Expert: Thomas Valenzuela – Building a concentrated portfolio of long-term compounders | Stewart Asset Management

Bryce: [00:00:52] 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's 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 going? 

Alec: [00:01:09] I'm very good. Bryce. I'm very excited for this interview. We are joined by a fund manager all the way from New York. Yes, love it. And I'm excited to get stuck in.

Bryce: [00:01:19] absolute pleasure to welcome Thomas Valenzuela to the studio. Thomas, welcome. 

Thomas Valenzuela: [00:01:23] Thank you. And please call me Tom. 

Bryce: [00:01:25] Will do. Tom is Chief Investment Officer for Stewart Asset Management, a New York based asset manager, as Ren said her aim to compound client capital through a concentrated portfolio of quality US equities over the past five years. Stewart Asset Management has returned 23 percent per annum, compared to 17 percent for the S&P 500 total return. Tom has worked in financial markets for over 40 years and brings a wealth of experience and knowledge to this conversation today. So we're going to be unpacking all things Stewart Asset Management, Tom's views on markets today and just general discussion on everything that's going on in equities.

Alec: [00:02:03] But Tom, before we get into that, we love to start with the story of someone's first investment. We generally find there's a good story, or perhaps a good lesson that comes out of it. So to kick us off today, can you tell us the story of your first investment? 

Thomas Valenzuela: [00:02:17] Well, if you if you allow me, I'll give you two. The first one was when I was in high school, I had an uncle who was a doctor, an investor, and he paid for medical school by investing at a very early age. And so he owned shares in Chevron, back then called Standard Oil of California, and I bought one or two shares for myself all the five hundred dollars. But what might be of more interest to your audience, particularly those in Australia, is that my first real investment was in nineteen seventy nine and I bought shares in Australian company OK. And so at the time, I was working at Morgan Stanley and the partners at Morgan Stanley had invested their own personal capital in two companies that were in Queensland that had rights to oil shale project there, and they were called Southern Pacific Petroleum and Central Pacific Petroleum. And so being young and callow youth, I was looking to make some quick money, and I noticed over the course of my career that males loved to trade and make quick money and most of the time lose money. But in any event, as I was a young man right out of university working for working on this project, and I looked around to see if there are any companies that owned any rights, mineral rights to where these two companies Southern Pacific and Central Pacific on their oil shale right again in Queensland, around Gladstone. And so in any event, I bought shares in this company. And in about a year's time, they went up three or four fold. And of course, you know, as a young man, you love to trade. And so I traded them, and that's how I paid for business school. Oh, no. That was my first real investment in 1979, as oil was going from sixteen dollars a barrel to fifty four dollars a barrel, not unlike the present environment, and that sort of got me hooked on investing. Thankfully, I sort of learnt over time that really it's more important to work hard, be patient and be long term if you want to make real money. Mm hmm. And that's precisely what we do here at the Stewart Asset Management. So that was my first investment, 

Bryce: [00:04:28] nice, successful one by the sound of it. And before we unpack. Stewart, you know, Tom, there's there's been a lot of change in markets from that very first investment to today. So we'd love to hear some of your thoughts around some of the biggest changes that you've observed, but also some of the things that remain sort of true as ever. 

Thomas Valenzuela: [00:04:47] You know, the biggest thing that's really changed for someone in my position who really does this every day, day in, day out, looking for companies, looking for investments, looking for shares that are going to go up over a long period of time and create wealth for our clients is really that information. There's much more information about companies now than there was when I was first starting in the 1980s. And that's really the big, big change. And that actually is helpful to individual investors, too. And I do want to make that point that individual investors can really do well for themselves again, if you're dedicated and you work hard at it, so. But that's the biggest change. Now, if you're asking what hasn't changed, that's almost equally as important because human behaviour doesn't change. So this whole input impulse towards fear and greed has not changed at all. And we have seen just over the last 12 months a good deal agreed last year, particularly. Certain areas of the market and now a good deal of fear in certain and many of most areas of the market, and that's probably the biggest thing that remains the same. What I've also seen that hasn't changed over the years is that if you have a sound philosophy and a good strategy in investing and you stick to it and you add hard work to it, you can really earn really good returns for yourself. And that's an important lesson to learn, and you really can live through the retrenchments and the bear markets and the slumps. If you really can put some time into it, hard work and you have a really sound philosophy and strategy, and that's really important to emphasise, I think. 

