[00:03:00] Kyle Grieve: Welcome to the Millennial Investing Podcast. I’m your host, Kyle Grieve, and today we bring Matthew Peterson onto the show. Matthew, welcome to the podcast. 

[00:03:09] Matthew Peterson: Thanks so much, Kyle. I’m a big fan of the show and it’s a pleasure to be here.

[00:03:12] Kyle Grieve: I really enjoyed the origin story for your fun that you outlined to Guy Spierre.

[00:03:16] Kyle Grieve: For those in the audience who haven’t heard that story, would you mind discussing it in some detail? 

[00:03:21] Matthew Peterson: When that happened, when we did that podcast, he sort of sprung that on me. And so I wasn’t really expecting to ask those questions that were pretty personal. So I don’t mind sharing. I have a background in economics and math.

[00:03:31] Matthew Peterson: I went to undergrad at a small liberal arts school just south of you in Tacoma, Washington, called the University of Puget Sound. And the brief story is I always wanted to have this fund. So even in undergrad, that was, I was putting the pieces in place and I went out to Wall Street and I worked in risk management consulting for primarily Goldman Sachs for a billion dollar fund.

[00:03:49] Matthew Peterson: a bunch of years, Goldman, Morgan, and a few other firms, mostly in market risk, credit risk, et cetera. Earned my CFA designation. I was out in the UK during the financial crisis, again, building a calculator with Goldman and putting my savings together so I could set up and launch this fund. And it was, I was pleased.

[00:04:09] Matthew Peterson: It’s not, people on Wall Street don’t get paid millions right out of the gate, right? You still have. entry level positions, et cetera. So when I left wall street, I had saved about a half a million dollars and some of that was in retirement and I put a hundred thousand into the fund and we launched and it was a friend’s capital who gave me 25, 000 in my own.

[00:04:25] Matthew Peterson: And so that was actually 12 years ago, almost today. It’s been about 12 years. So when we launched, I had this very fixed runway and I knew this industry is very strange because a lot of the people that fall into it come from a very high net worth. position in the first place, which gives them a little more flexibility in their lives and whatnot.

[00:04:45] Matthew Peterson: When you come at it and you have a fixed pool of assets that are on the decline as you’re trying to ramp up a business, there’s a little more pressure guys been very helpful to me throughout the years. And we did that podcast together and he pointed out that early on in our discussions, he was giving me advice that I literally could not implement because it was expensive advice.

[00:05:03] Matthew Peterson: And I showed him a budget that I did keep in my wallet, and it was so frugal, it was hard for him to even comprehend. And it’s even hard for me to comprehend what we went through then, but we started from very humble beginnings, and we grew the fund to 3, 4, 5 million. Relatively quickly, we paused there for a little while and we’re still very small, but we’ve reached right around 22 million.

[00:05:27] Matthew Peterson: So we’re growing, we’re compounding and we’re raising capital. So things are moving in the right direction and we don’t have to be quite as frugal, although we’ve built some nice habits. So I know 

[00:05:36] Kyle Grieve: some listeners of the show are interested in eventually starting their own fund from scratch, just the way you did.

[00:05:41] Kyle Grieve: And as you just pointed out, you put a considerable amount of time, effort and money into starting a Peterson Capital Management. What advice from your experience would you give to others who are also looking to start a fund? 

[00:05:52] Matthew Peterson: There’s a few common questions that come up, I think. And yeah, I’m happy to share a few words of advice.

[00:05:58] Matthew Peterson: I think one question people often consider eventually is whether they need separate accounts or a pooled asset vehicle. And they’re slightly different businesses. And I, for example, with Peterson Capital Management, we wanted a pooled asset vehicle because it enables us more flexibility to do, to make the investments in the right way, to execute in best practices.

[00:06:17] Matthew Peterson: If everything’s separate, the accounts are a little, they’re not consistent. And you don’t necessarily have a real track record. There isn’t a joint track record, etc. I think what people evaluate are the pros and cons. So when they do separate accounts, they’re able to raise capital a little bit more easily because there’s so much transparency.

[00:06:35] Matthew Peterson: A friend, family, neighbor would be maybe willing to. Move some assets from their wealth manager to a manager who is managing separate accounts pooled asset vehicles. It’s there’s a slightly different customer or partner in our situation. It’s a partnership and they’re more familiar. I think it’s a little more tends to be higher net worth.

[00:06:55] Matthew Peterson: And then you have access to sort of the. the pension funds, the endowments. And so a pooled asset vehicle is where we wanted to be at the end. So we started there at the beginning. Some people tried to step into that. So separate accounts are slightly less expensive. They’re a little less onerous from a regulatory perspective.

[00:07:16] Matthew Peterson: But the real fun, the real track record comes from having that pooled asset vehicle, and it will allow you to manage those assets much better. That’s one thing that people often consider as they’re moving into the business, and it’s strange, we talked about Guy a moment ago, and his CFO Mark Chapman wrote a white paper several years ago, I think it was called, With Whom I Would Invest, and what they were looking for were the right fee structures.

[00:07:44] Matthew Peterson: And so what’s interesting is people go into this business and then they evaluate how they’re going to set up their fee structure, but I think the proper free structure has already been shown and it’s, with a very low or no management fee and our hurdle rate and our performance over that hurdle and that does all sorts of subtle things, but it really aligns incentives and it gives the manager the proper motivation to go out there looking for the best possible investments and opportunities.

[00:08:11] Matthew Peterson: and then be rewarded for finding those not for just raising capital, et cetera. So I think the fee structure is if you have the right long term vision, you want to set it up with your best practices at the very beginning. And there’s very few funds out there that have designed it with the proper fee structure.

[00:08:27] Matthew Peterson: Over time, those funds will, I think, perform better for their clients. They’ll be better businesses. And in fact, it will make the managers better managers. I always encourage people to just use best practices. I mean, they’re laid out and then people try to get creative, but it’s a little bit unnecessary to get too creative with the structure.

[00:08:46] Matthew Peterson: And people oftentimes ask what it costs. And it depends on where you get your legal work done. That’s usually the most expensive, but it might be. In today, maybe 40, 000 or 50, 000 U. S. dollars, you could get your fund documents set up and almost everything set up, and then you would need probably an administrator, you would need an auditor, and there will be an admin and audit ongoing fee, and then you’d have some basic expenses, but for maybe 40, 000 or 50, 000 in set up fees, and then probably 製作完成 40 or 50 a year in operations.

[00:09:19] Matthew Peterson: Just if you are a very small fund, I think that would be manageable, and that’s probably in line with what you should expect. 

[00:09:28] Kyle Grieve: So I really enjoyed your postmortems and your annual letter to shareholders. What do you think are the biggest benefits to yourself and your partners that you derive from writing?

[00:09:37] Matthew Peterson: That’s a great question because I do find these almost, I find these subtle benefits and they happen over time. Originally when we started doing postmortems, it’s because the best managers were writing postmortems. And one, it of course helps us learn and then document what we’ve discovered in that investment period.

