Welcome to the Investing for Beginners podcast, in today’s show we discuss the cult of Warren Buffett with Eric Schleien of Granite Capital Management and the Intelligent Investing Podcast.
- Berkshire Hathaway annual meetings
- Searching for “under the radar stocks”
- How to find investment ideas
- Investing outside of the U.S.
- Competitive Moats
To learn more about Eric and his firm, check out the links below:
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All right, folks, we’ll welcome you to the Investing for Beginners podcast. Tonight. We have a special guest with us tonight. We have Eric Schleien from who is the CEO and founder of Granite State Capital management. He also has a great podcast called the Intelligent Investor podcast, and he has agreed to join us today and talk about some really interesting, cool stuff. So, and some things we haven’t discussed before.
So Erica, why don’t you say hi and tell us a little bit about yourself, if you wouldn’t mind. Well, thank you for having me on. Yeah, so my name is Eric Schleien, and ID run and Granite State Capital Management, a hardcore value investing junkie since I’m 14 years old, is when I started reading about Buffett. And you know, my interest in investing came so big props to the Motley fool. They had written book years and years ago called it was something like an investment guide for teens, how to make more money than your parents or something like that.
And I thought it was fascinating to see that book in the bookstore. And you know, I just started reading and, and, you know, talked about bait, you know, very basic concepts, right? Like, the dangers of being in a lot of debt, you know, don’t spend more than you earn. And they started talking about different investors in the book. So I started taking books out of the library of those different investors. And when I got to reading a book about Warren Buffett, the first book I read about him was Warren Buffett wealth by Robert Miles. And that was the initial book that sort of sparked my interest in Buffett. And I, and I went down the rabbit hole from there. So on the investment side of my life, that’s, you know, that’s a bit about me. I’ve plenty of other interests in other things in my life, but for the investment stuff, that’s, that’s how I got into all of this.
Let’s start with the Buffett thing. Cause I think it’s really fascinating how you said that you wrote a letter to the Buffett and he actually replied to you. So what happened there? I did the idea of me writing a Buffett is probably cooler than the letter back to me. So it started where I was at a party at my neighbor’s house. And he had known someone who had played a poker game with Buffett and, you know, the only kind of game people tend to associate Buffett waivers with a bridge. So I wrote him a letter and said I was thinking about coming to the annual meeting. And I also shared with him about my neighbor’s party and wanted to know how good of a poker player he was. So he responded back to me that that I should come to the meeting and that he would guarantee me a good time. And that he’s not a very good poker player. So that, that was, that was his response to me. And, and, and he did, he did fulfill on his promise. I had an absolutely amazing time in my first Berkshire Hathaway meeting and I, and I went to 15 more, you know, 14 more sense. I’ve been, I think I’ve been to like 15. No,
That’s awesome. Maybe break it down for the audience. What, try to encapsulate what Berkshire meetings like I went to one in 2018, and I absolutely loved it. So maybe you can kind of break that down for people who are aware of his meetings.
Yeah, sure. So when you say come all the way to the middle of Omaha, Nebraska, to watch two old guys answer questions for six hours, it doesn’t inherently sound so appealing. Especially now that you can watch it online, but I would imagine you could attest to this, that watching the Q and an online doesn’t really encapsulate the magic of the environment of that experience. So the first thing is it’s very experiential. So I’m now going to have the challenge of trying to talk about an experience, right? It’s like talking about the Grand Canyon, and you look at a photo. It doesn’t really do justice to actually being there and being in the presence of the Grand Canyon. So I’m limited to that, but that being said, the the the, the environment is very, very high-quality people. You end up having extremely high-quality, intelligent, amazing conversations.
It’s not like one of these typical, you know, sort of networking kind of events where everyone has this agenda, and they just want to throw their business cards at you. I’m not going to say there’s none of that. There, there are always people that are going to be like that. But I have met so many friends over the years in so many just great quality relationships. And, you know, I still talk to a lot of my, you know, a lot of those relationships on a, a weekly, a monthly basis. I’m actually staying with someone right now who I met at my first Berkshire Hathaway meeting when I was 18. So, I mean, it’s like, that’s literally how awesome it is. And you’re around so many amazing people who are all there for the same thing, you know, Berkshire Hathaway, but what’s cool about it is that it’s like, well, what does Berkshire Hathaway represent?
What does Buffett represent? And it represents certain values, right? So there are things like, you know, integrity and business ethics. And there’s just that whole, that whole world that Buffett encapsulates, and while not everyone is going to be there and be focusing like Buffett, there’s something that draws you, you know, there’s something that resonates at your core with the Berkshire Hathaway meeting. So people there, they already sort of this character-based foundation, to begin with, it, it ends up being like a very high-quality fraternity in a lot of senses. So that’s, that would be the gist of it if I could if that speaks to it.
