Mastering Micro Private Equity: Brent Beshore's Strategy for Wealth Generation

0:00I uh I got a flat tire yesterday and my immediate reaction was I got a flat tire this sucks yeah tow truck's only coming in two hours and uh you know I hit a pothole basically and you know potholes are avoidable sure and you can sit there and just be like initially I was kind of like wow this sucks but you know I was like you know in the grand scheme of things the grand scheme of things it's just a flat tire yeah so we had a flat tire with uh a few flat tires coming into this sorry about that well I appreciate you having me on

0:40thank you of course welcome welcome to the show I've been following you for years now because you put out some of the best content around buying businesses I would say micro businesses um so small to medium-sized businesses and you know I reached out to you because I wanted just to meet you and catch up and then I figured why not give the benefit of the listeners to have that catch up so let's dig into it [Music] I just got off reading your annual letter and I would love for you to tell folks why you write annual letters and what was in this one that's a big question uh

1:31yeah right angle letters um to keep kind of all the stakeholders that we have informed I mean we've got kind of three big kind of pockets of people uh one are the people who we work with right so the portfolio company leaders employees people at the firm here uh are investors and then people who potentially would be partners on opportunities and we found that the best way to repel the wrong people and attract the right people is to put out content that says who we are and what we do and so yeah the annual letter was um a reflection back actually it's been 15 years since I haphazardly started

2:11permanent Equity or before it was even called permit equity and so it's a kind of look back um some announcements on new hires we did to a couple new deals uh this year and I'm just trying to do uh look back and and kind of take stock of where we've been do you think more companies should do annual letters I know chamoth did an annual I don't know if he still does it but he was doing annual letters of course you know the Berkshires of the world do annual letters like you know is this a trend that we think is going to accelerate I mean I think there's a lot of

2:44organizations that I see that that kind of do an annual wrap-up or an annual letter um I think it can be super valuable it depends on what you're trying to do with it I mean I read a lot of annual letters that um look like victory dances uh when things are going well and and look like excuse Fest is when when things aren't and I don't think that is maybe as uh valuable I think you know just trying to be be who you are I guess in all situations including your annual letters probably the way to go I think what's cool about doing an annual letter is

3:14like probably once a year you really need to re-evaluate like what's happening what's the state of the world how you know where is the wind blowing where the Tailwinds where the headwinds and it's just beneficial just to like sit down I love like you called A letter like it's not a letter it's a blog post or a PDF realistically you know that's why yeah that's why I really like it I mean it also gives people like me like I feel invested in permanent Equity I read the letters so I feel like more people should go and publish if you have never published a a yearly letter if you're listening to

3:58this it's work it's worth doing yeah yeah I would agree I mean again tell people who you are and what you're trying to do and it will attract the right people and repel the wrong people absolutely so when I was reading your letter before this I didn't realize how big you were so today you know your portfolio of companies you know 700 full-time employees and you've got just under 350 million dollars manual Revenue so the scale has become big um now obviously the economy is weak right now how are you feeling about 2023 and permanent equity having a portfolio of companies you're going to have some that are going to do

4:40better in certain environments uh than others and the nice thing is that we're very different than traditional private equity in in the sense that we don't um typically put any debt on the companies so um for us we have a lot of operating flexibility I mean we can you know earnings can go down 50 60 and everyone still keeps their jobs and we actually had a conversation yesterday we were in Dallas with a new acquisition and we had this conversation with them we're like hey if you all think that things are going to be tougher this year than they were last year like let's not miss

5:14an opportunity to invest in people and technology and hopefully come out the other side of this way stronger when everyone else is retreating and entrenching let's be aggressive um because we have the ability to do so because we're not holding to a bank in covenants and taking all the free cash flow that we have and sending it to a to a financial institution so um we really encourage our companies when there's adversity like don't miss the opportunity for a good crisis and um served us well for folks that don't know permanent Equity super well can you can you talk more about what type of businesses you'd

5:52like to to buy yeah so we acquire majority Stakes so we're always doing majority uh buying a majority of the equity in small family businesses that are typically family run as well um so these are when I say small these are maybe not depending on what most people think this is a small business these aren't the local sub shop or you know hair salon these are typically pretty good sizable businesses making between three and fifteen million dollars a year of earnings typically revenues of call it 15 million to 150 million kind of in Revenue so I mean there's you know these are these are pretty chunky chunky

