[00:03:20] Kyle Grieve: So I’d love to get to know a little bit more about how you’ve used your education background here in physics. Obviously, it’s a quite extensive and how that’s helped you become a better investor.

[00:03:29] Andrew Martin: Yeah, I guess in terms of, yeah, I did a theoretical physics degree and then yeah, PhD in astrophysics. Stops or starts conversations when you mentioned that, but yeah, I think really what it kind of has helped my whole career, I guess, in terms of there’s a technical aspect to that, you know, in terms of the technologies that you use and becoming, you know, technically literate, and there’s obviously a lot of kind of mathematical modeling and analysis that kind of goes into that to you know, varying level. Sometimes it’s quite high level of statistical analysis and modeling, you know, applied to physics. And in the case of what I was doing, I was looking at weighing low mass x ray binaries, so binary systems with a star like that, like our sun and a black hole and essentially just sort of measuring the orbital periods of those and weighing the black holes to yeah, try and determine if they are actually black holes above a certain limits, then you can theoretically prove that they are black holes. Yeah, I guess that kind of, it does apply very esoterically, I guess, to investing, but there’s obviously a lot of analysis that goes into investing and you can, some of it can be more simple.

[00:04:33] Andrew Martin: You know, you’re looking at income statements, balance sheets, or, you know, the, the numbers that come out of a business and other times it can be, you know, you can apply a little bit more of a kind of technical aspect to some of the investments you look at. I mean, I did end up doing a bit of a. There’s a Monte Carlo analysis, some statistical analysis on a particular stock, just because it seemed to be the best way to look at the particular piece of analysis.

[00:04:54] Andrew Martin: But yeah, a lot of the time, yeah, it is a bit more kind of simple, but it does kind of give you a bit more of a feel of like the sort of numerical side of what you’re looking at when you look at investments. It does apply, even though it is a very different kind of feel.

[00:05:06] Kyle Grieve: So you did another interview where you mentioned that sometimes during your research process, you found an idea that was just so interesting that it made the hair on your neck stand up.

[00:05:17] Kyle Grieve: This kind of reminded me of this the reverse story of, sorry, of George Soros, where he was kind of talking about how he would notice or observe that there were times in his investing career where he might have like a headache or a, or a backache. And this would kind of signal him that this things didn’t feel right.

[00:05:33] Kyle Grieve: He ended up selling. I love this because it’s so interesting to get to know more about these unconscious signals that, you know, happen in, in investors that are going at a high level. So, you know, I’d love to, for you to tell us a little bit more about maybe some of the characteristics of, of an investment that make, you know, make the hair go up on your neck and you know, what that investment would look like.

[00:05:54] Andrew Martin: Yeah, no, that’s an interesting question. Yeah, I remember reading about that as well. Yeah, he’d get a back spasm sometimes, wouldn’t he? Would have a particularly good idea, or wanted to get out of an idea that had gone past its course. Yeah. And I remember thinking that, oh yeah, I wish I could find which part of my body was going to spasm or do the right thing to tell me to look at an investment or not.

[00:06:11] Andrew Martin: But yeah, I guess it’s the hair tingling thing that I kind of thought of myself. But yeah. And it kind of makes me think that the example I’m thinking of, I guess it was the ECIT banks was a good example of that, where the smaller community banks, minority banks that have been given capital by the government to basically expand a bit more quickly and help you underprivileged areas and groups.

[00:06:34] Andrew Martin: And yeah, just when I read about it, obviously not many people had kind of realized that’s what was happening that they’d essentially been given these, the preferred stock had been issued by these banks and they were going to get a lot of cash out of that and a lot of investment through that because they had very favorable terms in terms of interest rates they had to pay in the coupons they had to pay on those instruments.

[00:06:51] Andrew Martin: And that was one moment where I thought, yeah, this is a really good investment idea. And we’ve had it in other things since then as well. I guess another one would be McCoy Global like last autumn, which kind of came a bit more slowly. So sometimes there’s like an epiphany moment, sometimes it’s just more gradual.

[00:07:04] Andrew Martin: You have to do lots and lots of work, usually anyway. But yeah, with that one, I kind of came across it. I was doing an A to Z kind of search through lots and lots of stocks. And then, you know, it was in the end. So it was halfway through, a little bit over halfway through came across this type of one. This, this one seems a bit cheaper and is growing, has been growing for many years.

[00:07:23] Andrew Martin: And it just looked, all the metrics kind of looked much better than everything else I’ve just been recently looking at. So it’s one of those where you had to kind of stop and then dive a little deeper, go down the kind of rabbit hole of looking much more closely at business. And it was oil drilling tech company.

[00:07:38] Andrew Martin: I don’t already heard that many people talking about that business or anything relating to that. Lots of people looking at oil stocks last year, even though a lot of value investors and GARP investors don’t really like those kinds of stocks. So it kind of made me think maybe there’s a bit of a gap here that some, no, not many people might look at this, they might just throw it out because they don’t want to look at oil or energy.

[00:07:56] Andrew Martin: But then I, the more I dug into it, the more I realized there was a technology element to it and a machine learning component to it as well. And the data they were harvesting, still harvesting for the oil drilling technologies that they’ve got. And it just kind of made me realize that this is a very special investment.

[00:08:09] Andrew Martin: I’ve not heard anybody talk about it. And so, yeah, the more I sort of dug into that, that became a kind of, yeah, guess hair tingling on the back of the neck kind of moment as well. Although it was over a much more gradual period, there was no kind of back spasm for that one. It was a bit more gradual.

[00:08:22] Kyle Grieve: So one thing that I observed while reading all of your letters was that you mentioned a few investments, especially kind of earlier on, but you didn’t say what the name of it was.

[00:08:30] Kyle Grieve: So it’s interesting. So I did, I did an episode this year about Nick Sleep and Qais Zakaria from the Nomad Partnership. And they mentioned in a couple of their letters how they didn’t want to talk openly about some of the names that they had for one very specific reason and that reason was to combat commitment bias.

[00:08:46] Kyle Grieve: So, you know, commitment bias can keep you in a name maybe longer than you ordinarily stay to due to your signaling of your commitment, whether that’s, you know, from writing to your shareholders or even sharing it in social media. So I want to just hand it over to you. You know, are, are you avoiding talking about names that you’re accumulating maybe just to avoid getting more and more eyes and interest on the, on the stock or the business, or is there a bias angle or perhaps it’s kind of a mix of the two?

[00:09:10] Andrew Martin: So it’s a good question. Yeah, and I’ve, it is a psychological effects. You do notes in yourself. When you talk about a name, you do, you’ve put it out there and you’re talking about it and then you start to defend your position. And. You might get somebody argue against it, or you might get somebody who agrees with you, and you kind of, you almost get defensive that I’ve got to argue my court or talk about it.

[00:09:28] Andrew Martin: And then, yeah, it’s creating a bias in your own head which can be damaging. So, I guess we do talk, I mean, in the courtier letters I talk about stuff, but then you’re not getting direct feedback, so I can’t think that kind of helps with that, that it’s a bit more one roof. We don’t kind of have a lot of kind of back and forth on X or any of the social media platforms in that way.

[00:09:47] Andrew Martin: So I think that helps alleviate it a little bit. I don’t like to kind of get involved in discussions with people in that way. And I like to hear what people think, but then I just let them have their opinion. I have my opinion. I keep that separate. So maybe that helps with the commitment bias. I’ve almost noticed the opposite effect if there is an effect where names like McCoy Global’s probably a good example where we’ve done a lot more work and more analysis to defend and we’ve put more money into it than some other positions.