[00:09:56] Matthew Peterson: In some of the postmortems, we’ve had very positive wonderful outcomes. And then we can talk about why. And in some, we’ve had less desirable outcomes and we talk about why and what lessons we can derive from that. And so that’s very useful. And at first level thinking that’s perfect. You start doing them, you start writing, why do we exit?

[00:10:13] Matthew Peterson: You go back to your notes on why you made the investment in the first place. You actually evaluate how much money did you really make? Because a lot of investors out there. Using their own personal account. They’re buying and selling things and then they forget what they’ve done and or they eliminate bad mistakes from their psyche and they actually over estimate how well they’re performing.

[00:10:35] Matthew Peterson: So by doing this, we really rub our nose in our mistakes. What I’ve noticed very much over time. Is it makes us better investors as we go in because I do not want to write that negative postmortems. Those postmortems that we put out there to the public and say, look, this is what we learned. This was what was wrong with the business model.

[00:10:55] Matthew Peterson: And a lot of times I’m disappointed in myself that. I didn’t see what I now see. And there’s a few things. We were involved in Horsehead years ago. I talk about the failures more than the successes, but we were involved with Horsehead. It’s shocking to me that we weren’t in there and it was a fraud and all this stuff, but we weren’t looking at the bond prices and the bond prices were straining at such a discount.

[00:11:18] Matthew Peterson: And so now, of course, we always would check where the commercial paper of the firm is trading. Because these are slightly different markets. They have different analysis. And there’s times when the bond market is recognizing something and the equities market hasn’t recognized it. It’s very surprising to me that back in 2012, 13 and 14, we weren’t going out and looking at the discount that it was trading for.

[00:11:42] Matthew Peterson: We’re looking at the debt of course, but we’re just not looking at what it’s trading for the market. Now, of course. We’re looking at those types of things. There’s other situations, we were in General Motors for a while, and at the end, I think, in terms of, I think it was a mistake. I think General Motors is this legacy OEM, and it looks like it’s trading for low multiples and things, and it looks like it has potential for some sustainability, but in reality, these are really slight margins, it’s a terrible business model, huge up costs, up front expenses.

[00:12:14] Matthew Peterson: Fixed expenses that are enormous, and then you have to project what demand and desire will be several years in the future, spend all of this operating capital, and if you’re wrong, you end up at a loss, and so there are regular adjustments to earnings, it seems every year there are adjustments to earnings, and yeah, it’s just a hard business, it’s sort of I think what, it’s similar to what Warren Buffett would say about the airlines business.

[00:12:39] Matthew Peterson: It’s just a hard business. And even when it starts to look attractive, it’s the business model that’s difficult. So these postmortems are really valuable in analyzing what we did wrong and what we did right. But it really helps you remember and routine what you did wrong and hopefully avoid those mistakes again and just grow as an investor.

[00:12:56] Matthew Peterson: And it’s certainly doing it over time. It makes me much more careful in allocating capital because those difficult post mortems, they come and I want to avoid them. 

[00:13:07] Kyle Grieve: So according to your latest annual letter, you have seven positions. As a concentrated investor myself, I appreciate that high level of concentration.

[00:13:15] Kyle Grieve: I’m interested in knowing what experience and wisdom from your past got you towards the concentrated side of the diversification spectrum. 

[00:13:23] Matthew Peterson: So that is a sort of an evolution and I think we reached that a long time ago, but in most finance programs and even a lot of professional investors, Ray Dalio, et cetera, really emphasize the importance of diversification.

[00:13:38] Matthew Peterson: And then you have the other side of the coin where I think it’s Charlie Munger because he seems to be a little more pointed in this, but Munger or Buffett says diversification is for those who don’t know what they’re doing. What’s the right answer? I think if you don’t know what you’re doing. You’re really wise to diversify.

[00:13:53] Matthew Peterson: And if you know what you’re doing, then it would be a mistake to diversify too much. Concentrated portfolios do have the capability to outperform, but you need to invest in the right opportunity. So when we first launched the fund, we had slightly more positions. And I think it was because I was concerned.

[00:14:11] Matthew Peterson: I didn’t have the confidence to really sit there in seven holdings. Seven holdings is A wonderful, I’m so pleased that we have this fun down to these seven compounders. Now what I did a few years ago that your audience might appreciate is there’s a gentleman from 1940s or so, John Kelly, who came up with the Kelly criterion, and you may have heard some investors reference it in the past.

[00:14:34] Matthew Peterson: Kelly did a lot of his math with punch cards and it was for ATT, et cetera. The idea played out really well in like a blackjack type scenario. So if you have a fixed pool of assets, which is what you have in a fund, or what you would have at a blackjack table. There’s a formula, if you’re in a probabilistic situation, and you know the probability of a win, and then you know the outcome if you win, and you know the probability of loss, and you know the outcome if you lose, there is an objective amount.

[00:15:01] Matthew Peterson: that you would bet. You just run it through the Kelly criterion. The challenge in finance is you don’t know your probability of success, and then you don’t know what happens if you’re right, and you don’t know what happens if you’re wrong. We can be wrong and make money. I mean, it’s a very interesting industry.

[00:15:15] Matthew Peterson: So what I did several years, many years ago now, maybe, is I inverted that and I went into Excel and I said, look, I’m not as mathematically gifted as Kelly was. But I can use his formula and rederive everything in Excel in basically an afternoon. And so instead of solving for the Kelly criterion, I just said, what’s the optimal allocation?

[00:15:38] Matthew Peterson: If we examine every scenario, let’s just look at everything. How many assets would you want in your portfolio? And there’s certain benchmarks that you can consider. Like Warren Buffett says, one out of three investments is a mistake. So let’s say we’re only right 66 percent of the time. I mean, we should be right more than 50 percent of the time, but we don’t know how much we’re going to.

[00:15:57] Matthew Peterson: make. When we’re right, we could make zero when we’re right, or we could make 400 percent when we’re right. So we, I built this large Matrix and it was so clear that the. It just told us the optimal amount to invest. And it was in almost every field between 10 and 50 percent of your capital. It very quickly shows you that the optimal way to invest is a very concentrate portfolio.

[00:16:23] Matthew Peterson: And as you move away from that, what’s interesting is you have to understand a little bit the math behind it because as you incorporate more and more positions, you get diversified and those positions may have different levels of returns and it will happen at different points in time. However, you are not always reducing your risk.

[00:16:41] Matthew Peterson: Sometimes those firms have the same exogenous risks and you didn’t realize they were correlated in the first place. You’re actually getting no diversification benefits. Or very little, and you’re also reducing your expected return because your 20th holding presumably will not perform as well as your first pick.

[00:16:57] Matthew Peterson: So it would be much wiser, typically, to just eliminate that 20th holding and put your money into the first holding. And so that’s what we try to do, and I back it up with the mathematics and things like the Kelly criterion, so I’m very confident that it’s correct, but it does have volatility, so the, you, as you get more concentrated, you’ll be a little more volatile, and I don’t want to suggest that people should Hold a single stock.