6:30companies and um yeah we like to partner for the long term so we're technically private Equity we buy equity in private companies but the term private Equity comes loaded with a lot of meanings and typically what it means is you know we call it the buy lever strip and flip model so you buy the company you put as much debt as you possibly can on the company so you can put as little equity in and um if everything goes great then the equity returns look fantastic if everything doesn't look great then then there's a good chance the company detonates you have to make some really hard choices which usually means to cut

7:04people and then they're looking to make significant changes in the business and then sell it to somebody else within typically a call it two to five year time Horizon so we do it in many ways the exact opposite so what we do is we buy with no intention of selling the business we typically use no debt in the transaction we love to keep leadership teams in place we don't uh we don't replace the leadership typically unless there's a sort of acute problem and um we hold them definitely and partner with them and try to be kind generous long-term Partners it's really a first principle is rethinking of of what

7:39private Equity is and and should be and I mean really just came from looking at how did families build wealth in the first place like I've never met a family who's like you know what we did was we levered up a company to the moon and tried to change it within a short period of time and then flipped it to somebody else it's not at all what how typically wealth is built within families wealth is built by you're passionate about what you do you become good at it you Faithfully serve your customers over decades and compound and so that's what we're trying to do as well

8:10could you give some examples of like what types of businesses that are like yeah so we've got a very diverse pipe portfolio we own um a swimming pool builder we own a the heisen matchmaking firm so executive Search but for love um very interesting business we own a military recruitment firm uh picture frame manufacturer uh fence Builder I mean it's it's really all over the place so Services manufacturing construction um we really uh we want to get involved in things we think of as like Main Street businesses things that are going to be around for a long time uh enduring need for them really enjoy just sort of

8:46the the Main Street how do you deal with acquiring a business that you really don't have domain expertise in so for example like you might realize you know swimming pool business is a huge opportunity the numbers make sense to you but you know you don't know the first thing about how much chlorine to put in a pool yeah we never are experts at the businesses that we acquire in fact that's a you know we think of as we're the experts in the business of business so you know we joke that everything tastes like chicken layer of business where no matter if you're doing pool building or matchmaking or you know

9:25um recruiting for the military it's all the same things you need you know marketing advertising Sales Systems you need accounting systems you need to make sure you're in compliance taxation HR systems recruiting means all the things that are the business of business uh is where we really feel like that we want to build expertise and we want to partner with firms that are deeply knowledgeable excited about talented in the thing that they actually do so you know we always say we're not going to be involved with the company that wouldn't be successful without us what we're trying to do is be good long-term partners and bring a talent about the

9:59business of business to them that typically most small businesses lack I mean we like to say often that small businesses don't say small on purpose there's a reason why they stayed small and usually there's some Lids on the business that we're able to release over over time that help the business grow I recently had uh Nick Huber on sweaty startup um and he has a really good saying which is you know if there's a fax machine in the building chances are there's an opportunity meaning you know there's a lot of Technology efficiencies when you see a fax machine because no one's really using fax machines do you think a lot about or do you

10:40encourage your teams to think a lot about technological efficiencies yeah I would say in some ways it's fool's gold and in some ways it is real gold and it just depends on the situation we actually we bought a company a couple years ago that um the we couldn't figure out why the orders weren't coming in and then we finally figured out it actually went to a fax machine that the fax machine was unplugged we plugged in the fax machine and orders started coming out so yes there are things like that that you can do that will improve the technology of the firm I would say the thesis that

11:14you're going to come into a small blue collar you know sort of Main Street business and transform the business in any sort of reasonable time frame with you know fancy technology is likely a pipe dream you're going to have a lot of cultural entrenchment a lot of inertia you're going to break a lot of systems and people in the process by trying to implement that especially quickly now over time time of course we always want to be pushing the companies to be sort of the Kaizen approach right the constant Improvement of the company I would say many because of the time Horizon of many investors being so short

11:50they don't have the patience to actually compound that technology advantage over time and so they've got to come in and break everything which by the way you can do and it'll work it just increases the range of outcomes that you should expect right so if you don't come in and change anything you should probably expect the company to perform kind of How It's performed in the past the more you start changing systems and changing out people it increases the upside opportunity but it also increases the downside opportunity so you just have to be careful uh when you start doing that what is the uh Kaizen approach it's just

12:25an idea that like you always want to be constantly improving every day in in sort of measurable ways so you know it's this idea it's just continuous Improvement right uh it's it's an idea that you know just because something's not broken doesn't mean you can't make it better and I think that's where a lot of we see small businesses fall into this trap of like you know so if it ain't broke don't fix it which leads then to have these Lids on the business that really keep them from growing and so we encourage our leaders to do is to say hey look um when everything's going great like