[00:10:17] Andrew Martin: So maybe it is the kind of the anti commitment bias that because we’ve done that much more work and we needed to become more convicted to have a slightly higher position in it. That kind of had the opposite effect, but we’d obviously done more work and it worked out better for us, whereas maybe a name where you kind of think it’s a bit cheap, it’s maybe in a more risky kind of position.

[00:10:35] Andrew Martin: So you don’t want to put lots. Maybe there’s some, you know, a bit more hair on a particular name. So you don’t do as much analysis. We still do lots of analysis on it, but maybe those ones don’t work out quite so well. I’ve kind of found the opposite effect. The ones where we’ve done the most work convinced ourselves the most have tended to be the best ones.

[00:10:50] Andrew Martin: But yeah, that’s the opposite effect. Yeah.

[00:10:53] Kyle Grieve: And so, you know, just in your investing world, what kind of biases do you find that are the types that you need to combat on a regular basis, or maybe ones that you’re susceptible to, or ones that you’ve had to strategize as you learn more and more?

[00:11:07] Andrew Martin: Yeah, I think for me, it’s, I’m quite good at being contrarian and perverse, if that’s the right word.

[00:11:14] Andrew Martin: So I’m quite happy to disagree with everybody else. And if I find something that’s really cheap, I’m quite happy to buy it if it’s cheap. I’m not thinking there is often a reason why people aren’t buying that stock. So it’s good to find out. But then you’ve got to come to the conclusion you disagree with them for whatever reason.

[00:11:27] Andrew Martin: So we’ve been talking about gold stocks recently, and I disagree with the market at the moment in terms of those that I don’t agree with why they are as cheap as they are at the moment. But then I think the bias I personally have to fight is kind of, it’s almost price movement bias. So if a stock starts to go up or starts to go down, it’s hard to kind of fight those animal spirits of you found a cheap stock and it’s going up.

[00:11:48] Andrew Martin: And you kind of, you know, you don’t want to be stopped to panic by and chase the market up, especially if you’re trying to build a position in something that’s called a moderately liquid or, you know, you’re going to, it’s going to take you a few weeks to kind of build up a position. If the price starts to move for you or against you, it’s trying to stop that from biasing what you’re doing. I think you just have to look at the absolute level and say, this is still cheap. This isn’t still cheap. It’s maybe a bit less cheap than it was yesterday, or it’s a bit cheaper, but that shouldn’t really bias you in terms of. It’s very hard to guess why a price has moved in any particular direction.

[00:12:18] Andrew Martin: I don’t even remember one time. I think it was somebody on Twitter when it back when it was Twitter, was arguing why a stock had moved and it was literally because I’d sold it that day may have pushed it down slightly. So I was arguing all these reasons why it would have gone down or up that day. And it’s actually just because I’d sold a chunk. So yeah, you can kind of tell yourself up in knots in that so I think it’s yes price movements ride and price level I have to be careful off in terms of biases. But yeah, there are so many biases that you do have to kind of keep out your eye out for all of them.

[00:12:45] Andrew Martin: And yeah, look inside. It’s difficult to look inside your own emotions of what you’re doing and why you’re doing it. Just trying to be rational, which is to fight down the emotional side of things.

[00:12:56] Kyle Grieve: So you mentioned there about being a contrarian here. So I had a question for you specifically on that. So, you know, you probably maybe you don’t see this because you’re just naturally a contrarian, but I think.

[00:13:06] Kyle Grieve: A lot of other investors see that being a contrarian is good in the markets, but it, you know, it can be really hard if that’s not how you are, you know, by nature, because it’s, it is a lonely proposition, right? You know, humans are, are, are tribal beings and we enjoy being part of a herd and, you know, we want to agree with a lot of people rather than maybe disagree with a lot of people and.

[00:13:26] Kyle Grieve: So, you know, kind of differentiating yourself can be hard, even if you want to do it. So I’d love to know more about you, you know, how are you kind of differentiating yourself the most? And, and you know, are you naturally, do you think you’re naturally a contrarian or do you think that it was kind of a conscious decision to kind of move in that direction?

[00:13:43] Andrew Martin: Yeah, I think it actually am. Yeah, just in terms of, yeah, the way I am, and it must be born. I think there’s certain elements and traits of the way investors are. You’re, you’re kind of born with it or born with certain elements. I’m sure there are lots of elements I maybe don’t have enough of, but the contrarian side of it, I’ve got that.

[00:14:00] Andrew Martin: Yeah. And it’s almost being proven, right? I kind of enjoy that more than being with the crowd. So if you see what I mean, so times when yeah, you pick an investment, nobody agrees with you or not many people agree with you and then they start to join or there’s sometimes, you know, a group of people who are investing in a particular stock or name who do agree with you and then maybe the majority doesn’t.

[00:14:20] Andrew Martin: So, yeah, that’s kind of happening in different ideas we’ve got at the minute. And then over time, you know, the stock price might start to go up and the best part is really when what you have predicted or estimated will happen in the future, if that starts to happen, that’s really kind of gratifying, because that’s really, that’s where all kind of the estimation analysis from what we’re talking about, the beginning kind of comes in that and that’s what the hardest thing to do, I think, is that you’ve got a position now in a company.

[00:14:44] Andrew Martin: And maybe it’s going through a kind of inflection point or the business has changed its strategy, which you think or estimate is going to make XYZ changes in the future and push up if you’re going along, you know, the EPS or the free cash flow. And if that then starts to happen, it’s roughly along the lines of what you were predicting, then that’s very gratifying.

[00:15:03] Andrew Martin: And then people start to believe that. And I think the gold stocks, based on what I’m estimating are in that kind of position now. Unless gold kind of crashes off by a large amount, the cash flows will keep coming in for these stocks. And people, I think, are starting to look at them a little bit more. And again, they’re a bit like the McCoy example where they’re not the kinds of stocks a lot of GARP or value investors would look at because people don’t like commodity stocks.

[00:15:25] Andrew Martin: And I agree with them 99 percent of the time, but this 1%, I think maybe it’s worth a look at.

[00:15:31] Kyle Grieve: So the other side, I guess, of that whole contrarian equation is you know, obviously the herd can be wrong very often, but sometimes it’s right. So, you know, how do you kind of fight that contrarian nature to be different maybe than other people when maybe the herd eventually becomes correct?

[00:15:47] Andrew Martin: Now, that’s a good point. A landmine does happen, and it has happened, and it’s often if the herd is right, or, you know, some part of your thesis breaks, or you were wrong, you know, it wasn’t going to be right, then you just have to try again, forget the emotions a little bit, and look at the analysis, so the X, Y, Z facts have just happened, you were maybe wrong in whatever you thought, and then you have to then start agreeing with the herd, and yeah, maybe you have to sell out of position at a small loss, or yeah, reduce the size of your position, or, you know, sometimes you might miss out on an idea as well, but, you know. That will mean that’s, you know, the sins of omission, I guess that there are some stocks you look at and you just can’t quite get to grips with why they’re cheap and sometimes you’re wrong. So, I mean, it’s not, that’s one of the least bad ways to be wrong. I guess that you’re then just missing out on making money rather than losing any, but you know, lots of times I, you know, read theses from different people.

[00:16:37] Andrew Martin: I don’t quite doesn’t quite fit into what we do. But it ends up doubling in a year’s time. Yeah. Okay. The guy was right. And the analysis they did was right, but it’s not the kind of thing that we’d normally do. So again, yeah, you have different kinds of crowds doing different things that and I think you just have to kind of stay in your lane for one of the better phrase and do what you do and just, yeah, keep following a process.

[00:16:57] Andrew Martin: I think it’s one of the most important things.

