#36 – The Runner

John Huber runs a small long term asset management firm and runs 50 miles per week.


SUMMARY

John Huber is an investor with a small fund managing his family assets and outside capital in a concentrated portfolio. John has written an excellent blog, Base Hit Investing, for many years, explaining his investing principles. We discuss these in this episode, including what John looks for in an investment, why he emphasises capital allocation even more today, where he sees the sweet spot in revenue growth, why he likes Alphabet, why he is focused in North American stocks but is now looking at Japan and US small caps and why Floor & Décor is one of his major positions.

GETTING INTO INVESTING

John started out in real estate, profiting from dislocations in residential markets in the global financial crisis. That allowed him to accumulate the capital he needed to embark on his true love, investing and to set up a fund modelled on the Buffett Partnership.

Some takeaways

What John Looks for

Huber looks for 4 things in an investment:

  • a durable business that passes what Buffett would call the 10-year test. You can close your eyes and look out 10 years and understand what the company’s doing or visualize what the company’s doing.
  • a company that’s producing high returns on capital
  • good capital allocation, sort of a management test.

John now places a greater emphasis on the third criteria of capital allocation. He noticed from some of the investments that have worked often have to do with management doing rational things with the capital. Notably, share buybacks.

 

Growth Traps

John has written in the past about there being three drivers to make money from an investment

–             growth in the business

–             change in the valuation

–             and the change in the number of shares.

He refers to this framework as the 3 Engines. And people over-emphasise the first part, the growth. Some of the best stocks of all time have not been fast growers. I mean, there are a few like Amazon and Netflix and others, but a lot of them have been just “steady eddie”, six, eight, 10% growers, like in O’Reilly Auto Parts, that uses its free cash flow to buy back shares.

You get say 8% from growth, you might benefit from a valuation increase, but you don’t even need that much because the secret sauce is if a stock trades at 10 times earnings, they can buy back a lot of their shares over time.

John cites Peter Lynch who felt that 20% revenue growth was a ceiling when it came to what companies could manage and he cites John Neff who also looked for lower growth rates. Huber believes his sweet spot is companies growing revenues between 6% and 12%.

 

Alphabet

Huber has a significant position in the stock in his fund. After doing a talk at Google in 2018, he remarked that “the culture (and more specifically, the incredible talent) of these firms is somewhat under appreciated, … Google has an unusually large number of employees who are not just super smart, but also very humble. There is an introspective focus on continuous improvement and long-term thinking that is very palpable there.”

He also remarked that “Culture, employee talent, and workplace satisfaction are three things that don’t show up in the numbers, ..but they are extremely important to the long-term earning power of the company..”

He still admires Google and thinks it’s a phenomenal company. The culture was undervalued in 2018 and still is today. He thinks one thing that has changed in the ensuing six years is some of those factors have become more appreciated in the market, I think. In 2014- 2016, Google and Apple, where Google traded under 15 times earnings, Apple traded at eight times free cash flow, net of cash which were incredible valuations for these companies. He felt that the culture, the human capital component to these companies, doesn’t show up in the numbers, but has an incredible amount of value. And he thinks that’s still obviously the case, although more of that value has now been recognised.

 

Overseas Investing

John visited ChHina pre-Covid with his friends Connor Leonard and Jake Rosser (two investors Steve greatly admires). One takeaway was that venture capitalists there rivalled Silicon Valley. It was  ultra competitive, with everyone starting a new business, a new venture. One of the things he learned on that trip was that China was going to be a difficult place to invest in.

His next trip will likely be to Japan where he likes the changes happening with the authorities encouraging buybacks. He thinks that trapped capital there has stifled economic growth and this will now be released. A number of our recent podcasts have talked about Japan:

#29 with James Aitken; #30 with Grant Williams; and #32 with Jonathan Ruffer.

 

Small Caps

John believes that there’s a dichotomy between large stocks and small stocks in valuation. So he has been looking a lot more at small stocks because he finds them to be attractively priced. And those companies are more willing to meet and he finds that valuable and useful.

 

Floor & Décor

This is one of John’s largest positions and he is attracted to it because he sees a a significant contribution from the growth engine – close to 20%. It dominates a very fragmented space. They’re the biggest player in retail flooring., with probably 13,000 mom and pop shops around the United States – a very fragmented group of small competitors that can’t compete with Floor & Decor because they don’t have the same scale. And the industry backdrop of housing has gone through ups and downs but over the long term, he thinks that business is positioned to do well with a really strong moat.

And here is the latest Floor & Decor valuation snapshot per Sentieo, priced at $119.81:

Running vs Investing

John runs 50 miles a week and thinks investing and running share long feedback loops – it takes a long time for compounding to work in investing and in health.

 

John’s Portfolio

Here is John’s portfolio as per his last 13-F at the time we published on 20 June, positions as of March 31 – these have been independently sourced and not verified. These certainly are not investment recommendations – always do your own research. 

 

 

 

ABOUT JOHN HUBER

John Huber is the Managing Partner of Saber Capital Management, LLC whose partnership is modelled after the original Buffett Partnership fee structure, with no management fees, and a performance fee above a 6%pa threshold.

The goal is to invest in a collection of durable businesses that can compound value at double digit rates of return over the long run. Prior to forming Saber in 2013, John spent nearly a decade investing in real estate.

You can find John on Twitter, read his Substack and follow Saber Capital Management.

 

BOOK RECOMMENDATIONS

John recommended 3 books. Built from Scratch is the story of Home Depot, which John sees as the model for his second largest holding, Floor & Decor.

Peter Cundill, There’s Always Something to Do has been previously recommended.

He also recommended Neff on Investing which is a book Steve rates highly:

HOW STEVE KNOWS THE GUEST

Steve has followed John’s blog Base Hit Investing for many years and one reason for doing the podcast was to enable conversations with investors whose writing he enjoyed. Chris Pavese (#12) was another investor with a small fund (or in Chris’ case family office) whose writing Steve liked and who turned out to be a fantastic podcast guest. Similarly with Richard Oldfield (#13) who is a brilliant writer and was another super guest. If you enjoy the conversation with John, check out those two also.

 

Chapters

00:02 – Investing insights and education 
08:21 – Long-term growth strategies
17:16 – Importance of stock buybacks
25:42 – Recognizing business value
39:37 – Sustainable business investments
46:49 – Global investment opportunities
59:25 – Portfolio diversification strategies
01:12:51 – Value of reading in investing

 

Transcript

John, listen, welcome to the podcast. I’m delighted to talk to you. I’ve been reading your blog for some years, probably back, might be 10 years now. But I know you always wanted to be an investor, but you went into real estate first. Was that partly a way of building the capital? Or have there been other advantages, beyond a couple of home builders, for example?

 

John Huber (02:34.447)

Yeah, well, it was exactly that. It was a way to try to build some capital. I started reading about Warren Buffett like a lot of investors in college and started reading some of his biographies, which of course led me to the Buffett letters, the Berkshire Hathaway letters, and the partnership letters particularly interested me just because it was, you know, that was more along the lines of what we would call like a hedge fund today.

Buffett called it a partnership. And I just looked at it as, wow, this is a really great way to manage capital. You sort of align yourself with your limited partners, your investors, and you make money if they do well type of thing. And so I really admired the structure that he set up and early on I kind of thought, wow, maybe I can do something like that down the road.

Real estate for me, I was very interested in it at the time and I’ve always been interested in business and investing and entrepreneurialism and wanted to pursue that as a way to leverage my very limited resources at that time. And a partner and I went around buying, you know, it was one of those things where we were in the right place, right time. It was the beginning, the very beginning of the global financial crisis. And the foreclosure boom was really in 2007.