12:56let's not take it for granted let's continue to push the advantage and when everything's not going great uh let's use that maybe downturn and some slack in the system to improve everything like how do you think about technology businesses in general a lot of people who listen to this this podcast uh either run technology businesses or work for technology businesses it sounds like primarily the businesses you buy are more like brick and mortar type businesses is that is that fair to say yeah I mean we actually have one software-based business that we acquired uh last year which is I mean there's technology in every business but but

13:34that was a more technology forward business that we that we acquired so we're not luddites but yeah I mean what do I think about technology businesses I think they're incredible I mean I think that once you have an advantage and you know the the business model of a lot of these technology businesses are some of the best in the world right I mean software as a service is an incredible business model recurring revenue is is stickier than project-based Revenue there's a lot of advantages to it and Technology can do incredible things right in terms of you know specific businesses I think there's an ease in in

14:06sort of a hype cycle that I've seen where you know um maybe crappy business models get lumped in with great business models because it's all under the umbrella of technology and they get funded in a way that um doesn't make a lot of sense to me but that's not my world right and I mean there's a lot of people who are a lot smarter than I am who have done very well for their investors and have done very well by companies by funding things that I wouldn't have expected to work but again um we all have our our role to play my take is I think your motto would do really well

14:40in the technology World especially going into 2023 uh valuations are going down you know I haven't announced this publicly but we we just acquired a business that if you would have told me a year ago or two years ago I would have been like there's no way that team is willing to come work with us you know not that just just in the sense of like people are more interested to come together now uh during times like these and so you know valuations going down teams more willing to join uh bigger bigger companies um and then with you also like you said you said you said that hey like we're not

15:23experts in the swimming pool business we're in the you know business of business I'm pretty certain that your model I you know I'd love to hear more about how you underwrite businesses like how do you think about paying for businesses is it like you know a three to five times earning thing or how you think about it but yeah why wouldn't your model work for technology well it might I mean I again we bought a technology business last year so I think it I think it does my my um gut reaction is that the um competition and what people are willing to pay for technology for

15:58businesses is is typically just more than we can get comfortable with um so you know when we look at buying 10 million dollars of cash flow for 50 or 60 million dollars right and it's pretty predictable it's hard to go from that to paying a revenue multiple on something that has very little earnings and so it just it feels like a very different shift in the world now I understand why people pay what they pay for the technology businesses and there's people who do an excellent job of stripping out a lot of costs and you know I hate to use the businessy term Synergy but like

16:31creating synergies between businesses um I mean there's plenty of firms that are known for doing that you know we like to keep businesses intact and independent um and we'd like to take a a humble view I think the humility is is something I talked about in the annual letter the forms of humility that we try to exhibit are not only in not using debt and being humble in terms of what we know about the business and don't know about the business but also in the price that we pay if you pay a ton for a business the expectations are Sky High you've got to start doing a lot of things to generate

17:05that return if you pay a little bit less expectations can be lower and you can take your time so you know I think that we would not be opposed at all to continue to acquire and partner with technology companies we would love to do that if expectations were reasonable and I think there's a lot of publicly I don't fault technology owners for saying hey if somebody's willing to pay me you know 10 times Revenue over here and you're willing to pay me seven times free cash flow over here like I'm gonna choose the guy who's willing to pay me a lot more great no problem at

17:40all a lot of people ask me Greg how do you build products that Foster Community well I've got good news that's exactly what late checkout does my company we partner with the largest brands in the world and fast-paced startups to design products that resonate with your community we add a couple interesting clients every single year so if you're interested and that sounds like you email front desk at laycheckout.studio with what you're working on what you need help with and don't forget to mention the where it happens pod thank you my thesis is I think you're going to see a lot more inbound of Technology businesses in 2023 and I think some of

18:31those valuations are going to be reasonable and I think a lot of them are going to come from indie developers and teams so the equivalent of family businesses and Technology are these Indie teams where you're talking about two or three people who've iterated on a product I'll give you an example I just saw that a product I was using called tweetthunter dot IO was just acquired it's like a um build you know build and monetize your Twitter audience fast you know it's a monthly subscription uh I think they've got acquired for 1.8 million dollars my hunch is that that was like a reasonable valuation given where they were at