[00:16:59] Kyle Grieve: So you had this really good metaphor in the markets concerning earthquakes that I wanted to ask you about. I really liked it. So the metaphor at its core was that, you know, you said the market is generally static. It doesn’t move very much. But there’s obviously these kind of periods where they can enter a dynamic position, such as, you know, large scale changes happening relatively quickly.

[00:17:18] Kyle Grieve: Maybe earnings go up very quickly or they release a new product or the market starts understanding it. So, you know, the stock can frequently be anchored to its past, which is, which is great when, when you see that there’s this new information accumulating before everyone else. But obviously, sometimes you get this new information that accumulates more and more, and then once enough of that information accumulates, kind of go moving to your earthquake metaphor.

[00:17:44] Kyle Grieve: It reaches this kind of tipping point where things happen, such as the stock price can shift very rapidly up or unfortunately, it can also sometimes shift down. So, You know, I’d love to know more about this, this, this metaphor here, especially in these, you mentioned these kind of hidden shifts. So what are some of these hidden shifts that you think you like to look for, or maybe that you think that the market tends to overlook?

[00:18:07] Andrew Martin: Yeah, glad you picked up on that. Cause I did not, many people kind of wrote to us about afterwards, but I thought it was a good, yeah, good example. It’s from my physics past, I guess it kind of made me think of that. Yeah. So in, in earthquake physics, there’s the static and dynamic friction. So dynamic friction is less powerful than static friction.

[00:18:23] Andrew Martin: So you have tectonic plates rubbing against each other, the pressure and forces build up. Then it reaches the tipping point or point where the static forces can’t stop the plates moving against each other anymore. So they start moving and they switch into the dynamic friction regime, which is a less strong force, and so they move a lot.

[00:18:41] Andrew Martin: So it’s kind of an analogy where, yeah, when something starts moving, it’s like anchoring. In the case of stocks, stops forcing the stock to stay where it is. And you can imagine why that might be in terms of psychological agent kind of theory that people are looking at stock prices, the stock hasn’t moved to weeks and weeks, and then suddenly it goes up 5%.

[00:18:59] Andrew Martin: Everybody’s going to start, well, you know, a lot of people can start looking at that. So why did that go 5%? And then you realize there’s a piece of news or, and then it moves up another 5%, another 5%, and then before you know it, you’ve had a 20, 30, 50, 40, 50 percent move. So yeah, I started to observe that in different names and it was kind of around the time, I think it was Cypher Pharmaceuticals, there was a little small piece in one of their calls where they just said that they’d obviously bought this new business line.

[00:19:23] Andrew Martin: And the CEO kind of casually says, so this has doubled our revenue and earnings for next year. That’s from nobody really picked up on that, that part of what he’d said is, well, quickly as they maybe should have done and the stock price moved just a little bit that day. And then more people noticed, and it moved a little bit more, a little bit more, people realized there was this fundamental change to the business, it was already a very good business, but it was kind of reinforcing the fact that the CEO’s doing very good stuff, and they just made a big change to the business, and that’s happened in lots of other places, there’s a few stocks at the moment that we’re looking at where this is also happening.

[00:19:53] Andrew Martin: And it’s, it’s a few names that we’re not going to mention yet, cause we’re still building a position, but probably mention it early next year. But similar kind of thing where the kind of stocks that we like are inflection stocks, where there’s a change to the business or some strategic shift or something that’s going to fundamentally affect the business, or there’s a new deal or some kind of interaction, some financial change that’s going to kind of prove out that the strategy is working for a business and you kind of see it playing out.

[00:20:18] Andrew Martin: And that’s kind of what we look for ideas where the thesis has kind of already started to play out. I like those kinds of ideas that you don’t have to predict that this competitor will do this, or this market will do this, or this product will work. It’s already started to work, but maybe people haven’t quite picked up on that fact.

[00:20:36] Andrew Martin: Tectonic plates have only just started to move. Those are some of the best ideas, I think, because you’ve got a lot more certainty and less risk than in other ideas. We’re trying to predict markets that are very complex two to three years out. So yeah, that’s kind of where that, you know, thinking color came from.

[00:20:52] Kyle Grieve: Another thing I noticed is, again, this was a couple of years ago, so maybe it’s changed by now, but you talked about mainly being fully invested. So I wanted to discuss just a couple of potential problems with being fully invested that I’ve observed that, and I’d love to get your thoughts on that. So you know, being fully invested makes a lot of sense.

[00:21:07] Kyle Grieve: I, I personally also tend to be fully invested as well, but I also don’t have to invest other people’s money or field calls from angry partners. But some of the possible issues are for you, you know, getting people who want to redeem their money after maybe you’ve had a tough point or, you know, from your standpoint, maybe the market goes down and you see that a lot of the businesses that you already own are really attractively priced.

[00:21:30] Kyle Grieve: You want to add more, or maybe there’s some ideas that you’re looking at. And, you know, they’re right for the taking, but you don’t have any capital to, to buy them with. So, you know, I would love to, for you to discuss a little bit more about how you think about this problem. You know, how do you find raising capital when you think you have a bunch of new ideas and yeah.

[00:21:46] Kyle Grieve: So please, I’ll hand it over to you.

[00:21:48] Andrew Martin: Yeah. And it is a tension when you’re running a fund or managing other people’s money that, yeah, you can’t control what everybody wants to do or needs to do. And it can be independent of the market. Sometimes that somebody just needs to make a redemption for their own reasons.

[00:22:01] Andrew Martin: And it can be things that are happening and, you know, it could be a, it’s this person who’s having to generate some liquidity or whatever the reason or, yeah. And it can be when the market is going down or it can be when, yeah. Like you say that the fund has done well or badly and yeah, the timing of new investments and redemption doesn’t necessarily come when you want it and when you’re finding new ideas. So yeah, I think you’re kind of we kind of try and manage it holistically.

[00:22:24] Andrew Martin: So you don’t have single investor that’s too large in the fund. So it’s kind of the opposite side of the fund management I say management side of the business that sometimes people don’t talk very much about. I think that you’ve got to manage the liability side as well, but it’s much better to have 100, ideally 1 percent investors, or, you know, rather than one or a few, you know, say three, say three and a third percent investors, because they could cause you, you know, some difficulties if they suddenly redeemed all their money.

[00:22:53] Andrew Martin: So we have to manage it on that side. And we haven’t really had any really large investors come in who’ve kind of changed the sort of structure on the liability side, but a couple of times there’s been a couple of got close to kind of put in some gating mechanism, just a very mild gating that would just help us a little bit if they needed to withdraw it all at once and they would get the, you know, the money out in two or three months anyway, but just help if they, if they needed to do that, some of the liability side.

[00:23:18] Andrew Martin: And then I guess on the asset side is, you know, again, it kind of comes down to liquidity. If you’re investing in S&P 500 stocks, then you could quite easily just liquidate with very little effect on the fund. So again, you’ve got to obviously have a portfolio, you know, different names. And kind of manage that whether things are going well or badly with the stocks and if the stock does well and becomes a large percentage of the fund, you can run that up to a point, but I think you still have to manage that a little bit because yeah, you’ve got the kind of liability side of it.

[00:23:45] Andrew Martin: So I think it’s kind of a liquidity management question that. Yeah, it’s kind of interesting that not that many people talk about it, but it’s a fundamental part of what you do because you don’t want to end up in the position where you have to sell this stock that you think is very cheap and the business is very cheap because you’re having to manage that against maybe another position that’s more liquid.

[00:24:01] Andrew Martin: You have to try and balance all those factors. So yeah, that’s kind of how we look at it. Kind of liquidity, holistic management sort of exercise.

[00:24:09] Kyle Grieve: So we haven’t really gotten the chance to talk here that you tend to invest in smaller businesses. You mentioned that generally, you look for businesses that are less than 1 billion in market cap for the most part.

