TIP803: How Economics and Art Shape Better Investors w/ Kyle Grieve

You're listening to TIP.

Most people believe that optimization is the key to success in many areas of life.

But most people fail to see that optimization has led to catastrophic failures when the

environment changes rapidly.

Today, we're going to discuss mental models from both art and economics in some more detail

to help us build a better framework for thinking about the world and investing.

These two categories work very well together simply because successful investing relies on

several economic forces.

While economics does a decent job of explaining how money flows in and out of a country, it

doesn't account for the art part of investing.

Economics is more scientific, rigid, and relying on numbers and calculations that you can

really just see and feel.

We'll view businesses through the lens of efficiency, supply and demand, optimization,

and capital efficiency.

We'll look at why these economic principles are just so powerful and how they can help

you think of companies through a more global perspective.

But while investors enjoy relying on numbers, KPIs, and compound growth metrics, that simply

doesn't tell the entire story of the business.

If you want to find wonderful investments, it really helps to align yourself with the

right management team.

And a good manager is like a skilled movie director.

They tell a story specifically cultivated to attract the audience that they think would

make the best viewers.

Now in terms of investing, a viewer is an investor.

And if the business relies on long-term thinking and transparency, it will want shareholders

who also value long-term thinking.

So having the right audience is key, but to tell the best narrative, managers must also

frame the story properly to highlight areas of their business that attract the right

audience while repelling the wrong ones.

So if you've ever wondered why monopolies exist or why markets can swing from euphoria

to panic just so quickly, it's simply because investing isn't about just numbers.

It's about perception, narrative, and human behavior.

Now, let's dive right into this week's episode on mental models from art and economics.

Since 2014 and through more than 190 million downloads, we break down the principles of

value investing and sit down with some of the world's best asset managers.

We uncover potential opportunities in the market and explore the intersection between money,

happiness, and the art of living a good life.

This show is not investment advice, is intended for informational and entertainment purposes

only.

All opinions expressed by hosts and guests are solely their own, and they may have investments

in the securities discussed.

Now for your host, Kyle Greve.

Welcome to the Investors Podcast.

I'm your host Kyle Greve, and today I'm going to cover a variety of mental models from

art and economics, inspired by Shane Parrish's book The Great Mental Models Volume 4.

Now this book is interesting because at first glance, economics and art just don't really

seem to have that much in common, but Parrish did a great job explaining just why they

interact so well.

For instance, he writes that economics is as much science as it is in art, and that inside

of economics, the laws don't necessarily follow the laws of nature just as something such

as biology or physics.

This is largely influenced by things like narratives and culture, which are vital aspects

of art.

Now the first mental model that I want to discuss today is scarcity.

So the book points out that the fundamental problem that we face as individuals, groups,

and as a species is just how to allocate limited resources to meet our endless needs.

Because we have to close this gap to keep our species alive, we are forced to become more

creative and rely on our abilities to invent new technologies that make this world a better

place.

I think where scarcity really shines is in its application to business.

Where there is scarcity, there will always be some sort of pricing pressure, and we'll

cover supply and demand here shortly, but just realize that when a service or a product

is scarce, it generally increases its economic value.

And not only does it need to be scarce, but it also needs to be something that's actually

desirable.

If it's undesirable, it doesn't matter how scarce it is because no one's going to want

it.

Now one thing that I've learned over the years of thinking about things like luxury is

just how good many luxury companies are, specifically at taking advantage of scarcity.

Take a luxury brand such as Brunello Cuccinelli, for example.

So this apparel is incredibly luxurious and also high priced.

And if you want something, it can be somewhat difficult to obtain without the right connections.

For instance, if I want to buy something from them, I'd have to either shop online

or visit one of their stores.

And they actually don't have a store in my city, so my next alternative would be to

go to a premium department store, such as Whole Renfrew, which does carry them.

Now, I've checked it out before.

I tried on some jackets and they just didn't fit quite right.

And that could have been perhaps because the person that was helping me just wasn't great

at finding the proper fit, but it just wasn't really a good thing, I think, for the brand

and from my view.

Now there's pretty much no chance I'll ever buy anything online because the products

are very expensive, you know, a jacket.

The ones that I was trying on were $6,000, for instance.

And even if I wanted to buy, I actually don't trust the sizing would be right, given

my experience there and returning things by mail as a real pain.

So this is why many luxury bands refuse to have their products sold by third parties.

A business that takes even better advantage of scarcity and luxury would be something

like an airmass.

Airmass takes scarcity to a whole new level.

If you want to buy a bag from them, there are several steps involved that help create

scarcity that have helped airmass build their brand.

So let's say you want to purchase one of their high end bags like a Birkin.

When you go into the store, the sales associate will tend to try to get you to spend money

on cheap items first.

These might include things like scarves, shoes, belts or jewelry.

This is referred to as pre-spent.

The sales associate will generally aim to build relationships with customers who have already

spent, say, one to two times the price of a Birkin bag before making them an offer to

actually buy the Birkin bag.

So this strategy takes advantage of scarcity.

People who want the bags are willing to make other purchases first.

This is obviously great for airmass as they are making more revenue per customer and

they are building scarcity because obtaining the bag often takes some time and some effort.

So they're basically making their customers work towards eventually obtaining the bag

that they've always dreamed of owning.

And the real kicker is that once the sales associate makes an offer, they may have that

bag in just one color to offer to that customer.

Once you're offered it, you basically take it or leave it, but if you leave it, obviously

they have this limited supply, meaning that you may have to wait even longer to get one

either in a different color or even in the color that you want.

Airmass reportedly makes approximately 100,000 bags per year.

So if they wanted, they could easily increase their production to better meet demand, but

this wouldn't obviously satisfy their goal of creating scarcity.

Now, remember, scarcity is only built when the demand for it is sufficiently high.

If airmass manufactured a million bags, it would definitely have fundamentally changed

its core business model, which it 100% wants to avoid because it would hurt the brand's

reputation.

And in luxury, that's really everything.

But scarcity has another side.

I mentioned earlier that scarcity creates a lot of innovation.

And part of why innovation tends to be a net positive for society is that it simply

just lowers prices.

When you have competing businesses selling commoditized products, the one that can sell at the lowest

price is off in the victor.

Look at Costco.

It's nearly impossible to find a store that can compete on everyday pricing with Costco.

Simply because its business model is very, very strict about keeping their gross margins

at a specific number.

And because they run such a lean operation and because they're able to utilize scale economics,

they're able to constantly sell products to their customers much cheaper than pretty much

anywhere else.