19:20that's one of the reasons why I wanted to talk to you frankly is because you know as we get more acquisitive in 2023 I think like yeah I guess this is a question for you which is how do you value a business great question I mean I think this is where uh at the end of the day what everyone's trying to do whether they understand it or not is trying to Value how much cash is going to come out of the business and win right I mean that's ultimately how any business is value the present value of future cash flows now there's a lot of differences in how

19:52you value and how you think about the cash flows that will come out and there's a lot of preferences for some people are fine delaying those cash flows for a very long time and some people are very excited about having those cash flows now and so this is where the the differences in valuation and preferences in the marketplace you have one person who's um excited about cash flows now they're probably not going to acquire a technology company with no cash flow and maybe even that needs to needs more at reinvestment ultimately what that technology company is trying to do is build future cash flows through Investments

20:27now and this is where you see incredible businesses like Google and Facebook or you know highly unprofitable for a period of time and then flip to profitability and now they just gush cash and you know uh it's incredible if you if you you know looked at their income statement in the very beginning it wouldn't have looked anything like what you see now and so that's the maturation of the business over time um in technology in particular is very sort of asymmetric and non-linear and so I think that's where you know I don't have a good predictability of a business that goes from you know losing a million

21:00dollars to losing 10 million dollars to losing 150 million dollars to losing a billion dollars like I don't have a lot of vision for how that business then ends up making 5 10 15 billion dollars down the road right I just see a lot of losses and you know seemingly a lot of ways to to lose money in that opportunity other investors see that and say that's exactly what they should be doing this is perfect they have all the heuristics and and sort of mental shortcuts to be able to see through the noise I just see noise now somebody else takes a look and says hey you know we

21:32just bought a really large fence Builder you know they literally put pickets in the ground and brackets and they build fences like these are not complicated residential fencing I look at that and say okay I I know what the demand for fences is I mean I can predict it based on net population migration I can look at it based on housing starts um the replacement cycle of fences you know you can sort of look at the predictability of that and you can see you know what is the labor flow look like what are the customer bases look like and you can extrapolate out okay over the last you know 10 years they've

22:06gone from X to Y to Z it looks pretty linear to Me Maybe we can come in and add some you know again sprinkle on some of the business of business that maybe they're lacking in de-risk the business increase the quality of earnings and hopefully quantity of earnings over time that feels much more predictable to me and so I can more easily value a business where I can see cash flows and can see the trajectory of cash flows than something where it's going to take a lot of reinvestment back into the business and a lot of assumptions to understand what what the present value of those future cash flows would look

22:39like and do you do you have a model for like we won't pay more than 7x earnings or we generally pay 3x earnings do you have boundaries that you set for yourselves when you're when you're valuing businesses yeah I mean I would say we maybe we can talk about the lower and upper bounds um so the lower bounds it's you know if you see a business that um you think has durability and you know is transferable you know a lot of smaller companies are just not transferable we we call it own remote where all of the value of the business is tied up in the Goodwill of the owner

23:15so the owner leaves all the relationships all the skills um everything kind of falls apart they're the linchpin right so a lot of businesses are just not transferable but if you see a business that you think is transferable and is durable you know three three and a half times uh true earnings so not ebitda depending on the capital intensity of the business but truly what is discretionarily coming out of the business um on an annual basis in terms of cash flow you know three three and a half times is really the lower bounds and that's going to be a situation of typically distress you know there's gonna be some some

23:52distress factor maybe it's age maybe it's illness divorce um there's gonna be some you know midlife crises happen um or three-quarter life crises happen I mean you know there are some something that's happening um where the the person who owns that says look even though I could probably get a higher price elsewhere I just don't want to go through the hassle and I want to find the right place for that for that asset you know three three and a half times kind of a lower bounds I would say of that you know on the upper bounds we have paid ten times in the past for a

24:27business I mean 10 times the question is 10 times what right it's a multiplier of what so you know my I always joke with owners and they're like well I was really hoping for seven times I say look you can make up a number and multiply by seven that's whatever you want to do um seven times what's the question so when you look at it you know typically what the multiplier is okay is it is it seven times previous year earnings is it seven times what we project to be the future year earnings is it seven times a blend of the last three years is it

24:54seven times ebitda is it seven times cash flow is it seven times earnings is that pre-tax post tax I mean you know you can do all these like you know multipliers of what really matter what I would say is of discretionary cash flow is sort of normalizing for Capital expenditures um and for reinvestment sort of necessary reinvestment back into the business you know we paid 10 times but that was for a business that was incredibly fast growing and that we felt high confidence in and we were able to get some preferential treatment in terms of the share class that we were participating in so look we paid three

