Hey everyone! Welcome to The Investor’s Podcast. I’m your host, Clay Finck, and today I’m very happy because I’m joined by Chris Mayer. Chris, thank you for joining me today. [00:02:30] Chris Mayer: Hey, good to be on with you, Clay. [00:02:32] Clay Finck: So I read through your book, 100 Baggers for probably the third or fourth time in preparation for this interview. [00:02:38] Clay Finck: And it’s definitely one of my go-to’s when figuring out the types of things I want to look for when purchasing a company. I’d call myself more so like a quality investor. I want to buy a higher quality company kind of what Warren Buffett’s preached more and more, maybe we could get this conversation kicked off by maybe just having you just tell us what a 100-bagger is and what brought you to writing a book on them. [00:03:02] Chris Mayer: So 100 baggers of stock that goes up a 100 to 1. So you put a dollar and you get a hundred back. How have I got into it? Well, that’s interesting. I mean, I started with Chuck Akre really in 2011 and he gave a talk called An Investor’s Odyssey and you can find it online. I definitely recommended it, great talk. [00:03:21] Chris Mayer: And in that talk, he mentions a book by Thomas Phelps called 100 to 1 in the Stock Market. And I was an investing junkie. You know, I thought I had read every kind of investing book out there, all the obscure ones too, and I’d never heard of that one. So I got it, and you know, I really loved it. [00:03:36] Chris Mayer: And I started quoting from it and this was back when I was running my newsletter. I had a reader say, you know, you should update that book. So I was like, yeah, that’s a great idea. So that’s how it really got started. I started to put together the research on my own and to update Phelps’ study but that’s what really inspired me. [00:03:54] Clay Finck: It is funny that you come across some of your best ideas from the outside. It just kind of serendipitously happens to you and then you’re like…hey why didn’t I ever think of that? [00:04:04] Chris Mayer: Serendipity is a powerful thing, man. At this point, that’s one of my favorite words, serendipity. It never underestimates. [00:04:10] Clay Finck: So tell us some of the key characteristics you found in studying the 100 baggers. I know you put a lot of money into updating the study to put together the new list of companies that achieved the 100-bagger status. So, what were some of the key characteristics you found? [00:04:25] Chris Mayer: Well, the list that I created to, I sort of, you know, called it a little bit. So I took out a lot of the little, tiny little microcap, microcap flares. Like, you know, if some little mining stock went from 5 cents to five bucks or something, that, that kind of stuff didn’t make it because I was trying to kind of grapple with the idea that you might be able to see these in the numbers. [00:04:46] Chris Mayer: You know, you can’t really predict if the mining companies are going to hit it big or some small little biotech company is going to have a big drug that suddenly goes up hundreds of percent, we’ve all seen those happen. So I was trying to find, see if there were some predictable ones and I guess I was a little bit…I didn’t find as much as I thought I would. As far as this kind of like a statistical profile, which I kind of hoped I might get more at but because the path up the mountain is so varied and there’s so many different ways. But if I hadn’t like to pick a few things, I would say, you know, almost all the stocks, all these stocks took a long time to get there. Like if just imagine a fat tale, like most of them were 20, 25 years it took to get there and to do that, you have to compound capital at 20 to 25% a year for 20, 25 years and that gets you your 100 baggers. [00:05:34] Chris Mayer: That’s basically the math of it. So that kind of frames it and everything else is kind of backing into how do you get that? So that’s the most important and I would say that means that you have to have companies that grow a lot. [00:05:48] Chris Mayer: So the McDonald’s of the worlds and the Home Depot’s that just expanded and had the world as their market. I mean, those are the ones that kind of stand out. That’s definitely one of those traits. The ability to just really grow high returns on capital, long period of time. [00:06:05] Chris Mayer: Obviously companies that did this also usually had some sort of moat, had something that they did that was difficult to copy. And then another one that I liked that I’m more sensitive to because I’ve integrated this in my own investing process and that’s it, that they have some sort of entrepreneur or somebody behind it. [00:06:22] Chris Mayer: So there’s a number of likes, you know, Charles Schwab, you got Charles Schwab, right? Steve Jobs behind Apple. I mean there’s always, not always, but there was often an individual and entrepreneur, some driving force that really got it going. And that was important to the name and then there are exceptions to that but those are some. [00:06:38] Clay Finck: Yeah, and then the biggest winner of your study was TIP’s favorite, Warren Buffett and Berkshire Hathaway. I think at the time you wrote the book, it was an 18,000 bagger, which just mind-numbing returns when you think about it and look at his track record versus the S&P 500. [00:06:55] Chris Mayer: Yeah, it’s nuts. This is crazy. [00:06:58] Clay Finck: You know, as someone that’s younger and is continuing to learn more and more about investing and listening to your past interviews. I know you talked