GuruFocus Value Insights Podcast: Jeremy Deal Discusses Efficient Growth, Tech Stocks and Time in the Market

Sydnee Gatewood: Hello, everyone! Thank you for joining us on the GuruFocus Value Insights podcast. You can subscribe through Spotify or your device's podcast app, so you never miss an episode. We are pleased to have Jeremy Deal, the founder and portfolio manager of JDP Capital, join us today.

Founded by Jeremy in 2011, JDP Capital Management is a private investment partnership that makes multiyear investments in publicly traded businesses with substantial and recognized earnings power. The fund was designed for compounding generational capital for high net worth families globally.

To achieve its goal, the firm implements a four-pronged approach it calls Survivor and Thriver Company criteria. Thank you for joining us today, Jeremy!

Jeremy Deal: Thanks for having me. Great to be here. Love the show.

SG: Thanks so much. Just to dive on in, though, tell us a bit more about your investment approach.

JD: Well, the investment approach… I started my investment journey like a lot of value investors with a passion for Warren and Charlie's history and going to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholder meetings. And the most important thing that I learned from studying Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) was to look at a stock as if I was buying the entire business. So that really stuck with me when one of the first books I read, “Making Up An American capitalist,” felt like I was reading, you know, that was one of the most important books I'd ever read. It just felt like it felt like I was reading my destiny. And I knew after reading that book that I wanted to become an investor and the principles of that book were, to me, principles that Buffett had learned from Ben Graham, which was regardless if you're buying a whole business or buying a stock, you have to take a similar approach.

SG: And I guess that's shaped or influenced your process a bit.

JD: Yeah, it did. So like many investors, I interpreted this concept very differently when I started. When I started, I tended to look at companies in the rearview mirror. I would say, “OK, this stock, we're gonna look at it like we're buying the whole business and in that case, we're gonna buy it based on the current assets based on the current earnings.” And what I thought that multiple should be versus what it may have been selling for in the market. And so this sort of rearview mirror-looking type of value investing is how I got started. Andthat meant I was looking at more cyclical low, P/E companies or companies that were distressed, they were coming out of some significant turmoil. And this was right after the financial crisis when I started, so you could find a lot of companies that really look cheap.

But in the end, several years later, let's call it the end of that approach, I started realizing that for me, the better way to invest was to find businesses that I could hold that appreciated over time and not needed to be and didn't just need to be traded because they mean -everted back. And I started to understand what it seems like Warren Buffett (Trades, Portfolio) started to understand a result of his relationship with Charlie Munger (Trades, Portfolio) that if you buy higher-quality businesses and think about how they might look over the next five or 10 years versus today and focus on and develop a criteria for understanding those the future of those businesses versus what you're paying for them today that you could buy and hold them and build conviction that will allow you to even add to them during big drawdowns. And so that process was an evolution that started for me around 2015. So maybe 3.5 years into running the fund or so.

And another thing that I started to think more about was, you know, in Buffett's history and Munger's history, they benefited from an incredible tailwind and a macroeconomic tailwind in America and following the Great Depression in 1929 and in into the ‘30s, stocks got very, very, very cheap and they were able to buy companies that were benefiting from a resurgence and long tailwind growth in the U.S. for single-digit multiples. So many of these companies may have been growing at two or three times GDP, but they were just cheap and the market was much more inefficient back then. So that opportunity doesn't exist today, the markets are much more efficient and our economy is much more efficient and things are very different. And so when I put all this together, I said, “OK, I need to, you know, develop some kind of criteria or how do I think about a business that could survive and thrive over a long period of time.”

And I worked with somebody else on a research project that we called peak-to-peak analysis. And the peak-to-peak analysis looked at companies over $100 million market cap and considered if they were purchased at the peak of cycles, going back to the 1970s, which is as far back as we could get really good data, and held to the next peak. So assuming you paid a premium or you bought them at the absolute top of the market and held them to the next absolute top of the market, so you didn't have the benefit of buying at the bottom of market cycles. And we looked at the companies that really beat the index, maybe 5, 6 or 10 times the index, the S&P 500 over those peaks started to see commonalities. Now many of them, they were all from different sectors. The winners were from different sectors. They weren't just tech, for example; you had winners in all sectors and you had winners with multiple market cap sizes. But after looking at them start to develop, there's just some high-level criteria that I thought could serve as maybe just a guardrail for thinking. And to help, more or less, just say no faster to potential new investments that weren't necessarily special situations, but companies that they wanted to own for a long period of time. And so, you know, in the market, you have companies that have been around forever but have underperformed for a long period of time. So we call those companies that have just survived, they have not thrived at all. So wanted a criteria and to think about the businesses that could not only survive, but actually thrive and potentially beat the market for, you know, 10 or 20 plus years.

