Podcast Summary
Andrew Brinson's background in private equity prepared him for value investing success: Andrew Brinson, with a background in private equity, developed a keen eye for undervalued companies and achieved exceptional returns through Turtle Creek Asset Management's mid-cap focus and unique investment approach.
Andrew Brinson, the CEO and co-founder of Turtle Creek Asset Management, has an impressive track record in value investing. With an average annual return of 20% since the firm's inception in 1998, Turtle Creek outperformed the market significantly. Andrew's background in private equity prepared him well for investing in public markets. He noticed that investors often lacked a deep understanding of the companies they owned, leading him to question the efficient market thesis. Through his experience in M&A advisory and private equity, Andrew developed a keen eye for identifying undervalued companies and has successfully applied this approach at Turtle Creek. Their mid-cap focus and unique investment approach have resulted in exceptional returns for their clients. This discussion highlights the importance of hands-on experience and a deep understanding of companies in achieving investment success.
From M&A to public market investing: The founders' experience in M&A and private equity shaped their fundamental investing approach in the public market, rooted in cash flow analysis and a commitment to their strategy, even without extensive value investing background.
The founders of Turtle Creek Asset Management gained valuable experience in mergers and acquisitions and private equity before transitioning to the public market as engaged investors. Their approach to investing is rooted in fundamental analysis and the present value of cash flows, shaped by their time in the "upstairs market" of M&A and the "downstairs market" of private equity. They continue to be intrigued by the complexities of public companies and remain committed to their fundamental investing strategy. Despite never having attended a Berkshire Hathaway meeting or read extensive value investing material, they have developed their unique investment approach through hands-on experience.
Identifying Unique Companies for Superior Performance: Turtle Creek invests in unique, highly intelligent, and shareholder-focused companies, contributing to their outperformance through careful identification, valuation, portfolio construction, and optimization.
Turtle Creek's investment approach is built on the foundation of finding unique, highly intelligent, and shareholder-focused companies, which they refer to as a "different kind of value investing." This approach was developed through years of experience in advisory roles, private equity, and investing in public companies. The first step is identifying these unique companies, which often have no clear comparables in the public market. This focus on unique companies has contributed to Turtle Creek's outperformance over time. The remaining steps in their approach include determining valuation and intrinsic value, portfolio construction, and continuous optimization. The team's extensive background and experience have allowed them to identify and invest in companies that others might overlook, leading to their success.
Understanding a company's culture, management, and incentives is crucial for investment: To invest successfully, go beyond business models and valuations, engage in ongoing conversations, and delve deeper into a company's culture, management, and incentives.
Finding the right company for investment goes beyond unique business models and valuations. It's about ongoing conversations and asking questions to understand the company's culture, management, and incentives. The CEO's public persona might not always align with their private thoughts, and it's crucial to dig deeper. Over the years, Turtle Creek has owned 115 companies, but only 30 remain in their portfolio today. Some were taken private, some are still great but not cheap, and others have lost their edge. Turtle Creek aims to find generationally great companies that align with shareholders and outcompete the competition for the next 10-20 years. Additionally, Turtle Creek focuses on mid-cap companies because they require access to management, and their size aligns with Turtle Creek's investment approach.
Mispricings in mid and larger cap companies: Despite larger market size, mid and larger cap companies can still be inefficiently priced and offer attractive investment opportunities. Look for well-built out companies with earnings that justify their market cap.
Mid and larger cap companies, despite their larger market size, can still be inefficiently priced and offer attractive investment opportunities. The speaker mentioned that they have found significant discounts to intrinsic value in the mid cap space, and despite the vast number of companies in this space, they are still working to identify and invest in undervalued companies. The speaker also emphasized that market size does not correlate with market efficiency, and that all companies, regardless of size, can be mispriced at times. Additionally, the speaker highlighted the importance of investing in well-built out companies with earnings that justify their market cap, especially in the mid and larger cap space.
Minimizing losses through quality investments and accurate valuations: Successful investing involves minimizing losses by focusing on quality businesses purchased at attractive valuations, thorough valuation processes, and being willing to adjust assumptions for accuracy.
Successful investing isn't about avoiding losses at all costs, but rather about minimizing them while focusing on quality businesses purchased at attractive valuations. Jason Brett, the speaker, shared that out of over 100 investments made, only a few had negative impacts on the portfolio's performance, and the losses were immaterial. He emphasized the importance of a thorough valuation process, which involves building a financial model, making assumptions, and engaging in dialogue with company management. The goal is not to be overly conservative, but to strive for accuracy in forecasting and to be willing to adjust forecasts as necessary. Valuation risk, or paying too high a price for an investment, is a significant concern, but the focus should be on getting it right rather than underwriting assumptions to minimize risk.
