Intro

Patrick: [00:01:21] This week's conversation is an ode to old school, fundamental public market investing. My conversation is with IMC's Connor Leonard who spends most of his waking hours thinking and reading about markets. His mandate is to invest purely as if it was his own money, with no pressure to hug a benchmark and no pressure to do much of anything other than earn strong, long-term returns. The portfolio that results from this approach is highly concentrated and unique. Connor's strategy is to sort companies into four categories based on their type of sustainable competitive advantage. As you'll hear the vast majority fall into the first category, which means they have no such advantage and therefore should be largely set aside. We spend the majority of our conversation talking about the other three categories; one, companies with a legacy moat; two, companies with a reinvestment moat; and, three, an interesting category that Connor calls capital-light compounders, which we explore in detail.

When you step back and think about public markets, you realize how amazing it is that we can, from afar, buy an interest in so many companies around the world. A select few go on to deliver outstanding returns. This conversation highlights how hard that can be, but also how fun and ultimately rewarding. Please enjoy my talk with Connor Leonard.

Trends in Public Markets and Background on IMC

We were talking about one of the trends that you're noticing in value investing. So maybe we'll just start there in the middle of our conversation.

Connor: [00:02:36] Sure. So I think that there's been a change over time in value investing from quantitative to qualitative. So what I mean by that is if you were to go back to Security Analysis, Ben Graham's work or even looking more at like Seth Klarman stuff from Margin of Safety, a lot of it is, you're looking for statistically cheap securities. So the classic example would be there's a host of banks that are on more or less the same. They trade for one times book value. Then there's this one bank that happens to trade for 0.5 times book value. And that would be your opportunity to essentially arbitrage - you're buying a 50 cent dollar, when it gets to 90 or 95 cents, you would sell. What I've seen lately, and I think you have a role in some of this, is that those statistically cheap kind of no-brainer opportunities are in a sense being picked off by quantitative models or just different players in the market, which historically haven't been there.

Maybe you see some of this still, but I don't see as much of nine banks being at one times book value. And then the 10th one for no reason is at 0.5 times book value. So I think the game is shifting towards more of a qualitative game. So what I mean by that is, some of the businesses that I'm looking at people ask me, "Well, yes, you're looking for a long-term growing business, but how do you value that?" Well, I think part of it is you're not valuing it based off of a static multiple today. You need to have a little bit of a qualitative aspect. You need to say, I'll just do an example, this is not a security we own but Zillow Group is one I just looked at recently that earns essentially 0% margin. It's a similar business model to Rightmove, which is in the UK and earns a 70% EBITDA margin.

I'm not saying Zillow can earn a 70% margin but if you study that other business model, of a company that's a little bit more mature, and then you apply it to a company today that hasn't quite gotten there, you can see where their earnings power will be. That's something that a model or a chart in Value Line isn't going to pick up on. So I think that that's where the game is moving because it's harder to replicate. You need to study a lot of different business models and kind of put it all together and apply it to the situation that's right in front of you.

Patrick: [00:04:42] So we get into a lot of these concepts in some depth. Maybe we'll back up a bit, just tell a bit of your backstory, talk about your business and the history of the business. Because I think it's fascinating and is an important part about how you think about public markets.

Connor: [00:04:55] Sure. Well, it's not my business, but I think it's one of the lesser known business stories that I think is really interesting. And outside of North Carolina, I don't think the IMC story is very well known. So IMC is a privately held holding company in Raleigh, North Carolina. It's controlled by the Maynard Family. It was set up in 1971. It was a legal entity that James Maynard and a business partner used to raise capital. They raised $50,000 from friends, family, local businessmen, I think their middle school teacher was even in there. And their goal was to start a restaurant business. That restaurant was Golden Corral. It's gone on to have an incredible multi-decade run. They are now the number one buffet and grill restaurant. I think they have $1.7 billion in system sales, 500 locations and it's an 85% franchise business. So the best part is that that original $50,000 that went into IMC remains the only outside equity capital that's ever gone into the business.

They are now the number one buffet and grill restaurant. I think they have $1.7 billion in system sales, 500 locations and it's an 85% franchise business. So the best part is that that original $50,000 that went into IMC remains the only outside equity capital that's ever gone into the business.

Patrick: [00:05:48] Crazy.

Connor: [00:05:49] And some of those original shareholders are still shareholders in IMC, and it's been a phenomenal run of compounding. I'd say one of the issues, and when I say issue, it's a good problem to have with a franchise or a capital-light business model is that they generate a lot of cash, but there aren't always obvious opportunities to redeploy that capital inside of the business. So you have a decision to make as an owner. Do you send the cash out of the business or do you keep it in the business and maybe acquire other companies?

So that's the process IMC went through, I think beginning in the 1990s, the Maynards are big fans of Berkshire Hathaway. They really liked the Berkshire model and they tried to mimic that in a sense and use the cashflow that Golden Corral generates as a source of permanent capital to fund the acquisition of other privately held businesses. So the same way Berkshire uses insurance float, we use the cash from Golden Corral to get the ball rolling. And then today we have eight businesses that we own privately. We're actively looking for majority acquisitions, typically five to $25 million of earnings power, or earners earnings. And we're looking for the capital-light or franchise type business model to kind of add to our family of companies.

So a perfect scenario for us would be family owned business - maybe there are three family members that own it, two would like to exit the business, one would like to stay on and run it. And we think that we could be an ideal long-term home for that business. So that's our core business. That's what I've spent a lot of my time on. I've been fortunate to work for the Maynards my entire career. And I've done public investing, private investing. I've been on the board of one of the companies we own, I've worked in one of the companies we own. So I've seen business from a lot of different angles. But what I really love to do, and my passion is public market investing. So I was fortunate that a couple of years ago, they set me up as an internal investment manager in IMC, where I can take that same private acquisition mentality, but apply it to the public markets. So I have a portfolio that I think of almost like a conglomerate, the same way IMC is a conglomerate. The difference is, when I buy a business, I buy through the public markets. I get a quote on it every day and I'm typically a minority holder and the prices will fluctuate, but I don't think of them as pieces of paper. I think of it as businesses that I own. The same way IMC owns a collection of businesses.

Patrick: [00:08:01] So maybe you could describe why it's public markets that you enjoy exploring or maybe even feel there's more of an edge in public markets, having spent a lot of time in all aspects of this business. Just talk about public markets investing as maybe as an advantage.

Connor: [00:08:15] Well, I think when you're buying a company privately, you're typically buying the business from an owner who knows it exceptionally well, and they know exactly what that business is worth. They're probably selling it at an opportune time. And if you offer 50 cents on the dollar, unless they're in a distressed situation they're probably not going to be interested in that. The different dynamic in the public markets is I get a quote every day, I'm buying a piece of the business, probably from a secondary party. So I might have the ability to know more about the business than they do. They might be selling for non-economic reasons. And I can use that volatility to my advantage where typically a business, especially the ones we're looking for, they're on a somewhat steady path. Hopefully they're increasing intrinsic value gradually over time but the price that you get quoted on everyday can fluctuate all over the place.