about how you learned a lot along the way and kind of found your way to wanting to buy these higher quality companies. And I think one of the biggest struggles for me is the catch 22 of you want to own a great business but oftentimes the market knows it’s a great business and it’s trading at a higher valuation or a higher multiple. [00:07:24] Clay Finck: And I think that some investors kind of struggle with that because maybe 20, 30 years ago, a lot of these higher quality companies weren’t trading at as higher multiples but maybe we’ll see that direction shift a little bit with higher interest rates now too. [00:07:39] Chris Mayer: Yeah, I mean, that’s an interesting point. [00:07:40] Chris Mayer: I mean valuations for most of these great companies, who were generally higher, I mean, it wasn’t like we, we all can find exceptions, right? When I think like Constellation Software, you know, you go back to like 2015 or 16, whatever it was, I think it was, they had a free, crazy low multiple of earnings. You’re like, what happened there? [00:08:00] Chris Mayer: But that’s not very typical most of the time, great companies carry premiums and even then, it can still work out. I mean, I always think of those little exercises like Terry Smith is famous for doing, where he looks at a company and then he rolls back 20 years and shows you what you could have paid and still made and still earn whatever 10% compound return. And the PE multiples are always really high. You know, you ain’t got to be careful with that kind of thing cause you got to be right about the business, but I’ve done that with some of my own holdings. [00:08:28] Chris Mayer: I remember I did Copart, and I think I looked at like… it’s a 10-year period where it was up 10X but I looked at what you could have paid and you could have paid like 60 something times earnings and still made 15% compounded over that decade. Even though at the time it was still trading in a premium to the S and P. I think it was 20 something times. [00:08:48] Chris Mayer: So yeah, you really got to be right about the business. And then I would say you don’t think of it necessarily, like you only get one bite of the Apple. So you buy some today and, two, three years down the road, maybe you get another chance where it’s, where it does get kind of cheap. [00:09:03] Chris Mayer: So you know, if you’re younger and you’re investing in these things for long haul, you’re going to get more assets as you go, and you’ll probably be buying them for years. That’s another lesson with 100 baggers, is that for a lot of these stocks, you could have bought them at the highest price paid for, you know, highest price they traded in any year. [00:09:25] Chris Mayer: You could have done that for years in a row and still made 100 times your money. So if you’re really right about the business, you have more room on valuation than you probably think. [00:09:34] Clay Finck: As you mentioned, you really need to be right about the business and a key piece of that is obviously what you’ve alluded to is the moat. [00:09:42] Clay Finck: A company needs to be able to continue to grow and continue to fend off competition and earn those high returns on capital and continue to grow earnings. An example to nowadays a stock that’s kind of been punished as Alphabet. Charlie Munger said they have the strongest MO in the world years back. They regret missing that one and then now, people are saying, they have no moat, there’s AI’s coming in, ChatGPT and all this and its capabilities. How do you go about assessing the durability of a moat? [00:10:12] Chris Mayer: Yeah, I spent a lot of time on that. Cause I mean, Clay, you naturally, you hit it. [00:10:17] Chris Mayer: That’s the thing, if you’re going to own these things for a long time and you’re buying businesses own pre- you know, earn high returns on their capital, you want to make sure they continue to do it year after year and so you have to spend a lot of time figuring out what makes it special, why are they earning those high returns. [00:10:32] Chris Mayer: So naturally excludes a lot of things that are very cyclical. You know, you might have some obvious examples, we say you have oil and gas coming, it’s earning great returns, but that’s only because it’s we’re at a good spot and the oil cycle, for example, that might not always be the case, right? So you really have to spend time figuring out what makes it special. [00:10:49] Chris Mayer: And I don’t know, I mean, there are different kind of competitive advantages and network effects. We all know some of these. I think of an example like say Copart is a name I own. I always mention it because it seems to be a good example of a company that has a moat, has basically one other competitor, Insurance Auto Auctions but it’s competitive advantages really rooted in the real estate that it owns and accumulates over a long period of time. [00:11:15] Chris Mayer: And then the network effects of having all these different buyers and sellers of salvage cars, salvage vehicles on their marketplace and so that becomes very difficult for competitors to crack over time. So that’s what you have to do. I mean, it’s a case-by-case basis, looking at the companies and figuring out why, how is it able to earn those high returns? And then being convinced that they can do it for a long period of time, and it’s very difficult to copy what they do. [00:11:42] Clay Finck: As I’ve learned more about how investors go about beating the market. It’s been a really humbling experience initially. It’s easy to believe