YouSaid · the spoken record

Steven Bregman

lines on the record: 132
first: 2021-12-28
most recent: 2021-12-28
sittings or episodes: 1
sources: podcast

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“Say one last thing. I enjoy this very much, but before I say that part, I'll say I warned you in advance, and I reiterated now, I told you, I'm an inefficient speaker, and I apologize for that I heard Lynn Alden. I heard Lynn Alden the first time speak. You called me up and I thought, let me see what you do. And I saw your first podcast with her. Now, she's an efficient speaker. I really envy the way she communicates.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“I think it's trapped there, and I think what will happen is that it doesn't have to be a collapse. It could be that 5, 10, 15 years goes by, 20 years goes by, and little by little by little, you know, they're the ups and the downs, they're patterns, there's the anthropomorphizing of the market. Oh, it had a surge, it took a rest, it's recovering, and people wait and wait and wait. And after 10, 15 years, they'll realize, hey, it really hasn't gone anywhere. and that the market gets cheaper that way. I just don't know. I guess I'll have to wait for the late returns at an election.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And those who would buy their buyers for Amazon just at a lower price. Maybe just get discontinuity in certain sectors, right? And maybe the money flows into different sectors. Indexation is not going away. Maybe it evolves. Maybe it changes. Maybe there are better indexes developed. INFL, we think, is a better index. On the other hand, the sum total of the available market cap of all those wonderful companies in that particular, in our opinion, in that particular ETF, it's a thimble. It's a thimbleful. There isn't enough market cap even if people are interested in buying it to satisfy enormous scale of index money. I think the money's kind of trapped there.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Do some good in the world, but it's an asset class that if in math sometimes the symbol IFF, capital IFF, if and only if. That does come to become an accepted. Asset class, it can be orders of magnitude larger. Final question was how would I frankly don't know. One answer is it won't actually happen. It won't be a collapse because Well, so long as money comes in. But at a certain point, money can't come in anymore. So, if money inflows stop, it doesn't even have to be net outflows. Who's supporting the prices? Who's buying these shares And the active managers aren't buying them. So what happens then? So you have to have a trade. You have to sell. But if there aren't buyers Maybe nothing happens. It sounds weird though. I really think what happens is the terms of trade change.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Could do very, very well, and that particular index, therefore, owns the best of them, and it is concentrated. There's nothing wrong with concentration per se, it depends. So that's a tool to use. And then there's another interesting one, the crane shares with a K. Crane shares global carbon credit ETF. So there's an ETF that serves its purpose from my point of view. If you want exposure to carbon credits,”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Use I'll give you two one I don't use this someone else does at Horizon there is an oil service company ETF. The oil service industry did far worse than the oil companies themselves because they're the suppliers of services or equipment to the oil companies. They get cut back fast and so they've suffered a true depression In the last half dozen years. So, in an index, there are those that really failed. They're not coming back. But the ones that are still there, they stood the test. They passed the existential risk test, even at these low levels of activity up through last year, they were still cash flow neutral or cash flow positive. They're there. So if there's more development, a recovery in their area They're so cheap.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“I don't know, but before I get there, I want to actually answer a not quite posed question. We're not against indexes. Examples. One is And you kind of described it. There are a couple of extended market indexes, ETFs. I think Vanguard's got one. iShares might have one, which is it endeavors to have more of the entire market in it. could have a couple of thousand stocks represented, and it endeavors to be more equal weighted across them The major indexes are. It's still difficult, but they are more equal weighted. You do have more opportunity for, let's say, the middle portions of the roster of names to actually have success and not be crowded out of benefiting the entire index. And I found a couple of interesting indexes lately that I like. They have a special.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And so it's at the very beginning, in a way, in a strange way, I think it's more undervalued now because of the development of technology and the whole development of the area and how important the Permian Basin is to not only the US oil portfolio, but the global oil portfolio. I think TPL is actually cheaper today in a ways than it was six years ago before it started its recent era period of appreciation.