Alec: [00:06:40] Well, Tom, in your 40 years in in in financial markets, you would have seen so, so much change. And I guess in that time working, you know where you've worked. Have you developed a personal investing philosophy?

Thomas Valenzuela: [00:06:57] Yes. So that started very early on when I worked at a firm called Lazard Prayer in New York. And then it evolved when I met Bill Stewart, who is a he and I are the founders of this firm, and I worked for him, worked with him previously at the firm called W.P. Stewart, as well as well as an I was the chief investment officer there. And so one of the things I found early on in my career is buying high quality companies that grow and paying a reasonable price for those shares. Maintaining a long term perspective can really make you real money over time, and that's important. And then, you know, we really the Stewart philosophy is really all about that. Now there are some other techniques that we use in terms of valuation that are time tested that we've been using since 1975 that have been really, really helpful to our investing. And that and that's important. But the really the big thing is really high quality companies because in times like this, when you're undergoing a retrenchment in share prices or when you're going through an awful bear market slump like March of 2020, you really want to own high quality companies that are growing as well. So, for example, Johnson and Johnson is a very high quality company. Covid is a very high quality company, but they really don't well that quickly. So if you can find a company high quality growing faster than the market as a whole, the S&P 500 and pay a reasonable price for it, you'll do quite well over time. And we have specific valuation techniques to tell us what price to pay that are time tested, but those are really the three critical instances. Now look, there are a lot of ways of making money, and some people are brilliant traders, but there are very few brilliant traders that have been able to sustain that record over decades. I've had a business partner who worked for George Soros, my senior partner, Bill Stewart, manage money for Soros at one time, clearly a brilliant trader who's been able to do things very, very well over decades. But that only happens. There are only one or two of them. Every generation is even that many. So for the rest of us, what really works is just following those three things high quality companies, reasonable prices, maintaining a lot of perspective and I might say relevant to Australians where I believe you have a very high tax regime. It's good to avoid the taxman. If you have a it's good, it's good. You avoid paying money to the taxman if you're long term, at least in the state. So I don't know what your laws are like, but I do understand you have a good, tough tax regime there too in Australia. 

Bryce: [00:09:47] Yeah, I love that philosophy, Tom, and we are about to unpack Stewart and a bit more detail. But before we jumped on the call, you mentioned that Stewart had a bit of a connexion back through to the father of value investing, Ben Graham. So are you able to unpack that a little for us and then we'll jump in? 

Thomas Valenzuela: [00:10:07] Certainly. Certainly. I mean, it's an interesting story. We don't talk too much about it, but I thought it might be of interest to to your audience. So way back when in the nineteen sixties, one of the original founders of our firm, Bob Kohn, is no longer with us actually studied directly with Ben Graham at Columbia Business School, and Bill Stewart himself studied with one of Ben Graham's partners in Graham's partnership, Graham Newman, back in the nineteen sixties. So one of the things that we say about ourselves with a little tongue in cheek, but it's actually quite true. We apply Ben Graham to growth stocks, and that's what we do. And so it's very interesting because. If you see if you read Ben Graham's intelligent investor, what you will actually find in the there is far more mention of earnings and earnings growth than you would ever suspect. It's almost in every chapter. And in fact, he devotes several full chapters to earnings growth, earnings, earnings quality and what one ought to pay for that. It's really quite fascinating. I would urge every one of your individual investors to read that book. It's a terrific book and really can make you really help any investor. And we certainly use it. It's a real reference. I have a I have a fully annotated copy at home. 

