TIP557: Mastermind Q2 2023 w/ Tobias Carlisle and Hari Ramachandra

The key takeaway from the Berkshire Hathaway annual meeting is that even at 90 and 100 years old, Buffett and Munger are still active and energetic. Despite tribalism and the dominance of the US dollar being concerns, Buffett is thoughtful about American exceptionalism. Tobi admires their philosophy of survival by doing the right thing, which attracts businessmen and investors alike. Both speakers tackled diverse questions and shared insights on leadership, motivating financially-independent subsidiaries, and successions plans. The meeting was a great opportunity to soak up their philosophy and learn from their experiences, with Buffett more succinct than the prior year, and Munger still brilliant at almost 100. Overall, the experience was enjoyable and enlightening.

Palantir is a data analytics and security company that helps government agencies connect the dots by harmonizing and providing insights and intelligence from the data. The company's platforms, Gotham and Foundry, are cloud-based and powered by Apollo, which also delivers software. Palantir has partnerships with Microsoft and AWS and has been growing revenue at a rate of 40%. While their earnings per share is negative 26, they have been able to get close to break even. Their majority of the revenue, 55%, comes from government agencies. Palantir's unique ability to solve the complex problem of data harmonization in government agencies makes it a potentially good fit for companies like Geico.

Palantir Technologies has huge potential in the data analytics market, which is expected to grow to $346 billion by 2030. They have a team of over 4,000 employees and the right technologies to succeed, but their go-to-market strategy needs improvement. Their per unit cost is high, so they usually work with big enterprises, but their sales team is only 15% of their employee base. Palantir needs to solve this sales and channel problem and build an ecosystem to scale. If they can figure out their go-to-market strategy and create a starter package for their product, they have the potential to be a very undervalued company. However, it's not a sure shot and requires some risks, but if they can succeed, the future looks bright.

Palantir is a company that offers an AI-based system that brings together data from various systems to provide an interface that is easily understandable by humans to monitor and analyze these data feeds. It has been successful in solving complex problems with government agencies and is now applying that dark expertise in the commercial and enterprise world. Palantir is a killer app as it solves the problem of data not being interconnected and produces something understandable by humans. However, the company has outstanding ballooning, and it is hard to evaluate the company's future 10 years down the line as it is tough to assess where they are today. Palantir is attractive, but it's essential to have a better go-to-market strategy to understand the company better.

Security architecture is critical for products dealing with large amounts of data. Palantir has solved the problem of data harmonization and security, allowing for the application of ml, visualizations, anomaly detections, and predictions. Virtu Financial is a high frequency trading shop that relies on having the best technology and good connections. They provide the backend infrastructure for many ETFs and are the second biggest market maker for retail. They do well when there's more volatility and trading, but their financials have suffered due to the disappearance of meme stocks. Zero days to expiry options have been a recent development that might be slightly beneficial for them. However, the business has faced scrutiny from the SEC over payment for order flow.

Robinhood generated income by getting paid by market makers but SEC is reforming the market structure which will affect the market makers. Robinhood has a complex capital structure with varied share classes and insiders controlling the company. The stock is presently trading close to its lows and is free cash flow generative. It pays a substantial dividend and, being a dirty shirt, may perform well in case of a crash. It seems to be undervalued to the insiders who hold the shares and Robinhood has been using its free cash flow to buy back its stock. Overall, it seems like a good trade rather than a long-term investment.

The speaker is discussing his portfolio and mentions potentially rebalancing in a month. He believes the stock in question is undervalued and has potential for positive returns, especially in times of market instability. However, there are risks such as the share classes making it difficult to determine the true market capitalization and ongoing negotiations with the SEC which could result in enforcement. Despite these risks, the speaker believes the company is good at generating free cash flow and has flexibility in scaling the business up or down. There is potential for the company to make money in various conditions, but there is a black swan risk if the SEC changes the nature of the market-making business. Overall, the speaker believes the potential for positive returns outweighs the risks.

Virtu Financial is a good investment due to its strong position, cheap price, and good cash flow. With its acquisitions and capital allocation strategies, the company is likely to grow stronger despite the risk of regulatory headwinds. It has tailwinds working for it due to the secular trend of more trading, although peak uncertainty and cyclical trough may cause volatility. Shareholders are currently paid dividends and buybacks, and the company pays out what it earns. Despite regulatory risks and complexity, the company is expected to benefit from any increase in volatility, making it a good trade in the years to come.

