HOW STEVE KNOWS THE GUEST

Steve bumped into Christopher outside the Markel meeting in Omaha this year. He had read his letters and was keen to interview him. Steve learned a lot from interviewing Tom Slater, the well-known growth investor and early backer of Tesla, earlier in the year, so had been looking for more growth investors for the podcast. If you know of any who would be interesting and interested, please email us at info@behindthebalancesheet.com. Christopher happened to be in London in early July so they agreed to meet up.

Although they didn’t talk about it on-air, Christopher is an avid art enthusiast, as is Steve. Christopher is such an enthusiast of Ai Weiwei’s work that not only has he amassed a major collection, he even asked the artist to design him a home in upstate New York. He sold the home some years ago, as it was unsuitable for his family, and obviously for a good price, as a recent sale of the property showed limited appreciation since.

But it reminded Steve of the plans submitted by Charles Rennie Mackintosh for a competition organised by the German design magazine, Zeitschrift für Innendekoration, for a “grand house in the modern style”. House for an Art Lover was Mackintosh’s entry. It was praised for its original design, but it was disqualified for insufficient drawings.
By this time, Mackintosh had already completed several buildings and was designing the Hill House, probably his most famous residential commission. Construction of House for an Art Lover was started in 1989, delayed in the early 1990s because of the recession, and was finally opened in Glasgow’s Bellahouston Park in 1996. And so many tourists visit Edinburgh and pass Glasgow by…

Tsai Residence from the Robb Report website:

Contents

00:00 – Legacy of investing wisdom
15:49 – Tesla’s strategic investment insights
24:37 – Cash flow and market position
32:59 – Valuation and growth tolerance
43:37 – Navigating tariffs and investments
58:24 – Growth pains vs. extinction
01:10:36 – Essential reading for investors

Transcript

Intro Clip

CHRISTOPHER TSAI: If it didn’t have a moat, we wouldn’t own it.

CHRISTOPHER TSAI: So this is a company that I think when one does a deep dive, and I’ve done multiple deep dives over the years in various verticals of business, and I think that more and more value investors, as you’re seeing in 13F filings, are starting to buy Tesla only now because they see deep moats in that. Business. And yes, they have a very deep mode in energy storage.

CHRISTOPHER TSAI: They have such advanced capabilities on the autonomous driving side. And to clarify, in terms of energy storage, I’m not just talking about the ecosystem, Steve, that they’ve built around power walls and electric vehicles. I’m talking about Megapacks. These are the large-scale electric utility type. Yes. Storage facilities for energy called Megapads.

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Podcast

STEPHEN CLAPHAM: I’ve had quite a few value investors on this podcast, so I thought I would shake it up a little by inviting a few more growth investors. Confusingly, Christopher Tsai describes himself as a value investor in spite of his portfolio having forward multiples, if I’m generous in the calculation, of over seven times on EV to sales.

STEPHEN CLAPHAM: Over 30 times on EV EBITDA and over 60 times on PE. Learn why he thinks that represents value and why he thinks there is more to a multiple than meets the eye. Tesla is his biggest position and he was disappointed to have to trim it when it reached a 33% weighting, substituting it with a cash shell.

STEPHEN CLAPHAM: In a first for this podcast, he recommended Proust and he explains why. If he had not read In Search of Lost Time, he would not have bought Tesla, and why he thinks Tesla has multiple deep mobs, why he continues to hold Costco at a 55 times multiple, and why in a 25 stock portfolio, he targets 35% in the top five positions and 57% in the top 10.

STEPHEN CLAPHAM: Christopher, who incidentally is the third generation of his family to be an equities investor is a deeply thoughtful person and investor and it was fun chatting to someone whose views and whose portfolio were so different from my own i learned something and hopefully You will too.

STEPHEN CLAPHAM: So Christopher, it’s so good to have you on the show. I normally ask people if they always wanted to be an investor, but you’ve told the story of buying $100 of stock. I think it was NACRE, if I remember correctly, when you were 11. And that must have been a lot of money.

STEPHEN CLAPHAM: I mean, you don’t look very old, but that was a lot of money then. So of course you always wanted to be an investor, but you’re the third generation of your family to be an investor. So just let’s start by just tell us a brief. Account of that legacy and how it shapes your early understanding of markets and of investing.

CHRISTOPHER TSAI: That first trade was so incredible for me and really formed my enthusiasm for looking at companies. I spent about three or four hours weeding in the garden to get that $100 of capital.

STEPHEN CLAPHAM: Three or four hours? That seems quite a… Generous return.

CHRISTOPHER TSAI: Pretty good, right? Pretty good rate of return for those hours. I took that $100, bought five shares of NACRI at 20 a share. That was 100. Went to 25. I thought it was the best thing in the world. So I called my broker, Bruno, to sell. Only problem was the commission was 100.

CHRISTOPHER TSAI: The commission was more than my profit on the trade. So I had to convince Bruno to waive the commission. I kept the full $25 of profit. I thought it was the best thing in the world. And from there, I used some of that money to get a Value Line subscription. It was off to the races.

CHRISTOPHER TSAI: So every day after school, I would come home, look at Value Line, study it, and began managing money informally when I was quite young, around 16. Eventually launched my business when I was 22 and been doing the same thing, looking at companies every day, looking at Value Line every day ever since.

STEPHEN CLAPHAM: And at 16, you… Persuaded somebody to part with their life savings. I mean, how did you do that?

CHRISTOPHER TSAI: Well, it took me about a year, so I probably wasn’t that very good at it. But I went to a local restaurant called Lotus East on Greenwich Avenue in my hometown of Greenwich, Connecticut. And Johnny…

STEPHEN CLAPHAM: Is it still there, by the way?

CHRISTOPHER TSAI: It’s not there to my knowledge.

CHRISTOPHER TSAI: Johnny was the owner, and he liked to talk about stocks. So we started talking for… About a year. Eventually, I convinced him that I could do better than what he was earning in the bank, and I could do better than him trying to speculate buying and selling and buying and selling, which he was doing. So he gave me his entire savings at the time, which was $400,000.

