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Stock Picking, Nintendo, And A Flyover Stock With Todd Wenning
Welcome to another episode of the BAS podcast. Last week I had the pleasure of speaking with Todd Wenning, who used to work at Ensemble Capital but is now pursuing a new venture called Flyover Stocks. In the episode we go over stock picking and several important investment-related topics such as portfolio sizing. We also discuss Nintendo (NTDOY) and Todd also discusses an interesting company.
As always, there are three ways to enjoy the podcast.
1) You can watch the video on Youtube (and don’t forget to subscribe!)
2) You can listen to the episode on Spotify (if you wish you can also leave a review here!)
3) You can read the transcript I prepared below.
You can obviously do two of the above simultaneously if you wish to!
Recall that this is the fifth episode of the BAS podcast, which should be more recurring from here on out. You can find prior episodes below:
Before leaving the transcript here I wanted to do some self promotion! :)
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Leandro: Welcome once again to the Best Anchor Stocks podcast. It's been actually a long time since the last episode. I was talking to Todd now, and it's been, already five months. I thought it was like three months, but actually that's five. That's because time flies and obviously we had summer in the middle.
And today I have the pleasure of talking to Todd Wenning, who previously worked at Ensemble but now is undertaking a new venture. And I think, Todd, that would be... first, well, thank you for coming, obviously, and then I think that would be a great starting point to talk about your new venture or what you're doing right now.
Todd Wenning: Yeah. Thanks so much, Leandro. It's really nice to be here. You've had some great guests. I know Christian Billinger and Chris Mayer, they're great investors, people I really respect. So anybody out there who hasn't listened to those episodes, please do so. They're really good conversations.
Yeah, thanks. So I started Flyover Stocks, which is an investing newsletter that is free at the moment and we are kinda exploring overlooked companies with economic moats led by great stewards of shareholder capital and that to me is the essence of what I look for as an this investor. And it's been really nice to have the creative freedom, so to say, to write exactly what I wanna say and do what I wanna do with the Flyover Stocks newsletter. And so that's been a real pleasure to do and I've had some great energy, you know, personally writing and getting stuff out there.
So I've really enjoyed the process and I've been writing publicly about investing since 2006. So I'm going on 17 years of writing for the public. And it's been a very core part of my development as an investor, and I can't imagine not doing it in the future. I think it's so, so critical to do and it's been a great accelerant of my learning process.
Leandro: Well I think you touched on it right there, but what...how do you think writing has made you different as an investor? Because I also started writing maybe three, four years ago and I actually have seen like, quite a bit of changes as an investor. So what changes have you seen?
Todd Wenning: It's a great question and really it comes down to how I think, right? So when I started writing for the Motley Fool back in 2006, one of my jobs was to support the various newsletters that we had. So that was inside Value Income Investor, Stock Advisor, Hidden Gems, Small caps.
So I would write articles that were sort of evergreen investing lessons about each of those categories. So small cap investing, for example. And that would force me to learn about small cap investing. And I would start figuring out, okay, this is interesting. You know, insider ownership matters a lot in small caps, low debt matters a lot in small caps.
So that helped me kind of think through what felt natural to me as an investor. So certain things didn't feel right, didn't match my personality type very well. And so I just kind of, you know, lower the volume on those, so to say.
And when I found something that really struck a chord, I increased the volume and I really dug into things like quality investing that really struck a chord with me. And, dividend investing, because it's kind of linked with quality investing in companies of great cash flow. So just being forced to write for different types of newsletters, different topics, really accelerated that process.
And then as I was writing those articles, thinking, okay, what might somebody say who disagrees with this point? What might they say? And how can I address that in this article? And sometimes I would find, well I actually agree with that point. And so that it's a great exercise to again, force you to learn and think through things that you might not otherwise have done at that point in time.
And then once you publish, you have that conversation with the readers and they might say, well, this was a great point, but he forgot about that. And so that helps accelerate. And so it compounds, it's a compounding process, much like investing. And so, I just really enjoy the process of getting my thoughts out on paper and really putting the words down.
That will, you know, stick with me over time as I'm thinking about an investment to say: "ah, I remember thinking this way at that time." Have I changed my mind on it? How do I think about it? So all that's part of the process.
Leandro: Yeah. And you also get like a history of your thinking process. Because you can go back and read...obviously if you go back and read your first articles, you're going to think: "well, I mean, I have improved a lot obviously", or "maybe I have changed my view on this topic, but not so much on this."
And you touched there on a very interesting topic, on the link between dividends and quality. I know that there are a lot of investors that actively pursue dividends. I personally don't think that's the right strategy because the dividend should not be an end, but it's just a consequence of what you're buying.
So how do you view the link between Dividends and quality?
Todd Wenning: I think there's a struggling between the cash flow analysis, right? So great quality companies produce a lot of cash flow either in the near term or in the future. And so dividend investing forces you to find companies that are producing cash flow today and you can't pay dividends with earnings, it has to come through cash flow.
So really thinking through the cash flow statement, what is free cash flow? What are they paying out as dividends each year? Are they saving, are they reinvesting enough in the business? So just thinking through that process, through the lens of dividends, I think is a really smart way of getting into the business of quality investing.
I think if you start with companies that might be more speculative and then eventually will start paying a dividend 10, 20, 30 years from now...I think that can be a really bumpy road, so to say, to get into quality investing. But if you start with companies that are in the, say, dividend aristocrats list that have been paying dividends for 20, 30 years and raising them each year consecutively...
I don't necessarily subscribe to the idea that you should only buy dividend aristocrats or that dividend aristocrats are a solve for something else. Because a lot of times companies can gain that system by, you know, raising the payout by a penny just to stay on the list each year, even though they shouldn't be doing it.
So I think you really needed to sort through those, but I think it's a great indicator that the company has a cash flow presently. And the other thing is, at least in the US and some of the companies in Europe and elsewhere in the world, we have typically a progressive dividend policy, which means that the board is gonna pay out at least this much next year, or at least that's implied.
And the last thing that companies and progressive dividend policies want to do is raise the dividend that they can't afford in 3, 5, 7 years time. So I see it as a sign of confidence from the board that we're gonna be able to earn at least this much in year 3, 4, 5. That may be a misplaced confidence, but it is confidence from the board and you have to ask yourself questions.
Okay, why do they feel this way? And then that brings you back to questions about competitive positioning, economic moats and, and their growth runway.
Leandro: Yeah, I mean obviously it's like perceived confidence by management because the last thing that once that they want to do is, five years down the road, cut the dividend. Because we already know how that like impacts shareholder value creation because you have a lot of shareholders maybe that are there for the dividend. So...and we have seen it with companies such as Intel that maybe they grew the dividend too much and then they had to cut it and then that brought problems.