that it’s impossible to beat the market nowadays with all this information that’s out there. [00:11:57] Clay Finck: Anyone can access it for free. You have all this money in Wall Street that can invest in certain resources you can’t get access to. The list goes on for reasons you won’t be able to beat the market and I was reading The Joys of Compounding. It’s a fantastic book by Gautam Baid and he talks about this study where they looked back and they looked at, okay, here’s the higher performing companies that earn high returns on capital and the lower performing companies. [00:12:24] Clay Finck: And what they found in that study is that the winners tended to keep on winning and the losers tend to keep on losing. And when you buy one of those winners at a fair price, essentially the opportunity for an individual investor like me, the opportunity is to have that long time horizon. So buying those winners and then just allowing them to compound as you just sit and wait and I think that’s one of the beauties of it and something you’ve discovered in your research as well, right? [00:12:52] Chris Mayer: Yes, and I don’t know that you necessarily want to make, like be in the market your goal right off the bat, because it’s kind of like saying you want to be happy. It’s just not a goal you go at directly. [00:13:01] Chris Mayer: It’s the end result of a good process and also you don’t have to do it whole hog. If you were an individual investor, you could take some of your money, put it in index fund and leave it there, and then put some other part where you’re trying to do better than that by studying businesses and doing, as you suggest, trying to buy the winners. [00:13:16] Chris Mayer: And I definitely agree with that, that the winners tend to keep winning. There’s always, again, there’s always exceptions, but it’s easier. You know, I was saying kind of joke with the end, you’re just buying, you’re buying a chart that goes up into the right. You want to keep going up into the right. [00:13:28] Chris Mayer: But that’s what tends to happen. The winners do tend to keep on winning again, because they have some competitive advantage and something special, and then they keep doing it. So at all good points, I would say. [00:13:41] Clay Finck: Another piece I found quite interesting in your book was the focus on investing in stocks rather than other asset classes. [00:13:49] Clay Finck: Nowadays, there’s a good number of people that put a lot of their wealth outside the financial system, and some probably just wait and hold cash waiting for the next crash to happen, essentially trying to find the market and you referenced the work of Barton Biggs in how he studied these different historical catastrophes, what I’ll call them, and how one preserves their wealth during times of chaos. So talk to the audience about why investing in stocks offers investors good protection against this type of calamity. [00:14:23] Chris Mayer: Right. Yeah. I mean, Barton Bigg’s book was an interesting read. I think it was called War, Wealth and Wisdom and he looks at World War II and he looks how different stocks, stock markets behave. [00:14:32] Chris Mayer: And even through that whole calamity, if you had bought, you know, US stocks he would’ve done okay. I don’t know if I would take that too much to extreme. I mean, I think the basic idea is that you want to own something. You want to own stuff. And if you own shares in a good business, a great business, your odds of surviving that calamity are probably okay. Now we can come up with extreme calamities where that’s not going to be the case but most of things like wars and recessions and those kinds of things. And just think about it. I mean, when you have great business, you also have people there trying to figure it out, trying to figure out the problems and keep the business going. [00:15:11] Chris Mayer: So I think people underestimate that because they tend to think that they just want to own something like gold. Something that they know won’t change and there’s certainly a place in your portfolio for those kinds of assets, but I don’t think you want to underestimate the ability of a really good business to navigate its way through difficult times. I mean, just look at the 20th century is kind of a mess but there’s a number of stocks that did perfectly fine. [00:15:36] Clay Finck: And the result of his work, he essentially recommended putting at least 75% of your assets into stocks. [00:15:44] Chris Mayer: Yeah and that’s Barton Biggs, which he was kind of a… I mean, he was kind of pessimistic in that book, right? [00:15:49] Chris Mayer: I mean, I think he had a lot of survivalist stuff in there too and he still said 75% and this guy is just looking at history in different markets and how they performed during very bad times. [00:16:01] Clay Finck: Another piece I really resonated with in your book was the focus on owner operators. [00:16:07] Clay Finck: I was talking with one of our founders, Stig, about a company and you know, I was telling him all about the business, you know, how well the stock’s done over time. And he kind of ignored what I was, you know, saying about the business. He’s like, how much stock does it do the insiders own? And it kind of just took me aback because it was, you know, pretty unrelated to what I was talking about. [00:16:27] Clay Finck: But I think it just hits on the point of how important insider ownership and owner operators is within a business. These are businesses that are heavily owned by the managers because the