management teams is fascinating.

I can't imagine not doing that. But as you mentioned, it's also building a team. And we have built my partners and I I think have built a really good culture, a good team.

So my wife knows that if something happened to me tomorrow to do nothing, keep everything in turtle creep. So when I step back and look at the work we're doing today versus ten years ago, twenty years ago, I think the work actually is Better company by company. But the thing my partners and I excited the vote is we're able to pick from so many more, more companies than we were back in the day.

And if we hadn't grown in the investment team, if we weren't following more than one hundred companies, we wouldn't have a portfolio trading at ten times earnings with that kind of growth. And in fact, I went to asked one of the analysts a while ago, I said, tell me about the companies. We have a full view on the thirty most expensive ones, some of which we've earned in the past, as I described.

And IT turned out their trading at one hundred and twenty percent of intrinsic and twenty percent above in transit. Where's think of those editions? Just the additions to the portfolio are trading that less than fifty percent of intrinsic value.

If we had not grown in the investment team, if we had grown as a firm, the plot fully wouldn't be nearly as cheap. People ask me, why is IT so attractive right now? I think some of IT is that narrowing of the market that we've all read about, the magnificent seven and the amount of passive money that's some of IT.

But most of IT is we haven't been standing still. And how could you not want to do that? I mean, it's not like I want to stop doing that.

So yeah, I think my attitude and my two founding partners, their attitude is, and they are Younger than me, work going to do this as long as we can. But to come back to that stress, that point is there's not a star manager here. There is not some vant who just has a nc for picking stocks.

There are some groups like you would know about a lot of them. We're more of a team based approach with a consistent strategy where I don't think we should come to group think. And that means there's no one or two people that are absolutely critical to the investment process, at least that's what I believe I D like to think i'm important, but I don't think i'm critical anymore. It's the excitement of not only of the companies that we get to interact with and learn about, but it's also just interacting with the people at the firm. So health willing or health allowing, i'll be doing this .

for a long time yet. Just something really remarkably built. And you mention your two partner, so jeffrey cole and Jeffery hamel, you found at this with them twenty five years ago and you guys together for the past thirty years.

So you've all hold in this process over many, many years. Let's just footed that so entire. I can't thank you enough for joining me here today. It's such a pleasure having you on the show yet again. So before I let you go, how can the audience learn more about you and turtle creek if they like?

But I think just listening to this podcast and the other one, we I think it's all there, but we have a good website that we write a lot. I think we keep our most recent three years of annual meetings, which we record, and we've got a series of writings called the door of the turtle and the way of the turtle. So I think just on the website, there's enough there to really understand our investment approach.

And its funny, years ago, Young kid came in from vancouver. He'd found us through his father and he said, stop writing so much. So would you mean because other people are going to do IT? And I said, no, no, no, IT.

We're not saying anything new. I mean, maybe the one new thing is a debate of bian hole verses what we do, but otherwise there's nothing original here. A good value investors have been doing that for a long time.

And there's in fact, as many commentators in the industry, at least I hear them say, there are fewer and fewer of value investors, which I think is true, the few and fewer fundamental investors, at least as a proportion of the market. So investors heart in this conversation that sounds kind of like, you know, you can find great companies and then you own when their cheap and then you change in time. 我 提供 when we show those case studies， how we've done on the holding and how we've changed IT like a tripling the number of shares in the portfolio year the day in hindside.

IT sounds really easy. And I said, of course you did. You bought more when the stock was down, of course. But in the moment, it's not so easy always, or at least maybe we find IT easy, but you need to have a certain temperament to be able to buy more stock at lower and lower Prices because then you need the foundation of really having a baLanced quality view of intrinsic value. And if you have that, and you combine that with the temperate, actually not that hard to catch falling lives all.

Well, Andrew, thanks again. I really appreciate the opportunity, and I know the audience is going to enjoy this one again as well. Thank you.

thanks.

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