And so we came up with four criteria that we observed during the study. And the four criteria were a business model that is adaptable and relevant in tomorrow's economy. So these were businesses that had a good business today. These are not startups, these were not venture companies, but the companies that were good to say, but positioned in a way that they would be more relevant to take advantage of a bigger trend that was happening in the economy.

So the next thing we looked for or the next thing we saw was that the companies that performed the best in this peak-to-peak survey or analysis had durable pricing power that was protected by a growing competitive advantage. So that meant they had an advantage that would allow them to raise prices. And that was a durable advantage and that advantage was actually growing. And so they were a lot of times able to hold margins, but at least hold them when other companies couldn't hold them over long periods of time. And so that slight nuanced advantage, the ability to go to the where pricing power was protected also gave them a long-term tailwind.

The next thing was capital allocation and balance sheet strategy that supports the company's moat. So you need capital allocation that doesn't hurt the company. You know, you need disciplined capital allocation. If a company makes a really bad acquisition, for example, they could spend many years trying to dig out of it. It can hurt their moat.

And the last thing is we saw that in most of the best-performing companies, there was a significant alignment of interest between management and the minority equity holders. So you didn't have a group that was outsized. Was it being advantaged or an outsized way at the top? And you had a real alignment of interest.

So these four criteria, like I said, just serve as somewhat of a guardrail. It doesn't mention valuation, for example, which is an important part of how we look at all businesses. But what it does do is, like I said, allows us to say no quickly and to revisit a thesis from time to time and say, “Hey, which of these things is the company getting better at or which of these things is the company not getting better at or, or losing out to?” And when we see a company that we've held, for example, losing out on one of these core things, it could mean that we need to sell it.

SG: All right. Thank you so much. I think your approach sounds pretty unique. It does have some value investing elements to it, but what would you say sets your strategy apart from a value investing other than you don't really incorporate value into that four-pronged approach?

JD: Well, valuation is an important part of any investment decision. But I think that when you're thinking about a company, so like I said earlier, you know, the the traditional way people think about value investing a lot of times comes down to buying cyclical companies, companies that are trading for low valuation and they're hoping to trade or they're looking for mean reversion and then sell the company. But this other lens, which I also very much think is value investing, is buying a business with a structural advantage. So it allows it to compound and grow.

So valuation is important because we need to be able to look out in five or 10 years and see that even if we make a mistake, that the earnings power that the business has and is building is significantly larger than where it is today. And we don't necessarily have to nail the long-term intrinsic value or terminal value. But we do need to see that even if we're wrong, there's a lot of upside. If we can measure that upside as we go, as the investment plays out. So for example, if a business, and this has nothing to do with market cap, this has nothing to do with sector, but if you look at a business that has a $1 billion market cap and you go wow, looking based on their position, their financial strength, you know, where they are in a sector that is positioned to be much more relevant in the future than the past. They have an incredible management team, et cetera. And the addressable market they're going after is multiples bigger than that market cap. You can imagine a situation and they're growing and they're not reliant on outside capital. They don't need to tap the capital markets to grow; that they're internally financed cash flow is financing their growth and they have a clear opportunity to reinvest at very high rates for a long time. You can imagine a scenario where that company might be 2, 3, 4, 5 times bigger than it is in a few years. But if that same business had a $200 billion or $300 billion market cap, it's just a different exercise. It doesn't mean that it also can't be multiples bigger in the future. But it is a different exercise which, but we're looking for in our own way and our own model to be able to say, “Yeah, I think that, you know, based on these assumptions and those assumptions can go up or down” and we get those wrong all the time. But with some kind of a margin of safety, I feel like the business could be significantly bigger than it is today.

So that is the way I interpret modern value investing. So value investing, that's not mean reversion. Betting that a company, you know, just trades for three times earnings today because it has a commodity component that may become more valuable and maybe that should trade for six times earnings. You have to sell it. I think that's a very valid way to make money. But that is not, that's a very different way than looking for a business that has a structural advantage that will allow it to continue to compound and grow for a long period of time. So I think it's about, you know, time and market versus market timing and t's very different from the way most people invest because it does require a longer-term time horizon and it involves enduring volatility that a lot of people just can't stomach.

