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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“The imprecision of a typical DCF, the very mechanics of doing a DCF usually lead to false outcome in the precision of them. And so we don't have a sharper pencil than everybody else on the appraisal. We just want to gauge as to whether something's kind of reasonably priced or overpriced or underpriced and act accordingly. And so we have found emergent businesses we own, for example, 15, 16 years ago. I did a deep dive in the 3D printing space and owned one of the industry participants who was run by a bunch of engineers that had a really rational approach to setting up the business and turning in razor blade type of a business with proprietary consumables. And we recognized that rapid prototyping was a niche case for 3D printing that would ultimately become rapid manufacturing and it was going to have a very long-term disruptive potential that would provide tailwinds for the entire industry for a long time. And by going to the trade shows and stuff you can see which businesses were”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“First of all, a typical analyst is learning how to do a DCF and they're not stretching out a DCF for 20 or 30 years, right? And so if you think about an analyst that's been underwriting Starbucks since inception or something like that, I mean, they're probably just continually wrong, right? I mean, they're continually wrong about the potential for the business and for the duration of the internal compounding and exceptional rates is just vastly unappreciated by all market participants at just about every point in the first 20 years of that business. And so those are the types of businesses that we want to own something that has the ability to compound at exceptional rates for a long time. And pricing isn't our differentiator. And so what I mean is if you would have paid twice the market multiple for Walmart in 1974, you would have ended up with a phenomenal result, right? And so we don't throw pricing discipline to the wind. We want to buy everything at a discount to what we think it's worth. But we think the qualitative drivers of the potential story override in most cases.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Return prospects. So, in terms of just the moat specifically, it's just like management or underappreciated sources of growth. We're just trying to do a deep qualitative analysis on what makes it special and exceptional. And that can be some traditional source of mode. Like in order 5 forces, they could have some unusual bargaining power over their suppliers or something like that. Or it could be something newer and more interesting where you have emerging network effects in a certain part of the business that's growing quickly or something like that. But I don't think that our success has been necessarily in identifying modes that are completely new and untested and we're setting new standards for what new modes look like. It's most of the traditional work that has already been well described within the industry. It just happens to be that perhaps we're coming to that before those modes have fully matured. And it might be more of a bet on the emergent growth prospects of the moat. And so I think that that's probably where”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, we don't have a ton to add to the canon. I mean, this is a super hot topic and has been for five or ten years. And there are people that think about this all day, every day that probably have a library of information that they can spout off the top of their head that could rival what we think of internally. What I can say is that anything that would allow a business to outer its cost of capital for a sustained period of time and keep competition at bay is interesting to us. And we want to understand it. And so as we present companies internally, and by the way, we present companies solely on the basis of these qualitative factors. We're looking for exceptional, the best companies run by the best people with the best prospects for growth, independent of price. So everything that we pre-qualify for purchase is done without any knowledge of what the stock price is or has been. And then once it's qualified for purchase on what we call our focus list internally, at that point we do appraisals and we conviction weight in a concentrative portfolio are highest sort of total.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“To move a little bit into what we currently do, the two differentiates for the firm are the level of concentration, which is still pretty concentrated even by concentrated manager standards. But also this idea of qualitative research. And so if we just sort of step back for a second, it's an often forgotten concept, but it's very basic and everybody should keep it at the top of their mind that stock prices are simply a reflection of internal compounding of business value per share, right? Absent distributions and dividends and multiple expansions and contractions.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so, if I'm also doing the investment research, I felt like I needed the best opportunity that I could have to, as just a single person, to underwrite these ideas and feel confident about the work that we were doing and eke out a variant based upon research that honestly, if I would apply that same amount of time to researching Microsoft or whatever, I wouldn't have been the 50th best analyst on it, right? Despite a fair amount of ambition and I feel like I had a good understanding of what was happening, I just couldn't confidently say to investors at that time that we had some sort of legit variant perception.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Microcap originally came from time scarcity and resource scarcity in my world. And so I literally started out of the spare bedroom, my condo in West Lake, which is a suburb of Austin. And I didn't, you know, as I said, with 21,000 dollars in paid-in capital obviously wasn't investing a lot in infrastructure and things like that. I had a laptop, some accounting software, little known fact about my firm is for the first nine years I didn't have an attorney, which is just so frugal that I didn't want to pay for one, which was I do not recommend to people. I think it was completely reckless course of action. And now we have great attorneys that we have great contracts and things like that. But our initial institutional contracts, I just negotiated myself. I just thought I need to save every dollar I can because this is survival. I burned the boats. I didn't have a plan B. This was going to work, right? And so had this laptop and this accounting software and this environment of financial scarcity, but also time scarcity. I had to do everything. I had to do everything from balance account statements and charge fees and process this and that. And it was just me.