CHRISTOPHER TSAI: Fortunately, I did fairly well for him, and he effectively became my first client.

STEPHEN CLAPHAM: It’s extraordinary you say you weren’t that good, it took you a year. I mean, I can’t imagine age 15 or 16 persuading somebody to give me money to invest for them.

CHRISTOPHER TSAI: Well, I spoke to not just him, I spoke to other local businessmen, and he was one of those who decided to take a shot on me.

STEPHEN CLAPHAM: How many did you speak to, though?

CHRISTOPHER TSAI: About a dozen or so.

STEPHEN CLAPHAM: A dozen. Well, that’s a pretty good hit rate.

CHRISTOPHER TSAI: I wound up getting about three of them, if I can remember correctly.

STEPHEN CLAPHAM: And what was it that they saw in you? Because, I mean, if you had somebody come to you age 16, I was very keen on investing. You might say, oh, you know, I’ll give him $10,000 and I’ll encourage him. But you wouldn’t give him half a million dollars, would you? And at that time, that was a million, two million, three million dollars, right?

CHRISTOPHER TSAI: And not only was his life savings.

CHRISTOPHER TSAI: So I think that ultimately. People give money to somebody if they trust them. And they trust that they are going to treat their capital like it’s their own. I grew up in a family that struggled to make its first pot of capital, starting with my grandmother, who was the first woman to trade shares on the Shanghai Stock Exchange.

CHRISTOPHER TSAI: I know how much trouble, how much… Pain she went through in order to get enough money to afford an education for my father so he could actually leave mainland China and come to the United States. I saw firsthand how much my father struggled to build his career.

CHRISTOPHER TSAI: The preservation of capital, the importance of capital has been something I’ve taken dearly since I was a little kid. I respected every dollar that I earned from gardening, from pulling weeds, and I didn’t waste it. I at least tried not to.

STEPHEN CLAPHAM: Was that something that your father imparted? Because your father was a wealthy guy, right?

CHRISTOPHER TSAI: I don’t think he necessarily imparted it in me in a direct way, but I think children learn from watching others around them, not only their peers, but grown-ups. So something that not just him, but also my mother did, in terms of my upbringing, probably instilled some sort of respect. For previous generations, a respect for hard work, and a respect for what the value of a dollar is.

STEPHEN CLAPHAM: And is that something that you try and impart to your children now?

CHRISTOPHER TSAI: I try very hard, and I think that every parent does. It’s a question of how effective one’s methods are, and we’ll see in time.

STEPHEN CLAPHAM: Yeah, I’m a bit… My family, I think it’s a bit like the mechanics card. You know that story. Mechanics card is always the worst maintained. Trying to explain to my children about how to preserve wealth. Absolutely no interest in investing. Your kids, don’t they?

CHRISTOPHER TSAI: They have an interest.

CHRISTOPHER TSAI: One would love to be an entrepreneur. One is probably going to go in a different direction, but they understand.

CHRISTOPHER TSAI: That wealth is created over time. It’s not something created short-term buying and selling. And our 2024 annual letter was written really not just for our investors, but it was written for them. So a lot of this legacy and how I think about the stewardship of other people’s capital is all… Baked into that 2024 annual letter so that my children can hopefully take a nugget or two from there for their lives.

STEPHEN CLAPHAM: That’s quite cool. I mean, preservation capital, obviously very important, but you had a rough time, 2022. How did that feel?

CHRISTOPHER TSAI: It’s never a good feeling when a portfolio goes down. And in 2022, we went down even more than the market.

CHRISTOPHER TSAI: Over these 25 or so years that I’ve been managing capital for others, we now have a 25-plus year track record. Typically, in down markets, we’ve performed better on a relative basis. In 2022, that was not the case. One of the reasons was that I think we were not diversified enough.

CHRISTOPHER TSAI: And another reason… i i believe looking back is that we were too exposed to long-duration businesses businesses that had cash flows pushed out into the future that the companies with the higher multiples got hit a lot harder in 2022 and so that was one of the reasons why we underperformed the s p in 2022 but we came roaring back in the subsequent years.

STEPHEN CLAPHAM: How does that sort of color your attitudes or number of stocks and concentration? Because in the letters, you talk about targeted concentration. What does that mean?

CHRISTOPHER TSAI: So, PSY Capital manages about 60 or so separately managed accounts. We try to ensure that all of the accounts are managed in an identical way. However, for various tax reasons or other client-imposed restrictions, There might be some accounts that might have 22 securities or 23 and not necessarily 25.

CHRISTOPHER TSAI: So the goal is to have a targeted allocation that is identical across all portfolios. But it’s, in a few cases, not that way. So that’s why we say targeted.

STEPHEN CLAPHAM: That must be quite complicated to manage, isn’t it?

CHRISTOPHER TSAI: Not really. We manage the portfolio like a fund. And so when we’re trading, we trade as a block. And then we allocate across client accounts. So we really treat the whole 60 or so accounts as a fund.

STEPHEN CLAPHAM: But your concentration is quite high. And I just wondered, that must be a worry when you’ve had that experience before where you were brutally treated by the market when you had these high multiple stocks.

STEPHEN CLAPHAM: Has your tolerance for concentration reduced?

CHRISTOPHER TSAI: As a consequence of that well i think that within our community of value investors PSY Capital would be perceived amongst many as overly diversified. Oh, really? We have 25 companies, and I think you and I probably share some friends who manage capital that might have just 10 companies in their portfolio. And then there’s the other extreme where you have so many companies, call it several dozen.

CHRISTOPHER TSAI: I think we struck the right balance between being able to add alpha for clients and knowing our client tolerance for volatility. I think right around the 25 number is the correct number for us. And ironically, that’s where we started out 25 years ago.

CHRISTOPHER TSAI: We became more concentrated over time. And now we’ve come full circle and we have about 25 names today. The top five names I should mention represent a target allocation of 35% of capital. So the top five are pretty weighty.

