Expert: Ricky Sandler – Valuation is an opinion, mispricing is an opportunity | Hearts & Minds

Bryce: [00:00:26] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you doing? 

Alec: [00:00:47] I'm very good. Bryce is very excited for this episode. We love this time of year in the lead up to the Stone Hearts and Minds conference because some of the best investors in Australia, but importantly some of the best investors from around the world come to Australia and pitch one of their best ideas on their best idea, all for charity. And we're so lucky that we're joined by one of the speakers at this year's Sony Hearts and Minds Conference. 

Bryce: [00:01:10] It is our pleasure to welcome Ricky Sandler to Equity Mates. Ricky, welcome. 

Ricky: [00:01:14] Thank you. Nice to be here.

Bryce: [00:01:16] Ricky is the founder, chief investment officer and chief executive officer of Eminence Capital. Ricky founded Eminence in 1999 and has grown into a $5.7 billion asset manager. As Ren said, Ricky is speaking at the Hearts and Minds Conference on the 18th of November. And if you're unaware of what hearts and minds is, it is one of the leading finance conferences here in Australia dedicated to supporting Australian medical research. 

Alec: [00:01:42] Now Ricky, we always have a lot to unpack here, but we always love to start these interviews with experts by hearing the story of their first investment. We generally find there's a good story or a good lesson that comes out of it. So to kick us off today, can you take us back? What was your first investment?

Ricky: [00:01:58] So it's an interesting question. You know, I guess my family, my father, was in the investment business. He was a Goldman Sachs research analyst and an early hedge fund manager and started at his own in 1982. So I guess I technically had some investments as a teenager, but I wasn't really all that engaged. And frankly, it wasn't until I wasn't exactly sure I was going to go into the investment business. And it wasn't until I actually did and started managing like a paper portfolio. And at Mark Asset Management, when I first started that, I kind of really got the essence of, of making investments, making mistakes, you know, things that were like you picked on your own and kind of completely. So there is, there's a couple, but, but I think maybe the one that was most interesting to me was a company called Felker Lodging. And it was when rates were just becoming popular in the early nineties. So this must have been like 1992 or three. They were a lodging read and I knew the lodging space pretty well. And it was a company that came public with only six hotels with a pretty small company. But there was a really big opportunity to convert by hotels and convert them to an Embassy Suites flag, which was sort of a better brand and an improved kind of returns on capital. And it was sort of one of the first ones I brought to him on to my boss and sort of bought my paper portfolio. There's so many investment stories about having done this for 30 years. I'm not sure that any one is going to be some illuminating story other than having, you know, always loving to discover things and loving kind of the intellectual and kind of a scrappy pursuit of gaining an edge in investing. 

Bryce: [00:04:05] Now, we love that about investing as well. The rabbit holes that it forces you down, that if you weren't sort of in the game and passionate about it, you wouldn't find yourself going down. Yeah, it's super exciting. So, Ricky, before founding Eminence, you worked at Marque Asset Management, which you mentioned, and you co-founded Fusion Capital Management. Really interested and understanding. What have you learnt over that period of time and, and how was the market in the mid to late 1990s compared to today? 

Ricky: [00:04:33] Yeah, sure. It's a great question. And there have definitely been some, some really important formative things that have come out of my experiences. You know, I think working for Maurice, Mark and Mark Asset Management, he was a believer in deep research in owning great companies. And we've continued to continue to take that to heart and thought that was terrific. I think, you know, he was probably less valuation sensitive then than I am. And I think that that, you know, worked for him. And, you know, he's a terrific investor. And I think for me, you know, I've talked about finding your own investing compass. Like I had a harder time squaring that. And so when we launched Fusion, Quality and Value were our two pillars of what we wanted to buy kind of good businesses at actual prices. And then, you know, I think in the Fusion years we had a really good run and then in, in. 1998, the Russian debt crisis hit and the emerging markets crashed. And there was kind of a growth scare. And I think we had not built a very deep shorting practice. I think we were probably spending 70% of our time on the long side. And then we would short sort of similar companies or some some companies that we understood to be more expensive and maybe less well positioned than what we were along, but, but didn't build a single sock shorting practice. And I think the feeling when, when, when the market was really under pressure and I didn't have the protection that I needed to, to feel like I wanted to go on the offence was something that caused me when I, when I launched Eminence to build single stock shorting into 50% of our time and build a core competency there and really make that part of our strength is to have staying power and even offensive power amidst dislocation. And that's been one of the recurring things about cycles is, you know, you ultimately need to go on the offence at some point in every crisis then and having that ability and conviction, not just conviction, the ability based on your portfolio. So, single stock shorting was something that I really took away from the experience of fusion that I wanted to do better and and much more rigorously in Eminence. And that's been a core part of what we built over the last 23 years. 