So I think we jumped directly into the topic of stock selection, but I want to go one step before that because basically I think everyone that invests in individual companies wants to sort of outperform the market, or at least that should be the goal.
I mean, you see the value track record creation of the big investors and it's great. Obviously they outperformed for many years and then the difference compounds in 10, 20 years to add to a lot of money, which I think brings new investors into stock picking.
I think it's also common knowledge that it's not easy because the great investors of all time, maybe there are a very small subset of the whole investor base. Maybe, I don't know, 0.05% of the all investors have managed to outperform consistently.
So what are your thoughts on stock selection versus maybe a safer approach like index investing?
Todd Wenning: Well, I think most investors probably fall between the extremes. So there are people who are very comfortable just index investing and saying, I don't wanna think about individual stock selection. I don't wanna get caught up in it. I'm just gonna put it all in index funds. That's a very reasonable assumption, and I think it's pretty brave to say "I'm not good at this and I don't wanna spend my time, my weekends doing research and learning about economic moats and dividends and all sorts of things."
And on the other extreme of people who are just extremely passionate about the art or the craft of investing. And so I think most people probably fall in between. I think if you're a professional investor, you can, or if you're a full-time investor, you can be fully active. And I think that's a reasonable thing to do over time is, you know, honing your craft, getting better at it over time. You can diversify enough where you're not going to have a disastrous outcome if you know what you're doing.
But I think most people probably fall somewhere in between where, you know, they have some index funds in areas where they're not particularly strong, maybe energy or something, or biotech where they just don't have a skillset...or maybe an international market to have some exposure there, but they invest their domestic portfolio with their own custom approach.
And so I think...for people who are thinking about whether or not they want to invest in indexing or individual stock selection, I think it really comes down to, you know, do you have a passion for this? This is something that you really get a lot out of, and do you have the time to put into it?
So, I mean...if you're working a job, a, you know, nine to five job and you're very busy and that, and you have a family or something, or other passions that you're distracted by, there's no shame and just reading about it on the side or buying one or two stocks and indexing the rest. I think that's, that's very reasonable to do.
But I think from an individual's perspective, they have to figure out am I passionate about this. Do I have the time, do I have the time to build the skillset and then time to deploy the skillset.
Leandro: No, I completely agree. I mean, you need a lot of time to follow and, and even more time to be an active investor if you write about it. I found out that since I started writing about it, then the time you take is obviously much longer, but at the same time you cement the knowledge much better because you remember what you have written about and everything.
So I think that what you said it's important because you sort of mentioned that there's...or sort of implied that there's more to stock selection than just returns.
So for example, with index investing, probably the learning curve is flatter, and with stock selection you have a learning curve that is exponential. And obviously I think people tend to see outperformance like not worth it if it's not big enough. So for example: "oh, why would I pick stocks if my outperformance is going to be 1% every year?" Maybe that's not worth it. But obviously if you do it for a long enough period of time, then 1% is going to compound to be quite a large sum.
So what do you personally get out of stock selection beside the potential outperformance, so to say?
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Todd Wenning: I think, as I mentioned earlier, it's an art, right?
I really believe that...there's a great book, I think it's Robert Hagstrom wrote, called "the Last Liberal Art", which is investing...and me coming from a liberal arts background as a history major in college and trying to learn...there's not many jobs out there anymore that allow you to incorporate things from philosophy and art and just culture, pop culture, things that you can tie into your day-to-day job.
And I just love that process of taking this, you know, wide array of disciplines and applying it to what I do. And so, there's pleasure in that. There's delight in that process. And so that's, that's a positive of byproduct of the stock selection part, also just learning about how businesses operate.
And I think through that you can learn how people operate and you can start to create, find patterns of great businesses, and then that'll help you identify the next one.
You know, I was just doing some research on Howdens joinery, for example, and it jumped out to me pretty quickly that this reminds me a lot of the distribution and logistics networks that I've come to really appreciate over time like Fastenal or Pool Corporation. And so that just clicked in my head.
Wow, this is a business I need to pay attention to. And so I wouldn't have gotten that out of, you know, doing straight indexing. You know, this is a process and I think when, you know, the Great Buffet quote, "I'm a better investor because I'm a businessman and a better businessman because I'm an investor."
I think that those two things come together and they help you think through businesses in a way that you wouldn't if you just indexed.
Leandro: And I think many times we are not aware of how this knowledge is compounding. You know, it's compounding, but you're not aware until what point. So you maybe read about a business model and because you have seen that four or five times, you automatically point out the flaws or the strengths because you know how that works for another company or maybe in another industry.
And also with with indexing...what's interesting to me is that indices are getting increasingly concentrated around some mega caps. Do you think this is a headwind to the safe nature that everyone perceives that index have?
So what technically with an index, you...what you are trying to own is the broad market, so you are very diversified. But if these indexes get concentrated into several companies, do you think that's a bit like if you were picking stocks because at the end of the day you're putting a significant amount or maybe 10 companies?
Todd Wenning: It's a great question and I don't know the historical nature of the mix in the past, but my guess is that historically it's been a lot more diversified in the top 10. There's very rarely been a time where a company like Apple is seven plus percent of the S&P 500. So if you're buying the S&P 500 ETF today, 7% of that is represented by one company. And so, you know when, when Jack Bogle....and I started my career at Vanguard and it was steeped in the Jack Bogle philosophy and indexing, the benefits of it.
So I very much, you know, respect the index process and really, you know, am a fan of Jack Bogle and his legacy. But I think it has changed a bit in that regard. Since when, you know, Jack was creating these products and thinking through the values of indexes.
I'm not sure there was ever a time, and I could be wrong by that. I'm sure someone will let me know if I am, but, but there's never been a time where you've had such concentration in seven stocks or so at the top of the S&P 500. And, so I think you do have to think about that a little bit more. And maybe the answer to that is you find an equal weight S&P 500, but then you become a little bit more small cap in your allocation.
So, I think you just have to, you know, weigh your options. But I do think that active investing, this is one of the areas where you can customize a bit relative to the S&P 500 over if you don't want to own Apple or something. You don't have to, you can own 20, 25 companies get the diversification and the broad benefits of diversification without having to be exposed to certain companies that you may not want to invest in.
Leandro: That has always been my thought, like if you get the index, surely there's gonna be a way of, let's say, filtering the better companies and leaving out the worst companies. But then obviously that doesn't necessarily translate into returns because maybe the good companies are at the price that they don't offer a good rate of return going forward, so it's not as easy.
But I think obviously it would be a good starting point to maybe get an index and start seeing what is quality, what is not, and maybe just waiting until it gets to a reasonable valuation.
So now focusing on stock selection, I mean, we've talked about like you can basically do your stock selection and build your portfolio, you can invest in indices or you can do both. I personally do both. So I have also holdings in indices and I also have my portfolio of individual companies.