managers ultimately decide the fate of the business. So maybe you could expand on what makes owner operator companies a ripe hunting ground for investors. [00:16:49] Chris Mayer: The more and more I study business and the more experience I get, the more I realize that at bottom business is just about people and I guess there are some businesses that are so great that even when they have lousy management, they can survive that but I always think of that Buffett quote too, where he says, you know, over 10 years, a CEO determines where 60% of capital of the business is employed. [00:17:12] Chris Mayer: Something crazy like that. So capital allocation makes a big difference and so I always like skin in the game. There are a number of things I’d say. You know, the behavior of people who own a lot of stock is just different and especially comes out in times of crisis. And there’s different studies for this that show that they all invest and continue to invest even during downtimes where a more hired hand CEO might, you know, kind of pull back and wants to preserve his job, doesn’t want to be called in a question. [00:17:44] Chris Mayer: So I think about even specific examples you know, like Old Dominion Freight Lines is a business I own and I’ve continued to invest in opening new distribution centers, even when the trucking markets are weak and where their competitors don’t. I remember a slide deck from one of their presentations where they show over a 10-year period of time the number of distribution centers, how it’s grown for Old Dominion but for a lot of their competitors it has not. [00:18:08] Chris Mayer: So the willingness to invest in the business is very important. There’s another interesting example I mentioned Copart and I tweeted this. The difference between Copart and Insurance Auto Auctions when it came to investing in the business, Copart, again, owned by Willis Johnson and Jay Adaire that have quite a bit of skin in the game and they think long term and invested long term. [00:18:27] Chris Mayer: Whereas Insurance Auto Auctions was owned mostly by investors. It was not an entrepreneur. In the heart of that, and they were more intent on paying dividends and didn’t reinvest in the business as aggressively. And so over time, now you really see the difference. The market share for a Copart is where they were almost equal, say I think it was in 2016. [00:18:49] Chris Mayer: Now it’s like 60/40 slanted for Copart. And that’s not something you can easily fix because Copart has been investing every year for all those years and you know billions of dollars by now. And so it’s very difficult to make up that. So those are some reasons. I think also there’s other evidence that’s out there about families, family owned, you know, I also count families as insiders. [00:19:14] Chris Mayer: So if you have a family-owned business, they tend to, they have certain behavioral patterns that are good. And so, for example, they don’t play that earning earnings, the quarterly earnings gain, they tend not to give guidance. They tend to be less levered, less financial leverage. You know, you add that all up, the incentives are just more aligned naturally when you have, when you’re investing with people who have a lot of stock of their own, they’re already on the same side as you, just naturally by the fact that they are paying so much stock. [00:19:43] Chris Mayer: Again, I always like to point out that there are exceptions to this and I’m sure we can all come up with it. Examples of businesses where the insider owned a lot and you know, still treated minority shareholders very. But by and large, when we look at the good place to fish, you know, by and large the populations of insider owned companies tend to outperform. [00:20:02] Clay Finck: I mentioned the Joys of Compounding and he has a chapter all about incentives, and he’s following these Buffett and Munger quotes and you read that chapter and you’re like, just like blown away. That incentives really drive so much of human behavior if you want to understand why someone’s doing what they’re doing. [00:20:20] Clay Finck: It goes back to the incentives and when someone owns a lot of stock, just naturally they’re going to want the shares of the stock to do well over time, and they’re going to be more likely to think long term and make those conservative type decisions. [00:20:33] Chris Mayer: Right? Yeah. I mean, but my Munger’s famous quote on that is show me the incentive and I’ll show you the outcome. [00:20:38] Chris Mayer: So, yeah, and that’s a big part of what I do at Woodlock Houses, look at the incentives and portfolio is full of companies that have high insider ownership, so it’s important. [00:20:52] Clay Finck: You mentioned Woodlock and the fund you’re managing. So transitioning from your book 100 Baggers, what were some of the key takeaways other than maybe the owner operator piece that you’ve implemented into your own process? [00:21:08] Clay Finck: Do you always try and apply this template when you’re investing in a company or are there other sort of situations? [00:21:14] Chris Mayer: Well that is a great question. I mean, I think that yeah, when I did the study, it definitely had an impact. I began to appreciate a lot more the compounding that these high-quality companies are capable of and the results. [00:21:29] Chris Mayer: But it took a while. I was kind of slow to go that way entirely. Cause even when I opened my fund in 2019, I was still, I still had some positions that were like some of the parts or deep value kind of, or