And that’s when we were able to go around to different banks and acquire single family homes, primarily at the beginning is what we focused on. And we were able to buy properties at significant discounts to their underlying value. And we would fix them up, lease them, hold them for cashflow and kind of recycle that process over and over again. And so we did that as a way to leverage the capital and build some capital so that I could start a fund down the road. And so that was sort of a means to an end.

 

steve (04:39.09)

And I’ve been, I really enjoyed your blog and you’ve got this trick of saying there’s always three things, which reminded me, when I was on the sell side, when you spoke at the morning meeting, the salesman could never capture more than three things. So it was always, and I think it’s actually quite true, there’s always three things about a stock, but you talked about there being three drivers to make money from an investment

  • growth in the business
  • change in the valuation
  • and the change in the number of shares.

And you’ve talked to think about how some, for example, growth investors overemphasize the growth part. And a few value investors place a lot of emphasis on the second in the search for low multiple stocks. But not enough people pay enough attention to the third part, buying cash-generative businesses that can buy back stock, especially lowly-rated ones, which are very similar to what David Einhorn’s doing right now.

 

He thinks that, you know, there isn’t much point in buying a stock and hoping somebody else will come along, another institution will buy it. You’re better to buy something that the company will buy. Can you just talk about this?

And you also said that you found a sweet spot on the growth side between 6% and 20%. Can you talk about why that is and how you approach all this.

 

John Huber (06:00.235)

Sure. Yeah, yeah, we can talk. I wrote a post called Growth Traps, which was sort of inspired by the book, John Neff on investing. And, you know, we can talk about that in a minute, but just to answer the first part of that question on the three engines is what I call that.

Yeah, I think it’s interesting. And you brought up David Einhorn. He’s been vocal about this in a few of his letters, I think in recent years about he invested in this company called Consul Energy, which is I think one of the stocks that he uses as an example here. But that stock, roughly speaking, might trade at a 20% free cash flow yield. And his view is, hey, we don’t need, he doesn’t explicitly say this in terms of laying out the three engines, but he’s basically saying we don’t need growth, we don’t need even a change in the P-E multiple, getting a 20% free cash flow yield.

In that case, they’re using most of the free cash flow to buy back shares. So you’re getting a buyback yield of 20%. So you don’t need the other two engines, was his point there. My point in kind of outlining those three drivers is just to get people to think about how a stock goes up or down.

And I think in recent years, so many people have focused on that first engine, which is the growth engine. And growth over the long run is obviously critical to a business’s success and a stock’s success, but surprisingly, you don’t need that much growth. Some of the best stocks of all time have not been these huge fast growers. I mean, there are a few like Amazon and Netflix and others, but a lot of them have been just steady eddy, six, eight, 10% growers, like in O’Reilly Auto Parts, that uses its free cash flow to buy back shares. And so you get some contribution from growth, maybe you get 8% from growth, maybe you get a little bit from a valuation increase, but you don’t even need that much because the secret sauce there is if a stock trades at 10 times earnings, and let’s just for sake of argument assume that the earnings are cash earnings, 10 times free cash flow, they’re going to be able to buy back a lot of their shares over time.

And so that’s how you get these high-teen type long-term returns. And the secret there is these businesses, some of these stocks have been, in my opinion, perennially undervalued just simply because they’re not fast growers and they don’t attract a lot of attention, at least in the early years. I mean, everybody knows about AutoZone and O’Reilly now, but and NVR, but for years and years, those stocks traded at 8%, 10%, 12% free cash flow yields.

 

That gave them the ability to buy back so much of their float. And so I do think you’re seeing this in some other stocks right now that, perhaps a decade from now will be the next AutoZone or something, but I just think that is something that investors need to think about all three of those when you’re thinking about the valuation of a company.

 

steve (09:09.866)

No, that’s absolutely, absolutely clear. And you mentioned John Neff and investing. I enjoyed that piece that you wrote. And funnily enough, it’s a book that I read a year ago. One of my students, Will, recommended it. And it was a fantastic book because it really transports you into history, doesn’t it?

 

John Huber (09:29.403)

Yeah, it’s really interesting. I mean I love books that are filled with like case studies. You know, experiences of the investor, I don’t read a lot of investing books anymore. Because it, you know, you kind of, you get to a certain point where you kind of feel like you’ve read most of the investing books. And now it’s more about like, okay, let’s read more about business specifically. But that is a really good investing book.

Peter Cundill wrote a book, he’s a Canadian investor that is very similar where I think that book is called There’s Always Something to Do. Both those books are interesting because they talk about actual investments and they go into case studies and so you can learn a lot from reading through those. But yeah, John Neff, I mean, you were mentioning, Steve, the growth traps. A lot of people talk about value traps and that’s basically paying what appears to be a cheap price for a business that’s eroding and that’s obviously a value trap.

I think that the issue with growth traps or companies that are growing too fast, that’s the opposite end of the spectrum. Companies can get themselves into trouble by trying to grow too fast. That might mean making ill-advised capital expenditures, taking on too much debt, maybe hiring too many people, and that can cause a lot of growing pains.

It can overburden the capital structure or overburden the operating structure of the business and it can lead to a sort of a bloated cost structure. And that can lead to problems just like value traps. So that’s sort of the point that John Neff made is you’d be careful of companies.

And Peter Lynch made the same point, be careful of companies that are growing too fast because you can run into those sorts of problems. So he kind of had this like 20% is sort of a warning signal. Once you start growing above that, you need to be very cautious.

And so that’s just something to keep in mind. I’ve noticed throughout my own career as an investor, I’ve invested in companies and stocks across all different categories, but some of the best ones I’ve had have been in that six to, I wouldn’t even say six to 20, I would say more like six to 12 in terms of the percentage growth rates, coupled with a healthy buyback yield and perhaps a cheap price where you get the benefit of the multiple expansions. So you get all three of those working for you and that can be, and that can lead to a really nice long-term investment.

 

steve (11:59.262)

I think it’s just if you grow above 20%, it’s just a very difficult thing to manage because just the growth of the overhead base and keeping up. I mean, I’ve seen this a number of times and when you’re growing at a fast pace, everything gets left behind. And it’s just very, very difficult to manage.

 

John Huber (12:07.155)

Right. It’s very, yeah, it’s really hard to do that. Yep. That’s exactly right. I, um, you know, we’re talking about books and one book I read, um, maybe a year ago now is, is called Built from Scratch. And so I was doing some research on a, on another company in that space and, uh, Built from Scratch is about Home Depot. It’s about the origin story of Home Depot.

And they, they went through a period in the eighties where they went through a very tough time and I wouldn’t call it necessarily like an existential crisis or a near death experience, but they did have some issues in the mid 80s. They made an acquisition and what was happening is they were trying to grow their store count at an unnatural rate of growth. They were taking on debt to fund store growth, which was a similar playbook to what Walmart did for years and years.

Walmart never made free cashflow until the late 90s because they were always pouring all of their operating cashflow back into new store growth, and then some taking on debt to further that growth, basically, press on the accelerator a bit.

And Home Depot was really pressing on the accelerator, and then they made an acquisition that caused some growing pains. And so they, Arthur Blank went to the board after that and said, look, we want you to put sort of a speed governor on our growth, we don’t want, we wanna put in something in writing that says we cannot grow faster than 20% or it might’ve been either 20 or 25%. But they were growing north of 30% for a while, and that’s just a unit growth count that is really difficult to maintain.

 

steve (13:58.026)

Yeah, it’s hard to manage. You wrote a really good piece, I think it must be 10 years ago now, on returns on invested capital. And it’s funny because people always talk about returns, but not many people understand them as well as you do. And you said, you look for businesses that can produce high returns in capital, that can reinvest a large portion of earnings at similar high rates, run by good management who allocate the excess cash in a value creating way and preferably management with a stake in the business. They aren’t that common stocks with those four characteristics. I mean, how do you find them? Do you use a screening process as part of your process or how do you do it?

