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.
00:31:44 · Deiya Pernas, Mikk
[00:31:44] S1: Yep. It's about... So so our only guarantee is, is public market investors. It's different for private market investors. But at the end of the day, we're going to make returns. We're gonna get paid if and when, if we're correct about the future company is gonna look like. We're only gonna get paid when the general participants start to see the company the same way we do. And the forcing function for that is improving fundamentals, is kind of value creating revenue growth. The company's scaling well and is dropping in the bottom line. They may be a two going to a three and then maybe someday going to a four. But eventually, maybe the market doesn't see it now when there... It's a two going to 2.5 or, you know, 2.5 going to, you know, three. But if the company continues along that path, you are guaranteed to make excess returns if the market sees things the way that you do. And the fundamentals, the improving fundamentals are a forcing function of that. [00:32:46] S0: Would you rather own a 10 out of 10 business becoming becoming a nine or five out of 10 business becoming a seven?
00:32:46 · Mikk, Deiya Pernas
[00:32:46] S0: Would you rather own a 10 out of 10 business becoming becoming a nine or five out of 10 business becoming a seven? [00:32:56] S1: So we would never own a business where new trajectory is going down, mainly because the mechanism I described to you is going in the other direction. And for us, you're only going to get paid when things get better and the market see things the same way you do. And you got absolutely big money, maybe it goes from 10 or nine and they get inspired. I don't know. But for us, it's a much more reliable way to make extra strides if you're betting on the improving trajectory of businesses. And clearly, the caveat is, yeah, this has to be a variant perception at the time that you're making the investment. [00:33:32] S0: Maybe it will have a too loaded answer, but, what causes investors to miss inflection points? Maybe this is the secret sauce, but maybe maybe there is something you can share.