Expert: Jeremy Kokemor – Finding opportunity in car dealerships and Constellation Software | US Tour

Bryce: [00:01:25] Welcome back to another episode of Equity Mates, coming at you from downtown Omaha as part of the equity mates on tour in the USA. Welcome. If you're joining us for the very first time and still trying to get up to speed. You can go over and check out our Get Started Investing podcast. Otherwise, thank you for joining. Alec and I on our journey of investing as we try and break down your barriers from beginning to dividends. Now, while we are licensed, we are not aware of your financial circumstances. So any information on this show is for education and entertainment purposes only. Any advice is general. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:02:00] I'm very good, Bryce. Very excited. This is our first of our USA interviews. We went halfway around the world to speak to some of America's best investors, and we saw America's or history's greatest investor speak. Still haven't quite landed that interview. But this is with a fund manager, Jeremy Kokemor, who we first read his investor letter about six months ago. Just came across it on Reddit. And six months later we met him at a hotel in downtown Omaha. 

Bryce: [00:02:33] Yeah, it was pretty awesome. So before we introduce Jeremy, a massive shout out to Milford for sponsoring the Equity Match US tour. It wouldn't be possible without the Milford are a leading New Zealand fund manager and they are now available for Australian investors and advisors. 

Alec: [00:02:47] Milford's Flexible active management strategies and high performing globally. Experienced investment team aim to deliver strong long term returns while managing downside risks. 

Bryce: [00:02:56] And Milford's team also invest in the same funds as their clients. And as you hear in Jeremy's interview, that is very important. So, you know, they are highly motivated because they're on the journey with you. 

Alec: [00:03:06] Find the Milford funds on your trading platforms or at milfordasset.com.au and before you invest, be sure to read the Fund's product disclosure statement and target market determination found at milfordasset.com.au, massive thank you to Milford for sponsoring US tour. But Bryce, today's guest tell us about Jeremy.

Bryce: [00:03:26] So Jeremy pursued a career in investment management after he graduated from the University of Virginia and Harvard Business School. He also had a stint at T Rowe Price and is now the founder of Right Tail Capital. They are an investment firm that focuses on buying undervalued, high quality businesses through fundamental research. And we really get a sense from him about how Buffett and Munger actually really shaped his investment philosophy. 

Alec: [00:03:52] Yeah, well, without any further ado, let's take you back to Omaha and our conversation with Jeremy. 

Bryce: [00:04:00] Jeremy, welcome to Equity Mates. 

Jeremy: [00:04:02] Great to be here. Yeah, good to see you, Bryce. 

Bryce: [00:04:05] So, Jeremy, as you said off line, you've heard on our show before that we start our interviews with a Game of Biznerdle, The equity Mates Daily Company guessing game. We've got five clues. An American listed company. 

Alec: [00:04:18] And after each clue, you can guess. 

Bryce: [00:04:21] Or you can say next clue and we'll give you the next clue. So clue number one in January 2023. My stock rose over 100% after I announced I would use ChatGPT AI for content creation. 

Jeremy: [00:04:36] I don't have a ton of confidence in this answer, but I'll go ahead and say Meta. 

Alec: [00:04:42] Not Meta, our second clue. My first viral hit was a listicle called The 28 Funniest Photos of Cats being Cuts in 2008. 

Jeremy: [00:04:54] Another wild guess I'll say in Invideo. 

Alec: [00:04:57] No.

Bryce: [00:04:58] Okay, so clue number three I am known for producing articles, lists, quizzes, online content, and videos of a variety of topics. 

Jeremy: [00:05:09] Hmm. Next clue.

Alec: [00:05:12] According to the New Yorker, in 2014, I deleted over 4000 early posts. Quote, Apparently because as time passed, they looked stupider and stupider. 

Jeremy: [00:05:24] Twitter. 

Bryce: [00:05:25] No. Along those lines. Final on my stock ticker is BZFD. 

Jeremy: [00:05:29] BuzzFeed. 

Bryce: [00:05:36] Tough one. I remember when the it was 100% overnight the stock went up. 

Jeremy: [00:05:44] What's the market cap of BuzzFeed? Any idea? 

Alec: [00:05:46] Oh, it would be a lot smaller this year than it is. Yeah, yeah, yeah. I think they actually because they had a news division, but I think they've announced they're shutting it down. 

Jeremy: [00:05:54] That's a good one. You guys stunned me on that one. Yeah. 

Bryce: [00:05:56] So the market cap is only 84 million. 

Jeremy: [00:05:59] Wow. Wow. 

Alec: [00:06:00] Really? Yeah. I think we can hazard a guess that it's not in your portfolio.

Jeremy: [00:06:04] Not in my portfolio. 

Bryce: [00:06:06] Where are you going? To go research it now. So, Jeremy, let's kick off. We'd love to start with a bit of a little bit of a background about yourself and how you came to found retail capital. But there is an interesting story about how we connected. So perhaps if we want to start there. 