Costco can also take advantage of scarcity, but in a much different way than airmass.

Instead of trying to create scarcity, it removes it from the equation as much as possible

to basically differentiate itself from competitors.

So Costco can increase the supply, for instance, of its products by partnering with suppliers

who can then sell in bulk to Costco.

Sometimes they have a supplier where Costco is literally their only customer.

So Costco can increase the supply available to its customers, which is why they can sell

at such a cheap price.

Their competitors, on the other hand, can definitely not take advantage of this simply because

they just don't have the same scale or the same relationships with their suppliers to buy

in such large quantities and get the same volume discounts that Costco can.

So if Costco were to shrink in size and reduce their customer count, it would be a very,

very bad outcome for them.

This would then force them to order their products in lower volumes, which would increase

prices and they wouldn't have that same differentiation compared to competitors.

Now I like businesses that take advantage of scarcity, but admittedly, it's not a

feature that I require from my investments.

Totally all of my businesses face competition, and I don't consider any of them to be true

monopolies.

But if you can find or create scarcity somewhere on your supply chain, then that can help improve

your business model.

For instance, one business that I own that I won't name sells a variety of wood trust

products.

This doesn't seem very differentiated at first, after all they've identified hundreds

of acquisitions across their geography, but they have created scarcity by automation.

They're only a handful of competitors using it, and because this business can acquire it,

it can rapidly improve its margins versus its competitors.

So while the end product isn't scarce, the way they manufacture it is quite scarce,

which should accrue additional margin to them, allowing them to compete even more because

it can then manufacture the product at a larger discount compared to their peers.

Now I want to transition and discuss supply and demand in some detail here.

So supply and demand work very well with scarcity.

As I mentioned earlier, if a product is scarce, it can generally be priced higher than

products perceived as being less scarce.

Supply and demand is what really sets market prices.

The easiest way that I like to look at this is by examining businesses buy and sell orders

inside of the stock market.

So an individual stock follows the laws of supply and demand just as a commodity like orange

or oil does.

When a stock has increased demand, more and more buyers enter the market, and they want

to get their orders filled as they will bid above those market prices.

If multiple bidders bid above market price, then the stock simply will go up.

And it works both ways.

If a business expires lower demand, then prices tend to fall because there are more sellers

and there are buyers.

In that case, the seller will place their ask below the market price and if they want

to get filled, they will have to go lower and lower creating selling pressure and driving

the price down.

So markets are said to be efficient because they price assets when supply and demand are

relatively stable.

And prices are approximately close to intrinsic value.

The market is supposed to be efficient at closing that gap.

But there are clearly holes in that theory.

So I just looked at Apple's 52-week high and low.

Now everyone listening to this is going to be familiar with Apple.

It's a $3.7 trillion dollar company that sells products that is used by a large percentage

of the population, especially in the Western world.

And yet when I look at the 52-week high, it's about $289 versus the low of $169.

And this means that Apple has fluctuated about 26% above and below its midpoint, which

suggests a significant amount of volatility in supply and demand for Apple's stock.

Yet, the business continues to sell more and accrue more and more profits.

So the longer that I invest, the more I really realize that nearly every single business

out there is a lot more cyclical than I'd like to think.

The best businesses are the ones that can buck this trend.

If the world is in a recession, it can still thrive.

If the economy is firing on all cylinders, it just rides that tailwind.

This is an exciting fantasy, but the longer I'm in the market, the more I realize just

how much I've diluted myself into thinking that this is true for a large percentage of

companies.

The fact is that even the best and largest businesses are going to be sensitive to economic

cycles.

And that is because of supply and demand.

And the best proof for that is to look at recent events which have fundamentally altered

the supply and demand curve.

COVID is probably the best example that I can think of.

As the world essentially shut down, businesses were obviously very adversely affected.

Put another way, demand for many products and services was disrupted on a very massive

scale.

Many businesses that thrived on having customers were forced to rely on government relief

just to stay in business.

While most retail businesses suffered from lower demand, some actually benefited from

a surging demand.

For instance, Amazon.

We all know Amazon.

They ship products to customers so they can shop online.

And that was a direct beneficiary despite pretty sharp decline in retail demand.

Between December of 2019 and December of 2020, revenue went up 37% while EPS improved

81% for Amazon.

Today, many commodity businesses are doing quite well, especially when you look at something

like gold.

Gold is a direct beneficiary of the supply and demand curves.

Gold has become an increasingly important commodity simply because of several factors including

central banks buying it up, inflation fears, geopolitical instability, lower interest rates,

and stronger investor demand.

All this has just created more demand for gold, but gold like all precious metals is a resource

where supply cannot necessarily jump up to meet demand, which is why gold has appreciated

so much in price over the past few years.

I'm looking at some figures for gold supply between 2024 and 2025.

Gold supply has only jumped by 1%.

Since 2024, when gold was around $2,200 an ounce, it's now $5,100 an ounce.

Gold has been a great beneficiary of the supply and demand curve.

Now, I'm personally not the type of investor who actively seeks businesses in highly

cyclical industries or assets.

I prefer much steadier ones.

The problem with more cyclical businesses is that you need a very, very clear understanding

of just how that cycle works.

If you are wrong on the timing, you can get absolutely destroyed.

If you buy a cyclical top, it generally means there's one of two outcomes.

One, you lose a ton of money on the cycle down and then you end up selling at the bottom.

Or two, you tie up significant amounts of capital for the next up cycle, which can obviously

run multiple years.

Now, I obviously never look for the first option and even though unfortunately it happens,

and the second just doesn't seem to be the best use of capital to me.

If I could understand a product cycle better, okay, well then that maybe leaves a third

option, which is by the bottom of the cycle and then wait for it to go up and then sell

at the top.

Now, this obviously sounds good in theory and I think this is why cycles are attractive

to a lot of investors, but I just personally have very limited experience trying to do this.

And on the times that I have, I've been largely unsuccessful.

As a result, I just tend to try to find businesses that are at least optically less sensitive

to cycles and can rise at a good clip over time with a general increase in GDP growth

and inflation, but also have other advantages that add additional return.

And even in the businesses that I do own, I like looking at them through the lens of supply

and demand, especially when analyzing how they stack up against competitors.

So I love businesses that have unfair advantages.

And even though they might operate in competitive fields, they can capture a larger market share

or invest more in improving their products compared to competitors.

For instance, a low cost supplier might have better operating margins than its competitors.

This allows them to spend more on things like advertising and R&D compared to competitors,

further strengthening their competitive advantage.