 

John Huber (14:43.031)

I don’t use a lot of screens. Occasionally I’ll look at a screen just for fun, just to see what it might turn up. But usually whenever I do that even, it’s more just a starting point to do some deeper work. So I’ve never been an investor that looks at a screen for like low PE stocks or anything like that.

 

Yeah, how do you find them? That’s the trick. I mean, there’s no easy answer to that. It’s sort of a, you know, my method is I build a watch list. And so I have a watch of just a simple spreadsheet on, you know, it’s like a Google spreadsheet that tracks all of my companies that I’ve followed over the years. And then I slowly have, you know, I sort of have two tabs on that list. One is my companies that I’ve already researched that I’m ready to invest in if the price is right.

And then there’s another list I call the farm team and baseball parlance, which is basically companies that I’m interested in learning more about. I’m in the process of researching. I’m not sure yet whether they’ll make the cut for a future investment or not, but I’m evaluating them. And so, those can come from all different sources. They can come from a good friend of mine who recommends looking at a company, another investor I respect. It could come from reading an article in, like, I get all these online trade magazines and stuff that gets sent to my email and I’m constantly reading through different uh in just reading about different industries.

I might read about a new company that I want to look at. Could be a book that I read, you know, it’s hard to pinpoint exactly where the ideas come from. It’s just sort of an amalgamation of all of the work that you do during the day and you know that stuff compounds over time and so you build a list and then you know I always have like a priority research list of you know, try to focus my work on two or three companies at a time, but it’s a long, long list of companies that I’m interested in reading about. So yeah, that’s kind of how.

 

steve (16:38.454)

How do you decide, I mean, how do you decide how to prioritize that watch list? So you’ve got the back book of stocks that you’d be interested in and spending time looking at. You don’t know very much about them and you’ve got, I don’t know, 50 or 100 of those. How do you decide what one comes to the top of the list? Is it a price driven thing?

 

John Huber (17:01.399)

Yeah. Yeah, it’s usually I try to prioritize, you know, you always want to be most efficient, right? And so you, I try to prioritize what I think is perhaps most actionable at the current moment. So, you know, there’s a lot of stocks that are, you know, in my view, offer compelling value or potentially compelling value now. And you want to research those ones first.

Having said that, I’ve never felt overly comfortable investing in situations where you have to act fast, you know, I’m, I’m more of a methodical, I take my time. I’m a slow learner. You know, I, I like to do deep work, a lot of research on the industry. I really try to understand what I’m doing. And so that takes a lot of time for me. So I’m never in a rush. And, and the reality is sometimes I miss things, you know, because I don’t act quickly and that’s just part of the, part of the game, but that’s, that’s my method.

Yeah, I think one thing in terms of trying to sort through ideas, and this is something that I have evolved over time, you’re always trying to get better as an investor. One of the things Nick Sleep said, who’s an investor I really admire, I think he had a watch list one time that he wrote about this in one of his letters called High Quality Thinkers. And basically what that was, was a management team that really understands capital allocation.

 

That is an element of, there’s really four things that I’m looking for when I look for stocks. I’m looking for a durable business that passes what Buffett would call the 10-year test. You can close your eyes and look out 10 years and understand what the company’s doing or visualize what the company’s doing. And then I wanna have a company that’s producing high returns on capital, that’s number two. And then number three would be capital allocation, sort of a management test. And then the fourth is valuation.

That third criteria, it has become more important to me personally, just because I’ve noticed from some of the investments that have worked often have to do with management that’s doing really rational things, not anything heroic, just rational things with the capital. And so, you know, that that’s something that I’m spending more and more time thinking about when I do see a management team that’s doing smart things with capital. I try to flag that, make a note of it, follow up on it, try to get to know them.

 

steve (19:27.374)

So that would typically be what somebody that you saw buying back shares.

 

John Huber (19:31.523)

Yeah, buying back shares is a good one. The nice thing about share buybacks is if you think the stock is cheap, then you’re sort of getting a double dip. You’re getting that buyback yield plus the potential for the multiple to go up. That’s two of the three engines we spoke of. If it’s a good business earning good returns, then you’re probably getting some growth as well. So yeah, any stock that you buy, in theory, you’re going to be able to get a good return you know, obviously you think it’s a cheap stock. So you should hope that the company, if they have, to the extent they have excess cash, should be buying back that stock as well. So buybacks are a huge factor for me. It’s something I really like to see.

 

steve (20:13.602)

It’s funny because, you know, obviously, I’ve been a global investor. So there’s a dichotomy between the US markets and other markets. And in other markets, buybacks aren’t quite as fashionable, haven’t been as popular. But in the US, I mean, I would have said that the majority of US companies that I’ve met with have talked about buybacks.

I mean, I’m struggling, trying to remember that all of the companies I’ve seen, I’m trying to remember anybody that said, oh no, we wouldn’t buy back stock. They all say they would buy back stock. Maybe they aren’t as aggressive in actually doing it. But it’s a pretty popular thing in America. I mean, I wouldn’t have thought that would be something that would necessarily distinguish many companies.

 

John Huber (21:02.887)

Yeah, it’s a good point. I was reading some things. It came across something back in the 70s, and I was doing some work on a little bit of a research project unrelated to this topic. But it did occur to me that buybacks have not always been in vogue in corporate America. It’s a relatively new phenomenon. There were companies like Henry Singleton at Teledyne. I think CapCities bought back a bunch of stock. Tom Murphy.

I mean, there were companies that bought back shares, but they tended to do it using tender offers or they tended to do it opportunistically, which honestly would be my preferred way to do it. Nowadays, it’s much more programmatic. Companies treat buybacks like they do a dividend.

They just return capital to shareholders, which I don’t even think that term is actually that accurate. It’s more you’re really buying out a partner when you’re buying back shares. You’re not returning capital to shareholders. You’re buying out a partner.

If you and I are partners with one other person, and we have three partners, and we want to buy out his share, then that’s the buyback. You’re sort of cashing out the partner. And obviously, that’s beneficial for the two of us as remaining shareholders of the business. But yeah, it hasn’t always been that way. I think the important thing is looking at…

I try to sift through what management says versus what they do. And that’s just, you know, you can look at a 10 year chart of a share count and see, you know, did this, they might talk all day about buybacks, but the share counts not moving. And so you can, you can easily see if they, if their words, you know, um, match up with what they’re, what they’re actually doing.

 

steve (22:44.802)

Well, of course, we see quite a lot of companies where they’re buying back stock in the open market, but they’re giving them to the employees and behind the scenes, some of the options are quite staggering.

 

John Huber (22:58.727)

Yeah, right. Yeah, that’s, that’s the thing. I mean, that’s why you want to look at the net share count reduction. And that’s, that’s what I would call the buyback yield. Um, if there is such a term, that’s the term I use myself, but you know, you, you want to see like how much of that free cash are you getting as a shareholder via a dividend or a net buyback net of all the stock that you give away.

 

steve (23:21.774)

And do you think about that as a percentage of cash flows? Or you just think, OK, they bought back 10% of their shares in the last five years, so the chances are I’m going to get more of that. Another issue, of course, is the price that you do it at. And I’ve found that companies aren’t as disciplined as I would like, often, in buying back shares when things are bad and the shares are cheap.

 

John Huber (23:48.147)

Right. Yeah. Yeah, that is the case with most companies. You know, even companies I admire, I you do notice that. And there’s no good explanation that I can come up with for that other than human nature. I mean, when things are bad, people get scared. And people you know, just saying, buying stocks, nobody wants to buy stocks when times are tough and things look bleak, and things are going to get worse in the next year.

