The Exchanges

Q What are the things you most took away from the experience?

A So I'd say two things. One, I learned what a terrible business looks like. So trying to run this training center, right, we're trying to offer first world services at third world prices. And so the only way that worked is if we could get volunteer free labor from college students who are willing to come over either for a summer or for a year and teach English for absolutely nothing. The second thing I learned growing up as an American, most of us are really taught this idea of meritocracy. If you're this great phenom at basketball, you're going to get recruited, you're going to get noticed, and eventually you kind of get in the system. I think a lot of us believe that the same thing is true in normal intellectual pursuits and any kind of typical job, right? If I go to school, I get a four point oh, I put in the hours, someone's going to find me, I'm going to get a great opportunity. And being in the Middle East, they have this term in Arabic called wasta. And the direct translation is influence, but what it really means is Who you know is everything. They get their job based on their uncle or their sister or their father gets them a position. And seeing this just so rampant, I realized I was like, you know, if this is here in the Middle East, this has to exist in the States as well. Maybe it's important for me to focus on who I know and building connections, et cetera, and not …

AI assessment note: “So I'd say two things. One, I learned what a terrible business looks like.”

Q As you look at your list of the hundred best companies, are there biases in terms of sectors and market cap?

A We have three strategies. We have a SMID strategy, an all cap strategy, and a large cap strategy. We kind of cut the difference between SMID and large at around twenty billion. So there's no overlap. As far as industries, there are some areas that we avoid. So for us, with our long-term time horizon, we don't know what the price of a commodity is going to be five to 10 years into the future. So if the value of a company is dependent on the underlying price of a commodity, that's probably not going to work for us. We tend to stay away from things that are highly levered because it makes those values really unstable over time. And then we tend to stay away from things that are highly regulated by various government entities. And so while we're global in nature, we're willing to look anywhere. There are certain countries where if there isn't the rule of law or we don't have recourse to the assets, probably not going to invest.

AI assessment note: “We have a SMID strategy, an all cap strategy, and a large cap strategy.”

Q When you pivot from automating part of the processes to integrating AI, what did you find in the work with AI?

A The biggest area where it's really been helpful is idea generation. So we had this treasure trove of data going back 15 years on what makes a truly great business, what makes a terrible business. And we were able to train a model based on both qualitative inputs and quantitative inputs to look for these truly great businesses. And what I mean by a quantitative input is it's what's called a feature. And so if you don't understand machine learning, you're new to it, feature engineering is It's saying, hey, a single point of data isn't that important, but if you can look at a combination of these single points of data, it's more important. So for instance, from a financial standpoint, I don't care about margins in 20, 22, but I do care about margins over time. So if I'm looking at the trend line of margins over time, that's a feature. If I look at return on tangible assets over time, that's a feature. If I look at return on invested capital over time, that's a feature. And so we had about 300 of these, you know, the most predictive Of a great company or bad company would be things like the trend line of the intrinsic value per share over time, or maybe your share count over time. Other things like that are very indicative. Now, the nice thing about machine learning relative to a stock screener, which is where your mind instantly goes when you think about this, is stock screeners, …

AI assessment note: “The biggest area where it's really been helpful is idea generation.”

Q Why don't you take me back to your first window on the world of investing?

A Well, for me, it's actually my mom. She worked for a company called CKE Enterprises, who today owns Carl's Jr. Restaurants in Hardee's. She was their treasurer back in the day. So her primary job was actually doing corporate cash management. It's kind of fun now as a professional looking back on some of their 10 K's and seeing my mom named as an NEO. I've been told, I haven't confirmed this, but people have told me she was actually the highest ranking female in the restaurant industry at the time. Which, you know, I don't know if that's a credit to my mom or a discredit to the restaurant industry, but looking back, I can see just how tremendous that was. I remember growing up with her talking about this stuff all the time, and actually, I have a memory of being 10 years old. She's sitting me down on my bed and explaining to me how she earned extra yield on stock holdings by writing covered calls. Who does that with their ten-year-old kid? But my mom was obviously a pioneer of sorts, and you have to be a little different to do that. So definitely my first window, and it's funny that we actually write cover calls now.