The first question that comes to mind when building a portfolio is the types of companies you would like to own. And I think this boils down to investment philosophy.
Obviously I don't think many people are going to own all the companies from the same industry, but when you look across the companies, they're going to have some common traits. So what do you look for in companies? I think atthat when when I ask this question, I always think that I'm asking "what's your investment philosophy?" Because for me they are kind of synonyms, right?
Todd Wenning: About, lemme see six or seven years ago now, I started jotting down my investment philosophy in a diagram where I try to visualize, or at least conceptualize what the core beliefs that I had in investing were, because I had a lot of ideas kind of bouncing around.
So I thought, you know, I just left Morningstar maybe a year or two earlier, really steeped in the moat philosophy there. And that was a great experience. But I wanted to, you know, kind follow the Peter Lynch idea that, you know, don't invest in anything you can't illustrate with the crayon, right? So I took that seriously and I drew out a diagram of my investment philosophy, and it came down to, you know, a Venn diagram of three things, which is moat management and price, or valuation, I'd say.
And so what I'm looking for is the convergence of those three things. And they don't happen often, but that's how I look for companies in my portfolio. It really starts with the moat. When I look at companies, I know people might look at value first. They might look at management first, but I start with the moat because I think everything grows from there.
So as I'm reading an annual report or I'm reading a paper about a company, I'm looking for the markers of what I see are potential indications that the company has an economic moat. And from there I start getting interested. And that's how I dismiss ideas that come through me as I can't fairly quickly identify the source of the company's economic moat. I move on. I might come back to it later, but it's not now something I want to spend a lot of time on because, you know, your time is limited as an analyst, as an investor, and so you have to really focus on the companies that stand out to you.
Leandro: And I think also many people start looking at the price, but that makes no sense without looking at the other two things because it's impossible to judge the price without knowing how strong the moat is or the management plans in the years ahead.
And what you said is...I mean, I completely agree with it because a moat cannot change as fast. But if you have a strong moat, then you know that probably the price will change at some point because it always does. And maybe it doesn't get to your buying point, but it gets close. So then that's the variable that you want to look at last.
And speaking about this, about some characteristics about companies, I think that it's very important to do your own...like you did your own diagram because I recently did a checklist for Best Anchor Stocks where I look for certain characteristics in companies. And the category with the highest weight is management and capital allocation. And a lot of people asked me like, why is that the category with the most weight? And I honestly didn't have an answer because it's like, well, it's because I value management and capital allocation much more than maybe hyper growth.
But obviously if you're a growth investor, You don't have a track record of 10, 15 years on management. Maybe you have to value more the growth prospects than management. So I think that's kind of personal.
What would you say, I guess you talked about moat and management, but inside those two categories, what would you say you overweight and what would you say you'll sort of underweight or is not so important to you?
Todd Wenning: So when we talk about economic moats...I just wrote a piece on what we mean by economic moats because that phrase is thrown around a lot, especially in quality investor circles now. And sometimes, you know, if you talk to my management team and they say they have a moat and you start asking them questions, they don't really have a great response sometimes.
And so I think it, it's important to understand what we mean by an economic moat. And, to me, it's really an unfair advantage that is structural, meaning that something that can't be just replicated over the next year. Like what is it that allows you to earn your cost of capital for at least the next 10 years?
And when you start asking those questions, you get various answers. And I think it's important to really hone in what they mean. And Buffett had a great comment section in his 1986 letter to shareholders where he first used the phrase economic moat in a letter at least. And he talks about Geico and talks about how Geico's moat is based on a low cost advantage and the way they can make that moat wider is by continuing to lower the cost.
And so I think that's a great synopsis of what a moat argument should be. What is the source of the moat and how do they make it wider or what is the risk if they don't make it wider? If costs rise at Geico, that will be indicate a shrinking of the moat. And so I think it's important for investors to really understand what they mean by economic moats when they're talking about it.
In terms of what I overweight, one of the things that I have really come to appreciate over the past couple of years is the importance of product and service relevance. So a lot of brands and a lot of products are recognizable. I mean, Kodak's recognizable and, and Blackberry is recognizable, but their products are not as relevant as they were 20 years ago.
Leandro: I'm actually in the process of moving out and yesterday I found my old Blackberry and it's not been as long since Blackberries were relevant, but now they are like completely out of landscape.
Todd Wenning: So I think it's really important to, when you're thinking about a company's economic moat, to also think about how relevant do you think its products are gonna be over the next 10 years? You might be wrong, but I think by asking yourself that question, it really starts to create some great thought processes in your head.
Okay, what might ruin this? So if, if you're Blackberry...we're all doing this post-mortem, of course, but thinking about, okay, what might challenge Blackberry in 10 years? What sort of company might come around? What might they offer? Where are their weak points in their offering? And it's, for Blackberry, it was, you know, they were focused on the business customer and iPhone came in and said, you know, we're gonna make it for the consumer and then that changed into business.
So thinking through potential risks and being able to monitor them over time. So you might've started out with Blackberry saying, I think it's gonna be relevant over the next 10 years, but as the iPhone came out, now you gotta start questioning. Okay. How might this happen? You know, should I reduce my holding? Should I increase my discount rate? And so I think thinking about relevance is really important.
I think something I underweight would probably be thinking about just financial strengths. So, I don't mean to say like, I'm investing in companies that have weak financial strength, but I think when a lot of times quality investors will go, well, I only want to own companies that don't have debt. Well, that's fine. And that's a fine approach, and there's certainly benefits to that. But I also know some great companies that have BB credit ratings and their credit trades like an investment grade, like Ball Corporation, which is a packaging company. They make aluminum cans. And so that's certainly a risk and you have to be aware of it, but you know, to dismiss a company out of hand for not having an investment grade balance sheet strikes me as potentially short sighted that you might miss some opportunities.
And I'm not advocating going out and buying companies trading with non-investment grade balance sheets or anything like that. I'm just saying keep your mind open, and think about why are they able to go out to the market and their debt's trading for investment grade spreads, but they have a double B rating.
And so I think if you dismiss a company like Ball out of hand, which I don't own, but I followed it at Morningstar for three and a half years, I think you might miss some opportunities. So I think it's just important to think about financial strength or financial balance sheet relative to the company at hand and to not insist on, say, only having a company with net cash or, you know, AAA credit rating or something like that.
Leandro: Yeah, I think when people talk about financial strength, they tend to believe it's easy to see because you just get a balance sheet that it's a point in time and you see what's the financial strength of the company. But obviously that doesn't tell you much, because if you say, okay, the company has enough cash flows to cover its interest payments for the next year or next five years.