Yeah. If I can paint a picture, just remember the first, the very first time I went; I was super blown away because I had done the meetup with actually Preston and Stig from the Investors Podcast. They, I guess they used to host a meetup every year. So there is a group of maybe like a hundred of us. And so I didn’t really know what to expect, but basically, we stood in line at like five or 6:00 AM, and this line wrapped around the stadium. And then once they opened the doors, it was like a mad rush, like imagine black Friday at Walmart where they’re giving away like big-screen TVs or something. It was like that. And people rush to claim a seat, and you’re in this huge stadium, this huge indoor stadium. And then I would be tired just sitting there answering all these questions. It’s like back to back to back, but here you have Buffett and Munger who are quite, quite up there in age, and they’re just, you know, Buffett’s just snapping off answers. Like as if he’s talking about not super complex investing topics, it was just, it was fascinating. I was completely blown away, and I agree it’s a great experience. And you just really have to be a shareholder in Berkshire to be able to attend.
Yeah. And now, you know, you know, when I was first Going to it, you know, the B shares were like in the thousands of them and the B share split, it was very easy to get a share. But what not a lot of people, don’t what a lot of people don’t know is that if you don’t have any B shares and don’t feel like buying one, or, you know, let’s say you don’t even have a brokerage account, right. Or like, say maybe you just started to invest. You can go on to eBay and Buffett. Berkshire will actually sell credentials to the meeting for $5, and they sell unlimited credentials and flood the market so that no one can scalp tickets cause people were doing that years ago, and it really annoyed Buffett. So he, he, you know, got the price to be $5 by flooding it with infinite credentials.
He really does think about everything. It’s, it’s funny. Okay. So moving past the cult of Buffett, what about maybe not completely passive? What about Buffett and his ideas most influenced you and have led to your kind of philosophy and how you invest today?
Well, I think to put simply the idea that buying security is, is, you know the intrinsic value of a security is all the cash flows. It’ll produce discounting back to the present, you know, not, not a very radical thing to say, but it’s a little mind-blowing. How many even quote-unquote professional investors have, have moved away from that—a very simple idea. So I think it’s even though a lot of Buffett’s career, when if you analyze it, I mean, he’s, he’s done some complex stuff, but the principles are very eloquent and very simple, so easy to understand, difficult to master. And so it just made sense to me and me, and I see investing as a long-term game, you know, you’re playing for 30, 40, 50 years, maybe more. And I just didn’t, you know, I’m looking at Buffett, you know, I’m looking at myself when I was a teenager and reading some of these other books on day trading and technical analysis, or more speculative growth stuff and thinking, there’s no way I could do this for decades and be successful. You know, maybe you could do it once or twice and get lucky, but it just, it just made sense that if I wanted a long-term investment career and I have a, even a decent track record long-term that these principles were, or probably smart too, to start studying and following.
So I, there are different levels of the kind of investing and with the discount, you know, with the margin of safety. So would you say you’re more on the devalue side or more on the kind of closer to the value side? Or do you move between that? How would you describe the way you look at stocks like that?
Well, what Munger would say is that all investing is value investing. So, you know, whether it’s some deep value stock, that’s trading below net cash or trading at some steep discount to liquidation value, or it’s a company that maybe is just trading at like, you know, seven, eight times earnings with moderate growth, or maybe it’s something trading at 25, 30 times earnings where growth is growing at a hundred percent a year. Right. So, I mean, I love businesses that are hyped up growth for years and years to come, that you’re getting at a pretty cheap multiple you don’t see that too often, but, you know, I’ll, I’ll look to wherever I can get a good, good rate of return where I’m not taking a lot of risks. So I don’t, I don’t think I have no proclivity in one way or the other.
I think it’s easier. I would say it’s easier for me to look at a high-growth business at a very, very good price. Cause it’s, you know, I can tell you when something is a good product, I can, I can kind of see when something has a competitive mode, but sure. Oh, man. So, you know, when last year when Facebook, you know, it was like at 160, 170, and it was trading at a market multiple, and they stripped out the cash, it was trading in a, I think it was trading a multiple that was even lower than the market or right around the market. Like you didn’t have to be that smart to figure out that Facebook is a better business on average and is higher growth ahead of it than the average business in the S and P 500. I mean, I thought that was a pretty simple idea.