CHRISTOPHER TSAI: And then the other 20 round out the balance of the portfolio in a fairly equal way.

STEPHEN CLAPHAM: But you’re more than that, aren’t you? Top five? I don’t know. I mean, I’ve only got the March filings.

CHRISTOPHER TSAI: Yeah, there’s some accounts that are…

CHRISTOPHER TSAI: Are larger in terms of our assets under management. So when you look at the 13F filing, you’ll see that, for example, Tesla will represent a larger piece. But again, it comes back to what is our target allocation? And our target allocation calls for the top five positions to be 35% of capital. The top 10 positions represent 57% of capital. And for some accounts, that might vary a bit.

STEPHEN CLAPHAM: Okay. And, well, you mentioned Tesla. So we had lunch just before this recording. You said you trimmed Tesla because it was a larger proportion. So just talk about that. And how does it feel kind of being forced to trim your flowers?

CHRISTOPHER TSAI: Yeah, I’d say that it’s a happy outcome. To own a stock that’s gone up seven or eight times since our purchase. We purchased Tesla first in February of 2020, and we paid an average of $41.66 a share.

CHRISTOPHER TSAI: It did rise to become about a third of some client portfolios.

CHRISTOPHER TSAI: And I had another opportunity last year whereby I thought that some of that capital could be allocated into this new name which i did need capital for and it was the right moment to increase the portfolio diversification while not necessarily having to sacrifice upside so we sold some of the Tesla position down last year it was one of our most successful it’s been one of our most successful investments that i can think of since i founded the firm but it remains our number one holding today and i mean you own it not because it’s a car company because it’s because of robo taxis right i don’t own it just because of robo taxis i own Tesla because the business has such deep moats across multiple verticals, not just the auto manufacturing side, but software, energy storage.

CHRISTOPHER TSAI: And it’s, to me, a trillion-dollar startup in many ways, with the autonomous driving piece, the robo-taxi piece that you’re pointing to. Just in its infancy having launched in Austin, Texas this month or last month.

CHRISTOPHER TSAI: The robotics business just in its infancy. This is a trillion dollar startup with such deep economic moats across its verticals.

CHRISTOPHER TSAI: So we look for businesses that have extremely high returns on invested capital, importantly, extremely high returns on incremental invested capital and deep moats and long runways in which to deploy capital over long duration. And Tesla fit all of those areas that we look for in 2020. As today and I can argue even to a larger extent.

STEPHEN CLAPHAM: I mean I get the the moat in autonomous driving well is it a moat I mean I suspect that President Trump doesn’t want too many Chinese robots roaming the streets of Washington so you know he’ll the U. S. Will favor the the the US incumbent. But I mean, the Chinese are probably way ahead of the US in autonomous vehicles, I would guess.

STEPHEN CLAPHAM: I mean, I don’t know anything about it. But things like energy storage, I mean, does Tesla have a moat in energy storage? I mean, I could understand that when you buy a Tesla, they’ll persuade you to give you a discount off your electricity bill and all those sorts of things.

STEPHEN CLAPHAM: Does it really have a moat in robotics? I mean, who knows who’s going to win in robotics? I mean, Musk is clearly a genius, but, I mean, honestly, does it have moats?

CHRISTOPHER TSAI: If it didn’t have a moat, we wouldn’t own it.

CHRISTOPHER TSAI: So this is a company that I think when one does a deep dive and… I’ve done multiple deep dives over the years in various verticals of the business.

CHRISTOPHER TSAI: And I think that more and more value investors, as you’re seeing in 13F filings, are starting to buy Tesla only now because they see deep moats in that business. And yes, they have a very deep moat in energy storage. They have such advanced capabilities on the autonomous driving side.

CHRISTOPHER TSAI: And to clarify, in terms of energy storage, I’m not just talking about the ecosystem, Steve, that they’ve built around power walls and electric vehicles. I’m talking about Megapacks. These are the large-scale electric utility-type storage facilities for energy called Megapacks. They are really one of only two companies that have built such a deep moat.

CHRISTOPHER TSAI: And a lot of that moat is driven by software. There’s something called AutoBidder, which is a software program that large-scale utilities will purchase as part of a mega-pack deployment. And it allows them to really optimize revenue over the usage and demand for electricity.

STEPHEN CLAPHAM: Okay. And you were interviewed by The Guardian about Elon Musk’s…

STEPHEN CLAPHAM: Foray into the Department Of Government Efficiency. Are you kind of relieved that that’s all unwound?

CHRISTOPHER TSAI: Well, I’m hoping that it’s unwound.

CHRISTOPHER TSAI: We’ll see. To some extent, it’s coming back to bite Elon. I think that his deep involvement in that area of politics is definitely behind. But his involvement in politics in general is not behind.

STEPHEN CLAPHAM: Oh, dear.

CHRISTOPHER TSAI: We’ve just seen him expressing his dislike for the one big beautiful bill once again. And ultimately, though, here’s an individual who, to some degree, is…

CHRISTOPHER TSAI: Benefits from his relationship with the government. But President Trump also needs Elon Musk. So they need each other.

STEPHEN CLAPHAM: Why does President Trump need him?

CHRISTOPHER TSAI: President Trump, in my opinion, needs Elon because Elon could sway the vote in a meaningful enough way that it becomes problematic for the Republican Party. And Elon needs…

CHRISTOPHER TSAI: President Trump to some degree for the benefit that the companies that he controls is currently getting from the U. S. Government. And that might be economic, and that might be in terms of a road map that has less hurdles today than it might have had under the Biden administration.

STEPHEN CLAPHAM: Because the car business is…

STEPHEN CLAPHAM: Is problematic isn’t it i mean apart from the fact that it’s competing with BYD who seem to be able to produce cars a lot more cheaply it’s also problematic in him acting for Republican acting as a part of the Republican government because it’s Left-wing lovies and libertarians who like to drive Teslas, who believe in the EV, who believe in climate change, and who believe that by driving a Tesla, they’re changing the planet.