[00:24:20] Kyle Grieve: So there are some interesting problems that you also outline specifically with, with small caps, you know, for instance, if a small caps price shrinks, that often means the price and the valuation can decrease, you know, quite violently and liquidity can, can dry up pretty quickly. So I’d love to just know, you know, why, why did you end up settling for looking at businesses kind of in that market cap area?

[00:24:44] Kyle Grieve: And also, you know, how has, has looking at the smaller market cap area contributed to your outperformance here over the past few years?

[00:24:52] Andrew Martin: It’s an interesting point though, I guess. I mean, most of the we don’t, we don’t set out a rule that says we will only invest in ideas below a billion. There just tends to be where most of the ideas are.

[00:25:02] Andrew Martin: We’ve had a couple, or in my history I’ve had a few as well, that have been multi billion dollar names that are very liquid household names, but they just go through a certain point in time where they become good investments that kind of fit inside the framework of what we, we do, but it tends to be that most are below a billion.

[00:25:19] Andrew Martin: So, yeah, you do end up sometimes having less liquid names, but it’s kind of surprising that just a stock at a particular market cap level, some will be liquids and some won’t be as liquid, even at the same size. And it varies by market and region, of course and over time. So, but I think one of the things we’ve found is that, the kind of lucky element of, if you are writing what you’re looking for and you find an undervalued stock.

[00:25:43] Andrew Martin: And again, you’re investing against the crowd, which is possibly or probably causing some of the liquid illiquidity. People don’t want to invest in particular lanes. And then if you’re right and the stock appreciates you know, in the ideal case, then they tend to become a bit more liquid.

[00:25:57] Andrew Martin: So they grow. So a 50 million market cap stock will become a 500 billion in an extreme example, and that’s going to become a lot more liquid. And then it’s much, much easier to sell. And then, you know, if there’s an idea that doesn’t really go anywhere, then hopefully you’ve got a bit more time, you know, there’s, you know, oftentimes we’ll have an idea and it doesn’t quite pan out the way we’d predicted.

[00:26:16] Andrew Martin: And so nothing necessarily bad happens to it. But then you just kind of sell out of it over time. Yeah. And so, and I think that that kind of helps your outperforms, that kind of affects that things will become more liquid as they appreciate if you, if you’re right. But then you do get obviously the converse problem where you might be wrong, but then I guess the opposite to that is that that can often increase liquidity as well. People will be suddenly selling and maybe the buyers disappear, but suddenly there’ll be a whole new cohort of people who want to buy in this stock and maybe it’s dropped 20, 30%, but then you can perhaps, you know, more easily sell out of that if you need to.

[00:26:47] Andrew Martin: So, yeah, it’s kind of worked out in both directions really in terms of the liquidity side of things. And I think we, we try and impose a limit as well in terms of liquidity. So there’s been a few really good ideas that if we, if I was only managing like a few thousand dollars, then there would have been fantastic investments, but we could only invest a small amount because they were so illiquid, they end up doubling, of course, and then you sell out of them.

[00:27:09] Andrew Martin: But yeah, you kind of have to limit yourself to, I think, ideas where you can kind of sell out of them in a reasonable amount of time, like, say, a few months, something like that. It’s kind of beyond that, then you kind of. They’re often good investments, but you’re kind of a bit more stuck into them. And I prefer to have a bit more liquidity in that.

[00:27:26] Kyle Grieve: So you mentioned in one of the previous questions a little bit about looking for these inflection point businesses. So I like to actually just kind of dive in a little bit more into that topic. So someone I’ve, I’ve interviewed before on the show, Paul Andreola, he also looks at inflection point businesses, but probably a lot earlier in the inflection point than I think you might be looking at them, but you know, tell me like, are you looking for businesses that are already decent businesses that might have an inflection to make it much, much better?

[00:27:52] Kyle Grieve: Or are you looking at businesses that maybe would be considered turnarounds for instance?

[00:27:57] Andrew Martin: Yeah, we don’t look at so much a turnaround. So yeah, I think you’re probably right. We are slightly later stage than yeah, investors like Paul often. It’s a mixture in terms of like how long the history of companies had.

[00:28:09] Andrew Martin: Sometimes the stocks we look at have maybe IPO say 5 years ago and they’ve kind of grown steadily, but then they hit the inflection point and something big changes. Other stocks might be two, three years old in terms of their, you know, their journey along the markets and then hit an inflection point.

[00:28:25] Andrew Martin: But then I think, you know, again, maybe connect McCoy Global is a much older idea in terms of a company to be going for decades and decades has been listed for a long period of time, but then has kind of come to a point where it was very cheap and was growing more quickly and had inflected in terms of its business strategy.

[00:28:43] Andrew Martin: So it changed fundamentally. In various ways, what it was doing, and it just happened, and when you track back through the history, there are lots of very complicated reasons why it got to it, where it had in its journey. So yeah, so you get ones like that that are, you know, a bit, a bit longer in the tooth, as it were, but then there’s a couple we’re looking at at the moment, which are much more recent and you kind of see what they’ve only just started inflecting now, because really the, you get obviously the operational leverage effects start to kick in.

[00:29:08] Andrew Martin: So some businesses that just started off very, very small have grown and then hit an inflection point and people start to notice them and bigger customers come along. So, and then that can be a good inflection point, but maybe the market hasn’t kind of noticed that yet, but the growth is still there. So, yeah, it’s a mixture of those things, I think.

[00:29:24] Kyle Grieve: So let’s talk a little bit about diversification here in terms of position sizing. So you obviously outperform the market here for quite a long time. And you look generally, as you said, just said at smaller cap stocks, but you know, you’re probably not owning, you know, the magnificent seven. So it’s safe to say here that you’re not closet indexing, for instance.

[00:29:42] Kyle Grieve: So tell me a little bit more about how you like entering a position, you know, at what point are you thinking of adding, for instance, to an existing position? And in an optimal world, you know, how many positions do you usually want to own in the fund?

[00:29:56] Andrew Martin: Yeah, it varies. It’s sometimes been the case that we’ve had to say between eight and 12 kind of core positions and then a smaller tail of positions we’re kind of going into or out of, but we’re probably well into the twenties at this point.

[00:30:09] Andrew Martin: And it’s partly a function of what the market’s doing. Although the market is expensive in lots of regions at the moment, it does seem there’s quite a few ideas out there because a lot seems to be changing to me. So things like AI and a lot of the new technologies are coming out. People are starting to talk about quantum computing, but that’s, you know, even more perhaps in the future, but maybe not as much as I think it is.

[00:30:31] Andrew Martin: Yeah, so there’s lots of different ideas that come up at different times and then it’s a balance between that and how diverse you want to be. But yeah, I think somewhere between. You know, it could be between 10 and 20 core positions, or maybe as low as eight. If you have like the period where you’ve got some very high conviction ideas for the, you know, the majority of our positions, that’s kind of where we’ve been in terms of diversity.

[00:30:52] Andrew Martin: I think to have much more diversity than that, it’s hard to track everything and be on top of all the businesses in the details you need to be. And often they’re in completely different sectors, which makes it hard if you’re trying to understand, you know, 10, 12, 15, 20 sectors or subsectors, that’s kind of hard, especially when a lot of them are quite technical.

[00:31:11] Andrew Martin: And, you know, there’s technical elements to every business trying to track that is difficult. So I think that would then start to hurt your outperformance. So I think, yeah, kind of keeping it at that level, I think is best in terms of, you know, a little bit more laser focused on what’s happening with those stocks.