[00:17:21] Matthew Peterson: Charlie and Warren sometimes say 4 is enough, but 10 might be really enough. And 12 is plenty. So if you know what you’re doing, you just want to be finding the greatest business models in the world, the greatest management teams, the greatest return on equity and buying it at these really low prices. If you can capture something like that, Phil Fisher, who, is sort of what Buffett’s evolved into, would say, if you buy right, you don’t have to worry about when you sell.

[00:17:48] Matthew Peterson: So that’s what we focus on. We’re trying to find these compounders that will just grow for decades, and we get really great prices, really great business models, and there’s not that many of them. It’s you can’t just throw darts at the market, so we can go into this if you’d like, but we have a process where we look at the 13 Fs of a lot of wonderful value funds and value investors, and it’s quite interesting when we take that approach, if you were to think there’s maybe 5, 000 investable securities in the U. S. or accessible to a lot of U. S. holders, we’re looking at over 100 funds, And we create a subset of everything they hold. And that’s where we are doing most of our research. And we only have about 400 firms inside of that. So we eliminate 90 percent of the market. And we would sometimes go outside if we find a great opportunity, but we need to understand exactly why it would not be in any other portfolio of people that we have a lot of respect for, admire our friends.

[00:18:42] Matthew Peterson: If none of them have found it and we have, maybe we truly found something special, but most likely it’s just a mistake. And it’s just in that other 90%, most of the market’s efficient. So the efficient hypothesis, efficient market hypothesis is mostly accurate. It’s like nuance, niche opportunities that sometimes fried opportunities for a great investment.

[00:19:02] Matthew Peterson: So our belief and we’ve tested this inside of this. 400 stock subset holds a lot of the great opportunities. And they’re not all great opportunities, but maybe 25 percent of them are. So we’ve found a way to reduce our error rate just because we have a greater pool of positive assets that we’re selecting from.

[00:19:25] Kyle Grieve: Excellent. So that leads really well into my next question. So concentrated portfolios are a double edged sword and like you said, there’s tons of upside, but there is also downside. If you don’t know what you’re doing, Robert Hagsstrom shared the results from an excellent study that he did and he showed that lower stock portfolios, same thing that you concluded in the 15 stock range with randomly selected stocks had the largest representation of both over performing and under performing portfolios.

[00:19:49] Kyle Grieve: So concentration works really well if you do it right, but can punish you severely if you’re doing it wrong. What do you feel are some of the primary strategies that you use to reduce risk in your concentrated portfolio? 

[00:20:01] Matthew Peterson: That’s an interesting study. And if you think about that study logically, I think it makes a lot of sense.

[00:20:05] Matthew Peterson: I’ll look up at that study, but you know, if you held every position in the market, you’d have the market. And then if you had only half the market, you could actually have a lot of portfolios with 50 percent of the market. So you could run the analysis on all those. And if you got down to a 10 position portfolio, some of those portfolios would capture all the winners and someone would capture all the losers, which is why I think the results show as they do.

[00:20:29] Matthew Peterson: So how do you make sure that you get the winners in your portfolio? That is the challenge, right? And I think it’s so essential that you go into this minimizing your risk. Because the downside of a security, it really hurts you, right? You don’t want to, if you have a concentrate portfolio, if there’s uncertainty in a position, I think it’s best to leave it out, go find something that you’re more confident in.

[00:20:54] Matthew Peterson: That’s the point of this. So what we do is I think early investors often invest like a Ben Graham. They’re doing a lot of accounting. They’re doing a lot of work with the financial statements. When that becomes really second nature and ingrained in your process, then I think the evolution is quite natural.

[00:21:13] Matthew Peterson: You start looking for, I start looking for things that are not on the financial statements. I’m more looking for value that wouldn’t be picked up by a stock screen. I’m aware that most Investors, retail, and even professional are out there creating filters and screening for the stocks that they want to research.

[00:21:34] Matthew Peterson: It seems it’s a slight difference than what we do with our 13Fs, but what happens is. In statistics, you get type one and type two errors. So when you screen the things that are on the financial statements actually hurt you. You have type one errors when you have a lot of firms that shouldn’t be in your output that show up in your output as a great opportunity.

[00:21:55] Matthew Peterson: That would be something maybe where the margins are declining and the earnings are going down and it looks like it’s trading for low multiples, but it’s not trading for Low future multiples, and you get type two errors where you miss the great opportunities. We have a holding in Daily Journal. It’s an extraordinary opportunity and the financials don’t reflect reality at all.

[00:22:17] Matthew Peterson: So it’s about what’s not on the financial statements more than what is on the financial statements. What’s on the financial statements of course important, but you need to find off financial statement value. That other people are missing. And there’s moats and things where people look for moats and we look for the moats.

[00:22:33] Matthew Peterson: How are we going to protect the competitive aspect of the business? But we’re really looking for outstanding business models where they can maintain high margins, have solid earnings, growing earnings for a number of years, decades, and we’re looking for extraordinary management teams. So if we can find.

[00:22:50] Matthew Peterson: a business that’s bringing in a lot of cashflow. And we recognize that the management team is not good at capital allocation. That can be a terrible value trap as many would call it. So they’re bringing in cash. It all looks great. And then management’s out there doing poor acquisitions. And they’re just burning up the cash.

[00:23:06] Matthew Peterson: It’s a difficult spot. We try to avoid that by finding the greatest management teams and there are just outstanding business people alive, running these firms. If you follow them around and see where they’re interacting, you can discover these new opportunities. So I like to see things when there’s a John Malone running the company, or when there’s a Warren Buffett running the company, that very allocations can be done intelligently.

[00:23:31] Matthew Peterson: And of course, then the hardest. Part of those two is that when you get a great business and a great management team, the price is I don’t know, NVIDIA, so no value investors can ever buy it and it’s a real problem. And it’s a challenge. We’re really focused on getting the lowest possible price.

[00:23:47] Matthew Peterson: It’s sort of ingrained in me. I, we talked about how frugal I was even starting the firm. It’s just sort of like my own personality. I don’t want to overpay for these securities. So for years, all of the fangs were totally out of reach. I think some value folks got a chance to move in a little bit over the last year or so, but it’s challenging to get a very low price when you get the great business model and the great management team, which is why when you do have that opportunity, you really back up the truck.

[00:24:14] Matthew Peterson: You make it up. 10 percent holding. I mean, it just, it’s it’s like a totally missed opportunity. If you get one of these small chances in your life and then you spend 2 percent on your net worth on it. It just doesn’t move the needle. 

[00:24:28] Kyle Grieve: Absolutely. So one of the problems of having a concentrated portfolio like yours is that when a new idea comes onto your plate, it can be difficult to try and draw capital from your other ideas because there’s so few of them.

[00:24:39] Kyle Grieve: What is your strategy on this end in terms of finding capital for a new idea provided inflows? 

[00:24:47] Matthew Peterson: It’s a good question. And I don’t know if, I don’t know if the best answer exists today. I’ll tell you what we do. Philosophically, we’re making investments. The seven that you talk about, we have a few other holdings that come in and out, or we do, we take little toeholds in positions, but these are what we call our infinite compounders.