They only want to buy stocks after things look like they’ve sorted themselves out. And by then, of course, the stock’s up 50%. And that’s just the way it goes. So it is rare to find a management team that thinks that way. But even to the extent that buybacks are programmatic buybacks, where they’re just sort of returning the cash flow, as they say, to shareholders, that still can be beneficial to you if you think the stock is cheap, undervalued, right? And if you don’t see the stock as undervalued and you don’t want them to buyback shares, then perhaps you should consider selling the stock and reinvesting it in something that you do like. So yeah, consistent buybacks aren’t a bad thing.

 

steve (24:58.486)

So no, quite agree. So you did a talk at Google in 2018, that must be quite a rare thing for an investor to do. Because they, so well done you in getting the invite. But you said then that the culture and more specifically the incredible talent of these firms is somewhat underappreciated. Google has an unusually large number of employees who are not just super smart, but also very humble.

There is an introspective focus on continuous improvement and long-term thinking that is very palpable there. You also made the point, which I thought was a very good one, that culture, employee talent, workplace satisfaction are three things that don’t show up in the numbers, but they’re extremely important to the long-term earning power of the company.

So Google alphabet now is, I think, it’s a 7% position in your fund based on the 13 Fs. I don’t know if they’re quite right. But I was just wondering, has your thinking changed at all in the intervening five years? You obviously like the company, right?

 

John Huber (25:56.775)

Yeah, I’ve always admired Google, I think, as a phenomenal company. I do think everything you just kind of rephrased from one of my old posts, I would agree with all of that. I think culture is undervalued. I thought that in 2018. I still think that today. I think one thing that has changed in the ensuing six years is some of those factors have become more appreciated in the market, I think.

 

In the mid teens or 2014, 2015, 2016, Google and Apple, where Google traded under 15 times earnings, Apple traded at eight times free cash flow, net of cash. Just incredible valuations for these companies. I just felt like at those levels, the culture, those things that you just listed, the human capital component to these companies,

 

doesn’t show up in the numbers, but has an incredible amount of value. And that’s still obviously the case. It’s just, I think more of that value now has been recognized, I should say, by the market. Now, I still think some of those stocks offer great value, but, you know, I was a shareholder of Apple for over six years and, you know, Apple at 10 times earnings and Apple at 30 times earnings, those are two different things.

 

I think those are two different investment profiles. So yeah, so I think, yeah, I just want to stress for anyone listening is, those things are all true. I mean, human capital is a critical component to business, especially in today’s world, where so much value comes from intangible ideas, but you just have to be careful about what price you’re paying for those things.

steve (27:48.054)

Yeah, I mean, I couldn’t agree more on Apple. I mean, I said, I think about a year ago, just over a year ago, I couldn’t understand its valuation and it’s carried on going up. It just seems bizarre to me. I mean, to pay 30 times earnings for a company of that size. And, you know, it’s just its sheer size must cap its ability to grow. And, you know, when it comes out with a new big thing being a $3,500 headset, you know, I’m scratching my head a bit.

But on Google, I’m quite interested because the recent developments in AI, which I’ve just been writing my sub stack and I’ve been writing, I did it last year, I covered a whole bunch of banks outlooks for the year. It was very popular, of course, I’ve done it again. I’ve actually, it was so long, I had to split it into two sub stacks. And every bank is talking about AI, the opportunity in AI. Not one of them mentions a stock.

You know, they say it’s an opportunity. Well, I’m sure it is an opportunity, but it’s probably more likely to be an opportunity for the banks to cut costs than it is for some tech company to actually make a lot of money, I suspect. But in AI, that creates quite a significant uncertainty about Google’s future.

I mean, one outcome, and I think it’s been an under-appreciated possibility, because everybody sort of said, oh, Microsoft, OpenAI, they’re the winners. And of course, Google have been doing this for quite a long time and they’re pretty smart people. And it could be that they’re actually much more advanced than anybody else and that they can cement and extend their position because we don’t know, we only see what they are showing us.

But another potential outcome is the search box goes and the business model’s undermined. And, you know, I own Alphabet, so full disclosure, I’ve got it in my personal portfolio. And I just, I’m wondering at what point to exit it. Because to me, there’s such a range of potential outcomes. And I’ve got no ability to, I don’t have a clue which one of those outcomes is going to be the right one. And the problem is that it might be a winner takes all kind of issue that if you either have the best AI or you’re left behind. I don’t know enough about it. But how do you?

I’m not expecting you to be an expert in AI, I’m just wondering how you factor that into your process.

 

John Huber (30:16.827)

Good. Yeah. I mean, I, you know, Google’s one of those investments that I think it, you know, it’s it’s a business that has so many, what I would call options on future potential. And some of that has to do a lot of that has to do with the human capital that we were talking about before. And I felt the same way in 2018 when, which is around the time that I wrote that post that you referenced and that is still the case today.

I think what has changed is the new developments with AI, the competitive picture. Microsoft might be getting into search. It does feel like there’s more competition, and that is what capitalism is all about. And so I do think there are potential risks to that business. But I do think also that, you know, one thing that Google has that very few companies in the world have is just a treasure trove, just an absolute mountain of data. And that data can be used in all kinds of different ways. And certainly it’s above my pay grade to try to figure out how to use that data. That’s what they’re doing. And so we have a bunch of high quality thinkers there that I think will use that in productive ways.

You know, I think of Google as like, I think Buffett actually referred to this company as sort of a royalty on the cost of goods sold or the operating, the advertising budget of corporate America. And I think likely Google’s position in digital advertising is extremely strong and likely to grow over time.

Advertising tends to grow at nominal GDP rates, in some cases slightly above that as economies develop and get stronger and companies have excess cashflow to, um, to spend on advertising. And so Google and, you know, a few other companies like Google will be in position to capitalize on that as, as more and more dollars continue to flow to digital advertising.

So I think that position is still very strong. And then you have all these other things like cloud and, AI and all kinds of other initiatives that may or may not develop in Google’s favor, but they have such a cash generative machine going that I think has a strong moat that I view those as uncertain potential upsides, but we’ll see how some of those shake out.

 

steve (32:56.17)

Interesting. You said you make slow decisions, which I like. I mean, I was going to ask you, I mean, how long does it take you to research a stock? I know it varies, but just, you know, roughly?

 

John Huber (33:09.397)

It’s hard to say because sometimes I come across a stock, one of the recent investments we made last year, basically from day one, I thought, wow, this is a great business and it’s a royalty company. It’s a mineral rights royalty company. Almost immediately, I understood the…

 

the situation, I felt like I understood what was happening. I had spent time researching that space for years before, so I understood the industry already. But in terms of the situation going on in that specific investment, I felt like I understood that very quickly. And one thing that’s interesting, Steve, is I’ve noticed some of the best investments I have made over the years have been…

 

you know, in hindsight, it’s easy to say this, but you do feel like almost like no brainer type ideas where you’re just so convicted right away that it makes sense. Now I’ve spent a lot of time researching that particular investment over the ensuing months, but sometimes it really has you at hello. And so it varies. But I do spend a lot of time. I mean, sometimes I’ll spend months researching an idea.

 

and never do anything with it. Other times I’ll come across an idea where I don’t buy the stock right away, but almost like I say, literally on day one or day two, I’m like, wow, this makes a lot of sense. And so sometimes those ideas come quickly.

 

steve (34:43.53)

I mean, I’ve taken positions in something usually because of some change in an environment. I just said, look, it’s obvious that it’s going to benefit and I’ll buy the stock and then I’ll do the research afterwards to make sure that there’s nothing wrong with the accounts, nothing wrong with the management, that sort of thing. And actually, on the short side, it would often be extremely quick.