Bryce: [00:07:00] Yeah. Just a follow on for retail investors who don't have the ability to short like institutions and like, you know, large fund managers like yourself, how should we think about, you know, protecting and the defensive side in moments like now. 

Ricky: [00:07:19] Yeah bet this is a great question and I think highlights an issue that shorting is hard and it's it's it requires diversification and scale and resources. And so I don't think it's easy for individual investors to do. And I wouldn't. I wouldn't practise it. What I would say for individual investors is I think the key is, you know, trying not to get caught up or overextended as in sort of emotionally euphoric type events and try not to get overly depressed in really kind of tough times. I think that in order to measure , hopefully if he's disciplined can be building some cash when things are frothy and can be deploying that cash when they're less frothy or maybe very, very fearful. I think they can also use broad based indexes to hedge parts of their portfolio at parts of the time if they're particularly worried, I don't think holding a. Ten, 20, 30% hedge against their portfolio. And the S&P is taking a lot of risk and is probably protecting a lot of them. I'm not suggesting that they constantly do that, but I'm suggesting that's a tool in addition to building up some cash. I think I think they can use things like that to cushion the that the downside and obviously don't have more allocated to equities than than is appropriate for for where they are on the lifecycle and money that they that they need the next 12 months and never use leverage I think is kind of some some things I think individuals can do. 

Bryce: [00:09:00] Yeah. 

Alec: [00:09:00] Great advice in preparing for this interview. I listened to your interview with Patrick O'Shaughnessy and you spoke about how that period in the late nineties really gave rise to the hedge fund and that the hedge funds excelled in that period. And then really up until 2008, they had like a real, real golden moment. And I guess, you know, that that period started with a massive sell off in high growth tech names, and then hedge funds really emerged out of that. If we fast forward to 2022, we've sort of gone through a decade of active management, really having to work to keep up with an S&P 500 and an index that just is flying and pushed up by these massive tech names. And then we've seen a massive sell off in high growth tech. Do you think this is a set up similar to the late nineties where active management is going to really shine through?

Ricky: [00:09:56] I do. It depends on the type of active management. Obviously, if you're a growth manager and you're your formative years and your learnings came from, you know, the post GFC period and 2015 to 2019, you learnt one thing, you learnt valuation didn't matter and buy the best companies and fast growing companies and I think some managers haven't, haven't done so well, but I think the true stock pickers that have kind of valuation, discipline and short selling skills have, have and will continue to fare well both this year and and going forward. And I think it'll be a much better environment and I think a good environment for the right type of active management and stock picking. And so, you know, I think you need to have independence. You need to be not afraid to be alone and kind of wrong, because I think the challenge in investing is, people tend to not like to be kind of alone and independent and different. And in order to do that, it takes good research that you can lean on and kind of hold your convictions. And I think that type of discipline is going to do quite well in this market. Hmm. 

Bryce: [00:11:17] So really focussing on your long positions, how would you define your investment philosophy? Like you mentioned, quality and value. But if you were to drill down a bit on that, how do you define it? 