25:25times for a business we've paid 10 times for a business those would kind of be the I would say rough you know yardstick to use in terms of range most of the time we're paying four five six times and again four five six times what uh four five six times what we think is going to be the trajectory of the business in the future it doesn't matter if you made you know 10 million dollars last year if you're going to make two million dollars next year you can't value the business on 10 you got a valued on two so we're always trying to understand what does it look like for us

25:54to be in the owner's seat and what do we predict to be the cash flows coming from it do you have any insight into when an owner should consider selling a business I talked about on the Pod uh in my you know 2020 to recap uh podcast that we had an offer an eight-figure offer to sell our business and we decided to decline it because you know we really like what we do we want to do it forever that kind of forced us into the position of like thinking about it do you think that just just like how you know every year you sit down and you write your

26:31letter should should a business owner every year sit down and be like should I sell my business I would say no I think that largely if if going through the exercise of do I want to sell or not is um unless there's a reason to I don't think it's a very fruitful exercise I mean you know you should understand what you have but I mean look if you think about it in terms of Private Business versus a public business if you owned a publicly traded company Greg like you would have prices shout out to you every second of every day of exactly what people think the business is worth right

27:02does that mean you should sell your position in the company just because somebody's shouting you a price like probably not right I mean you should yeah I'm proactive right yeah it's just different absolutely for private business owners because there's no one shouting prices typically at private business owners right so when somebody comes inbound and says hey this is how I value your business and you're like oh that's flattering that's interesting right I'm you know it kind of perks me up like I start thinking about what would it look like to not own this business anymore what would you know would I rather have 10 million dollars

27:33or would I rather have the business that's a good question to ask but no I I yes to answer your original question are there good reasons and bad reasons to sell a business absolutely um the good reasons would be changing lifestyle um a change in in sort of Need for time I mean again death divorce sickness are our three really dominant factors that typically you know reorganize somebody's life but there are plenty of others I mean we've bought businesses from people who are like hey I you know I've just figured out that I want to be a painter and as much as I you know enjoy the

28:08people and enjoy the business like my real passion is getting in art studio and painting fantastic that's a great reason to sell the business so there's a lot of bad reason to sell businesses though too you know primarily uh ego which uh you know I don't know how many people I've heard say well you know my buddy at the Country Club said you know he sold his business and he seems happy and so I figured everyone else is selling their business I should sell my business too and now I want to you know try to put up as big of a number on the board as I can so I can

28:37brag to my buddies about it that does that's not a great it's not a great reason um another not good reason is you know I want to time the market and I want to try to you know I know the business isn't going to do very well in the next five years so I'm going to try to screw somebody over and offload the steaming bag to them like that's probably not a good reason either um so you know I think that good deals are win wins for the buyer and the seller and that's ultimately if you can't look somebody in the eye and tell them that you think it's a win-win for

29:04both sides and I don't think you should do the deal uh shifting gears a little bit just I need to ask you I heard a little birdie told me that you had you had lunch with Charlie Munger once is that true I did yeah it's fantastic I mean uh Charlie was uh incredibly gracious and kind uh deeply thoughtful um very opinionated I like people who speak their mind and tell you tell you what they actually think and he certainly he certainly did that I mean it was a it was a fantastic time it was it was a great opportunity to sit at the feet of an elder who's been there and

29:40done that I mean I think I'm you know more broadly just I'm a big fan of asking people who have a lot more life experience than me and have done things that I would you know aspire to when they do you know ask about their mistakes ask them about their triumphs ask them about what they would want to know you know what I should be asking them even you know so got to ask them a lot of questions that you know is all off the records I can't really talk about you know what we necessarily discussed but it was a wonderful opportunity I'm really grateful for it

30:08I mean I see some similarities between what you're doing in Berkshire but also some differences could you can you talk more about that yeah I mean we're not trying to be anybody but us and I mean you know kind of directory the business that I run you know when we first started having cash flow you know you become an investor by default you're like okay I have excess cash what am I going to do and I you know my late 20s I was blessed to have a business that was Cash flowing growing and uh exceeded dramatically My Lifestyle needs and so um you know when you have money left

30:43over you start saying okay what should I do with it and you know during that period of time I spent probably two full years studying what I would call like kind of a the investing grades trying to understand what they did what were the mechanisms they employed and they're very different right I mean you read thorndike's book The Outsiders you know there's a really good uh kind of introduction to a bunch of people who are um some of the best investors of all time but like how John Malone did it it's completely different than how Sam Zell did it which is completely different than how Warren Buffett and