Now, part of what I think makes a business attractive is its ability to leverage optimization.

This is the next mental model that I want to cover.

Parish makes a great observation that optimization is really like finding the best way to pack

your luggage so that everything fits.

In business, I like to think about this analogy a little differently.

Sometimes, it's more about packing the same amount of luggage in a smaller suitcase

or even packing more items into a suitcase of the exact same size.

But before we talk more about optimization and business sense, I want to tackle optimization

through the lens of one of my favorite topics, which is biology.

Parish makes a great point in this chapter.

When viewed through the lens of biology, optimization reveals some very interesting trade-offs.

In evolution, optimization means that organisms adapt to best suit their existence.

But if all organisms are chasing optimization, then why do organisms ever go extinct?

It's a great question, and while there are many possible answers, the book discusses

the idea that environments aren't really static.

First, environments go through pretty brutal and relatively quick changes.

And if you have an organism that is fully optimized for one environment and that environment

no longer exists, then so long to that species.

So a great example of this is the dodo bird.

I remember my mom talking to me about this when I was a kid.

So the dodo bird is now extinct, and it once existed on the island of Mauritius.

For multiple millennia, the dodo bird lived with basically no natural predators.

And this caused a whole bunch of evolutionary changes in the bird.

For instance, the bird no longer knew to fly, because it just simply didn't need to worry

about the high energy requirements to flee prey that didn't exist.

And this also allowed it to nest on the ground rather in trees as it didn't need to hide

its eggs from potential predators.

Now from an evolutionary standpoint, the dodo was optimizing for the environment that was

available to it.

The problem is that humans arrived in the 1600s, and they introduced predators to Mauritius

that quickly changed the environment.

Predators like docks, pigs, and rats all became predators that the dodo was just completely

unable to deal with because it was optimized for this zero threat environment.

Even roughly a century of human arrival, the dodo had gone completely extinct.

Now the extinction wasn't because the dodo wasn't optimized, you could easily say that

it was just too optimized.

If it had still been able to do things like just fly, for example, they might still exist

today, but no longer as a flightless bird.

But because it was optimized specifically for its environment, it was completely unable

to handle the changes that occurred.

Now how does this look in a business context?

The fact is that business environments change over time, and this is part of why capitalism

is just so brutal.

Not only do you need to defend yourself against competitors who are looking to steal your customers,

but you have to deal with changes in the world, whether that's interest rates, technological

innovation, changing preferences, monetary policy, the list is, you know, really endless.

And this is why businesses can work like gangbusters for a time, then just recede into

obscurity in a relatively short period.

The first business that really comes to mind as a good case study of this is Peloton.

So Peloton was set up to absolutely thrive during COVID-19, simply because many of its

competing products or services such as, you know, just going for a spin class or going

to the gym were heavily impacted by shutdowns.

People who went to spin every morning could obviously no longer do so, and they needed

to find some sort of alternative.

One such alternative was to just simply do it from home.

So the environment shifted very quickly, and Peloton was set up to capitalize on it.

On November 8, 2019, Peloton shares traded at about one cent, and by the end of 2020,

shares were trading at $163.

Now the problem for Peloton was that it didn't account for the high likelihood that its

environment was completely unsustainable.

There was a very low chance that demand for their product would remain at these elevated

levels, but they progressed forward as if it would.

So they dramatically increased production, heavily investing in their supply chain capacity.

They increased their hiring pace to keep up with demand.

They even spent $400 million to acquire a production facility in Ohio to add in house

capacity.

Now, had the COVID environment been the exact same, this probably would have worked out

brilliantly for them, and who knows what their market cap would be at today.

But that's not what happened.

During COVID, you know, these bikes had so much demand, there were these month-long waitlists,

and the business was actually criticized for being unable to keep up with demand.

Now when you look at it just at the face value, this is a pretty good problem to have.

But then, you know, they basically over-optimized.

As the environment began to normalize, inventory started swelling up with unsold bikes.

All the new employees that were hired to keep up with demand became a waste of resources.

And the new manufacturing facility that they invested in, which initially seemed like

a competitive advantage, became a liability.

Now, unlike the Dodo bird, Peloton, it's still alive.

But its stock price today is just $3.76.

So while it exists, it's now relegated to a relative obscurity because it was optimized

for an environment that was highly likely to regress to the meat.

Now, part of Peloton's weakness was that its products were in a very niche market.

They were after all specializing in a very specific market.

Not only fitness, but specifically biking, and not only biking, but spinning in place.

Not in some sort of spinning studio, but at home.

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So this brings us to the next animal that I want to discuss, which is specialization.

So here's what Paris wrote about specialization.

Specialization is when a person, group, or nation focuses on producing a particular

good or service, intending to be able to do it in less time, at a higher quality, and

or at a lower cost.

For an individual, it's a microeconomic specialization.

For a nation, it's a macroeconomic specialization.

A one thing involves a trade off because it means not specializing in something else.

Now specialization is something that I find pretty fascinating because without it, humans

wouldn't be where we are today.

I've recently returned to the exceptional book Guns, Germs, and Steel.

And one of the premises of that book was that certain countries advance at a much faster

rate than others, simply because they specialize in things like food production.

Because they were able to produce food on less land in less time, people in those societies

could then venture out and use their brains on things other than finding food or farming.

This is why they develop things like government and highly organized societies.

So if you look at America in 1776, America was basically a nation of farmers.

About 90% of the population's workforce was in agriculture.

But by the 1930s, that had decreased heavily to about 21%, and today, it's just one

to two percent, and even within that cohort, a large percentage of the people are basically

just operating automated machines.

Now specialization also helps create trade.

When you can do things other than farming, such as making clothes or weapons, you open

yourself up to trade with others.

And in many societies, they traded with people in far off lands, allowing them to travel

and seeing what other technologies existed that could then be brought back home.

So we can think of specialization in sports terms as well.

So when a sport like basketball, there are multiple players on one team.

And on that team, you tend to have a different mix of players who specialize in different

things.

And the teams that win tend to have the best mix of specialists.

So you might have your superstar player who simply excels at putting the basketball

in the hoop and scoring a lot of points.

But surrounding that player, you might have a ball distributor who excels at getting open

shots for their teammates.

Then you might have a few players who are just really, really good at shooting specifically

three pointers.

But you know, basketball also isn't a purely offensive game.

You might then have a few players who are defensive specialists.

You might play these players, late in games, and get them to guard the opposition's best

offensive players and just make their lives a little more difficult.

Then comes the added difficulty that many of these players have a mixed blend of specialties.