Chris Mayer wrote this “100 Baggers” book and then another great book that I'll mention called “How Do You Know?” And it's about the way he thinks about investing. I love both of those books, “100 Bagger” and “How Do You Know?” because it focuses on businesses that would be worth, you know, it focuses on businesses that have the ability to be much bigger in the future than the past. And how do you know that you don't necessarily know this, you need to come up with a way to think about the business and monitor the business that will be different from the way that most investors think about a publicly traded company, which the way most people think about a public company is: How did they do this quarter? Did they beat their earnings according to this; did they beat, did they miss? Is this in a sector that's rotating into favor or is this in a sector rotating out of favor?

So because markets are liquid, most people think in very, very short periods of time: one year, two years, one quarter, one week even. So investing like this is, it just requires a very different mindset, more of an entrepreneurial mindset, more of a business owner mindset, if you will. And even though we're not using leverage, the fact that we're gonna buy and hold something as long as it continues to fit, as long as the thesis holds, it can just fit our criteria and the thesis has not changed even and so if the stock goes down, maybe we buy more, if the stock goes up and it becomes fully valued based on today doesn't necessarily mean we're going to sell it. So that is, I think, what separates us from most investors is that ability to think like a business owner instead of, you know, starting over every year.

SG: That's great. Thank you so much. I think your approach, like I said, is really unique and you are definitely finding a way to differentiate your strategy in a way that still works. So, I like that. But considering the current environment of high inflation and elevated interest rates, how has it affected your investment approach, if at all?

JD: Well, higher interest rates, you know, I guess it's more of a question about economic cycles and one of the ways to think about the change in the interest rates is an economic cycle and that was, you know, on the backs of Covid. Every time there's an economic cycle, it's an opportunity for the right companies. And what I mean by that is the economic cycles force companies to re-evaluate what's important to them. It forces them to look inside and say, “We need to get more efficient, we need to prioritize what we do best. We need to cut fat, we need to just become more efficient.” And it's an opportunity for companies to say also “How can I become more relevant? How can I take market share from the weaker players?” So you see a lot of times that the strongest companies and the leaders come out of these cycles much stronger and do much better over the next 10 or 20 years than they probably would have done if there had not been a washout or a market cycle at all.

So in this particular cycle, to start, this has been a cycle where companies, public companies at least, have been preparing for a big recession. That still hasn't happened. But the fear of that recession and the fear that has come from higher interest rates has caused companies to, like I said, even though, you know, from the biggest companies down to the smallest companies, focus on their capital structure, raise free cash flow, just right-size their business. And so, whether it's a packaging company, it is finding more efficient ways to process, to manufacture and process, finding lighter materials, doing more with less. Maybe it's more robotics, maybe it is squeezing more hours out of existing employees. Maybe it's just rethinking the verticals they're in and saying, you know, what we need now is the time to double down on that new vertical or maybe it's a time to refocus and not be so extended around verticals that are really outside of our core focus. And so what's made headlines are all the layoffs, but underneath the layoffs, especially in tech, you've had leaders that have emerged much stronger than they were. And even on the non-tech side, even smaller companies, what has happened is you have earnings or capital structures that, when the growth does come back into these companies, it'll produce higher returns on capital and the better companies will emerge stronger and better and potentially even the weaker companies could be better off in their own way because maybe they are just more nimble. So in the end, higher inflation and higher interest rates in a strange way can create or has created efficiency in many public companies that will probably deserve a higher multiple. So I know that sounds crazy or that could sound crazy. But if a company has a more efficient business, incremental growth, like I was saying, comes through and you have higher returns on capital, then ultimately it should reflect a higher multiple until it's disrupted.

This particular cycle has been shorter than I think most people anticipated as well. This isn't the 1970s. We're in a very asset-light kind of economy compared to where we were in the past. Commodities are a much smaller percentage of input costs for most businesses. Our lives are just more about experiences than maybe the type of the way that we used to consume, you know, 30, 40 years ago. So all this is an interesting setup to where we can, where you can see companies evolve and come out of this cycle stronger than they were. Maybe when people were a little more, a little fatter and happier.

SG: All right, thank you. Touching on a little bit of some stuff you mentioned. You talked about efficiency. What are some of the industries or sectors where you have found what you call efficient growth? And how does this fit into the bigger picture with your strategy?