[00:25:06] Matthew Peterson: And we classify them as infinite compounders actually, so that our partners, investors, et cetera, if we start making changes, that becomes their concern. Not that we’re just holding this passively. Because we’re really trying to hold these for decades. So the question is, what do you do with your last bit of capital?

[00:25:27] Matthew Peterson: We have about 15 percent of our capital in cash. And when we’re making these investments, our intention is not to sell it. So even when we find a new, very attractive opportunity, we often are skeptical because we know the firms we’re invested in so well, we know them. We’ve done years and years of research often before we even start.

[00:25:47] Matthew Peterson: Making our first purchase. And by the time we find some new opportunity, that’s usually filled with a lot of known unknowns and unknown unknowns. And so the risks inside of that new position are greater than the risk in our current holding. Everything in finance Many things in finance is an opportunity cost consideration.

[00:26:09] Matthew Peterson: So if you have a long term compounding position and then there’s an opportunity that looks like it may do slightly better, it’s not even something we consider switching. We would never really consider switching. The positions that we have in our compounding portfolio are compounding. When we find new opportunities, fortunately, we’re raising capital.

[00:26:27] Matthew Peterson: So we don’t have the problem right now that you’re discussing. We were bringing capital. We do have ideas. We could put more capital to work, but I’m patient. We’re not in a hurry. And I don’t know if that answers the question totally. I’m just sort of telling you our philosophy, Kyle, is we’re making these investments.

[00:26:44] Matthew Peterson: And until we discover that something isn’t working or our thesis was wrong, or we’re learning about the business model. And as we do, we recognize there’s going to be a different, new, better opportunity. We just, we actually hold and we try to hold forever. And we talk about that. So we’re always looking for new opportunities and we find opportunities and we do have some cash, but if we found some outstanding opportunity, I would probably just write a note to our partners and say, if you want to own this, we’re going to buy it and we need some capital and we’d probably get a nice response.

[00:27:19] Kyle Grieve: Excellent. So you’ve done many great interviews on utilizing options for generating profits for reducing cost basis in stocks that you want to own. But from talking with many value investors, I know many of them seem to associate options with having a gambling addiction. As a result, many investors choose to never utilize options.

[00:27:35] Kyle Grieve: So what truths would you tell investors who are afraid of options due to the negative spotlight it’s had in the last few years? 

[00:27:43] Matthew Peterson: Warren Buffett uses them. That’s one truth. Warren Buffett sold puts to buy Burlington Northern, sold puts to buy Coca Cola. People don’t realize, I think, how much they’re used in some places because it’s not, it doesn’t always show up on the 13Fs.

[00:27:56] Matthew Peterson: But for me, and for the firm, my background’s in math, and so this is just, to me, it’s just a little puzzle. And when I was out on, I’ll give a small piece of background to answer the question when I was out working at Goldman, we were doing these model validation documentation. It was actually for the SEC and I was going through these products that were traded on all the different desks at Goldman firm wide and analyzing and figuring out risk and exposures, et cetera.

[00:28:22] Matthew Peterson: And during that time in maybe 2004 or 5, realizing that Even internally, because there’s siloed organization, there would be these offsetting positions between desks, and so they were neutralizing what they thought was exposure by accident. And it was at that point became pretty clear to me that there was a real mathematical advantage.

[00:28:42] Matthew Peterson: It’s just algebra to writing a put and receiving a premium. And then hoping to receive the shares that you’ve written the put on. And so that’s when we started really implementing this and we call it structured value. There isn’t really a name for it. We’re just using structured products inside of a value investing framework.

[00:29:01] Matthew Peterson: And what it does, the truth is it lowers your entry point. So when you’ve spent less on the exact same investment as someone else, you have a higher IRR when you exit because you’re exiting for the same price or higher than that person as well. So with the same exact security, we actually make much more than a retail investor.

[00:29:21] Matthew Peterson: And there’s many people who have been taught Wrong. Or maybe what they’ve been taught is the sort of populist view of options, and I’ve read most, I think books out there on options. They’re not because they’re such quick reads and they’re so basic for the most part. I think Taleb has one dynamic hedging, right?

[00:29:39] Matthew Peterson: That’s just, that’s like off the charts on the other side. It’s there’s nothing in the middle for anybody who is a little more than a novice. And what these books tend to show is what a call option is and how it gives you a right to buy the stock in the future. And a put option just protects you.

[00:29:54] Matthew Peterson: So you buy that and you sell in the future. Then they might start talking about covered calls in a book. Maybe this is like chapter 15 you’re in now and they’re like, Oh, here’s a covered call. You can write a call to exit. Great. And then in the fourth option with the fourth possibility, you can only buy and sell a call and buy and sell a put.

[00:30:11] Matthew Peterson: And they either Leave it out entirely, or they just talk about how dangerous it is. And it’s not clear to me that the authors of these books have ever taken a course on value investing. Because if you know what the underlier is worth and what they’re talking about, it’s not dangerous. They’re talking about the option price itself being risky and you might have to buy the shares.

[00:30:32] Matthew Peterson: But what if you want to own the shares? Cause that’s what we want. So instead of writing a market or limit or in the market, if there are options available, I would always sell a put option. I would never buy in the market. I don’t, in a personal account, I would, I just would never do it. It to me feels like paying retail price when I know how to get the wholesale price.

[00:30:53] Matthew Peterson: And it’s a very nice advantage. Our entry point is oftentimes maybe 20 percent below the market price. And you can imagine if instead of buying for 100, you buy for 80, when that share goes to 800, you’ve made 10 times your money instead of 8 times your money. Do that over any amount of years, your IRR is percentage point higher, percentage points higher, many percentage points higher, than someone else who made 800 percent instead of 1000%.

[00:31:19] Kyle Grieve: Excellent. So let’s start with the simple stuff first. So you just discussed put options. So let’s start with put options to someone who’s brand new to options and doesn’t even know what a put option is. Could you just explain exactly what that is? And then could you explain what the process would be like for them to decrease their cost basis using put options?

[00:31:36] Matthew Peterson: Yeah, definitely. So a put option is considered an option to be if you’re the buyer or owner of a put option, it gives you the right to put your stock to someone else for a predetermined price. And so you buy that in the market, just like sort of a stock for a different price, which is called the premium.

[00:31:53] Matthew Peterson: So you pay a premium to have the right to sell your shares in the future. So one thing to remember for those that are new to this is that one option is 100 shares of stock. And that’s another reason why If I’m weaving this all together, why you would need a pooled asset vehicle and you couldn’t have separate accounts because if you have separate accounts, the pool that’s vehicle, you just have 100 million sitting in one place.

[00:32:15] Matthew Peterson: And so you can use these quite easily. But if you were to, I’m just thinking of, I think Google is 100 and I don’t know, 30 or 40. So dollars per share. If you write one put, you’re basically exposed to 13 or 14, 000 depending on the size of your portfolio, you might not be able to get the diversification and things you need.