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Relative to, well, it's worth far, far, far more, we believe, on time than it's trading for now still. As opposed to that it's beginning to reach certain saturation point in terms of its marketplace or the development of its land or something like that. For instance, give you one fact that I want to make this about TPL. Only about 10% of all their properties have been explored, and of the parts that are explored, they're only partially explored. They're just getting going.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“When you wouldn't let something get to be very big, again, you don't really want to drive blind and you never want to give up. You have to be careful and judicious and self-aware about it, the opportunity to make judgments. But one of the reasons why we let TPL in individual accounts that we manage get so large? Because of the reasons I mentioned, it has no balance sheet risk, it has zero debt. It's absent all these other various business risks I mentioned. And we continue to believe it's far subjective, of course, it's far, far, far cheaper.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Was going to say, I think there are two features about passive indices that do not pass the lucky penny test. And I want to hear your thoughts on that. Number one is that the S&P 500, the index instruction as of now is not every single penny. It has such a small fraction of gold miners, such a small fraction of energy. So it's not every penny. That's critique number one. Critique number two is that if only 4% of stocks beat treasury bills in a debate, then anytime you switch, and I've heard you say this before, so that's not my really original thinking. But anytime you switch, you have a 4% chance of making a wise allocation decision.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Destroyed them because in technology, unlike other businesses, they don't have any control over obsolescence risk. Somebody can come along with a better idea. And I like to think that Bill Gates understood that just the same way he destroyed an entire industry with an idea. You know, while he was building Microsoft, some guy could wake up one day in Tel Aviv or Bangalore or India, wake up in the morning, go, oh, that's what I was thinking. And it's just an idea. It's an algorithm. And maybe that could wipe him off the map. One of the risks with technology that doesn't exist in lots of other businesses.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“That MS-DOS, the PC, cut a swath of destruction through the world of global large cap, blue chip technology companies that all went away. You haven't heard of Group Bull, Unisys, Commodore, Sinclair, two dozen companies. There were household names”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“By the way, the MS DOS, Microsoft disk operating system, do you know that was originally called QDOS? Do you know that stood for? Quick and dirty operating system. Because it was amazing. He actually got that contract from IBM to produce the operating system for the IBM PC. And he begged them for a little more time to work out all the bugs. And they said, no, you got a deliverable date. Deliver it. And so I gather they worked very hard to deliver it on time, but it had bugs in it, which is why people's PCs kept crashing. For years and years and years until they could fix the bugs. But that was just, I'm not doing it justice. It's a complex piece of programming. But in a sense, it was just an algorithm. It was a piece of intellectual property. And he came up with it. And I can't remember them all off the top of my head.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Start becoming a policy issue, either because you employ so many people, and if there's unemployment or low wages, it becomes a political policy issue, or it has to do with how much in taxes you pay, or it has to do with antitrust issues. But you become large enough. It happened to Microsoft once upon a time, if you'll recall. It happened to AT&T. It happens over and over again. That's a separate kind of risk that you don't see on the income statement or balance sheet or PE ratio per se. There's the technological obsolescence risk. It's possible. I have this way of thinking like Microsoft. You know, Bill Gates was known as being a very, very hard competitor, always pushing, always looking, maybe playing hardball. And I suspect, I'll say, you know what, I think maybe he understood.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So valuation does matter what we evaluate is that those companies are not only very, very expensive in any kind of traditional way, but if you look more closely at some of their finances and the way they construct Employee compensation expenses, for instance, that they're really a lot less profitable in one sense than they appear to be, meaning even more expensive. Then there are the issues that, and this is also an historical repetitive cycle, when you get to be large enough as a company,”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Eventually, though, here well, if we want to go just in a simplistic statistical way like that, you look at this. And as Susie mentioned, I know you'll know. There hasn't ever been a sector of the market that has gotten to be dominant a dominant sector, as oil did in nineteen eighty, become 30% of the market, in which the aftermath was really very unpleasant for the people who were there It bespeaks of excess. The dot com bubble, you couldn't convince people. I can't tell you how much we wrote about it. People got very angry at us for using the B word for bubble. And you know what? We were wrong. Quite some time until we stop being wrong.