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“All these things precluding this from evolving under the previous sort of regime. But Swinson and others that resourced an internal public due diligence effort had people directly talking to potential boutiques and managers saw somebody like me and said, we can do this. And not only can we do this, we should do this because it makes sense for the portfolio and it avoids all of these other agency issues between decision maker and management.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“So the 50th name in your portfolio is doing nothing to get you more of the free lunch, right? I mean, it's just exercise in gathering assets to get more asset-based fees for a manager. You can have a diverse set of exposures and a diverse set of value drivers within the portfolio and be reasonably diversified with eight to 12 names. And so especially if you plug that into a multi-manager context for the institutional allocator, it just makes sense. And so I thought, okay, this would be the optimal way of compounding for the client. Now, is it possible, right? And that was where the Swenson book came in. It's like one of our first meetings with a consultant, they said, we don't even have a filing cabinet for you. Concentrated small and micro, like what is this, right? And then, oh, by the way, if we do underwrite you and we like you, you're going to close at 130 million in capital. And then we can put two clients in you and then we've done all this work and we get no utility out of it. And so there.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“And understanding the investment process and that sort of thing. And so that sort of removed the Forti Act Fund and the Wealth Management Piece. And so I ended up at the institutional side. And I said, well, how, with all these gatekeepers and stuff, how would concentration fit within this context? And the answer was it was perfect for institutions because institutions use multiple managers, which obviates the need for any one manager to excessively diversify. And in fact, I was looking around going, everyone is way too diversified just generally. And it's still probably the case. I mean, 10 equity managers each holding 100 stocks charging 1%, you're charging active fees and getting passive results. It's ridiculous. And so everybody should be concentrated. And then you had the academic research that supported this notion that high active share managers tended to outperform, that a manager's best ideas tended to outperform their worst ideas. And then, you know, I was a math major in college. The evidence is that after eight stocks, you're 80% diversified.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's interesting the prior firm that I work for was highly diversified and purely quantitative. And so it's the exact opposite of basically what we do. And I sort of took Occam's razor to the entire thing. I said, okay, they were servicing 40-ACT funds and they had a wealth management piece and they had third-party marketers raising institutional capital. And I said, if I just started from first principles and said, how do you optimally compound capital? And how could I make that fit within this institutional and wealth management and Fortiac fund world that I'm seeing? And structurally I said, I don't want to be in the 40-year fund business because it's a regulatory nightmare. It's very high fixed costs. And if you're capacity constrained at some level, you're sort of removing the one benefit of being in the 40X fund business, which is scale, right? I didn't like the wealth management piece because quite candidly, servicing individual clients is just a repeated exercise in explaining the basics of the stock market to people. And I don't like managing investor psychology. I like managing money. I like digging into companies.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think that allocators are always looking for something unique and differentiated, unusual, usually produces unusual results and concentrated microcap, I think was pretty unusual at the time.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure, there are a lot of people of that ilk who would love with a very small war chest to go in and be able to attract that capital. I'm curious, you know, you mentioned the product market fit. You mentioned that wave and trend. What were the other factors before we get into the investing itself that you think allowed you to win some of that business?”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Started to be appealing. And so an interesting part of our history, which is just fascinating when you think about it, is, you know, over 20 years, we've never had a formal sales and marketing effort. We don't have any institutional salespeople on staff or anything. And we closed one out of every three conversations we had with institutional allocators back in 2000. And that's me walking into the Yale Investment Office with $600,000 in composite assets and trying to get money. We didn't get Yale, by the way, but I mean, the Yale Acolytes were early supporters of us, and that's when the snowball got going.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Management. So we just happened to ride that bow wave of concentrated manager adoption. You know, when I started in the business, it was still very much this 60, 40 stocks bonds, Morningstar salbox driven view of the world, where after the Swenson book and some of these Yale Acolytes started going to large institutions, foundations, endowments, et cetera, they started to add these uncorrelated equity-like return asset classes. And the public book started shrinking from 60% to something a lot less than 60%. But the constitution of the managers within that book started to change as well. And the 100 stock portfolio at 1%, those people were fired and in its place were people like us, boutiques, that looked a little bit more like hedge funds, high active share, highly concentrated, flexible, capacity limited, all that sort of stuff. And so we kind of, I think, rode the bow wave of kind of a new asset class, if you will, where concentrated management”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“In the background because it sort of was like a cookbook for me on what modern allocators were looking for in an investment manager. And so that kind of gave me license of saying, well, look, despite all these consultants, gatekeepers, Morningstar style boxes, et cetera, what I was contemplating to optimize the future compounding of a portfolio might actually fit in a modern context in a direct relationship with a boutique like ours without scaled resources and assets, we could go to the Yale Investment Office and try and pitch what was at the time concentrated microcap eight to 12 stocks. I mean, it was pretty new and interesting at the time. And it just happened to be that that was the moment at which lots of large institutional allocators started adopting what was then known as the Yale model or now is known as the endowment model and has, I think with the benefit of 20 years of hindsight, was a correct assertion that this would percolate to all corners of institutional investment.