JD: Yeah. So to try to beat the S&P 500 for 10 or 20 years, you need to own businesses that have efficient or durable growth. You need growth and it needs to be durable because it needs to last for a long time so it can compound. And so technology has become greater and greater. I used to think of it as kind of its own sector like most people did. And today I don't think of it as necessarily its own sector. Every company is a tech company to some degree, whether it's Domino's Pizza (DPZ, Financial), I mean, the component of growth and efficiency for most businesses is rooted in technology and it may not necessarily be just paying for cloud services or some kind of a SASS product or, you know, spend per se, but it's overall leveraging the digital economy. So becoming more efficient across the board and becoming more involved in people's lives, connecting directly to them, is using technology to do that.

And so there's companies that I think you can benefit from in one or two ways. You can benefit by, you can look at companies, invest in companies that are benefiting from technological change because they're becoming more efficient or you can own the businesses that are providing the technology that are allowing the other companies to become more efficient. So whether that's, you know, like I said, it was referring to even packaging technology or manufacturing technology or back office rationalization technology. So there's a lot of ways to think about it, but we're just seeing a lot of up and down from the small companies all the way up to large companies. We're seeing companies just become more efficient and focusing on efficient growth and leveraging, you know, technology the best that they can to just come out stronger. You know, that doesn't mean that every company will be more successful and deserve a higher multiple though.

I can maybe mention an example. You look at the last really big downturn we had was the Great Financial Crisis in 2008 and ‘09. And if you look at, you know, two companies that I like to talk about don't necessarily overlap in what they do exactly, but they're both sort of quote unquote technology companies. One is Salesforce (CRM, Financial) and one is IBM (IBM, Financial).

And Salesforce kind of peaked, so let's call it pre-GFC peaked in May of 2008 for roughly $13 a share and adjusted for splits today, so maybe $13.30, $13.35 a share or something like that. And then it fell by more than 70% by February. So that's a big drawdown. The company wasn't cheap either and it traded for, you know, 8 times revenue and 330 times earnings. So most people would say, yeah, they deserve to fall that much. Look how expensive it is.

On the other hand, IBM also peaked in May 2008 at about $120 a share and it fell at the absolute bottom, which didn't last very long, just $75. So maybe only 37%. You know, 35, mid-30s, let's call it mid-to-high 30s decline from peak to trough. So that didn't feel nearly as bad and the company was cheaper. I mean, it traded for, you know, 11 or 12 times earnings.

But what happened over the next 15 years with Salesforce returned 66 times. So 66 times from the bottom. That's a 31% compounded return. And revenue grew from something like $750 million in AIR to $34 billion today. Now there were acquisitions in there; there was all kinds of stuff that happened. They made a lot of mistakes along the way, of course, but that was an enormous success story. And that's a company that really took advantage of the market at the time of the dislocation at the time to really focus and sharpen. And they had an enormous tailwind from the digitalization of sales products. And the prior to Salesforce, there hadn't been a service or the mindset, it's not even really that their product hadn't really existed, it was more than that there were databases out there for sales processes, but this was a big kind of megatrend where we were transitioning from basic databases and even pen and paper to customer relationship service, customer relationship software, where a company could become much, much more efficient. So other companies were taking advantage of Salesforce software to become much more efficient. And because they were also experiencing a really, they were going through a really, really difficult time during the financial crisis. So they were firing people, they were looking for ways to get more efficient and making that investment in Salesforce and going from, you know, maybe their sales people just writing down notes, pen and paper using Excel to managing leads and sales on Salesforce was a home run because the return on investment was so incredible.

And so they were able to grow versus IBM, on the other hand, which, you know, was a cheap company and continues to be cheap. So like I said, the company peaked at $120 a share fell to $75. But today only trades for like $160 a share. So, you know, excluding dividends, you're talking about a 5% kegger, a company that maybe grew 5% a year for the next 15 years. And so it dramatically underperformed the market. Even looking at it from a peak to peak, so $120 a share at the peak to today, $160 and maybe to today is a peak or the beginning of a new, or maybe last year was a peak or something. Wherever you measure that most recent peak, it was a loser and it was cheap then and it's cheap now.