Jeremy: [00:06:23] Sure. Sure. Happy to, Bryce. So the way I originally heard of you guys and the great work you're doing is, you know, anytime someone signs up on my website to receive my letters or any communications, I'll always reach out to them and try to learn a bit about their background and their interest in investing. And oftentimes it's maybe someone I've met before or someone who saw my letter posted on LinkedIn or something like that. And this one gentleman actually said he heard my letter being read on the equity mate's podcast. So I was, you know, immediately intrigued and wanted to learn more about you guys. And there are several amazing things about it. You know, one is just the great work you guys are doing over in Australia, you know, kind of across the world. But a big part of my investment philosophy and we'll get into that is owning high quality businesses over the long term and not trying to overly predict macro occurrences, even though I want to be aware of the macro environment. And so in this letter we're talking about, which is very appropriate for where we are today in Omaha at the Berkshire Hathaway shareholders meeting, I spoke about how, you know, Warren Buffett's always getting asked about interest rates and geopolitical concerns and things of this nature. And when I'm listening to the old Q&A from his annual meetings, I can never figure out unless I see it beforehand, I wouldn't be able to guess what year he is giving these answers. And because he's always getting asked the same questions, maybe just a little bit of a different flavour and you guys bounced it off each other so well played the guess the year it sounded like it could have been 2022 because we were talking a lot about rising interest rates and the impact on valuations. And if memory serves, I think it was actually 1997. So anyway, that's how I originally heard about you guys. 

Bryce: [00:08:24] Where did they didn't? I just want to know where that guy was based in the US because it's awesome that our content has actually made it over to the US.

Jeremy: [00:08:31] It was actually a gentleman based in Australia they got. So I think he had heard the podcast.

Bryce: [00:08:36] Yeah. Nice. Nice. 

Alec: [00:08:37] Well I think it's the great thing about, you know, the internet and the fact that, you know, you're based in Virginia writing letters for your your investors, your clients and you know, us on the other side of the world can just stumble across it. I think I came across it on Reddit, but it's just such a it's there's so much information out there and so many people sharing their knowledge. Just got to start looking. 

Jeremy: [00:09:00] Sure, sure. And since I've been, you know, since I founded Right Tail and have been writing the letters, each the sharing of the letters in the knowledge has led to so many great friendships and relationships. And so the opportunity to sit down with you guys is, you know, one I never would have dreamed of several years ago before founding right now. So just incredibly grateful for that. I can share a bit about my background. So I grew up in New Orleans, Louisiana, which is kind of, you know, down and down in the southern part of the United States. And, you know, maybe for some of your listeners, whenever whenever folks here I'm from New Orleans in New Orleans is a very unique place in the United States. There's a ton of music, a ton of culture, great food. 

Alec: [00:09:47] We've been there. And Bryce, the Hurricanes is at the drink shop.

Bryce: [00:09:54] What's the street called? 

Jeremy: [00:09:55] Well, there's Bourbon Street. 

Bryce: [00:09:56] The street? Yes. 

Jeremy: [00:09:57] Yeah, Bourbon st. 

Alec: [00:09:58] Bryce, isn't allowed to go back There 

Bryce: [00:10:01] Massive jazz music fan. But I went with a couple of mates who are massive drinking fans, and so we just spent all their time on Bourbon Street. 

Jeremy: [00:10:09] Well, you can. Yeah, you can find, you know, sort of any flavour of activity in New Orleans and in university. I brought friends back to New Orleans three of the four years for Mardi Gras. And we would do, you know, kind of a whole sampling. We would go to some good restaurants. We would do maybe one night on Bourbon Street. But Mardi Gras was also a big family activity as well. You know, as a kid, we would dress up in costumes, kind of like Halloween, go sit on the parade route, catch cups and beads. And I took my kids for the first time last year, which was a ton of fun. Such a great place to grow up, you know, Still love, you know, I cook jambalaya for friends and red beans and rice and some of the great Cajun cuisine that's down there. So I grew up in New Orleans, went to the University of Virginia, where I studied economics in history, worked for a few years in investment banking and investment management, then went to Harvard Business School during the great Financial Crisis, which was just a fantastic life opportunity to meet great folks from all around the world, learn with them, learn from them. And then since graduating from Harvard Business School in 2010, I've solely been focussed on investing in public equities. First tier price, a large kind of global long only investment manager. And then for the ten years or so before Right Tail, I was managing concentrated portfolios, most recently with Thompson SIEGEL and Walmsley in Richmond, Virginia. And so, you know, this is what I've always loved doing, and the opportunity to start retail has been a long term dream of mine. And really, you know, the original premise was, look, I want to, you know, invest for as long as I can think straight. And I want our families investments in retail to be our family's primary source of wealth creation, even if no investors, you know, were to join me or the business didn't produce any revenue. That's okay. We'll just keep investing in high quality businesses and try to pay very undervalued prices for them. And so that was really the original premise behind starting. Right. 