Ricky: [00:11:28] What I like to say is simplistically and then I'll kind of dive in simplistically, we want to buy honourable businesses that are mispriced stocks where we understand why the stocks are mispriced and we believe something over the next 2 to 3 years will change that mispricing. And let me drill into that a little bit for kind of sense. So honourable businesses, that means that if you paid a fair price, you'd be happy to own your family for the next 5 to 10 years, because it's a business that will continue to be competitively in a good place, generate good cash flow, and grow. You know, you're not worried about major structural challenges. You're not worried about some exogenous macro event like a commodity type business. So for us, it's some businesses that have, you know, at least management teams that we trust, businesses that are in control of their own destiny, businesses that over time should grow somewhere between moderately to very quickly. But the point of that, I think, is that when markets get really dislocated, you need a source of strong hand. And the honourable business point says, if all my investors left me, I'm left with this portfolio. I'm good. I feel good for me and my family and the employees here. And so it turns out to be markets get very volatile for different reasons at different points in time and very dislocated. And kind of leaning on that as an ultimate backstop is very very important, but I think different than others. We want to make sure we buy mispriced securities. And I think a lot of other investors might like great businesses or fast growing businesses or low multiple businesses. And I think so. We say, I want to understand. I want to believe the stock is mispriced for what we believe it is and understand what that source of mispricing is. Sometimes it's a little bit of a technical, a factor or a macro reason why other people are selling it, and you believe that that will work its way out. Sometimes it's a short term problem in a good company, but there's some misperception or some reason people are selling it. And then you, through your research and through your analysis, both understand why that exists and believe that over a reasonable time horizon that will change. And so over because it's an honourable business, it should be compounding value at a reasonable rate and because it's mispriced, it should get revalued. And so over that 2 to 3 year period of time, we're hoping to make more like 50 to 100% in our stock because we'll get a couple of years of compounded value and then maybe a 30 or 50% revaluation. And then if it is still a good company and it is fairly priced but not cheap, we'll probably move on and leave the compounding to somebody else and try to rotate that back into the next mispriced honourable business. And I think that that in a nutshell kind of encompasses us. And as I said, I love the best business that's growing the fastest at a really low multiple, but they never all exist. And if it did exist and I couldn't figure out what was mispriced about it, I might not even buy it because I might not understand what could change. And so we are in the business of buying mispriced securities, but amongst, amongst a subset of, of, of assets. 

Alec: [00:15:13] Yeah, I think that distinction between undervalued and mispriced is really interesting. And I know in a previous interview you explained with an example of a coffee company that you invested in where it wasn't that, you know, that it was undervalued. It was that it was mispriced. And that, I think, really illustrated it. Can you share that example with us? And so it can really illustrate it to the audience? 

Ricky: [00:15:40] Sure. And I think that, you know, undervalued is an opinion. It trades here. I think it's worth, you know, 30% more. It's my opinion. I can give you a lot of finance theory. You should create this multiple. But, you know, ultimately mispriced means that other investors are looking at it in a certain way, treating it in a certain way, and therefore pricing it in a certain way, which may be technically accurate today, but is not accurate over a normalised horizon. And and and that will change. So I think that's sort of the high level difference. I think in Green Mountain's case, which, you know, Green Mountain owned Keurig, the coffee company that had the machines and the single serve pods. And it was a company that. Had had a lot of different kinds of messy things going on. We got involved. It had been a big growth stock that had come crashing down and there were a few things that were mispriced about how investors thought about it, one of which was they were losing money in trying to get into international markets and they were losing money trying to get into the coal business. And they were going to make a machine that could make a cold beverage, much like the hot coffee beverage that the Keurig machines make. And, the market was valuing the company on, on its earnings. I think when we got invested it was probably in the teens multiple of earnings. But if you took away the losses, it was probably trading at more like ten times the core earnings and we would say they could shut those businesses down. They're not capitalising those losses at at, into the earnings. It's sort of saying those businesses have big negative value and they might have some negative value, like they'll put some money into it before they make a decision, before it turns profit. But the one the market was not treating some of the money, losing businesses independently. And then I think the other issue was that the company originally had a patent on the pod and they had invested a ton and that was going away and they'd invested a ton in manufacturing so that if companies weren't paying them a royalty, they would be the supplier. They could do a lot for all the other brands. Starbucks would come into the systems and Nestlé and all these other brands would come on. And I think people believed that the, the, the profit per cup would go down a lot. And through our analysis, we understood that that was much more stable than people understood. Just looking at the patents going away because of how they had invested in the manufacturing scale. So they were the low cost producers of these. And so they could do this for you and make their profit per cup in a way that didn't necessarily rely on the royalty. So, so and that's why the market priced it at a lower multiple than it should be. And so there were a lot of messy things going on at the time. We sometimes like I wouldn't say messy situations implies that they're real issues, but messy financials where there's something obscuring what's really going on. And through both our analysis and our research, we kind of can get to the right place and therefore have a different view. I think particularly in today's environment where quants and other people who are sort of scraping and using data and stocks trading on factors, we find one today where if a company is losing money, it is now in this unprofitable basket and many of those companies will never be profitable. But quite a few are unprofitable today, but for good reason. And so there are things that we often find when the financials look one way, but we can understand the underlying health in a different way. So we know that will change. That could create an opportunity about why something is mispriced and what will change about it. Mhm. 