Nothing against, you know, IBM. There were probably periods of time where it would have felt really good to own IBM because the volatility was low. And I'm sure there were, if you look at its history, which I haven't done, there were probably periods of time where IBM just maybe outperformed Salesforce. Where there was much more certainty around its free cash flow was easier to model it. But buying IBM at the time was buying a business that was in terminal decline and continues to be in somewhat of terminal decline. And so maybe it lasts, maybe it's around for another 50 years.

So I would call IBM a survivor because it survived a really long time and it will probably continue surviving in some shape or form. It can use this free cash flow to make acquisitions that will just keep it around longer, but it's not a thriver.

Salesforce, on the other hand, in hindsight, is an example of a survivor. It not only survived, but it thrived and making an investment in Salesforce at 330 times earnings,r whether it was at the peak of 2008 before the great financial crisis or at the bottom, when the world was kind of collapsing in early 2009 required a very different lens than just saying, “OK, is this company cheap or not” required an understanding of, or at least a bet on the future and how the future was unfolding and the structural advantages that it would enjoy as it was creating and pioneering efficiency for other companies. So maybe that's, hopefully that's not rambling too much.

But this is an example I think we're also going to see coming out of this last cycle. You're gonna see companies that bottomed in 2022 come out and emerge over the next 10 or 15 years, very similarly to what we saw with Salesforce. Back in 2009, you're gonna be able to look back and say, “Wow, that company just did incredible things for the next 10 or 15 years!” And maybe it's not completely obvious now and, you know, I wouldn't speculate necessarily. I don't want to, you know, name companies that may or may not be the next Salesforce, but there will be companies that do, you know, multiply more than the S&P 500. And there's also going to be companies that if you would have bought during 2022's meltdown that didn't go down very much and that we're gonna probably look back in 10 or 15 years and it will have only gone up, you know, 34% or 35% a year for that period of time if they survive.

So thinking along those lines, you know, is just a different approach and I hope I can highlight just through those, and those are kind of two extreme examples. So for every Salesforce and IBM, you can find a ton of companies, whether it's Netflix (NFLX, Financial) or whatnot that were risky at one point, really risky. Tesla (TSLA, Financial), you know, they were, they were financially maybe a little unstable at some point in its history, but over a really long period, just crush the index. But it did require thinking through the lens of how can this company look and how is it advantaged and how is it getting stronger? How is it emerging from the cycle before emerging stronger and more focused than its peers?

SG: Those are all really great points you've made. This is just great. Sticking in that vein of tech stocks, is there any specific characteristic that makes these companies more prone to fit this efficient growth trend? And if so, what are they?

JD: Well, traditional technology businesses, you know, their costs are just people. So they have high gross margins, sometimes 80%, 90%. Software businesses, for example, and their costs are just employees. So during boom periods, they overhire and they, a lot of times, will take 100% of their free cash flow and reinvest it back in the business and not show GAAP profitability. Other times you have businesses, I mean, this last cycle you had companies come public that shouldn't have come public, more venture-type businesses that probably aren't sustainable on their own without a capital raise. And you want to avoid those, but technology businesses, you know, especially for the, for the leading technology businesses, and I don't necessarily mean just mean market cap size. So yes, Google (GOOG, Financial) and Amazon (AMZN, Financial) are leaders, but you don't necessarily need a trillion-plus market cap to be a leader in your sector. They still benefit from being able to look around and say, “Hey, you know what, we have too many people, we have too much fat, let's cut some fat and become more efficient.”

And so, for example, Salesforce went through a big layoff and it is doing much better financially. They went through a big layoff in 2000 and this year or last year, ‘23. And it's not the last time, not the first time they've done it, they've been through several of these. So it's just easier for them because they have more flexible cost structures than like a manufacturing business that is limited on what it can cut. Employees may only make up some small, much smaller percentage of their cost of goods. So for their opex, for example, or a manufacturing business like GM (GM, Financial), like how much can they really cut? You have a lot of union labor, you have enormous fixed costs, so you're just a lot less flexible.

So technology also benefits from generally, you have a lot of founder-controlled businesses because they're younger businesses. Or you have large inside ownership at least. And there are businesses that came from as a result of disrupting something. So they have this mindset of, you know, they're worried about being disrupted. I mean, we're living in an age where companies are being disrupted faster than they've ever been disrupted. So, if it's not being disrupted from a technology, companies are being disrupted from a change in the way we live our lives or the way we think, the way we prioritize things, you know. You may prioritize eating healthier today than maybe somebody would have 30 years ago. Maybe you would eat McDonald's (MCD, Financial), you know, a lot less on a monthly basis or a yearly basis than then maybe, you know, cousins of yours that are 20 or 30 years old or from the same part of the world, from the same neighborhood even. And so those are just examples of we're going through. As time goes on, the pace of change is happening much faster on the technology side. Because a lot of these companies were the disruptors, I think that they're much more sensitive to fact that they can be disruptive and generally they kind of live on that cutting edge.