 

You know, my record was about, I think the management, it stood up for about 10 seconds. And I texted the office and said, you know, this is, it was, you know, just comical. And yeah, obviously it wasn’t 10 seconds of work. There was work done to follow up, but it was just that, you know, you got very high conviction very quickly. But you look for…

 

John Huber (35:23.508)

Yeah.

 

John Huber (35:34.471)

Yeah, sometimes you just get an insight like that, right? Like the company management team that you spoke of, or maybe, and I don’t know, short stocks, but maybe you got that, you just had an insight, and sometimes that insight just comes at, it could come at any moment, and then all of a sudden it crystallizes all of the work that you’ve done previously. And so it’s like a light bulb moment, and so that sometimes can happen, and sometimes, honestly, those are the best ideas.

 

steve (36:02.974)

Yeah, I think they usually are. I always think the simplest ideas are always the ones that have made the most money, yeah. You look forward and visualize the company in 10 years, which I think is a very, very difficult thing to do. And you wanna be confident or certain, or as certain as you can, that it’ll be a bigger company generating more profit. I just wondered, how do you do that? I find this very difficult because, you know,

 

John Huber (36:07.411)

Right. That’s been my experience.

 

steve (36:30.206)

my background was special situations. So, you know, it’s usually buying something that’s crap, that’s gonna be perceived as a bit less crap and will go up a lot. And, you know, so I’m now trying to, you know, look at things in a longer term environment, look at things with, you know, more of a quality lens. And I just wondered, how do you do this? Because that visualization in a fast changing world, lots of disruption. I mean, or is it that you just choose, you know,

 

established incumbents with a long runway for growth like your floor and decor sort of example. I mean just how do you think about what’s going to happen in 10 years time?

 

John Huber (37:11.931)

Yeah, I mean, that’s the thing I’ve prioritized most in recent years, really since the get-go of my fund. But the two things would be durability, and then we spoke about this a few minutes ago, but capital allocation. And those are my best investments. I did a post-mortem on my fund recently, the first 10 years. And those have been the best investments, have been the ones that I felt most convicted on in terms of the durability. And then also,

 

steve (37:27.553)

Mm.

 

John Huber (37:41.075)

the capital allocation that I understood. And so looking out 10 years, I met with the management team of NVR, home builder, and Paul Saville, the chairman of the company, made this comment like, home building hasn’t changed since Jesus was a carpenter. And so that’s the type, and it got me thinking like, yeah, 10 years from now, NVR is gonna be building homes. And we have…

 

all sorts of reasons why you might like or not like NVR as a company. But I think there’s some fundamental tailwinds to that industry that I really like. And I think there’s a shortage of housing in this country. And so if you’re in the position to add supply to a supply constrained market, you’re in a good spot. And when you couple that with the quality of the management team and so forth, that gives me confidence that a company like NVR is going to be around. It’s easier to use examples, but a company like Copart, that’s another great company that has a sizable barrier to entry. And what they’ll tell you is it’s not just that it takes a lot of land. So Copart, for those of any of you probably know this company, Steve, but if you don’t, or if your listeners don’t, it’s basically they own junkyards, they own salvage yards, and they will take a cut of, basically, when you get in a car wreck.

You send your car to one of maybe two places in this country. And those, those are essentially junkyards that will auction your car to a wholesaler or a dismantler or somebody else that wants to buy the car for, um, for scraps or to try to rebuild it and resell it. And so, um, these are like platform companies, but they own big, they’re very capex heavy, they own a lot of land or they have to lease a lot of land. In cold parts case, they own the land.

And so that’s a barrier to entry and it’s really hard. The thing that’s interesting about that business is the permitting process is extremely difficult. It’s hard to set up a new junkyard. Nobody wants one in their backyard, right? And so that’s like a barrier to entry that gives me confidence that business has a lot of staying power. And so I try to look for things like that where I can wrap my head around what the company does, what their barrier to entry is, or what sort of competitive advantage they have.

And then, just ask yourself a simple question, do I think this company’s gonna look similar in 10 years? Some of them, they’re hard. I mean, Google is the one exception where that is more difficult to judge, but I try to place emphasis on companies like Floor and Décor or like a Copart that have that durability and predictability to their business.

 

steve (40:25.262)

But I mean, I would look at Copart through a slightly different lens. It’s not a stock I’m familiar with. But I would say in 10 years time, we’ll be that much closer to the adoption of automated vehicles. So if Google is as smart as we think they are, maybe they’ll have some breakthrough with Waymo. And automated vehicles will become a thing, in which case there’ll be much fewer car wrecks, one would imagine.

And that could, you know,in 10 years time, we could be thinking about Copart as having a market that’s 50% smaller or 70% smaller. I find this, you know, looking out a long way, very difficult. Am I just being am I just too nervous? And things don’t change that much?

 

John Huber (41:14.785)

No, I think that’s right. I mean, in terms of just, it’s difficult to look out that far. I think finding companies, I mean, there are sometimes, and I’m not recommending Copart, I’m not recommending any stocks, of course, but certainly I’m not recommending Copart as a stock. I’m just saying that as a business, I think it has durability. And one of the things that I think is interesting is, you know, there’s oftentimes the narrative doesn’t necessarily jive with reality.

And one of the things that’s interesting about, and this could, I would throw like fossil fuels in general in that category where we need more energy in 10 years. You know, we’re trying to electrify more and more things. We’re trying to electrify our vehicle fleet. And you know, these things take energy and energy has to be produced from somewhere. And so even though renewables are gaining share, we’re still gonna need a lot of fossil fuels.

So sometimes narrative doesn’t match up with the reality. With Copart, an interesting stat there is, there are 1.1 billion vehicles on the road, and that’s up from, I think, 850 million a decade ago. And those are not EVs, those are gas-powered vehicles. And so we actually have more ICE vehicles, internal combustion engine vehicles now than we did a decade ago, even though EVs have obviously dramatically taken market share or are rapidly growing over the last decade.

And so, you know, as the world continues to develop, I think we’ll see more and more vehicles. And every year that goes by, you have in this country 15 or 16 million new ICE vehicles on the road, and those vehicles have a long lifespan. So I think there’s a longer lifespan there, in particular, when it comes to those types of things. But yeah, there’s always a risk to businesses. I mean Geico itself could be disrupted by the things that you speak of and it’s hard to look out 30 years and be sure of any business, which is why you have to pay a price that, hopefully you get a lot of the cash upfront so you don’t have to rely too much on that 30 year terminal multiple.

 

steve (43:24.726)

No, sure. I mean, I, you know, Geico for sure will be disrupted by this. I mean, I think that’s a certainty. I mean, you know, obviously I’m sitting in Europe and you’re sitting in America and there’s a very different attitude to the car. But, you know, there was on the radio this morning, I was listening and they said that London is the slowest city in the world to drive a car in. And I can be quite sure that as soon as AVs are remotely practical, you won’t be able to drive your car in central London, which is, I don’t drive an EV, I bought myself a nice V8 engine car because I thought I’m not gonna be able to drive one for that much longer and I like the sound of it. But my children slightly disapproved.

But you went to China and I was quite jealous that you went to China with Connor Leonard, who used to run a family office and Jake Rosser of Coho Capital. I know they’re both friends of yours and I thought that must be a fantastic trip. Tell me, what did you learn from visiting China and what did you learn from doing that trip with them?

 

John Huber (44:42.083)

It was a great trip. We visited some companies. We met with a variety of different people and some investors there and just did some tourist stuff and learned about the culture a little bit, sat in coffee shops. It was a great trip. I think it was a nine-day trip that was also coming up on six years ago.