So if you apply that fundamental business investing, but to the public markets and you're patient, you can pick off that business, maybe when it's a little bit out of favor and then own it over a long period of time and capture that compounding of intrinsic value.

Patrick: [00:09:21] So intrinsic value is a key idea here. So maybe the advantages that you can maintain, it doesn't need to be precise, but some range of intrinsic value. And when you see the markets get way off base, over or under, you can act. And that's the inherent advantage of public markets. So talk about the notion of intrinsic value itself. How do you think about that concept? How many companies can one person responsibly maintain a range of intrinsic value for, and kind of what's your process for driving it?

Connor: [00:09:48] Well, I think if you go back to that qualitative versus quantitative, traditionally people think of intrinsic value as static. So you think of I'm buying a dollar for 50 cents. I tend to look for businesses that are a little bit more dynamic, where they're actually taking the intrinsic value of $1 today and increasing it to $2 over time. So I'm not as much looking to buy a business at a discount of intrinsic value and then sell it when it's fully appreciated. I'm looking to buy one, for I'd say, fair or slightly below - so a decent discount - and then hoping to latch on for the ride as it goes from $1 to $2. So the way I think about it is I'm trying to make money more as a business owner rather than sort of jumping in and jumping out at the right time.

And the reason why is sort of tied to the advantage that IMC offers just as an entity to do investing work out of. So we can legitimately apply a 5 to 10 year time horizon to our public markets investing versus I'd say most of our peers, who are maybe on a three to six month time horizon. So if you're investing for three to six months, frankly, the quality of the business, the return on invested capital, the runway that they have to redeploy that, it's not as much of a factor in terms of will your investment be a success or not. It's more about sentiment change or multiple expansion. So I would say that's an incredibly competitive game. I'm a one man investment operation. I don't want to compete against funds that have a $100 million research budget, who are forecasting Netflix's subscriber gains within 1,000 for next quarter. I'm going to lose that arms race. But if I can look out on the curve 5 to 10 years where there's fewer people who have the willingness or the capacity to look out there, and then I find a business that I think can compound intrinsic value at 15 to 20% internally, and I can buy it for a fair price and then stay with it along the way, which is a very tough thing to do - to almost not get in your own way, that's our business model.

And the thought process there is that, one, it's less competitive because not as many people can play that game. And then two, you get leverage on your decisions. So in that short-term model, you need to be constantly going back to the well and finding new ideas, new ideas, and you're turning over your ideas frequently. Versus if I do my work correctly and my thesis is on point for one investment that I can own for seven years that compounds internally at 20%, I got a lot of leverage off of that work I did. And so that's a better business model for me. And I'd say it doesn't work for everybody's personality. And a lot of investing is, there's not a right or wrong way to do things, but it has to match your personality. And so for me, I love looking at hundreds of companies a year and only pulling the trigger on one and then owning it for six years. That works great for me. I think for some people that might drive them crazy.

Competitive Moats

Patrick: [00:12:36] It's a good transition into a really neat framework or stages of categorization for how you think about different companies. And it requires us first to talk about the concept of moat. Moat is an idea that everyone's familiar with, it's maybe become even too popular as an idea. When I think of moat, really, I think about return on invested capital as a key metric. The rate of return that people are earning on their own investments within companies. You mentioned the $50,000 invested equity capital. So the return on equity is ridiculous for IMC and for Golden Corral and the franchisee model. But talk a little bit about the ways that you categorize moats. So as you're going through a hundred or 200 companies, kind of how you're labeling them and we'll go into what each label might mean for your activity.

Connor: [00:13:20] I think Pat Dorsey has been on your podcast, he does a really good job of defining first, "What even is a moat?" I think it's a structural advantage inherent to a business that allows you to earn great returns on capital. So why is that important? Well, if you're actually going to own a business for 5 to 10 years as an outside shareholder, you want to have some confidence in terms of where's the earnings power of that business going. There's a lot of businesses out there that I think provide a good service, good people - just think of a gas station in a small town or a convenience store. Those are good businesses for that community, but in terms of what are they going to be earning seven years from now? I don't really know. So that's why I focus on businesses that have these structural advantages. It's because I want to have conviction over where's this earnings power going.

So then when you get into the world of moats, and this is a very small percentage of companies that are out there, it might be 5% or less. You're looking for a business that is earning high returns on its invested capital - that would typically be the best indicator. But I think within that world, there are two buckets that I classify. One would be a legacy moat, and one would be a reinvestment moat.

So we'll start first with the legacy moat, because I think within that world, this is much more common. And a legacy moat to me is a business that earns high returns on prior invested capital. So an example of this would be a self-storage facility. Imagine you and I owned a self-storage facility in a small town. There's limited competition, has high occupancy rates. It's a good business. Maybe we invested $1 million into constructing this facility and it's cash flowing $200,000. So that's a 20% return on our investment and we're very happy owners. That's a great business, but the question is, what do we do with that $200,000 at the end of the year? Well, ideally we'd love to build another self storage facility. But maybe due to our geography or the population there just isn't demand for a second facility. So now we really have a couple options. We can distribute that out to ourselves, or we can maybe buy another small business in our community. But chances are, we're not going to earn that same 20% return on that cash that the business generated. So that's your legacy moat.

I'd say bigger examples that you'd see in the public markets would be a business like Coca-Cola or Hershey's. These are companies that people love to classify as having moats or high quality. And they definitely do. They earn incredible returns on capital. The issue is they have nowhere to put them. So Hershey's and Coca-Cola each distribute out 80% or more of their earnings as dividends. And I think that's the correct move. But basically that high return on invested capital, it's not worth as much to us as owners if there's nowhere to reallocate and get those same rates.

So then you look at the world of what I call reinvestment moats, and this would be like the elite sector of...

Patrick: [00:16:14] One percenters.

Connor: [00:16:15] Businesses with moats, right? So this would be a company that has all the advantages of the legacy moat, meaning your current earnings power is protected, but you also have a long runway to redeploy that capital in the business at high rates. This is where the compounding really comes from. So an example I like to use is Walmart in 1972. So they had 51 stores open at the time, the business earned exceptional returns on capital, it's 52% returns on net tangible assets. So if you think about within those small towns, those 51 stores, those were a legacy moat. If you're Sam Walton, you can count on that underlying earnings power, probably staying stable or increasing over time.

But at the same time, when it comes to capital allocation, it was a very simple game. He was just going to open as many stores as possible, as far as the eye could see. So Walmart had a reinvestment moat. They had a great economic model, they earned high returns whenever they built a store and they had basically endless runway to build stores. So if you fast forward to Walmart today, it's approaching 12,000 stores, and sales and net income are both up 5,000X from that original 1972. So those are the types of businesses we're looking for.