special situations. And it’s only, you know, it’s gradually over time it’s been pushing more and more to just doing the, finding some high-quality companies I can just own for a long time. [00:21:50] Chris Mayer: And so finally, I’m all the way over there and a 100 percent now, and I’m really not interested in buying something that’s trading it, you know, deep discount to beers and then you, oh, you play some sign of, you know, catch up that’s going to take place over the next year or two and then you trade and you do another one. [00:22:07] Chris Mayer: So I don’t do any of that now. So now I would say, yeah, I’m a 100 percent with the outline that I put in 100 baggers. So the big ones would be focusing on that return on capital and high return businesses that can continue to do that for years and years. That’s really the focus. I think maybe one difference is, in the book I talk about staying with companies that are small in market cap. [00:22:30] Chris Mayer: And in the fund. I’ve kind of, I’ve expanded that. I mean, I have some companies that, well, there may be like 30 million or now or so, although when I bought them they were less. But still, I think that would be one difference is that I’m not so much focused on market cap, but focused more on the returns. [00:22:44] Chris Mayer: I mean, I still favor smaller companies but I think I don’t think I’m going to, I wouldn’t in the fund. I’m going as small as I said in the book. That would be one difference. But other than that, yeah, that book is really the laid out the principles of what I knew. [00:22:58] Clay Finck: Another aspect of a business I’ve really come to appreciate is the return on capital, because that’s really, at the end of the day, is really going to drive your investment returns over the long run. [00:23:08] Clay Finck: So I’m curious if there’s a certain figure or hurdle rate you’re looking for maybe in when you’re analyzing new investments or analyzing that return on capital. [00:23:19] Chris Mayer: Yeah, I mean, I try to underwrite to at least 15% compounded, so double over five, quadruple over. And that’s, you know, with what I think are reasonable assumptions for the business and there’s no special magic to it. [00:23:32] Chris Mayer: I mean, I look at, I try to make some reasonable estimate of what Return on capital is. Make some reasonable estimate on what the reinvestment rate is and then you get that compounding number, see what you get. The end of 5 and 10 years, have some multiple on that. And then what’s your IRA, you know, to now? [00:23:51] Chris Mayer: So that’s the way I think about it and I really don’t get much more complicated. [00:23:56] Clay Finck: One thing I really like is how transparent you are with your portfolio on Twitter. I know that psychologically that can be difficult for some people to share a position they hold cause it becomes difficult to change their mind when the facts change. [00:24:10] Clay Finck: Because they’ve already stated they have a position in it. Could you give an example of a company you were holding that you ended up selling? And the reason I wanted to ask this is because, You mentioned earlier it takes a 100 bagger for 20 plus years to play out and selling interrupts that process and you have to kind of, yeah. [00:24:29] Clay Finck: Start over, I guess I’ll call it. One famous example of selling too early is Buffett selling Disney at a split adjusted price of 31 cents. He sold at a 55% gain and that ended up costing a billions, as many know. So what’s a recent example of a company you’ve sold and yeah, how your thesis was bust. [00:24:49] Chris Mayer: Well, yeah, I know. For first to talk about the transparency thing, I think, you know, writing a newsletter for all that time that I did and being in a fishbowl in that way, having portfolio just open call the time and everybody’s seeing every movie make, I think that was good kind of training for this cause gives me thick skin. [00:25:07] Chris Mayer: I really don’t care very much what other people think and I’m happy to change my opinion and that’s the way it goes. I. I’ll tell you one sell was well it was the only stock I sold last year. I had won buy one sell, so it was Texas Pacific, and I had that since my fund started in 2019. I held that it was a good winner, big winner. [00:25:29] Chris Mayer: But I think what thesis changed is I misread sort of the insiders there and the corporate governance like just got worse and worse. Anybody can, you know, search Texas Pacific and you could find TPLs a ticker and you’ll find lots about the assorted tale of what’s gone on there since you know, abuse is on executive pay, the way they’ve just a lot of things, the way they’ve handled their proxy with shareholders. [00:25:54] Chris Mayer: I mean, it’s the long list of things. So I couldn’t take that any longer. And that, that is one that I sold. [00:26:01] Clay Finck: Very interesting. Since we mentioned your portfolio, you have somewhere in the ballpark of 10 holdings and someone in the audience on Twitter wanted me to ask, why do you feel confident running such a concentrated portfolio when unknown unknowns are always lurking? [00:26:21] Chris Mayer: That’s a good question. I mean, I wouldn’t recommend it for everybody. And when you have a 10 stock portfolio, there’s a lot of things that are automatically no go. So I’m not involve, I’m not involved in anything that has financial leverage. I don’t have any deeply cyclical businesses. [00:26:35] Chris Mayer: All the stocks I have produce a lot of cash. I have high returns