Okay, but how are those cash flows going to move in if things get tough? Like are these products resilient or not? I think it's what you said. You have to look at the company and based on that you can know if it's maybe a company with a leverage ratio of three times, it has a better financial strength that a company with no debt.
So I think it's not just looking at numbers. And you also talked there about knowing the products are relevant in 10 years time. And I wanted to ask you about technology companies. Because obviously that's an industry where we've seen a lot of disruption.
What's your take on moats based on technology? Do you think that they're sustainable or do you tend to shy away from them because you're not comfortable with the stability of that moat?
Todd Wenning: Well, I think you have to try to identify what the moat might be. So what I mean by that is if it's a technology company, what is the structural advantage? If it's just IP, I'm not sure that's something I would be invested in. But if it has a switching cost attached to it, that's very interesting to me.
So thinking about companies with high recurring revenue, longer term contracts with their customers. For example, there was an article a couple of months ago now in the FT on Bloomberg. I thought they did a really nice job kind of breaking down the moat of the Bloomberg Financial Information System and how critical it is to the financial industry, even though it looks like MS DOs from the 1980s. You know, it's, it's still a critical component of so many investors around the world.
So thinking about technology, that's a great example. It doesn't have to be cutting edge, doesn't have to be something that's just, you know, AI driven or whatever. right? It has a clear economic moat, clear economic value to its consumers that is not likely to be disrupted.
It's come through a number of moat attacks. That's something I also also look for over time. Have there been reasonable attacks on the moat over time and what happened during that process? I remember when Amazon bought Whole Foods in the US. There was a lot of concern among Costco members or Costco investors that, oh, here we go, Amazon's going to deliver everything to your door. No one's gonna need to go to Costco anymore.
And I went home to my wife and I asked, should I be concerned about this? And she goes: "no, they're different, different shopping experiences." And so that was a great insight that saved and made me a lot of money over time...sticking with Costco thanks to my wife.
So I think it's important to think about how the moat has been attacked over the years, how the moat has developed. And seeing, trying to find technology companies that have those economic moat sources, whether it's network effects or switching costs, or they enable their customers to have an advantage that when they pay their renewal every year, it's a no brainer.
And so those are sort of technology companies that I would consider investing in. But I would not consider myself a technology first investor. I'm not typically looking for SaaS businesses or anything like that. Those usually aren't the first companies that I look at. But there are clearly companies that have wide economic moats in that space.
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Leandro: I think the example you mentioned is a good one because if you look at Bloomberg's UX and that it continues to grow, then that's, for me, it's a sign of a moat because if with that UX people are not switching out, then obviously there's something more than just technology. Because if not it would've been disrupted already.
And another point that you touched in one of your recent articles is that of portfolio sizing that you obviously said that stock selection goes before portfolio sizing. And I completely agree. First, you need to know what you want to have in the portfolio, and then you decide how much everything weighs. I think you also talked about the need for people to know themselves before going into how they want to size the portfolio. I think that it's a very easy question if I ask you how important do you think that knowing yourself is before sizing your portfolio, because I know you're going to say that it's very important, but I'm going to go a bit further and what I'm gonna ask you is...
What variables do you think that are important to look at to know yourself? Because I think everyone knows themselves, but maybe in the context of investing, it's hard to say, okay, I know myself, but what should I look at to size my portfolio?
Todd Wenning: It's a great question. I think you don't really know until you've been through something that just made you panic. And I've seen quality companies drop big time over overnight and just what that does to you and your thought process and, you know, companies that seem like they were untouchable, you know, can have a very unfortunate event.
So I think you need to be aware of how you respond to that and how comfortable you are with that sort of risk. I think Charlie Munger might've said over time, you know, if you can't handle a 50% drop in the stock, you shouldn't be invested in it. And so I think you really need to figure out how you respond to those events and try to understand how that plays into your portfolio weighing system.
I mean, some people I know have 50% in a single stock and they're like, this is the way I'm going to outperform is by...I have this great idea of strong conviction, deeply undervalued. I'm gonna put a ton of money into it and I can sleep at night with that. And that's great. But I think other people might say, I'm interested in, you know, having an arrangement, a portfolio of great companies that I just enjoy following. So 20, 25 companies.
I'm not making huge outside bets on any one of them. I just really love how they look when they all come together. Just an assortment of great businesses. I trust management. I trust quality. The moat I trust, you know, that it's under valued at the moment and just riding that wave as a sort of team, so to say, a team of portfolio companies, whereas other investors are very comfortable with the risk associated with making big concentrated bets.
And in fact, that's really how you make your name in this space in a very short period of time is to heavily concentrate in a certain number of companies. I just think that for most people that's a very difficult thing to do because of the emotions that play into that and how that might affect your decision making.
You know, when you've got 50% of your net worth in a single company and it drops 30%, you know, and you have to, you know, explain to the family why you're down so much that's, you know, that's not easy to do. Or your investors or whoever your capital providers are. And so that's, you have to be prepared to answer those questions and be able to handle that sort of stress to make outsize bets.
Sorry. Hard to pronounce. And so I think it's important to think that through when you're thinking about how many companies you want in your portfolio and how much you wanna allocate to each one.
Leandro: And I think if one fund manager would've held Nvidia since the start of the year at 50%, then they would be up there in the top charts for sure. But I don't know if that's a safe way...not for maybe you as a fund manager. You also have to think on the people that are behind your money because maybe you can be comfortable with that, but maybe the person that's giving you their money is not so comfortable with that.
Do you have any hard rules to portfolio sizing? For example, if a position is less than X percent, then I cut it because it's not worth it. Or I won't let a position run over, I don't know, 20% or something like that.
Todd Wenning: In my personal portfolio, I keep track of the position sizes and start to be a little concerned over 10% personally. I start to think, okay, is this the type of company that I can sleep well at night with this?
And if it...I mean, that's not a hard and fast 10% rule. If it runs to 11, 12%, that's one thing, but if it runs to 20, that's another right. And so that's how I'm thinking about things at the top end of my portfolio.
And at the bottom part of the portfolio, that's really an area I think of more as a sandbox, so to say, is thinking about, these are names that were probably top holdings or could have been top holdings at one time, and I sold them down due to valuation concerns or structural concerns or new ideas.
And so I think that's something else that people need to keep in mind when thinking about the number of stocks they want to have in their portfolio is I think when you sell out of a stock, at least in my experience when I've sold out of a stock, I kind of forget about it and I say, okay, I owned it, it's gone. And I start looking at other things.
And a lot of times what happens is those companies become great buys in a little bit of time, but I don't have any skin in the game anymore, so I'm not paying attention. And so you can look at the lower end of your portfolios as a way of...as a holding place, so to say, for ideas or existing ideas so that you remain engaged with the company, but you just only have a lot of capital at risk.