Alec: [00:11:28] I love that. Well, in the spirit of taking Ben Graham's learnings and applying it to growth investing, we'd love to sort of unpack your process because, you know, we hear a number of investors talk about looking for long term compounders and, you know, Bryce and I like to think we're still young. So we feel, you know, we want to invest with a long term time horizon. But it can be difficult to really navigate the amount of companies out there that you that you can invest in and really find those gems. So we want to pick your brain and understand how you do it. So starting with the whole U.S. market, every company that you have to choose from, how do you and the team start to filter that down into an investable universe? 

Thomas Valenzuela: [00:12:12] Sure. Let me break that down into two things. If I may just talk a little bit about our criteria as sort of a high level sense and then talk about our actual process, which I think is also important to talk about. So we have 10 criteria. Let me just throw out for your audience the most important of those. First and foremost, we're looking for businesses that are involved in or selling into growing end markets because again, if our philosophy is earnings growth, we want ideally organic growth, but we do own companies that grow by acquisitions. But growing in markets is really important. And global growing in markets and markets that are companies that can sell into growing in markets here in the states or and sell into them as they become international as well is also very important. So that's really the number one criteria that we're looking for is really revenue growth companies that are selling into growing end markets. The other thing we look for is dominant companies. We look for companies that are one or two in their industry. Now what we also look for in has been very fertile grounds to look at. And again, this is a Ben Graham. We do a lot of Ben Graham terminology that our firm is what we call primary companies and secondary companies. We're looking for primary companies again, big dominant companies. And what's the definition of a secondary company? The secondary company is basically a company that's smaller, less seasoned, but even a big company can be a secondary company. So one of the criteria we apply is if the company dried up and blew away tomorrow, would you miss it? So here in the states, there is a retailer called J.C. Penney. If J.C. Penney dried up and blew away which it did, would anybody miss it? No one would miss it. That's a secondary company. A primary company is. Would you miss Amazon? Yes. If it stopped doing business tomorrow or for example, my understanding is, is that there are, oh gosh, I think about 15 Costco stores in Australia, and most Costco shoppers love Costco. So as Costco dried up and blew away tomorrow, would they miss it? Yes, they would. And so that's our definition of primary and secondary companies that are secondary companies that are on the cusp of becoming primary companies. And that happens over time. For example, years ago, we owned Home Depot, and I can tell you another story about investing and investing for the long term concerning Home Depot. But if you think about Home Depot was a small company at one point with 30, 40, 50 stores, and now it has over a thousand stores. So it was a secondary company when we first looked at it now very much a primary company. I would say the same thing about a company we own now called Florida Corp. It's not in Australia, but there they have about 100 store. I have 100 plus stores. We think they can go to five hundred clear in some ways, a secondary company. But clearly, we believe will become a primary company over time. The other thing that we phrase we use a lot is growth at scale. And other people say, does it have operating leverage? In other words, as the sales grow, do more Dollars come to the bottom line, the more Dollars turn into profit. That's an important criteria for us as well. And then the other is a high reinvestment rate. Does the company have a lot of investment opportunities in its own business? Now, look, you can invest in companies that throw off a lot of free cash and they buy and shares. And they raised the dividend. There's nothing wrong with that. But what we have found is companies that have a high reinvestment rate, so if they they generate operating cash, cash, that's very good, they may generate some free cash. But companies that have a lot of reinvestment opportunities with that free cash, that's also important for us as well. And then obviously, as I just described another way you can say what I was just saying is companies that are self-financing financing. Now, a lot of the companies that have kind of their share prices really slumped in the last six months have really companies that have not been self-financing. They've really been losing money. They've not been generating either operating cash or free cash. We avoid those kinds of companies. And then lastly, and this is very important criteria almost isn't as important as really companies that are that are selling and growing in markets. Is it an exceptional management? Is it really a strong, exceptional management? And so that's also important. And we have to get to know managements to know whether or not they're exceptional or not. So for us, management do count. I know I have colleagues from business school and become very famous global investors who really say no managements don't count. It's all about the valuation for us management's count, and those are the main criteria of the 10 that we use that we're trying to apply to the companies that we look at here in the United States. So you can see that in that process, you can winnow out a whole lot of companies that some are very fine companies. Anything wrong with that? They're just not growing. Yeah. And we think the odds are paying a fair price for a growing company. The odds of making really good money making multiples on your capital over time, which is our intent, is much higher when we're investing our clients capital in those kinds of businesses. Mm-Hmm. [00:17:42][329.9]