on capital. Have really entrenched competitive advantages. So the odds of a permanent impairment in any one position is very, So that’s one reason. And two, you know, there’s a good case for concentration. I’m sure you’ve seen a number of different studies and you know, people have something of a false view that somehow the number of stocks they own is going to save them. [00:27:00] Chris Mayer: You know, that owning 25 is safer than owning half that number and really depends on what you own, right? So, There’s a lot of different research. I forget, you know, I remember Joel Greenblatt he said something like six to eight. You know, there’s other ones that say 10 to 12, whatever the number is. [00:27:16] Chris Mayer: The advantages of diversification roll off pretty quickly. Certainly you capture almost all of it benefits up 20, probably at 80% or so, maybe more with even. So I’m more comfortable with that because, you know, I can get to know those businesses really well. I really get to understand them deeply. [00:27:33] Chris Mayer: You know, we talked earlier about what makes them special, why they’re in those high returns on capital. So I really dig into that and so I’m really very comfortable owning them over a long period of time that’s how you get, that’s how I get the comfort. [00:27:46] Clay Finck: I did some research on your portfolio, and that’s when I found Constellation Software and then starting to researching it. [00:27:54] Clay Finck: Chuck Akrei, Francois Rochon owns it, who’s a Canadian investor, and he was actually on our podcast with William Green, and when he mentioned Constellation during that interview, and he talked about how the main reason he invested in the company was because of Mark Leonard, the company’s Founder and President. [00:28:13] Clay Finck: I’m actually releasing an episode all about Constellation here this weekend. The episode will be released by this by the time this conversation goes out. For those who not aren’t familiar, many of you likely are by now, Constellation’s, a holding company where every year they’re acquiring dozens and dozens of these small software businesses, and they’re just using the profits from those businesses and just renting and repeating and going out and buying more businesses. [00:28:37] Clay Finck: So Francois said when he read Mark Leonard’s letters, he described it as love at per sight. I can relate to it that as I read his letters and put together that episode. So I’d love to just get your general perspective on why Constellation made the cut for you. [00:28:55] Chris Mayer: Yeah, actually it’s the same for me. I read the letters, but I’ll say it first. [00:28:59] Chris Mayer: I was skeptical for a long time. I remember thinking, you know, they can’t be acquiring good companies. They’re not rolling up these, there’s no terminal value on these things. got to be junky, blah. I remember being very skeptical of that, but then I finally did, and I don’t remember what was the impetus that finally got me to sit down and actually go through his letters, but that was when it was like, wow, you know? [00:29:23] Chris Mayer: Yeah. It definitely got my interest then way up, and then I started to do a lot more work on it. I remember I tried to contact other investors on Twitter who had known the name and tried to just kind of orient myself to what’s going on. But now, yeah, it’s one of my favorite holdings. I’ve done a lot of work and I’ve talked to a lot of people who’ve worked there, and I think it’s a supremely rational place, really driven by all the things we’re talking about. [00:29:48] Chris Mayer: I mean, return on invested capital and growth rates at the heart of the incentives there. So, yeah that’s the gist of it. I mean, there are a number of interesting markers. Like they have the same number of shares outstanding now as they did when they went public. Just the track record of compounding free cash flow per share. [00:30:04] Chris Mayer: The incentive system’s great. Like I said, the executives there, they have to take portion of their bonus used to buy shares so they don’t get any option. Grants, no freebies. Mark Leonard himself is, you know, he has a frugal personality focused on shareholders, which I think per then permeates the rest of the organization. [00:30:20] Chris Mayer: There was that one letter where he mentions he pays up for business class out of pocket. So there’s all kinds of little things like that. I think it’s a very special company and it’s a good one to just own and leave alone. [00:30:31] Clay Finck: Was there anything interesting in particular you found in talking with people that worked? [00:30:37] Chris Mayer: Yeah, I mean, you know, the, they, how data driven they are, how they really stick to their hurdle rates on these acquisitions. So that definitely stood out. I mean, I remember l you know, if it’s a 25% hurdle rate, if you have a deal it’s 24.8 then no go. So it’s a lot of discipline like that I think is admirable. [00:30:57] Chris Mayer: And then just the MNA machine itself, their ability to find new names. I mean, I think their database, from what I’ve heard, is over a 100 thousand names. So suddenly, you know, context, I think they bought 134, something like that last year. So suddenly in the context of over a 100 thousand names, maybe 134 doesn’t sound. [00:31:17] Chris Mayer: So the other thing is the decentralized model is really amazing. So, you know, they’ve got these six operating units, but a lot of the MNA is pushed down. So it’s not like you have just people sitting