I'd say in summary, the legacy moat preserves your current earnings power and it preserves intrinsic value. And if you already own a legacy moat business, let's say you owned it privately, I would not advocate selling it - it's a great business to own, but I'd say for what I'm looking to do personally, within our portfolio at IMC, I'm more focused on the reinvestment moat type business model because I think it can not only preserve that earnings power, but increase it over many years. And I'm just hoping to latch on for the ride.

Patrick: [00:17:57] As you have evolved your thinking, there's a final category which I'm really interested in, which is what you call a capital-light compounder. So in the Walmart example, you expand CapEx, right? You're building a new store. Maybe you're earning great returns on that store, but it requires capital. So talk about that last category of capital-light compounder maybe with an example or two, and then we'll start to dissect how you look for these things, markers of them, and then some more of the interesting questions around the different types.

Connor: [00:18:23] So this category came up because somebody asked me, "Well, what happens if a business can grow without deploying any incremental capital?" And I thought to myself, well, that's even better. So there's this other group of companies, I would call capital-light compounders, and these are businesses that can increase their earnings power, therefore increase their intrinsic value without actually deploying any incremental capital. So they can kind of have their cake and eat it, in a sense. An example of that would be Rightmove in the UK or any business that is maybe a classifieds business, a two-sided network business, a subscription business model. So the factors you're really looking for there would be negative working capital.

Patrick: [00:19:07] Float.

Connor: [00:19:08] Float basically. And that comes when your customers pay you upfront. So that's why it's typically a subscription business and that benefits you as a business owner because your customers are in a sense financing your growth. And then you're looking for a business that's more reliant on intangible assets versus physical assets. So I think your classic manufacturing business, well, how do you grow? You build a new factory? Well, that requires capital investment. If you take a business, that's a two-sided network like a marketplace business, a classifieds business, they can add incremental customers and it really doesn't cost them much. The incremental margins are incredible because once you already have the platform built out, sure you have to add some new developers over time - there's some costs as you grow - but the incremental margins are just incredible.

Evaluating Classifieds Companies

Patrick: [00:19:58] Can you talk about classifieds as a fun one to roll with and get into a little bit more detail. That will resonate, right? It's a pretty simple thing but maybe in as much detail as you can explain why that represents such an interesting business model, classifieds specifically?

Connor: [00:20:12] So when I say classifieds, think of Craigslist, which is privately held in the US, and then there's a host of other companies internationally, that would be the Craigslist of Sweden or New Zealand or Australia. I mean, a lot of those are publicly traded. The interesting thing about a classifieds business is that it's a very difficult business to start up. It's sort of the chicken and the egg problem. Let's say I have something that I want to sell, maybe it's an old couch, or where do I want to sell it? I want to sell it to whatever site has the most buyers. Well, where do the buyers want to go? Well they want to go wherever the most couches are, if that's what looking for. So you kind of have to get that network effect started up.

And what I'm really describing there is liquidity, you need to get liquidity in your marketplace. And typically as you are building a business like that, you would forego making money on it or monetizing it as you build up your liquidity. And as you build up your liquidity, you're widening your moat constantly. And typically what happens in these businesses is you get to a point where it's essentially a winner-take-all type dynamic. Why wouldn't you sell your couch on Craigslist? That's where the most eyeballs are. You'd be crazy to go anywhere else.

So what you'll see in these various markets around the world is that the dominant classifieds business will have three, four, five up to 20X the market share of the number two. And there's a company out there, Schibsted, in Sweden that's one of the premier owners and operators of classified businesses in the world. They've basically said that if they try and enter a market and they can't get to that number one position in classifieds, they'll just give up, they'll kind of pack their tent and move on because there's really no point. So that shows you the strength of the moat. Once you've built up that liquidity and you've built up the network it's almost impenetrable. And I think the best example of that is Craigslist. I don't know how much they've invested in their websites since 1995.

Patrick: [00:22:05] It looks the same.

Connor: [00:22:05] It doesn't look like a lot and still they're the dominant force in the US classifieds business.

Patrick: [00:22:11] So from an investment perspective though, so let's say one of these is public, maybe the one in Sweden, there's a price that you have to pay. Markets are smart. They know that probably this business model is fantastic and they're probably willing to pay a premium. So maybe it's something that value investors miss but quality investors or even growth investors probably are very interested in these models. So how do you think about them then, just rolling with that same example, as emblematic of that kind of broader category, how do you think about when they might be an opportunistic buy, right? So, and the answer might be just that the market never properly discounts the kind of compounding that's inherent in some of these things, but how do you think about price as it relates to these kinds of companies?

Connor: [00:22:50] I really learned this business by studying Seth Klarman and some of those traditional value investors. And I think a lot of value investors have that hard coded in our DNA, that you can't pay above 10 times earnings for a business. You can't pay above book value. And I think that that's certainly a great investment strategy and a lot of incredible careers have been built on that, but I think it can bias us in some ways against businesses like this, where a lot of these classified businesses have been publicly traded for a decade plus and when they were listed a decade ago, they traded at 20 times EBITDA.

And so a typical value investor would look at that and say, "No way I can't touch it." I think if you take a deeper look at it and you see, okay, this is a business where, pretty much, EBITDA equals free cash flow. So these are real earnings that you could put in your pocket as an owner, they have long growth runways where some of these are growing 20 to 30%, and even some that have been listed for 20 years continue to grow 10% plus. So very long runway. And then if you pair that with some really good capital allocation, meaning if you have a management team who actually responsibly uses that cash to buy back shares, or to send it out to the owners, in a lot of ways 20 times EBITDA can actually be really cheap. Now you have to have conviction on all those factors. But I would say for a classifieds business, in a lot of cases, 20 times EBITDA is incredibly cheap. And so the advantage that you could have there is just framing the problem a little bit differently.

The other thing that you might look for is a business that isn't fully earning what it potentially could be earning today. So typically when you're starting up a classifieds business, you forego current earnings to widen the moat. You're basically saying, "Our focus right now is to get as many buyers and sellers on our platform. And we will try and maximize our profitability in five years or 10 years because as long as we build up that base, we're in this incredibly dominant position where we can then focus on monetizing it." So if you were an outside investor looking at a company that's EBITDA negative, let's say, but it's because it's growing 100% and because they're focused on building up that liquidity, as long as you have conviction on where it's going, you might actually be able to buy something that's incredibly cheap based on future earnings power. You have to have the patience to stick with it. But that's something that we think we can bring to the public markets that maybe not everybody else can.

Network Effect Businesses

Patrick: [00:25:12] Talk about, maybe some of these other businesses that have become so popular in the public discourse with a two-sided network effect. So the platform business model - the Uber's, the Airbnbs of the world. So it's interesting with Uber, for example, it's still obviously a private company but they consume enormous amounts of capital. How do you think about that kind of general category of popular technology companies given that they certainly seem to have some of the markers that you're talking about? How do you think about approaching those businesses?