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So it doesn't happen. And then we get to if you're not professional, you've got the best chance of doing this. But very few people have the patience. Because just like TPL, we've had clients with us for 20, 30 years, and even them sometimes. How do you feel about TPI? Here it's down a lot and so forth and so on. And it's the nature of the markets. It's what makes markets very difficult to be patient. because you always think you have more information than you do. You think you made better decisions. We overestimate our capacity to make decisions. But that Bessenbinder study, which is really startling if you've never seen it, Is telling.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Now, the reason why a professional portfolio manager can't do this, in part, is because we're taught to try to minimize volatility relative to the return. It's called the efficient frontier and risk-adjusted returns. And their portfolio managers are held to very strict standards about that. But the portfolio, in fact, is becoming, in a way, more and more volatile because it's converging on the performance of the two biggest stocks. And really, it's uneven. They don't do 12-15% a year. Sometimes it's a 20% year, sometimes they're down, and the portfolio is becoming more volatile. It's becoming more concentrated. That's not good either. And it's becoming, by definition, in the investment world more risky. And you won't be in your seat long enough. To look back and tell your boss, you see I was right, it works, you won't be there anymore.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“The return of the portfolio you can follow us through in your head is going to ultimately begin to converge on the performance of those two outperformers on the top. And eventually the portfolio will start producing, let's say, 12, 13% annual returns, even though the market's only at 10.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So in the third year, instead of being 11% positions, maybe the two outliers in the top, maybe they're 12% positions, and the ones that are going down, those are even smaller. And you carry this through enough years, four, five, six, seven, eight years. You'll reach maybe eight years, nine years. You'll reach a turning point, a turnover point or a tipping point When the ones that keep going down, they're beginning to become relatively immaterial. They go down each year, but they're so small now it doesn't really bother you much. But the two that are outperforming, maybe they're 15% positions and 20% positions. The ones in the middle are the ones in the middle. And what's going to happen is”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“They all started at equal weighted position. They all started with a 10% position. The two that went down are no longer 10% positions. They're a little less nine and one's eight or something like that. And the two that went up, the outliers on the upside, they're like 11% and 11.5% or 12% positions. They're now a little bit larger than 10%. So for year two, the two outliers in the top They're going to account for a bigger proportion of the return of the portfolio. And the ones on the bottom are not going to offset them exactly because they start off with a smaller percentage. They're going to get smaller.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Six in the middle. Okay, so at the end of year one, right? So you put this portfolio together on December 31st, and by the next December 31st, at the end of the first year, what's happened? The portfolio has a return of a little less than 10%. Why? Because the two outliers Up 15% and 20%. On the upside. The downside, the other two balance it exactly. They went down 15% and 20%. And the others in the middle averaged to 10. So util return is going to be a little less than 10%. But now we start on year two Starting year two. The two that went down”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So I'm going to simplify it to a portfolio of 10, just to simplify it. You wouldn't do it this way. But let's say out of the 10, you've got Two of them that are outliers on the downside. One's going to go down 10% a year, the other one's going to go down 15% a year on average. And they're just going to keep doing that. You have two outliers on the upside. One's going to go up 15% a year, the other's going to go up 20% a year. Actually, make them both the same. One's going to go down 15% a year. The other's going to go down 20%. One's going to go up 15% a year. The other's going to go up 20% a year. And in between, you got the other stocks. They vary more or less around, let's say, the long-term average of 10% return. One's 11% a year, one's 9% a year, one's smack on 10, but the rest of them are in the middle.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So, is it really smart or is it just chance? Okay, so let's shift into making a portfolio that will outperform the market. So if you just select, it could even be random, but maybe you put some thought into it. But you put together a list of stocks. The only requirement is you have enough stocks so they can encompass what's called a normal distribution, just big enough so that chance can work on it. So you could see with a 10-penny example, it might not work so well with a 100-penny example, it works better. It gives you more opportunities. But statisticians and mathematicians would say maybe 35 stocks is enough, right? But pick a range of stocks in some kind of broad range of stocks and then never touch them again.