Some might be great at passing and defense.

Some might be great at threes and passing but horrible at defense.

A good team finds a right balance at the right time to put the best possible lineup of

specialists out there to win the game.

But when I think about how many of the great investors invest, they have taken a more

generalist approach.

Investors like Warren Buffett, Charlie Munger, Lee Lu, and Peter Lynch invested across

multiple industries.

And I doubt any of them would have been nearly as successful if they'd focused purely

on one industry.

There are some specialists out there who have thrived.

Someone like Derek Pilecki who my co-host Clay has interviewed before is a great example.

He invests primarily in the financial sector and is built a career on beating the market

by investing in small and mid-cap companies in that sector.

But the majority of the world's best investors tend to be generalists who invest across

different sectors and even in different geographies.

So while I think specialization is important for most people in most fields, it's not a

prerequisite for success in investing.

Part of what makes specialization powerful is that it allows you to admit what you do

not know.

This was a huge strength for Charlie Munger and I think it really helped him retain a

high level of curiosity through his very long and successful life.

So no matter what you specialize in, just remember that you'll never know everything and

it's very important to learn from a variety of fields.

Warren Buffett has always been a fan of capital efficiency metrics such as, you know, return

on invested capital and return on equity.

Buffett once said, at Berkshire, we would love to acquire businesses or invest in capital

projects that produce no return for a year, but could then be expected to earn 20% on

growing equity.

Now this leads to our next mental model, which is efficiency.

Parish notes that efficiency is the optimal path to achieving your end.

If you think of it through the lens of a video game, it's basically, you know, getting

the most points in the least amount of time so nothing is wasted.

But in economics, efficiency is how well resources are distributed.

Let's look at a theoretically efficient economy.

In this fiction, all companies earn the highest possible revenue with the lowest possible

costs and consumers receive the highest quality product at the lowest possible price.

Now, unfortunately, this doesn't exist in reality.

Capitalism is truly brutal and a business that isn't constantly trying to improve is

more likely to cease to exist than to be maintained over an extended period.

Because capitalism is so brutal and competitive, businesses are constantly fighting to maximize

revenue while maintaining or minimizing assets and spending.

Businesses which don't pay attention to these crucial details are just not long for this

world.

Then, as a consumer, it's quite easy to realize that we aren't getting the lowest

price possible on everything that we buy.

For instance, in Canada, where I live, we have among the highest prices for mobile coverage

in the entire world.

For instance, Canada's cost per gigabyte of data on mobile devices is about 25 times

out of France and 1,000 times out of Finland.

So if we want a cellular device, unfortunately, we have no option.

We have to pay.

Now, the Buffett quote that I mentioned earlier is wonderful because it really highlights

what Buffett looks for in his investments.

I won't comment so much on the patience part because it's not relevant to this mental

model, but the part about the 20% returns on growing equity is very, very relevant.

Buffett understands efficiency at a very high level.

Not only does he search for businesses that are generating profits, but he also wants

businesses that will leverage efficiency as they grow.

If you buy a business that's generating $20 million in profits on $100 million of

equity, you have qualified for Buffett's ROE number of 20%.

But they don't necessarily need to grow fast, but they'd like them to at least keep up

with inflation and maybe have some latent pricing power.

For a business to grow, it must reinvest its earnings, and this is where the efficiency

angle really comes into play.

So let's look at the example I gave earlier.

If the business invests $20 million of its profits back into the business, it will now

have $120 million in equity.

If the business is efficient, it should then generate $24 million in profits.

But you can probably see where the hard part is here.

If you constantly are reinvesting profits, you really have to evaluate where you are

spending that money.

Some businesses like C's Candies cannot actually reinvest profits, and therefore they pay a

very substantial dividend to Berkshire, which then reinvest it into other businesses.

Now this doesn't make C's a bad business by any means, as it's still very capital

efficient.

When Buffett bought it, it had an ROE of about 25%.

The difference between a business like C's and one such as Geico, especially in its

earlier days, is that Geico could reinvest a large portion of its earnings back into

the business.

If you want a business that can truly compound, this is a magic ingredient.

Geico was able to reinvest in things like advertising, which would deliver benefits to

the business not just a year from today, but potentially over multiple decades.

Now if you can maintain an ROE of 20% while reinvesting 100% of your profits back into

the business for decades, that's a business that you should probably be backing the

truck up on because you can easily pay up for these types of businesses and still generate

incredible returns.

But finding a business that can do this is not easy.

For all the investors out there, you need to not only look at a company's capital efficiency

metrics, but you also have to evaluate its future reinvestment opportunities and whether

it can continue to reinvest at a high rate above a reasonable hurdle rate, but also evaluate

its future reinvestment opportunities and whether it can continue to reinvest at these

high rates.

But even if you find a business that pays a small dividend or maybe occasionally buys

back its own shares, it doesn't mean the business is not being efficient.

So let's say a business can only reinvest 50% of its profits at 20%.

And if it reinvests more than that, the return drops so let's say 5%.

In that case, it can be better to pay a dividend and avoid deploying that capital in an inefficient

way.

And if the company has a cheap share price and maybe gets a return above 20% back by

buying its own shares, that's another great use of capital.

So you must look at a company's ability to deploy capital efficiently and assess what

kind of job they're doing.

This is not easy and it's not something that comes naturally to the majority of CEOs.

So look closely at what they're doing, why they're doing it, and think critically.

Now one mental model featured in this economic section of the book that I really enjoyed

was a one on monopolies and competition.

Now competition is actually good for markets because as I mentioned when we looked at efficiency,

the more competition there is, the more businesses tend to create better, cheaper products

for customers.

You can look at the automotive industry as a great example.

Yes, cars have gotten more expensive even on an inflation-adjusted basis, but there

have also been large changes to vehicles over time.

During 1970 and today, inflation-adjusted vehicle averages, I believe in the US, have

gone from about 28,000 to 49,000 according to the Federal Reserve Bank of St. Louis.

But during this time, vehicles have also become much larger, much safer, much more fuel

efficient, have longer life spans, better performance, and have much more advanced electronics

on board.

Now you can argue that the high levels of competition inside of the automobile industry

have created better safer and cheaper vehicles for consumers.

But there are other industries where competition kind of gets distorted.

I mentioned earlier how expensive mobile coverages in Canada, and that's because in Canada,

our mobile carriers are oligopoly.

Now an oligopoly is a market structure in which a few players dominate the market.

The problem with oligopolys is that they create an environment that just reduces competition.