Bryce: [00:17:43] Well, Tom, speaking of assessing management, it's it's a part of the process that so many experts we speak to put a lot of focus and importance on, but it is very difficult for retail investors Ren and I to actually make good judgement calls on management just purely because we don't have the access that fund managers do to be able to sit down with them in the room and ask the hard questions. So how do you actually approach meeting management? And what are some of the good signs or red flags that you look for when you're assessing a management team? 

Thomas Valenzuela: [00:18:14] Certainly, yes. But let me just you said one thing that's really intriguing about retail investors and so forth, and I think it's a little bit of a fallacy that you can't come to as good judgements as we because when it comes to managements and the reason why I say that is because going back to the first thing I said, how would markets change? What is information? Just go on YouTube. YouTube has so much information, so many interviews with management. Now, maybe you won't be able to shake hands with them like we can, but you can really see them. You can spend a lot of time with management just online as they give presentations. Or is they're interviewed on YouTube in a way you never could 30 years ago or 40 years ago? That erodes one of the big advantages that big institutional investors have over individual investors, and I cannot emphasise that enough. And I would just say do that because then you can develop judgement, your own judgement about figuring out whether management is really a strong management or a weak management, because at the end of the day, it's really about people you are choosing. We are choosing to invest our capital, our clients, capital with people, with the management really at the end of the day. And if we follow our other criteria, we're going to be invested in good businesses. But every good business needs a really good management. And if you really want to make exceptional returns, you have to be invested with an exceptional management. Know how do we exactly do that? So it's been tough to be perfectly blunt and the Covid, because what we do is we like to make on site visits. We like to go to see companies. We like to see that the animal in its lair, so to speak. We like to have personal relationships with them. I can think of a company, for example, they have stores in Australia. TJ Max and founder of TJ Max is was a tremendous retailer and they revolutionised retailing and certainly in the United States. And at one point early in my career, I knew the the founder, CEO chairman quite well. I had his home phone number. This was really in the era before, so everybody had a cell phone, so I used to call him at home sometimes. And the same with the CFO. Now there are ways that you do that you go to conferences, you go up to management, you start asking them questions, informed questions that show them that you've done your work and they take a liking to you. And they understand that you want to know more about their business and that you understand their business not as well as they. And so once you prove you bought a foetus that you've really done your work on their management and in fact, you are long term, right? You really start to cultivate a relationship. Management, the other thing I've also found, again for your younger listeners, is that all the guys like me always want to help young people, particularly young people who ask good questions. And so I would urge you or your younger viewers to go and ask good questions because your old guys always want to help young people who are curious and intelligent. It's just the rule of life. And I've used that a lot when I was younger. Now I have to figure out other ways of getting close to that. 

Alec: [00:21:17] So, Tom, you filter the US market down to an investable universe. You assess management. As part of that, you have from from what we could read on your website. You end up with a universe of about 40 stocks and then you like to run quite a concentrated portfolio from there. So how do you then make those portfolio management decisions, I assume. Valuation becomes a big factor here. Why do you prioritise concentration in the portfolio? 