31:11Munger did it yeah I mean I would say we we try to take the best of what we liked about each model and you know be first principles thinking about our own model and um then just try to be us I mean you accumulate knowledge and experience and so in terms of Berkshire um you know they grew what I would call up in the market so there's kind of two ways to grow this is maybe something we we want to discuss but one way to grow is I think the more traditional way which is you do a deal and then you do a bigger deal after that and you do a

31:42bigger deal after that and do a bigger deal after that and you sort of grow up into larger and larger transactions as you accumulate more and more Capital the challenges with that model very few people can be good at every stage of the game I think this is what makes um buff and Monger so remarkable is that what Berkshire was 50 years ago and what Berkshire was 40 years ago and 30 years ago and 20 years ago were all very different things from one another you know when I've gotten to speak with those guys about the early days I mean they were deeply involved with their

32:17companies they were doing things so differently they were they had a completely different mindset and they matched the mindset and they match their skill set to the situation and the needs that they had at the time which totally makes sense there's just very few people who are that adaptable and are able to be learning on the fly like that over long periods of time you know I would say the the model that we prefer is to to grow out which is you do more deals of similar sizes or in you know sort of a similar range not bigger and bigger deals so as you accumulate Capital you say okay we're used to doing

32:52two deals of 10 million dollars a year 20 million dollars total you know sort of capital out the door okay well now we have 50 million dollars a year to put to work um do you do a you know double the size of deals or do you do twice as many deals I'd say is we want to go out not up we really like the area that we're in um you know we we think we've developed an expertise in a very unusual style of company where it's kind of a common link where they're too big to be small but too too small to be big they're like in

33:22this adolescent phase of business which I think you um have a lot of fruits it's more volatile to be honest um because obviously you know adolescence as well is volatility um but you know the volatility can be upside volatility as much as downside volatility and so there's real fruit in um helping take a company that maybe doesn't have as isn't good at the business of business as we've talked about and helping them get better at that while they have a really great core expertise in the thing itself that they do so that's the model that we've chosen that doesn't mean we won't get involved in in larger businesses I mean the last

33:55check we wrote was um a 40 million dollar check which is that's a big check for us I mean you know it was not too long ago that I was writing million dollar checks and and those seemed like big checks right to to be that large now maybe in 10 years we'll be writing 400 million dollar checks but we really like what regardless of the size of the check we really like to be with companies where we think there are growth opportunities that can come from a skill set or expertise that we can bring to the table I'm in a situation where I'm trying to become a better capital allocator

34:29never taken a finance course in my life uh have invested in oh really okay that makes me feel much better about it yeah I mean um yeah is that so that okay wait so you let's let's dive into that you haven't like no formal no education around Finance or anything like that because you seem to be like grooving your way through financial terms and writing checks and so you know well you fooled me well I just because you don't have a formal training and it doesn't I don't think mean you know I I've learned over time I mean I I was not one of these people I can barely

35:08open up Excel I didn't work at another firm you know I don't have a I don't have a degree from a a fancy School in in finance I you know I don't have any of the traditional markers you know I often joke that I'm the Forrest Gump of private Equity right um but I've learned along the way right you pick up Concepts just because somebody didn't teach it to you it doesn't mean you can't learn it um you know I've read a lot and um tried to really understand again the first principles of of what people are talking about and oftentimes jargon just covers up a lack of understanding so

35:38learned over time but you you said you want to be a better Capital allocator why do you think you're not a good Capital allocator now I said I want to become a better capital allocator and I'm saying that because in in my world I'm seeing a lot of opportunities you know I've done a lot of like seed stage series a technology investing probably invested in 50 companies uh late checkouts invested in probably 30 companies in the last two years some of those have become really big businesses but given what I think is happening in the market I just wanna I just want to become better you know

36:19yeah um and I think there's probably a lot of people listening to this that are like wow there's going to be a lot of opportunities that are going to come online and best be prepared so what would you what would you recommend to folks who who want to level up their Capital allocator skills in terms of places to go for that people to read books courses you name it yeah well maybe just firstly we can talk about what does it mean to be a good capital allocator and what does it mean to be a bad Capital allocator so when I think of good Capital allocation um I think of a keen understanding of