And really, the question you had to ask, which I guess you could still ask, is, you know, is Facebook going to be around in 10 years, and will Facebook still keep growing? And a little Mark Zuckerberg keep allocating capital at a, at a good rate of return? I think the answer is yes. I think Facebook is a fantastic business. And I think B the negativity in the news has only kept those multiples are lower than they should be. But that would be one example. Another example, actually, this was really, really easy; I can say, this is actually pretty easy to figure this one out. There’s a company called GAM account network and also known as GaN is actually what they’re called now. And I found them when they were trading on the alternative investment market in London, which is kind of like the pink sheet equivalent of the over-the-counter equivalent of the United States, but it’s even more obscure.
So they have an auction system where you can only buy the stock a few times a day. It’s a really weird arcane system. And a lot of brokers only let you buy a stock on the aim exchange. And here was a business. They do the backend for a lot of these online casinos. So, you know, they had some pretty big clients. And what I liked about them is that they had very, very good technology. So a lot of online cause, you know, casinos trust to trust them, to do all their backend, you know, their, their backend work and, and, and, and, you know, customer, I don’t know what the term is, but base basically to track all the customers, to do all the real money internet gaming and you need an, you know, it’s a whole platform, it’s a whole technology, and a lot of companies was really bad at executing it.
And especially when you’re dealing with larger casino businesses. So here was a company that had pivoted to the United States really before anyone else did, taking advantage of the legalization of online gambling and Pennsylvania and New Jersey. And now Michigan. And it looks like New York is, is, is going to be coming up soon. But that’s, you know, there’s, there’s tons of growth and, and, and tons of, you know, future clients to get from that, right. Then, the Tam is, is, is insanely huge. And GaN is the market leader in that. So you could have bought GaN at one point early in 2020 at like one to two times revenue for a company that was projected to have 35, 40% normal normalized margins at scale. And they’re growing revenue at a hundred percent a year. So I don’t know, you know, like where can you find a business in the United States, growing revenue at a hundred percent a year will be very profitable and have extremely high margins at scale. And you’re getting in at one to two times revenue like that, that, that, to me, it was just a no brainer. And I, and I, I put 10% of my assets into that at the time. So those are the kinds of things I love, you know, I just don’t get to do them too often.
Yeah. You bring up a good point about that being hard to find now. So how does the approach change if at all in today’s market with it seeming like a lot of people seem to agree, there’s quite a bit of froth In certain places. So how do you approach a market like that?
Really, I think in certain places, I, you know, like WD 40 is trading at like 60 times earnings or, and there’s a lot of businesses that are that I don’t even think have that much high growth ahead of them that are trading at ridiculously high evaluations. And then a lot of the, you know, SAS businesses, tech businesses, not all of them, but, but a lot of them are trading at like a hundred times sales, 80 times sales 300 times sales, right? So it can be very difficult to make money long-term where you need really, really, really high growth rates even be able to make an app, you know, like a 10% rate of return for some of these businesses. I’m not going to say it’s not going to happen with any of them, but it might be hard.
And I think a lot of people are going to lose a lot of money speculating on some of those names, but there are other businesses, you know, for instance, say a com you know, say a company like Brookfield asset management, which is something that I own for myself and my clients. And, you know, Bruce Flatt as the guy that runs that business. But quite frankly, you know, any of the subsidiary CEOs could probably run the business just fine. You know, if he got hit by a bus tomorrow and you know, they’re an asset management business they have a bunch of private funds, and they invest in infrastructure and renewable energy and, and all in all in different real estate projects they invest in real assets and then they also have some limited partnerships that they own stakes and that they have spun out over the years that are not publicly traded, and they may own stakes in those limited partnerships.
So you could add up the value of their LPs and then, you know, put a conservative to somewhat average and multiple on the asset management business. That’s been incredibly well-managed over the last 20 years. I mean, they’ve compounded capital 20% a year for the last 20 years. And you know, you’d get a stock price. You know, I had said low end and the mid-forties to low fifties, and then on the high end and in the, in the, in the sixties, low seventies and the stock trades at 40 today. So there’s a growth company with, you know, years, years of growth ahead of it trading at a pretty, pretty low valuation. So there’s certainly an opportunity. You just have to spend extra time looking. So w, where I tend to look is, you know, companies that are not traded in a lot of index funds, right?
So if you’re not in the S and P 500 or in one of the major indexes, that’s often a place to look because you don’t have the index funds, just sort of indiscriminately buying and bidding the stock up. Another place to look would be, say, places, where there’s not a lot of analysts following them or the liquidity is low. So a lot of these over-the-counter stocks, you know, most of them are garbage, but they’re there’s certainly opportunity on the OTC markets. You can also look internationally, sort of, right? So just because the United States is expensive, there there’s other parts of the world where you can find businesses where maybe they don’t have English financials, or there’s, there’s something weird about them. And then they’re in a different country. So people sell off the stock, and then there are other businesses where maybe the business doesn’t fit perfectly neatly into some category.
