YouSaid · the spoken record

Brian Bares

lines on the record: 75
first: 2021-04-26
most recent: 2021-04-26
sittings or episodes: 1
sources: podcast

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“But instead, I'm thinking about work or other things personally, and I'm just out of the moment completely. And it has impacted my business life because I've had some business success and I haven't enjoyed it because I'm constantly thinking about the downside, the risk management or the future planning or the future optimization. So I know it's kind of an unusual answer, but it's probably my biggest mistake is not just being present and having some gratitude for the great things that have happened to me.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think my biggest mistake, and it's probably going to sound kind of strange, has been a failed attempt to be present in my life. And what I mean is I have this subroutine running in my head all the time. And it is risk management. It's what could go wrong here, both personally and professionally. What could go wrong here, constantly thinking about backup plans and potential outcomes that are negative and how can we mitigate those? And at the same time, I've got this subroutine going about the future prospects, future planning, and what could happen if things go right and what should we be doing to optimize for the future. And that's not how you're supposed to live your life. It's just not how you're supposed to live your life, right? I mean, you're supposed to be present. You're supposed to have gratitude. You're supposed to have awareness and meditation helps a little bit with that, but it's been a continual process for me of fighting that. I mean, I will find myself at my kids' basketball game and I'll be watching my kid hit a three-pointer and I should be excited for this.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“But that's been the hardest thing to compensate for. And I wish somebody would have told me that a lot sooner so that I could practice and get better at it earlier. I think I would have been more successful.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“I wish I knew how important public speaking would be to our job. I suffer a little bit of anxiety from public speaking, and I don't think that's uncommon. Being a state school person from Nebraska and feeling like kind of an outsider, I've probably had this psyche filled with imposter syndrome my entire career that's probably fueled the insecurity a bit. But what people don't tell you about being a investment manager is not only are people underwriting your ability to execute on an investment portfolio and to run a business. But every now and then you have allocators that are underwriting your ability to go to their boss, to their CIO, to their board, or to their clients, and to communicate what you're doing. And those are high stakes situations. I found myself at the Plaza Hotel three years ago talking to 500 people, and my knees knocked when I talked to 10 people 20 years ago. And it was a very difficult road for me. And it was all about just reps and practice into this day. I still have some of that.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“My mom is the most pious person that I've ever met. I grew up Catholic and she's a very intense mask goer and her expectations for us growing up were very high in terms of academics and achievement and so forth, but they were even higher for values, integrity, and that sort of thing. And it wasn't an aspiration to be an honest person. It was an expectation that was hugely influential in my life. And then my dad is a natural contrarian, which I love about him, because we talked about he buys stuff off the 52-week low list. And he's an eye surgeon and an entrepreneur, and he never really cared what anyone thought of him. And I love that about him in a good way. And so I think that gave me the confidence of 27 to go out and start a business despite having a bunch of doubters in my circle and just to tune all that out, ignore it, and go for it. So yeah, I think that's what I've learned.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“My biggest investment pet peeve is when people buy our stocks based on our 13F. It's not for the reason that you might think. I mean, yes, we do a lot of work and we build all this IP and then 45 days after the end of the quarter, it's freely available and public knowledge for everybody. And so that's kind of an annoying byproduct of our business generally. But the real reason is that I usually get somebody friends, family, or somebody that I don't know saying, hey, I bought XYZ because you own it. And all of a sudden, I'm in a no-in situation because as we discussed earlier, 65% batting average is not 100% batting average and it's Murphy's law that whatever they buy does poorly. And I didn't tell them to buy it. I don't want them to buy it. Yet I take on this burden of ownership of that investment outcome. And so that's super annoying.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“I picked up Zen in the art of motorcycle maintenance again a little while back and I seemed to gravitate towards that book every four or five years and reread it. There's something in that book for every stage of life and I always pick up something new in that book. I mean the wanderlust of youth, the challenges of parenting, the discussion of work and life values and quality and all these sorts of things. And so I usually find something interesting in that”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“I got into meditation a couple of years ago. I know there's probably a common answer for a lot of people these days, but just the endless redirection of my attention has become kind of annoying over the years, right? Where you have this constant stream of IMs, phone calls, texts. I've got three boys and wife and they're pinging me during the day and that sort of thing. And so I think meditation has helped me redirect that or get back into a state of focus after a series of attention distractions.