AI assessment note: “Well, for me, it's actually my mom.”

Q So you kind of inverted the life model. A lot of people in the industry go and make money and then they say they want to give back. You went and did that first and then pivoted when you came back. So what was your thought process in coming back at the beginning of your career?

A I met my wife, and she actually attended Baylor University at the same time that I did, and we somehow ran in the same friend group, but we never met, and so while we're overseas working on the same project in Jordan, was very lucky, married way above my pay grade, and now we've got four kids. I was very happy eating rice and peanut butter, doing the whole humanitarian thing, but as I'm thinking about getting married, thinking about having a family, It's very important. I'm now thinking about retirement, paying for college. I need to think about investments, et cetera, et cetera. And, you know, it's funny the way life works, but my mother-in-law, she happened to have a book on a shelf when I was staying at her house one time called A Random Walk Down Wall Street by Bert Malkiel. Read it. Got very excited about index funds and allocating to this asset class when it's down and rebalancing. I'd also heard a lot about Warren Buffett. So I thought, well, I should at least look him up. And I Googled him like anyone else and very quickly was captivated by his wit and his wisdom, not just in investing, but life. Again and again, when he says like, if you only read one book on investing, it needs to be the intelligent investor by Benjamin Graham. He's the best investor on earth. He tells me to read that. I should. So I promise I'm not making this up. I actually took the intelligent inve…

AI assessment note: “thinking about getting married, thinking about having a family... I need to think about investments”

Q Thanks, Jim. That's awesome. Love hearing stories like that. So when you set out to form Saguaro, you mentioned the importance of having values that you really live by and work by. What were those values for your firm?

A So for us, there's five things. We want to build trust. We want to act courageously. We want to give generously or live generously. We want to pursue joy. And we have this phrase that great isn't good enough. It's really just the idea of continuous improvement or continuous learning. And for us, trust is everything, right? If we don't trust you, we don't want to do business with you. And I think if we're not trustworthy, people aren't going to want to do business with us. I think living generously, again, it's about that idea of giving back and serving. The way I visualize this is like you have a cup, right? And if you fill that cup up with water, well, you now have the choice. Are you going to pour that water back out? Are you just going to try to hoard all that water in? And if you pour it out, you get filled again. But if you're already full and someone tries to pour more water in, it just kind of flows out. And we've all found in our life from the time we were children growing up that as we give, we receive. And so for us, that's who we really want to be. Acting courageously is just about, okay, if we follow this process, whatever, life is hard. Sometimes things are challenging, but it's in the midst of those trials and those tribulations. Do you follow your process? Do you continue to execute? Do you continue to move forward? And if you do, we think that's the right way to…

AI assessment note: “So for us, there's five things. We want to build trust. We want to act courageously.”

Q Let's turn to the investment side of what you're doing. What is that set of investment beliefs that you have that drive what you're doing at Saguaro?

A Our philosophy is we want to take the best of everything that's come before, that classic investment discipline, and we want to fuse that with hyper-modern technology, so the latest and greatest, the things that are out there that could make us better at what we do. Every human analyst, better, faster, or hopefully both, and we believe that that's the way to really produce exceptional results for the next 10 years, is to make us better, and technology can accelerate that. The way we approach investments is ultra simple. One, we're trying to find the best businesses on earth. So we have a list of a hundred companies. For something to get on that list, something else has to come off. So we're constantly searching for these super high quality businesses. Two, once we have them on that list, we're waiting for a true opportunity to buy that company at a discount to what we think it's really worth. We know from experience and also from academic research that even the best companies out there They tend to experience a 50% drawdown from peak to trough at least once every decade, and that's really what we're waiting for is that type of opportunity, and then finally, once we have a great business that also gets discounted and we own it, we want to own that thing as long as possible. We want to find these truly great businesses and allow them to compound and to do what they do. I wish we …

AI assessment note: “The way we approach investments is ultra simple. One, we're trying to find”

Q Once you've decided that the business is good enough quality to be on your list, there's a big gap between something that's trading at your assessment of fair value and 50% below. So what rubrics do you use to figure out when you might want to start buying something?