in headquarters doing, you know, 134 deals, one every third day, you know, sitting there doing these, whatever it is. [00:31:37] Chris Mayer: It’s really, you know, farmed out to these six groups and even within those groups and there’s certain MNA, the ability to MNA. So it’s a very decentralized. Which is remarkable. I don’t know that anyone has succeeded to quite the extent Constellation has with that model. [00:31:53] Clay Finck: Yeah, the decentralized piece is quite interesting. [00:31:55] Clay Finck: I can see a lot of, you know, positives from that, but one tweet I just saw the other day talked about how there was issues with compensation of some of their employees, and that can be kind of one of the drawbacks with the decentralized piece is each of these managers and the operating groups kind of need to figure. [00:32:15] Clay Finck: What works for them. And if they don’t get these great ideas from some of the other groups, then they might not move quick enough because they’re, there might not be as much communication at times. [00:32:26] Chris Mayer: Yeah. There’s been some turnover more recently being, I don’t know, the last year or so, and most of that has been in Yeah, like MNA teams, you know, there’s a number of copycats and if you look at them, they’re ex Constellation guys, so this is. [00:32:41] Chris Mayer: It’ll be interesting to see how this plays out over time. But then, you know, when I talk to people that are close to the organization or a little higher up, they will tell me that the people left are, I don’t want to say they’re fine, you know, they’re okay letting them go. They’re younger people, they went from money and the higher level executives are very stable. You know, you get those golden handcuffs with your shares and all that, so we will. [00:33:05] Clay Finck: I think the big if for me with Constellation is their moat and their growth runway. I know that the management team is going to do right by shareholders. They’re going to try and take advantage of them. They’re never going to budge on their hurdle rates and they’re going to be transparent when they think the returns are going to be lower on their acquisitions going forward. [00:33:23] Clay Finck: So how do you assess or think about the MO in the growth runway? Is it something that’s knowable?. [00:33:30] Chris Mayer: No, I mean, yeah, that’s the big question. Like if you’re a Constellation shareholder is like how long they can keep going and there must be a limit out there. There’s a limit out there somewhere but the way I think of, it’s a couple of ways. [00:33:42] Chris Mayer: One is I mentioned the 100 thousand plus in the database. I think there’s plenty of room, and I’ve talked to actually some of the copycats as well, and they don’t even necessarily run into each other. So it still seems like there’s a lot of names. There’s still a lot hard to believe because it’s. [00:33:56] Chris Mayer: But there’s a lot of these things out there. The world’s pretty big it seems like it. It seems like it. So that’s one. And then the other way I think of it is that, you know, if I want anybody on the planet to be thinking about how to deploy capital, it would be Mark Leonard and his team. Right? So they have a feeling they’re going to come up with some interesting things to do. [00:34:16] Chris Mayer: I mean, they have other avenues. We saw the way they did the All scripts deal, we saw how they did the spinoff with topics they’re doing another. So, yeah you know, I’ve heard they could go in the horizontal market software, they could go into another vertical. I mean, I just think that they, I have a great deal of confidence in them, and I think they’ll be able to, Figure out interesting new things to do. [00:34:36] Chris Mayer: And if not, then I think they will return the capital. And that will be, I mean, at some point that will happen, right? There will be, you can’t grow to the sky. But you also remember, you know, people said the same thing about Berkshire for a lot of years and just kept going and going. So, I suspect we have a lot of time left on Constellation. [00:34:52] Clay Finck: Your fund also holds Topicus, which is a spinoff of Constellation. I think I read somewhere that Topicus is around what Constellation was in 2010, 2011, in terms of their size. So do you view them any differently just as highly capable of a management team, just probably more room to grow? [00:35:12] Chris Mayer: Yeah, I don’t. Yeah, I think that’s about right. [00:35:13] Chris Mayer: I mean, they’re focused more on Europe, and Europe is a little less competitive than North. And Topicus has some advantages there being in those individual markets, having local people there that speak the language, know the rules. So I think Topicus will be a good one. I think it’s very much like a mini Constellation. [00:35:34] Clay Finck: Since you wrote the book, 100 Baggers. Everyone wants to know what the next 100 bagger will be but we don’t want to put too much pressure on you or any particular company but maybe you could share one of your higher conviction holdings. [00:35:49] Chris Mayer: Well, you know, I only have like 10 names, so they’re all pretty much high conviction names at this point. [00:35:56] Chris Mayer: I mean, we mentioned a couple, you know, I certainly think Copart’s a really good one, particularly because now their chief competitor is kind of put up the white flag. I agreed to be acquired by Ritchie Brothers and I don’t know whether that deal will happen or not. The Ritchie Brothers shareholders are rebelling