It doesn't mean they'll all be successful, of course, and it doesn't mean that they won't be disrupted, but they have that lens. If you've come from that place, just that place of being the disruptor, it does give you a little bit at least of the mindset that, you know, you can also be disrupted and then, like I said, your costs are mostly people so that you can flex that up and down and the impact is very dramatic. You know, if you can let 20% or 30% of your workforce go over a two or three-year period and your revenue even stays the same, the result is a lot more free cash flow you can use for other things, whether it's you reinvest in other initiatives or make acquisitions or even return it to shareholders. So from a position of flexibility, asset-light businesses are definitely more flexible than traditional, kind of older economy manufacturing businesses. That doesn't necessarily mean that they are always winners; it just means they, at a high level, have a lot of flexibility in their cost structure.

SG: All right. Thank you for expanding on that a little bit more for us. Could you share a few specific examples of companies that fit this category that you like, you did mention a few already, that fit this efficient growth trend?

JD: One of the companies we own is Spotify (SPOT, Financial). We've owned it for a long time and we've owned it since the very end…we bought it kind of at the end of 2018, early 2019 after I think it had the IPO. They did what's called a direct listing, a Dutch IPO where they just listed the shares. They didn't raise any money. They didn't need to raise any money, so they didn't and the stock was down I think 45%, 50% from that direct listing and that's when we bought it.

They have a bloated cost structure. One of the reasons I have always liked the company is because its core music business we think generates lots and lots of cash. Despite the company, it is a free cash flow generative company, or it is kind of a breakeven type of company. It does technically lose money on a GAAP basis, but when you drill down, you go, wow. OK. This core music business makes a ton of money and they're using that money to reinvest back in the business and things that they think will allow it to grow. And so it's kind of a different conversation.

But from just a pure structural perspective, they just have been bloated for a long time. And I always thought about it as well, that's a little bit of a margin of safety because, you know, that if they needed to cut people, they could and they would still have a phenomenal business. And that's kind of what happened. They've made small acquisitions over the last three or four years and they've just not, they've hired too many people and so they ended up in a place where the gross profit for employees was just too low or bloated. I think they peaked at 8,000 employees for a company with, you know, something like a little over €4 billion in gross profit. Just, it's just a lot of employees and they announced cuts this year or in 2023, 20% plus their workforce. And again, no different than we saw with a lot of tech companies and actually there's a lot of companies in general, even non-tech companies. But you know, what are their costs? I mean, their costs, their real costs outside of the, you know, outside of their revenue share with the labels on the music side, their costs are just people. So when they have too many people, they cut costs.

So we think that they'll benefit from that, it'll make them a lot leaner. It'll make them more focused and they'll emerge a stronger business. So that's an example of something that we own in the portfolio that needed to cut costs and have cut costs. And it should benefit the company, should set them up for a long run. We're hoping at least.

SG: Thank you so much. I do like Spotify, too. So shifting focus a bit, what is the most important lesson you have learned over the course of your career?

JD: The most important lesson I think is kind of back to what I was saying earlier, this idea of time in market versus market timing. The idea that, you know, sometimes it just feels like that you can, let me rephrase that. I've learned the value of buying and holding the right businesses versus trying to time mean-reversion cheap stocks. That's been probably the most important lesson. Although I'm still guilty from time to time of doing it, we actually, I don't know, we may have even today 5% of the portfolio in what we call special situations, which are mispriced companies, a company that's really mispriced, but there is a short term catalyst. Either I think it's going to get acquired or there's a restructuring of some kind that's positive that the market hasn't recognized yet. And they have those in there. I had those in there in the past to kind of offset the volatility and a buy-and-hold type of portfolio. Sometimes it offsets the volatility. Sometimes it actually makes volatility worse.