STEPHEN CLAPHAM: I mean, we’ve seen massive falls in Tesla sales in Europe because the Europeans just don’t like what he’s been doing in the government side.

STEPHEN CLAPHAM: Does that worry you? I mean, at the end of the day, it’s the car. Company that’s producing all the cash flow today. I mean, I accept that it could be quite different going in the future.

CHRISTOPHER TSAI: Well, there’s a massive amount of cash flow being produced today, and a lot of that cash flow is being reinvested in the business. So the current earning power of the business is nowhere near where it could be if Elon decided to take his foot off the gas pedal, so to speak. But this, again, is a trillion-dollar startup that is investing in many, many areas.

CHRISTOPHER TSAI: You mentioned BYD. I don’t think that Tesla is a direct competitor to BYD. In fact, Stella Lee, who was the executive vice president of BYD for many years, I think she has a different title today. She gave an interview recently in the past few years in which she says that BYD and Tesla are not competitors.

CHRISTOPHER TSAI: There’s only a 15% overlap in their customer base. It’s 1.5. So BYD, to your point, is manufacturing cars that are much cheaper. But by doing that, they’re playing in a different market. Tesla is not trying to produce a $10,000 vehicle right now as BYD is. Tesla is producing what is still an aspirational product for many people, but one that is becoming cheaper and cheaper every year.

CHRISTOPHER TSAI: On purpose. So instead of pocketing extra profit as the company continues to scale, Tesla is lowering prices on a continuous basis, on average 15% to 20% a year if you go back and you look at history.

CHRISTOPHER TSAI: And they’re doing that in a manner that resembles scale economy shared, a business model where you’re giving back to the consumer like Amazon, like Costco, incremental margin in order to drive the total addressable market. And that has been very successful for Tesla, having gone from producing just 100,000 or so vehicles 10 or so years ago to 1.8 million vehicles today.

CHRISTOPHER TSAI: Henry Ford was probably the first person I know of that I can think of from a historical standpoint that followed that. Scale economy shared business model. And as Ford grew and scaled and increased its volume, it didn’t happen on a consistent year-by-year basis.

CHRISTOPHER TSAI: There were periods in which sales did not do as well as in previous years. We are going through that now with Tesla, but Tesla’s also laying the foundation for a much larger volume. Production in the future.

STEPHEN CLAPHAM: It’s interesting. We’ll have a side bet on, because I think BYD will find it a lot easier to produce a rival to the Model S than Tesla will find it easy to produce a $10,000 car. And in fact, when we leave here, there’s a BYD that looks exactly like a Model S. Let’s go.

CHRISTOPHER TSAI: Let’s go check it out.

STEPHEN CLAPHAM: But you sold some Tesla to buy QXO. So let’s talk about QXO.

CHRISTOPHER TSAI: Brad Jacobs reluctantly Steve we reluctantly sold Tesla to buy some qxl the the timing was right again it allowed for further diversification Tesla became a third of the portfolio but it remains our largest position today and i’m very bullish about Tesla but let’s let’s let’s jump to qxl yeah so why are you bullish on qxl we’ve got Brad Jacobs i’ve known Brad for more than 25 years I’ve had the honor of knowing Brad for more than 25 years because my late father, Jerry, was one of the original investors in United Rentals when United Rentals was being formed.

CHRISTOPHER TSAI: So he was one of the five or six or seven people that actually contributed the capital before any major fundraising.

CHRISTOPHER TSAI: I’ve watched Brad over these years. I bought United Rentals shortly after it went public in 1997. I’ve been an investor in Express One, Expedited Solutions, which was the…

CHRISTOPHER TSAI: The company in which jacobs and a small group of investors including me put capital into which later became xpl logistics i’ve watched Brad operate with such skill over the years and i’ve seen him overcome challenges and recognize challenges that might come up in the future So here’s somebody who…

CHRISTOPHER TSAI: As stewards of other people’s capital, I would want our capital behind him. QXO is his new venture, if you will, which is one that is going to consolidate, is consolidating the building products distribution industry.

STEPHEN CLAPHAM: And how do you value something like that?

CHRISTOPHER TSAI: Well, there’s some math and there’s some faith. And to get comfortable with what is essentially in the early days, which was a year ago when he effectively took control of a company called Silver Sun Technologies, and it became tradable in size. It had a very small float, so you couldn’t really buy it.

CHRISTOPHER TSAI: But once it became tradable, which was in size at the end of July of last year, so almost a full year now, we bought. So we paid about $11 a share. At the time, it had a little over $5 billion or so of cash. And so the way I looked at the company was, well, what are the companies in the industry selling at, both public and private?

CHRISTOPHER TSAI: How is he likely to deploy this cash? At what rates of return? And how quickly can he scale and use free cash flow from businesses that are producing lots of… Free cash flow. These businesses have high free cash flow conversion in general.

CHRISTOPHER TSAI: And so I thought paying roughly 11 a share was a fair price and reflected a modest premium to being able to align our capital with Brad. So I thought that was something that made sense for a portion of our capital. With the stock now at roughly double that, or 22 a share, Brad needs to continue to execute to drive further value.

CHRISTOPHER TSAI: But there is a lot of low-hanging fruit through the Beacon acquisition that can be harvested. And the company can use the free cash flow from Beacon as well as future capital raises to… Further deploy capital at high rates of return. And we can talk about some of those assumptions if you want.

STEPHEN CLAPHAM: Well, I mean, I’ve got no idea. I mean, how much will Beacon make this year?

CHRISTOPHER TSAI: Well, I personally think that Beacon is as good of an asset or better than Conway. So Brad bought Conway For Express One. And over three and a half years, he doubled EBITDA. I think that that’s possible within Beacon. I think we take margins up substantially on Beacon between organic growth and margin expansion from roughly 9.5% margins to call it 15%.