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I'm very fortunate to live in Austin, Texas, and so there's a lot of fun outdoor activities that are available to us. I live on the west side of Austin, which is close to the lakes. Most people don't know that Austin's got all these great recreational lakes around the area. And so I picked up a couple years ago wake surfing, which is you're basically on a surfboard in a boat that is designed to throw off a surfway where you drop the rope and you can cruise at 11 miles an hour behind the boat. And for a 47-year-old, I guess it makes me feel young. That's been a hobby of a couple years ago.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Problem where we have made this effort for years to try and increase the diversity inclusion elements of the hiring process, but the hiring pool itself hasn't been serving up what we need. And so we have started an effort where it targets further down into undergrad, like sophomore year, undergrad. And so that we can formally train people up within the organization over the summer with paid internships that give those people a bit of a leg up in the ultimate hiring process when they come out of undergrad. And so this summer will be the first round of that. We're calling it the BCM accelerator program. And we already have three people signed up for it, and we're super excited about it. And so it's just yet another business challenge among many that we're tackling.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so we, despite our small size as a team and relatively small size, I mean, we're an institutional asset manager, we're five and a half billion under management today, and that's small by Wall Street standards, but it's a decent sized firm now. We have actually just become a signatory to the UN PRI. And so I think that that fits well within our research process because we're not precluding ourselves from really buying things that we would have otherwise. It requires a little bit more documentation. But at the end of the day, I think it's where the puck is going and institutional investment management. And so we want to be good partners to our clients who are most of whom are also signatories to that. And so ESG is becoming more of a highlight. We are not advocates. We aren't taking activist positions in trying to change policies and things like that. But most of the businesses that are pre-qualified on our focus list are pretty compliant anyway. And so it's not a heavy lift for us. So that's a change. And in diversity and inclusion, one of the issues we've had is I think what's referred to in the industry is kind of a pipeline.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Then everybody talks to each other and says, Wait, it sort of exacerbates the Porter Spy Forces problem that these managers have. And so for us, it's been very helpful in having these multiple strategies. It's allowed us to maintain our promises to investors to produce good results with all of them. And I think the important thing is to maintain the level of concentration. You make a promise about that and to stay flexibly sized for the opportunity set and the knock-on benefits of having the multiple strategy says it's increased the robustness of Bear's capital generally.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Pay attention to them. But they also want a robust infrastructure and they want the diversity that comes with a large client base and they want a staffed operations and compliance effort and all these sorts of things. And so what's interesting is that when one strategy is yanging, one is yanging, and it gives our team a robust confidence in the fact that, hey, I'm still going to have a job here if we have a prolonged period of outperformance. Our ops team is still going to wake up and do the excellent work that they do every day. All of our investors are sure that there's no existential implosion risk from the actions of a quarter or a year of underperformance. And then additionally, the actions of other investors are actually minimized. And so most people don't know this, but like large institutional allocators tend to act in concert, but they're also in this game theory problem where if there's five investors in somebody's fund, everyone's sort of pointing at each other, wondering what the other is going to do. And if there's a redemption.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Always want to maintain our promises that we have made to investors, and so we kept micro cap strategy, capacity limited, redeemed capital back to investors, but took the library of information that was now clearly small cap as the market caps grew for these companies that we researched both in the portfolio and on the focus list, and formed a small cap strategy and just offered that to investors. And then the same thing happened in Midlarge in 2014. And so today, we cover the waterfront of market cap in the US. I think a lot of endowments take the approach that we only invest with single strategy firms. And I get that, but I would argue vehemently against that. I think there's been huge benefits to us having the various strategies and the benefits are to both us and our investors in that it has kind of removed operational risk, right? I think every investor wants you just a”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a real interesting discussion, actually. So, we were single strategy firm. We had