And when you have little to no competition, you can do things like raise prices with little

to no repercussions.

So back in 2013, there were actually some rumors going around that Verizon would come up

to Canada.

But the oligopoly made of bell, shawl, and rogers, made enough of a fuss about it to

get that narrative completely blocked, which reduced the potential competition, which would

have been great for consumers, and obviously not so great for the existing oligopoly.

When the government can interfere on behalf of a company, it can be very, very good for

the business, and not so good for the consumer.

Knowing this, most people in the general public tend to dislike when oligopolys.

Generally speaking, the more options you have, the more you can shop around and find the

best price.

When you have to go to one place to buy something, you're basically at the mercy of the business

to just pay whatever they decide to charge you.

And this is why you see anti-minonopolistic regulation all over the world.

At times, the government just simply has to step in to block mergers to avoid dealing

with anti-competitive behavior.

A more recent example of this is Live Nation, a business that owns several companies across

the concert value chain, including things like ticketing, promotion, venues, festival,

management, merchandising, and streaming.

It's no surprise that Live Nation was part of John Malone's Liberty company before being

spun out.

Malone understands the power of monopolies as well as pretty much any other businessmen

that I've come across.

And if you want to learn more about them, I covered him in a lot of detail on TI-P797,

which I'll be sure to link to in the show notes.

Now Live Nation was a target of a US anti-trust trial regarding its monopolistic position over

parts of the entertainment industry.

But Live Nation ended up coming to a settlement.

The deal basically caps the ticketing service fee at 15%, and allows venues to sell tickets

through competitors rather than exclusively through Ticketmaster, which is obviously owned

by Live Nation.

Live Nation was also required to divest from several exclusive booking agreements with

amphitheaters, creating about a 280 million US settlement fund.

Now, this is a case where it's probably not good for Live Nation's value, but it shows

that the government is at least trying to ensure that the public isn't being completely

taken advantage of by a business with very clear monopolistic powers in an industry.

Monopolis are fascinating to me because as a consumer, you obviously don't really like

to see them for the reasons that I've given.

But putting on my owner's hat, they tend to be very lucrative.

So there's kind of constant push and pull regarding them that investors have to justify

in their own way.

Now, while I don't look exclusively for monopolies, I do like businesses with minimal competition

because it protects their margins and their growth potential.

One thing I think the market gets wrong is in believing that you must search exclusively

for businesses with monopolistic tendencies just to succeed.

I can't tell you how many times I've heard criticism of some of the businesses that

I have that have been exceptional winners.

It usually goes along the lines of, but they have no barriers to entry or they have similar

products to competition.

And while these are valid points that definitely have to be addressed, businesses with seemingly

competitive markets can still grow very fast for long periods of time.

Look at all the incredible consumer brands out there.

Coca-Cola, PepsiCo, Starbucks, Chipotle.

Our businesses operating in highly competitive landscapes where their products are largely

undifferentiated, yet they have been incredibly successful at creating a lot of shareholder

value over long periods of time.

So even when you're looking at a business that on the face of things don't appear to

have monopolistic tendencies, it doesn't mean that it can't make great investment.

The thing about business is that many businesses have advantages that aren't the easiest to spot.

Coca-Cola and Pepsi have incredible brands.

So even though their product might not seem so differentiated from others in their industry,

when you really dig in and think about their advantages, you realize that they are incredible

businesses.

So in both these cases, they own several competing brands.

If you look at the back of a bottle of your favorite soft drink, there's a very good

chance that Coke or Pepsi probably owns it.

And since these businesses are also so large, competitors simply cannot produce their drinks

at the same low price that they can.

They simply just don't have the scale benefits.

And since these businesses have products that customers really want, customers who include

grocery stores or convenience stores are basically forced to carry their products.

If they choose not to carry them, they run the very real risk that their competitors

across the street who do offer that same product are just going to steal their customers.

So while I would never call Coke or Pepsi a monopoly, both these businesses are just so strong

that they control a market share that will be very, very difficult for a competitor to

steal, even though they've been trying to do so for well over 100 years in Coca-Cola's

case.

Now the final mental model from economics that I want to discuss was one that I felt

I be remiss not to mention.

And that's bubbles.

Now bubbles are nearly always timely, but with all this talk today of AI being in one,

I think it's a metal, metal worth looking at.

Here's how parish defines a bubble.

Bubbles are an emergent property of markets, tend to have no single clear cause or to be

underpinned by deliberate fraud.

A financial bubble occurs when the price of an asset increases on enormous, even exponential

amount in a short period of time due to buyers expecting continued price increases.

This is a good definition.

You'll note that it makes no mention of an asset's intrinsic value to truly differentiate

between speculation and investing.

That is a key ingredient.

Value investors tend to invest in assets where price and value are completely divergent.

Whether they look to invest in businesses with rising intrinsic values where the combination

of that rise in value and the potential re-rating will deliver their returns.

Investors are much less worried about what happens to the price of their assets in the short

term because they're confident that in the long term, the asset will have a higher value

than it does today and will therefore also likely command a higher price.

Now using multiple mental models to think of bubbles, we can also use supply and demand,

which I've already discussed.

A bubble occurs when there is significant brine pressure as more and more buyers want

to own the assets and hopes of selling it to somebody else at a lower price.

The other big differentiator for a bubble is that it obviously pops at some point.

This means, unfortunately, that a large percentage of the losers and bubbles tend to be less sophisticated

retail investors who end up buying from institutions or investors who just have a better view

of whether a bubble has formed and can exit before it pops.

I will say it's very hard to know when a bubble will pop and even if you own an asset

that's going through a bubble and you're completely wrong on the date but decide to sell

a little bit earlier, it's probably better late than never because you're going to lose

a lot of money if you just hold the bag during a popped bubble.

The paradox of bubbles is that usually they're good and bad simultaneously.

Now let me explain that.

When you look at modern bubbles such as those in trains or the internet, it's obviously

a bad thing that investors piled into these investments and eventually lost a ton of money.

But the good part is that we have a really good system for moving freight by train and

the world with internet has drastically changed our lives.

You can argue that maybe it hasn't changed our lives for the better but it's definitely

made it more convenient in a lot of different cases.

The best case scenario is to allow others to take part in the investing part while you

sit back and wait for the technological marvel to just improve your own life.

Now, I want to transition here to some of the mental models from art that are we're

spending some time thinking about.

So the first mental model that I want to discuss from the book is audience.

Now, the opening sentence in the chapter is the concept of an audience helps us explore

the interaction between what we know and how it is experienced.