Thomas Valenzuela: [00:21:49] That's a very good question. There are a lot of questions in there. Let me let me firstly, let me just say that when you think about these 10 criteria and you apply it to, let's say, the Russell 1000 or the S&P 500, they're really not 10 20 percent of them, maybe something like that of the S&P 500, maybe five eight percent of the Russell 1000 fall into that criteria, right? Where you really can see the qualities in a business that will allow you to own it for years and make multiples on your money. So at any one time, it's really about 40 60 companies in that universe, those two universes, if you think about it and then after that, we've done all our work and it's an important part of our process they want to describe right now. What we do do is we build very detailed earnings forecasts about every one of those 50 companies, whether it's a profit and loss statement, cash flows, balance sheets, their business lines, their various divisions, their various geographies, et cetera, et cetera. So we come up with a five year earnings forecast and then we use that in our valuation techniques. That's where we really decide to make our investment decisions. So it's about, do we want to be within this business? Do we want to be invested with this management? And is this a valuation that can really, we believe, give us a high probability of doubling our client's capital over the next five years? The last part of that? What do we actually own? Well, that feels there is really valuation and that a lot of that is where Ben Graham comes in at that point. Now, without complicating things too much and stop me if I am. So if you think about we have a five year earnings projection, right? So if a company is selling at 20 times earnings right now and the earnings are growing at 15 percent a year, which is what we try to manage to in portfolio, we try to build the portfolio whose earnings are growing at 15 percent a year, twice the rate of the S&P 500. It's selling at 20 times right now. We're actually paying 10 times earnings five years out. So we've amortise that price earnings ratio from 20 down to 10. Now, if it's a great company like we think it is great management and market dominant or becoming dominant, then it's not going to sell at 20 times earnings in five years. It's certainly not going to sell at 16 or 17 times, which is a market long term market price earnings ratio. It's probably going to trade in the premium to 20. So that's how we think about valuation. And so we can come back to that later when you when you ask me about current conditions in the market. But that's our sort of if you want to call it a secret sauce in how we look at things, it's that last part of it. That's our valuation discipline. And we have these valuation, the history, if you will, going back to nineteen seventy five that really fell through various interest rate environments that tell us what we should be paying for these really high quality, quick, rapidly growing companies. But again, the key to it is really to figure out a company whose earnings are growing at twice the rate or thereabouts, or even higher than the S&P 500. And that's what was very important for us to do. 

Bryce: [00:25:08] Well, Tom, speaking of market conditions, we would love to get your thoughts on what's going on. But before we do, we're just going to take a very quick break to hear from our sponsors. So, Tom, you mentioned the valuations, and there's so much happening in markets at the moment, we've seen the Nasdaq and the S&P both fall, you know, beyond 10 per cent here in Australia as well. I think the ASX 200 has just touched on 10 per cent correction as well. But that does provide some pretty exciting opportunities for investors. So how are you approaching this market correction at the moment? And are there any areas of the market that you are paying particular attention to? 