concentrated microcap strategy, and we were very successful. And we gave money back to investors periodically. And we had this discussion with investors and said, do you want us to keep holding these names as they exceed the microcap? All of a sudden you buy a $150 million company and you wake up one day and it's a $2 billion market cap. It's not really micro cap anymore, but we feel like we have great research on the name. We feel like we have varying perception. I as a person would love to keep holding this company. And what's interesting is despite having sort of similar DNA or client-based head varying responses. So some of our clients sort of bucket by market cap and they say, no, no, look, we like you because you're microcap and we like the opportunities inherent in microcap. We had others that said, we just like alpha generation. I don't care if you invest in companies in Singapore. We just want your best ideas. And so I was faced with a choice where I want to.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Business evolved because clearly when you start with just a concentrated microcap strategy, you mentioned the number, I don't know, 160, 180 million dollars. That isn't something that ever really scales. So how did you think about evolving past that and maybe describe where you are today?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, your listeners can't see, but I have a head full of gray hair. I get nervous about everything. I get nervous about making sure that we have the right clients, that we have the right people on the team, that we have the right investments, that the right investments are fit for what people are paying attention to, that we truly have varying perception. I worry about all this stuff. So this is a business that is not only overwhelming because every day you wake up and you're drinking through a fire hose of information, but it is also an endless stream of worry. And so the big worries for me are making sure that we have the right team. that that team is excited and incentive to get up and work every day and that we have the right investor partners. I have friends that ran funds that through 0809 had Lehman Brothers as investors and that sank the firm. That's a huge piece of this is just making sure that you have the right partners. Yeah, I mean, I worry, I guess I worry about it all today.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“You go through this process, there are a lot of aspects that other types of managers would, the proverbial lose sleep at night, owning 150 cent dollar or things like that, when you get nervous about what might be to come, what are the aspects of your process or the portfolio that tend to give you the most angst?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so our cell disciplines probably, if you've seen the cell discipline slide in a manager's deck over and over again, is probably not that different than other managers with one exception. So we'll sell if something gets wildly overvalued. We'll sell if we made a mistake and we'll move on. And then obviously the most common reason is there's some relative value trade that's available to us that will sell a more overvalued position into a more undervalued.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, our batting average is like 65%. That's been a historical sort of win rate. And probably the interesting thing about being concentrated is that when you are right, you're usually really right and that can have outsized magnification of the performance numbers. And so if I look back, it's not quite buffet where if you take out the best four decisions he's made is performance would be no better than average or whatever that quote is that he says, but you can point to 10 correct decisions that we have made that are largely powered the returns of our strategies.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, in the smaller companies, you are sometimes limited by the liquidity, by either the daily liquidity and how much of that you want to be or by the overall market cap and your inability to actually take this sort of position size that you want in a portfolio. I think there are trade-offs in one of the trade-offs for being in smaller companies is that liquidity, but the opportunity tends to be also a little bit greater. So we have had situations where, and I could go on and on with war stories where we bought a name at seven bucks a share and had to get out at one and the liquidity dried up and it took us nine months to get out of the name, right? I mean, it's the Roach Motel you can get in, but you can't get out. And that's just part of the game. Fortunately, we have reasonably long-term investors and they all understand that that is part of the game and we'll liquidate their portfolio. So for example, if they leave us because we want to make sure that we're cautious and measured about how the liquidity impacts happen and then likewise when they give us monies typically in tranches so that we can sort of ease it into the names that we have.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And in these types of names, certainly in the microcap strategy, you'd imagine that the stocks could be very volatile. I'm curious how you've traded off the potential for liquidity with optimization of position sizes.