Recognizing potential for organic and inorganic growth in companies: Successful investing requires looking beyond current earnings and growth rates to factor in future growth and margins for organic and inorganic expansion, and optimizing portfolio based on attractiveness and market prices.
Successful investing involves recognizing the potential for both organic and inorganic growth in companies, and factoring that into long-term forecasts to determine intrinsic value. This can mean looking beyond current earnings and growth rates, and making explicit assumptions about future growth and margins. Additionally, portfolio optimization involves sizing bets based on attractiveness and updating weightings as market prices change. While this process requires making assumptions and inherently involves some degree of uncertainty, it allows investors to make informed decisions and potentially achieve outsized returns.
Combining buying and holding with adjustments for better returns: Successfully investing for the long-term involves finding great businesses and holding onto them, but also being flexible to adjust positions based on valuation for potentially enhanced returns.
Successful long-term investing often involves a combination of buying and holding great businesses, while also being willing to adjust your position based on valuation. This approach, which some call "continuous portfolio optimization," can lead to even better returns than a strict buy-and-hold strategy. For instance, holding onto companies like GEICO, Apple, and Coca-Cola for decades has paid off handsomely for investors like Warren Buffett and Bill Miller. Similarly, owning a single stock for over 16 years, such as a Canadian specialty food company, can yield impressive compound returns. However, it's crucial to give credit to a company's management and growth strategies when considering whether to hold onto a stock. By combining the discipline of finding great businesses with the flexibility to adjust your position based on valuation, investors can potentially enhance their long-term returns.
Symmetrical investment approach for maximizing returns: This strategy goes beyond buy-and-hold by adjusting holdings based on price changes, maintaining long-term relationships with good companies, and potentially outperforming the market and individual investments.
The discussed investment approach goes beyond the traditional buy-and-hold strategy by applying a symmetrical approach to adjust holdings based on price changes. This approach, rooted in a fundamental analysis, aims to maximize returns by tweaking investments without disrupting the core holdings. Companies appreciate this long-term commitment, and it's a win-win situation for both parties. The icing on the cake is the potential for outperforming not only the market but also individual investments. This strategy, inspired by private equity experiences, allows investors to maintain a long-term relationship with good companies while optimizing their portfolio.
Recognizing undervalued opportunities and buying more when prices drop: Successful long-term investing involves recognizing undervalued companies, having discipline to buy more when prices drop, and focusing on the long-term potential of the business, not market movements.
Successful long-term investing often involves recognizing opportunities when the market undervalues a company, and having the discipline to buy more when the price goes down. The speakers shared an example of Automation Tooling Systems, a Canadian portfolio company they first encountered in 2004. Although they initially liked the business, they didn't invest due to valuation concerns. However, when the stock price dropped significantly in 2009, they saw it as an opportunity and bought in. From that point, the stock compounded at an impressive 22% per year. The speakers emphasized that they don't try to predict market movements or time the market. Instead, they anchor their decisions on the long-term potential of the company and adjust their holdings accordingly. This strategy, which involves buying more when the price is low and selling when it's high, has led to significant returns. They also mentioned that this approach isn't commonly discussed or implemented by many investors.
Dynamic assessment of intrinsic value: Turtle Creek invests by constantly re-evaluating a company's intrinsic value, focusing on long-term potential, and managing risk, rather than following a static buy-and-hold strategy.
Turtle Creek's investment approach emphasizes a dynamic process of constantly reassessing the intrinsic value of their holdings based on new information, rather than a static buy-and-hold strategy. They aim to give companies full credit for their future potential while managing the risk of missing out on upside growth. Despite some holdings not yet generating high returns, Turtle Creek has managed to offset this by increasing their intrinsic value over time. The investment team's continuous evaluation of companies includes considering both positive and negative developments and avoiding being swayed by market sentiment or short-term events. Turtle Creek's approach differs from a buy-and-hold strategy in that it does not attempt to predict market movements or time the market. Instead, they focus on the long-term 5 to 10 year return potential of each company, considering its risk-adjusted expected return and the presence of tailwinds in its industry.