[00:31:24] Andrew Martin: And as you say, you know, if you need to add to a position that’s kind of gone nowhere, but the business is doing well, then we would do that. We’ve had situations where stock we liked, went up a lot, sold out of it completely. And then it dropped various emotional regions and things that were happening in the market again, that from a contrarian point of view, I didn’t agree with why it had fallen.

[00:31:44] Andrew Martin: And then yeah, and then we bought back in and it’s gone back up again. So you get these kinds of weird situations that, yeah, that’s probably you didn’t get a lot, but sometimes you get situations where you can buy into stock twice and then, you know, make money out of it, depending on what happens with the emotions and what Mr. Market’s thinking about things.

[00:32:00] Kyle Grieve: And so, you know, since you like these inflection point businesses, I guess, you know, sometimes you might enter a position without maybe necessarily having 100 percent conviction. I don’t know. Maybe, maybe you do. That the inflection, it will play out exactly as you, as you want it to.

[00:32:15] Kyle Grieve: So, you know, are there sometimes, you know, I guess it’s completely situation dependent, but other times where there’s certain inflection point businesses where you, you know, maybe you make, you make kind of a smaller starter position. Then you want to see how that thesis plays out over time before you start adding to the position.

[00:32:28] Andrew Martin: I think it comes down to a lot of the time, the kind of inflection points we’re looking at.

[00:32:33] Andrew Martin: They’re not a long way out in terms of time. So they’re not years and years out there probably in the next year, 18 months, there’s lots of times where. You look at a business and you can kind of see in the next few quarters, I’ll know whether this is working out or not. So you don’t have a lot of time in the kinds of businesses and inflection points we’re looking at.

[00:32:51] Andrew Martin: So yeah, you have weeks or probably one quarter usually to do all the analysis that you need to do as much as you can. So it’s really a question of kind of diving into the business, trying to understand it as well as you can. Often there’s technical and technological components to it, again, which makes it can be a little bit more challenging, but you, you just have to kind of do the work.

[00:33:10] Andrew Martin: Yeah. And somebody relates to like software and there’s a lot of businesses relating to the internet and how that wouldn’t have existed, you know, 30 years ago, 20 years ago. And so I think it’s really, you’ve got to try and get to the point where you have more certainty as quickly as you can. So you dive into the business, you try and understand, you think there’s an inflection point.

[00:33:27] Andrew Martin: You try and understand as much as you can to prove to yourself with enough certainty as you can, you’re never going to be 100 percent certainty. So it’s probabilistic. You know, if the inflection occurs, that might mean you double or triple your money. So you’ve got to be, if you can become 50 percent certain, then that’s good expected value kind of payoff, but it can become more than that.

[00:33:44] Andrew Martin: And that’s obviously even better. So you don’t necessarily have to be even 90 percent convinced you have a very good idea. And you spread it across multiple ideas. Of course, we’ve got some good examples out of the moment where we’re just trying to get as much confidence as we can, that these things will play out the way we think they will.

[00:33:58] Andrew Martin: If they do. You probably will make two or three times your money in the next quarter or two, because what we think is going to happen will happen and it’s kind of started to happen. So these are actually fairly early for us by a few weeks and months. Yeah. So you haven’t actually seen like the financial results come through, but you start to see some of the business results.

[00:34:16] Andrew Martin: So it’s kind of those two elements as well as the business element kind of worked through of the inflection and as the financial results come through in a very rare cases, the business inflection has happened. Nobody’s really picked up on it. And then the financial inflection has also started to happen.

[00:34:30] Andrew Martin: And if it’s still cheap at that point, then that’s usually can have a lot of certainty at that point.

[00:34:35] Kyle Grieve: So let’s talk a little bit about your evolution here as an investor. So I’m not sure how you, how you came exactly into investing, but, you know, I think a lot of value investors come because they’re attracted originally from Benjamin Graham, just via Warren Buffett.

[00:34:49] Kyle Grieve: And then, you know, some of them have a couple of years of experience and then they tie and tend to either kind of stick to maybe a very value based focus that, you know, Warren Buffett or Benjamin Graham, obviously, in probably even a more extreme manner chose to do, or they decide to expand and kind of move somewhat in other directions.

[00:35:09] Kyle Grieve: I know that you kind of discussed your evolution a little bit as kind of more of a value focused investor, and now you’re probably, I know, I, I know you, you know, you’re talking about think buying things for cheap, so you’re still a value investor at heart, but maybe, I know you’re also looking for growth at a reasonable price.

[00:35:21] Kyle Grieve: So maybe could you discuss that, that evolution in a little more detail?

[00:35:26] Andrew Martin: Yeah. I think one thing that Bill Ackman was saying. You either read the materials from Ben Graham and Warren Buffett and you have an epiphany or you don’t, it’s kind of, you’re in one of those two camps and you kind of get it and I did, I just, it kind of made sense to me and I was kind of surprised at myself and the rest of the human race that there are other people who don’t invest that way, that you have momentum investors and different things, obviously, that make sense in different ways and do make money.

[00:35:52] Andrew Martin: But yeah, the whole value investing idea kind of made sense to me, and I did I think what a lot of people do, went back and read the writings of Buffett I like most for the partnership letters when he was dealing with small amounts of money and doing sometimes quite esoteric things and things that don’t, people don’t associate with him, like short selling and you know, he was much more activist back then as well.

[00:36:11] Andrew Martin: So, yeah, that was all fascinating. And then I read through, you know, over time, his letters and he munger and became more of a kind of growth investor, I guess. So he looked more at the business side of things. And I think that’s kind of the evolution. A lot of investors go through and I’ve gone through as well, but I was probably more kind of asset focused in the early days.

[00:36:27] Andrew Martin: I would look at the assets of a business, whether it was cheap price to book, but it was still kind of a healthy business. And some of those worked out, some of those didn’t work out so well. And then I think for me, that’s probably a lot of investors. If not all investors have one or two stocks, maybe that they have a success with very early on that then lights them up and you think, oh, maybe I can actually do this.

[00:36:47] Andrew Martin: Cause that worked out really well. And I made some good money out of that. So, yeah, I’m one of my ideas was Bank of America in 2011. So it was very early on for me in terms of what I was looking at. And it was just, yeah, very, very cheap name at that point. It was kind of coming out the back of the credit crisis, but it was still having problems with its mortgage book.

[00:37:05] Andrew Martin: It took years for that to all kind of play out in a lot. Banks and Bank of America suffered particularly. And they’re also waiting to find out the results of a fine. They’re about to get intensive, their handling of the situation. So I think at the very bottom, they were trading somewhere along the lines of if you normalize their earnings and worked out what that business was really worth and could earn, they were trading at about three and a half, four times earnings.

[00:37:26] Andrew Martin: And it was Bank of America and they were going to grow obviously over time because some banks had not survived the credit crunch. There’s going to be more of an open playing field. The regulation was obviously going to hamper growth a little bit, but there’s still a lot of growth kind of built in there.

[00:37:39] Andrew Martin: And yeah, it was one of those situations again, where it was Bruce Berkowitz. I was reading all the stuff that he’d written about that name and it just really kind of made sense to me. And obviously the market didn’t think so for the Bank of America is going to get a very large fine and the price that it was trading at meant that the mortgage business was going to blow up completely and the rest of the business didn’t exist.

[00:37:59] Andrew Martin: Basically, he was making a huge amount of money out of credit cards and the rest of its businesses on the commercial side and retail banking, huge amounts of cash flows coming out of those businesses. And once the kind of mark to market effects of the mortgage business faded away, it was obviously going to make tens of billions of dollars, which is what then started to happen gradually over the next couple of years.

[00:38:19] Andrew Martin: But the market realized within probably a year that that was the inflection point. It was happening and the fine wasn’t as big as people thought, and it’s kind of staggered. And then the price tripled within about two years. So there’s an example where you do the analysis, even with a big name like that worth billions that being kind of contrarian and that kind of, yeah, made me think that that’s a good way to kind of look at businesses.