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“We want to buy with the intent of holding for a really, really long time. Very fortunate to have a largely non-taxable client base, and so we don't really have to manage to low turnover. We consider ourselves low turnover. For example, we had one stock in the portfolio for 18 years. But what I will say is that if you look at the numbers, we're actually roughly about 30% turnover. So it's thinking in a 10 stock portfolio about three new positions per year. But it's not tail wagging dog. We're not managing to a number. We're just trying to do what's rational, and that's just kind of how it worked. We're in the public markets, and every now and then we get really lucky and the evolution of investment thesis happens in a fairly compressed time period. And boom, you know, we're out of the name in 18 months. And then other times maybe we've made a mistake and we pull out of the name pretty quickly. And so that's influenced the turnover number. But we've had some years where there's zero turnover of the years where it's higher, but in general, it's probably three new positions a year.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Something like that. And that's going to lead you into businesses that are probably under earning on their capital base. And that's the symptom of a market that's gotten more efficient. And so one of the great things about a process is we just ignore prices and input to the process. And that allows us to just focus on best businesses, best people. Because the biggest mistake most people make is in the pricing or the appraisal of the business. And so if we're a little bit wrong in that appraisal, we can still make a lot of money because your experience in a common stock, the longer you hold it is going to be the internal compounding of business value and not the beginning price. With a huge caveat, we're not running out paying 50 times revenue for some business that even with the most optimistic assumptions, we couldn't justify the current stock price.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Growth is part of the value equation. We are value philosophy because we want to buy stuff for less than it's worth, but we are not value factor investors. I think if you look at the Fama French refactor model, price to book has just stopped working. And some people say, well, we're ready for the ultimate mean reversion there and comeuppance is going to be huge when it happens. And my contention has always been that perhaps the market's getting more efficient and that low price in relation to book value is just a symptom of a business that's underearning on a capital base and potentially in permanent economic decline. And maybe everybody's realizing that, right? And so that's one of the great things about ignoring price as an input to our process is that we don't get led into these value traps. I mean, most managers, if I tasked you with starting a small cap strategy and you have a Russell 2000 boundaries as your market cap universe, you might just start with a simple screen. And usually that screen involves price, price earnings, price evoked, EBD, bed.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, we want to be disciplined about what we pay and we want to pay for less than what we think the business is worth. Unfortunately, we have been subjected to the torture and it has been torture over the last 10 years of watching the most expensive names on our focus list outperform the cheapest names by a long shot. I mean, if you are value factor focused, you have had a very, very difficult run over the last 10 to 15 years, and I'm not saying anything earth-shattering there, I don't think. And so the good news is that the qualitative framework that I just described does allow us to make these qualitative convictions that are as or more important than the price-to-value disparity. And so we have bought 85, 90 cent dollars where we were just super convicted in the quality of the business, and that has paid off for us and is one of the reasons that we have probably better numbers than people that are more value factor focused. I hate it when people ask us, are you a value manager or growth manager or whatever? It's just like.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, one thing we really haven't talked about at all is price. These are, in your estimation, the best businesses in your universe with great management teams and great growth prospects, you might not be the only one who discovered it. So how do you factor price into your portfolio and assessment?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“To size according to conviction. And so, what it typically looks like is 8 to 12 percent kind of starter position, and then we'll ramp it up to 15% or perhaps high teens if we're really convicted in the name. And then we have kind of a, let's call it a gentleman's agreement among our clients, excuse the gendered language there, but we say 30% is our hard cap. And so nothing gets over 30% of the portfolio by weight will automatically start scaling it back.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Where the rubber meets the road. I mean, that's the hard part. And most managers try to take judgment out of this process and they just buy the cheapest price to intrinsic value. And either 50 cent dollars, sell their 100 cent dollars, watch rinse repeat. And it's an easy sell to the allocator because they want to see some confidence in the repeatability of the process. And everybody has this artificial confidence that this will continue to work, but that's just not reality. This idea of qualitative equivalence among your opportunity set is the biggest mistake that most managers make. ABC at 80 cents on the dollar is not the same as XYZ at 80 cents on the dollar. They're different qualitative businesses. They're different competitive advantages, if any. They're different management teams and their strengths and they're different growth opportunities. And not all of that can be captured into a DCF. So we just are constantly trying to make these qualitative contrasting judgments and using our best brain cells to try and sort out what has the best total return potential and then trying.