A One of the things that makes us different from other people I know in the industry is we think in terms of ranges of values around businesses versus point estimates of value. For instance, at Vulcan, we use point estimates of value and it works great if you have businesses where the value is stable and you can size your position according to the discount that you think is in that stock. That works wonderfully. But if I have high quality businesses, oftentimes they also grow. The perfect example is Amazon. And at Vulcan, we spent a year trying to figure out what is the appropriate valuation rubric to use for this company? Because if my assumption is they're going to grow at 10% versus 15%, I get a radically different outcome in my value. We asked the question, we're like, well, is Amazon too good to own? Because it's hyper growth and the value fluctuates, can we not own it? Because it doesn't fit the process. That experience made me feel, it's like, well, I'm not fully confident what Amazon is worth exactly. I am very confident that it's worth more than X, and I'm also very confident it's worth less than Y. So we're trying to have that humility to say, listen, if these are truly great businesses that are kind of once in a decade type opportunity, yeah, I don't necessarily know what it's worth, but man, if it gets down here to the low end, I really want to own it. And once I own …

AI assessment note: “we think in terms of ranges of values around businesses versus point estimates”

Q So to take a step back from the investment program, as you're going to build a new business, everyone could look at the asset management business and say, wow, it's a crowded landscape. You're a new entrant. It might not be the type of business That you would have on your list of a hundred best businesses. How have you thought about building a business in that landscape?

A Yeah, that is a great question. So we're very aware that it's only one out of three that kind of even make it to a certain point. That sounds like rolling the dice, but for us, there were a couple things. One, we truly asked the question, are we going to build something of value that we think humanity needs? Because humanity does not need another asset manager, right? I mean, we need that, like we need another hole in the head. There's just too many of them trying to extract value. We said, if we're going to do this, one, we want to have values that we think are worth reproducing. Two, we want to have a product where we think we're properly incentivized to do what the client wants, which is ultimately perform. Incentives really matter. And for us, we've seen too many firms that they become very successful, but they have a simple management fee and the incentive to really perform isn't necessarily there. And so we said, well, how do we combat against that? And so we have a different structure. We want to be performance fee based. We want to make sure that we're capacity constrained and Over time, as we grow, we actually want to drive our management fee down. So there's a lot of operating leverage in this business. If we happen to be in the 33% of firms that do succeed over the long run, if we go from a hundred million to a billion dollars in AUM, we don't up our cost by 10 times…

AI assessment note: “we have a different structure. We want to be performance fee based.”

Q How do you define what a great business means for you to make it to that hundred list?

A First off, we want free cashflow. We're a big believer in free cash. Like, I don't care if you're going to disrupt the world in five to seven years. If I am not 100% confident, you're not going to be able to make it between today and there in the future. I mean, there's a lot of great people in the VC space or other parts of the market where they can make money doing that, but that's not our game. We always hear the moat analogy. Obviously, we're looking for moats in terms of competitive advantages, but I think we're different in that we spend a ton of time thinking about what's inside that moat. Do you actually have Rumpelstiltskin in some back tower up there who's spinning straw into gold? You have a king and queen who in essence are good at capital allocation. Are they using that gold to bolster the moat and make their defenses bigger and take care of their people inside the kingdom? Or are they just enriching themselves and throwing lavish parties and doing whatever? And then finally, I want to give a real shout out here to Pat Dorsey. He wrote a little book on value investing. And he had one idea in there, which I've never heard anybody else talk about, but it's this idea of, yeah, we want companies that grow, but really is that growth inside the moat? There's a lot of businesses where people will get excited about that business and they'll be like, oh, look at this. They'…

AI assessment note: “First off, we want free cashflow. We're a big believer in free cash.”