Teqnion, a small Swedish stock, uses a simple but difficult business model of growing through acquisitions of small industrial companies with niche markets and pricing power. The company has financial targets of net debt to EBITDA lower than 2.5, EBITA higher than 9%, and doubling the EPS every five years. They pay for acquisitions in cash with 60-70% upfront and the rest in a two-year earnout, financed 50% internally and 50% by bank debt. Despite being a small and relatively unknown company, Teqnion has seen a massive increase in stock prices and possibly reflects a strong business. However, acquiring businesses is notoriously difficult, and acquiring companies typically do not gain value.

When acquiring companies, the premium paid to existing shareholders of the acquiring company and the difficulty in finding good bargains for private companies make it challenging to achieve a five-year payback period. Teqnion's success in this regard can be attributed to the Swedish culture of trust, which enables decentralization and succession, and values equality over excessive wealth. Small Swedish companies, which are Teqnion's main market, have limited potential acquirers, making it possible for Teqnion to acquire them at somewhat favorable prices. Teqnion's promise to not burden acquired companies with debt and sell them off contributes to building trust with small business owners, making them more likely to choose Teqnion over private funds offering higher prices.

When investing in small industrial companies, it is important to focus on acquisition discipline of the management team and not overpay for acquisitions. Private equity companies tend to centralize a lot, making it difficult for replacements for CEO roles. Teqnion offers a simple yet not easy strategy, requiring the right people to execute it. Similar to Berkshire Hathaway, acquiring discipline by not overpaying and incentivizing managers appropriately is crucial for success. However, overpaying and too much debt can be the main risks in investing. It is important to pay the right price for businesses to ensure that returns look more like the underlying returns of the business. Overall, investing in small industrial companies with good track records of making acquisitions can result in successful returns.

Investing in Teqnion, a company trading at a P/E of 26, requires trust in its key management figures, Johan and Daniel, who have different risk factors. Their departure could cause a significant impact on the company's future growth, which is a major source of its value. Johan comes with a strong background as a mechanical engineer and speaks the jargon of the companies they acquire, and his parents are still big shareholders. Daniel, on the other hand, has a background in Bain McKenzie and understands capital allocation well. Before investing in a company, understanding the management's capability in capital allocation is crucial. Also, it's important not to fall in love with a company before investing in it.

When evaluating a company, pay attention to the corporate culture and management's behavior. A healthy corporate culture is essential, and management's frugality and transparency are positive signs. But ultimately, the success of the company depends on its return on investment capital, which should be high, and the longevity of its runway. Long-term investments in high-quality companies for a premium price can be profitable, but it's important to have faith in the company and its management. Investors should focus on high-performing stocks, even if they're priced relatively high, and avoid trying to find undervalued gems, as this is close to impossible without taking on significant risk.

The compensation for the CEO and management at the discussed company is relatively low, even by software standards. The CEO made $140,000 in base salary and received a $120,000 bonus split on the profit they made in 2022 compared to the previous years. The benchmark keeps on going up each year. This company seems to have no overpayment or extra debt issues, making it promising for investors. The valuation is also good, with a 4% free cash flow yield growing at 20% a year. For those interested in investing, building a position slowly by buying a few shares at a time and learning more about the company is suggested. Lastly, observing the macro trend with a bulge of aging Baby Boomers and transitioning businesses is worth keeping an eye on.

Having a financial expert on board can be a great partnership for engineering businesses as engineers aren't familiar with financial terms. Compensation plans should be simple, concrete, and incentivize employees to do the right thing instead of silliness to hit numbers. Teqnion, the discussed company, has a more conservative approach of focusing on profits rather than revenue, which is more derivative of profits. They have a higher cost of capital, payback period 5 years, and 50% banded and 50% cash, which is easier to understand. Tobias Carlisle runs two funds in the US and maintains that the global economy is deteriorating under the hood with stock prices not reflecting it.

Tobias Carlisle, a deep value investor, hopes for a market collapse to buy stocks at cheaper prices. He explains that historically, markets bump sideways for 18 months before the last third, which is the business end. He predicts that the last third will come in 2023 or early 2024, but time will tell. The Investors Podcast (TIP) Mastermind Community is a platform for investors to meet like-minded people, bounce ideas, and get new suggestions. The community was initiated after noticing the increasing interest in meetups TIP organized. Members can find people to talk about investing, which they might not find among their friends. The platform provides a space for investors to increase their knowledge, get support, and widen their perspective.

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