So people just kind of ignored it. So there’s, there are places to look. You just have to be creative. And then, and the game is harder today than it was said, 30, 40 years ago, where you could just do a, you know, look, look through a Moody’s manual and find every stock trading, you know, below the net, current asset value, buy a basket of that, and you’d do okay, or even say, buy the lowest you know, lowest 10% of the price to book companies and beat the market. You know, that that strategy has you, you would, you would underperform by low PE price to book companies last 20 years. And there are reasons for that too, which, you know, we can get into, but yeah, you have to be more creative, but there’s, there’s value. If you look,
Let’s say that somebody is brand new to investing; let’s say they started in January. And that was their new year’s resolution to try to find some stocks that are good value, and they’re not paying too high of a price for it. How would you suggest somebody start on the path towards looking in the place where it doesn’t seem like things are cheap at all?
So I would, you may not like this answer. I want to tell you listeners who are beginning to invest may not like this answer, but like, with a lot of things in life, there’s, there’s often not a shortcut, right? So it’s like the life hack; the shortcut is actually doing the work. So I would say, this is what I did. And it worked well for me, but you have to see it. This is kind of your style. I made a list of every company that I wanted to study, you know, cause if I weren’t going to have fun doing this, I would burn out. And if you’re doing this for years and years, and you’re not enjoying the process now want, you’re not going to last. So I made a list of like, you know, I don’t know how many companies it was.
It was; it might’ve been 50, 75, something like that. I’m just companies that I wanted to study that I thought were interesting. And then, one by one, I read their annual reports. Sometimes I would call the management teams. You know, you’d be amazed how many CFOs will actually talk to you if you give them a call? And I learned, and I learned about different businesses and different companies. And then I said, okay, well, what, what what do I think the stock could, could be worth? You know, what multiple my willing to buy this? Where do I, how do I feel the growth rates are going to be? So, you know, first, stable business that’s growing and, you know, three to 4% a year, if I could buy it at ten times earnings, you know, with no growth, that’s the 10%, you know, that’s a 10% rate of return.
And then that can get juiced up a little bit. That’s a great return. So yeah, I would love to own, say, Colgate or, or Nestle or at ten times earnings. That sounds fantastic. But most of those businesses don’t trade at ten times earnings. So it might be that, you know, I remember for me that, that first year or two of me learning, I only bought like one actually I only bought two stocks. I bought this little supermarket business called village supermarket. And they were just trading at, you know, right around book value and a low, multiple to earnings. And I bought stock in Apple computer. And, you know, when you stripped out the cash, it was also trading in a very low multiple, and you had Steve jobs running it, but it was only two stocks that I bought and everything else.
I didn’t really know how to figure it out. So as I started learning and learning about different businesses, learning about their competitors that, that, you know, expanded my as Buffalo would call it your circle of competence, my circle of competence. And that’s what allowed me to start getting creative. I would also recommend for a new investor is take a look at what some of them, you know, the rockstar investors, are doing it. So take a look at the Berkshire Hathaway portfolio, take a look at the daily journal portfolio, take a look at, you know, when bill Ackman’s doing a filing or any of these other, you know sort of famous investors, see what they’re doing and start studying those businesses. You know, you can also pay for research too. So there’s a guy who I’ve had on my show quite a few times, Jeremy Raper at Raper Capital. He writes a, you know, a wonderful, great newsletter, and he gives a lot of stuff away for free on his Twitter. So He gives out some great ideas and, and he Tends to, you know, I think Me and him were very similar in a lot of ways where he looks at a lot of these under the rules,
Radar kinds of securities in different countries, but also easy to understand. There’s a, you know, a bunch of blogs that I think are great, like a, yet another value blog, you know, they have a subscription service, but they also give away a lot of free content read annual letters of different investors, you know, and you can find those online often, and they’ll talk about the things that they hold. So I think as you start to find what you enjoy and what you enjoy reading, what you enjoy learning about, there is no shame and taking an idea from someone else. As long as you understand the idea and you’re not just blindly taking it from someone else. So I would say the start; that’s how I would start it. And you kind of figured out your own path along the way.
Those are fantastic ideas. Thanks for sharing that.