But not having any...your mind will start moving to other places and other stocks. So I think it's important to think about that as you're allocating your portfolio.
Leandro: And maybe before sizing your portfolio, you need to know more or less the number of positions that you want to have in it. I think this is also extremely personal. Just like everything in investing that's extremely personal has to be tailored to your own...to how you are or who you are.
So what's your number? Because for example, I think in my case, somewhere between 15 and 20, it's appropriate because I feel it's enough diversification and also I can follow them closely because I cannot follow, for example, 40 or 50 companies closely.
Maybe you don't need to follow them closely because some of them weigh like 0.5% of the portfolio because you're just tracking. But what's your number and maybe what's the rationale behind that number.
Todd Wenning: So my portfolio is somewhat similar in number of stocks. So it's 15 up to 25 potentially, if I have a lot of interesting ideas at the time.
But I think that's roughly the capacity that someone has to follow a company or a set of companies at a reasonable amount of depth at a given time. When I was on the sell side, I had, I think, the most, I was 24 companies at a given time. And so, and that was with a lot of knowledge leverage because they shared a lot of characteristics and that was a full-time job just managing and looking at those 24 companies.
And since I've moved to the buy side, that's really kind of still roughly where I think my capacity is....it's about 20, 25 companies at a given time that I feel like I can keep track of and keep in my head and, you know, not feel like I'm gonna miss anything. Super important. So that's typically how I would think about capacity for myself is, is that many companies, and obviously you can keep a watch list, a paper portfolio or something to, you know, keep companies on the back burner.
But for me, I think to do the amount of depth that I wanna do on a given company before making an investment, I think 20, 25 companies is nice. And I think the data supports that as a reasonable portfolio size to get the benefits of diversification, but also have the opportunity to outperform.
You know, clearly if you concentrate more, you have more opportunity to outperform, but you have less benefits of diversification. And so it really comes down to, again, personal taste. If you can deal with 10 companies and you feel like you're diversified through those 10 companies, then that's great and you've got an opportunity to outperform and also underperform.
And so you have to balance, you know, how much you're comfortable with, you know, being above or below the market at any time.
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Leandro: Now, when I talked to Christian Bellinger, it was interesting because, his portfolio, it's obviously very strong companies, but you can see companies that are the leaders in the same industry. Some of them are, obviously, most of them are oligopolistic industries. Like, for example, I think, he owns the elevator companies. So, Schindler and I don't know if he owns, yeah, I think he owns OTIS too, but, well, he owns two companies there. And then in luxury, he owns LVMH and Hermes. And obviously that made me believe that he was...he followed a top down approach, but then he told me that that's not true because he is bottoms up. But obviously if he finds interesting companies in an industry. Then he researches other companies and in many cases the industry is very strong.
And then he mentioned also a point that was very interesting in that he found synergies in the research. Because obviously if you have LVMH and Hermes, then those two companies don't take the same research as maybe LVMH and Amazon obviously. So have you followed that approach sometimes? So do you, for example, hold more than one company in any industry because you thought the industry was strong, or do you focus more on this specific company and you just try to own the leader in that industry?
Todd Wenning: That's a great question, and I think I have done that to some degree. You know, I own two trucking companies in my personal portfolio and I own a couple of insurance companies. And so, again that's like knowledge leverage or synergies, however you wanna say it. So I think, you know, having not so much a top down view, but a conviction in what the future holds really can help you kind of find a couple different companies in the same industry.
So, I don't know Christian's thought process, but, you know, thinking about elevators for example, I would think, well you, you're gonna need more urbanization over the years with a growing population, especially in some emerging countries. And you have to, or you need more population density or in certain areas and you're need higher multifamily residences and you're gonna need elevators and the existing elevators out there need to be serviced and it's not going away. There's really no reasonable thing that could happen in my mind over the next 10 years that would displace or disrupt the need for elevators. And this isn't a pitch for elevator companies. I'm just saying that that's how I would think through that process. And say, well, I'd be comfortable owning the two major operators in this space.
Maybe one of one of them is more based in emerging markets, one more is developed markets, one's more new installations, one more, one's more maintenance. And so I think you can ride the both waves and, you know, sleep comfortably at night. And you can almost think of those as one position, right?
Rather, rather than say these are two separate companies. These are two companies on a theme.
Leandro: Yeah. I completely agree. And another question that I have is if you, take volatility into consideration when building your portfolio. I mean, I think everyone knows that volatility is not a risk per se, like the price moving because maybe the underlying company is doing just fine.
But obviously it can lead you to one of the greatest risks of all that maybe is selling out too soon of a position because it has gone down and then you get nervous and you sell it or you start to question your thesis. So I'm honestly a firm believer that the quality of the companies obviously matters, but also, how easy or hard it is to hold that company for a long period.
So let's say you held Amazon, Amazon since 99. Well, obviously you are super rich now, but how many people endured that 90% drop? I mean, probably less than 5% of the shareholders and, and I'm being very generous probably.
So do you take it into consideration when building the portfolio or do you just don't care about volatility because you trust the companies that you have and you don't care if the price moves a lot?
Todd Wenning: A couple of interesting thoughts on that. So there was a great paper by Fundsmith, the UK fund manager, I think it was from 2013, talking about low volatility and how...it's based on research by Daniel Kahneman that investors tend to overweight their confidence in companies that have a 10 to 30% chance of outperforming and underweight their confidence in companies that have low volatility, even though they have 70 to 90% confident or certainty of being a positive outcome.
And so I think there that's one explanation for why low volatility stocks have done well as a group over time is that they kind of fly under the radar of investor interest because they're not exciting, they're not cocktail party stocks where you can tell, I invested in Tesla, I invested in Amazon in 1997 or whatever. And these are kind of boring companies that just continue to create a lot of shareholder value over time, but they're not exciting or they're not driving, you know, a lot of talk amongst, or whatever the circles you're talking to.
On the other hand, I think, one of the things I've come to more appreciated and change of mind over time is that, the stock price movements in the short term are not reflective of the stock of investors thinking about the short term. So I used to think about stock dropped 30% of the market's being short sighted. Well, really what the market is doing if you think about how a discounted cash flow model works, and if you think a business's value is based on its future cash flow is discounted back to the present at a reasonable rate, what the market's really saying is that the terminal assumption, which drives the bulk of a company's value is now in question.
So when the stock drop's 30%, it might be based on short term news, but what the market price is applying is that if there's a change in how investors are thinking about the terminal state of this company, so five, 10 years out, what does that look like?
And so when a stock drops 30%, the market's saying something has changed, whether it's in the discount rate has to go up significantly, or I have doubts about what margins are gonna be or returns on invested capital or cash flow, whatever it might be. So as a long-term investor, when you have conviction in a company's long-term outlook...so again, thinking about Costco, that example, you know, was investors were doubting what 10 years looked like for Costco when Amazon bought Whole Foods.