Q And how do you think about those different risk factors in your portfolio?

A We ultimately think risk is not knowing what you're doing. We're going to have controls, right? So there are certain limits on how much we'll have an industry exposure, how much we'll have an individual position, but really by focusing on a few things and knowing those things really well, we limit ourselves to what we believe to be only the best businesses in the world. So we do get some of the benefits of diversification. I think you get most of them in eight or 10 names, but again, it's that quality bias that if you combine Long-term and quality, it really tends to bail you out in the long run. I mean, if bankruptcy risk is almost zero, and you have a company with some form of dominant competitive advantage in its niche, it tends to do pretty well over the long run.

AI assessment note: “there are certain limits on how much we'll have an industry exposure”

Q When you're sitting at Vulcan, it's twenty billion. You said some large firm is going to be able to capture this opportunity. You're starting to mine for it. What's the impetus for leaving?

A Well, we have to go back in time, I think four or five years into my tenure at Vulcan. Vulcan had the opportunity to build out this affiliated manager program. So we had several different groups who had a track record, but they weren't very large, and they were looking for somebody to handle their back office operations, maybe some of the business front office, and then really Client development. And we had a debate. Is this something we want to do? Because we actually had three groups. We're like, man, we could really do something here because Vulcan did not have a lot of external service providers. We had built our entire back office ourselves, and we thought we could really leverage this with other affiliated managers. But after an extensive discussion, CT follows the Greek maxim of know thyself, and I think he knew himself pretty well. He thought, if we do this, I'm going to be very involved and If my ultimate goal is to produce the best possible returns that I can for our clients, I want to stay focused. And so we made the decision at that time to not do affiliated managers. And the AI system that we built was adding so much value and we really had vision of where we wanted to go with it. We kind of got to the point where if we kept going, we risk upsetting the investment mandates we already had. So we've got this really great twenty billion dollar apple cart. Now are we r…

AI assessment note: “if we're going to do this, it probably needs to be independent of core Vulcan”

Q Which two people have had the biggest impact on your professional life?

A Well, I already mentioned Rick Berman, who obviously played a big role. I'd say two other people. There's a guy named Bill McDonald, who's also on our board. He's a former professor at Notre Dame, really well known in the industry because he and another professor there named Tim Loughran actually created the bag of words approach for sentiment analysis. So, I mean, he's worked at places from Citadel on down, trying to help them really develop that. So for us, great member of our board, because he's the fusion of both classic investment discipline and artificial intelligence data science. But he taught the applied investment management class at Notre Dame. And when I was a part of that, he tore me apart. I mean, it didn't matter what work I provided to him. It was never good enough. I mean, just ripped me to shreds and forced me to do things at a level I had never done before. And frankly, have never really been forced to do a lot of other places. I thought he hated me at the time. I thought I was a terrible student. And it's only later I found out he pushed me so hard because he thought I really had something.

AI assessment note: “Well, I already mentioned Rick Berman... There's a guy named Bill McDonald”

Q What did you learn working at Vulcan that was different from what you had figured out on your own?

A Well, I think coming into Vulcan, I was more of a special situations guy, and I really wanted to make the same evolution that Warren Buffett himself had made, which is how do I really find these high quality businesses that can compound for long periods of time? And really looked up to C.T. Fitzpatrick, who runs Vulcan, because that's what they do. Very much quality investors for the long term. Very fortunate it ended up working out because when Notre Dame connected me to Vulcan, I actually got an interview. They took me out to this nice Italian restaurant in Chicago. After the entrees were served, we started talking stocks, and it turned out that one of the companies I had bought while I was in Jordan called Bolt Technologies, actually, to make these underwater sonar guns to detect, you know, mineral deposits or oil deposits at the bottom of the ocean was something that Vulcan had sourced for their small cap program. They brought me down for the interview, and the rest is history.

AI assessment note: “when Notre Dame connected me to Vulcan, I actually got an interview.”