Bryce: [00:20:01] So Ricky, let's turn to growing eminence founded in 1999 and as we said at the top, it's now a $5.7 billion business. But we're interested to know how you think about the balance of being a great investor and then also building a great investment house. How do you think about that process? 

Ricky: [00:20:18] I mean, it's a wonderful question because I think that they are very different skill sets and oftentimes don't necessarily find themselves in the same person. I think being a great investor, you know, a lot of the things we've talked about deep research on different points of view and being willing to kind of be different from others and contrarian in some ways and country. You can try and say but making sure you have a point of difference. I'm sort of famous for saying, you know, if I have a macro view or some other view, it's not valuable. If it's consensus, it's kind of priced in. So there's some elements about that. I think in growing a business, investing is a very lonely, kind of insular, kind of inner confidence. And you grow a business, you're attracting talent, you're nurturing talent, you're attracting investors. You have to have a little bit of IQ and other things to sort of do that. And, you know, there are things that I've had to learn along the way. I don't know, I'm a better version of my younger self, having been through different iterations and having started a small firm and, and ultimately growing it and, and doing. Things to kind of build around your weaknesses as a human as well as an investor is a very important part of this business. So I think maybe the last piece is like building a good culture, which is a kind of tagline. But I think we take it to heart. And I think you want to create an environment where the employees want to come in and do battle together. They have they like the people. They respect the people around them. Their biggest motivation for working hard is not that you're yelling at them and they don't want to disappoint the people next to them because they know they're working hard and that the shared team will continue to make the individual better as an organisation. So in theory, any one of my analysts or portfolio managers could go run up a portfolio at a pod or at some of them you'll start his own firm. But, you know, I like to think that our team makes them better, I make them better, they make me better. And that kind of mentality in the culture I think is a little bit unique and I think is important to building something enduring. And, and particularly in a business that's got so much volatility in capital and markets and in temperament and people that yeah, those are those are some of those things. And I do think they're quite different skill sets as you point out. And people who view themselves as good investors and start businesses may often not appreciate that. I'm not sure I appreciated it when I did it when I was young and I got the benefit of learning on the job. 

Alec: [00:23:21] Mm hmm. Speaking of your team, so I believe you have a team of over 20 analysts now. And as you said, many of them could go and run their own money. But I guess it would be real you know, I'm trying to imagine how I would do it. It would be really difficult to teach full time to invest in, you know, all that knowledge that you've built up through, you know, being in markets year after year, imparting that to younger analysts, I guess. How have you done it? What have you learnt from doing it? And any tips for Bryce and I as we try and learn to be better investors as well? 

Ricky: [00:23:59] Well, I think a couple of things I would say. One is we've the team is a little bit unusual in its size based on how we're broken up. So we have 15 or 16 analysts and portfolio managers that most people would consider sector based analysts and PMS. We have an additional three that are just short, only because the short side requires a lot more resources. Your position sizes are small and they turnover more often, so you need more ideas, more power on the short side. And then we have a team of about seven or eight quantum data science people that are resources for me and the investment team. So it's a big team, but it's a little more manageable when, when, when you think about it in that sense. And I would say I like to hire. We've historically hired younger analysts that maybe had two years of investment banking experience, maybe two years in private equity or something else, but not a lot of investing experience. I wanted them to have building blocks, but then we teach them how to invest our way and they bring something different to the table. And ultimately through growing several people that way as a team underneath me and they kind of are training and working the analysts below them. You're kind of I know I don't train a lot of the young analysts that we have now or any of them, to be honest. But they hear me speak in all of our sector meetings and in our research meetings, and they're kind of getting the details from that. The portfolio manager, a sector head that they work for. So a little bit of trickle down. I think what I would say is I think that this business is more about the competitive spirit of figuring it out than being the smartest person in the room. You have to be smart enough, but that's not the highest bar in the world, and you have to be hungry and humble and always learning. So there's a type of person that I think is the kind of person we want to hire. And then maybe another thing that I think we do a little bit differently than others is I'm a believer in working with and trying to lift up my underperformers rather than cutting them loose and moving on. If I think somebody has the capabilities and the right attitude, I'd much rather work on their weaknesses and make them better. Then get rid of them. Spend the next six months finding the right person. Now the. Six months, training them another six months, trusting them. And it's a lot of time and I think people don't appreciate that as often we're in a performance oriented business, so it's easy to say, like, you're underperforming, you're out. We will more often take four for the right person with the right attitude and capabilities, will take them to invest in them. 