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Make a go of this. I'll use some friends and family money and I'll start talking performance. But I won't start talking about myself to people until I have three to five years in and I have a track record and all this sort of stuff. And I always counsel people that that is the exact opposite of what you should be doing. If you have a great process and you have good people, I think the best allocators, especially I grew up in the institutional community, like the best allocators, they underwrite people philosophy process. They're not looking for the best five-year track record. If they were doing that, they'd be performance chasers and they wouldn't be successful. And so I say go right after it, right out of the gates, start talking to people and try and make your mark. And I think that there has to be a certain, and excuse the phrase, product market fit in what we're doing. One of the key parts of my story is that I just happen to recognize after reading every single book in the investing section of Barnes& Noble, I came across the David Swenson book pioneering portfolio management, which is very similar.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so the interesting part of my story is that I'm kind of an outsider. I didn't have a stint on Wall Street. I was a state school person, never lived in New York. And so I actually do attract a fair amount of unsolicited phone calls that said sort of, I want to do what you did, how did you do it? And so I think there's a kind of interesting story of we don't have any onsite capital. All the capital that was ever put into my firm is $21,195.14 is all the paid in capital. I mean, the barriers to entry in our business are not financial, as everybody knows. The hurdle to getting to success and investment management are things other than the starting capital for the management company. But I've touched on a key point, which is you need to have some frugality early so that you have the scratch to be able to make a go of this for a couple of years. You need to have a fairly extreme amount of self-confidence, which I just happened to have at that fairly young age. And so there are all sorts of people who are doubters who are going to tell you this isn't going to work. And then furthermore, most people say,”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Circle back to that origin, there are so many people that would love to start their investment firm and very few of them come to where you are today. What were the As you look back, that you recommend to other people if they're going to try to give this a shot on their own.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I moved to Austin, Texas in 1996, and I was trying some entrepreneurial things straight out of college and spending all of my free time reading annual reports and doing my own common stock sort of personal portfolio research. And I thought about doing this buffet model where the family partnership together with some friends and family.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Probably a pointer in my history to our initial launch in micro and small cap. And so I sort of felt like there was some discovery value in coming across Buffett at an early age, but also I enjoyed the treasure hunt and the discovery value of finding some small out-of-the-way company that nobody'd ever heard of doing something interesting that had the potential to be the next great company.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh man, there's too many to list. I remember coming across this just random paper based newsletter that talked about certain stocks and described them, and I would buy them based on nothing more than just reading about them and some random paid-for newsletter that I'm sure was the self-selected Pondi scheme type. And ultimately, the whole thing is a scam. But, you know, these were all names that I were not the headline names at the time. These were small cap stocks, which I think is.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Grew up in a household that was fostering of academic and other achievements. And my father was an eye surgeon, but also an entrepreneur. And so he was starting. All sorts of random things that benefited his medical practice, and he would drag myself and my two brothers to these meetings and we would sort of absorb these high-level business conversations as youngsters. And so I think that sort of piqued my curiosity. He would look at the 52-week low list and the Wall Street Journal and pick stocks for himself. And that sparked some questions. And then I don't know. I think it was just a sort of a self-directed interest in business generally. I think I grew up in an environment of actually relative financial scarcity early. My dad was in medical school while I was growing up. I always thought to myself, I don't want to be in a situation where I have to have my freedoms constrained because my paycheck depends upon it. And so I think the entrepreneurial ambition that outed in Barrett's capital was really driven by a desire for financial independence. And that was just sort of coupled with an extreme intellectual curiosity in stock markets.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So I'm from Omaha, Nebraska, which doesn't really matter much for the story other than there's clearly interest in Warren Buffett that was peaked and that was kind of late 80s, early 90s before he became the international superstar that he is. My father was in the U.S. Air Force, and so we were stationed outside of Omaha, Nebraska at Offit Air Force Base. At the time, Nebraska had a fairly robust effort to keep the top high school students in state. And so I was offered a full scholarship at the University of Nebraska, studied math and extraterrestrial science. All the while was reading annual reports in the evening and trying to hone my craft to the best of my own knowledge and came across the Berkshire Hathaway and reports opened up my own self-directed brokerage account and started making all the mistakes that early investors do, but got those out of my system and my teens. And so felt like I got a relatively early start on my progression as an investor.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source
“My guest on today's show is Brian Bears, the founder of Bears Capital Management, a $5 billion long-only investment boutique that employs independent qualitative research on growing companies to build highly concentrated portfolios. Our conversation covers Brian's early life investing lessons, bootstrapping and asset management business, and finding product market fit. We then turn to his investment approach, highlighting target companies across business quality, management, and growth, the research process, position sizing, decision-making, and cell discipline. Lastly, we discuss the evolution of BCM's business from a microcap strategy to three strategies across market capitalizations today. Please enjoy my conversation with Brian Bears. Brian, great to see you.”
2021-04-26 · Capital Allocators · Brian Bares – Qualitative Concentration at BCM (Capital Allocators, EP.191) · IDENTIFIED FROM THE TRANSCRIPT · source