Now, the fascinating part about the audience that comes to mind for me is the interaction

between a business and its shareholders.

In one of Buffett's shareholder letters he wrote, in the long run, a company's shareholders

will be the shareholders that the company deserves.

Part of this delicate dance between a business and its audience of shareholders is just

how information is passed from the business to its shareholders.

Based on how a business behaves, whether that's the content in their shareholder letters,

the institutional shareholders they've attracted, their levels of transparency or opaqueness,

how they strategize their incentive structure, whether they think long term or how insider's

street their own shares will largely determine the picture that they paint for potential investors.

There are many winning attributes that investors can look for in a business.

You want transparent managers who are willing to admit mistakes or short term problems

that the business is going through.

You want a business with incentive structures that hopefully align management with owners.

You want companies that treat their shares like gold, not like toilet paper.

And you want a partner with managers who are focused on the state of the business in

five years and not on just beating analysts next quarterly KPIs.

You'd also like to see managers who have a large percentage of their net worth tied

up in the company that they manage to make alignment even more powerful.

Parish writes, some artists extensively study their audience to cater to every detail

of the work to them.

Now taking too far, the consideration can change the artists as they pander to the whims

of the crowd.

Other artists are less concerned with public reception and choose to create what they wish,

hoping that it finds an audience.

Now, if you think of a company and its management as artists, they can often paint a picture

that attracts the wrong type of investors.

Let's say you have a business where management owns a very small share of the float.

They're constantly giving short term guidance.

Their earnings calls are them just discussing guidance on a quarterly basis and how they're

doing against those numbers that they're forecasted.

They never discuss mistakes, instead cherry picking on their wins, and they strategically

dodge questions about any of their prior mistakes.

They're also trying to currently raise money and are partnering with investment banks

that tend to have very high levels of turnover.

Now this is a business that's likely going to attract shareholders who are much more

short term in nature.

Think of momentum investors, day traders, and less sophisticated retail investors.

A business like this will unfortunately pander to the whims of the crowd.

And in doing so, they often open themselves up to anything from low-level dishonesty to

outright fraud.

Now, a business that has to consistently meet analyst forecasts, unfortunately, tend to

do stupid things over long periods of time, just like an artist who rose to prominence

for their unique style only to pander to their audience.

Degrading their quality, a manager can do the exact same.

Instead of managing the business to improve it gradually, it manages the narrative to

attract short term oriented shareholders.

And Ron is a terrific example.

And Ron's management knew that analysts had a certain expectation for the business.

And if those expectations were not met, their share price would be punished.

So instead of showing the large fluctuation in their business's fundamentals over time,

they just focus on managing the narrative by just fabricating their financial numbers

to make the business look a lot better than it actually was.

They did things like booking future revenues immediately.

They created off-balance sheet assets to hide their mounting piles of debt.

And they structured deals that booked in accounting profits with basically no economic

benefit to the business.

Now had Anne Ron take a no-long-term approach, admitted to its shareholders that outcomes

would fluctuate, it might still exist today.

But because they painted a picture that was not representative of reality, they no longer

exist today had to lay off 4,500 employees and saw two billion other pension fund invested

in Anne Ron stock go to zero.

So if you're a long-term investor looking at potential investments, you want a business

and a management team that wants an audience of very long-term investors.

I've already covered a few things to look for, but you should also pay attention to guidance

because it's a very easy way to figure out what kind of relationship management wants

with investors.

Guidance is often given simply because large institutions that have invested in a business

want regular updates so that they can share these with their own investors to help manage

their own investments.

But there are many great businesses out there that just flat out refuse to give guidance.

Simply because they know they're probably going to be wrong on their forecasts.

If you give guidance, you give yourself very little room to be wrong.

If you're wrong about something or have a bad quarter, you're going to upset a large

portion of your shareholder base and increase likelihood of losing shareholders and therefore

a decline in price.

If on the other hand, you just skip guidance, you're basically signalling that you are

a long-term focused business.

If you can admit to your shareholders that quarterly results will vary and that you will

need to live with that, you'll attract investors who are more likely to withstand the volatility

of the market.

As a business, this is the type of partner that you want, as you know your shareholders

are less likely to panic sell your stocks.

And they're much more likely to help you with future financing if they are required.

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Alright, back to the show.

Next we look at the mental model called contrast.

The book outlines a great example of how pick pockets work.

So if a pick pocket were to walk past you and just shove their hand in your pockets,

they would probably get caught and be quite unsuccessful.

So the rely on things like contrast to fool you into thinking that they maybe just accidentally

bumped into you rather than just stealing your wallet.

So contrast is about comparing two distinct things to produce a very specific outcome.

Painters use light next to dark, composers use silence next to sound, and writers place

tragedy beside comedy.

The point is simple.

We understand things more clearly when we see them relative to something else.

The best analog for investing was gifted to us by Charlie Munger.

In his excellent speech on the psychology of human misjudgment, which I've discussed

in detail in TIP 793, which I'll link to in the show notes, I discussed one great mental

model that Charlie gave us, which was the contrast misreaction tendency.

So the problem with contrast is that it can often hide things, just like the pick pocket

of virtue or attention, while stealing from you, our minds can also play similar tricks

on us.

For instance, when looking at company evaluations, humans tend to fool themselves.

In a bull market, a business trading at 25 times earnings while growing at 10% might

seem like a complete bargain, yet in a bear market, a business that is still growing at 10%

might seem an expensive trading at 10 times earnings.

Or even if you remove market perception, you can also look at the interest rate environment.

In COVID-19, companies were borrowing money hand over fist at near zero interest rates.

Then, they were using that money to buy back their own shares.

Now, when you can access cheap capital, and your shares are trading at a better yield

than short-term bonds, this can look like a great proposition.

And when interest rates are near zero, your shares can still be quite expensive, and yet

still have a better yield than those short-term interest rates.

The problem with both of these scenarios only comes apparent once things tend to normalize.

For instance, during COVID, businesses were investing money into their own shares while

firing their workforce.

So not only were the optics not great, but the capital allocation decisions were also

pretty ugly.

So if you had a business buying its stock at, let's say, a 2% yield, that just wouldn't

be a very good investment if you'd reinvest into the business at, say, 12%.

And even at a 2% yield on buybacks, you could easily justify just paying a dividend since

shareholders could buy an index fund that earns 8% returns over the long run.

As contrast often leads people to misjudge things, it's a very powerful tool for examining

your own portfolios.

For instance, each year, I review my holdings and determine what returns might look like

in the next three years or so for each of my holdings.