Connor: [00:25:41] I think they're all exceptional businesses. I think Buffett's touched on this a little bit recently that it's a unique time in American business where the biggest businesses that are growing the most actually deploy basically no tangible capital. So that's just a really big shift from, think of railroads or different business models that have dominated in years past. So I think, for us, I'd say those businesses are a little bit more in what I call the major leagues, meaning Facebook, Google, companies like that. We're talking hundreds of billions in market cap. So many analysts and funds are following that. So what I like to do is study those companies intently, but then apply those business models hopefully to something that's more in the minor leagues.

So what I mean by that is my sweet spot for an investment might be 500 million to 5 billion of market cap. And when you get down there, and it might even be in a foreign country where there's just not as many US analysts or US funds looking at it. So I study those companies, not really with an intent to invest in them, but to learn from them, then hopefully apply that to the smaller companies where if I'm right on it, that business could conceivably go up 5 to 10X versus Facebook or companies like that today, who just might run into the law of large numbers at some point.

Patrick: [00:26:57] Talk about maybe if you can an example of a company today, to put some of this in context, maybe in that $500 million to $5 billion range that looks really interesting and we can walk through kind of why it does.

Connor: [00:27:07] One company I've talked about publicly in the past is Zooplus out of Germany. They're Europe's largest online pet food retailer.

Patrick: [00:27:15] Okay.

Connor: [00:27:15] So they sell 50% of all the pet food online in Europe. It's a business that gets me really excited for a couple of reasons. What I'm really looking for as an investor would be a business that has a great competitive position today, a business that I think can widen its moat over time, that has structural tailwinds, and then has a management team who has that long-term mentality, that's willing to forgo short-term earnings to grow the long-term intrinsic value.

What I'm really looking for as an investor would be a business that has a great competitive position today, a business that I think can widen its moat over time, that has structural tailwinds, and then has a management team who has that long-term mentality

So the highlights on Zooplus would be; only about 7-8% of all pet food is sold online, I think in other markets online penetration is 20 to 50%. And I think that over time pet food will get there also.

Patrick: [00:27:55] Are they purely online, do they have brick and mortar?

Connor: [00:27:57] Purely online. They sell pet food across 30 European countries. And I think, just from a consumer perspective, buying pet food at a store is sort of a pain. It's not a very fun process. It's a heavy bag. It's the same product every time, so it's really more of a chore. A business like TJ Maxx can give the shopper an experience, the thrill of the hunt. Pet food doesn't really have that. So it's something that you're basically buying almost like a subscription. And it works really well as an e-commerce business because while most e-commerce businesses deal with about 30% returns, pet food it's only about 2% return. So pretty much the dog gets the same food every month and as long as that's working, you're going to order it again the next month. So it's sort of a recurring revenue business model.

The whole pet food market is one that I like to spend time on and just look at companies in there because you've got this trend, the humanization of pets, and what I like to say is, humans have been domesticating pets for 15,000 years. That's what the book Sapiens said, but it's changed a lot I'd say in the last 100 or 200 years. If you went back a couple hundred years ago, pets lived outside, they got table scraps, if something happened with the pet in terms of health you wouldn't necessarily take...

Patrick: [00:29:09] It died.

Connor: [00:29:09] I mean, they basically took it out back, right? So today, you've got the dog spas, the organic dog food, the dogs that go through these elaborate surgeries. And the reason why is because people think of pets as part of their family. And so if you feed yourself organic food, then of course your dog would want organic food too. So what you see, and this is across the world, the pet food market is incredibly resilient, meaning in recessions, you're still going to feed your pet. And it's also growing because people are spending more of their discretionary income on their pet. So it's growing 2 to 3% a year.

So really with Zooplus what you have is the overall pie growing a couple percent, and then within that pie, you have online structurally taking share from brick and mortar. Because basically if you buy pet food online, you pay less money, you have a bigger selection and you don't have to carry the bag to your car. So it's just a really good proposition all the way around. They've got a great management team, they're founders, they own 5% of the company and they really have a nice long-term view on the business. They're not focused on next quarter's earnings, they'll basically tell you it's irrelevant. They're trying to focus on how can Zooplus continue to have 50% market share in this niche market when maybe 25% of pet food is sold online. So that's the type of business that is, I'd say, right down the middle of the fairway for me and I'll make that a fairly material position when I find a company like that and then sit back and hopefully they do the work for us.

Patrick: [00:30:32] They do the work for you.

Connor: [00:30:33] And we just hop on for the ride.

Patrick: [00:30:35] I'm always interested with, it's tempting to always talk about the end of the process, right? Where it's a company that you found you did the work, you buy it, you hold it. I'm always interested in the path that got you there, because as a quantitative investor, it's all about screening processes, factors, et cetera, very rules-based. But I recognize that a lot of fundamental or more discretionary types of investing follow a much more winding path to reach a given company. So maybe take Zooplus as the example, what was the groundwork that was laid that ended up with you finding this company? How did you find it? Why did you get interested in pet food? That sort of the process behind the scenes is always fascinating to me.

Connor: [00:31:11] Well, I would say, I wish there was a secret publication that had all the best ideas, that's just not the case. It's really, it's a combination of a lot of factors. I'd say; one, I'm just constantly reading all day every day, and that can be a range of publications. It's newspapers every morning, it's trade journals, it's reading other companies filings that I'm interested in, it's reading annual reports. And so you're just trying to get as many data points as possible. And then my job is to really filter those data points. So when I get a company that kind of comes across my radar, like Zooplus, in this case one of my friends told me about it. He's another investor and I respect the way he looks at businesses. And I found that to be a really good source. Not for making an investment decision, but if you think about it, I think there are 20,000 publicly traded companies in the world and I'm a one man operation. So how do you sift through all that?

Well, if you talk to other investors you respect and admire and they say, "Here's one of my favorite positions," that's a great one to put on a list and say, "I'm going to read that annual report and give it a shot." So that's how Zooplus specifically came about. And I think once you're kind of in there looking at the company, I really break down that process into, I'd say two parts. I really think of myself part as a board member and part a journalist. So what I mean by that is, when I'm initially screening through a company, I'm trying to put on my board member hat. I'm trying to find the three to five key variables that really matter for the business. And why I say board member is that a lot of people in this industry are investment analysts and their job is to know everything about the company that's ever existed. Where did the CFO go to high school or something like this, and you can get really bogged down in the details. I mean, you read the last 10 years worth of 10Ks, or 10QS and every single earnings call transcript that has ever happened. And I think you can get a little bit lost in that. So what I like to do is sort of take a first step back and say, "What are the three to five variables that really matter?" Because in my experience, if you get those right, and of course, you'll go through the details just to make sure, but typically you can simplify all great investments into maybe just a couple paragraphs, and it will be those three to five key factors.

What I like to do is take a first step back and say, "What are the three to five variables that really matter?" Because in my experience, if you get those right, and of course you'll go through the details just to make sure, but typically you can simplify all great investments into maybe just a couple paragraphs, and it will be those three to five key factors.