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So you flip them, and okay, you take away these three because they didn't come up heads and you flip them again, you flip it. You start with 100 pennies, right? You keep flipping, you keep flipping. And finally you're down to two pennies. You flip them both. One comes up tails, get rid of it. Now you have the smart penny. The one that always knows come up hits.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Is down this year, and what are you going to do? You still want that thing? So we get complaints when things are down, but that's the nature of it. If we would have cut back or sold it every time it's down, we wouldn't own any. Okay, so to get back to the smart penny, this is an experiment you can do. How do you figure out which is the smart penny? So let's say you take 10 pennies and you just put them all down and then you flip them all. You flip each one. And you want to select for the penny that knows to always come up heads.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Now, however, you would think we would be happy about it. I can tell you TPL is just a headache for me because all I get is complaints. Believe it or not, all I get is complaints. If you look at a long-term chart and you look at it carefully, you'll see that there are quite a number of periods when either it dropped 30 or 40 or 50 percent. Or when years went by, and it was flat as a ruler and just didn't get up out of bed. And so, what happens is it's just a human thing. Is clients have our portfolios and things are doing fine? And then one year things are not doing fine. The portfolio is not performing as well as the S&P 500. And they're looking at it and they wonder why, you know, you got this big TPL position and it's down.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“I'm not going to And the reason I'm not concerned about it is because nobody ever does it. Certainly, I'm not worried about professional investors doing it because they're not allowed to. They can't do it this way. They get fired before it can ever happen. All you have to do Is select for the smart penny. So if you take, see, how do you know who's a good manager or not? It takes a long time to know. Maybe they're just, they hit upon a certain inefficiency and they don't even realize it. Or how do you know which is the best company? It takes a long time to find out. As a preface to that, I'll say you talked about how wonderful TPL is done. In fact, the first report we wrote on Texas Pacific Land Corp was in May of 1995, and on a split-adjusted basis, the stock was two and a half dollars a share. Today it's about $1,200.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And I'm willing to share it with you for free. We won't even charge you. And I'm not even going to ask for a royalty, although I should.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“I'm not going to get into, we have such a long discussion. You're probably tired of me already. I'm going to mention it, but we're not going to talk about the best and binder study. But that was a study that determined from like the 1920s onward that only 4% of stocks Only 4% of stocks out of something like 25,000 stocks that were covered in the entire period ever outperformed treasuries. So number one, people aren't very good at guessing which stocks will do better on a consistent basis. But let me cut this short. I'll give you a shortcut. We have, yeah, I'll give you two shortcuts. We've discovered, we're probably not the only ones. I know we're not the only ones, but we're one of the discoverers independently of a magic formula that is guaranteed to well outperform the S&P 500. And I'm actually willing to share it with you.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“It only recently, not so many months ago, became a corporation for the first time. So it became eligible this past year. It became eligible to actually be in indexes and ETFs for the first time. And it actually is now probably in a couple of dozen indexes. It's got about, I don't recall exactly, but let's say roughly in the neighborhood of a $6 billion market cap. I'd have to check that. It might be eligible. It actually could be eligible for inclusion in the S&P 500 one day. And that could well happen.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“In terms of inflation beneficiary, Freeport McAmaran has to support 24,000 employees in terms of covering its operating expenses and all of its assets on an extended basis can act upon its operating business and make it more expensive to do business. The Royalty Company doesn't have that problem”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Relative to the share price five years ago, they've accumulated to 5% of the share price you might have paid five years ago. There's an iron ore Royalty Trust, believe it or not, called Mesabi Trust. It's very much like TPL. It has rights to royalties on this Iron Range in Minnesota, which Minnesota is basically where iron comes from the United States. So how many employees? Zero. It's a trust. It has some lawyers it hires to make sure it gets paid and so forth. Free cash flow margin, just like TPL's oil royalty margin business, 90%. Debt Dividend payments the last five years as a percentage of the share price you would have paid five years ago 109%. You get your tire purchase price back in dividends paid in the last five years. That's the difference.