Bryce: [00:12:16] And so for all those budding fund managers out there, at what point did you feel like, well, how did you know? Yeah, this is the time that I'm going to go out on my own. 

Jeremy: [00:12:24] Sure, there's never going to be a perfect time. Yeah, if you want to do it at some point, you really need to just kind of step up and do it. And I liken it a bit to when my wife and I first decided to, you know, potentially have children. And we're very fortunate to have three awesome, healthy children. We have two girls, Caroline and Claire, who are 12 and eight, and a son named well, who's ten. And I liken it to to that thought process around having children, because you can try to be as prepared as you possibly can, you know, and maybe you have some savings and you've bought a house and your marriage is healthy and all these things, but there are always going to be surprises and things that you didn't envision. And I would say the same thing with starting retail. You know, for most of us who want to start an investment firm, there's not going to be someone who shows up with a pot of gold and an answer key and says, now is the time. You should go ahead and do it. But if you want to do it, at some point, you just have to do it and, you know, just kind of put one step in front of the other and try to build that dream that you've always had.

Alec: [00:13:29] Now, we've touched on a few elements of your investment philosophy, but it'd be great to really unpack it in detail. So you go out on your own, you start retail and you I think you write an initial letter to your investors outlining how you're going to invest. Can you give us the key points from that? 

Jeremy: [00:13:47] Absolutely. Absolutely. Yes. I'll briefly mention the name Right Tail was the one name that really resonated with me, and there were really four points from it. One is if you think of a normal. L-shaped distribution curve. I want the returns, the long term after tax returns to be excellent and to be in the right tail. Secondly, I'm typically going to be investing in higher quality businesses that have already proven themselves to be exceptional or to kind of be in the right tail versus their peers or companies at large. And then there are two personal reasons. One is just, you know, similar to compounding and how, you know, a little bit of better returns can just lead to dramatic wealth creation over time. You know, and no better examples than Warren Buffett and Charlie Munger. And I love the process of how do we all get a little bit better or a little bit smarter, whether it's stock, whether it's investing, whether it's health and fitness, whatever the case might be. And then the last piece was I didn't grow up with much in the way of financial resources. And so the opportunity to manage someone else's wealth and savings and hopefully improve their financial outcomes over time is one that I take really seriously. Now, the investment philosophy is really just about buying high quality businesses at a fair to below average price. And when I think about quality, there are several qualitative and quantitative factors that I think about on the qualitative side. I really want to understand what are the company's competitive advantages and why are they, you know, stable to getting stronger over time. And then the way that may manifest itself on the quantitative side is I really want to find businesses that are producing high incremental returns on capital. So it's great if a business has had historical returns on capital, but what do we think about the next five years or the next ten years? So high incremental returns on capital? And secondly, hopefully the business has a long reinvestment runway so they can take that cash that they're producing each year and reinvested back into the business at a high rate of return. I don't have anything against companies deciding to pay dividends or repurchase their shares, and that can be fantastic as well for long term shareholders. But I'd rather find a business that can continue to reinvest at high rates of return.

Bryce: [00:16:10] Now we're sitting here in the second level foyer of the Courtyard Marriott at what is it, the Woodstock of capitalists? 

Alec: [00:16:19] Yeah, Woodstock. 

Bryce: [00:16:19] Woodstock for capitalists here in Omaha. Is it fair to say, Jeremy, that Buffett and Munger have really shaped exactly what you've just spoken about?

Jeremy: [00:16:29] They've had a dramatic influence on me as an investor and even some things, you know, in terms of how I'd like to live my life as well. Yeah, there are just so many things that Warren and Charlie talk about, and some of these things have kind of hit me at different points in my investing journey, you know? So recently I've been spending a lot of time thinking about Munger's. Munger talks about how he doesn't worry about the mistakes he makes because he knows that everyone's going to make mistakes and you can't really avoid them. So why don't you just kind of accept that? And, you know, over the long term, your winners will do really well. So that's one thing I've spent time thinking about lately. Yeah, I've spent a ton of time thinking about just the dramatic impact that a small number of positions can really have on investment performance. And then they do such a great job of keeping things simple as well. So those are a few things that come to mind. But, you know, then on the life side, you know, I love Warren's point about, you know, why not, you know, have the second half of your life, you know, be better and more enjoyable than the first half, you know, And I think that has just dramatic implications for, you know, let's just treat each other nicely and with respect. And over time, that'll probably lead to, you know, more, you know, happiness and serendipity and great relationships and things of that nature. So several impacts that have, you know, determined how things go kind of day to day of retail. 

Alec: [00:18:07] Mm hmm. There's definitely a romantic notion about Warren's life. You know, he bought the house decades ago and has lived there ever since. So much so that Bryce and I are going to drive past the house at some point this weekend just to say. Yeah. Have you. Have you seen? 

Jeremy: [00:18:22] Maybe I'll come with you. A friend of mine swung by yesterday and showed me a picture of it. So yeah. 