Now, once you've identified those, that's when it's time to put on your journalist hat. So your journalist is, you're assigning yourself a story. And the story is those three to five key variables, and you become obsessed with those variables and you look at different forms of information to try and answer those questions. So that could be talking to people who are involved with the company or suppliers, it could be sort of the traditional work, meaning reading annual reports and call transcripts. It could be going through message boards or just different places to extract information. In the case of Zooplus, one of the things I did, a question I wanted to answer that I sort of assigned myself is; if I had a friend in Europe who had a pet and they were buying dog food every month, how would I pitch to them, why should you buy it from Zooplus versus maybe Pets at Home, which would be PetSmart in the US or Amazon, for example?

So I told myself if I can't answer that question, if I can confidently say, this is exactly why you should be buying it from Zooplus, I probably can't buy that company. So basically what I did was I put myself in the consumer's shoes, I went through Zooplus's top five European markets and price shopped a basket of 50 SKUs that I came up with that roughly approximates their sales distribution, and I used Google translate heavily. And you basically go through SKU by SKU, country by country, Zooplus versus Pets at Home, versus Amazon, and you ask yourself, where would I buy this from? And really what you're looking at would be the price, the selection, the shipping terms. And what I found was that Zooplus, if I had that friend in Europe, I would 100% tell them to buy from Zooplus because you're going to get the breadth of products, the depth of products, really great price that in many cases is significantly lower than Amazon, and you'll get very consistent shipping. So I think that's just the benefit of being a pet specialist. All they do is pet food versus Amazon who is more of a generalist. And what I've found is that if you want to try and beat Amazon at their own game, it's almost impossible, right? The scale they have. But if you focus in these very specific verticals, I think there is a world where a vertical can compete effectively against Amazon. I think even within Amazon, Zappos or diapers.com are examples of that.

If you want to try and beat Amazon at their own game, it's almost impossible, right? The scale they have. But if you focus in these very specific verticals, I think there is a world where a vertical can compete effectively against Amazon.

Exploring Different Verticles

Patrick: [00:35:44] This is a thread that I've started to really notice again and again in these conversations. Most tangibly in my conversation with a seed stage venture capital investor named David Tisch in New York city, who talked about the kind of potential future of the local and niche business model over the next 10 years with these kinds of massive technology companies, Amazon's the perfect Deathstar example, that the real opportunities will be in these kind of tightly defined verticals. So it sounds like Zooplus fits very neatly into that.

I'm curious how, as you explore different industries versus different companies, how you think about those two dynamics in terms of what matters? So are there certain industries that are almost blind spots for you, there's just no way, I'm never buying a metals and mining company or something like that? That's an industry I often hear. And then maybe it would be fun to dive into the most peculiar industry that you've explored that you think has interesting dynamics.

Connor: [00:36:40] Well, I would say generally speaking, I don't look at the world on an industry classification. I'm a generalist investor. I just try and fish where the fish are, so to speak. And really for me, when I'm going through an annual report for the first time, I'm trying to figure out how does this company make money? What are the unit economics, meaning what are the economics of one transaction? And if I can figure that out, then I'd say the company is fair game. If I can't figure out how the company makes money within my first pass at the 10K, we're probably going to move on to the next one.

Patrick: [00:37:12] What's an example of that? A recent one where you're just like, "I don't know."

Connor: [00:37:14] I would just say there are some companies that you find where it's a cloud enterprise software company, or it's this generic business and it's a platform or whatever it might be, but I want to know how do they actually make money? So like Zooplus, it's really simple. They buy pet food from manufacturers, they mark it up 25% and they sell it to people online. That's my kind of business. So I like fewer variables. Once you start getting into this world where you have no idea, there's eight different business lines within one company and you have no idea how it all adds up at the end, that's just too many variables for me. I like to keep it simple.

Patrick: [00:37:52] Maybe give us an example of a peculiar business model for an individual company, or maybe not peculiar, but a surprising one, maybe in your deep investigation, it looks different than maybe it does from the outside looking in.

Connor: [00:38:03] Sure. Well, I would say sticking with the theme of internet retailers, I think a lot of the story with internet retailers is that they're incredibly low margin, they're not profitable, they're burning shareholders' money and they're very CapEx heavy. I think that would be the narrative of a company like JD.com in China. If you just did a first pass through their financial statements, it would look like a business that has a big balance sheet that's earning negative margins and is therefore not earning a great return on shareholders' capital. So what you have to do sometimes is kind of pick apart the balance sheet, get some of the items out there that don't really impact the day-to-day running of the business. What I'm looking for is, what's the amount of capital employed, meaning what's the amount of capital that you would actually need to run that business.

So you're taking out things like Goodwill or intangibles, you're taking out investments in JVs or minority interests in other companies that they have. And you're really getting down to what's the working capital and where are the physical assets they need to run this business. And then you're comparing that to the earnings power. And what you'll find with a company like JD and a lot of internet retailers is they actually have massively negative working capital. I think their days outstanding is something like one day outstanding for a receivables and it's 58 days outstanding for payables. So that gets back to that dynamic where negative working capital means that your suppliers are in a sense financing your growth. And then the fixed assets aren't actually as high as I think a lot of people think. And then sure, is it a low margin business? Yeah, it might be a couple of percent operating margin that's increasing over time. But if you compare that to a very light asset base, it's really an incredible return.

So I'd say the whole group of internet retailers, they get this knock as an asset, heavy, low margin business, and they are fairly low margin because it's a very efficient business and you really have to have scale to compete, but they're actually a lot more capital efficient than I think people give them credit for mostly because they can stretch out those supplier terms. And so they can actually produce great results. And the best part about them is that the results actually get better over time. There are really a couple of business models that I like to focus on. One would be scale economics and the other would be network effects. And the reason why is because they're really the only two business models I can think of that improve or the companies get stronger as they grow.

There are really a couple of business models that I like to focus on. One would be scale economics and the other would be network effects. And the reason why is because they're really the only two business models I can think of that improve or the companies get stronger as they grow.

So if you think about it, if we had a business that was producing great results, kind of the laws of capitalism would say that new entrants will come in and try and take some of those profits for themselves. So that's why everybody looks for a moat. Well, I'm sort of greedy. I don't just want a moat. I want a moat that widens over time. So I've found that scale economics or network effects are the type of business models where, as the business grows, its moat just naturally widens over time. Some people will use the term flywheel or virtuous cycle. So basically for a business like Amazon or JD, or hopefully Zooplus, as they grow their economics get better, they can sell the same goods to customers at lower prices, their fulfillment costs kind of per package decrease over time. And so if you and I were trying to enter that industry cold tomorrow, we're so far behind, we basically have no chance. And it's the same thing in a lot of these network businesses. If we wanted to start up a Facebook or an eBay or something like that tomorrow, good luck, that ship has sailed in a lot of ways. And as those businesses grow, that network effect just keeps getting stronger and stronger.