Yeah. Oh, and let me also add two other resources that I think would be great. And there’s a message board that I’m very active on called the Corner of Berkshire and Fairfax, and, you know, people share about all different ideas all the time on there, but it’s also a really great community. If you’re new and people will be very welcoming to you if you’re new. And then there’s also the value investors club, a little bit more advanced than the write-ups. But anyone can register for a delayed, you know, 90 days delayed account and some of the best investors in the world have write-ups on there. And you can read old investment ideas that are 90 days old and, and quite frankly, an idea that’s 90 days old; a lot of those are still going to be applicable. So you get, you can get a lot of free investment ideas from there as well.
What’s the best way to get started in the market, download Andrews ebook for email@example.com.
That’s awesome and Great resources. And I was actually making notes on some of those because of some of those I was not familiar with. So thank you for sharing those with me. That’s awesome. Yeah. I guess a question I have, so some of the things that we’ve been talking about are super interesting. So I guess you tell me a little bit more about this under-the-radar securities idea. So we, you know, I spend a lot of time looking at stuff here in the United States, and I haven’t been, to be honest, I haven’t been as comfortable going outside of the United States. And I guess some of the things that you talked about early on were outside of the United States. So tell me a little bit about like, how you get past that, that, you know, I guess, a bias of the accounting standards and any of those kinds of things. And I know that that’s probably a little bit more old school thought-wise on my part, but, you know, that’s something that I struggle with, and I’m guessing other people might struggle with that as well.
Sure. So, you know, when I was at my second annual meeting at Berkshire Hathaway, we didn’t want to go back to boffin for a second. I had asked him a question, and I said, you know, if you were managing smaller sums of money, again, you know, you know, doing the Buffett partnership essentially all over again, would you be buying more of the kinds of securities that you were, you know, back in the 1950s and 1960s, or would you be, you know, buying more of the stuff that you are today? And he said, you know, flat out that he would both him and Charlie, you know, were, were very honest and that they would be certainly looking at more of the obscure kinds of stuff that they were looking at, you know, decades ago when they were managing much smaller amounts of money.
So, you know, that got me thinking that maybe I should be spending most of my time there, you know, figuring out Facebook; I brought up Facebook earlier like that, that really wasn’t too difficult. You know, I can kind of get an idea of the business. I don’t need to understand every little nuts and bolt of the company. I can see trades at a lower, multiple; there are not many variables you have to figure out, you know, I don’t need, I don’t need a 10-page analysis on Facebook. I can basically give you that analysis in the paragraph, quite frankly. But a lot of these say, you know, international stocks or over-the-counter securities, you have to do some more digging because most of these businesses, I’ve never heard of. Some of them, you know, say like maybe a company or a German firm that the financial Tony would be in English.
So you don’t have to use Google translate. There are times we’ll say what the OTC security is, where you might have to like go onto their website to get the financials, or you want to actually email the management to get their financials because they’re not going to be posted, you know, on the OTC markets, certainly not with the sec. So I spend most of my time doing that. How I get comfortable with it is really how I get comfortable with anything. So you know, if a, say a business is in, I’m just making this up, but, you know, say businesses in Japan, right. And it looks very cheap. But then I discovered they had this big subsidiary in China. Well, that’s going to make me a little less comfortable because China has more fraud. You know, or let’s say I’m looking at an undervalued company in Poland, and they’re trading below liquidation value, but they’re selling all this stock.
Well, that’s a red flag. But maybe they’re buying back stock. That’s a potluck. It would be very interesting. So I’m taking all these, you know, this is where the game’s harder, but it does not have a blind screen is, you know, I’ll start digging in one by one to these businesses. And I tried to get a sense of what’s going on and why the stock is cheap, you know, is management doing anything to correct it? Or are they taking advantage of anything? Are they, is something going on? So, you know, certainly, that other countries are not going to have the same accounting standards as the United States. But like generally, if say, if something’s treated in England, I mean, I don’t think it’s going to be right with it, like accounting fraud. You know, I’d be certainly careful if you’re looking in China; I don’t even really buy stuff in China or looking at Russia.
But for the most part, you know, my biggest concern isn’t accounting fraud. My biggest concern is there just something shady going on so that the management is like, you know, stealing from the company and they have egregious salaries, or there are some weird inter-family transactions going on. Or, and then sometimes it’s just as simple as, you know, you take a company in China, that’s trading at know 60 cents of a dollar of, of, of book value. But the returns on equity are half a percent because, you know, they, they hold cash and there is 400-year-old business, and they had only three golf courses and insurance company yet they like their main businesses to like sell two-in-one or something. So, you know, every, every business is you have to look at it individually, but like, I wasn’t, you know, like looking again, for instance, like I wasn’t worried that they were committing accountant fraud. Okay.
Okay, Gotcha. Okay. That makes a lot of sense. So do you have a threshold as far as a market cap or revenue that you try to stay above below? Is there any sort of, I guess, you know, not screening, that’s not the right word for it, but is there, is there anything that kind of gives you pause? Like maybe that’s just a little bit too small or a little bit too, a little bit too risky on that end.