[00:38:41] Andrew Martin: And yeah, I guess then again, but more earnings focused and then the latter years focusing more on the growth side of it as well. So, but it’s kind of a balance of all those things.

[00:38:51] Kyle Grieve: There’s another interesting paper that’s on your site that you wrote titled the three body universe. And so in that you mentioned that simplicity is a key part of your investing strategy.

[00:39:03] Kyle Grieve: And you mentioned that while owning a business that maybe is like some sort of unicorn disruptor or a business that has some idea that can cure cancer, you know, story stocks just aren’t really what you’re trying to achieve because of this goal for sticking with simplicity. You know, ultimately, you’re trying to find odds, business that has odds of success with minimal odds of failure.

[00:39:26] Kyle Grieve: So, I’d love to know a little bit more, you know, obviously, right now, you, you, you talked a little bit about things like AI and quantum computing, you know, how are you maintaining a focus on that vision of simplicity in some of the businesses that you own, especially when, you know, you go out and you see some of these just insanely speculative names that are clearly very low quality businesses that are essentially, they’re just story stocks and they’re zooming up in price.

[00:39:51] Andrew Martin: Yeah, I think the probability angle is an important one. And I read something that, yeah, there was an investor who was talking about it on X about Buffett being a very good kind of probability odds maker. And again, that’s not something people associate with him because he probably doesn’t talk about it as much.

[00:40:06] Andrew Martin: He kind of makes off the cuff comments, but if you go back to some of his early stuff, he’s obviously doing a lot of kind of probabilistic waiting things and not everything invested in worked out. So the Berkshire Hathaway itself didn’t do very well. And yeah, I think that’s one of the things you have to kind of force yourself to do.

[00:40:19] Andrew Martin: Cause I mean, you were asking in one of your previous questions about inflection points and. Being certain that they’re going to happen. You’re never going to be certain that it’s just the probability that you you’re going to be going to have that inflection point and being as certain as you can. So, yeah, there’s a lot of odds making and it’s a difficult way to force your brain to think.

[00:40:35] Andrew Martin: So there are some things I do in terms of, I guess, almost like a checklist of certain things that I look at in different stocks and depending on what kind of situation it is and what kind of estimations you’re making in the future, trying to work out probabilities that those would happen. So okay. I mean, you can do things, for example, like coming up with different scenarios as kind of basic one that there’s a kind of the middle point of what you think is going to happen, the low end and the high end, and if you kind of force your brain to then think about what’s the probability of that’s going to happen and the bad case and the good case, it forces you to think in a slightly different way.

[00:41:09] Andrew Martin: And I think you come up with a better estimate of what will happen because it’s forcing your brain to not say, I think the valuation of this stock is X. I don’t think that’s very helpful. It’s saying, well, it’s somewhere between X and Y and are these kind of bands of good, bad and fantastic. So, but what are the probabilities those will happen?

[00:41:26] Andrew Martin: So what’s the probability that the inflection doesn’t happen at all? And then your brain can kind of go through that, you know, you basically create a scenario of, I don’t know, I guess like the gold stocks. That’s one thing we did with that. So the gold price is, you know, somewhere a little over 2, 600 at the moment.

[00:41:41] Andrew Martin: For the bad things to happen to these stocks and for the price to drop precipitously from where they are now, gold would probably have to fall down to 1, 600 or 1, 800 and that’s probably, you know, being generous, but yeah. What’s the probability that’s going to happen in my mind? That’s fairly unlikely.

[00:41:58] Andrew Martin: And then if the gold price kind of stays in the range that it’s in now, maybe goes up or down a few hundred dollars, say it goes just down a few hundred dollars, then the stock price will still be very, very cheap. So again, you’re signed up properties. And then the high probability that gold kind of drifts upwards, then in that case, the stocks are even more cheap than I’m estimating they are.

[00:42:17] Andrew Martin: And if you put that kind of probability weighting against those different scenarios, you come up with what your estimate is of what you think is going to happen. So I think it’s a good way to kind of force your brain into that odds making kind of process, not just go. There’s a lot of investors, some younger investors, I think, try and estimate a price and say this is undervalued by 60%.

[00:42:34] Andrew Martin: And that’s, I think, somehow the wrong mindset of what you should be trying to do. You should be trying to say what’s the probability that this doesn’t work out and this does work out.

[00:42:43] Kyle Grieve: So, in that same paper, he wrote, and I quote, in investing business and life, random events have much to do with the pace of success.

[00:42:51] Kyle Grieve: The best you can do is put the odds in your favor, set up your life so that you can be patient and reduce the number of dumb decisions to a minimum. This is tough. End quote. So this kind of is goes hand in hand what you were just talking about with, with odds and probabilities and using that. But I want to focus more here on the points about patience and then the points about reducing your exposure here to dumb decisions.

[00:43:12] Kyle Grieve: And you know, how have you set up your, your life, your. Investing analysis everything to try to get you to avoid making those decisions and, and, and stay patient.

[00:43:22] Andrew Martin: Yeah, I think for everybody, you need to try and yeah, find a way that you’re not in a rush. You’re not trying to get rich quick because that’s very difficult or impossible in this way of investing.

[00:43:33] Andrew Martin: People, you know, read about doing different ways, you know, some people have maybe got built up a nest egg already so they can kind of use that as a backstop or there are some other forms of income. I think that’s what you need to do if you’re going to be patient. So, yeah, you either need, you need some kind of buffer or cushion.

[00:43:49] Andrew Martin: If things fall, you know, stocks fall, you’re not going to be panicking and thinking I’m not going to be able to pay my mortgage on my rent next month. Then that’s going to make you make bad decisions like I need to make that money back because you’ve just lost it. So you’ve got to avoid that kind of setup.

[00:44:03] Andrew Martin: Yeah. And I think it’s a fundamental thing. You have to kind of set up your life in a way that allows you to do that and give yourself years and years of time to be able to figure out what you’re doing and work it out that way, you know, at least five years and you’re alone on that if you can. But, yeah, I think, yeah, people need to be careful.

[00:44:19] Andrew Martin: And I think most people do do that to it. In terms of the people that I follow on social media do that, you know, and it makes you worry about some of the crypto investors who are maybe putting a large amount of their early wealth or whatever into crypto and some will make a lot of money. Some might lose it, get burned by that, which is very sad, but I think, you know, you fundamentally kind of structure what you’re doing.

[00:44:39] Andrew Martin: However, you do it through, yeah, money you’ve saved up, if you’re working or yeah, some other kind of buffer that allows you to give you that time where you can just have that buffer against the volatility, because even the best investor in the world will, you know, have up and down periods and you just need to have that cushion.

[00:44:56] Kyle Grieve: So from researching your investing letters and listening to some of your conversations, I know that you invest quite heavily in global businesses. You’re not just sticking with the United States here. So I know part of the advantage of that is that it’s allowed you to kind of rotate capital, say, you know, the U. S. market gets expensive, you can rotate it to a completely different geography. Obviously, there’s, there’s bonuses to that because, you know, you’re not, you’re not restricted to staying just in one market. And if that market gets really expensive, it’s not exactly, you know, the, the most fertile playing field to play in.

[00:45:27] Kyle Grieve: Many investors, such as myself, however, though, have had difficulties. Investing in areas like East Asia, where I know that you, you guys have had some success, especially in regards, I think, to circle of competence. I’d like to hand over to you, you know, tell, tell me how you’ve kind of found success in these more faraway regions where, you know, maybe you’re not super, super embedded into, you know, the culture or, you know, how those countries work.