CHRISTOPHER TSAI: I think we can double EBITDA within three and a half years. And we can use that free cash flow, roughly 50% free cash flow conversion to redeploy into other businesses. And earn somewhere between 17% and 23% internal rates of return on the entire company over time.

CHRISTOPHER TSAI: So Brad is targeting much higher internal rates of return on the businesses that he acquires, call it 30%, 35% range. And effectively, I think that that translates into an overall QXO that will generate returns on total capital of 17% to 23%.

STEPHEN CLAPHAM: Would you know off the top of your head, I mean it’s an unfair question, what sort of level of EBITDA is making today or will make in three years time?

CHRISTOPHER TSAI: Well I mean I have my assumptions. I mean they did roughly a billion dollars or so of EBITDA in 2024 and as I said in you know three and a half years I think we’ll be doing close to two billion of EBITDA.

STEPHEN CLAPHAM: So it’s on like 20 plus times EBITDA?

CHRISTOPHER TSAI: Yeah it is.

STEPHEN CLAPHAM: And you…

CHRISTOPHER TSAI: You feel quite comfortable owning a stock yeah and that yeah multiple given the given the growth opportunity i do and you know great growth companies and the case of Amazon or Costco or or Tesla and And companies that are growing rapidly, from time to time, they might become more expensive than we would pay if we were allocating new capital.

CHRISTOPHER TSAI: And it’s our philosophy not to necessarily sell out of them. You know, we’re long-term investors. We’re thinking about businesses that we can own for a decade or more. And it’s only…

CHRISTOPHER TSAI: A matter of time before some of those businesses become overvalued. And we just have to sit there and wait for the business to catch up with the stock price. I’m not saying that QXO is overvalued today. I’m just saying that there will come a time when it probably will be. And that’s not necessarily a reason for us to sell.

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STEPHEN CLAPHAM: No, sure. I mean, 20 times for an acquisition vehicle doesn’t seem 20 times EBITDA. Just in case you thought I was talking about 20 times PE, listeners, 20 times EBITDA. I mean, it’s not. There have been growth vehicles valued at more than that in the past. I get that. But if I look at something like Costco, your own Costco is on 50 plus times earnings.

STEPHEN CLAPHAM: I mean, you know, my friends that sold it at… 30, 35, 40, they’re all going, oh, why did I sell it? And so you can feel quite comfortable about that. But it’s not inconceivable that tomorrow Costco could half. And when it’s halved, it would look more like the right price than it does on 50 plus times.

STEPHEN CLAPHAM: I mean, I don’t know, but you’re going to tell me why Costco is worth 50 times earnings or how long, I mean, how much tolerance do you have? Or is it just a philosophical thing that you’ll hold it if it’s on 60 times earnings, 70 times earnings, 80 times earnings, you’ll just hold it because you believe in the company and you believe that eventually you’ll get rewarded?

CHRISTOPHER TSAI: There’s obviously some sort of valuation where it won’t make sense to hold a company. I mean, the best business in the world is not necessarily the best investment, right? If it’s selling at too high of a multiple.

CHRISTOPHER TSAI: But I would say that, interestingly, if you go back and look at 20 years of history of Costco and you look at the valuation and what happened to the stock afterward, you’ll find that you could have paid up to 40 times earnings for Costco at any time over the past 20 or so years. And still received a 10% or greater rate of return.

CHRISTOPHER TSAI: My comfort from Costco owning it here is probably to some extent influenced by my time with Charlie Munger at his house in 2018 and we spoke about Costco at length.

CHRISTOPHER TSAI: Not all earnings are the same. Sure. One dollar, I mean, you know this more than anybody. One dollar of earnings from one company is not necessarily one dollar of earnings from another company, and therefore, the multiple is not necessarily, shouldn’t necessarily be the same. I’m comfortable with Costco at the current valuation holding it, not necessarily buying more.

CHRISTOPHER TSAI: But holding it because I’m comfortable with the quality of the earnings and I have a high degree of confidence in their ability to reinvest capital at high rates over a very long duration even from here such that we wind up with a rate of return that’s acceptable relative to our other opportunities and what would they be investing in new shops yeah primarily and are they mainly in the US or I think we’re going to see a lot of expansion Overseas.

STEPHEN CLAPHAM: Do you only own US stocks?

CHRISTOPHER TSAI: We only own today companies that are headquartered in the United States. And the way I look at the businesses is from a look-through standpoint. I’d figure about 60% or so of the revenue and earnings are coming from outside of America.

STEPHEN CLAPHAM: But you wouldn’t own a UK company?

CHRISTOPHER TSAI: I would. I would own companies and jurisdictions where I feel comfortable about the accounting and the rule of law. UK is certainly one of those areas.

STEPHEN CLAPHAM: Well, I’ve got news for you that our accounting is not that good.

CHRISTOPHER TSAI: That’s why I will come to you. That’s why I can come to you and ask any question.

STEPHEN CLAPHAM: So listen, you said our job as investors is to figure out what’s real, what’s not real, what that’s worth, what’s priced into the stock, and where the company’s valuation is going. Talk a little bit more about that.

CHRISTOPHER TSAI: Such is the case with growth companies, and growth companies are our focus.

CHRISTOPHER TSAI: Such is the case that they’re investing now heavily to create a higher intrinsic value later.

CHRISTOPHER TSAI: The effect of that is earnings are often depressed, and consequently, the perceived valuation is higher than it actually is. A P-E ratio, as we all know, is a static number. It’s price over earnings. It’s price over either this year’s earnings, last year’s earnings, next year’s earnings, but whatever number you’re using, it’s a static number of 12 months.

CHRISTOPHER TSAI: That doesn’t capture intrinsic value. You could have a company that’s selling at 100 times earnings, and it’s cheaper than a company that’s selling at…

CHRISTOPHER TSAI: 50 times earnings just because of how that cash is being invested, what’s happening to the earnings now as opposed to later. So I like to look at businesses in terms of their future cash flows, where I think that those cash flows are being deployed, at what rates of return.