So what I've learned, I think the hard way is, “Jeremy, when are you gonna move away from this idea of just looking for cheap companies?” I remember there's just this natural muscle, muscle memory, because I spent so many years digging for cheap companies, some successful, some not, that even after the 2022 selloff, I found myself doing screens for companies trading for net cash and spending a bunch of time and it wasn't necessarily investing that way with the fund, didn't buy any in the fund like that, but they just spent time and I thought, you know, what am I doing? The best opportunities are buying what we know, focusing on a handful of businesses that have the survivor and thriver kind of characteristics, are benefiting from a structural shift and just hanging on, you know. Down markets and volatility are part of the business, so you don't need to reposition, you don't need to rethink, you don't need to do anything. You just need to look up at the current holdings and say they're down, does this mean, you know, we take a hard look at them and say, do we want to buy more of these or has something changed in the thesis where we need to sell? But if it's just the stock price, then no, we need to buy, probably buy more or just hold tight.

So the biggest lesson is something I continue to learn the hard way, which is don't get distracted by too much by movements and prices. And it's something I'll probably always struggle with. I think al investors get sidetracked from time to time by something that's just really cheap, has fallen a lot and on paper, just screens really cheap and it sounds fun to own. But I guess I'm more talking to myself, which, you know, stay away from that stuff and focus on what you know and focus on businesses that you think are becoming better, not companies that are just trying to survive, but companies that are also going to, like I was saying, thrive as well.

SG: All right, thank you. In a similar vein, what is your best advice for individual investors in the current market environment?

JD: I would say stay invested. If there's anything that 2023 taught us, it was that leaning too much into market sentiment, especially bearish market sentiment, is not good for your health. So I would say just keep buying every month. Buy the S&P 500 or add to your favorite managers or add to your favorite positions and make sure you know why you're buying it.

But the biggest mistake that everybody makes, including professional investors, is they get sucked into the market sentiment. They get sucked into the fear of being down. They're afraid of being down more than the benchmark or quote unquote, losing money. And so it petrified… they become petrified and they can't make decisions. So the best advice is just to always stay invested, don't sell. If you need to trim, you know, because it makes you feel better, you need to raise cash because it makes you feel better, fine. But shorting the market and having a really big opinion, a loud opinion, on where you think the economy is going and the world is falling apart. All that is usually, you know, I guess from time to time maybe having that opinion in 2008, you know, before the GFC, OK, great. But the reason these huge financial crises happen is because no one is prepared for them.

But when everybody, like in 2022, what, what we learned is that everybody was so overly prepared for a crisis or a collapse in the economy that it just didn't happen, not to say that it won't happen in the future. But you can't time markets, you just have to stay invested, you just have to continue to add. And when something you like is down or something that you may like is down or even just the market itself is down, it's time to add, not sell. The mistake that most investors make is they invest at the top and they sell at the bottom. So you can avoid that by just slowly adding or trying to force yourself, even when it's uncomfortable, to add it. You know, when something is down, knowing that it may continue to go down more before it bottoms.

SG: All right. Thank you. I think that's great advice just to stay invested and stay the course and stay strong even when it's hard.

JD: It's an emotional business and it's hard. If it was easy, then everybody would be a billionaire. I mean, think about Apple (AAPL, Financial). Why don't we have more Apple billionaires? And the reason is because Apple was down 80% twice in its history and it's been down 20% many, many times. People can't handle it, they can't handle it. And they also don't have a framework for thinking about the company over a five- or 10-year period. They're worried about where it's going to trade in the next year. They worry about who's going to become president or if there's a war or if there's a trade dispute. And so that happens time and time again.

You don't need to find many apples in your life to be successful, but the key is you need to be able to hold on to them and you need to be able to add to them if they drop a lot. So it's obviously a very difficult thing to do because, you know, I don't think there's, there should be a lot more considering how long Apple has been a very successful company. You would think that there would be more people we would read about or hear about or whisper about, at least, that had made hundreds of millions of buying and holding Apple stock that weren't necessarily an executive of the company, but just people that, you know, were able to buy it or a fund that was able to buy and hold it, you know, starting in the early ‘90s or something like that. It's a very rare skill that people can buy and hold because they don't have a framework for holding something because they don't know how to think about the business other than what the stock price is telling them.

So kind of going back to what we originally talked about with the lesson from Buffett and Munger was if you can't see the stock as if you're buying the whole business, then you probably shouldn't be investing in individual stocks. You probably should just be investing either through an index or with a manager you like.

SG: Yeah, definitely. Thank you for all the above. As you know, Charlie Munger (Trades, Portfolio) recently passed away. In your opinion, what was his most important contribution to the investment community?