Thomas Valenzuela: [00:25:50] Yes. What's happened? What's creating some of these really interesting opportunities right now? And it's it's a it's a it's a tough environment, but there are a lot of interesting, good, valuable investable opportunities emerging and part of what's happened. Part of the reason why is because if you look at the compression and price earnings ratios in the last four or five months, it's really gone from 20 to twenty three times in the S&P down to under 20 times right now. And in our portfolios have also seen a peak price earnings ratio compression. You can also say it's happened not only sort of at the front end of price earnings ratios, but also on earnings five years out. So in our portfolio, we've seen your earnings go from about 15 times, which from our point of view really starts to be. We start to lose that margin of safety. Another Ben Graham phrase, but now it's at about 11 12 times, and that's a really good investable level for us. It doesn't mean prices won't go down another 10 percent or another 12 percent, but that's a really good long term investable level. So let me just help you out, help you understand that perspective. So in March of 2020, after that big slump, the bear market 30 percent collapse in share prices. Our portfolio was trading at about 11 times earnings five years out. Now, subsequent to that, our portfolios have more than doubled since that low the last week in March. Now let's go back to 2008. At year end 2008, our portfolios were trading at just over 10 times earnings five years out now. They went down another 15 18 percent to March of 2009. But if you look at that portfolio, if you had bought that portfolio at year end 2008, trading at around 10 times earnings five years out, which is about the low watermark that we've seen in the last 20 25 years, you would have made about 18 percent on your money for the next five years. So you would have been made about three times on your money in the next five years, investing in great, wonderful companies that were growing, that had good managements. That's a really for me, that's really a great way and for our clients is really a great way to think about investing. We think so. Yes, share prices could come in more. The retrenchment is probably not over, but we're starting to see an investable level in the portfolio and we're starting to see what some investors would call valuation support in the market. But again, we may see prices come in some more, but this is a very interesting period in which the really kind of sharpen your pencil and say, What do we want to buy more of or for those of those who have cash? What do we want to invest our cash in? What do we want to invest our capital if we're invested in some really good companies and they're selling pretty reasonable long term valuations? So, you know, look, you don't want to be complacent. But I do think there are some emerging opportunities now in the marketplace. And I think you've got to put it in perspective that over long periods of time decades you lived through these 20 percent bear market slumps. And if I may just give you one example of long term investing, and it's important to maintain your long term perspective now and again, this goes back to when I was early in my career. In nineteen eighty five, I bought ten thousand dollars worth of Home Depot and it went up and went up to $16000 in about three or four months. And I thought, Well, I'm going to sell it. I'm a genius, et cetera, et cetera. Nineteen eighty five, I sold it. I booked a nice profit six thousand dollars on an investment of ten thousand. I always ask everybody when I talk about long term investing, how much do you think those ten thousand dollars would be worth today had I left it in those shares of Home Depot in 1980? Actually, I think it was 1986. Do you want to take a guess or would you like me to tell you, tell us?

Alec: [00:29:57] But it'd be a lot. Yeah, I imagine it's going to be a lot. It'll be 60 million figures. 

Thomas Valenzuela: [00:30:03] Yeah, fourteen and a half million dollars on loan.

Alec: [00:30:09] You can't do that. Not see yourself. Tell them that. That's painful. 

Thomas Valenzuela: [00:30:13] Yes, it is painful. And so but that's the way you want to think. So, for example, we had a massive. MasterCard is obviously President Australia. We bought it on the initial public offering in 2007. We lived through think of the bear mind. We lived through 08. Yeah, we lived through a couple of 20 percent corrections during the euro crisis. We lived through 2020. We're living through this one. But yeah, have you bought it on the IPO, as we did for clients? You will have made about thirty five percent a year from 2007 to the present. Wow. So you really want to think about the long term when you think about things, and this is very painful what we're going through right now. Let's not deny it. And it's tough to see your statement of month and go down in value. But you really if you're really invested in these great companies that are growing, you can and there are only a handful at any one time, you really can make a lot of money. Hmm. But you have to. You have to. It's not always easy. You have to keep your wits about you. And that's hard. 

Alec: [00:31:21] Yeah, I think that's a really important point to stress. You know, there's so many reasons to be worried in the short term. You know, there's interest rate rises as inflation, there's tangled supply chains. But I think you know, the point you just made there is is such an important one for long term investors. So Tom, we mentioned that in these moments, there's opportunity and we'd love to know if there are any companies that have been added to your investable universe in this moment. I'm sure all of your analysts, all of your team of frantically searching the market, trying to find the best opportunities in this moment and would love to sort of hear what you're finding. 