Alec: [00:18:28] There's a concept we were talking about before around alignment. And I think, you know, Buffett is the ultimate example of an alignment between investor and shareholders. Literally, I think all of his wealth, maybe except for that house, is tied up in Berkshire shares. And that's something that you mentioning off line is important for you as well with. Right. 

Jeremy: [00:18:45] So yes, so several parts of how I set up retail, I've tried to create as much alignment with all of our investors, you know, who are largely people who are, you know, great friends and family members that I've known for a really. A long time and you want us to just continue to learn and invest and grow together. So from a from a fee structure standpoint, I've always been enamoured by the original Buffett Partnership fee structure, which did not have a management fee and only charge the performance fee. So as I was starting Right Tail, that was something that was always in the back of my mind. And I have two fee structures currently, one that is the exact Buffett partnership fee structure. And then I also have a structure that is management fee only primarily to give investors a choice as to, you know, kind of what makes the most sense for them or makes them happy. So that's one area where Buffett has had a big impact and alignment really matters to me. The other piece, Wren is really just around. To me, it should be table stakes in this business for the investment manager to invest right alongside, you know, each of his or her investors. And so, you know, our family has the vast majority of our liquid net worth invested in the same portfolio that each of our retail investors owns. Yeah. So will they win together or will suffer together from time to time over the long run. When we look back in five, ten, 20, 30 years, I think we'll be really happy with the results. But there's a key piece of, you know, hey, we're all going to do this together. 

Alec: [00:20:21] Yeah, It just feels like for me, the most important thing when you're looking at all, all of the active managers you can choose from, like that sense of alignment and like the wins and losses are shared with the manager. It feels like the most important thing, but you don't really hear it discussed a lot. Do you hear much more about investment philosophy and time frame and stuff like that? But just that sense of alignment for me would be the number one thing I look at when I'm choosing an active manager. 

Jeremy: [00:20:47] Well said. 

Alec: [00:20:47] Yeah. So let's, um, in saying that, let's now drill down on your philosophy a little bit more. Concentration is something that I think is really interesting and you run quite a concentrated portfolio, just 8 to 15 positions, which you know, when, when your portfolio is at eight positions, you'd have to think that's one of the more concentrated portfolios that you see out there. Why that philosophy and how do you manage that? You know, when markets are volatile like they are now. 

Jeremy: [00:21:17] So today I am closer to the higher end of that 8 to 15 range. And that's primarily just as I have been building the portfolio over the last year. There have been points in time where it just seemed like the opportunity set was fantastic. And rather than get bogged down in the position sizing or the exact number of positions, I thought, you know, we had kind of a mid-teens number of excellent positions. And so, you know, I decided to go about it that way and to just kind of keep, you know, researching those current names and to research new names as well. To get to your point around concentration, to me, this number of securities is ideal and accomplishes several different things. One is concentration really allows your winners to have a very punchy impact on performance. Right. And we really care about long term great performance. So that's a fantastic piece of it. Another piece is most of the research that I've read over the years suggests that you still get an excellent amount of diversification, even owning what sounds like a relatively small number of securities. And so I try to have the portfolio be as diversified as possible and to have idiosyncratic investment cases for the names that I choose to own. So that's a big piece of it as well. And then a big piece of any investment management business is how one, you know, spends his time. You know, again, I think the concentration allows a punchy impact on performance while also, you know, allowing one to really focus their time on the names that matter most ultimately to the portfolio. 

Alec: [00:23:03] Now, are you are you USA only when you're looking at these names or, you know, have you looked at any Australian names for the portfolio today? 

Jeremy: [00:23:11] I'm all North America in terms of my investments, but I'm always trying to learn from other companies, you know, and things of that nature. So nothing in Australia, one Canadian name. But yeah, you know, really just trying to, you know, find and learn from, you know, some of the best businesses and managers around the world, which can be anywhere. 

Alec: [00:23:31] Some high quality companies in Australia. Yeah. If you like mining a lot of mining in Australia. 

Jeremy: [00:23:38] Well it's, it's funny, It's funny. I mean one of the most formative experiences in my background was my first opportunity, t Rowe Price, which was right after the financial crisis. And it's a great firm with a lot of different investment styles and typically very little employee turnover. And there was basically zero turnover. During the financial crisis. And so my first assignment was to cover small cap metals and mining. Oftentimes these businesses had CapEx budgets to build one mine, so they didn't have a mine in production and the budget to build the mine was often larger than the enterprise value of the business. So they're constantly raising capital. You know, maybe, you know, certainly presenting the more rosy side of any projections that they have. And that was a really formative experience. You know, for me as an investor, there are lots of different ways to make money. And I know some great mining investors, but it kind of helped me realise that, you know, that wasn't where my passions or strengths lie and and I'm really thankful for that opportunity. 

Alec: [00:24:41] Equity mates, we're going to take a quick break. On the other side, we're going to go stock specific with Jeremy. We're going to unpack one company that's in his portfolio and also an industry that's piqued his curiosity at the moment. But before then, Bryce, let's say another massive thank you to Milford for sponsoring our U.S. tour. 