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“They really are compounding machines. And that royalty model, that exists also in gold and silver. So I'll give you one more example very short because I have the statistics. Freeport Macmaron we talked about. 24,000 employees. The free cash flow margin in 2020 was 12%. Not bad. Of course, the cumulative free cash flow over three years was zero because it's cyclical, had some good years and bad years. Debt 23% of assets. That's pretty good. Not bad. The dividend payments over the last five years.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Can't happen to a TPL, can't happen to a royalty company that way. A royalty company is always making money. It's always generating ROE. And therefore, on a financial basis, it can always become pounding. So imagine this. Energy prices go up a lot. TPL is just making money like printing it like a mint. Money is falling from the sky. Oil prices fall a lot. They go right back to where they were. ExxonMobil might have some serious problems for a while. TPL's earnings go down, but it still has earnings, lots of earnings. And if its stock price falls, it'd probably take those earnings and buy back more shares because the shares are cheaper.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And so you're also suffering from that. Now in the gold business, that happened to Newmont way back when is that, yeah, their total revenues are going up over the years, but their margins are beginning to decline. Their earnings are still going up, but people aren't paying that much attention, that the earnings are going up more and more slowly compared to revenues. The price gets bid up a lot because it's done so well. Everybody loves it. And then just around that time, so much gold is being produced that there's now a little bit of excess supply and the price falls just as the company's total expense structure has maximized. And maybe they've taken on some debt too. Who knows? And then the whole thing collapses.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Yes. TPL, right? Well, you wouldn't be buying it from them. No. But from other parties, or leasing from the government, the price goes up. You're also competing with others for more equipment. Maybe they're equipment shortages. Your employees eventually want more money. You need a lot more employees. Everybody's competing for them. So your costs begin to rise also and your margins begin to suffer. Even as you're producing more and more revenues.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“First, you just ramp up production, what you have. That doesn't cost too much. But after a while, you need to expand. So you need to buy more property or leases, but everybody wants to. So you're paying more for that. You need more equipment.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Short term basis, yes. As soon as the prices go up, they just get more money, prices higher without lifting a finger. So on a short-term basis for a play, as they say in our business, a play, yeah, you do the play right, you buy the gold company or you buy the silver company, buy the oil company, you do fine. But what if this is going to be more than a year and a half? What if it's going to be 10 years? Well, we've had that experience in the past. What happens is inflation acts upon those companies' operations as well. If you're a gold miner or if you're an oil company, if there's more demand for your product,”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“They don't have replacement cycles, re equipment cycles like car manufacturers do. They're not even subject to interest rate risk. They're not even really subject very much to a classic business recession. They don't really have, in their way, even much in the way of regulatory risk. I think they're the second largest landholder, private landholder in Texas. They own their land. They have their property rights. and they just collect money. So what will happen is... One of the reasons why we like TPL number one is inflation. Talk about classic inflation beneficiaries. Inflation on an extended basis is really not so good, believe it or not, for the classic inflation beneficiaries like an oil company or gold miner.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“But they have no real cost to cover. So their revenues can go down, but their margin, maybe their margin goes from 90% to 89%. It really can't go out of business in the ordinary fashion. And a royalty model like this, it actually doesn't have most of the classic business risks that all businesses have. It doesn't have any direct competitors. Nobody can replace, in a sense, The royalty interest they have. They have them. They don't have real technological obsolescence. It's not like a technology company where somebody can come along with a better algorithm like TikTok as opposed to whatever Facebook is.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And oil prices go down too much. They can't cover their costs. They have to fire employees or reduce their spending. They have to tighten their belt. And they'll survive. They'll survive because it's a cyclical market and eventually the price will go back up. TPL can't have a loss. It's impossible to have a loss. Now, it seems a weird thing to say that as if I'm being careless with my words. But the thing is, their revenues can go down. But that part of the business only had a dozen employees.