[00:32:37] Matthew Peterson: So that’s why pooled asset vehicles help. Keep in mind these get big very quickly. So sometimes if people are looking to practice or see how this works, I actually do recommend it, but I recommend it slowly. So you’ll need to change your account. So you have the capability of using these products and then you would probably write one on a low price security that you would like to own.

[00:33:00] Matthew Peterson: If the share declines, you will be paid a premium and you will see how it plays out in your account. You will see that day one, there’s no value creation. You have a premium that comes in and an equally offsetting liability, which is your short put. And what happens is if the stock price expires above the price that you’re going to pay for your counterpart shares, they won’t sell them to you because they can get more in the market.

[00:33:25] Matthew Peterson: You’ll keep the premium and the contract’s finished. So if for earlier we discussed a hypothetical 100 share, maybe we pick up a 20 premium, and in a scenario like that, if the price of the stock is greater than 100 after say a year and it expires, everything’s finished. And we keep that 20 they paid us, which is 20 on 80 and collateral.

[00:33:47] Matthew Peterson: So we’re fully collateralized. If we have 80 plus they’re 20 makes the a hundred. We’ve actually made a 25 percent IRR just on the premium that we’ve held. So even if we don’t buy the shares. It’s actually still a very nice return. So we try to price these where we’re indifferent between owning the shares and just receiving the premium.

[00:34:07] Matthew Peterson: We want to be satisfied if the shares go up a little bit that we’ve still delivered a very good IRR to our partners. 

[00:34:14] Kyle Grieve: Excellent. So let’s look at the other side of things. Let’s say someone now already owns a stock, maybe they don’t necessarily want to sell it, or maybe they do, and maybe the price is getting super high above intrinsic value.

[00:34:24] Kyle Grieve: How would they use call options to help increase their IRRs? 

[00:34:30] Matthew Peterson: So we’re talking down the simplest plain vanilla points right now. If you have a hundred shares of stock we wouldn’t write a market order, limit order, and try and sell them. Market order is like the worst way. And then limit order, at least you’re saying, give me at least this price, you’re specifying a price.

[00:34:47] Matthew Peterson: You can actually do a limit order with a covered call. So we would basically put a limit order on our premium, we’d say, we’ll sell you the right to buy our stock for this premium. So if in that scenario we said the hypothetical 100 share climbs to 800, at that point if we’re interested in exiting, We may sell a 850 strike call for 80 and now we just wait for that to expire and if the shares go up another 50, we’re out, but our exit price is now like 930, so where everyone else is selling for 800 and a person who just has the ability to do a limit order, maybe they set the limit order at 850, we’re actually Far exceeding that in terms of what we bring in.

[00:35:34] Matthew Peterson: So it’s very important. We’re just bringing in a premium to enter the shares at the beginning, and then we’re bringing in a premium as we exit the shares at the end. And those two cornerstones can add double digit percentages at that moment. And then over the span of 10 years, you can quickly see oh, your returns are like 2, 3, 4, 5% higher annualized.

[00:35:54] Matthew Peterson: Throughout the entire holding period. 

[00:35:57] Kyle Grieve: So before we discuss your structured dividend capture system, are there any other option strategies that are worth learning for long-term investors that you can go over briefly? 

[00:36:06] Matthew Peterson: This is where it gets tricky because your audience will have such a range. We’ve gotten very good at what we do and we’ve back tested a lot of different strategies, so I’ll share, that’s sort of interesting.

[00:36:16] Matthew Peterson: We’ve hired a lot of. Python developers over the years, and we’ve been doing a lot with technology and we’ve found it a little bit difficult to communicate some of the strategies to the technologists because they are quite fairly complicated. And if somebody is new to finance, they’re very complicated to start talking about all these terms and Greeks.

[00:36:34] Matthew Peterson: And so we’ve come up with a system that actually seems to be working pretty well, and we’ll see where this goes, but for anybody who. has a musical background. It’s a little related to, it starts to look like sheet music. So what we have is an at the money and some staffs and we sort of, the at the money is sort of in the middle.

[00:36:52] Matthew Peterson: And then what we’ve gone to is something that would look like a half note is a, as a sale, because it’s an open circle and a filled in circle is a buy. And then we use like a stem up and stem down to reflect if it’s a call or a put. So that’s really what we’re trying to do. We’re either buying or selling.

[00:37:10] Matthew Peterson: call in a put through the entire strategy. Look, I think it’s, there’s so much value that’s, that people are leaving on the table when they just go and buy the stock. So I strongly encourage people to write a put, see how it works. You can write it out. Let’s, I’ll tell you how things have evolved a little.

[00:37:24] Matthew Peterson: So we used to write out really long data puts and we still do about times, but typically we actually like capturing a lot of the time value. And. So what we’ve learned and realized to be a little more effective than one long put is actually repeated short duration puts. So we make much more being a little more active, but in our mindset, we’re just exposed to this security over that period of time, but we tend to do them a little more frequently.

[00:37:54] Matthew Peterson: One thing that I think is a nice little evolution for some of your listeners is we found when there’s catalysts on the horizon and when something’s very mispriced, the FOMO of the rise in shares is what makes our sleepless nights, right? So we don’t want to have the shares run up and then we’re stuck with only 25 percent and we missed a huge gain.

[00:38:18] Matthew Peterson: The way that we’ve Overcome this is by instead of selling that one long put maybe out to 2026 from today, which would have been like an older, simple strategy. We will actually sell repeated weekly or monthly contracts out for quite a bit. period of time. And we will continue to put those in and we’ll continue to execute on those and sell those.

[00:38:41] Matthew Peterson: And we take that capital and we’ll buy a deep in the money, two year call. And what that does is it ultimately gives us a free call. That’s our intent when we’re doing that. I don’t want to get into all the detail on it, but very briefly you can see in our reports, we own Baba, that is exactly what we’re doing on Baba.

[00:38:58] Matthew Peterson: So it looks like we own Baba. But in reality, we’re just writing 80 and it’s so inexpensive, but we’re just writing these. We will write puts out for two months. We’ll pick up 4 for each put. We’ll do that for 10 weeks. And then we’ll buy another 40. 50 strike call expiring January 2026, and that ultimate call holding will convert to stock in a few years, probably be a much higher price, and that will be our infinite compounder that’s in our portfolio.

[00:39:29] Kyle Grieve: So as you outlined in your latest annual report, you found that the fund had excess cash that you needed to deploy. Now, the opportunity cost of staying in cash is very high, especially in these high inflationary environments. So you came up with the structured dividend capture system. Can you discuss how the system works?

[00:39:46] Matthew Peterson: Yeah, I can. We actually used to be, and partners ask me, should you be talking about this? There’ll be a few of your listeners who are able to go in and do this and dabble in this. And I think that’s wonderful. For most, it’s just much too complex. And so we have found that I don’t think we’re eroding the opportunity.