Focusing on direct operating companies: Turtle Creek Investment Group prioritizes owning individual operating companies, relying on their cash earnings and increasing debt capacity, and ignoring stock market fluctuations for long-term potential
Turtle Creek Investment Group focuses on owning direct operating companies and values each part separately, rather than holding companies with multiple public companies. These companies typically don't require excessive capital and can supply it through their own cash earnings and increasing debt capacity. The firm doesn't worry about stock market fluctuations or prices, as they believe in the long-term potential of their investments. Regarding market inefficiencies, the managers acknowledge their existence but haven't seen it directly impact their returns. They believe the market still offers inefficiencies despite advancements in technology and the rise of index funds. They also emphasize that a completely inefficient market could negatively impact their value investing strategy, as it might take a long time for value to show up.
Investing in well-run companies during economic downturns: Investing in well-run companies with strong balance sheets and leading industry positions can benefit from economic downturns, even potentially thrive, while diversifying a portfolio with 25-30 holdings allows for deep knowledge and consistent outperformance in the long-term.
A long-term investment strategy in well-run companies, particularly those with strong balance sheets and leading positions in their industries, can benefit from economic downturns. These companies may even thrive during recessions as competitors weaken or struggle with debt burdens. Furthermore, the number of holdings in a portfolio, such as Turtle Creek's 25-30 names, is a matter of balancing sufficient diversification with deep knowledge and conviction in the selected companies. Despite short-term market inefficiencies and the random nature of stock prices, a long-term focus on fundamentally sound businesses can lead to consistent outperformance.
Warren Buffett's investment in distressed companies: Experienced investors like Turtle Creek can benefit from Buffett's involvement in distressed companies, enhancing the company's reputation and confidence among stakeholders.
Even for experienced investors like Turtle Creek, there are times when market turbulence can cause undervalued companies to become distressed. In such situations, the involvement of reputable and experienced investors like Warren Buffett can provide a significant boost to the company's reputation and confidence among depositors and the market. This was the case with Home Capital Group in Canada, where Turtle Creek was the largest shareholder and Buffett's investment helped the company weather the crisis and recover. Despite the opportunity to increase their stake, Turtle Creek respected the shareholders' decision and the strategic intentions of Buffett, ultimately benefiting from the positive impact on the company's image.
The power of compounding in business and life: Quick and principled decision-making and long-term compounding lead to significant growth. Focusing on fundamentals and maintaining a long-term view helps navigate market volatility and capitalize on opportunities for improvement.
Compounding, whether in investments or in life, is a powerful force that leads to significant growth over time. As shared in the discussion, a company made a successful deal with Berkshire Hathaway, selling stock to them at a low price and buying it back at a higher price years later. This experience highlights the importance of quick and principled decision-making and the long-term benefits of compounding. In the context of Turtle Creek Asset Management, the firm's founders spoke about their continuous improvement and the long-term benefits of maintaining a steady, enduring approach. They emphasized the importance of not letting current market conditions or share prices discourage or distract from the long-term perspective. As they noted, the firm's returns would not have been as high without experiencing market turmoil, such as the credit crisis and the COVID crash. By focusing on the fundamentals and maintaining a long-term view, investors can navigate market volatility and capitalize on opportunities for improvement.
Missing investment opportunities due to market dislocations: Market dislocations can hide high-quality investment opportunities, but having the temperament and willingness to buy more stock at lower prices can lead to successful long-term investments.
Market dislocations present valuable investment opportunities, but it's essential to have the temperament and willingness to buy more stock at lower prices. The example given was an investment in an automation tooling systems company, where a board change and improving business strategy were overshadowed by the global financial crisis, leading to a significant price drop. If it weren't for the crisis, the investment opportunity might have been missed. With a 25-year track record, the investment firm plans to continue its collaborative and team-oriented approach, aiming to identify and invest in high-quality companies for the next 25 years.
Raising the Bar: Turtle Creek's Exceptional US Mid Cap Companies: Turtle Creek invests in above average, honest, and shareholder-focused US mid cap companies, emphasizing the importance of high standards after encountering exceptional examples.
Turtle Creek Asset Management, an investment firm based in Toronto, continues to raise the bar for the companies they invest in due to the exceptional US mid cap companies they've encountered over the last 15 years. Andrew Clark, the firm's Co-Portfolio Manager, emphasized the importance of companies being above average, honest, and shareholder-focused. He shared an example of a Canadian company they had missed out on due to recent management changes but recognized the need to elevate their standards after encountering high-quality US companies. Turtle Creek's website offers valuable content, including annual letters, interviews, and their investment approach series, for those interested in learning more about their investment philosophy.