Yes and no. So like the small, the smallest security that I, that I own, it’s like a $500,000 market cap. And I’m pretty sure that the CEO and CFO are stealing from the company. I’m not going to; I’m not going to go into what the name is or anything like that. But there might be some stuff going on with the business that could change, but I, I don’t want to talk about that because that’s so small, but generally, you know, if something’s, if something is like, say under like say one to $5 million margin cap, or even like to say under $20 million market cap, my first question was like, well, why is this public right? Like, you know, like, so, you know, I was even just on the phone with a CEO of a company the other day that that’s in the process of going dark and they’re going to have a major cost savings, you know, their, their market caps.
I mean, it’s silly low. It’s like, it’s under, it’s under, I think it’s like, I don’t remember, but it’s under $30 million, and they’re going to have a huge cost saving by going dark and not having to file with the sec anymore. But it’s a really, it was a really interesting valuation and, and really enjoy talking to the CEO and thinks about capital allocation. So like, you know, in that case, I wanted to talk to the management to kind of see, you know, get a sense of what was going on. But yeah, generally, I mean, you’ll see these businesses, like I remember this one that I found in college, so we’re talking like 2006 here and it was called Altecs industries. And they own, like, I don’t remember. It was like, like one oil and gas pump or something like that. Or like they had almost no assets.
It was just like a little oil and gas revenue every year. And the CEO, his salary is like half the market cap, right. What that was like a $1 million business, and the guys were making half a million a year. It’s like all the cash flows go to him. So like I tried calling him, there was no, like, it would just go to a voicemail. Like it would be like, no, it would never ring or anything. I can never get in touch with the guy. And so I mean, I don’t even know why it’s public. I couldn’t figure out the history of it. But like I kind of determined, like this thing is around because it’s the guy’s piggy bank and, you know, long story short, you know, fast forward, you know, from 2006 to 2021, that’s what it sounds weird to say, which is 20, 21 and the stocks, the exact same price.
So it like, you know, it’s not cheap even though it’s trading below book value because it should trade below book value. So yeah, just like use your discretion if something, a $3 million business and the CEO is getting all the, all the, all the cash flow, it’s like, it’s the family piggy bank, but there are exceptions to the rule. So like I have made investments. Yeah. So I own a, is one stock, North Northfield, precision. And we’ve, I’ve actually had had a guy talk about it on the, on my podcast a little while ago. It’s like nine; the market cap today is a little under $10 million. But it’s a real business. They have this tiny little niche. Like they have like a little monopoly making what are called precision air trucks. And they have like, you know, they’re like, they’re like one of the only companies that make this particular kind of little machine part for very particular tasks that are way above my pay grade to understand exactly what it’s for or how it’s used.
But they have like really nice margins, and there really has not been much growth up until potentially this past year where it might have some growth opportunities, and I’m buying a, basically the business at like, you know, sub ten times earnings for some possible growth and, and very consistent earnings that they just payout in a dividend every year. And now they’re paying a little bit less than a dividend to try to grow the company, but it was one of these, you know, low risk, you know, I think it’s very reasonable. I can make a 10% return on it, but potentially much higher. And you know, the management does send out reports, and they have annual meetings and, you know, we’ll see, you we’ll talk to you. So it’s a real business. And, and it’s, you know, they’re, the management owns most of the stocks that don’t trade a lot. But that would be an example of a small company where I could see it, see, see, they they’re dark, so they don’t have to file, and then they save costs on that, but it just kind of sticks around every year and pays a dividend to the shareholders.
Yeah, that’s cool. That’s, that’s really interesting. All right. Let’s pivot a little bit. So let’s talk about moats. This is one of, this is one of my favorite subjects. So let’s talk a little bit, let’s talk a little bit about moats. What are your thoughts on moats?
What are my thoughts on moats? That’s a very broad question. It certainly increases the value of a business, right? So, you know, going back to that original principle that, you know, the value of the intrinsic value of any asset is all the cash flows. It will produce to infinity discounted back to the present. Well, if you have a competitive mode, you have a higher probability. We don’t have crystal balls, but Mo, you have a higher probability that the cash flows that you’re experiencing now or the growth that you’re experiencing now is going to continue at least long in the future. More, if you have no mode at the moment, you have high margins, other people wake up to that in a capitalist system, or at least mostly a free-market system. And then those, then those margins get chiseled the way to zero. You know, that’s why most companies don’t make their cost of capital for that reason.