36:59opportunity cost is where it all really starts so everyone's going to have different opportunity costs opportunity cost means if I choose to do something I can't do something else but choosing to do something means you have access to an opportunity so a dentist in Des Moines is going to have a different opportunity set and different opportunity costs than you will now that doesn't mean yours are better than his or hers it just means that they're different so you got to really understand you know what opportunities do you have access to and why do you have access to them and how do you compare opportunities so this is where again as a series a

37:38investor seed stage investor you know you have an opportunity to invest in early stage companies that most people don't have access to so you got to create a rubric around what am I hoping to get out of those and what's the financial model that I'm hoping to to employ there at what expected return that we'll compete with you buying the S P 500 Index Fund competing with buying a house competing with everything else I'm making this up you probably have other opportunities so that that's where you really have to is a good Capital alligator you have to say okay I have to take the capital that I have

38:15and then I have to put it to work into some situation which is going to be sub-optimal there's no perfect situations there's no perfect returns there's no risk-free investing so you're you're taking risk and the question is what risk am I taking over what period of time for what expected return and then you just compare them and you say okay this is where Capital allocation becomes an interesting art of assembling a portfolio that maybe zigs and Zags in different scenarios right so if you have only seed stage investments in technology firms that are only in Silicon Valley I'm making this up right there's probably going to be a pretty high

38:54correlation between those Investments that may create unbelievable upside and unbelievable downside and depending on your risk tolerance and depending on how you think about holding cash and other Investments you might have that may be fantastic for you or maybe the dumbest thing you could possibly do that's what I'm saying is everyone's different what you have to think about is under what scenarios will it produce what return and what do I need that return for so it'd be really stupid if you said okay look I need to buy a house in two years I've got five million dollars I'm just making up a number um and I'm gonna go put that into early

39:30stage seed Investments because typically early stage seed Investments are not going to pay off for 5 10 maybe even 15 years right in terms of when I say pay off I don't mean Mark to Market I mean cash in your bank account that you can go spend on a house so that'd be pretty dumb right I mean if you say that that that's the objective I'm trying to meet is to buy a house in two years for God's sakes don't put it in early stage seed Investments now you could take that same amount of money and say yeah I'm gonna put it in the s p

39:58because it's liquid and I feel comfortable taking the risk that the Market's going to go up they're down or whatever it is and I maybe don't need five I need three of that five and I feel comfortable with a you know a sixty percent draw down I'm okay with that I want to take that risk because maybe it's a 60 melt up right um you know conversely somebody else who says okay look I've got five million dollars of cash on hand I've got a great Diversified portfolio of real estate and you know whatever else other you know sources of income maybe a W-2 employee some somewhere

40:29I'm good on the cash side I've got this five million dollars and I just want to try to generate the the best return I can possibly generate in that case and you have access to it maybe seed stage Investments are the best possible thing you could do those resources so there's no right or wrong answer it is trying to pair up your needs time Horizon to need and expected return to opportunity cost like what I want to do with you selfishly is just like open up all my books and just be like all right well how would you you know you're you're me you're you're us like what would you do

41:00I think like one of the things that is difficult is a lot of capital allocators are in their own world like you might be in your world and I might be able to look at your books and be like hey you actually like there's this whole new set of like community-based businesses or software businesses that are coming up that are going to be at you know this valuation that it might make sense to take you know five percent of your Capital to go and allocate for these reasons but vice versa and I I actually think I can gain a lot more than you potentially can gain but vice

41:34versa I think like having that feedback is is super super key and like I feel like Finance is pretty a lot of people keep it to themselves yeah people are funny about money right yeah I mean exactly because money money is money is in in some ways um a tool and in some ways the measuring stick and in some ways the comparison between people and some ways people see it as the judge of their value and so there's all these entanglements with money that have nothing to do with the actual money itself um exactly so yeah I mean and you're right people are in their silos I mean

42:13look I I I'll talk transparently about my finances I hold two types of Investments I hold highly illiquid small private Investments right in these companies that we that we've Acquired and cash and that's it like literally I have the the it's the most barbell strategy I've ever seen right now it's important because small private Investments are highly volatile and uh when you have an opportunity you need to be able to have cash on hand to be able to not need any permission to go and do it and so yeah even though I don't earn much on my cash and inflation is sub-optimal you know I think that the opportunity

42:54cost of not holding cash is quite high for me and so I don't invest in the stock market I don't invest in bonds I don't typically invest I mean some exceptions in other managers I don't invest in um you know early stage investing I don't invest in any of that stuff I invest in small private highly cash flowing companies and you know take that cash Harvest it and hold it until I want to redeploy it back into that same sector okay so we have a good understanding of what it means to be a good Capital allocator now how does one level up their skills and where could people go to on the Internet