Bryce: [00:27:05] Now, it's great to hear how you're unpacking it because Alec and I are obviously growing a team ourselves. And yeah, it's just great to hear from other people who are building teams on their own as well. Now, Ricky, before we jump into some of your top holdings, because we love to hear what our experts are investing in, we will take a quick break. But firstly, the exciting news for our Equity Mates community is that if you're unable to get down to the Stone Hearts and Minds conference in person, there is a virtual conference available for some of the selected sessions. Now we've been able to twist the arm of the organisers of Stone Hearts and Minds and we have a discount code for the AMP community. It gives you 20% off the virtual ticket, bringing it to $400 a ticket, a large portion of which goes to a tax deductible donation to Australian Medical Research. As we said at the top, tickets can be purchased on their website. We'll put a link in the show notes, use the code Equity Mates 2020 to know space and you'll get the chance to listen to some of the amazing speakers of which Ricky is one from the Sane Hearts and Minds Conference. Amazing initiative. So Ricky, let's take a quick break to hear from our sponsors. All right. Ricky, we grabbed the latest 13 F for Eminence and pulled out some of your top holdings and are really keen to dig into some of them. So Ashland Global is the top holding according to the 13 F. Talk us through it. What is Ashland holding? What's the thesis and perhaps what's the bear case as well? 

Ricky: [00:28:34] So Ashland Holdings is a speciality chemical additives company. They make very fine chemical compounds that go into consumer products, into life sciences and into coatings. So think about some chemical that would give shampoo its thickness or its smell or something that would give food or another consumer product. It's its properties. Life science stuff that goes into pharma. So they will make some products that go into coatings or extended releases. So they're not making the farmer's product, but they're making some property that makes the product better. It is and can be a fundamentally, really good business because you're providing critical value to these products in terms of features and functionality that their customers want. It's a relatively low cost of the end product. So you tend to have reasonable pricing power, and you work with your customers to get designed into R&D where they're developing the next toothpaste. And you're there with chemical compounds that help them make that toothpaste what it is and or the coating. So the thickness of a paint. And so as a whole bunch of things. But that's that's the business. Ashland was a holding company for a really long time. And over the over a number of years leading up to our investment had divested. So they owned Valvoline, they owned a refining operation, and they were a big holding company. And they had done a lot of what I would say is the right capital allocation. Let's sell off a lot of business and get down to to to a good business. And when we came to this situation, they had gotten down to kind of having sold the composites business, which was the last of what I'd say was less good business. And we're running this additives business but had run that structured the company is a holding company and so they had never had operational execution excellence and so they were always underperforming. So it was a good asset or good industry or good potential. But the numbers, the growth rate, the margins were well below what we observed from a lot of other companies. And one of the things that that we learnt through studying this industry is it's a I would say it's a business that can be a good business. It doesn't have to be a good business. You have to be close to your customers R&D, you have to tie your R&D to theirs. You have to have great customer service. You've got to do a lot of things from an execution standpoint. The old management team wasn't doing that, and so we invested behind a new CEO, Guillermo Novo, who's coming in and basically taking a good business that was run in a holding company, structured poorly and running it significantly better. And that was the thesis. It continues to be the thesis he has made. We are midway through. So not only has he made significant operating improvements and run the business better and accelerated growth and lowering costs, he has shed their last more cyclical adhesives business. And he is doing tuck in M&A that allows them to get new capabilities for their form and market presence for their kind of key chemical chains. And what I would say is some of the benefits of what he's doing are really yet to just sort of play out. So when you restart the growth engine of a business like this, you're a couple of years in development. We think about the length of time for a farmer product or a consumer product. And so then new product introductions are just beginning to kick in. Growth is just accelerating. Margins have improved but have a ways to go. And it's a very under delivered balance sheet that they have started to do the right things from capital allocation. So I'd say this is a classic, a pretty good a great company and it was mispriced because it was priced as an underperforming company. And we saw the catalyst for it to become. A leading performer, and I think we're midway through that transition. I love that.