Yeah, that’s a good point. So we were talking about Facebook earlier. What are your thoughts on Facebook and that, that moat that’s of the things? I think the thing that has given me pause about the company is a will. Will that growth continues as, you know, as a 20% revenue growth, is that really sustainable for the next 10, 20 years?
20 years? I don’t think so. Maybe I don’t know, but I think, I think over the next ten years, I don’t know about 20% growth, but I, I think you have pretty high growth over the next ten years. I would say double digits for the next five years if I wanted to guess.
Right. Yeah. Okay.
But, you know, in terms of modes, I, I mean, I think Facebook is one of the greatest businesses to ever exist in like in, in the history of the world.
Well, that’s, that’s quite a statement.
Yeah. I mean, I think that’s true. I would; I would say Facebook, Amazon, Google, maybe, you know, in the top 10 business businesses ever to exist in humanity.
What about that? What do you think about Microsoft that in that category?
Maybe there’s other; there are other moving parts to Microsoft, which I don’t, I don’t fully just get as much. So I don’t know. I mean, it’s great; it’s obviously a great business. I mean, their margins are insane, and they’ve been around for a long time, and they’ve grown to where they are, and now they have their cloud business too, which has taken off. It’s a great business. I don’t, I don’t, I don’t think it’s as good as Google or Facebook, but it’s great.
Right. So I guess the talking about Amazon, you know, the recent news with, with Jeff Bezos, stepping down, do you think that’s going to impact the company or how they operate going forward?
So my, I may look like a, like my guess is as good as yours, right? Like my, but if I had to just like put on my like, sleuth, like thinking lens for a second, I don’t think Jeff Bezos is the kind of guy look I, so one of the other things that I do in life is I do a lot of organizational consulting and cultural work. And, you know, one of the biggest problems sets that founders experience is how do I actually leave my legacy on the company? Right? Because we have seen times where a founder will leave, and they will leave it to someone who’s very smart, very good operationally understands the business, but there’s something missing, right? Like when Steve Jobs was running Apple, that was Steve’s vision. You know, whether you like it or not, that was Steve’s vision. How do you give, how do you give your own self-expression to somebody else?
It’s very, very; it’s, it’s actually a certain skill set. They don’t teach you in business school, and they don’t really teach you in most places. I don’t want to; I don’t know. We don’t have time for like, got into that, that whole body of distinctions, but it’s a, it’s a completely different skillset. And you can be really smart and business in a really dumb and turning a business over to someone else. But I would imagine Jeff Bezos is smart enough, I, to say smart, both intellectually and street smart, I think you have to be street smart to build Amazon as well, that he’s thought about this and has probably worked with people that have the skill set. So I don’t think he’s handing it off to someone who he just thinks is like, Oh, well, he’s he understands the business. They’ll; he’ll be fine. Like, I’m sure Jeff Bezos has done a ton of work for years on literally ensuring to the best he can, but whoever took it over would be able to carry out the vision for Amazon.
You know, it’s one thing to write in your annual report to say you don’t every day is day one, or, you know, that’s what they, that’s what they say at Amazon. But, one of the competitive moats in Amazon is the culture, you know, saying, saying every, you know, it’s always day one. It’s not just giving lip service to that saying; it’s actually embedded in the ethos in the environment. So, the big test is, will the new CEO. I’m sure he’ll say that. And he’ll write that in the annual report. Will it still be in the culture? I would bet. Yes. And I, I bet Jeff has done a lot of thinking about that. So I trust Jeff Bezos to do that job,
I guess, to bring it full circle. We started on Buffett. Maybe we end on Buffett, too, as a Berkshire shareholder. Are you, do you envision yourself holding on when Buffett finally passes the torch?
So to me, that’s a way easier question. I’m assuming the valuation isn’t like four times book value for Berkshire. So I’m like, yes, but I think buff that the transition of Buffett’s actually a way easier question to ask them than Bezos cause a lot, a lot of Amazon is based off what Bezos has created with Buffett. Buffer died the next day. I mean, Berkshire is fine, right? I mean, they have very independent operating subsidiaries. They have great cultures within those, those Berkshire subsidiaries already, at least most of the companies, not all the companies, but most of the, a lot of the companies. And there are so many guys there that like the Buffett, he’s not doing the capital, a lot of the capital allocation. He is still okay. I want to take that back. He’s doing a capital allocation, but there are other people there that can also do the capital allocation. There are so many great people at Burke who share that buffer die tomorrow. That the S the success of Berkshire hasn’t been relying on Buffett for many years now. So he’s been very good at structuring the company not to rely on him. So I was actually way less worried about that than I would be with them.