[00:45:51] Andrew Martin: Yeah, it’s it’s partly made easier by things like the internet where you can, you search up a lot of information. And go down rabbit holes. It’s kind of amazing sometimes what you can find if you really dig down into all kinds of weird and wonderful websites. It’s amazing what information is out there even in different countries.

[00:46:10] Andrew Martin: And I think it’s also been recently made easier to some extent with AI and Google Translate. So it used to be difficult sometimes that you could kind of just about recognize the income statement numbers and the balance sheet because you could see where the numbers made sense versus how you understand those things fit together.

[00:46:26] Andrew Martin: But you wouldn’t be able to read the language behind it, the, I mean, management discussions around it. But now that, you know, it’s the Google translate and other translation AI tools, that’s become a lot easier. But yeah, it makes it a little bit difficult. I mean, it kind of goes against, I guess the Scuttlebutt kind of approach where, you know, people actually visiting stores to see products and see if they’re selling, you know, that’s, yeah, that’s one thing that you want to be able to do, you know, and be able to get this kind of alternative information.

[00:46:51] Andrew Martin: And it does make it a little bit difficult if you’re looking at a completely different place, which maybe means you have to do a bit more digging around of what’s going on over there. But I think there’s often a lot more similarities than people think in non English speaking or in different countries outside the US. A lot of investors I know don’t really like looking at non English speaking countries and don’t invest that much outside the US, which then, you know, potentially creates opportunities that there are markets like Singapore, there’s been some good investments over there and it has historically got some links with the West in ways that other countries maybe don’t have the same kind of links.

[00:47:25] Andrew Martin: Other countries like India are very difficult to invest in if you’re, you know, on the outside, you know, sadly creates a sort of barrier there, but it’s really just, yeah, kind of doing the same kind of analysis. You know, often the businesses are doing similar kinds of things that, you know, every country is, you know, a lot of countries have banks and different kinds of businesses.

[00:47:43] Andrew Martin: You do get some quirks in certain countries where things work a little differently. In East Asia and Japan, I was doing a research sort of through A to Z of Japanese stocks and I just couldn’t get comfortable with most of them because they weren’t doing very many buybacks or they didn’t pay many dividends.

[00:48:00] Andrew Martin: They were just building up cash. And so there’s a lot of stocks that they’re fantastic businesses, but just that capital allocation is atrocious compared to somewhere like the United States, where people do lots of good buybacks if they’re building up too much cash, but that’s starting to change. And it has been pushed to push companies to do that. And there’ve been a few that kind of popped up on our radar, you know, companies started to do or, you know, buybacks and things that make more sense in terms of capital allocation. So I think it’s understanding the differences and the similarities. So some markets have certain similarities and some have differences.

[00:48:31] Andrew Martin: And then, you know, it’s kind of been surprising to me over the last couple of years, I think in Canada that people have not really been as invested in Canada as they maybe should be. And that seems to have changed the last year or so. You know, there’ve been some bargains over the years in Canada that they probably shouldn’t have been because it couldn’t be.

[00:48:46] Andrew Martin: You know, it’s not that different to the U. S. in terms of a lot of the things that are going on over there. And I think you’re right. The one thing that has kind of helped us is that when markets were cheap in one place, they’ve been expensive in another place, we were able to shift. So there was a point a few years ago where the U. S. got very expensive, but East Asia was very cheap. So we’ve kind of shifted, rotated over there. And then it kind of flipped back the other way a little bit. And we, we found some better ideas in the West again. And over the last couple of years, Europe has had some good pockets of good investments.

[00:49:14] Andrew Martin: Yeah, I think in general, we kind of look at places where there’s kind of good governance, right? It kind of comes down to that and being careful of what the kind of political geopolitical situation is behind that, you know, avoid doing anything where there’s been a really bad geopolitical issue or, you know, wars breaking out, that kind of thing.

[00:49:31] Andrew Martin: But yeah, you have to be kind of mindful of that when you look around the world as well.

[00:49:35] Kyle Grieve: So in another one of your letters, you were assessing your ability to outperform the market, and you came up with kind of these four main factors. One was that you focused on overlook markets with less competition, which we just talked about here.

[00:49:47] Kyle Grieve: Two was that you analyze just a lot of businesses. You know, you mentioned kind of go do it in the buffet A to Z thing. Then you look for tons of different businesses that hopefully have these large discrepancies between price and value. Three, you prioritize buying cheaply. And four, you have a process which insulates you from this external noise and different fleeting trends.

[00:50:05] Kyle Grieve: So I want to focus actually on the third point here, which you kind of broke down to as price being your due diligence. I’d love for you to just kind of further elaborate on how you use that as an edge, and maybe how you also triage your time to ensure that you’re maximizing time spent on positions that are worth spending the time on.

[00:50:23] Andrew Martin: Yeah, I guess we have a couple of elements to that. I mean, one’s kind of as much as anybody does in terms of looking for cheap businesses that are growing. And I think it’s probably the second of those that helps with that. If you’re looking at a lot of different stocks, it’s kind of amazing what will pop up, especially if you’re looking across the whole world, there’ll be things that are kind of jokingly thought about them as gulp stocks.

[00:50:42] Andrew Martin: Unbelievably low pricey. You can find some things if you look hard enough that you’re almost surprised they exist and that they’re that cheap. And then, you know, you’ll often find somebody else has also found them. So you’re not the only one, but if you look across enough stocks, then you see more of those than perhaps other folks would.

[00:50:58] Andrew Martin: But I guess the other thing we do kind of embed the way we look at individual stocks into the portfolio and do a cross comparison of how cheap they are with a whole bunch of metrics within the portfolio and against the external market and other ideas we’re looking at. So looking at, you know, the yield or how much cash a company has on its balance sheet, but just looking at across the whole portfolio.

[00:51:18] Andrew Martin: I’m trying to balance that and it’s kind of good way to look at things as well. Cause it kind of, again, changes your mental model because it forces you to sell things that are becoming a little bit too expensive and stops you thinking about the price movement. It’s one of the biases that, you know, it’s easy to get caught up with.

[00:51:32] Andrew Martin: It just fundamentally makes you realize this stock is, you know, it’s now whatever it would be, you know, of 2025. It might be still growing or it’s growing okay, but it’s not, you know, it’s three times less cheap than it was when I bought it. So maybe I should be selling a little bit of that and buying out of the one I’ve just found that, you know, had a P of five.

[00:51:50] Andrew Martin: So it was, then yeah, it kind of helps you. And as I say, there’s some metrics we use to kind of force ourselves to do that. And it kind of, it stops some of the biases that you have when you look at stock movements and just see, yeah, the movements on charts. So that’s kind of one of the ways we look at it.

[00:52:04] Andrew Martin: That thing helps.

[00:52:06] Kyle Grieve: So you obviously spoken a lot here about just a simple valuation tools that you use and so you actually mentioned one that I actually wanted to discuss a little bit more. You wrote that, you know, determining undervaluation is actually really easy. You just divide the market cap by the earnings in a year or two in the future and you get a number.

[00:52:22] Kyle Grieve: But you also mentioned that, you know, once you get that number, there’s obviously a lot of work that needs to be done once you get to that point. And also, you know, estimating future cash flows with high certainty can be pretty hard after just a year or two time, even, even with these, you know, super major businesses out there.

[00:52:38] Kyle Grieve: So, I’d actually like to know, you know, let’s say you have two businesses, you know, ABC has a lower evaluation in the next two years. And then let’s say XYZ maybe has a slightly higher evaluation, but you, maybe you have more certainty in the, in the cash flows, you know, maybe from year three to five.

[00:52:54] Kyle Grieve: I know that that might not be enough information for you, but between the two of those, you know, which, which one would you pick?