CHRISTOPHER TSAI: And as I said earlier, importantly, what’s the return on incremental capital? What do I mean by that? What are they making? For every dollar extra that’s going into the ground. So that’s how I’m thinking about businesses, changes in their fundamentals and the opportunities that they have.

STEPHEN CLAPHAM: And you’re very bottom-up, I think, focused. I mean, what attention do you pay to the macro? I mean, are you one of these people who say, you know, that Peter Lynch, if you spend 10 minutes on the macro… I’ve forgotten what he said. It was a 10 minutes wasted or nine minutes wasted. How much do you worry about the macro?

CHRISTOPHER TSAI: With a diversified portfolio of 25 companies, I worry less about macro than I would if I owned just a few companies.

CHRISTOPHER TSAI: I spend a lot of time thinking about business culture, the people.

CHRISTOPHER TSAI: The ecosystem around a company. By that I mean the employees, communities, the suppliers, the producers. I think about these things perhaps a lot more than some people might.

CHRISTOPHER TSAI: And I’m trying to think about where the world is. Moving because we’re getting paid. We as investors, as stewards of capital, are getting paid to think about where the world is moving. And try to understand that before other people do, at least before the vast majority of other people do.

STEPHEN CLAPHAM: You’re running stock for 10 years. I mean, you can’t see that far in advance, right? Sorry? If you’re running stocks for 10 years, you can’t see that far in advance.

CHRISTOPHER TSAI: Well, you can be. I think that Thomas Phelps, who wrote this fabulous book we were talking about at lunch, 100 to 1, he makes an excellent point. Toward the beginning of the book, I think in the first third or so of the book. He says that he implies you can make a lot of money if 10,000 people are ahead of you, as long as there’s another million people after that.

CHRISTOPHER TSAI: And you could have bought, and I wish I were smart enough to have bought Tesla earlier than we did in 2020, but I think you could have bought Tesla any time long. Since it was public to today and still have made quite a nice rate of return. I wasn’t that smart.

STEPHEN CLAPHAM: It wasn’t painless. I had Tom Slater on the podcast a few months ago, and of course they were the first big, well, they were the biggest shareholders and the biggest institutional shareholders in Tesla, Billy Gifford.

CHRISTOPHER TSAI: Yeah, they were certainly earlier than I was.

STEPHEN CLAPHAM: But you’ve done well, right? I mean, who cares? I mean, you’ve done well, and you’re hopeful. About the future. But you say you spend time on people culture.

CHRISTOPHER TSAI: Brad would be a great example.

STEPHEN CLAPHAM: And Tesla would be a great example because that is a culture and a management team that are very unusual. So just explain a little bit. I don’t want to spend the whole time talking about Tesla because it’s a bit flogging an over-reviewed horse.

STEPHEN CLAPHAM: Just if you were to look at a new stock tomorrow how would you sort of work out is it is it managed by smart people what would you look for and what you look for in the culture i’m i’m looking for businesses.

CHRISTOPHER TSAI: Where the management team not only has skin in the game they’ve you know they’ve they’ve invested real hard-earned money into the business it’s not just restricted stock and it’s not just options but it’s real skin in the game That, to me, is very important. Just like I wouldn’t want to give my money to somebody who didn’t have skin in the game if they were going to manage money for me.

CHRISTOPHER TSAI: That’s super important. But besides that, you want to look at the history of the capital allocation and watch if the management team has treated shareholder capital as if that capital was It has to be treated as a fiduciary. And I think that you look at Tesla and you look at companies like all of the companies that we own in the portfolio, the shareholder capital is treated preciously.

CHRISTOPHER TSAI: And one of the metrics that I use is I look at for every dollar of retained earnings, how much market value is being created. I think that ultimately we can debate all we want. Is the management team a fiduciary of capital? But eventually it shows up in the numbers. And one great metric that I like to use is I look at how much market value has been created for each dollar of earnings retained.

STEPHEN CLAPHAM: So that could be a very misleading number, right? Because you could be buying at the top, right?

CHRISTOPHER TSAI: Of course, we adjust for what we think the intrinsic value is at that time. So it’s not a market price.

STEPHEN CLAPHAM: And what about culture? I mean, what do you look for in the company culture?

CHRISTOPHER TSAI: Yeah, so…

CHRISTOPHER TSAI: Every business is different, and there are different nuggets of information.

CHRISTOPHER TSAI: There’s a company that we own called CoStar Group.

CHRISTOPHER TSAI: I came across Andy Florence, who’s the CEO and founder. I came across his commencement speech.

CHRISTOPHER TSAI: I listened to his commencement speech before owning the company, and I said to myself, that is somebody who I can see us aligning capital with.

CHRISTOPHER TSAI: And for your viewers who might be interested in a brilliant commencement speech, which really gets at the heart of somebody who cares deeply about the business that he’s created, I’d recommend going on YouTube and watching Andy Florence’s commencement speech, CEO of CoStar, because when you watch it, you’ll realize that this is a guy who’s put blood and sweat into the business. It’s his…

CHRISTOPHER TSAI: Baby, and he is going to ensure that this company not only survives, but… Thrives and he’s doing that by thinking long term by making smart capital investment allocation decisions and not not succumbing to some of the ways of his competitors and that’s been very.

STEPHEN CLAPHAM: Instrumental in building the mode around CoStar interesting it’s not a company i’m very familiar very familiar with although i saw that they bought on the market it was one of the competitors right move which was right in the back in the Substack last week. This is being recorded just at the start of July.

STEPHEN CLAPHAM: It will be going out a little bit later. But one thing I wanted to ask you about was China and the US-China relations. So it’s a bit of an unfair question, but we’re recording it just a week before we’ll know the results of the tariff debates. But how do you think about that? Because you’ve got a lot riding on this well.

CHRISTOPHER TSAI: Again, I mean, I think less about macro having 25 positions than I would if we only had a few positions. No one position of ours is going to make or break us. And so I don’t spend too much time thinking about tariffs.