What’s interesting about that is it coincided with that was a pivotal year because it was when Xi Jinping essentially rewrote the constitution to allow himself to extend his term past the typical two terms. Over there, they do five-year terms. And so that was the end of his first five-year term.

And of course, a lot has changed in China since then, unfortunately, in terms of, I believe it’s moved more in the direction of I should say it’s moved away from the trend, which I was hoping it would continue on, which was more of a, I don’t want to call it a democratic trend, but a little bit more liberal in terms of freedom, not liberal conservative, but liberal in terms of moving towards more capitalistic, moving towards more free market reforms and things like that. And I think some of those things have been reversed.

And the thing about the party is, you know, they want power above everything else, including the health of the economy in the short run, they want they need the health of the economy in the long run. Because otherwise you end up in revolt, right. But in the short run, if you have to prioritize one or the other, it’s going to, it’s going to be power, because you can always fix the economy later. And so that’s been that’s been a problem for them. But yeah, one of the things I learned there is just what a great country it is.

And just the people – Silicon Valley – I mean, everybody. There we met with all these different venture capitalists and this is a different time period. I’m not sure what it’s like there now, but just ultra competitive. Everyone’s starting a new business, a new venture. You know, so one of the things I learned is, you know, China is going to be a difficult place to invest in. Honestly, it’s just there’s so much there. There’s so much happening there.

There’s there’s so many new companies getting started up and it’s gonna be very difficult to pick the winners. So the broad takeaway for me is, I think there’s a few companies that probably have good competitive positions there, but outside of that, I don’t personally feel equipped to be able to predict who’s gonna emerge from the sea of growth that I think we’ll continue to experience over the coming decades there. But I’m keeping an eye on it. I think it’s a great country and there’s a lot of…I think there’s a bright future there, but a lot of capital, a lot of competition, and it’s going to be great for the people, great for the economy, but as an investor, you really need to pick your spots carefully there, I think.

 

steve (47:46.198)

You don’t really invest outside America, do you?

 

John Huber (47:50.695)

I don’t right now. I mean, all of my investments are North American. We have a few Canadian investments, but yeah, outside of US and Canada, that’s where 100% of my investments are currently. I am looking at other areas.

Japan is an area that that’ll probably be my next trip, probably later in 2024 to visit that country, because I do think there are a lot of interesting things happening there when it comes to sort of the opposite where a lot of their – we’re discouraging buybacks in America. They’re encouraging. They’re telling their companies to buy back shares. There’s too much capital locked up on corporate balance sheets in Japan. And that stifles the economic growth. You have trapped capital. That capital should be returned to exiting shareholders, who can then invest it elsewhere, put it in a bank. The bank can lend it out. That’s how the flow. You want to increase the velocity of money. And that’s what Japan is doing.

 

And so I think releasing some of that trapped capital is going to really help ignite some economic growth there. And it’s a much less competitive environment than China and other places. So I think there’s some interesting things going on at a macro level in Japan. And then when you couple that with the incredible valuations that I see there, that’s one area that I’m looking at. I’ve been looking there for a while, but I haven’t done anything there. But yeah, I’m willing to invest outside of the US.

 

steve (49:15.966)

Yeah, Japan’s an interesting place. I mean, whenever I’ve looked at it in the past, when I was a professional investor, you know, when you meet management, you just put your head in your hands. I remember, so I went to meet the management of one company. It was a competitor of the company that I had an interest in. And I asked him why he wasn’t putting his prices up. And he said, oh, customer is no like. Everybody else was putting their prices up and he just didn’t want to do it. And it was just bizarre.

Now, the tool that I use, the AI tool I use to transcribe my podcast, tells me how much I, it does it in blocks. It tells me how many blocks are me and how many blocks are the guests. Now, I’ve had a couple of guests I didn’t really enjoy, so I tend to speak more. And then I’ve had guests like you or Chris Pavese, where we’ve had a lot of discussion and arguments.

And one of the arguments, well, argument is too strong a word, but one of the disagreements we had Chris Pavese [and I] was on location because Chris was saying, look, I’m in the Blue Ridge mountains. It’s fantastic. It’s peaceful. It’s quiet. I’m away from the noise. I’m away from the hubbub. And that allows me to make better decisions.

And I said, man, nobody comes. No company, other than one that’s located in the Blue Ridge Mountains comes to see you. Whereas if you’re in London or in New York, every company in the world is coming through that financial capital. And that allows you to build up a picture of what’s actually happening in the real world because you can talk to the companies.

And I said, you know, my belief is that if you’re in the centre, you can, you can drown, you can switch the noise off. You know, when you wanna do some work and study a company, you don’t need to have noise on. What was it like in Raleigh? Is it the same as the Blue Ridge Mountains? How do you feel about this?

 

John Huber (51:18.131)

Yeah, well, I kind of envy Chris because he’s so I’m in the same state as he is North Carolina, and the Blue Ridge Mountains are one of my favorite places to go. I take my family up there every year and we go, you know, we go hiking in the Blue Ridge Mountains and we stay in a town called Blowing Rock. And it’s just beautiful up there. So yeah, I can see that is an ideal setting for getting some quiet reading done and some research.

 

But yeah, I think for me, I like Raleigh because it is a mid-size US city. It’s not a big city, but there’s plenty of things happening here. And I personally have, you know, I don’t know if it’s maybe, you know, you could call this like a little bit of FOMO or something, but I love going to the mountains and being, you know, secluded for a week or maybe four or five days.

But then I’m kind of like, all right, I want to get back to sort of where there’s a little bit more vibrance happening and things are happening be around my neighbors be around more people So I’m a little bit more of a people person in that regard But I do think there is something to the idea that you do need you do a spot and you could do that. You could do this in New York You could do this in London You don’t you don’t have to use as it is as an excuse that you can’t think in those cities You just have to carve out time to do that thinking if that’s important to you And so you can do that anywhere in the world.

 I think for me I like living here, it’s a good, it’s a, you know, I chose this spot more for family reasons and just, that’s just where I landed, but it wasn’t a strategic idea from an investment standpoint. But yeah, it’s, Raleigh is a great place to live. It’s a great place to, to run my business, to do good thinking. And then also like to hop on a plane. If I want to go to New York, I can be there in a few hours.

So it’s like, if I go to visit companies, companies for me tend to be all over. So I usually go to them. They’re not coming to me for sure. But you know, I just travel to wherever I need to travel. And, you know, I think it’s a happy medium. There’s, you know, as long as I’m relatively close to an international airport, then I can do my work. And, you know, I can sit in my office and get my reading done and kind of have the best of both worlds. So that’s kind of my take on it.

 

steve (53:31.19)

I mean, your fund is relatively small, relative to large institutional funds, are companies quite happy to see you? And does having a big profile, but you’ve got quite a high, you’re quite a high profile investor, does that help?

 

John Huber (53:49.591)

You know, you’re being kind, Steve. I don’t know how, but my profile is not, I don’t think my profile, to the extent that I have one, it certainly doesn’t get me in front of management teams. You know, the investing blog certainly has helped network with friends and certainly has helped build my business. It hasn’t helped like get me in front of managements. But I do think management teams are willing to meet with you.

 

One thing I’ve been working on a lot recently with a few of the smaller investments we have, and this is sort of a broad theme that I’ve just sort of started to notice, is there are a lot of opportunities between, I guess the way I’ve described it is like, I think there’s a dichotomy between large stocks and small stocks in terms of the valuation. So I’ve been looking a lot more at small stocks just because I find them to be attractively priced.

When I’m looking at small companies, then yes, those companies are more willing to meet with me and I do that to the extent that I can. I find that to be a valuable and useful thing to do. So I’m talking to management teams, I’m visiting with them occasionally, more on the phone call side, but I do go visit companies from time to time and I have a lot of phone calls. And yeah, like I said, on the small cap side, it’s a lot easier to do that.