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's why, I mean, I get it. It's perfectly consistent with what their careers to be. But all of a sudden, we're left reselling ourselves to a new team that didn't underwrite us. And perhaps that coincides with the period of underperformance. And it can be difficult. And so we've lived this privilege existence for 20 years where we haven't really had to have a formal sales and marketing effort or anything. And we've been pretty successful.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Gets advanced to the focus list, and all of a sudden we have a 20% position in the name. That is very possible. It happens all the time, and that is the fair amount of pressure for somebody who's 23, 24 years old. I wouldn't have it any other way. And that's what makes this business fun, right? I mean, it would just be bonkers for us to have 100 stocks and then know that our 100th position is a 0.003% exposure for the ultimate institutional allocator and just meaningless in the context. I don't want to do that. I want what we do to be impactful, good or bad. And that causes sometimes some painful months, years. I mean, we've had multi-year underperformance, and that's pretty painful. And people start to get their confidence shaken and the institutional allocator dynamic around that is very painful. It's particularly painful when you have allocator teams that have underwritten you that look you in the eye and say we're long-term perpetual time horizon, where your perfect investor, Brian. And then six months later, they take a job at a different foundation.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so it's sort of Slinkies around 25 to 30. I mean, if a business gets acquired or something like that, we don't immediately your market for replacement. So we try not to be pennywise pound foolish here. I mean, it's just, hey, what are the 30 best companies in the space? It's kind of a mental model. And then if that number is 32 or if it's 29, that's fine too. But the interesting thing is after 20 years, it's just getting harder and harder to qualify for the focus list, right? I mean, and that's a symptom of us doing well, right? And it's kind of frustrating if you think about it. It could be the perfectly rational byproduct of a process well executed that an analyst comes and works for us for three years and doesn't get anything advanced to the focus list. I mean, that just could be, hey, you know, you're doing your job. And every rep is part of the process, even if those reps are not accretive to our focused list or ultimately the portfolio. The flip side is also true where you'll know what pressure is when you are a junior analyst for us and you've come across the idea of a lifetime.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, before we get into the portfolio construction, when it comes to maintaining the focus list, at any point in time, I'd imagine these are the 30 companies in your universe you think are the best businesses. And then another one comes up. Do you just drop off the thirtieth to keep it at 30?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“A 10 out of 10 in management, or something like that. And so it's evidence that people are doing that on our team, kind of scoring it a little bit. But we try to get away from the quantitative overlay here.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, it is simple, but there's a difference between simple and easy, right? It's not easy. It's not easy because you have to do your own work here. I mean, we're not relying on the sell side for anything. We're not relying, we don't scrape other managers, 13Fs. We do all of our own work from start to finish. And it took us eight years to get from A to Z to do qualitative analysis on these companies and build up this library of information. We have made certain attempts at trying to score these various things quantitatively. And every time I try to layer a quantitative element onto this qualitative process, it sort of backfires for us. And so we've stopped doing that. It is really about pattern recognition and about getting the cumulative experience to tell exceptionalism from average. And so we try to avoid that. But I suppose there is in that distillation process some comparison and thus some measure of scoring. There's a slider sort of, so to speak, from zero to 10 on each of these buckets that every now and then in our discussions will say, well, this is definitely like.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sounds relatively simple if you lay out okay, it's moats management and growth prospects. How do you score these things like on a relative basis? Because each one is its own kind of multivariate equation.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Still make money. And so if we have an allocator that looks at us and they start working on us and it takes them three months to do their due diligence and another three months to get the board approvals and then they finally allocate capital to us, they can have some confidence that they're buying a portfolio of businesses that's not fully matured and that the opportunity is behind them as they're giving us money. So we have this kind of side benefit of having this continual opportunity for people to allocate capital to us and still take advantage of a portfolio that in theory and if we play our cards right is always affording decent go forward opportunity.