Alec: [00:33:20] It's fascinating. That's the thing I love about investing. And I guess the privilege that Bryce and I have is getting to speak to people like you. We just find out about companies that we would otherwise never know about. Ashlan Campbell. Let's talk about the Hearts and Minds conference a little bit in general, because, you know, it's something that we think it's great that, you know, you're coming in over from America to participate. That's a big trip. Why is participating important to you? 

Ricky: [00:33:53] So I think a couple things. I'm a big believer in charity and giving back as a core value for those of us that have been incredibly, incredibly, incredibly fortunate. And there are a number of conferences here, invest for kids in Chicago, someone in New York where I've done similar things and I've seen the incredible things that that are done, the incredible amount of money and the way a community comes together to both, you know, kind of share kind of business insights, but also raise money for really important charities. And so when I came over to Australia recently and I came over for another reason, my son's in school in Sydney for the semester. I was coming over and scheduling some business meetings, some potential investors, some people who know the market. I had never spent much time there. I was kind of blown away, to be honest, with the community, the size of the investment world over there. And the people involved in the song conference I had met with were really taken away by the $40 million in a short time that they've raised. Very impressive. And so, you know, I think if I can come and I'm a new speaker, I'm someone that people haven't heard from and can help them build an interesting conference. I think that's an amazing thing and I think the Australian market and the investor base in Australia is one that has never really had access to us. So we really look for them technically they have access but we haven't really come in and got to know them. And so my plan over the next year or two is to do a few more trips and, and this seems like a great way to, to get known and do something that was meaningful charitably with great people. So I'm really excited. 

Bryce: [00:35:44] Yeah. Awesome. You'll have to come and check out Equity Mates HQ when you get here. Open invite. Great Ricky the experts that sign hearts and minds get a you know have always have great track records you know certainly experts in their field and investing with sort of time horizons of five years plus. So we're always interested to understand when you come and pitch and the stock that you're pitching sort of has a timeframe of 12 months that it needs to perform. What do you think about that? And what are you looking for in the next 12 months that's going to be the catalyst for growth. 

Ricky: [00:36:20] You know, one of the things that I would say from our standpoint is we always take a long term view. But I like to say, you plant seeds at different times and they spread up at different times. And somehow we've had a portfolio that hasn't had a lease on alongside a major year of underperformance with the exception of 2010. And so I don't think you always have to try to make money and then in the short term to make money consistently in the short term, that's a little bit of a difference. This is one of my differences with other people. People are looking for near-term catalysts. Everybody's trying to make money. Now, people want to be with a winner. They want to make money this month, this quarter, one of our competitive energies looks over that. So somehow because I didn't buy every stock today, I have to wait two years for it to work out. So I bought it a year ago and they're going to work this year. Some I bought this year and they'll work quickly, some I bought two or three years ago and the thesis got delayed, but I still believed in it and some I got wrong. So just kind of holistically. So I think that if I look at the market today, what I've said is I think there are interesting ideas and some in every category. So I think the market has come to hate unprofitable companies, unprofitable tech, unprofitable growth and for good reason. We had a lot of unprofitable companies with some crazy valuations that never made any sense that we didn't own. But they will throw the baby out with the bathwater. And we have written about Uber in our letter recently as an example where the market has priced it like an unprofitable tech company. And we think it is just. Moving it to profitability, structural bullying, and that is the opportunity. So the market is mistreating a lot of companies like I lot. It is treating them all one way. I like to say that since November, all the unprofitable tech companies are down 70%. Some should be down 90. And we're short some of those and some should have only been down 30 or 20 and have really good upside. And so that's one I think the market is very worried about cyclicality. Now, the economy is slow, that's obvious. And one of the things that we like to look at, it can be idiosyncratic names where there's something that will make this company on a macro basis stand out. But everyone's selling it for a big picture reason. So there are some other companies that I could think about pitching where I would call them a dirt cheap cyclical with a micro story that will significantly overwhelm the cyclical, which is largely priced in any way. So everyone's worried about X and, and, you know, there's a range of things that happen. But, but if X happens, it's priced for that and idiosyncratic factor will drive outperformance and sometimes people overprice kind of what's obvious in front of them which so so that's kind of in my view and I we are some quality compounders that I like to ask them to be more of a quality compound mispriced for different reason. So what I would say to you is the market gives you different opportunities at different times based on how it is reacting to the world or what's what sort of working. And, you know, COVID was at a time like that where up until the election, the vaccine in 2020, everything that was a COVID loser or a value stock was shunned for the shiny growth. And there was a lot of opportunity in that in kind of tacking against what the market was. I would say it's like the flavour of the day. And this is where being a little bit contrarian helps us.