Bryce: [00:24:59] That's it, Ren, do you want to give your portfolio an offensive and defensive strategy? Yes. Nice. Will check out Milford's award winning Milford Australian Absolute Growth Fund, utilising the skills of Milford's experienced investment team. The Milford Australian Absolute Growth Fund has been focusing on delivering a smoother journey for investors for over half a decade. 

Alec: [00:25:18] With emphasis on managing risk and generating absolute returns. This lower volatility equity fund can play a key role in a diversified portfolio. The fund strives for long term capital growth, while mitigating the ups and downs typically experienced when investing in share markets. 

Bryce: [00:25:33] You can find the Milford Australian Absolute Growth Fund ticker symbol MFOA on your trading platform or at milfordasset.com.au. Now before you invest, please be sure to read the Fund's product disclosure statement and target market determination found at milfordasset.com.au. 

Alec: [00:26:02] We are here with Jeremy Kokemor, the founder of Right Tail Capital. 

Bryce: [00:26:07] So, Jeremy, with such a concentrated portfolio, you've got to have high conviction in what you're investing in. So we'd love to understand your process of actually finding opportunities and then drilling down to actually making that investment. And you spoke about car dealerships in your Q1 letter, if we can use that as a case study for your process of understanding an investment opportunity and then how you translate that to making an investment. Yeah, we'd love to hear it. 

Jeremy: [00:26:36] Sure. Yeah, I think that's a good one to talk about, Bryce. And to be clear, I have spent a lot of time on car dealerships lately. I have several investments that touch on, you know, sort of the broader auto ecosystem, have had investments in auto parts, retail and the salvage industry and certain other investments. I haven't actually made an investment in a dealership to date. But the way that the project really started is these companies have clearly over-earned during COVID because car prices went through the roof and there wasn't a lot of supply and consumers had a lot of cash in their pockets. So there's this interesting dynamic where earnings have been really high, probably too high, and headline valuations are really low. So I was like, All right, that's kind of an interesting set up. On top of that, the long term shareholder returns for several of these car dealership companies. If you've looked over 20 years, they've compounded at really high rates and have had good returns on invested capital. This like all right, this seems like a fruitful place to spend some time. And so that was kind of how the whole project kicked off. And if we were to almost erase COVID and assume it didn't happen and just look at the normal earnings growth that these businesses have historically produced, the valuations still seem fair to me. So that was kind of why I spent a lot of time there. You know, I've talked to folks at private dealerships, I've talked to the public companies, I've read their transcripts, their SEC filings, all the things I would normally do to study an investment. Ultimately, I haven't made an investment so far, really for two critical reasons. One is there is a potential long term change to the business model. That and you mentioned the word conviction. I could see it going several different ways. Companies like Tesla have largely decided to get around the dealership network and sell their cars directly to consumers. And so as the car park starts to transition more to electric vehicles, there's definitely some risk or some evolution that could happen to the dealership business model. And given that, I tend to think, you know, five years out when making an investment, that's continues to be a question in my mind. So that's number one. Number two is, you know, although I like the earnings trajectory of these businesses, have a zoom out and think over the long term, I do recognise that these businesses can be incredibly cyclical and that the last few years have been phenomenal. That's just something that gives me a lot of pause as well. 

Alec: [00:29:31] It's not something I would have ever really thought much about investing in car dealerships. Yeah, yeah. You kind of think of them as like old school retailers, but then, you know, you start talking about, you know, they've had consistent earnings growth and all that stuff. And it's an interesting opportunity. But anyway, yeah, not one I know much about. Another company that you wrote about in the original letter that we read. It would have been late last year was Constellation Software. A Canadian company and a company that we really find fascinating. Do you want to talk a little bit about the company and again, maybe about your process, how you when you first came across the work that you did to understand it and how you think about it today? 