Building a Portfolio

Patrick: [00:41:29] So we've gone into some detail on some of these aspects. So let's now step again and talk more about how you think about the actual portfolio. So you run a very concentrated portfolio, maybe the best advantage left is not caring what the market thinks about or kind of your relative returns in short-term time periods. That's a very rare luxury for money managers these days, where everyone is kind of more and more like the benchmark because the benchmark has been doing so well. So talk about how many positions you might own and now that we've kind of sketched out that framework of four categories - no moat (that's most businesses), legacy moat, reinvestment moat or capital-light compounder - kind of how you work through the progression and how you might size those different types?

Connor: [00:42:10] Well, I'd say the biggest advantage I have going for me is that the mandate I have is literally it's to invest as if it's your own money. So what I've seen in the industry is that a lot of investment operations are forced to almost create a product that sort of fits into a certain box. So that might be large cap growth or whatever relevant index that they need to track. And if they find a very interesting company but it falls outside of that box they can own it. And then their fun might have, whether it's regulatory restrictions or just the way they choose to structure things, they might have 100 positions or 200 positions. Then what that means is each position is maybe 50 basis points to 200 basis points or something like that. Contrast that to how a lot of people in this industry invest personally. A lot of people in this industry have a personal account. You'll ask them...

Patrick: [00:43:05] The dirtiest secret.

Connor: [00:43:06] Yeah. What do you own in your personal account? They'll say, "Oh, I own this stock. And it's 30% of my personal account." And I will say, "Well, do you own that in your portfolio? Or does your fund own it or whatever that might be?" "Well, no, our fund is a different product." So what I saw was, that there was a divergence in terms of how people invest when it's their own money and how they invest sort of as a professional investor. So our theory at IMC is that if you applied that mentality of a principal investor, of it's your own money, but you sort of added the benefits of being full-time, having all the tools in your toolbox, that you could actually produce results that are hopefully materially better than the relevant benchmarks. So our game plan, how I employ that day-to-day is I tend to have five to 10 holdings, so we're on the hyper-concentrated side I would say. A starter position for me would be 5%, which is typically maybe a max position for somebody else.

And really our whole theory is that the public markets are very, very competitive. I have a lot of respect for the peers that I'm playing against. And to think that you're going to find 100 or 200 incredible ideas or find 30 new ideas a year, I certainly can't do that. Can I find maybe one to two new good ideas a year that I think are no-brainers or that I'm really excited about? Hopefully, if I put in a lot of work. So our theory is infrequent, but concentrated actions. I'm studying hundreds of companies a year, I'm filtering them down and then hopefully I'm finding maybe one or two, and then when we find them, if I have that conviction, I'm comfortable making that 10 to 20% of my capital. That's an unusual thing to do, I'd say, in the world of professional investing. But I bet if you ask a lot of people what they do in their personal accounts, it looks just like that.

So our theory is infrequent, but concentrated actions. I'm studying hundreds of companies a year, I'm filtering them down and then hopefully I'm finding maybe one or two, and then when we find them, if I have that conviction, I'm comfortable making that 10 to 20% of my capital.

So the way I describe it is that our business model is very simple. It's not like your business model that probably takes a lot of IQ to put together day in, day out. Our business model is very simple, but it's very hard for most investment operations to replicate. So that's what I really like about it.

And then in terms of how did the different company types fit in, every company I'm looking at when I'm first going through a 10K, I'm trying to say, "Is it no moat? Is it legacy moat? Is it reinvestment moat? Is it a capital-light compounder?" And I'll classify businesses on my watchlist or even in my portfolio in those terms. And basically if it's a no moat business, I'm probably kind of throwing it out and moving on.

It's not that you can't make money on no moat businesses, I think you definitely can. But I try and stick to what I know well, and if I only have to have 5 to 10 holdings, I don't need to have an opinion on every business out there. I can pick my spots and these are the areas that I like to work in. And my whole theory with that is that there are so many smart people out there working in this field that I try and find kind of these little niches, little nooks and crannies. I try and go into the minor leagues, so to speak and find a company that I think has the characteristics of those big companies that are getting all the headlines today. And so that's the advantage - that I can say no to so many things, I can say no to, I'd say above average ideas and hopefully wait for a really exceptional idea.

And what I've found is that it requires a lot of patience but when you find those ideas that are absolute no-brainers, you can have concentrated positions in them because if you're right, it'll tend to work out really well. And hopefully if you have enough margin of safety, even if you're wrong, you'll still be okay and kind of live to fight another day.

Patrick: [00:46:36] What are the circumstances under which you would buy a legacy moat company?

Connor: [00:46:40] Sure. So I'd say there are two circumstances. First, would be a category that I call legacy moats plus outsiders. So William Thorndike has been a guest on your podcast. His book, The Outsiders, is one of my favorite business books. There's a handful of management teams out there that I would say are outsider management teams. Some examples in the public markets today would be Constellation Software, TransDigm, Danaher. Basically these businesses are a collection of legacy moats with almost like an internal private equity fund that sits on top of them. So they take the cash that the subsidiaries generate, to use TransDigm as an example, I think they own 36 operating businesses. They use the cash that those businesses generate, which are each great businesses, but they're legacy moats and they don't really have the ability to redeploy within those subsidiaries. They basically send it up to the headquarters in Cleveland, where you've got Nick Howley, who I'd say is a hall of fame capital allocator. And he's using that in a very disciplined, structured way to buy more businesses.

So the difference between how TransDigm or Constellation Software operates and how a typical business operates in terms of M&A is that typically M&A gets a pretty bad reputation amongst public company shareholders. And I think the evidence is pretty conclusive that M&A makes the company bigger, it might make the CEO's role more prominent, but it doesn't always add value to the shareholders, especially on a per share basis. But you've got this small percentage of companies out there who have these outsider management teams. And they've got a proven playbook where they basically stick to one niche that they know incredibly well. They know how to finance the businesses. They know the multiples that they can pay. They have operating executives who can go in and reconfigure the businesses if necessary. And I would say that they can actually redeploy the shareholders' money better than we could on our own. So for a company like that, you would rather that management team retains the money and buys the businesses for you in a sense, rather than sending it out to us, paying taxes on the dividend and then we look for opportunities ourselves. So that would be one category. That's your legacy moat plus outsider.

Patrick: [00:48:46] So just one more question on that, so it sounds almost like a more tax advantaged, fee-less mutual fund or something?

Connor: [00:48:55] Yeah. Or you could think of it like it's a private equity fund but you're not paying 2 and 20. Just to use TransDigm as an example, their management team is more capable of buying aerospace businesses than you or I would be. They probably get better access to deal flow. They know how to finance them. They know what kind of margins they can take those businesses to. So I would rather they keep the money and buy those companies because I think that they can earn above 20% returns on that incremental capital.

Patrick: [00:49:21] So then the other question is, and this is the kind of age old problem in our markets in general, which is maybe there are managers that can beat the market, but how do you pick the managers that are going to beat the market? So how could you possibly, there are outsider CEO's, how can you identify them ahead of time to be able to kind of enjoy that ride?

