00:38:08 · Deiya Pernas
[00:38:08] S1: I don't know. I... EBITDA is one where if they're just focused on EBITDA... Like, own a company right now. I'm not gonna say the name of it. Oh, well, didn't say the name of it. It's Paysafe. It's company's trading at very low valuations. And all they have to do is pay down debt and it's gonna be a home run. The company has stated, they've declared that they're gonna get down to, I think it's around 3x EBITDA or 3.5 or something like that in a period of you know, a low period of over two years. And they, but they have stated intentions of what levels of debt they're paying down, but their short term incentive plan is tied to EBITDA. So, you know, a lot of times a management team may not have incentive to pay down debt, because it doesn't really do anything for EBITDA. And maybe the capital they're using to pay down debt, they could use to make an acquisition or they could use to make some sort of investment that isn't that great in order to kind of grow EBITDA. So there's a tension there between what we want the company to do, what they say they're gonna do, and how they're how they're getting paid on the short term. Even though paying down debt is definitely the right move for this company. It is... If you're focused on, again, increasing intrinsic value relative to per share price, you're gonna be focused on paying down debt because the company's overleveraged. You want them to maintain flexibility in certain environments. It improves their ability to kinda survive and grow share going forward. But, Dean, I I don't know if you have anything else to add on incentive comp or what comes
00:39:43 · Dean Pernas, Mikk
[00:39:43] S2: I would just say incentives aren't really a panacea for management making good decisions. Like, you can't be like, oh, because they're well incented, they are going to make the right strategic decisions for this company. Endo, for instance, the CEO owned 40% of the company. Like, he was as well incentivized as anybody on the planet, and yet he made just horrible decisions. And so, yeah, you can be incented to kingdom come, but but that still won't save you. Unless it's truly egregious, it's it's really not a a huge signal. It's like... As long as a comp has has got some share... Shares, some owner... Some some options, and there's some key KPIs there, total shareholder return, As long as it's in that ballpark, it's... You can have an entire range of combinations, and it's it's okay. [00:40:27] S0: Now I also read that you guys pay unusual attention to working capital. Why is that?
00:40:27 · Mikk, Dean Pernas
[00:40:27] S0: Now I also read that you guys pay unusual attention to working capital. Why is that? [00:40:34] S2: Yeah. So working capital is... It's it's vital in two in two different scenarios, and the other one's not so much. It's it's one's small companies that are growing very quickly that don't really have access to the credit markets, and so they have to rely on their own cash flows to to kinda survive. An auction is is or cash flow is like auction for those companies, especially for very small ones. So, essentially, a small company is growing very rapidly. They have to take all their free cash flow they generated and then plug it into working capital to support future revenue growth. And so if there's any type of hiccup in demand, they run out of cash very quickly. And then number two, it's for companies that have a lot of working capital needs relative to the revenue of the business, and working capital needs are going to change due to some step change. So it could be COVID, for instance, the supply chains... Because supply chains got disrupted. All of sudden, retailers needed to have two x as much inventory on hand as they did before. And so all of a sudden, they need to plug that up with cash because they require more inventory days on hand. And so those are the two instances in which it's pressing to care about working capital. [00:41:46] S0: Deiya, you learned bankroll management from poker. Could you could you talk more about the lessons and using this while analyzing those businesses today?
00:41:59 · Deiya Pernas
[00:41:59] S1: Yeah, as far as bankroll management, it really applies to kind of how we think about our own portfolio management process. Bankroll management poker, it's essentially like if you're trying to make money playing poker, trying to build capital playing poker, it's like you start off with a certain amount of money, but whatever it is. Say, you can even start off with a $100 if you're just playing online and playing small games. But whether you have a $100, a thousand dollars, or a a 100,000, the whole thing is the same. It's like, okay. Well, I have a thousand dollars. What game should I play? Should I play games where I have to put up, you know, you know, 50¢ dollar where I have to buy in for a $100, or can I play games where I can buy in for $5,000? And the rule of thumb in poker is that you should generally only play play a game if it's, you know, essentially what we're setting your bankroll is what you should sit down table with. And you learn very early on as a poker player because, you know, especially, you know, a lot of poker players are young, and they don't have the discipline to only sit down with 1% of their bankroll. A lot of people, it's called shot taking poker where it's like, okay. Well, usually, I play a game where I buy in for a $100, but I'm gonna... Now I'm gonna buy in for I'm gonna play a game where I buy in for a thousand dollar. And you quickly learn, like, if you're if you're undisciplined, no matter how good you are at poker itself, you can be the world's best poker player in the world. You can understand game theory. You can understand probabilities. Can understand all the exploits in the world, but you're going to go broke. You're guaranteed to go broke if you are not disciplined at bankroll management. So bankroll management in poker is a lot easier. The the heuristics are a lot easier. But what you learn is, like, playing poker for a very long time is just how important it is. And I don't know what philosopher said it, but there's a difference between, like, blood knowledge and, like, mind knowledge. It's floating around in your head. But once you've made all these mistakes in poker, it becomes part of your DNA to understand what do I need to do to stay alive? What do I need to do to protect myself so I can keep playing this game for many, many years? And in portfolio management, it's it's a very similar mindset.
00:44:10 · Deiya Pernas
It's like, okay. What are all the ways that things can go very, very wrong in portfolio management? Well, you know, concentrated positions, especially in illiquid type securities. There's shorting where, you know... Well, there's shorting and, you know, leverage where if the position that you're putting money in moves against you, it could become a bigger, bigger problem in the portfolio. There's average down, which can also be an area of what they call convex risk, where if the position moving gets you, it starts become a bigger and bigger problem because you're averaging down very aggressively. So there are all these areas of pitfalls that you have to be very, very, very careful in portfolio management. You And know, coming from the poker world, you just know that, hey. I'm just never gonna take that risk. I'm not gonna put myself in that situation. And it... It's it's a way to ensure kind of your survival, essentially, no matter what happens and stuff. We can have another 2008 and our portfolio is gonna be fine. Yeah. Sure. We're gonna take a hit, but then we're not... We're certainly not gonna blow up, you know, just because we understand kind of these certain rules and it's very it's very visceral, our application in this course.
00:45:20 · Mikk
[00:45:20] S0: Now when it comes to portfolio management and and in poker, the bankroll management, I mean, if you have this heater, you're you're you're playing well, a lot of tailwinds, hands are going as as expected and and better. You're winning those flips, which you should you should maybe lose statistically. When should you double down or or or what's the conversation maybe with... Between you two, like, okay, a stock is... You knew that... You know that it's... It keeps going up. You've made right decisions. So do you add... To buy more or what's what's the thought process there?