I can plug in the current share price, apply a reasonable terminal multiple, adjust for

risk, and get a number that indicates what current returns are likely to be.

Now, this is very helpful for me in terms of the lens of contrast.

If a business is trading at an expensive share price, my forward returns will be low,

or even zero, or negative.

You can then look at past multiples for a specific business and its competitors.

Perhaps I'm wrong on the terminal multiples.

Let's say I'm too bullish, then maybe I'm going to apply too high of a terminal multiple

to each scenario, which is obviously going to give my forward return an unregulistically

high number.

But I can then reduce contrast by using that framework above.

I might do things such as looking at the PE range for my businesses and then apply

a reasonable number to the near future.

If I just looked at what the PE was during a bull market and I applied that in three years,

I'm going to get much higher returns simply because I'm using contrast in an environment

that is completely unsustainable.

That's why I like to look at PEs through both up and down cycles, then use something

in between the peaks and the valleys to get some sort of realistic number.

Another way to take advantage of contrast is when it becomes obvious that the market

is making a mistake.

If entire industries have validated PE ratios where you just don't believe that the high

growth is likely to be sustained, then you can help yourself simply by staying away from

these investments.

Yes, you may give up some short-term upside as these investments can go up for a time

before they get re-rated, but you protect yourself so much from buying the top and then

taking the right down.

Where contrast is most handy is when the market is contrasting stocks in a bear market.

This is when businesses that are growing at decent rates are price for failure or even

bankruptcy.

These are opportunities that can generate incredible multibaggers.

But you obviously have to be willing to do what other investors aren't by unloved stocks.

If you find a business growing at, let's say, 20% and yet it trades at a PE of just 10

where it's historical PE over the last decade was 20 times, that's a pretty good opportunity.

But other investors will simply stay away from them simply because they might see all the

other competitors in the industry trading for PEs far below 10 times.

Because they are, once again, contrasting against an unsustainable environment, they tend

to miss out on a lot of these opportunities with a lot of upside.

The final way that I like to think about contrast is when investors are looking at businesses

with compounding qualities.

The types of businesses that can reinvest 100% of their profits back into the business

at high rates return for a very long time.

What happens with these businesses is that investors use overly conservative numbers when evaluating

them.

And this can happen based purely on sentiment.

When sentiment is bad on an entire industry or theme, then others will apply lower growth

rates to all businesses in that sector.

But if you have a differentiated view that a business can continue to grow at rates maybe

closer to historical levels, then you can find some major winners in the market.

I believe software businesses that are deeply embedded in their customers workflows are a

great example of this today.

Many of them are having their multiples compressed and growth rate forecast reduced because they're

being treated like a low barrier to entry, SaaS business that can easily get disrupted

by AI.

Now, when looking at some of the best investor letters ever, I came across some very interesting

shared qualities that I brought up earlier in the audience section.

But what I didn't articulate then was that much of this has to do with another mental

model called framing.

Now, framing refers to what we see and what we miss.

We clearly focus most on what we see because it's simple for our minds to grasp.

When we look here, smell or touch something, it's much easier for our system, one to decide

whether we like it based on factors such as whether it's dangerous or not.

But when you were reviewing a company's earnings reports, quarterly calls, documentation

and presentations, you were viewing the business through the frames that they choose to display

to you.

While it's easiest to just focus on what you can see, whether that's if they're long

term oriented, if they're using value creating KPIs, it's also important to spend some time

on what's missing.

For instance, many business today use KPIs that I don't think are particularly useful

as an investor.

EBITDA is the main culprit.

The reason that I believe many businesses do this is that their earnings releases serve

as kind of marketing material for potential investors, specifically banks or other financial

institutions that may in the future provide the company with loans or buy its equity.

Since companies know that potential investors will read these documents, they can explicitly

highlight areas of their business.

The thing about EBITDA is it's a non-gap number, so a business isn't even actually required

to share it, yet the vast majority still do.

EBITDA is part of the framework of business can use to inform investors about its financials,

enabling them to compare them with competitors for growth and evaluation purposes.

But what I find most interesting about framing is when businesses go out of their way to show

specific KPIs that they believe are the most accurate representation of their economic

reality.

So in my portfolio, I have a few businesses with creative KPIs that I think do a really

good job of showing their economic reality and not relying on traditional accounting

numbers.

So the first to come to mind, which is actually two, are Luminatopagus.

Now, I lump them together here because they report identically and are also identical

in reporting to their parent company, Constellation Software.

Their primary non-IFRS, which stands for International Financial Reporting Standards,

KPIs, is something that they call free cash flow available to shareholders or FCF A2S.

Now free cash flow available to shareholders is a metric that is basically this, cash

from operations, less financial obligations, less maintenance catbex.

So the financial obligations of maintenance catbex numbers are numbers such as interest

paid on lease obligations, interest paid on bank debt or other facilities, transaction

costs on bank debt, repayment of lease obligations, interest dividends and other proceeds received,

and then property and equipment purchased net of proceeds from disposal.

So conceptually, free cash flow available to shareholders is basically the amount of

cash that belongs to shareholders, if the business decided not to make any new investments

or acquisitions or to pay interest.

You can also think of it as an internally generated cash available for future M&A inside

of both those businesses.

Luminatopagus frame this because M&A is the core of their business model, and they feel

that investors should understand that as the business grows, they're doing a good

job on acquisition front and are continuing to grow the free cash flow available to shareholders.

Now, if we look at how that metric has grown for both these companies, it's grown very

well.

So Topagus has grown free cash flow available to shareholders at a 59% kegge since it

went public, and Luminat has grown it at an even more astounding 92% since it went public.

Now, while these numbers are interested in a track, I don't think they've been the best

proxy for shareholder value simply because both businesses have relatively short histories

using this number, and my guess is if you could go back in time and see what the keggers

are with numbers that aren't reported to the public, they'll probably be a lot less.

But I still believe that over a long period of time, you know, when once Topagus and Luminat

are around for, say, a decade, the number will probably come down substantially and also be

a much better proxy for creating shareholder value.

So if you look at constellation software, free cash flow available to shareholders has actually

grown at a 17% kegge since 2018.

And over that same time period, the stock price has a 16% kegge or not including a very

small dividend yield. But as I mentioned in the framing mental model, framing not only shows what

you can see, but it's also important to consider what you cannot see.

So I mentioned earlier that most businesses use EBITDA, but Luminat and Topagus do not post that

metric on the quarterly financial statements or on their supplementary documentation.