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Really is informed by the strength of the mode, the sort of internal rating of the management, and the growth prospects of the business. And if all of those are intact, we can let that price to intrinsic value bounce around and still make money. Whether something 60 cents on the dollar, 80 cents, or even 120 cents in the dollar, if it's the right business run by the right people with great growth prospects, the default setting here is just to hang on to it. And there's actually a very little talked about benefit of having a strategy like this. And that is if you're an investment manager and you're catering to an institutional audience, what most people don't realize is that if you're this kind of event-driven or idea-driven investment management company, you're pitching an idea, for example, to an allocator, and that idea may be stale by the time the allocator actually makes an investment, right? There's this time disconnect. But if you own long-term compounding companies, you can be a little bit wrong on the price.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Decide kind of gladiators, thumbs up, thumbs down. Is this one of the 30 best companies in the space? And that if it is, it goes on our focus list. And at that point, we do appraisal work. And then the difference between us and other managers is despite my math background and the quantitative appeal of sort of rank ordering our focus list from price to intrinsic value, sell the top by the bottom. We let these qualitative factors really influence our portfolio management decisions as well. So we won't just prefer a 60 cent dollar over an 80 cent dollar to add to the portfolio. We have to look at that 60 and 80 cent dollar in two ways. First, our DCFs are imprecise tools at best. And so it's just an estimate. So 60 doesn't necessarily mean 60 and 80 doesn't necessarily mean 80. But secondly, like we have to couple that with the qualitative conviction in the go forward prospects to the business and that”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then if it looks good, we will have people go out to the company and do a full deep dive. I mean, we'll get really serious about it. We'll walk the factory floor. We'll train on the software. We'll go to industry trade shows and talk to users about what's happening with this business. And we'll get as deep as we possibly can to ensure that it comes to the top of the qualitative sort rank. And then all of that is distilled into a full presentation for the broader research team. And that presentation can last all afternoon and it's usually 100 and 120 slides long. And it's a full deep dive into the company. And at the end of that conversation, we start with at least tenured person in the room so that there's not some bias about everybody wanting to please the boss. And if I tell my opinion on the name, everybody else is obviously going to fall into line. So I want to know the unvarnished sort of intellectual top to bottom on the idea starting with the youngest person in the room and working their way up to me.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Had these other company to the schedule, and you would not believe the changes that are happening there. They got a new management team and they're trying this new effort and that's interesting. That is something.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“To look at what they want to. And so there's much more detail in the work if you underwrite a position yourself and you have some confidence in that position rather than if I said go look at XYZ Corporation, you know, there's this bureaucratic question about, okay, does Brian want me to write up something good about this or bad? Or like, it's just, now here's what we're looking for. Go take a look at the existing focus lists, go meet with all the companies, go start meeting with other companies. If you're going to Denver to meet with a company, stay there for four or five days and meet with every public company in Denver for four or five days, put three or four meetings a day on there and just get your reps, get up to that pattern recognition point where you can distill exceptional from average. And you'd be surprised at how often these sort of proximity site visits we call them actually yield interesting results. You know, one of my favorite things to do is to come to the office and have one of our analysts say, hey, Brian, I went to Seattle to look at XYZ and I just happen to.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, great question. So we have a rotating stable of junior analysts, so we hire people and put them to work and then tell them in three years, I got to go find different employment. Part of that is because we have a capacity limited set of strategies and that capacity limitation has actually included returning capital back to investors. And so there's an element of expense management to what we do within our business. And that includes not having an upward path for everybody at the organization, right? And so that gives us fresh eyes on what is a relatively static opportunity set after 20 years. It's dynamic and there's additions to the universe all the time, but it's helpful to just have fresh eyes of smart people looking at the stuff all the time. So we're constantly mining the existing universe plus any new additions or changes to the universe. And we're looking for those buckets of qualitative exceptionalism. And part of the fun of the job for me has always been the treasure hunt mentality. And I give our analyst team pretty much carbon.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Morgan Stanley, all rights reserved. And now, back to the show. Of curious about how this process works in such a concentrated portfolio so you don't have screens. Your people are out meeting companies all the time. How do you digest that information to figure out what's going to be on your focus list?