Thomas Valenzuela: [00:32:01] wSure. Well, what we did do is we bought recently, we bought some more shares in that small US company that I told you about. It's not so small actually Floor and decor. We think it has all the earmarks because of being another Home Depot. That's not a prediction, but that's just our best judgement right now. It's an exciting, very well-managed little company. I say little. It's not so little, actually. And the valuation is actually becoming very appealing right now. So that's one we also think that long term prospects for Amazon continue to be very good. We think the revenue growth will be good. It'll certainly be in double digit. But more importantly, the businesses that are really growing for them are they're really high margin businesses. The retailing business is obviously have lower margins of razor thin margins. But AWS, their cloud business, their advertising business, those are those are businesses that are that are growing at scale, meaning say they have a lot of operating leverage. So I think that the earnings are really going to grow very rapidly for Amazon over the next five years, and we're very excited about that. Plus, they are also investing a lot in their retail, particularly last mile, and they have the cash flow to do so. And they have a very good record of doing that and we think that they will remain dominant in that area. Online digital commerce in the United States. So that's another another one that we bought shares in was Disney, which we have been bullish on now for quite some time. They did a magnificent job during Covid. The Disney parks are now higher in revenue than they were pre-COVID. And I think that's really saying something. Their streaming business is doing quite well, grown faster than their own predictions over the last two and a half years since they launched it. And they are now they generate good, good, good, good operating cash flow, which they are now investing into putting more entertainment online. And I think that's very good. I think what that's done, Netflix share price has come back quite a lot. But I think what investing in content has done for Netflix over the last 10 years. And if anybody can do it, certainly Disney can. Now, obviously, that business is becoming more competitive and we're quite conscious of that. But we still think that Disney has very strong earnings power over the next five years. And I think it's going to be quite good for shareholders. So those are some of the companies that we've been adding putting more more capital into in the last 30 days. 

Bryce: [00:34:39] We always ask Tom, you know, for fund managers to let us know, Yeah, as you've just said, what? What are companies they're putting money into or what's going on to their watchlist, but it's just as interesting to understand what's coming out of the funds or what's coming out of the universe. So are there any stocks that you just put on the rubbish heap? 

Thomas Valenzuela: [00:34:56] Yes. Yes, yes. So on the rubbish heap? Well, I think they're good companies. The two, I'm about to say we just we are just a little concerned about some of the trends and whether or not they'll involve evolve into long term negative trends. We actually sold our shares at a very good profit in Facebook back at the beginning. Every year and we round it for about six years or so, and we were concerned about some of the changes that Apple had made and and their ad business. And we think that probably some of the things that are happening are to the benefit of platforms like Amazon and Google and not to the benefit of Facebook, so. But clearly, they've been brilliant operators and strategically and they generate an enormous amount of cash. We're also a little bit concerned about them spending $50 million on the metaverse. That's another concern that we have. The other one that we had sold, we sold it last year. Actually, we sold PayPal. And so you asked us, you asked me earlier about areas in the market that we were looking at five years ago. We identified four four areas in the market that we wanted to look at, one of which was what's called fintech or payments and so forth. We have a large investment, as I described for a number of years now. And MasterCard, we bought PayPal about, oh gosh, I think it was in the spring of 2016. It was about thirty eight. Thirty nine was our average cost. We sold it last year at it for a good profit. We thought that the business was it was very highly valued at the time. I think it was selling at about 40 or 50 times. And when a share sell that extensively, it puts a great deal of demand on the earnings growth. You need a very high earnings growth rate to amortise that very high speed. And that, again, is very much at the heart of our valuation process. So for us, it was a good business that done terrifically well in the previous five years, but it was very expensive and we saw the whole space becoming more competitive. That could kind of nip at the heels of of of some of the big guys like PayPal and even MasterCard. PayPal was an interesting company because there is an example of the company was a secondary company that arguably became a primary company over the last five or six years. At the heart of the payment process, still a good company, very low valuation doesn't mean we won't. We may not buy it back, but but we did sell it because of valuation and increased competition. 

Alec: [00:37:41] So PayPal maybe not quite on the rubbish heap, as Bryce said, maybe just on the it was on the expensive 

Thomas Valenzuela: [00:37:49] yes 

Bryce: [00:37:50] matter on the same day matter on the side. 

Alec: [00:37:54] Well, Tom, look, we are almost out of time. We could talk markets all day, but we want to say a massive thank you for joining us. We do like to always end with the same final three questions, but before then, is there anywhere PayPal should go if they want to follow you online or read more from your cell phone? Stewart Asset Management Yes, of course. 