JD: I think this is a different answer for everybody, but for me, you know, he really instilled the idea or the value of being able to think independently. And the value in living a meaningful life and living your own life, marching to your own beat of your own drum. And not, you know, like making things count because life is short. He lived a very, very high-quality life and it was his life. It was a life he wanted to live and he didn't let anything stop him. As soon as he was able to live that life, he did.

There's a great book on his life, I mean, there's a lot of books on his life, but one of my favorite books is “Damn Right!” by Janet Lowe. People have debated the accuracy of that book, I guess, but generally it talks about, there's a chapter in the book where it talks about Munger's transition to being independent in his early 50s. When he said, “Look, I've made enough money.” He's not, he wasn't crazy rich at all, but he made enough money to achieve what he wanted, which was independence.

And from that point on, he started becoming…he became his best person and we can all learn a lot from that. It wasn't necessarily about having a certain amount of money per se. It was about having the mindset to live independently and to think independently and to become a better person and let that compound do the right thing. And he's somebody I admire greatly.

SG: All right. Thank you so much. It's great to hear different takes on his contributions. And finally, to round out our time together, whether they are investing related or not, could you please recommend three books and three movies for our readers to check out and also share why you like them?

JD: OK, so I just mentioned. “Damn Right!” about Munger. I think it's chapter nine or chapter 11, maybe it's chapter nine, is my favorite chapter.

Another book I just mentioned earlier, “How Do You Know? by Chris Mayer He's the guy that wrote the “100 Bagger” book. Great blog. He also runs a fund. I really couldn't thank him enough for writing that book, especially How Do You Know?” I like it even more than “100 Baggers" and I like it because he talks about how difficult it is to know. But the way we think we know about whether an investment or whether this person is the right person or this is the right investment. A lot of the times we take shortcuts to tell us how do we think we know? And a lot of times those shortcuts, you know, they don't, they hurt more than they help. For example, P/E ratio, you know. Chris talks about P/E ratio and thinks about P/E ratio in the same way I do in that it's a very ridiculous tool that people use because the P/E ratio tells you nothing about a business, a low P/E ratio tells you nothing about how durable that company is. It tells you nothing about the management. It tells you nothing about where the business is going over the next five years. It is the same with a very high P/E ratio; tells you nothing about where the business is. It tells you nothing about the company's cost structure, the culture of the business, the structural tailwinds that it may or may not be facing or may not have to its back or that it's facing. So, like I said, you paid a low P/E for IBM during the financial crisis and you got a 5% kegger over the next 15 years. You paid 330 times earnings for Salesforce and you got a 66 times return or 31% annually over the next, you know, the next 30, over the next 15 years. So “How Do You Know?” by Chris Mayer. Great book

And the one I read recently was the Elon Musk book by Walter Isaacson, just a fascinating book about one of the greatest entrepreneurs in the last 100 years. Whether you like him or not, what he's accomplished has just been absolutely incredible. And the book does a great job of articulating just how hard he works and how important it is to have tenacity and to never give up and to stay focused and keep trying and take risks and keep trying and take risks and get back up when you fail and keep going. Very much an American dream story. And I just love the book. Nothing to do, you know, no opinion on this on any of his companies. Just that it's a great book and a great lesson on what it takes to be great as an entrepreneur,

Three movies. I recently watched a movie called “Nyad” on Netflix. I'm not sure I'm pronouncing that right. It's about Diana Nyad. She's a swimmer. She is the first person to swim between Cuba and Key West nonstop and she did it at I think, age 63. And again, it was just a very, very inspiring story. She also has a TED talk that my wife and I watched after watching the movie. Very inspiring about never giving up. You know, she had failed. She had tried it when she was in her late 20s multiple times and failed and just gave up. And she revisited swimming after not swimming for 30 years. She revisited it 30 years later and started one stroke at a time and basically rebuilt and found it in her to try and people thought it was impossible. She partnered with a great team, she had a great team around her, great coach and she achieved what nobody thought was possible. It was a great inspirational story.

Second movie, my all-time favorite movie is “Spy Game." So kind of an old school Robert Redford, Brad Pitt movie about travel, about spying. It's one of my favorites.

And third, I would go with my daughter's favorite movie for Christmas, which is “The Grinch.”

SG: All right. Well, thank you again for joining us, Jeremy. It was a pleasure to have you and just hear your thoughts on efficient efficient growth and tech stocks and all that it encompasses.

JD: Yeah. Thanks for having me.