And if you had conviction like my wife did, not me, that Costco was gonna be great and still was still doing what I was doing in 10 years, that's a great opportunity to buy because, even though there was a lot of volatility in the stock in the near term, that created a tremendous buying opportunity because you had conviction in the long term, in the terminal state and that provided the opportunity for you to outperform if that had indeed come true, which it has.
So I think that's something that investors should think about when think about that. It's not just a market's knee jerk response to short news. What it's implying, whether it intentional or not, is that something has changed with the long-term outlook, and if you disagree with that, there's your opportunity.
Leandro: Yeah. I mean, that's a great point and it's just math because if you get a DCF model and you changed your expected cash flow for next year you need I don't know, like maybe if you put a 70% drop even then the value of the company is not going to drop 30% because the majority goes from year five onwards or from year 10 onwards.
But obviously an investor has to judge whether something that happened that quarter is going to be permanent or temporary. And it's, when it's obviously temporary and the market is thinking that it's permanent, then you can find your opportunity.
I also think that, talking about the low volatility stocks, many people, when they see a chart that it's going basically up to the right, we are geared to thinking that something is...like it's too good, something's gonna happen that's going to correct, and then I'll have my opportunity. And these companies typically take trade a high price, obviously, because...they are not at a high price because outperforming they demonstrate that it wasn't a high price, but at a premium to the market, obviously because you have predictability, you have a higher quality company. That may be above average on the index.
And I think that, if you do a regular DCF on those companies and maybe go five years out, it's almost impossible to not be mistaken on the future value because five years is not a long time for a company that can endure 20 to 30 years. But you obviously have to set a point where you drop the terminal rate, right?
So then if you do that, you're probably missing a lot of value, but then you also have to be conservative. I think valuation is kind of a very, I don't know, personal, it's subjective obviously, and also very personal because you have to find a method that actually makes you convinced that what you're buying is value and it's not overpriced.
So how do you go about valuation? Do you do a DCF? Do you look at multiples...at historic multiples?
Todd Wenning: So I think...one of the things I've learned from Michael Mauboussin over the years, one of many things, is that the multiple that's being shown is just an implied DCF, right? That's what it is.
I mean, it is basically saying, you know, 15 PE is implying this sort of future for the company. And he has a great book, with Rappaport called Expectations Investing. And so...that helps you kind of think about, okay, here's what that market might be pricing in right now based on what the market price is.
And so that's one approach that I use is trying to figure out, okay, here's what the market is implying about this company's future margins growth rate, return on invested capital and then deciding if I disagree with that one or the other, you know, I think they're gonna do a lot better than what the market's implying. That's an interesting opportunity from a valuation perspective.
And I think...another thing that Mauboussin done is...has published what are called the base rate book, which looks at the past, I think, 60 years of company performance and lets you see, in terms of probability what a reference class for a certain company might be based on its historical growth rate.
So you know a company that's grown 25% over the past five years, how many companies of its size and that growth rate have gone on to do 10% or more sales growth over the next 10 years? And so you start to figure out is what I'm forecasting, is that reasonable based on history or am I completely off base?
Has this only happened maybe 1% of the time? And if that's the case, you know, should I alter my position size because of that? Because, you know, I might have strong conviction that this company's gonna go on to do great things, but if it doesn't have a lot of historical precedent, maybe need to like, incorporate some more outside view in how I'm thinking and position size accordingly.
Leandro: Yeah. Like you need to be very sure that a low probability event is going to happen if you're going to bet on it. And yeah, that's actually a great point.
So we've discussed a lot of things, but now I want to shift the conversation a bit to maybe some company specific, let's say, discussion.
First I'm going to discuss with you a company that we have in common, I think, which is Nintendo. And then I'll let you talk about any holding of yours that you're excited about, and tell us your reasons.
So the first on Nintendo, I think that a lot of the bear thesis obviously revolves about around Nintendo being Japanese.
Everyone....a lot of shareholders are scared of Japanese stocks because there's not a lot of shareholder friendliness in the management teams in the country. What makes you think this time will be, let's say, different for Nintendo? So what do you think is changing so that that the value the company is creating will be realized by shareholders?
Todd Wenning: I think Nintendo management has made slow but steady progress and improving how it thinks about capitalizing or monetizing its intellectual property. If you think about historically, you know what would happen at this point in the Nintendo switch cycle is they would launch a new one in the next year or two, although that's been rumored for a while now, it keeps getting pushed out and they'd have to re win those customers all over again.
And that's what happened after the Wii came out, did great, but then Wii became irrelevant and it lost all its customers and it had to re win them with the Wii U, which didn't go so great. And so that's...so you get into this boom bust cycle of consoles with Nintendo historically, and it's historically been very smart to sell Nintendo when the console is at its peak and everyone's excited about it and buy it back when things start up again.
But I think Nintendo has taken advantage a lot better of the Nintendo accounts, which are personalized sign ups that you can, you know, you register your account with Nintendo, then you play your games and interact with their IP and just like a Starbucks rewards card or a Chipotle rewards card, they can more personalized.
They understand what each player is playing, what their age is, what you know, what they're engaging in, what they like, what they don't like.
Leandro: One thing there, if I'm not mistaken here, if you want to play the Switch, you have to create a Nintendo account, right? So it's not like you can opt in or opt out, it's like you need that. So they have like, more than 100 million accounts, because they have more than 100 million active users on the Switch.
Todd Wenning: Right, it's a huge number and, you know, I forget the exact number of Nintendo Switch online accounts, but it's in the tens of millions as well. And so these are all ways that Nintendo can create this one-on-one experience, so between the company and you. And I completely believe that in five, 10 years as new generations of Nintendo IP comes out, they're gonna leverage that data that they have with you. So it's like, hey, you remember when you beat Bowser in this game? Here you get, you know, a chance to do it in this game or something, right?
Where they tie in what you did before to now. And so it creates this lifetime relationship with customers in a way that didn't have it before. You're seeing it, I think with the movie was a big leap for them. After the disaster that was the original Super Mario Brothers movie, the Live Action one, I think they really pulled back on trying to monetize their IP outside of the video game space because they got overexposed back in the late eighties. I mean, I've been Nintendo fan since I was five years old. And, you know, there was definitely a mania in the late eighties around Nintendo, and there was Nintendo Serial, well, there was all sorts of Nintendo things. And so I think they felt like they got overexposed.
And so for the next 20 years or so, they pulled back on monetizing that IP. And now they're finding ways to do that, you know, through Illumination and through the theme parks in ways that they wouldn't have in the past. And I think that is a sign that they are moving in that direction, that they're not just digging in their heels with the hardware and software as the only way to interact with Nintendo. So I think, and I think they have an activist, it's kinda soft activist, which is Value Act on, on their board....or not on their board, but you know, is an investor in advising them on things.