but you clearly have a wounded, distracted competitor that is at, I think, a structural disadvantage at this point. [00:36:19] Chris Mayer: That would take a lot of time and a lot of money and it wouldn’t even be certain that they could equalize with Copart. So that’s a good one. And Copart still seems to get better with age as the network effects kind of take hold and they still have plenty of room to expand overseas. [00:36:37] Chris Mayer: So that would be one super clean balance sheet and great team. I mean, really good capital allocators. This is a team, you know, they’re not paying any dividend, they’re reinvesting everything. So, I’m a very good compounder still. [00:36:49] Clay Finck: That is another great point that you brought up. Related to Copart, you mentioned some research that was done for Copart related to their competitor where the competitor was paying out dividends and Copart was keeping the money internally and reinvesting. And the difference in their returns, just like is astounding over time. So it goes to show, the importance of great capital allocation. [00:37:12] Clay Finck: And if you have a great capital allocator at the helm, they’re going to recognize that if you have a great business and you have reinvestment opportunities, then dividends aren’t a great use of capital because that’s money that could be used to deploy internally within the business. So I think that was also a really great point that I think a lot of younger investors overlook. [00:37:30] Chris Mayer: Some people get attracted to dividend. Yeah, that was one of the more controversial things that Thomas Phelps said in his book when he wrote that dividends are an expensive luxury and it’s just basic math. If you have a great business, you’d rather they take all the cash and keep reinvesting it if they can. [00:37:44] Chris Mayer: There’s certainly a place for dividends. You don’t want companies to just take the money and invest in lower quality businesses or blow it on stupid acquisitions and things. So there’s definitely a place where eventually companies should pay a. But if you’re focused on these, looking for these big multi baggers, then probably not going to be in a dividend pair. [00:38:02] Chris Mayer: Now sometimes, a company might return might be high enough where they could still pay. Half of their cash flow of dividends, men still compound really high, and there’s rare, bit rarely, but you’ll find every once in a long, long while you’ll find a business that can grow without re any reinvestment at all and has very high returns. [00:38:18] Chris Mayer: And so it’s a math problem. You know, it’s some combination of returns and reinvestment that you want to get. You got a good compounding number. [00:38:27] Clay Finck: Yeah, tying that into two businesses we’ve talked about. Berkshire, to my knowledge, never paid a dividend that I know of anyways and then Constellation software they pay a small regular dividend and they were paying these special dividends when they had extra cash. [00:38:41] Clay Finck: And I believe it was a couple years ago, Leonard released a letter stating that they’re going to be discontinuing any special dividend. Until they state otherwise, because they want to put that cash back into the business. And I think that’s a great decision how one of the executives is like bugging Mark Clinton to discontinue these and eventually he comes around to agreeing with them and making that move. [00:39:03] Chris Mayer: Right? I mean, if you’re earning 30%, then you’re returning, and you have opportunities to invest and get 25% return. But instead of taking that, you give it back to your shareholders. You know, your shareholders would probably say keep it invested at 25. [00:39:15] Chris Mayer: That’s still a really high. You know, returned. So I think that’s a very, you know, it was big positive that he came around on that. And yeah, that’s another feather in his cap I suppose. [00:39:27] Clay Finck: We had talked about, obviously Constellation and Berkshire and I knew Mark Leonard just as this Buffett like character. [00:39:36] Clay Finck: So if I were to spend this weekend just studying one company or one founder that maybe you just really admire, maybe even one investor is there anyone that you have in mind that would be worth researching and maybe even me potentially covering on the show? [00:39:50] Chris Mayer: Well, you know, Willis Johnson at Copart has a great story, as a book that jumped to gold, I’d definitely recommend that. [00:39:55] Chris Mayer: Great story and that would probably be the one I would go with. I mean, old Dominion also has a very good story cause they’re the Conden family and they’ve started back in the thirties with like a single truck lane and there’s also a book they have that tells their corporate story. [00:40:11] Chris Mayer: But in that case, it’s not one executive per se, it’s more of a family over several generations. But still an interesting case. [00:40:18] Clay Finck: Awesome. Well, Chris, thank you so much for coming onto the podcast. I really enjoyed it. Huge fan of your work and enjoy following you. So before we close it out, how can the audience get in touch with you and learn more about your book and your fund? [00:40:33] Chris Mayer: Yeah well, I’m on Twitter, so, that’s @ChrisWMayer. And I have a website, Woodlock House Family Capital. I have a blog I write occasionally. So, those are the two best places to find out more. [00:40:46] Clay Finck: Awesome. Thanks so much, Chris. [00:40:48] Chris Mayer: All right, thanks, Clay.