Thomas Valenzuela: [00:38:18] Well, there is our website and there are a lot of things on there on our website. And if you go to one of the tabs, I forget exactly which one it is, but I believe it's right on the first page of our website. You can see what Bill Stewart and my colleagues write about markets over time. We wrote one recently that's on our website called Food for Thought, which was about this whole phenomenon the compression of price earnings ratios and the emerging opportunities. Very similar to what we wrote in the first week in March of 2020, we wrote something called emerging opportunities that I would certainly recommend to everyone when we do have other things on our on our website in there. If you're interested about our top 10 holdings or top five holdings, which are about 40 percent plus of the portfolio, so it's a good chunk of it. You can see it right there. We publish it monthly. 

Alec: [00:39:10] I first came across yourself self-insured asset management from one of those letters, so they're definitely worth a read. But Tom will get into the final three questions, and the first one is, do you have any books that you consider must read? 

Thomas Valenzuela: [00:39:26] Yes. Yes, very much so. I mentioned it earlier Ben Graham's book The Intelligent Investor. Or maybe I didn't mention it by title, but certainly the Intelligent Investor. That's one I think the introductory book by Bill O'Neill is also very helpful. And so while you might call him a trader, it has a lot of useful observations that long term investors would find very helpful. I think that's very important. I think the other book that's really a must read as well is by a very famous M.I.T. financial historian called Charles Kindleburger called manias, panics and crashes. Because you've asked me what changed and what didn't change? Well, the whole notion of manias, panics and crashes has not changed in five hundred years. So that's that's. It's also very important, so I think those are the those are three great places to start for any investor. 

Alec: [00:40:24] Nice one. Love those three recommendations. The next question? Forget valuation what they're trading at today, just on pure business fundamentals. What's the best company you've ever come across? 

Thomas Valenzuela: [00:40:39] Oh, gosh. I've ever come across. 

Alec: [00:40:43] It's it's a big question, we know, but we love to end on a big question here. 

Thomas Valenzuela: [00:40:48] Sure, sure. I think it would be Home Depot. It hits all the 10 criteria that we talked about. We owned it for a long time. I would think that MasterCard as well hits all 10 criteria, though as I've said, you know you want to be on guard for increasing competition in their business. Certainly, Amazon is another one that we've owned for, I don't know, since 2002 didn't quite buy at the bottom on that one. But but it's true it's worked out quite well. The other one, I would say, is TJ Max, great retailer. That really was a disruptor that revolutionised things as well. And then the other that we owned was Precision Castparts, which was bought by Berkshire Hathaway. So and if you go back and look at it from the time that they revolutionised aircraft engines and aerospace that was in the late 80s and have you held it through at that time? It was two hundred and fifty dollars million in market cap in Berkshire Hathaway paid fifty billion dollars for it. So again, those are those are the ones that always come to mind that I always use. I would say to younger investors that just that I say to my younger colleagues here, about every 15 to 20 months, you will find a company that will compound there, that will double every five years or so that you can have for the next five, seven, 10 years that they're out there. It takes some hard work and dedication, but they are definitely out there.

Alec: [00:42:15] Yeah, yeah, I love that. Well, Tom, the final question that we like to end every interview with. If you think back to your early days in finance, when you were looking at Australian oil companies up in Queensland, what advice would you give your younger self? 

Thomas Valenzuela: [00:42:32] I would say accumulate a nest egg of capital that you won't need to buy a house to get married and have children, and just orient yourself towards trying to double your capital every five years and by investing in high quality, really strong companies. And you can do it and they're out there. And so if you follow kind of Peter Lynch's advice and Bill O'Neill's advice, invest in what you know, invest what's around. There's plenty of information to find those kinds of companies. And that would be my best advice. Just try to accumulate a nest egg that you won't need and try to compound. 

Bryce: [00:43:09] Awesome, well, great way to finish their time. And we certainly appreciate you sharing your time all the way from New York. We love speaking to you guys over there, so thank you very much. All the best with everything that's going on with markets. And will we look forward to checking in again with you at some point? So thank you very much. 

Thomas Valenzuela: [00:43:26] Thank you, fellas. 

Bryce: [00:43:28] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com. Or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group where on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.