Connor: [00:49:37] So I think this is more on the qualitative rather than the quantitative side of things. I think for some people that scares them a little bit, it's a different set of filters that you're applying. But really the key tool there would be shareholder letters, then I'd say just qualitative clues along the way. So really what you're looking for is; what is their capital allocation philosophy? First of all, if they don't write a shareholder letter and they don't tell you that it's going to be really hard to figure it out. But I'd say for most of these companies, the management team takes a lot of time and effort to put together a very thorough shareholder letter, which shows that they actually care about the outside shareholders. They treat them more like partners rather than a nuisance or something.

And then you just see factors along the way in the company. If you go through the proxy and you see, how are they compensated, how much of the business do they own? We want owners, not executives. An owner is somebody who's focused on cashflow, who's focused on increasing intrinsic value 5 and 10 years from now. An executive is focused on hitting next quarter's earnings target. So if they're compensated based on next quarter's earnings target, it's going to be very difficult to act in that long-term manner. And then you look for some other factors that I'd say are probably less obvious, but they kind of get me excited when I find them. So it might be that the annual report is just a very bland brown cover and it's been that way for 20 years or something. Or you go on to Google maps and you look up their office and it's a nondescript office building in Florida. It's not a skyscraper in Manhattan or something.

And you just hear stories about how they travel like Mark Leonard from Constellation Software. He wrote a shareholder letter, it was probably 10 years ago, where he said in painstaking detail, he described a flight to Europe where he flew coach, even though he's six foot seven. So does that one cost actually matter? No, but it sets the tone for the whole company. And I think Fastenal is another company that's sort of famously frugal. Frugal is a nice way of putting it. But if you get that culture from the CEO, it can kind of filter down through the rest of the company. And those are ones I really like because you can develop almost a trust in the management team where you know that they're working, they're kind of on your team. They're not looking out for their own interests, they're shareholders also and we're really all on the same side.

And then even if the business maybe sells off in price, so let's say the business is doing well, but the stock has a rough patch, you're almost excited in a way, because if the price falls 30%, they're going to take advantage of that and start buying back the shares in sort of this lumpy fashion. So those are ones where if you find that management team early and you trust them, and you think that they can redeploy that capital for a long period of time, you want to buy one of those, hopefully make it a concentrate position and sort of get out of the way.

Patrick: [00:52:21] You mentioned there was a second reason as well why you might buy a legacy moat, so what would that be?

Connor: [00:52:25] So there's a second category of investments I will make from time to time, which I would call intermediate holdings. So kind of my dream holding would be what I call a core holding. A core holding would be a company that is doing well today, I think it can do well for 10 years. I buy a stake in that business and I basically treat it like a private holding. I'm not checking the price day in, day out. I'm not trading around it. I mean, I look for the business updates. I read the filings. I follow the news, but I'm really thinking of that as a private company that we almost permanently own. And I don't want to sell it. If I got a press release tomorrow that the business was acquired for a 30% premium, I would actually be upset because there goes my 10 years of compounding. So that'd be kind of what I call the core holding. That's really what I'm looking for.

But at the same time you do come across these opportunities, which I would call an intermediate holding, which would be more of a three to five-year type time horizon, where you've got a business that's got a moat, it's growing intrinsic value, but it might only be grown intrinsic value, let's say 5 to 10% per year. So if you were to own that business indefinitely, you're probably not going to make more than about five to 10% as a shareholder. So you need to have sort of an end in sight with the business and you need to pick it off opportunistically. So a really simple example that most people would know is Berkshire Hathaway, their days of compounding at 20 to 25% are probably in the past, but it's still a business that has enough momentum where it's probably growing at a single digit, high single digit type rate and every now and then Berkshire Hathaway will sell down to 1.2 times book value or thereabouts. And I think if you bought it at that point and owned it for 50 years, would it be a great investment? No, but at that point you have such a great risk-reward that you can pick it off at that low multiple, own it for a couple of years, it'll grow a little bit and then may be you sell it when it sort of rerates to 1.5 times book value. And those are great investments.

And I think those don't come around as often. You need to just sort of have, I'd say a watch list of companies like that, and then just be hoping that they stumble along the way, or maybe the market sells off or something like that. So that's my other category of companies that I would look for, but it still needs to be a business that I have a lot of confidence in where the earnings power is going. It just might not be increasing at that really high rate I'm looking for.

Patrick: [00:54:47] So then the last two for the portfolio, and we'll close with a couple of fun questions is the kind of choice, let's make the assumption that there's some opportunities set, so you can kind of choose between them - between a reinvestment moat and a capital-light compounder. And really what I'm getting at here is whether or not you think, because obviously the capital-light compounder sounds like the dream business, right? It's a licensing model or something, where very little capital required, maybe not that many employees, fantastically high margins, sort of the dream business, but whether or not there's fragility baked into that business model without the hard assets or the fixed assets maybe as being as high, how do you think about the interplay between those two opportunities sets in your portfolio?

Connor: [00:55:29] Yeah, I would say it depends on what you're looking for and what you're comfortable with. So I think some people, like that Walmart example that I cited earlier, that really worked for people because capital allocation is less of a risk there, even though the business requires capital to grow. It's a very straightforward path. At the board meeting for Walmart 40, 50 years ago, I don't think there was a lot of discussion in terms of what's our plan for capital allocation. It was open more stores. So I think if you have a lot of conviction in the unit economics of that next store, that can work well for a lot of people. I would say technically, if you're splitting hairs again, we're talking about the best of the best businesses out there, I would say the capital-light business is slightly better. I think Buffet said the best businesses are royalty on the growth of others requiring little capital itself.

Patrick: [00:56:20] It sounds pretty good.

Connor: [00:56:20] It sounds pretty good to me. I would say the factor you have to look at there is, at the board level and the management level, how are they allocating the capital? Because when a business is generating an enormous amount of cash and there isn't an obvious place to put it you do run the risk that they can start putting it in...

Patrick: [00:56:37] Stupid places.

Connor: [00:56:38] -less than ideal places. So some examples would be, Coca-Cola, I think at one point owned a movie studio and also a fish farm or something like that. And then they started buying all the bottlers. And so it's a problem where you almost have so much cash, and maybe it's an ego thing or something, you don't want to just give it back. So you want to do something with it and chances are you're just not going to be able to put it in a place that's as good as your original business. So you'll probably be diluting the business over time. What I like to see, kind of the dream scenario, would be a capital-light compounder that's got some growth runway ahead of it, meaning its underlying volumes can grow and maybe even pricing power in there. And then you've got a management team and a board who is signed up to just systematically buy back shares. So that's what Charlie Munger would call a cannibal.

I think an example of that in the public markets today would be Verisign. Verisign is essentially a toll road business on the internet. If you have a dot com name, you pay 8.99 to Verisign. You might've bought it through GoDaddy or something, but ultimately that's where it's going. And it's probably the most dominant business you'll ever come across in terms of lack of competition because they essentially have a regulated monopoly and they earn 70% plus margins, they generate tons of free cashflow and fortunately they have Louis Simpson, who traces back to Berkshire, on the board and they just cannibalize their own shares. So that's one where you say, now we've got the benefits of a capital-light business and we've sort of removed that variable of well, what if they buy something crazy? So that's really your dream scenario I would say.