Jeremy: [00:30:16] Sure. Yeah, I'd be happy to. I mean, Constellation is such an intriguing company with a really interesting long term history. You know, so I always share with folks that, you know, several times and who knows, maybe this will apply to the car dealerships as well. Several times or often. I don't make an investment when I do the original research. And two reasons that pop out a lot, or one, you know, maybe I end up not being comfortable with the valuation. And if I'm looking at a higher quality business, maybe the valuation just seems too expensive for me, where I think our returns may not be as high as I'd like them to be. Secondly, you know, I find that the research just continues to build. Over time, the library continues to expand. And so I may not understand what makes a business truly special the first time I research it. I'll continue to add to that knowledge over time. And then maybe there's a big market sell off like early during COVID or something happens to the company. And I mention all this because it's what happened as I researched Constellation software. So for years I had been reading the CEO, Mark Leonard's shareholder letters, which are just fantastic. And I don't say this lightly, but he reminds me of Buffett. You know, he thinks very much about returns on capital and how to make great long term decisions for the business. And so for years I was reading these letters and I was blown away by his thinking and his discussion. I never probably saw it in those early years that the stock was too expensive, but the part that I was missing was two things. One is just the incredible returns on capital that they have generated through their acquisition strategy. And two is the runway that they've had for that acquisition strategy. So if we zoom out, Marc Leonard started the business almost 30 years ago in the mid-nineties. He's focussed on vertical market software businesses, which are often critical pieces of software for their customer. And that matters because customers are less likely to switch if that software is really ingrained in their business processes and if customers are less likely to switch, then the level of recurring revenue is really, really high and Constellation or the business manager doesn't have to worry each year about how do we refill the revenue from last year. It's the revenue from last year is largely there. And then we can focus on either how do we sell more to our current customers or how do we go out and find new customers, or how do we take all the cash we're getting from these awesome businesses and reinvest that cash? And what Constellation has done a couple of things that have been really rare. One is they've been incredibly disciplined on the price they pay for the software businesses that they buy. And so there's a lot of relationship building that goes into that. There's a lot of discipline up and down the organisation. So that has produced just tremendous returns. I've also been blown away by most companies have some amount of stock compensation, either restricted stock or options that has some dilutive effect on the shareholder base. But Constellation went public, I believe, in 2006, and their share count hasn't changed at all really. So there's been no dilution. And so that just means that the owners of the shares benefit, you know, there's better alignment and and benefit even more in. And they have a very unique compensation philosophy where Constellation actually requires their managers to take a portion of their cash bonus each year and reinvested in the shares that way. So it has created, you know, I think, good long term incentive alignment as the business has performed really well. And so maybe to just kind of tie it all together, I'd been reading these letters for years. Last summer I started researching software businesses that had high recurring revenue just to see if maybe with the market sell off, there were any instances where a good company had just been kind of thrown out or forgotten about. And each time I was digging into a company, I kept finding myself saying, Well, let me see what Mark Leonard said about this in one of his letters. And over time, the critical insight for me was, you know, gosh, like, maybe I should really just be spending more time and diving into Constellation. Right.

Alec: [00:35:08] It is just a reminder for me, and I've had a long term campaign in Australia that Australian brokers give us access to the US market and, you know, they're slowly opening up more and more markets. But in Canada, most of most brokers don't give us access to Canada. And hearing you talk about Constellation is again, just a reminder that we need access to the Canadian market. I feel like this would be an interesting point to turn to valuation because, sure, as you said, Constellation, a high quality business, but from a price to earnings standpoint is often seen as quite expensive. So when you were doing that work and you were, you know, in some of last year, you were turning back to Mike Leonard and you're like, maybe I should look at Constellation more. How did you then think about valuation and what was the point where you were like, I'm comfortable with this value. 

Jeremy: [00:36:00] Sure. And you're spot on Rand that the headline valuation does not does not jump out as extremely attractive at first glance. You know, it's not a business that trades for ten times earnings per se. 

Alec: [00:36:15] As we recall it. I think it's about 80 times earnings. 

Jeremy: [00:36:18] On my numbers, it's historically been closer like in terms of free cash flow per share. If you look at my next 12 months earnings, it's historically been somewhere in the 25 to 35 times.

Alec: [00:36:31] So I'm looking on Google, but that's always looking backwards, isn't it? 

Jeremy: [00:36:34] Yeah, maybe it may be looking backwards. And you know, most years they do a lot of acquisitions and last year they did their biggest acquisition ever. So that's not that could be part of it as well. But your point is well taken and that you know, if you just invert that 25 to 35 times, we're talking about kind of a 3 to 4% cash earnings yield, again, doesn't jump out as super attractive. So I look at several different valuation approaches. One being, you know, sort of recent or, you know, sort of near term earnings multiples. But then another piece of maths I do is trying to think of a stock more like a bond. And so that first piece is your cash earnings yield. And then I think about, well, how might that cash earnings grow over time? And I separate the growth into two buckets. So one is growth that can happen without any reinvestment. So two good examples there of businesses that can grow, I would argue, without much reinvestment are if you're familiar with the bond ratings companies like Moody's or. Yeah right. They're they're sort of the gold standards and they probably get a little bit of volume growth in most years. But then they also get pricing growth because they're the only ones around. Visa and MasterCard would be another example where they've got the broader payments network. And if you believe that volumes will continue to convert from cash to credit over time, there's some natural growth that's built in there without necessarily a ton of reinvestment. So that's the first bucket growth without reinvestment. The other growth piece is, well, how much can the business grow by reinvesting? And so there I'm thinking about how much can they reinvest and at what rate of return. And so if we were to zoom out, Constellation shares have probably compounded over the last ten years somewhere in the 25%, maybe a bit higher neighbourhood. So they've been kind of doubling every three years plus or minus. Right. And so the maths I did kind of suggest that there are two critical factors here as I think about Constellation over the long term. One is how much money can they reinvest, which is also a function of how many vertical market software businesses are there to buy, which the company suggests there are tens of thousands of these companies. 

Alec: [00:39:02] And for context, for people, they've acquired, what, around over 300 in their journey.