[00:40:04] Matthew Peterson: It’s too small for. major institutions, and it’s just too time intensive and it’s very difficult I think for just like an individual retail investor to do it in the scale that we’re doing. But they can certainly do it on an individual level. Let’s back up for a second because I think it’s important to point out, this is, we are presenting something, the structure dividend capture is how we’re handling the cash right now and we are, When we share this, it sounds really simple, but it was really not easy.

[00:40:34] Matthew Peterson: So by 2017, we launched in 2011, I actually gave a presentation in Switzerland because we had been looking for this opportunity for so many years. And all we knew was a bunch of stuff that wouldn’t work. And we were looking at. How we could flip between Google A and C shares or how we could trade a share that was on listed in two securities in the price.

[00:40:57] Matthew Peterson: Two exchanges and the prices were different. We’re looking for all sorts of arbitrage opportunities. We’re looking for opportunities to even change between Berkshire class shares, all share classes. We were considering so many opportunities and then they would fall apart usually in their implementation.

[00:41:13] Matthew Peterson: So if the opportunity sort of existed, And that’s basically, theoretically, taxes or liquidity would cause a bunch of problems. So I gave this presentation and we didn’t have anything to show anybody. It was basically showing this group of really sophisticated investors, we’re looking, has anybody found anything?

[00:41:31] Matthew Peterson: We’re finding nothing. And or we’re finding nothing that works things that might work in an IRA in the US where you don’t pay tax, but nobody has that much scale in the IRA, except for a few lucky folks. So it’s hard to put these into action. And we really realized this was going to work. around 2019 and started doing all the backtesting.

[00:41:51] Matthew Peterson: So this very simple solution is a little like Edison. Like we found all the ways not to build the light bulb before we found, discovered how to build a light bulb. And we feel really fortunate. I feel so fortunate that we have this. Value funds in particular tend to hold cash to deal with the old problem you mentioned.

[00:42:06] Matthew Peterson: The opportunity costs and they’ve made all their investments and they don’t want to miss The next big opportunity. So they have to sit there with a little cash. And the challenge you mentioned is exactly right. We sit with millions in cash. And in fact, it’s even a little more extreme for us because we have cash backing some of these puts.

[00:42:25] Matthew Peterson: It just looks like a massive pile of cash. And especially in zero interest rate environments, it’s painful. It’s it doesn’t feel right. So we’re always looking for ways to maintain the liquidity, not take risk. And get a higher yield on the cash. Alright, so that’s where we’ll start. Now, we’d already been implementing structured values, so we’re already selling puts to buy the securities.

[00:42:48] Matthew Peterson: That’s nice. What we recognize with structured dividend capture is that there are a number of very decent firms that don’t have to be the best firms in the world, but very decent, solid firms. There’s trouble in various industries all the time, but I’ll say right now at the risk of whatever, that there’s a lot of firms in the financials.

[00:43:07] Matthew Peterson: industry that pay a super high dividend and are selling for pretty low multiples. And, we don’t own any of them right now other than indirectly through a Berkshire Daily Journal. But they do look sort of attractive as long as we don’t have a recession, as long as we don’t have a commercial real estate breakdown, as long as we don’t have inverted yield curves for years and years.

[00:43:27] Matthew Peterson: So there’s, they look attractive if you’re able to go in and just take, exposure for a very small amount of time. We’re very comfortable with that. So to summarize, there’s a few institutions in the world that are paying really high dividends like 6, 7, 8 percent a year, even more sometimes. And they often pay them quarterly, so 2 percent a quarter.

[00:43:49] Matthew Peterson: So what we do is we write a put with an expiration date right before the ex dividend date. which is the date that they calculate who gets the dividends. And we pick up a premium for selling a put and it’s usually just a week long when that put expires. And we also get over 1 percent premium on that exposure.

[00:44:08] Matthew Peterson: So in a week, we get 1 percent plus on our put premium. If we take in the shares, We then often get a one or 2 percent dividend that next week. And we’ve written a covered call to exit, which gives us oftentimes almost a percent, but the covered calls are sometimes we’ll take a little less cause we just want to get out.

[00:44:26] Matthew Peterson: We have found often we’re getting three to 5 percent over a one or two week period. It’s really outstanding what we’re able to. Capture. The problem is that dividends are only paid four times a year. So what we needed was first, I did it manually and it was a, it was months and months of analysis. Not totally consistent, of course, but like it took months to figure out if it would work.

[00:44:50] Matthew Peterson: And These prices are volatile and change daily, so the option marks in particular are notorious for being volatile. A 3 call today could cost 6 tomorrow. That’s what people are worried about when they talk about the volatility or the risk affiliated with options. It’s because the volatility of the price is really high.

[00:45:08] Matthew Peterson: What we focus on is the end. We either want this stock or not. And I don’t care how much volatility there are in these options. We’re waiting for that outcome. And if we sold it right, And we don’t get the shares, we still get a nice premium, and if we did everything right and we do get the shares, we’re happy to own them.

[00:45:23] Matthew Peterson: Alright what we did is we hired a bunch of interns, to build a lot of Python and different scripts, and help us with a whole system that we have now called AlphaOne, where we do a, analysis, and we do a lot of backtesting, and ultimately, What we do is we, I’ll just share the conceptually what happens.

[00:45:40] Matthew Peterson: We start with a list of 13 F files, over a hundred of them. And we come up with the super set of all securities. We own, we then pull in a bunch of data and this is all automated now. So we pull in a bunch of financial data and it flags things for us and actually just eliminates things that have violate certain thresholds, too much debt.

[00:45:58] Matthew Peterson: We just don’t want to deal with it. We also need to identify those. That are paying a high enough dividend and those that we have to pull option data in as well. So we have to gather option data and pull in that. And then we run a whole analysis where we say, if we’re, if we do this, what’s our expected IRR.

[00:46:12] Matthew Peterson: And ultimately from that list. So we start with a pool of say 5, 000 securities we could invest in. 13 F’s narrow it down to 400. And then once we get it through all of the final parameters, it delivers a list of about 30 for the next quarter. And so what that does is we can then line up the ex dividend dates like a Gantt chart, sort of looks like a project plan.

[00:46:36] Matthew Peterson: And that’s the output of our system. So I get that output and then we implement it. And we actually trade based on what our system tells us to do. And we reconfirm it manually, but it’s right. And then we start writing our puts to expire right before the ex dividend dates. We pick up a put, we pick up a dividend, and then we write a covered call, and we exit.

[00:46:53] Matthew Peterson: And some of them don’t work, but we do it in a basket form. So we’re, if we have 30 over 13 or 12 weeks, we’re doing two or three or four each week. Some of them don’t work. One that we had previously that didn’t do very well this quarter is Icon Enterprise. So they paid a large dividend. They started cutting the dividend.

[00:47:10] Matthew Peterson: The shares fell almost in half. I think we’ve actually maintained almost, I don’t think we’ve lost very much. Because we get such a haircut going in, and then we pick up a dividend, and then each week, we’re just selling calls, and we’re picking up a dollar a week, and as the shares go from 30 to 18, we’ve picked up 10 or 12 dollars along the way.