Alec: [00:40:20] Yeah, well Ricky, you've got me very excited to hear your pitch on the 18th of November. I'm looking forward to hearing what you decide. Look, we are almost out of time and we do like to finish with the same final three questions. But before then, I just want to ask you a general one about, I guess, the market as it stands in late October 2022. You know, inflation is still high, and interest rates are rising. Everyone's watching the Fed. Well, what do you think about that sort of macro picture where we are in the economy and I guess or I guess, do you think about it at all? 

Ricky: [00:40:56] Yeah, we have to. It's interesting. You know, 15 or 20 years ago, I think we focussed on individual stocks and over the cycles and the GFC, you know, we've had to become more macro where and now we have to become factor aware because of how the market market has changed quite a lot in the 15 years. And this is something I will actually talk about at the sound conference as well. A little bit of the big picture, how the market structure has changed, who the players are, how they trade, how they think and how securities get priced. I think that what I would say is I think the market has it about right with the risks and the issues. I think we are choppy to the side. You want to feed the extremes. So we had been, you know, buying as of, you know, a week or two ago and we had been selling and reducing some exposure after this kind of big several day rally that we've seen. And I think after the kind of 20 to 25% decline, there is more balance in the market. And I would say that I think there is a little more downside skew than upside skew because reflexivity plays through and the markets in the economy are going one direction. And so there's a little bit of second order effects that will have to play out. And so I think that people can deal with all the negativity and we have been cautious this year. I think people can forget a few things like underneath the surface, a lot of stocks are down a lot and have priced in lower earnings and higher rates in a lot of places. Number two, institutional investors are broadly positioned very negatively. Sentiment is awful other than the retail investor who is still in the market. And that's a factor. On the other side, a lot of strategists are espousing negative views. So there's a lot of negative negativity. Equities are nominal earnings vehicles. So we may go through a recession, but a lot of the recession models people have are recession in a low interest rate, low inflation world, where their earnings expectations may be worse than then I think they'll be as companies are able to price. For inflation, there may be real earnings declines, but nominally they may grow and we invest in a nominal world. So and then lastly, the U.S. private sector has pretty healthy consumer balance sheets, good bank balance sheets, great corporate balance sheets, decent people are well prepared for this. So I think we've got to see a few more cards play out. But I think for next year, choppy, sideways, fade to fade, the extremes by individual, a little more dispersion and individual companies. And we'll have to see how sticky inflation is and what the Fed's reaction functions are, things we can't know. And just sit here and tell you, I know exactly how inflation could play out and then what the Fed's reaction functions are going to be. I could give you a convicted opinion, but I think anybody that tells you they know the answers to that would be only partly true. And there's a lot of research we can do, but actually predicting future inflation is one of the hardest things for anyone to do. 

Alec: [00:44:20] Yeah. Yeah. Well, Riki, we have run out of time, but the great news for our audience, if they do want to hear more from you, they can. If they can make it down to Tasmania on the 18th of November, they can see you in person or they can jump on line and there they use the code Equity Mates 2022. They can buy an online ticket with a 20% discount. How good? But Ricky, let's jump into the final three questions. And the first one is, do you have any books that you consider a must read? 