Jeremy: [00:39:07] They're somewhere around 700, I believe, somewhere in that 500 to 1000. And to your point, many of them have been, you know, small, you know, maybe 5 to $20 million of enterprise value. So, yeah, there's a first piece of how much cash can they deploy each year and then at what rates of return can they deploy that cash. And so if you multiply those numbers together and put a multiple on it, you can add up those three buckets, the earnings yield, the growth without reinvestment and the reinvestment growth. And long story short, even if I assume that the returns on Capital Constellation generates over time, naturally come down over time as they get bigger. That hasn't really happened so far, but to me that seems like a more logical way to approach the analysis. To me, it seemed pretty reasonable that we could get a 15% annual return or have the stock double every five years, and that would be a dramatic slowdown from what the business has produced historically, where it's kind of doubled every three years. So who knows, maybe, maybe it declines at a slower rate than I'm assuming. But I felt relative to my portfolio and with this being Constellation being a collection of high quality software companies that qualified for, you know, a great spot in the right tail portfolio. Separate from that, it wouldn't shock me if at some point Mark Leonard decided to invest outside of vertical market software. That brings some concern with it. But also his investment track record has been so good. And again, I always pause before making the Buffett comparisons, but I think this company and this management team has done such a good job that why sort of. Interrupt unnecessarily interrupt their history of compounding. To me, they've kind of earned the benefit of the doubt after, you know, after I've done a lot of work trying to understand what makes the business special. You know, to me, the prospective IRR, you know, a little under a year ago was still fantastic and warranted a spot in the retail portfolio. 

Bryce: [00:41:22] So, Jeremy, you've mentioned car dealerships, but we'd love to understand if there are any other areas of the market that are really capturing your curiosity at the moment. Sure. 

Jeremy: [00:41:32] Sure. You know, as I think about each year, each month that goes by. And I would guess that over time, I'll probably make 0 to 3 new investments per year. I'm not I'm not turnover averse, but I think I think typically it will be pretty low. Maybe you'll have an occurrence like COVID, where great businesses with great balance sheets sell off 50%. And and that might be a time to be more active and have more turnover. But really, I think about it a key performance indicator for me is just how many businesses are my studying or businesses that I'm taking to a deeper level of understanding. So that's kind of what I think of. As, you know, each year I want that library of knowledge to be growing. So we talked about car dealerships. Another area that I've spent some time studying is companies that run outsourced clinical trials for pharmaceutical companies that have historically had some long term growth tailwinds. There are concerns today about what the funding environment will look like for new drugs just if capital dries up, that might have an impact on biotech or larger pharma companies. And so, again, I'm trying to understand the businesses and potentially if I look out over a longer term horizon, what might the investment opportunities in these companies look like? So that's one area where I've spent some time, really. Bryce. It's just, you know, trying to turn over a lot of rocks and get to understand businesses better and, you know, and take it, take it that way. 

Alec: [00:43:20] I'm trying to and someone else has spoken to us about this outsourced clinical trials market. And I was just trying to Google the company name and I couldn't come across it. Does it ring a bell? No, no, it does make me think. How many great companies have we heard on this podcast that just sort of gone in one ear and out the other? 

Bryce: [00:43:39] I think the the idea of turning over rocks like Ren and I often sort of sit back after speaking with people, my managers on the show and, and just sort of contemplate what life would be like as a, as a highly concentrated fund manager spending a day just reading and thinking and. 

Alec: [00:43:59] Just being curious. 

Bryce: [00:44:00] Being curious. It sounds really pleasant. What does your week look like generally? 

Jeremy: [00:44:08] And you hit the nail on the head. And, you know, even if I think about my university experience, I wouldn't have been able to describe it at the time. But I started out pre-med. I ended up majoring in economics and history. And the key thread that ties it all together is just the love of learning. And so on a typical day, I try to do several hours of primary fundamental research either on an existing holding or a new company that I'm trying to get to know better. But I also try to carve out some time each day for broader non-fiction reading because I believe it's all helpful and just the process of, you know, hopefully learning about different things. And if you're familiar with the concept of consultants where it's like every every little thing kind of builds on itself and you never necessarily know where the insight is going to come from, or if I'm reading a book on psychology or physics or whatever, maybe it'll help me have an insight on a company I've been researching. You never exactly know where those insights are going to come from, but yeah, just try to carve out a lot of time for reading and and reflection as well. 

Alec: [00:45:24] Buffet has that quote. Being an investor made me a better businessman. And being a businessman made me a better investor. I think we can build on that. And saying being an investor made me more curious and make me being curious made me a better investor. Kind of butchered it. 

Jeremy: [00:45:39] Well said. Well said in a Munger. We'll talk a lot about to just sort of you know I find that a lot of people. A lot of people. Yeah. It seems like maybe you've read less than they would like to. And I read a ton and I would still probably say, you know, I read less than I'd like to. He very purposely understands that reading has had a big impact on his life. And so he's like, All right, I'm just going to prioritise that. And that's something I try to think about as well. And I think we could learn a bit from. 