[00:47:29] Matthew Peterson: It’s quite incredible how much protection we have, the margin of safety, and at the same time when they do work, We pick up three or four or 5 percent in a single week. So when we run the whole basket, we back tested this and it’s very interesting. And it’s fascinating. We have found, I’m confident in saying where we’ll be like, high over 15 percent is like easy.

[00:47:50] Matthew Peterson: It looks easy. We are already doing that. And now we’re testing individual Greeks and variables. We’re back testing the thetas. We’re back testing the deltas. We’re trying to maximize that. We’re actually testing whether we have tested, whether we should be writing in the money or out of the money. Puts and calls, where do we have our expected?

[00:48:08] Matthew Peterson: Where’s expected return, the greatest? Historically, we would always write out of the money because it felt conservative to me and we didn’t really have a good way of back testing it. We are, we’re kind of on this edge. There’s not a lot of people doing what we’re doing. There’s almost nobody. And if you’re doing it, come and tell me, we can compare notes, but basically at this edge of this frontier, we have to start.

[00:48:28] Matthew Peterson: We’re making logical assumptions. And so when we’re putting this in practice, we think, okay, we’ll go out of the money and we’ll sell our puts out of the money. That way we won’t take as many shares and we feel that it’s conservative. What we discovered because we made a little matrix test where we tested in the money, out of the money for both calls and puts.

[00:48:47] Matthew Peterson: We discovered that the theory was a little flawed because when we sell out of the money, we always capture everything that falls and we miss everything that’s flat or going up. If we sell in the money, we still capture all the stuff that falls, but we also catch what’s flat and going up. So when we did our original back test and said, okay, we’re going to get X, Y, Z returns based on this.

[00:49:06] Matthew Peterson: We’re now finding. Oh, wait, all we have to do is write in the money versus out of the money and our yields go up again. So we are just with a scalpel doing these tests and refining our implementation and with each test we’re getting percents, sometimes jumps, sometimes a few bips, but we’re making slight changes.

[00:49:26] Matthew Peterson: And one of them is that in the money is sales are correct instead of just out of the money. 

[00:49:33] Kyle Grieve: Awesome. So let’s move on to Seritage Growth Property, a really interesting business. So for a time, Seritage Growth Properties was quite a deep value opportunity, which was why I’m sure you bought it. But before we discuss why you sold it, can you give the audience a brief overview of what you saw in this business that got you interested in the first place?

[00:49:52] Matthew Peterson: Yeah, so that’s in itself a pretty good story, but Sears was, Sears, Eddie Lampert years ago combined Sears and Kmart, and then it was a sort of failed, failing business, and Eddie’s very Intelligent, and good with these corporate transactions and things What he was able to do was, before Sears really went down and filed bankruptcy He sold off lots of their assets, and he spun out their assets So that the Sears business model bankruptcy Wouldn’t take down all the rest of the value So he spun out all the real estate into a REIT Called Sage and then had Sears rent from the reit.

[00:50:29] Matthew Peterson: All right, so that’s how this got started. And then you had a situation where Eddie Lampert, who’s a great business mind, was a large owner. Y Warren Buffet bought five or so percent. There were a lot. It was a, there were a lot of value investors involved. We started doing some real deep analysis. So around that time they had 212 malls and we do deep research.

[00:50:48] Matthew Peterson: So in my view, to find the value of the company. It was one of these things that are simple, but not easy. We just need to find the value of every mall. So simple. Problem is, all the malls are a little different, but it’s not that big of a problem. We actually did the work, and we just valued every single mall, and we did it over and over.

[00:51:05] Matthew Peterson: When we were first doing this, Seritage was receiving some income from Sears, and was bringing in new tenants, and they had this capital recycling program, and it was a pretty nice model. They were going to get rid of all their low quality Sears. Locations and then focus on some premier assets, in some cases build up.

[00:51:25] Matthew Peterson: And there was a real opportunity for them to be a big player in this space with some really nice assets. I, for those, most people have never been to a Sears listening to this podcast, but the locations. are really nice. There’s a location right in the middle of Santa Monica. There’s locations all over in Florida, all over UTC in the middle of San Diego.

[00:51:44] Matthew Peterson: These are super valuable properties and there’s not a lot out there like them. So they’re attractive. Anyway, all that aside We actually made an initial investment by selling puts always very early on. We were first doing the analysis. We realized, okay, they’re going to be able to do property level financing.

[00:52:02] Matthew Peterson: They’re going to reduce their debt because they owed Berkshire a 7 percent debt, etc. So we went in for a little while and then we recognized after maybe a year that this development project and everything that their plans, it’s real estate, their plans were going to be implemented much more slowly.

[00:52:19] Matthew Peterson: then was reasonable. So we exited not because it was a bad position. I didn’t think it was a bad position when we exited. We exited because it was going to take too long for this to materialize. And so we were out when COVID hit and there were a number of factors that took place but the shares dropped a lot.

[00:52:39] Matthew Peterson: And we had already analyzed These malls. So that’s where this compounding knowledge comes into play. We came in 20, early 2020 and Saratoga dropped to 6 a share from 40, and they still owned a lot of the same assets. They were down maybe to just under 200. So we went through in a month and I revalued every asset.

[00:53:04] Matthew Peterson: And also with an intern and our analyst and we went through every asset again and had a few discussions and it was. We did a lot of research. So we determined at that point, I think the prices we were projecting were we, and we really knew the asset prices. It was like 28 a share is what I recall a bunch of years ago, selling for six.

[00:53:23] Matthew Peterson: So again, we sold puts. We’re happy to sell puts. And we ended up owning Seritage for a price of about six or so throughout various puts that we had sold. And I don’t mean to go on for so long, but Basically, we continued valuing these properties. And it was, it’s interesting because there weren’t too many other people.

[00:53:42] Matthew Peterson: There were one or two other people that were sort of interesting in the property values, but most of the world, in terms of heritage analysis, would say, These are A class properties. They should trade at this cap rate. These are B class. It was these buckets and they were doing sampling and it wasn’t accurate.

[00:54:00] Matthew Peterson: Now they’re down to 40 properties. You can watch them on their website. They’re all listed there. We valued every single one. We’ve called, we’ve had calls with multiple brokers about every single one. We visited most of them. And what happened was we recognized that Three years ago, it was a 28 value. Then we were doing the analysis and it was like an 18 value.

[00:54:24] Matthew Peterson: In January of this year, we were doing an analysis and real time, it was like 12 was kind of a floor. In February, they released a document that sort of put their plans in play. And because we had analyzed every property, we were able to solve the puzzle. They weren’t giving us all the information. They were saying, we’re going to sell this many properties that are worth 50 million or more during this window.

[00:54:50] Matthew Peterson: Then we’d go look at our values and we’d say, which properties you don’t have that many properties worth that many weren’t that much, or we recognized we could see around the corner. And then we also knew from 2015 that again, this plan was going to be slow because real estate it’s almost in it.