Ricky: [00:44:51] I have a few books that I think are important to read. Good To, Great by Jim Collins is a terrific kind of business strategy. I read The Art of Short Selling by Catherine Staley recently. Titans is a book about industrial companies, I believe. Titans is the name that I thought was an excellent, excellent book. I actually quite like more than books. I quite like interviews and writings of different investors as well. So all the Buffett letters and I would encourage a lot of people to to read or listen to people. You can't be like any one person, but you can pick little bits of things from people that resonate with you and build your own investing compass. And I think that's maybe the most important part of being an investor, because you've got to have a conviction in what you do. And therefore, I don't want to be just like Warren Buffett. I want to be just like Steve Cohen or David Tepper. But there are pieces of each one that I like. And building your own compass is my value.

Alec: [00:46:00] I love that. The book, The Lessons from the Titans. It's actually funny you say that. I actually bought that. I haven't read it yet, but I bought it this way. So great minds think alike, I guess. 

Ricky: [00:46:13] Yeah, it's very instructive. And a recent book. Yeah. 

Alec: [00:46:17] The second question is forget valuation, forget investing in it today. We just love to understand what you think makes a company great. So based just on what the company does and who runs it, what's the best company you've ever come across?

Ricky: [00:46:33] It's probably either Marriott or Google, a little bit different businesses, I think. You know, people probably really know Google. But let me just touch on Marriott for a second. I've covered this company for my entire kind of career. I mentioned earlier that I did some lodging back in the early nineties. So, you know, the franchising business is one of the great businesses you get to grow with other people's capital. You get kind of nominal pricing, you get super high returns and you bring a lot of advantages to the ecosystem through the franchising business. And that company not only has those great business characteristics, but as the Marriott's as a management team and the people that they brought on early on they separate it out. Host Marriott they've the real estate from the brands and that was a brilliant you know, very early prescient kind of strategy. And so they've done the right things on capital allocation and execution and keeping the quality of the brands. Great. So, to your point, it was to start with a good business, have good management that executes well and does good capital allocation. So that'd be one and I think it would be hard to sort of not Google although maybe after last night's earnings people are saying they're undisciplined in their expenses. And I think they have been terrific in all those areas in capital allocation and execution. And they started with a fundamentally great business that builds as the ecosystem gets bigger, they build their competitive advantages and they sort of. Flywheels are kind of important. Yeah.

Alec: [00:48:16] Yeah. To two great businesses. We've had people answer Google before, but you're the first to answer Marriott. And that's why we love this question because we always hear new, new perspectives on it. But Ricky, final question is if you think back to your younger self buying was it felt call lodging fell call lodging for you know your paper portfolio early days. What advice would you give to your younger self? 

Ricky: [00:48:41] I would tell my younger self to nurture his network better at a very young age. I was given access to incredible CEOs, CFOs and and I ask good questions and I was thoughtful and I built an I for poor and and I it probably took me till much later in life to realise that, you know, we don't get anywhere by ourselves and we learn a lot from other people and trying out other people's expertise and experiences. And I think, you know, doing that in a thoughtful way would have been a really helpful thing. So that would be one. And I think this notion is this notion of learning from your mistakes but not necessarily in the immediate aftermath or in singularity. And what I mean by that is a lot of people can lose money and say, let's not just do that again. Now, right after you've lost the money, your perspective, maybe the mistake you made was actually selling the stock there. And what is that? What is the lesson? And then I like to string together. So I think I was like everybody else, like you draw these one offs, but you string together the mistakes that you made. What are my tendencies? What? What things? So. So I think in the mistake category, I would take a little bit of time and build some perspective. So that would be another one. And then I think the one that everyone always says is the hard decisions, whether they're people based or otherwise, they agonise over. They almost always feel great right afterwards. And you agonise, you know, make them when you make a decision, move swiftly. 

Bryce: [00:50:31] Yeah. Three great pieces of advice to finish on there, Ricky, and thank you so much for taking the time today to speak with us in the Equity Mates community. We're super excited to see you. It sewed hearts and minds, such a great cause. And, you know, thank you for saying great things about Australia. Hopefully we can meet in person when you get here. 

Ricky: [00:50:51] This has been great. Appreciate the quest, the thoughtful questions and the good dialogue. 

Bryce: [00:50:55] No worries. Will our good luck with the pitch and and we look forward to catching up and speaking again soon. Thank you very much. 

Ricky: [00:51:02] Great. Thank you.