Alec: [00:46:08] Well, speaking of reading, are there any great investing resources or great investing books that you think Bryce and I and our audience should put on our list? 

Jeremy: [00:46:18] Sure. I mean, there are so many out there, you know, and you mentioned investing resources. There is one that I'm subscribed to, and it's a 1 to 1 man research effort called Scuttle Blurb that does just a fantastic job. He typically posts twice a month, kind of goes in-depth on a company or an industry scuttlebutt blurb is someone I've been subscribed to for, you know, the last several years. And I think that's just a really good job. Often I'll agree with his insights, sometimes I don't. But it's more of a process of, you know, just having thoughtful dialogue in a way, being able to read his work. So that's one that jumps out to me that maybe for your listeners in Australia might be, you know, a little less of a well-known resource. Yeah, beyond that, there are so many out there. I mean, I'm probably on my third time going through the podcast forums of the Berkshire Hathaway annual meetings which go from and for whatever reason, the recording start in 1994. So we almost have 30 years at this point and you know, like we were talking about earlier where it's tough to guess the year, you know, there are always just random insights that come out as I listen to these two, sometimes I'll be on a walk or, you know, I like to run quite a bit, too. And so that's one of my sort of podcast feeds that I go back to pretty regularly. 

Bryce: [00:47:42] So Jeremy, we have unfortunately reached the end of our time. It's been awesome. But we do have two final questions to wrap up. So the first one is we're obviously here for the AGM and Warren and Charlie sit there for about 8 hours and answer questions from shareholders. If you had the opportunity to get up on the microphone to ask one of them a question, what would you ask?

Jeremy: [00:48:05] Wow. Well, that's a great question. You know, I think I would ask them, you know, what are the things that have just kind of helped them simplify their investing approach and have had the biggest impact on them from that standpoint? You know, that would be fantastic to just kind of hear a candid answer around that. So I'd probably start there. 

Bryce: [00:48:27] Nice. Well, the good news is we all have the opportunity. 

Alec: [00:48:30] Tomorrow, so 

Bryce: [00:48:31] I'll be seeing you on my phone over 12. Absolutely. And then finally, Jeremy, each year we host the Equity Mates Awards and it's an opportunity for us to celebrate experts that have come on the show and really contributed to helping out the equity markets community become better investors. And so by virtue of being on on the show, you are now automatically in the running for the equity markets expert of the year and our audience will vote at the end of the year on who they think has been one of the most enjoyable interviews now to help them with the in the process of choosing who that would be, we'd love to know if you were to win and receive the beautiful glass trophy, where would you put it?

Jeremy: [00:49:16] That's a great question. You know, just one I haven't really thought about, you know, really the opportunity to just spend time with you guys and discuss investing and share a bit about how I approach philosophy and hopefully, you know, help learn with, you know, some of your listeners and learn together. You know, that's really why I'm here. If I were to somehow receive the trophy, you know, I'd probably place it in, you know, work from home, have a, you know, have a small office that I work from upstairs in my home, and I'd probably place it there. But really, the opportunity to spend time with you guys and your listeners is, you know, is a great reward in itself. 

Alec: [00:49:56] Love that, Jeremy. Well, we're pretty stoked that we got to meet you. It's funny how these things work. Six months ago, we come across your investor letter online and six months later we're in Omaha chatting. So thank you for making the time.

Jeremy: [00:50:09] Oh, thank you. Yeah, just fantastic serendipity. And yeah, really appreciate the work you do. And yeah, thanks for everything. It's been fantastic. 

Bryce: [00:50:17] Well, we'll see you at the line at 430 tomorrow. Waiting, waiting to get into the AGM. 

Jeremy: [00:50:22] Sounds good. You bring the doughnuts? I'll bring the coffee.

Alec: [00:50:25] Sounds good. 

Bryce: [00:50:26] Thank you so much, Jeremy. It's been a pleasure. 

Jeremy: [00:50:27] Thank you, guys. 

Bryce: [00:50:29] Equity markets us. It is brought to you by Milford. A massive thank you to Milford, who are a leading New Zealand fund manager and they are now available for Australian investors and advisors. 

Alec: [00:50:38] Milford's talented and globally experienced investment team aim to deliver strong long term returns while managing downside risks. They also invest in the. Same fund as their clients. 

Bryce: [00:50:48] You can strive for a smoother investing journey with Milford's experienced active management and their award winning Milford Australian Absolute Growth Fund ticker symbol MFOA. 

Alec: [00:50:57] I find the Milford Australian Absolute Growth Fund and other Milford funds on your trading platforms at milfordasset.com.au And before you invest, be sure to read the Fund's product disclosure statement and target market determination found at milfordasset.com.au 

Bryce: [00:51:13] Stick around as this Thursday we've got the third and final episode of our Wealth Builders, where we look at two final lessons from Warren Buffett. But as always, Ren will pick it up next week.

Alec: [00:51:23] Sounds good.