And I think Value Act, taking the right approach, which is kind a softer, more advisory type of activism versus trying to do something internally, which I think would be very disruptive to Nintendo and its culture. So I think they're taking notes and I think they're improving.
I think, you know, there's been a lot of articles about how Japanese corporate governance has been improving and becoming a little bit more amicable to I guess the US or European investors and how they think about shareholder value. So I think all those things are turning positive for Nintendo management and certainly a change from the past 20 years.
Leandro: And I think what a lot of people miss with Nintendo's IP is that they...everyone sees it like a source of revenue, it's much more than that. Because you're basically turning your sales and marketing expense into revenue. Because if you put the movie out, then you're going to drive a lot of Mario sales. I mean, we are seeing that already.
And so then you not only get more revenue, but you probably also get more leverage. And that's kind of very unique, I think. And in my opinion, this is one of the differences that Nintendo has with Disney. Both companies get bundled together many times because they have a very strong IP, but what I see is that Nintendo actually, their optionality with the theme parks, the movies is actually Disney's business, but they have another way of monetizing that.
So then that can bring a more...not maybe like Disney, that they started releasing a lot of Marvel movies and then everyone was like fed up of the Marvel saga. Because Nintendo doesn't actually need it for their business. So they can do it like a more calm approach. Probably they're going to get criticized because they are being slow, but I mean, they always get criticized because they can do things faster.
Do you think that Disney and Nintendo are really comparable and where people start throwing them together due to their IP, they're making a mistake?
Todd Wenning: They share some qualities and Buffett had a great thing about Disney way back when, I think it was maybe the late sixties and the seventies, about how it's an oil rig where the oil seeps back into the ground and you know that that IP, they can just keep putting it out every 30, 40 years and just keep minting money. And so I think to that extent, yeah, I think there are some similarities with Mario.
And these aren't human actors, these are cartoons. They're, you know, they're digital animation. And so I think you can, there are some similarities there where you can keep rolling things out. You know, the, the actors, there's no lifetime on them. They can just keep putting 'em out. And it's a key advantage that Nintendo has is that they can put a Mario game out and it just sells, even if they had no advertising, that's gonna outsell the vast majority of games that are put out there. And that's one thing I've come to appreciate about the video game publishing industry, is that you either go all in AAA game and try to have a blockbuster result, or you try to find these, you know, kind of these, underground, you know, startup games that's kind of a catch fire. And, but that's, that's like a one in a thousand, it's like a lottery ticket type of thing, and the Nintendo can just put it out the Mario game. And sell, you know, 10 million copies, and be one of the best sellers of the year. So that's a real clear advantage that Nintendo has.
I think, you know, they...like you said, I don't think they have to rely on theme park sales. So I think there are differences with this in that regard is that Nintendo does a really good job preserving the longevity and the relevance of its IP coming back to relevance. And I think that's part of the downside, or risk of Nintendo though too, that it's a cultural, and, you know, when Shiso Abe went to take the torch from the Rio Olympics in 2016, he was dressed up as Super Mario. So the whole country was represented by Nintendo.
And so I think there is that in the back of their mind where we have to preserve this. We can't just have Nintendo flop because it's a national cultural icon. And so I think that there's good sides and bad sides to that. So I think from a risk-taking perspective, they can be very conservative and frustrate investors for that reason. But on the other hand, they are thinking long-term and, you know: "How do we make Nintendo relevant for generations to come?" And there, there will be challenges over the next 20, 30 years, especially with, you know, artificial intelligence and content creation being easier than it was before.
But I think Nintendo has that, you know, I've argued in the past that they've hit this nostalgia point where the original players of Nintendo people like, you know, myself, who were six years old, when, when I got my first Nintendo back in the eighties, I'm now a parent. I share that IP with my kids. My kids understand it. And when I was growing up, my parents didn't understand Nintendo at all. And so we, we didn't have that in common. We didn't have that shared experience with, you know, my kids and I do, and I think you know, the, the gamer ages will get older. I mean, I'll be playing video games until I'm, you know, 70, 80 years old. And then beyond. I see no reason why I won't.
And, it's just a new form of entertainment. So I think, you know, they are certainly riding a very strong long-term tailwind. And so I think there are some comparisons with Disney in that regard that it's a way for generations to communicate across, you know, some grandparents and grandchildren talk about Disney in away. They may not have other shared experiences, and those things are rare. They're very rare, sports teams, maybe, you know, being the other obvious one.
So I think there are some similarities, but I wouldn't invest in Nintendo thinking: "oh, this is just a version of Disney." It's is a very, very different business.
Leandro: Yeah. I know this comparison is going to like, get some pushback, but I think of Nintendo's IP a bit like luxury companies, where they don't want to flood the market with maybe a certain franchise, because then you're going to reduce the equity of that franchise. So if you see Zelda, they took, how long was it? Like six years between games? And obviously that's a long time, but that's the way of putting out a game and selling 10 million copies in three weeks, because if you put out a game every year, then you're not going to have that impact. And it's not, obviously you're going to get more sales, but over 10 years then your franchise is not worth as much as the one that has been carefully developed and carefully marketed.
And then I think the other bear case for Nintendo, which I actually don't see it as such, but I know it's been thrown out as a bear case, is cloud gaming. So now to, to play a Nintendo game you basically can do it on mobile and be probably disappointed or you can do it buying a Switch that is like Nintendo's toll so you can play their games.
And that actually has worked very, very well over the years. But now people are saying that with cloud gaming then consoles are going to be rendered like useless because you basically can play every game on whatever device. So what do you think about cloud gaming as a risk for Nintendo's business?
Todd Wenning: It is a risk in some ways. I think Nintendo very much saw and internalized what happened with Sega back in the early nineties by kind of getting away from the hardware and focusing on IP and the content and being distributed everywhere; you just lose some of its of its value. And so I think Nintendo will always wanna have some sort of hardware involved in their interaction with their IP. And so it could be glasses, it could be something else in the future. But I think Nintendo will always have a Nintendo branded piece of hardware involved in their interaction with their IP. So I think, you know, had these discussions in the past about Nintendo, like, well what if Nintendo put it on Microsoft Xbox? Well, yeah, I mean, you could, and it would get more distribution and more people would have access to Nintendo, but you mentioned that a toll that you pay the entry pass, so to say.
But the hardware to those Nintendo's IP is unique and I think they are very aware of that. So, you know, if you wanna play Zelda, it's not just pay dollars and getting the access to Zelda, whether you have PlayStation or Xbox, but you have to buy the Nintendo hardware to play it and really buy into that ecosystem.