STEPHEN CLAPHAM: But you’ve got, you’re on Tesla, you’re on Apple, you’re on Nike. So over 20% of your portfolio is exposed to the US-China relationship. I would say over those three stocks, probably 20% of their sales go to China.

STEPHEN CLAPHAM: If those tariff negotiations go the wrong way, that’s 4% of the sales of your portfolio that are at risk. I mean…

CHRISTOPHER TSAI: It’s not so clear, though, as to… I mean, I can spend all the time I want on thinking about tariffs, and I have a very good ecosystem of fellow investors and analysts, and we talk about these issues all the time, and we…

CHRISTOPHER TSAI: Go through the numbers and it really is not so clear even if this you know if if if terrorists were to be proposed and and implemented unilaterally you know if those companies would actually benefit or not benefit and to what degree and which ones it’s it’s not so clear and you could have tariffs implemented on autos for example and it massively benefits Tesla you can have it massively.

CHRISTOPHER TSAI: Work against Tesla. It’s not so clear because the competitive landscape is so dynamic and it’s changing all the time. And there are various players.

CHRISTOPHER TSAI: And when you own 25 companies, it’s not so clear on a weighted average basis which of those companies is going to do well and which of those companies is not going to do well as a result of tariffs being implemented in a unilateral manner. I don’t think so much in those terms.

STEPHEN CLAPHAM: A situation in my investing career where i would own your portfolio right because it’s far too growthy for me you know i’m i’m kind of like safety i don’t like high multiple stocks i feel makes me feel uncomfortable which is why i’m so poor but if it were if i were in that situation what would worry me was that i’ve got a binary outcome because if those tariff talks go the wrong way.

STEPHEN CLAPHAM: I mean, they don’t supposedly will, but there’s a risk. And if that happens, then will the Chinese consumer buy more or less Tesla cars, more or less Apple phones, more or less Nike shoes? And what will the Chinese government do? Maybe the Chinese government will say, you’re not allowed to come into work wearing Nike trainers if you’re a government employee. And I just wondered why you… How you thought about that?

CHRISTOPHER TSAI: Yeah, I mean, in the case of Tesla, without going into a lot of detail, I can tell you that some of the smartest friends of mine, and we’ve all spent a lot of time thinking about, again, tariffs and these issues. We’re not concerned about Tesla’s position in China. We think that the position of the company is extremely strong.

CHRISTOPHER TSAI: In cases of… Nike and others, it’s not as clear for me as an investor. But consequently, again, we own 25 companies. Some of those companies are going to benefit, and some of those companies won’t benefit. And on a weighted average basis, it’s extremely hard to tell what is the effect on the portfolio.

CHRISTOPHER TSAI: So I tend not to think about those things. And as my late father said, if you have growth, and we have growth across these positions, growth takes care of a lot of things over time. Sure, absolutely. So we’re truly focused on growth and we’re truly focused on finding value within growth.

CHRISTOPHER TSAI: And I don’t think about… Necessarily high multiple stocks as not being value stocks. I’m looking at what do I think this intrinsic value of the business is and often you can buy value, you can find value in companies that have high multiples.

STEPHEN CLAPHAM: No, no, that’s absolutely clear and I do own some high multiple stocks just to be clear. One of the ones that I own a lot less of now is Alphabet. And I’ve had a few investors in this podcast, people that I really respect who own Alphabet, you own Alphabet.

STEPHEN CLAPHAM: And it seems slightly bizarre to me that the stock price hasn’t done worse because everybody, every investor is using chat GPT or Perplexity or whatever. There must be eventually some doubt about the Google white box search engine. Just talk me through how you think about that.

CHRISTOPHER TSAI: Let me divert for one second so there’s oh wherever you want quick story so yeah i was talking to a father recently he’s in the car with his daughter and his daughter left her phone at home so she said can i borrow your ipad and the the father said sure what do you need it for she says i need to look something up so daughter says where’s your chat GPT?

CHRISTOPHER TSAI: And the father says, I don’t have chat GPT on my iPad, just use Google. And she said, what’s Google?

CHRISTOPHER TSAI: So to your point, it’s interesting that Google is, I agree, held up fairly well. And it’s held up fairly well because the advertising revenue has held up fairly well. And of course, there’s been multiple compression. They have a lot of cash on the Balance Sheet. It’s still perceived as an ultra-high-quality business. But is it?

STEPHEN CLAPHAM: I mean, that doesn’t seem an accurate perception to me.

CHRISTOPHER TSAI: So you mentioned you’ve spoken with some investors about Alphabet, and I have investors who are on both sides, investor friends who are on both sides. And on one side, On the bullish side, the argument is that Alphabet has data that ChatGPT or Perplexity or Grok don’t have. It knows exactly your travel plans, whatever you’re searching for, and that’s extremely valuable.

CHRISTOPHER TSAI: And Alphabet can pivot in a way that leverages that data. In order to compete successfully against large language models. So that’s on one side. And the other side is, the other extreme is, they’re toast. We own a small piece in Alphabet. We’ve owned Alphabet for a fairly long period of time. And its targeted allocation is less than 5% at this point.

STEPHEN CLAPHAM: It’s interesting because I was at this marketing event and There were exhibition stands, and I mean, every single one of them was about AI. And, you know, loads of people were talking. I mean, so, you know, I’ve got a small internet business, and I subscribe to Neil Patel, who’s a search engine guru.

STEPHEN CLAPHAM: And his email frequency has, like, doubled or trebled because he’s got to pivot massively because, of course, his search engine optimization engine. Is no longer relevant because more and more researchers are going through AI.

STEPHEN CLAPHAM: And it’s much less about attracting Google. It’s much more about attracting AI. And so, look, I mean, I interviewed Bill Nygren probably over a year ago. And Alphabet was his biggest position. I interviewed John Armitage, who I’ve got great respect for. And he on…

STEPHEN CLAPHAM: Owns it and obviously you know everybody can see this so it’s it’s in the share price i just but it puzzles me that where the incremental buyer is going to come from at that point where the search engine revenue shrinks and it seems inevitable to me over time that that search engine revenue will start to shrink i don’t know from what point i mean it might carry on growing for another two years i don’t know but at some point surely it will shrink won’t it.