That alone is a very important signal because it shows that they're not catering to investors

who optimize for it. And yet, they can still raise debt when they need it. No EBITDA reporting

required. Luminat currently has about $208 million in long-term debt. Topagus has about 347 million

euros of debt. So clearly, they're able to raise debt without bothering to report that figure.

And I personally prefer the free cash flow available to shareholders number as it's a much better

representation of reality for a business because it still removes the cash needed to keep a business

running, which EBITDA often misses. Another area where Luminat and Topagus are light on

is on adjusted ratios such as adjusted EBITDA. They do this simply because they end up

expensing a large portion of their share-based compensation on the income statement and then adding

it back in. Since Topagus and Luminat don't use share-based compensation, they don't really

need to add it back in to any of their figures. In the past, Constellation software are used in

adjusted net income figure, then added back the amortization of intangible assets. They stopped

important this a few years ago, but they believe that the investments into intangible assets

did not diminish an economic value, so they would add it back for monitoring purposes.

Two other metrics are very popular with SaaS businesses, which is what Luminat Topagus really

are engaged in. But they completely skip these two. So they are annual recurring revenue or ARR,

which is simply how much revenue the business is producing on an annual basis that is recurring in

nature. And then there's the Rule of 40, which adds revenue growth and EBITDA margins. The

Rule of 40 states that if the sum of those numbers is equal or greater than 40%, then you're in

good shape. Now, while I have no problem with either of these figures, I do believe they shift the

focus away from what I consider most important, which is cash flow. While Luminat Topagus are fully

capable of showing these numbers, it's not necessary because they just don't place that much

importance on EBITDA for the purposes of incentives. And they care a lot more about cash flow,

not revenue growth. So for those reasons, they just don't bother with either of these KPIs.

So framing is very important when you're looking at a business. Of course, you should focus on what

a business is trying to show you. But equally important is what a business is refusing to highlight.

If they refuse to highlight numbers such as EBITDA, it might be because they just don't need to

rely on this metric to show that they're generating a lot of cash. Lastly here, I want to go over a very

important mental model from art, which is plot. Now, plots are very interesting to me because

humans simply love telling stories, and we understand the world better through storytelling

rather than through vague or ambiguous facts. Plot helps us make sense of the world. But they can

also fool us. Parish discusses two potential red flags of plots or narratives. First, given two

stories, we can be swayed by the better plot. And second, narratives that we tell ourselves can

often blind us from conflicting information. So let's have a look at a historical example from

the book of how a better story resulted in a positive outcome. So Johann Kepler is best known as

one of the foremost early contributors to the science of astronomy and optics. But he was also a

great son. Let me explain here. So in 1615, his mother, Katarina, was accused of witchcraft.

Now in those days, for many people accused of witchcraft, the outcomes were let's just say

much less than ideal. She faced 49 different accusations all based on some form of cause and

effect narrative. Things like she hit the girl's arm and the girl's pain increased by the hour,

and now the child was unable to move one finger. Or Katarina had given her a harmful drink four

years previously, and she suffered inhuman pains ever since. Basically, when Katarina was around,

bad things quote happened unquote to others in her vicinity. Kepler, who had already defended

Copernicus from superstition, was great for this job. He noted every single charge against his

mother and used contemporary science to explain the outcomes for the so-called victims of his mother's

witchcraft. He helped explain the poor outcomes of the accusers in terms of things like natural

disease, a person's bias, family quarreling, or simply just mishaps. And in the end, his mother

survived unscathed. Now reading this makes me think of Morgan Howell's wonderful quote, best story

wins. Howell also wrote about this on his blog back in 2021, and in the article, he discusses

Yuval Noah Harari, and how he wrote the book Sapiens, which eventually became the most red

anthropology book that was ever written. And the most interesting fact about it was Harari's position

in terms of authority to even write this book in the first place. So Harari said, I thought,

this is so banal. There's absolutely nothing there that is new. I'm not an archaeologist. I'm not

a primatologist. I mean, I did zero research. It was really just reading the kind of common knowledge

and just presenting it in a new way. The point that Howell was making was that plot or narrative is

a lot like a form of leverage for the transfer of information. And the reason for that is that

stories wide in the arc of people that the lessons from that story can impact. If you have boring

stuffy information like how physics work and plan on portraying that to people using things like

math-based models and graphs, you're not going to impact a lay audience, only specialists.

But if you tell a story behind it that people can really resonate with, you can teach relatively

boring topics to a much wider audience and gain much more acceptance. The second problem is how

narratives affect our ability to update our beliefs. It's a well-known fact that humans prefer to

just stick with their belief systems that are very reluctant to change them. And this is even in

the case of conflicting information. When you think of confirmation bias, you understand exactly

what I'm saying. We prefer to look for facts that support our narrative rather than tear them apart.

This is especially dangerous in the world of business. Since the business landscape is constantly

changing, adjusting in a no particular order, you have to be willing to adjust your narrative and

relatively quickly if you want to optimize for good decision-making. I think this is the most

powerful part of the plot mental model. When we generate stock ideas, we are essentially writing

a plot for the thesis. And while I think plots are necessary for a good thesis, we also have to be

diligent about identifying holes in the plot. There's a section in the book that discusses a theater

rule called check-offs gun. It states that if there's a gun on set in Act 1, it must go off by

Act 3. Now the way that I interpret this when looking at my plots is that if there's a specific

catalyst that I'm looking for to unlock value, it needs to happen in a very specific time frame.

And if it doesn't, it's safe to say that that catalyst may never happen. And if that's the case,

the plot has clearly changed drastically, and it's a very good signal that I need to exit that

investment. One great example for me was on a business called Heritage Growth Properties.

The catalyst for the business was at a certain amount of its locations would be developed,

and the value of those developments would far surpass the company's market cap.

The problem was the development simply weren't happening. While a hole in the ground can be

worth a lot once it's covered by office towers, it's not worth very much until that happens.

And I felt that their execution was quite poor because it just didn't seem like the developments

which were the catalyst for a better stock price were actually occurring.

So once it was obvious that the catalyst hadn't happened, and I lost a lot of conviction that

it would happen any time soon, I just simply exited the investment. And I was quite lucky on that

one as I made annual returns of over 18% and yet the current price is about 77% below what I

initially paid for it. Now that's all I have for you today. If you want to keep the conversation

going, please shoot me a follow on Twitter at a rational MR, KTS, or connect with me on LinkedIn,

just search for CalGreve. I'm always open to feedback, so please feel free to share with how I can

make this a better listening experience for you. Thanks for listening and see you next time.

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