Yeah. It does make a lot of sense. And I think it’s something to consider. It’s something I think a lot of investors don’t consider until it happens, like, as was the case with Bezos. I mean, I always assumed he would kind of be there forever, but you just never know. And it’s, I guess it’s another part of the fundamental analysis, really.
Yeah, I mean, there’s, there’s no shore things for this, for the most part, and investing. So part of the art, I mean, you know, investing as much more of an art than a science. I mean, if it were just science, every accountant, the mathematician, would be a billionaire. That’s not the case. So the art of investing is how do you underwrite that? Like, you know, how do you, how do you underwrite buying Amazon if it doesn’t work out? Like, I would say if, if, if I don’t remember what the guy’s name is, but then, the new CEO of Amazon, I mean, if he is not aligned with the culture, I mean, Amazon is not going to be Amazon anywhere. I’m just straight up about that. But I don’t; I don’t think that’s going to happen, but like, maybe there’s a 10 to 20% chance that doesn’t have that, that doesn’t happen. Like, I don’t say, I don’t think it’s zero, I’d say it’s a low probability, but I don’t think it’s zero, but I think if it works out, Amazon still cheap, I actually own a lot of Amazon as well.
Good businesses. Yeah, they are. I wish I did
They’re public. So you can still buy.
Not at those prices.
I hear you. You know, people have been saying that, though, for the last ten years, they don’t want to own a face program. And some of those prices, I’m not saying just indiscriminately, but you know, one of them, one of the things that Buffett has said, God, I hate doing this right now. I’m actually going to publicly criticize something with Buffett, which is making me cringe. But I think that’s like, you know, let’s criticize the cult leader here for a second, you know, Buffett. One of the things he shared that really stuck with me when I was a teenager is he said, you know, don’t worry about where the price has been, look to what the intrinsic value is now. And I remember that’s actually what allowed me to own Amazon is, you know, I just looked at the stock chart for Amazon. It’s like, you know, I’m cringing.
Cause they’re like, I don’t really feel like you buy Amazon at the 52 weeks high or the, you know, the 30 years high or whatever it is. Right. But when I was doing the analysis on Amazon, I was like, okay, I think this is actually a 50 cent dollar, even though the price has gone up a lot. So I just saw that I had that bias solid. I had that emotional reaction and the bottle anyway, I think, you know, Buffett talking to my ear while don’t worry about where the price has been looked to it now. And then I remember a few months after I bought Amazon, I watched this interview of Buffett, and he was talking about, like, what a hard time. He’s like, he’s like, Oh, Amazon’s a great business wished I bought it. But it’s really, really hard for me to buy the stock after it’s gone up so much. And I’m like, I thought, that’s what you told us not to do. So like, I, I S I, it occurred for me that Buffett was, was actually being psychologically, psychologically anchored to the price of Amazon. I thought that was really interesting. So we’re all infallible in our own ways.
That’s a great way to put it. I love how we covered the scope between a hundred thousand dollars market cap all the way up to trillion-dollar. So we made sure we got the whole range today. It was a fun conversation, Eric. Where can people go to find out more about and what you’re doing today?
Sure. So I have a few links depending on what you’re interested in. If you want to check out my business, it’s GSCM.co that’s for the Granite State Capital Management company. And I do have a few investment write-ups on there. People want to get a deeper idea of my thinking. They can also go to my personal website, which is just Eric Schleien.com. And if they click podcast, they can listen to all the episodes of the intelligent investing podcast. And then they can also click to subscribe on Spotify, Stitcher, you know, whatever podcast platform you like to use. But I’m more than happy if people want to get in touch with me personally, have any questions about investing value, investing, how to get started? Any, any, any questions about today’s episode? I’m very, very active on both Twitter and Instagram, and it’s just Eric Schlein is my Twitter and Instagram handle. So if you’re on Twitter, feel free to reach out to me if you’re on Instagram; as they would say in Clubhouse, slide into my DMS, but yeah, I’m very accessible. So I’m always happy to share information and ask, you know, answer any questions people would have for them if you want to get in touch.
Awesome. Well, thank you very much for all that, Erica; I will make sure to put all those links in the show notes so everybody can access all that stuff. And there was a lot of great information there for sure. And Eric, thank you very much for coming and taking the time out of your day to come to talk to us and share your knowledge with us.
My, my pleasure. Thank you so much for having me on
All right, folks. Well, that is going to wrap up our conversation for this evening. I wanted to thank Eric again for taking the time out of his day to come to talk to us and share his knowledge with us. So without any further ado, I’m going to go ahead and sign us off. You guys, go out there and invest with a margin of safety emphasis on the safety. Have a great week, and we’ll talk to you all next week.
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