Patrick: [00:58:15] A couple of fun closing questions since it's late on a Friday. The first, and you're not allowed to use anyone from Berkshire on this list, is your Mount Rushmore of capital allocators.

Connor: [00:58:26] Certainly some people from Berkshire would be on there. I was just at the Liberty Media investor day yesterday. John Malone would certainly be on the Mount Rushmore of capital allocators. Just seeing him in person, he's a savant. I mean, he's playing chess and we're playing checkers. It's just incredible. And he's done it as an investor and as a business operator. So I have a lot of respect for that. I would say if you want to get more into the traditional fund manager side of the world, I'm a big fan of Seth Klarman and Baupost, that's really how I learned the business. One of the partners in our fund when I was in my first week gave me the book Margin of Safety. I remember reading the first chapter late one night and it was literally the light bulb went off and I became obsessed with value investing from that point. And I've been that way ever since.

And then I'd say sort of, if you're looking for an under the radar investor, there's a guy, Nick Sleep - Nomad Capital in London. They're actually not open as an investment fund anymore. They shut down a couple of years ago but they've had an incredible track record of compounding. And it's really the style that sort of matches up with the way I like to do things, concentrated, great businesses. They had big positions in Amazon and Costco and a couple others. So that's the kind of stuff that I get excited about is when you come across shareholder letters where it's not just, "We have 50 positions and we're constantly going in and going out," it's a guy who lays out his thesis for why this business should go on a good run. And Nick Sleep laid out why you should buy Amazon in 2004 when that was far from consensus. And then not only did he buy it in conviction, but he held it all on the way, which is maybe just as difficult.

Nick Sleep laid out why you should buy Amazon in 2004 when that was far from consensus. And then not only did he buy it in conviction, but he held it all on the way, which is maybe just as difficult.

Patrick: [01:00:05] Even harder.

Connor: [01:00:06] Maybe just as difficult as the initial purchase.

Patrick: [01:00:08] Talk a little bit about any sort of really impactful mentorship. So I find often in investing stories like yours, that maybe Seth Klarman's book is like one version of a mentor. Maybe describing the experience of who the mentor was first and foremost, but kind of why they were a mentor, how they did it with you and how it impacted you?

Connor: [01:00:28] Well, I would say it would have to start with Quinton Maynard. He was our chairman and CEO. He unfortunately passed away a couple months ago at age 38 from cancer, which is really sad. But he hired me right out of college, which is very unusual. Our first interview, we just talked about one stock for an hour, which was Sam Adams or Boston beer. And he offered me a job. I didn't know what I was signing up for, but I'm really glad I took that job in hindsight. And so I got to learn about business, public investing, and private investing from him. So his dad, James Maynor, who's most closely associated with Golden Corral, but he's also just an incredible capital allocator. And he's great at thinking about financing. I'd say if they ever write The Outsiders part two, he should really be in consideration for that.

And then I'd say they're just some investors that I respect and admire. And what I do is I'll write a handwritten letter to people and just say, "I'm a young investor. I love this business. I love the game. I'm trying to get better. Do you have some opportunity to talk on the phone or meet in person?" And you'd be surprised if you send out letters like that to people, more often than not they respond. And I think that's just part of the tradition of value investing is to sort of give back to people who are earlier on in their journey. And I don't think there's a lot of secrets that you're giving away because most of this stuff is fairly straightforward but it's really difficult to do day in, day out. So those people have been really supportive along the way.

What I do is I'll write a handwritten letter to people and just say, "I'm a young investor. I love this business. I love the game. I'm trying to get better. Do you have some opportunity to talk on the phone or meet in person?"

Patrick: [01:01:52] What is the kindest thing that anyone's ever done for you?

Connor: [01:01:55] I'd say, to go back to Quinton, just he's top of mind. I had this passion, I'd say borderline fanatical interest in being a public markets investor. And to be honest with you, that's not really what our business is. It's not our core business at IMC, our core business is buying private companies. That's what I've been doing for a number of years, but he saw my interest and he gave me an opportunity to do really what's my dream job inside a company with people who I respect and admire. I don't know how anybody can do something kinder than that.

Now, hopefully, he thought I could actually make him some money in the process and do well for the IMC shareholders. And trust me every day, nobody wants that more than I do, not just to prove him right, but also I really believe in the IMC story and our model and I just feel fortunate to be a part of that. So my life is just so much better because my path crossed with his and he's just done so many things along the way that he didn't have to do but he was always really great at looking out for other people. And I think it made him fulfilled and that's how he lived his life. So he was a great role model.

Patrick: [01:03:01] Last question, which is to go back to that conversation about Boston Beer Company, Samuel Adams. So you talked about it for an hour. What do you think it was in that conversation that got you the job?

Connor: [01:03:11] So a little background, I'm from Massachusetts, at the time I was in college. Peter Lynch would say, "Invest in what you know." I knew that market fairly well, right? Also at that time, Boston Beer was not a very well-known company, it was more of a regional company. It was sort of before craft beer exploded. And maybe there were two sell-side analysts at small shops that followed it. And I just got obsessed with that company. It's a fairly simple business. It's a good business. The beer business has made a lot of rich people all across the world. I mean, they had this fanatical CEO who I loved. He, I think was a sixth generation brewer with three degrees from Harvard. So these are all great places to start. And I did a lengthy investment pitch on that company for an investing class in college. I used that company for every class project I could possibly use in my strategy class or operations class. So I knew that thing cold, I knew it inside out. And so when I came in and talked to them for the first interview, most of the interviews in finance they're asking you brain teasers or how many ping-pong balls-

Patrick: [01:04:13] Ping-pong balls.

Connor: [01:04:13] -in a Boeing 747 or something. And we just talked about the beer business and Sam Adams for an hour. And fortunately it wasn't two hours. I don't know if I'd have enough to keep going, but that's when I knew that this was the kind of group I wanted to be with. I said, "What am I even signed on for here?" And they said, "Well, you'll get to learn about public investing, private investing, you'll get to learn about business and you don't have to do investment banking in New York." And I said, "Sign me up."

Patrick: [01:04:37] So we'll test you one last time, which is thinking back to that business, what were the call it three levers with your board member seat on that mattered for Sam Adams?

Connor: [01:04:46] You had the growth of craft beer as a segment, I would say. You had them transitioning from a regional brewer to more of a national brewer. At the time, they were really the only craft brewer that had scale, where they could kind of bridge that gap from just an upstart and start selling into bars with kind of the Bud's and the Coors' and all that kind of stuff. And then you had the fanatical CEO. And the price, I'd say it wasn't a no brainer, but it was certainly fair and the stock did pretty well. And that always helps.

Patrick: [01:05:18] Fantastic. Well, this has been a lot of fun, thanks for all your time. And we'll maybe do it again sometime.

Connor: [01:05:23] Sounds good. Thank you.

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