 

So I think the large caps were very cheap a decade ago. And, you know, we talk about Apple at 10 times earnings. I mean, Visa was 13 or 14 times earnings. Google was under 15 times. You know, there, a lot of large companies were very cheap. And I don’t think that there was that same Delta between small and large stocks like there is now. And so, um, and this isn’t really for me, like a value investment.

I’m not, I, I always, I’m looking for companies that I, that I think are durable, that I understand and that offer great value and that can come in a variety of sources, not necessarily a value factor, but there are a lot of quote unquote value stocks that I think are compelling currently that might not have been the case four, five, six years ago.

 

steve (55:56.518)

I think it’s quite interesting. As I said, I was writing this outlook piece, which will be published in my sub stack over the next two weeks. It got so long, I had to split it into two. But one of the things that was quite evident was the gap between small cap and large cap valuations in the States. More than one bank had the point.

And I think these sorts of things are very useful because you want to fish where the fish are, as Charlie Munger used to say, right? And so if you know that there’s a large cap, small cap, but you know, pricing differential, then it behoves you to look at the small caps. I mean, you’ve got some quite large companies. So I guess Floor & Decor would be kind of mid cap for America. It’s about 11 billion.

I was looking at it because it’s your second largest position, I believe. And I was surprised at the valuation. It looks like, I mean, I had it down as in a 50 odd P.E. And I was quite surprised because, I mean, we’ve never met before and I’d never looked at your portfolios. I don’t know why I had the perception that you wouldn’t be the sort of person that owned the 50 times P.E. stock. But why? Does that not scare you? Are you so confident about the prospects?

 

John Huber (57:26.459)

Yeah, that Floor & Decor is one of the exceptions to my rule of thumb of, you know, preferring all three engines working in your favor.  Floor & Decor, I think we’re going to get a significant contribution from the growth engine. And not hyper growth, you know, it’s but it is butting up against that 20%. You know, it’s growing at 20 to 25%. And it is a it is a, you know, as Peter Lynch used to say, it is a fast grower.

 

It is a company, you know, I just for anyone interested, Andrew Walker and I did a podcast on Floor & Decor recently, and that’s probably a good way to get more details and more of my thoughts on that specific company. But it is, I don’t think it trades at a 50 PE. I think the normal earning power is quite a bit cheaper than that.

And that’s just based on some accounting factors and just the nature of some of the leverage that the business has experienced in the last few quarters. I think that’ll sort itself out over the next year or two, but it is certainly an optically expensive looking stock regardless. But I think it’s got one of the strongest motes that I’ve studied in a vertical that doesn’t attract a lot of attention, which is flooring.

But the thing that in a nutshell, Floor & Decor is dominating a very fragmented space. And so they’re the biggest player in retail flooring. And there are probably 13,000 mom and pop shops around the United States. And so there’s a very fragmented group of small competitors that can’t compete with Floor & Decor because they don’t have the same scale. They can’t offer the same low prices. They can’t offer the same selection.

And that’s what Floor & Decor do. So it’s kind of running the same, it’s very similar business in my view to, um, O’Reilly Auto Parts, where they are catering to the professional customer. They’re, they’re consolidating a group of very fragmented, um, smaller competitors that don’t have the same scale and that white space just lasts, you know, a long, long time.

And then you couple that with the industry backdrop of what we spoke about earlier, which is housing. I think housing has a, it’s going to go through ups and downs, certainly, you know, through recessions, interest rate cycles and so forth. But over the long term, over the next decade plus, I think that business is really positioned to do well and it has a super strong moat in the industry it operates in.

 

steve (59:57.482)

No, it’s interesting. I mean, I hadn’t appreciated that. I just looked at the multiple on the screen and I thought, oh, because you’d written about that now.

 

John Huber (01:00:05.799)

Yeah, it’s one of those rare stocks where, yeah, if you look at the 10 year test of it, Steve, once you get to study it, it might not be one that jumps out at you initially, but when you study the business and you, I mean, I’ve been to their distribution center, they have a number of them, but I’ve been to the one in Baltimore, which is one of their newer ones. And you just get a sense for how much of a well-oiled machine that supply chain is and how difficult flooring is. I mean, one pallet of flooring weighs over a ton when it comes to like some of the… It’s heavy to move.

 

steve (01:00:39.634)

Yeah, no, I mean, I can see it’s a very robust company. I haven’t done any work on it. I just saw the valuation was quite….

 

John Huber (01:00:50.579)

Yeah, that’s one of the rare ones in the portfolio where I think that, you know, we have a number of stocks right now that are trading at, I would say between 10 and 15% free cash flow yields. And that tends to be more of my sweet spot. We have a couple that are sizably above that, actually.

But Yeah, there tends to be, I mean, the capital return engine is something we talked about before, the buybacks are something I speak of, or something I focus on a lot. And so that’s the majority of the portfolio, I would say, falls into that category. But we do have a couple that I think are going to be long term, you know, they have a long term growth runway that are attractive when you look at the earnings they’ll generate, you know, years out in the future.

 

steve (01:01:40.526)

I mean, I used to think it was quite important to have a range of valuations within the portfolio. So, you know, just having a portfolio of stock on single digit PEs probably wasn’t gonna work because there was probably a reason why they were, you know, there might be different reasons, but you know, if the stock market decided growth was what they wanted, what people wanted, then these stocks would languish.

And so I’ve always believed that one of the ways to diversify your portfolio is to think about, you know, have some, don’t have all cheap, boring, low, single digit PEs, have some sex and violence in there, just to give you a little bit of diversification. And I mean, do you think about that? Or you, I mean, you’ve got a very concentrated portfolio.

 

John Huber (01:02:32.507)

Yeah, that’s an interesting point. I do have a variety of different diversification tests. These are things like I want to be cognizant of what my exposure is to things like interest rates. I don’t want to have too much debt. Most of my companies don’t have much debt at all. But to the extent that companies do have debt, I want to know what percentage of the portfolio has debt on the balance sheet.

What that consolidated debt level is, how much of it is exposed to any one industry? So not just interest rates, but things like housing. We have some housing investments. And then also, yeah, I do think about not exactly in the way you put it, but something similar in terms of, I think in terms of categories of investments. So I have two broad categories. And one would be like my core holdings.

These are companies that I think can compound value for a long period of time. And I intend to own those for a decade plus. And that could be a royalty company that takes a cut of the natural resources that it owns in the ground. And that will probably be happening 10, 20, 30 years from now. Or it could be something like Florinacore that I think just has a sort of a better mousetrap and a huge moat in the niche that it’s in. And so I think those are like the category ones that I intend to hold.

And then category twos would be more of what I call value to a private buyer. And so these are stocks, maybe similar to more of your special situations, but they may or may not have a traditional catalyst like most special situation investments do, but sometimes they do, but sometimes they don’t, they’re just cheap. And so I tend to look for stocks that are, the value to a private buyer is significantly above where I think the stock is trading at. And so we have a few of those as well.

 

And so, yeah, like I like to have some diversification in those categories, but I don’t, I don’t like from a top down basis, try to allocate to those. I just look at the opportunities. And so I just sort of explicitly outline where my portfolio allocations go. But yeah, I do think about those. And then also in terms of the three engines, I want to have some of the portfolio weighted towards, you know, the capital return engine. Ideally have most of the portfolio in value stocks. I think the base rate for value as a factor is, is pretty evident over the long run. It hasn’t worked in the last decade or so, but I do think if I had to pick one factor above everything else, it would be value as measured by enterprise value to EBIT or even PE or something like that. But I don’t make investments on a basket basis on that, but that is something I keep in mind.

