Speaker unverified: belief

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…on't buy companies that are market share donors. With CEOs, I really want to buy this. That's like a headache, right? So there's a stage of the life cycle where companies kind of become un-acquirable? Those companies, I don't worry about them being acquired. What you worry about, as I said, an activist comes in, replaces management. Usually the new management team can't fix it, but sometimes they can. And that's a risk. In terms of the companies where I said they have no terminal value, the risk is just that they usually trade at low multiples. And so you're basically just DCF-ing the cash flows. And if the cash flows—if something happens and people receive the cash flow, it’s going to last a little bit longer because the starting valuation's low, they can go up. Cyclical shorts are just entirely different. The risk is just that you're early or you're just wrong about the cycle. There's something about the cycle, which is different this time, but those are kind of the main categories of shorts. Speaking of cyclicals, why has Rolls done so well? They’re up 5x, 10x over the last few years. This is Rolls-Royce, the jet engine and turbine manufacturer. Yeah, yeah. Their main business is aircraft engines for wide-body jets. They're not big in AI, IGTs? Not as far as I know. They have an SMR business, so that could eventually help. Rolls is not very cyclical. The reason why— Aren't engine makers historically cyclical? Not as much as you would think, because most of the business is: I sell you an engine for not much money, but I make a lot of money in aftermarket, which is much more predictable. So the airframers are cyclical, but the engine makers aren’t? Airframers are cyclical, but pretty good secular growth and it's a duopoly. Rolls-Royce was just horribly bandaged for a long time. Making jet engines is incredibly difficult. It sounds hard. It probably takes like five to 10 years to do the R&D to develop a new jet engine. So Rolls-Royce actually had good technology. It was just very, very poorly managed and they signed a bunch of contracts with airlines that were very unfavorable. And they had a new CEO come in and he operationally turned the business around in a pretty fantastic way. You guys were long Rolls, right? Yes. So that's a good example of how—because every management team says, “We're going to turn this thing around.” And every management team has a projection that looks good. And so how did you determine that now finally they're going to turn it around? anagement team says, “We're going to turn this thing around.” And every management team has a projection that looks good. And so how did you determine that now finally they're going to turn it around? Okay, so let me start by saying the US and Europe are very different in this respect. Let's take a US company that had a turnaround industrial company like 3M. 3M had been a horrible stock for a very long time. Wasn’t well managed, new CEO comes in, puts up one or two good quarters—we owned it. Everybody basically understands what's happening and the stock kind of goes to fair value with the assumption that the margins are going to go where they should go. The US is pretty quick at seeing change happening and then pricing in that change. In Europe, I find… A company like Rolls had underperformed for so long, I guess that European mutual funds, they just kind of got in their head that Rolls-Royce is something we just don't want to touch. So the voting machine is laggier in Europe? Why is the information connectivity higher than in the US? What's going on? I think it's hard for me to explain, but I've seen it over and over again in Europe. It's almost like when Rolls was being turned around, it was pretty clear after the first year that what he was doing was going to work. And it wasn't really that difficult to— Based on earnings, based on deliveries, based on talk to customers? Based on—you meet with the management team. They say, “Here's our plan, here's what we're going to do.” You see things playing out. You see the income saving progressing as the person said. You get a sense for Tufan—name of the CEO. You get a sense for like, okay, is this person good the same way you would assess it. Is the right framework that it's US and rest of world? Or is Europe uniquely bad at this compared to Latin America, compared to Asia? I don't do enough in Latin America to have a strong view. But a Japanese turnaround, would that— I think Japanese turnaround would be closer to Europe than the US, but I've done a lot more in turnarounds in Europe. If Rolls-Royce was trading in the US, I'm fairly confident that after the first few quarters and people meeting the CEO, it was very clear to me that the CEO was excellent. And why is that functionally, do hedge fund managers, or most of them presumably, are in the US and they mostly like to buy American stocks or— I think the American markets are just much more efficient. There's just a lot more capital. But there are no hedge funds—very few hedge funds presumably—only invest in the US. I think you'd be surprised. I mean, I think Europe is generally viewed, appropriately so, as an extremely low-GDP, unexciting place— There's an issue where presenting that to your LPs is kind of embarrassing. Is that part of the problem? Like, “Oh, we took a position in a European company. I'm not sure we would want to do that.” No, no, no. Obviously you don't. But I'm just trying to understand why the average hedge fund manager doesn't just back up into Rolls. But isn't it just a home country bias? People invest in what they know. , no. Obviously you don't. But I'm just trying to understand why the average hedge fund manager doesn't just back up into Rolls. But isn't it just a home country bias? People invest in what they know. Yeah, I think it's much easier from the US to invest in US companies. You understand the accounting, it's US GAAP. You don't have to stay up all night to follow the stocks when they report earnings. You do that? You're assuming like hedge funds— If you have a big position in another time zone, do you stay up to watch earnings or do you wake up to watch? I actually have—without an alarm clock—I will wake up almost exactly between 2:55 and 3:00 AM almost every day. Wow. Wait, let's dig in. Yeah, there's so much to unpack. So, you wake up ahead of earnings. No, no, forget earnings. Every day. Oh, okay. Every day. Just because I've been doing it for, who knows, 20 years. The European market opens—depending on Daylight Savings Time—opens at 3:00 AM. Okay. You just want to see what happens at the open. No, I don't want to wake up. I actually don't want to wake up. Yeah, but you're there. But it's just like old habits die hard. So you wake up, check Yahoo! Finance, and go back to sleep. Yeah, sometimes I'll send out a bunch of texts. Thoughts for the team, people who have no interest in getting a text at 3:00 AM. Does your team to have a special setting on their iPhones where it doesn't chirp? It just tracks an alarm. I've never actually asked them. I don't expect… If the company reports earnings, I expect the analyst to be awake. Wow. And I'm awake, too. You can't, that would be like— Wow. Do you go back to sleep then? I try to. But look, it's like— I just want to have a split screen. So you are in Miami, you're up, the analyst is in a one-bedroom in New York City, laptop in the bed, on the phone with you. It's three o'clock in the morning. Company's about to report earnings. His girlfriend doesn't understand why she's already on the couch in the other room. And then it gaps down, it's gapping down, it's red. We could see the red reflected on the analyst's face. This would make a great movie. And then what are you telling them to do right now? Are you just saying, “Why is it red? It should be green.” Well, I mean, usually it's red for the right reason. And then it's just a matter of understanding, okay well, is the stock overreacting? Or, what actually happened? Does this actually change our view of the intrinsic value of the company or not? And that's a matter of… The analyst is, in real-time, we're discussing what happened and sometimes we're buying, rarely we're selling, but sometimes there's a quarter where it's like your whole thesis is just wrong. Usually, it's like your thesis isn't totally broken. Maybe the stock is down 5%, 10% and you kind of say, “I understand why, but it doesn't really change my long term.” So it's been 30 minutes now. You did your stuff. Now it's four o'clock in the morning. Do you go back to sleep? Because the analyst is not going back to sleep. I'm telling you that.…

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