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And they just don't have to do anything but receive their royalties. They don't have to have the capital intensive business. They don't have to have all the employees. They don't have to buy property. They have the property. And their operating margins. Make even like Facebook or Microsoft's headspin, it's 90. It used to be 90. Today it's a little lower because they've got involved in some water recycling business there. But the basic rowy business basically is 90% margins. So if you think about what happens, let's say oil prices go down a lot. If oil prices go down a lot, which we saw that happen not quite recently, just as a living laboratory example, ExxonMobil can have losses. Why? Because they have a lot of costs.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Drilled seriously there before is because it's so deep that the technology didn't exist to bring it up in an economical way. But now it's very easy to do. Well, easy with a lot of technology and so forth. So TPL still has, among its various assets, it has interest or royalty interests in a lot of this acreage. So it doesn't matter who it is. It could be Chevron. It could be Occidental Petroleum. It could be Apache Corp. Any of these companies happen to drill on In areas where TPL has a royalty interest, TPL gets the royalties. So unlike those companies, Let's say up until quite recently they started a new business having to do with water rights they have. But for a dozen employees, got a billion dollar plus company.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So they went on for like a century and a half like that and kept buying in shares with their little trickles of revenues. And they kept buying in shares. And it became fewer and fewer shares outstanding. But if you kept owning your own shares, if you didn't sell them and they were buying back acreage too. Excuse me, buying in shares. And they sell some land here and there, but they both pack more shares more rapidly than they sold land. So what happened is year by year by year, over the course of a century plus, you get more and more acres per share of ownership. And it was kind of like an internal compounding machine. And they only had like a dozen employees. So, because of advances in technology. Starting about six years ago or so. Some companies began drilling seriously in the Permian Basin. And the reason they hadn't”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“They were granted that kind of land. It's almost a million acres in emotionally in western Texas. They were granted that land, believe it or not, in 1888 as a result of a railroad bankruptcy. And so the bondholders, the railroad failed, the bondholders inherited Here, guys, we can't pay who your bonds, but here's the land, and they put it into a trust. And the trustees of the trust were allowed to do a few things. They were allowed to sell acreage here and there to pay off the bondholders. They were allowed to accept grazing fees if any oil was produced on their land. They could collect some royalties on that. 95 or 98% of the land was actually grazed out for cattle And they could buy shares back, they could pay dividends. That's more or less all they were allowed to do.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“Then there's something called a royalty business model. And a royalty business model. Is they don't own any assets, they don't own, they don't have to drill, they don't have to have employees. What they do is They happen to have an interest, let's say, in mineral rights, in a certain property, certain land. And anyone who drills in that land, they bring up some oil or gas, they've got to pay a certain percentage to the royalty company. Maybe it's 2% or 3%, whatever the number might be. And the royalty company just accumulates it. And they don't have to do anything. Now, how do they get it in the first place? Well, in the case of Texas-Pacific Land Trust,”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“And let's just make it easy. Forget that ExxonMobil has refining businesses, chemical refiners. It doesn't have to be ExxonMobil into any of them. They dig in the ground. They bring up oil, and they sell the oil. That's what people think of as an energy company. And it's a natural form of business, meaning they have a lot of employees. They have a lot of property, plant, and equipment. The equipment needed to drill for oil is very expensive. It's very substantial. It has to be replaced and upgraded often. And before you even do that, you have to have a lot of capital just to buy a lease or buy the land on which to do it. So you have to mobilize a lot of capital in order to do this. And then you have operating expenses. So it can be very profitable. Maybe you have a 15% operating margin after taxes or 10% operating margin, whatever it is.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT
“So I have to start at the very basics because the best kind of inflation beneficiary company is a business model that does not exist in a sense in the Wall Street consciousness. You won't find them in the S&P 500. They're not studied. And I speak very often to professional investors, sophisticated professional investors. They might be an account exec at a very large investment firm or even the kinds of analysts who come in to assess us as to whether we're fit to manage some funds for other parties. And when I tell them about this, they're really not sure what it means. So I'll explain it so that I'll give you an example between a conventional energy company like an ExxonMobil.”
2021-12-28 · Forward Guidance · The Hidden Risks of Passive Investing | Steven Bregman · IDENTIFIED FROM THE TRANSCRIPT