 

steve (01:05:16.722)

Interesting. Now you talked about a similarity between cross country running and investment, both have  long feedback loops. And I want to ask you about this because you run 50 plus miles a week, which is like more miles than I do in the car, would you believe, in a week. And it may surprise you, I took up running, you know, in my advanced years, I took up running in COVID, because I just needed to get some, needed to get out, I needed to get some exercise.

 

John Huber (01:05:32.015)

Right. If you’re in London, that’s probably good for you.

 

steve (01:05:46.59)

And it was like sheer desperation. And I hadn’t run since I was at school. And when we were at school, we either used to run around the field, the playing fields, the rugby pitches, or the long route was outside. And when we did the outside, a few of us used to stop in the tenement and have a cigarette. And we used to miss out a lap, which shows my age. But what’s the similarity between investing and running? What’s the long feedback loops?

 

John Huber (01:06:15.731)

Yeah, well, a long feedback loop is, you know, in both running and investing and you can say running, but it’s fitness in general, right? Or you could even say like healthy lifestyle, healthy eating. You know, if you’re trying to improve your health or your fitness, it takes a long time and there’s no quick, it’s kind of a topical conversation right now with the like, you know, some of the, some of the therapeutics and the drugs that have come out in the last year that have, that have sort of hit the headlines and stuff, which I’m not a fan of any quick fix to health.

I think it’s a long feedback loop, meaning you have to put in the time, you have to eat healthy. It’s common sense, it’s simple stuff. So with both health and investing, it’s very common sense stuff, right? Consume fewer calories than you burn if you wanna lose weight, eat healthy. To me, that’s, I eat a lot, I try to mostly plants, eat food, mostly plants type of thing.

 

And nothing is meat, I eat meat too, but I just like, it’s pretty simple to get nutrient dense food, healthy eating, it’s common sense. There’s no like magic, there’s way too much complexity. There’s always a fad going on, whether it’s like intermittent fasting or things like, and I’m not, I hate to call that a fad, but I do think like you don’t need any, you just need to do common sense things, eat healthy, exercise, and consistently stick to that program.

And you’ll notice improvements over a long period of time, right? Over a period of weeks, months, years. And that’s the same with investing is that you can’t, you can’t force things. You can’t make money tomorrow. Right. You have to put in the work today. It’s like Jeff Bezos said, like somebody said to, Hey, great quarter, Jeff. And he’s like, well, that hap, that great quarter happened three, four, five, six, seven years ago, right?Lon It’s so it’s a, it’s a process that takes time. And so that that’s sort of the metaphor there is the long feedback loop is it take with both running and investing.

 

It’s a long game. You have to put in consistent work day after day and it compounds over time.

 

steve (01:08:18.822)

Interesting. So I normally conclude by asking people to recommend a book, but we started off by talking about Peter Cundill’s book and John Neff’s book. The John Neff on Investing I really, really enjoyed. And I was looking at that because I was trying to understand how people invested in an era of inflation. But is there another book that you would like to recommend?

 

John Huber (01:08:41.907)

Yeah, those are two great books. Another one that we spoke of that I would recommend would be Built from Scratch. And so that is a book about, I referenced it earlier, but it’s about Home Depot. And, you know, we touched on Floor & Decor. That would be a book that for anyone interested in Floor & Decor, the Floor & Decor CEO came from Home Depot. He spent 20 plus years, two decades running Home Depot or working at, he started at the floor and worked his way up to executive VP of operations.

And, you know, he was at the store when it had, or at the company, when it had 16 stores and he left when it had 2000 stores. And so they’re kind of running the same playbook at Floor & Decor Corp in a similar way. And so I think that’s a great book for anyone interested in that company. And it’s a fun read. I mean, it talks about the origin story and how they raised capital and how competitive it was and how difficult it was and the growing pains that they experienced. So it’s a really good sort of a case study on Home Depot and how difficult the retail business is. But that’s another one.

 

steve (01:09:45.142)

Well, I’ll put those three books in the show notes. Peter Cundill has been recommended before. I’ve recommended John Neff, but no guest has. And certainly, he built from scratch. I’ll need to read that. I’ve got a pile of books. I actually photographed a pile of books on at the start of the year. But I thought, how am I going to get through all these things? I mean, it’s just, you know, I saw people photographing the books that they’d read in the last year.

 

John Huber (01:10:01.788)

I think I saw that. Yeah.

 

steve (01:10:13.11)

And I thought, how do you manage to do that? Because I read the book and I put it on the shelf. I mean, it just so happened that I had a pile of books that I was working on for the podcast that was in a separate pile. And then I had another set of books that I just put on the bookshelf. I just put them together. But probably the last thing I need is to add to my pile. But I kind of feel that, you know, you can’t have too many books to read, right? That’s…

 

John Huber (01:10:51.694)

Yeah, books that you speak to, I know everybody talks about reading books. I think I read fewer books than most of the people, at least if you look at their Twitter profiles. I mean, I do have a couple of friends that I know for a fact they’re reading 50 books a year plus. And yeah, like a book a week. And it’s hard to do. For me, I always think of it in terms of an opportunity cost. If I’m going to read this book, I’m going to have to do – that’s time away from reading about this company that I really want to read at. And as I’m reading the book, I keep looking at the corner of my desk, looking at this annual report that’s just calling my name and I want to dive into that.

And so I think as an investor, there’s no right way to do it. Warren Buffett, I don’t think reads a lot of books from what I can tell. Now, that might sound shocking. I think he reads books, but he reads an enormous volume of financial statements, right? And or reports, hundreds and hundreds a year, he says, right?

So I think that’s where he’s spending his time. And he even joked at an annual meeting recently that, you know, his bridge playing, he plays like 15 or 20 hours of bridge a week online. He says, yeah, my bridge playing really cuts into my book reading. And so I get the sense that he doesn’t read, he’s not reading a book a week. I would bet that. And probably part of the story.

 

steve (01:12:28.17)

I’m sure he’s not.

 

John Huber (01:12:29.715)

Now Charlie Munger on the other hand, of course, is famous for, you know, like he’s legs with a book sticking out as his kids used to say, like he’s reading a book all the time. And so there’s different ways to do it. You get a different perspective from reading a book, but I find most of my reading tends to be like company specific financials, trying to get at the crux of the thing. But yeah, books can be very valuable and I do read a fair number of them, but just not as many as I read, you know, annual reports, I guess.

 

steve (01:13:01.202)

It’s fine, because when I was at the hedge funds, I just didn’t, I couldn’t pick up a book at the end of the day. I’d read so much every day. And what, not just annual reports, but, you know, research coming in from the banks and reading, you know, reading up about companies and trade magazines. I mean, my eyes couldn’t, couldn’t have managed it.

And my wife used to go mad. She actually bought me a Kindle. Because when we went on holiday, I used to pack it with the suitcase with all these hardback books. So this suitcase weighed a tonne and she bought me a Kindle because it was just unreasonable. The only time I could read was when I got on holiday. But listen, I really enjoyed talking to you, John. I really appreciate you taking the time. Where can people find you if they want to get in touch with you?

 

John Huber (01:13:48.679)

Yeah. Well, Twitter is always a good spot to find me. JohnHuber72 is where you can find me on Twitter. And then from there, you can find my firm’s website, SaberCapitalMGT.com. And then I write a blog called Base Hit Investing. And you can search for that and find me there as well. And I do a lot of writing online. So yeah, always, always happy to engage with anyone that has interesting thoughts or questions or the like. So But yeah, I appreciate the time. Steve, it’s always a fun conversation and enjoyed it very much.

 

steve (01:14:24.45)

Thank you so much.