43:33or yeah where can they go to learn I'm a big fan of reading older things that have stood the test of time and so if you think about many of the best investors of sort of our generation are steeped in thoughtful things were written quite a while ago and so I would go back and read what I would call the classics right now depends on how you define it and a lot of these by the way are people roll their eyes out and they're like oh everyone's read these well look if you're if you're already at the level where you've read all of the the greats

44:09then like why are you taking advice from me you're probably a better investor than I am right like that's fine um but I'm probably going to say the things that that most people who have been in this space have done which is go back and read The Berkshire letters and when I say read the letters like get out of you know print them out put them in a binder and like turn off your phone and go get a pencil or pen out and mark them up and when you come across a concept that you don't understand and I mean you got to really test yourself do I really

44:42understand what he's talking about do I understand this concept fully if you don't put your pencil down and go research it Google the out of it right and try to figure out what people are saying about that concept and really try to make the connections between that concept that he's mentioning and maybe your own life or your own investing it takes it's a it's a slow process to really you know it's one thing to to read about something to learn about something really a different thing to understand it have it sort of seep into your uh logic and process systems but I would say the Berkshire letters are an

45:12incredible education uh and and like anything else like I mean Buffett's been writing for a long time like the early letters have a lot of the same things the later letters do they've just been repeated in sort of different situations Howard marks is another one that I think very highly of um you know I have not uh I think that that his early letters especially um so these are letters from A chairman of uh oak tree uh Capital seems Howard marks um very famous dead investor um certainly benefited from uh falling interest rates over over basically his entire career but he's just an incredible thinker and a thoughtful guy

45:49and and kind and generous and I would I would you know especially as early letters I would read them Book Like The Outsiders will in you know definitely increase your surface area of awareness of a lot of different investing Styles I think that's the key the key is how people do things are very very different people's thoughts on debt people's thoughts on risk tolerance people thoughts on sector on stage of company are all going to be so different what you want to do is you want to go and Sample you know who are the best early stage investors and why are they really good do they just get lucky over and

46:20over again or does there some something in the system that they've created right and can you replicate that better replicate part of it or do you even want to replicate part of it that's going to be very different than somebody who's investing in heavy technology or heavy capital expenditure businesses or you know industrial businesses or turnarounds or small companies medium-sized companies large companies public private I mean there's all these different people that are out there you know choosing a very uh Niche thing to invest in I mean there's people who invest only in funding lawsuits right I mean this the the amount of things that you can invest in are almost Limitless I

46:56mean there's a guy I know who he's the largest um supplier of debt to the watermelon industry right like you'd never guess that in a million years so there's a lot of these really interesting niches that you can fall into but you got it before you before you choose your sort of off the beaten path thing that you want to go do if that's what you choose to do and become a sort of professional investor in that area you've got to learn what the path is and to study the path is to study the sort of the people have gone before you and have done quite well

47:26that's not a good enough place to wrap up I don't know what is um there's a temptation to follow you know the IT person but there's just so much wisdom in in the grades so I think that's and I loved your idea around like okay go spend like two hours every week or an afternoon every week and go read a Berkshire letter grab like a pencil and a highlighter and a notebook and write about it and I think actually what could be fun is also like you know grab a group of people to do it with sure um just do something though don't don't not do it because you can't get the

48:06group together yeah you know so I could just go do it and you can be like us who don't have Finance degrees too amen you don't need to finance degree teach yourself it's all on the internet I mean honestly like I owe most of my career to Google I don't I mean I I'm not joking when I say that I mean literally um I called a a local lawyer that I had at the time whenever I had the opportunity to buy my first business it was very I had no capital I took an SBA loan and I said okay so what do we do next and he said well we need a due

48:37diligence so I literally typed into Google do diligence due diligence right and then it pops up d-u-e diligence I'm like what is what does it do oh do that's what he meant and then I'm like what are you know are there lists out there and like you start googling lists for due diligence honestly like there's no better way to do it than just to hop in and just try to be humble and learn I appreciate it uh where could people learn from from you well permanentequity.com is our website we have a lot of we've written a lot on there we have a lot of things published

49:13um under the resources tab our view on the world and investing and operating and that's probably the best place I mean I'm on Twitter and Linkedin and all the all the places not all the places those are the only two places but um yeah I mean I'm pretty accessible if I can be helpful to anybody feel free to reach out yeah grateful to be on the show thank you thanks foreign

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