[00:55:07] Matthew Peterson: Everybody knows that it’s. Over time and over budget. So I don’t even think the folks that put in their proposals that place bids, I think they’re placing them knowing they’ll go over time and over budget. So when we see this report and it looks a little bit incomplete and it doesn’t seem to match our figures, right?

[00:55:25] Matthew Peterson: And then we recognize it’s going to be over time or budget. All we know is that 12 a share is sliding, and we redid the analysis conservatively again, lift cap rates again, we are always using factual figures from like the CBRE index, and what we know is at the time, maybe it says, okay, there’s 10 in value a share, maybe the market’s trading at 11.

[00:55:48] Matthew Peterson: And we know the trend’s been going down for two years, so we have to make a decision. And when you asked me about how that inversion flipped, it used to be a really positive risk return, but we recognize then the risk is actually that they can’t sell these, that there’s further issues in the real estate market.

[00:56:06] Matthew Peterson: Particularly, this was around the time that SBF FTX had already gone down, but now the Silicon Valley Bank was going down. The banks were basically going to be a run on regional banks in America. And frankly, we recognize that financial institutions themselves are restricting their lending. So there’s not a lot of people out there lending 50 million or a hundred million to buy a cash flowed mall.

[00:56:30] Matthew Peterson: But a lot of these properties are actually a hole in the ground or worse. Greenfield with an, with a demolition project on top of it. So when it came down to, when we started to understand all those things, we recognize that the payout wouldn’t be as high. And we also recognize the payout wasn’t coming soon.

[00:56:48] Matthew Peterson: So if you read the management reports, they still say they expect to pay 18 to 28 a share. They’ve never updated that figure in, I believe, 2024. And I will tell you from my perspective, it’s fact there’s nobody’s going to get 12 from Ceritage next year. There’s no, nobody’s, that’s not happening. And I’ll also share.

[00:57:08] Matthew Peterson: And you’ll maybe find this range wide, but of course we can’t. How do we do this? So we look at every mall and we know that there are a few key variables that are important. We know that we need to know about the occupancy rate. We need to know about the rental rates. We need to know about the NOI and what sort of margin they might receive.

[00:57:23] Matthew Peterson: And then we need to know if there’s somebody going to come and buy the property and they need to do some development. What sort of discount to the development? Do they buy into a different cap rate than they expect to sell at if they’re going to do development projects? So we factor in all these variables, and then with each of them we have a low, base, high for each variable.

[00:57:42] Matthew Peterson: And so then the outcome shows us a low, a base, and a high. And I know, for example, Aventura. Their mall in Aventura is the most, probably most valuable mall in the property and on their list, and I think our range right now is somewhere between 175 and 250 million for that property. Kind of wide range, our base is somewhere in the middle of that.

[00:58:02] Matthew Peterson: And we see people celebrate on Twitter when they sell a property and it doesn’t seem, it seems strange to us because what matters is if the property sells for the right price, not if it just sells. So everyone says another property sold and then there’s a little chat about it. Until we know the price it’s sold for, we don’t know if it’s good or bad.

[00:58:19] Matthew Peterson: So Boca Raton, when that sells, it’s probably going to be bad because they’re dealing with some challenges there. So there’s only 40 properties left and we’ve been looking at 212. So now it seems easy. I can just start telling you if I’m not going on too long, Kyle, I’ll just start telling you some answers to the questions you’re probably going to have.

[00:58:36] Matthew Peterson: I think at the high, they have one point, less than 1. 2 billion in assets. And the thing to know about Ceritage is because they’re doing the strategic alternative plan to liquidate, which by the way, we’ve learned from you. John and other that can be reversed. So there’s no liquidation trust coming at the end of next year.

[00:58:58] Matthew Peterson: It’s going to probably reverse if they’re going to liquidate this though, there’s no compound. So 1. 2 billion is their assets. We know they have 400 million left in debt and they have 70 in a preferred debt. We estimate with the recent sales. So we watched their website, not their filings for their sales because.

[00:59:17] Matthew Peterson: Filings are like months delayed, but we don’t always know the price, but we think they have about 150 million cash. When you do all the math and you work out low base high, I’m pretty confident that, and this may sound like a wide range, but it’s, there’s probabilities of this being totally right, but we have probably, I expect six to maybe 12.

[00:59:40] Matthew Peterson: Maybe, but that gets harder the higher rates go. There’s obviously a cost running the business. Their capital expenditure run rate is about 25 million a quarter. And so there just isn’t more. Stig Brodersen has called out 40 assets, but not using the 4 million shares announced.. he says they are going to sell off the 9 core assets they determined.

[01:00:10] Matthew Peterson: Stig Brodersen, Preston Pysh, Adam Gums, Clay Finck, Patrick Donley, Robert Leonard, value those 10, you probably will have a good sense of what you’re going to receive. So we’re mostly, we’re basically out of seritage. We’ve more or less exited and we had a nice return. It was about 100 percent return in a very short amount of time because we sold puts.

[01:00:35] Matthew Peterson: We don’t have to put the cash out until much later. So I think we put the cash out. I’d have to go look, maybe in 2022 and then exited in 2023 and made 100%. We’d have the exposure for longer because of the puts, but we actually had the capital out for a year. So it was a very nice return. And these things are a little more complicated, but because we feel that there’s a floor on the ceiling, I’ll tell you for one or two years, super sophisticated listeners.

[01:01:04] Matthew Peterson: I think there’s a really unique opportunity where. You can write a put that goes out as far as you can. So you’re pretty sure you’re going to get the shares. You could write a 10 strike put, and you’re not actually going to put capital out. I then think it’s pretty attractive, write calls every month and you’re just creating a dividend for yourself.

[01:01:25] Matthew Peterson: And the return is really high because the volatility is really high and I’m not concerned about it going up too much because there’s, it’s not sustainable to be up and if it ever went up and we were, it can’t really go much higher. 13, 14. I mean, that would be the price moving away from the market, which is possible, but we could always write another put if we need to neutralize that position.

[01:01:48] Matthew Peterson: So that selling of a put where you’re pretty much going to get the shares and then writing a little bit of a covered call on those. Is really attractive, like high yields at the moment, if anybody wants to go and do that. 

[01:02:02] Kyle Grieve: Matt, thank you so much for joining me today. Before we say goodbye, where can the audience connect with you and learn more about you and your fund?

[01:02:09] Matthew Peterson: Yeah, sure. So I’m on X, MattPetersonCFA, anybody can go to my website, our website, petersonfunds.com. We have a lot of annual, we have a dozen years of letters and a lot of content and research there. We have a YouTube channel. So search for Peterson Capital Management on YouTube and we’ve put out quite a bit of presentations, material, research.

[01:02:32] Matthew Peterson: I think those are good places to start. And if anybody wants to email me, they’ll find my email address, but it’s Matthew Peterson at petersonfunds.com 

[01:02:42] Kyle Grieve: Okay, folks, that’s it for today’s episode. I hope you enjoyed the show and I’ll see you back here very soon. 

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