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, this happened a couple of times, usually in the MA department, where you have somebody that's very successful and that has hyper-rational approach to the business. They have a great business, they have a great mode, they have fantastic growth opportunities, but something happens to where they feel like they have an opportunity to glom on a significant acquisition to a business. And the data is pretty clear here. 80% of acquisitions fail to meet their intended synergy targets. And everyone thinks at the top of a business that they're special and they're in the 20%, but that's just not the case. And so we have had a couple of instances where we like the business, we like the people, and then all of a sudden we wake up one day and there's a press release that there's just this huge needle moving acquisition that's happened. And that sort of shakes our confidence. Unless that's an overt part of the plan and we have underwritten as part of that plan the ability of the people to do M&A successfully, it's typically a red flag for us. This is not going to end well.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so there usually doesn't get some large option grant or misalignment of interest in the proxy or something like that. And so we obviously look at that sort of thing positively. The important thing I think to remember is a lot of our peers just sort of read a bunch of Buffett and say, well, we're just looking for great capital allocators, right? There's this idea that's sort of archetype, this Henry Singleton sitting in an office somewhere and just making these wonderful decisions on buybacks versus dividends or M&A and things like that. I think that's an important part of what we look for, but we extend that pretty significantly to operational execution. We want people who like to win, who have a plan for winning, who have a rational strategy for the future, have an ability to execute. And there's some data out there for us to point to that says, yeah, this is a high likelihood of executing.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Then you do 10 meetings and you say you look back in the first, so maybe it's not so great. And then you do 100, and you say, okay, I can start to see some emergent patterns. And so it's our goal for our junior analyst to get them up to speed as quickly as possible and get these reps in, which obviously has been more difficult during COVID having to do this over Zoom and remotely. But for 20 years, we've been just out in the field, unlimited credit card budget for the team. Just go out and meet as many companies as you can because you start to develop this pattern recognition. And so what are some of those patterns? Well, internally, we have a phrase that we like to use, an encore performance, where if somebody or a team has been successful somewhere and they've moved to a different company, it's typically a pretty good bet that they'll be successful again at the new company. And so that's one pattern. We obviously look for what a lot of other people look for in terms of the alignment of interests, the founder owner, operator dynamic, where typically us is outside passive minority shareholders will be protected by founder owner operator's stake in the business.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Gets tough. So I sometimes explain this analogy to our allocator prospects and partners because they get it really quickly. The first time an allocator would underwrite an investment manager, they may meet the team. And typically if you're in that room, you're probably reasonably successful and have some talents and things like that. And you probably walk away from that meeting going, wow, that manager, that team was really great. And then you do 10 meetings and you look back on that first meeting and you say, oh, maybe that person was average, but starting to get some reps in and I'm starting to see some emergent patterns as to what success might look like. And then you do 100 meetings. And then you can start to distill the average from the exceptional. And the same thing happens when you're researching common stocks and you do the sort of qualitative field work that we do. The first company visit I ever went on. I thought, well, these people are amazing. Well, of course, they're amazing. I mean, they rise to the top of a public company because you have some skill usually in sales and you can spin the yarn appropriately.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Companies were capturing, and so they sort of bombed on this functionality to their POS system and started getting a recurring revenue stream.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Set up just a sort of investment bank and capitalize on the sizzle of the industry and which ones were real and had real economic models. And there was a clear kind of winner in that case. And so we bought the stock and flatlined for five years and everybody was wondering about how smart we were in the space and questioning our thesis. And then it just hockey sticked and 3D printing was on the front page of the economist and on front page of the Wall Street Journal. And it got caught up in a bubble of non-fundamental buying and at which point we exited the position, called it a success, and moved on. But that's the type of business where I think anyone underwriting it at the time on an EPS basis or a next quarter's basis or even a next year's basis just kind of missed the potential for what was going to happen with the company. And then we've had other businesses where we owned a small software company that did POS systems for restaurants. And they had an internal effort where they were trying to capture the ISO charges at the distribution.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source