And that's also helped Nintendo fly away from the competitive nature, which has historically been very intense, with consoles and, you know, you see PlayStation and Xbox at each other, you know, trying to outcompete each other, probably the best graphics and, you know, being the biggest ecosystem. But I don't think either of them see Nintendo as a competitive threat to their business because Nintendo is coming out with, with, you know, six year old hardware and, you know, just trying to make games to be played on that hardware. And so Nintendo started, you know, join the fray and kind of just put his content on Xbox Live or whatever, that may be a negative into the equity unit of the value over time.
So I think, Nintendo, whatever comes next, whether it's, you know, for me, my guess is that there will be an artificial augmented reality aspect to the next generation of console, my guess is that they'll have a camera, for example, and that you'll be able to interact with things in your world through the Nintendo lens, much like the Mario Kart, the physical game that, that you can, the toy you can buy and, and play it.
I think Nintendo will continue to push those boundaries. They've always been interested in augmented reality, virtual reality, and I think that's an obvious next step to me, whether it's five years or 10 years from now.
Leandro: And I think it goes back to the part on technology moats that we talked about. Because I see a lot of people say: "no, but the Switch is like three generations behind the PS5".
And it's like, yeah, but that's not the point, right? They don't need to be at the same stage as the PS5, especially because you maybe need a lot of like very good graphics to play Call of Duty, but someone who buys the Switch, they're not buying the Switch to Play Call of Duty or Fortnite, they're probably buying the Switch to play Pokemon or Mario. And obviously you don't need the best graphics to play those games.
So now I'm going to...this is going to be a super open-ended question. I'm going to let you discuss any of your holdings that you think are interesting. I don't know if maybe you'll choose your latest article, but whatever you want.
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Todd Wenning: Sure. So, I think one company that I don't currently own that I just profiled on my blog is Howden's Joinery, which is a UK building supplier and it only sells to the trade or professional installers. And I think this is something that, whether you're an investor in Home Depot or Lowe's or Floor and Decor here in the US, you should be aware of the Howden's business model because I think it is scalable, and I do think it's interesting to make note of.
Whereas in Home Depot, for example, in the US it, it caters to both pro and retail DIY consumers. And so you have to find ways to satisfy both of them. Whereas with Howden's, you know, they operate 880 depots across the UK, parts of France and the Republic of Ireland. And they are basically a supply chain of depots that provide easy access to inventory and supply for primarily kitchens, but also other things for professional installers. And that's a really interesting moat to me.
So I think I mentioned it earlier about, you know, when I was researching this company it struck a chord, some of the pattern recognition, you know, thinking about, companies like Old Dominion Freight Line, which have created a physical network effect. So they have nodes in the forms of warehouses or service centers across the country that enable them to ship things more efficiently and reach more customers than they have in the past. And as they win business, that network density becomes just a huge earnings driver. And I think that there's a similar thing happening at Howden's joinery where, as the network of Depots becomes denser and closer to the customer, their prices should become a lot more competitive over time.
They only offer trade, only offer trade prices. So if you're a customer and you wanna refit your kitchen, Howdens can offer you trade prices through their pro customer. And they can determine at a local level, they have a decentralized model. So that owners of the depots can determine what price to charge to various customers.
And so the more business that an installer does with Howden's, the better this sort of relationship they have with the depot. And so that to me it becomes, I have an illustration in my post about the virtuous cycle. This creates over time. And so I think it's a very interesting business model.
Much in terms of the valuation depends on what you think will happen with the UK consumer and housing prices over the next five years. I mean, if you're negative on UK consumer or negative on housing next five years, it's not something that you should be interested in at this price, at present here in early September. But, if you believe the longer term opportunity that they have potentially to scale into other countries beyond the public of Ireland and France and UK, this is a very interesting business model that I think can be scaled internationally in more markets, if the management team sees an opportunity to do that.
Leandro: One thing that I've always had on my mind, what's the interplay between DIY or let's say sort of renovations in-house and the prices of homes? Because I imagine that if the prices of homes go up, then people obviously are going to buy less, but maybe they conduct more renovations in their homes.
Todd Wenning: That's right. And I think housing is so fascinating because if you think about, if you look, went back to October of last year, at least in the US, if you had asked home builders at the time and said, you know, in a year's time mortgage rates will be 7%, you know, start to tick up ways to start cooling, you know, it'll be harder to get to get credit than in the past. They would say we're in for a very difficult year. And it's been a very strong year for the home builders. And so I think housing is something that it can be very counterintuitive to someone who looks at an economics textbook. You know, coming, I was a minor in economics in college and, you know, that certainly wasn't in any of the textbooks.
And, so I think it is interesting, I think a lot happened during COVID quarantines that changed the way people think about their house. So I think people are spending more time at home, whether it's through a hybrid work situation or they move to a new home, during that time to, you know, to take advantage of lower housing prices in, you know, urban areas or wherever they might be.
And so they're, you know, thinking about how can we have this house set up for the next 15, 20 years while we enjoy it. And refilling the kitchen is something that can be done to give the house a makeover, so to say. And have people really enjoy it. Rory Sutherland, who's a great thinker from Ogilvy advertising has had a line about, you know, don't just go buy a new car, just have your car detailed and all of a sudden it feels like a brand new car and you'll enjoy it more, right?
That's kind of how I think about house remodels is, you know, you're not changing where you live, you're just upgrading certain things and it has like a new life to it. So it's unclear to me how that, how that plays into, whether it's, you know, UK consumer strength or European consumer strength. I think a lot depends on how people want to interact with their house, how important their kitchen is. And I think it's, I mean, personally I think it's an increasingly valuable, how see in home builders and us example who are getting rid of formal dining rooms altogether and just focus having bigger kitchens because that's where people congregate, that's where they, you know, have meals together and, and spend time together.
So, it's hard to say, how you know, people will value their kitchens and how eager it will be to spend, I mean, certainly if interest rates go up or unemployment goes up, that's headwind naturally, you would think, but who knows Things can be strange right?
Leandro: Yeah. Yeah. I actually have looked at some real estate companies, but more on the MPC-style, like Howard Hughes or St. Joe's. But, what you said, like, it's very difficult to know where this will go, right? Because it's so counterintuitive. Then you see rate up and then these companies come out and say that they've seen record demand, and you're like, well, it doesn't make sense.
Like if mortgages now are near the 7% and they say like, yeah, but we've seen record demand because everyone wants to live here. So it's, it's very difficult, but at least for me right now, it's out of my circle of competence. But I'll leave, by the way, flyover talks in the description so you can go read the article.
Okay. So thank you very much, Todd, I think that was all I had. We've been in quite a long time.
Todd Wenning: it's been great. Thanks Leandro.