[00:53:00] Andrew Martin: Yeah, that’s probably not enough information, but just to take the general point, I guess, I think it would be the one way we can get the most certainty. So, yeah, if you can figure out the certainty that it may be, it’s not as cheap, but you have more certainty for whatever reason, it would be those often, often you’re biased psychologically, I think, to the cheaper one, but often the latter turns out to be the better investment because it will carry on being certain.

[00:53:21] Andrew Martin: Maybe it’s in a business where the cash flows are more certain and that will kind of steadily grow over time. You know, we’ve had examples in color both sides where there are some business out there that are doing extraordinary things and growing over many, many years. Rates above 30 percent and you can kind of just see that continuing because there’s, there’s kind of embedded really strong business moats that they have.

[00:53:42] Andrew Martin: And it kind of comes down to that and maybe the uncertain one doesn’t have as much of a load. And it’d be the reasons that go into that and that’s causing, you know, you might see quarter to quarter volatility or, or something that, you know, makes you feel less certain because of the nature of the business, you know, some businesses have high levels of cyclicality and some businesses are just, yeah, more, more uncertain. So yeah, I’d probably go for the more certain business markets.

[00:54:04] Kyle Grieve: So I want to shift over and talk a little bit about tech. Cause I know, you know, you have some really interesting points on that in your shareholder letters. So there was this interesting trend that you noticed and you pointed out in your letters and around the mid 2023 mark, and that this was that technology is encompassing a broader and wider area.

[00:54:21] Kyle Grieve: Maybe that goes in line with your McCoy Global investment. Now, you know, this makes it easier for a business that maybe in the past would not be associated with technology and now can consider itself a technology business today. So my question for you is, you know, are there businesses that are maybe taking advantage of this just to specifically, you know, chase a premium multiple and increase the price of their stock price?

[00:54:42] Kyle Grieve: Or do you think that this is like an accurate signal and there’s businesses that are truly creating value based on technology?

[00:54:50] Andrew Martin: Yeah. I think that people chasing technology was true years ago. So, you know, maybe 20 years ago for dot coms. And there’s probably still an element of that, I guess, now with AI, not companies claiming to be doing a lot with more with AI than they really are.

[00:55:05] Andrew Martin: But I think there is also a trend, a real trend as well, that I started to notice it as we were doing our portfolio reports and the bucket things for investors into different categories. So this is industrialists, consumer discretionary, this is technology and our technology buffer bucket start to keep going up and it was because some of the things we’re investing with kind of clear technology companies, software companies, but then some of them, you kind of dug into the business like, well, this probably wouldn’t have been called a technology company 20 years ago, wouldn’t have had that element to what it’s doing.

[00:55:34] Andrew Martin: Maybe it would’ve been called publishing or something else like that. So it just kind of made me think that it gets to the point where McCoy Glue, you know, like you say, is probably a good example of that, has such a large technology component to what they’re doing. It’s not just what they’re doing. They obviously have a lot of hardware manufacturing as well, but you can maybe say that they’re 30% technology or 50% and then that kind of bumps it up and eventually gets to the point where, what is technology?

[00:55:55] Andrew Martin: It’s kind of a lot of different things that color covers almost everything, you know, to some extent or rather. So yeah, I think that’s a real trend. I think the other thing that kind of made me think about that was buffet himself who avoided technology, whatever that meant over the years that he was investing.

[00:56:10] Andrew Martin: And then he started investing things like Apple and realized actually that’s a really good investment that totally fits inside his circle of competency. And lots of other things probably would’ve done through the way and maybe his bias against technology kind of delayed him doing that. Yeah. And it kind of made me think it shouldn’t be biased against technology, that it can be uncertain.

[00:56:27] Andrew Martin: And there are cases where some businesses are uncertain that technology aspects and high level of competition can be a factor, but there are a lot of businesses out there that are much more stable and much more so than there would have been if there were technology companies 30 years ago so.

[00:56:42] Kyle Grieve: So you also had this really good point about how technology focused businesses today spend money on research and development to build things like you said, pools of data, you know, networks of servers or lines of code.

[00:56:54] Kyle Grieve: And an interesting thing to do with that is that, you know, traditional accounting standards doesn’t really value these. But it’s very clear as you just said that, you know, these areas can add a very, very significant amount of value to a business and this point actually kind of makes me think of Adam Cecil’s excellent book, where the money is, where his basic premise of his book was that he kind of needed to understand how tech businesses worked because it was financially dangerous not to.

[00:57:17] Kyle Grieve: I really like how he worded that. And his point is that legacy accounting methods are kind of outdated now because it doesn’t incorporate the value that’s added in this R&D to the tech businesses today. So, you know, give me some more information on how you kind of incorporate that into your investing.

[00:57:34] Andrew Martin: Yeah, that’s a really good point. I think a lot of people have started to, or more and more people have started to realize this, that yeah, say 50 years ago, a company is building a widget or builds a factory to create the widget to build the widget. Yeah, and that factory would have an asset value show up on the balance sheet.

[00:57:51] Andrew Martin: You know, nowadays. You have software companies developing all kinds of very valuable tech assets effectively that don’t really get valued correctly and the expenses that kind of go into creating them, you know, it was kind of just fall off the balance sheets and get subtracted against the income statement and too aggressive away, you know, and some companies make adjustments for that, you know, use the accounting in the, we think of as the right way.

[00:58:14] Andrew Martin: But yeah, I think that sort of lags a lot behind where these companies should be valued, so you get a lot of much more asset light businesses than you would have done in previous decades, and it’s only going in that same direction, you know, maybe with the event of AI, you’ll have more data centers, but still the AI technology itself still won’t necessarily get valued in the right way.

[00:58:33] Andrew Martin: So, yeah, one thing we do is, and again, it’s more an art than a science, it’s difficult, but try and work out what components of the R& D, for example, expenses should be taken out and are really actually true income. And I think that comes down to a lot of things in the income statement. It’s easy to think of the income statement as a very certain set of line items, but there’s a huge amount of art rather than science in terms of the numbers that take you from revenue to, you know, net profit.

[00:58:59] Andrew Martin: And I think, you know, this is one example of that where you should really just be accruing. Those expenses over, you know, a much longer life, lifetime, and for a fast growing business that can have a huge impact in terms of the amount of expenses being recognized now for growth. That’s going to come five years down the line and create much more income.

[00:59:17] Andrew Martin: And a similar thing as well. I’m not necessarily directly related to St. Louis, but it can be often with software is the sales and marketing lines as well. The sales are produced now. Dickie and SAS businesses, and that, that, that approach can be generating income for a long period of time as well for those kinds of businesses that could be a big effect as well.

[00:59:33] Andrew Martin: So taking those expenses out is often far too aggressive. So we make adjustments for that to try and normalize earnings. And often it’s quite shocking the result that comes out that you find that something that looks fairly valuable or a little bit too expensive turns out to be incredibly cheap. And then it’s interesting because then as you follow that through the years, you see that actually starts to pan out.

[00:59:51] Andrew Martin: The income goes up and those expenses are, you know, starting to come through as having generated that growth that you see.

[00:59:57] Kyle Grieve: So, Andrew, thank you so much for coming onto the show today and sharing your excellent insights with me and, and the audience. So I’d love to give you a handoff, you know, where can the audience learn more about you?

[01:00:07] Kyle Grieve: Read your shareholder letters.

[01:00:09] Andrew Martin: Yeah. Well, yeah, to come to our website, I guess, fairlightcapital.com. We put information out on X as well. I’m starting to use other social media platforms a little bit as well. So, yeah, under Fairlight Cap. So, yeah, just, yeah, continue to read our letters.

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