00:24:05 · Dean Pernas
[00:24:05] S2: Yeah. For example, Sleep Number is one. So Sleep Number was a company... A a mattress company during COVID that you hear the share buybacks being bandied around by managers just because investors like to hear them for whatever reason. And Sleep Number essentially bought back $800,000,000 worth of shares when the company's... At its peak during 2021. I think it was trading at a 100 or something a share. And, essentially, cash... They depleted cash to zero. Demand for mattresses went down to essentially zero because there's a huge demand surge during COVID, and the company, I believe, went bankrupt. And they could have used that cash as just... They they could have put it in a much more rational way. But it's it's just... It's... To buy back shares pro cyclically versus counter cyclically is just the worst decision. It's like most managers have no idea what the valuation of the company is, and they kind of just do share buybacks to appease investors or to to prop up the share price for options or or whatnot. And that's just the the the worst thing you can do. And to go bankrupt because of of that is just such a horrendous mistake. Then you have the opposite side who's like Henry Singleton at Teledyne that buys back shares. He he existed forty, fifty years ago, maybe more. Buys back shares essentially when they're at decade lows, and he buys back aggressively. So buys back 40% of shares outstanding in the span of two weeks. That's an example of what to do versus what not to do.
00:25:30 · Deiya Pernas
[00:25:30] S1: Yeah. I think like Dean was saying, great litmus test, if they're a decent allocator or a great way to eliminate somebody is what... How their buybacks look like. Most management teams are very happy for for whatever reason, probably because investors seem to celebrate it without celebrate it unconditionally when a company announces about buyback and they'll do it at any price. There is no value considerations when they come go to buying back shares. And we all know that, you know, if you're if you're gonna add to intrinsic value per share, which is really the goal, which should be the goal of every management team, which it's not, but let's just say it is, then you're gonna wanna buy back shares when the price is low relative to the value of the company, not the other way around, not pro cyclically like it's usually done. But as far as maybe some... Something private market investors to take away from capital allocation decisions is just usually how patient a management team is, yeah, how patient a CEO is with maybe an acquisition, if they have evaluation discipline, if they are thinking tactically about opportunities putting capital work in those opportunities. You're looking for somebody who's almost very conservative when the situation calls for it, and then they can kind of turn it on and also be very, very aggressive when when the... And when an opportunity emerges. So that type of kinda, you know, personality, I I think, you know, is is is gonna be a very good capital I get.
00:26:56 · Mikk
[00:26:56] S0: Has you never never stopped learning? What's what's something you maybe changed your mind about when evaluating those CEOs? Maybe there was something you didn't see coming. They made a decision. You thought that it's it's maybe good, maybe it's bad, and then the opposite happened. Has there been anything like this recently?
00:27:14 · Deiya Pernas
[00:27:14] S1: Well, one of the things we changed our our mind about was, I guess, we realized that most CEOs, you know, they're not really aligned with shareholders in the sense that you might think. Again, the purpose of the purpose of starting, you know, a company and building companies, you're trying to maximize insurance value per share. That should be the goal of every CEO. But as you start to do more analysis and understand this business that a lot of CEOs, that's not their goal at all. Their goal is to maybe make the company bigger over the next couple of years. Bigger doesn't necessarily mean... Can make the company bigger in all sorts of bad ways. Just take off a bunch of debt, like, bad acquisitions. You know, the company's gonna get bigger, but the intrinsic value per share is gonna decline. So, a lot of CEOs are incentivized to maybe do what they need to do, in order to satisfy certain short term incentives or even some of the long term incentives that are, you know, that aren't exactly tied into interest... Intrinsic value per share. So a lot of it is, like, CEOs maybe just trying to, you know, boost revenue growth, boost EBITDA, make the company larger in order to get paid more and, you know, the the small the small period of time they might be a CEO instead of thinking instead of thinking about the bigger picture and more about intrinsic value. Just to give you an example, I remember walking into a Rolex store, and I I don't particularly like Rolex. I love the company in Rolex, but I I don't really like the brand that much. And this is when the secondary market was kinda going crazy for watches. You know, people were paying, you know, whatever, double what what they were... What the Rolex... A Rolex boutique was actually selling watches for. And I asked the, know, the boutique manager. Was like, oh, why hasn't Rolex just raised their prices, like, you know, 40 or 50%? It'd be just a windfall of, you know, revenue and profit. It actually dropped straight to the bottom line. And she's like... And what she told me, she's like, oh, the Swiss would never do that, which is the exact perspective you want a management team to have if they're thinking about intrinsic value per share, and they're not only thinking about the next four or five years. Because the Swiss know that, look. Yeah. Maybe we can get... Maybe we can take...
00:29:33 · Deiya Pernas, Mikk
Make a ton of money and get rich over the next three or four or five years just by doubling our prices. But over the very long term, actually hurting the business by doing that because we're taking advantage of a short term kind of dislocation or or opportunity. So that's what you're kinda looking for in management teams and CEOs, and it's very hard to find. [00:29:55] S0: Now while doing the research, I found you saying great company doesn't always mean a great investment. And you have this principle, which is trajectory over quality, where a mediocre company becoming good can be more interesting than a fantastic company beginning to deteriorate? [00:30:20] S1: Dean, you wanna take that? [00:30:21] S0: Could you elaborate, please?
00:30:21 · Mikk, Dean Pernas
[00:30:21] S0: Could you elaborate, please? [00:30:23] S2: Yeah. Essentially, it's trajectory... We care more about the trajectory of a company. So a company that's a company that's there's three three different buckets. A company going from bad to okay, okay to good, good to great, or great to just generational. That's what we care about more than more than the initial state of the company. So a company going from great to okay, it's a reflection of bad strategic mistakes they've made. And that's... That that inertia is kind of hard to... It's hard to overcome. And it's it's much more difficult to invest in a company where the trajectory is going down because you don't really know when that's gonna inflect up. So, essentially, that could be a company that's losing share, a company that... One example was Burberry. So Burberry from 2010 to 2020 just crushed it on all financial metrics. But the reason was because they're diluting the brand. They were essentially, going through outlets as opposed to going direct to consumer and taking advantage of Chinese tourists that that love the brand. And so then you had pictures of of women dressed head to toe in Burberry, and so it just killed the exclusivity of the brand. And so they spent the last five years trying to overcome that. And so it's... Even though financials are great, revenue is growing, margins were growing, the trajectory was going down. The motor was was, was deteriorating.