CHRISTOPHER TSAI: We give a lot of…

CHRISTOPHER TSAI: Benefit to management teams and management teams that have proven themselves through adversity in the past.

CHRISTOPHER TSAI: I wrote a paper called The Power and Challenges of Compounding, and in it, I talk about how all great growth companies go through growing pains. The trick is to figure out whether they’re growing pains or whether They’ve reached old age and they’re on their way to extinction.

CHRISTOPHER TSAI: In the case of Alphabet, we own the stock. We’ve owned it for quite a while. I feel it is an issue of a growing pain and not necessarily extinction right now.

CHRISTOPHER TSAI: And some of that comfort is as a result of our feeling that the business can pivot in a way where revenue and earnings continue to grow. As opposed to shrink and the valuation is nowhere near as demanding as it was in recent years. That also gives me comfort in holding the position as opposed to selling it outright.

STEPHEN CLAPHAM: Just looking at it, it’s one of the cheapest stocks in your portfolio, other than insurance and Johnson & Johnson, the last 13 FIs. No, listen, I mean, it’s fascinating.

CHRISTOPHER TSAI: I think Tesla is one of our cheapest companies.

STEPHEN CLAPHAM: Well, forgive me, but, you know, I’m a simple person that just looks at the consensus forecast when I’m trying to understand the relative values. Now, it’s only when I sort of do, you know, go into it deeper that I start to think further on. Anything you’ve sold that in the last couple of years that you’ve regretted? Or that you’ve felt vindicated?

CHRISTOPHER TSAI: Well, I can tell you that most all of the mistakes that I’ve made over 25 years plus of managing capital is through selling great compounders too soon or trimming them back. And sometimes we trim back for necessary. Reasons.

CHRISTOPHER TSAI: And sometimes we trim back for reasons such as a position becomes a third or so of the portfolio. And as we’re managing money for foundations and retirement accounts, there is a level at which the prudent genes in my body start to flash and I make a decision. To trim back. But there have been a lot of cases, Steve, that I’ve regretted selling great compounders too soon.

CHRISTOPHER TSAI: I guess the most recent example is probably Netflix. And Netflix checks off all of the boxes that I look for in a business. And it went through what turned out to be a growing pain and not— a period of extinction and one that felt to me like a period of extinction and i mistakenly sold the business and now it’s roughly five times as valuable as it was and it’s only been a few years well.

STEPHEN CLAPHAM: You know you you had it on the way up so you shouldn’t be too disappointed about missing the missing the next leg And there’s always, I think, you know, there’s always the, there’s always another opportunity, isn’t there? Or sometimes there isn’t, I suppose.

STEPHEN CLAPHAM: But, you, your, your father was a very well known businessman. You, you met a lot of very great businessmen over around the dinner table. I mean, who’s really impressed you either in business or as an investor over the years?

CHRISTOPHER TSAI: Well, we were talking, I can name a couple, but we were talking about Brad, Brad Jacobs and What I admire, a lot of people don’t know that Brad is a meditation practitioner, as am I. And he is extremely thoughtful and also is deeply aware of the cognitive biases that he and humans as a whole hold.

CHRISTOPHER TSAI: And he’s willing to run businesses in his own life in a way that is counter to some of these ingrained cognitive biases. And I’ll give you an example. We spoke about Conway earlier. Conway, which is an asset-heavy business that he bought for— XPO Logistics was a clear pivot in investment strategy.

CHRISTOPHER TSAI: When he launched XPO, he spoke about building an asset-light business, focusing on an asset-light business model, and Conway was the exact opposite. There are few CEOs that will pivot in a way that is going to be perceived by the market. As a short-term or long-term negative.

STEPHEN CLAPHAM: And it was really badly, really badly received that deal.

CHRISTOPHER TSAI: Very badly received. But Brad saw an opportunity that the market didn’t recognize and he was not afraid to pivot the business in a way that wound up creating an enormous amount of value for XPO shareholders Reed Hastings is somebody who comes to mind who pivoted from DVD by mail to streaming.

CHRISTOPHER TSAI: And Reed took a massive hit to the stock price during this transformative period that wound up positioning Netflix as the leader it is today.

CHRISTOPHER TSAI: So I admire Brad for his ability to make truly rational decisions and disregard short-term fallout from the market in the name of creating even more shareholder value for his constituents. So he’s somebody who is running a company today. And I deeply admired… Somebody like Larry Tisch.

CHRISTOPHER TSAI: Larry Tisch, for those who might not know, was the godfather of my sister. So I got to spend quite a bit of time with Larry Tisch growing up and watching him make very rational, bold moves for Lowe’s Corp, irrespective, again, of what he thought would happen.

CHRISTOPHER TSAI: To the stock price how about investors anybody you particularly admire too many to list or there there are many investors that that i admire and i’m fortunate to call many of them my friend and a whole a whole group of them or those that are i speak to regularly so I’m very fortunate to be able to learn from some of the smartest investors that I believe are around today.

STEPHEN CLAPHAM: And, you know, you talk about yourself, you describe yourself as a value investor. And when I look at your portfolio, it’s on sort of eight times sales falling to seven, 30 times EBITDA, 60, 70 times PE. Now, OK, it’s inflated by Tesla.

CHRISTOPHER TSAI: Given you the benefit of the doubt and a couple of other things just explain to the listeners why you call yourself a value investor and not a growth investor well i don’t think first of all you can separate growth from value the higher the growth the higher the implicit value in any company with all other things being considered equal philosophy we would say ceteris paribus but Growth and value can’t be separated.

CHRISTOPHER TSAI: They’re joined at the hip.

STEPHEN CLAPHAM: I agree with that, by the way. I don’t like the distinction.

CHRISTOPHER TSAI: But I know a lot of people- It’s a style boxing issue, right? But ultimately, what is a value investor? A value investor is somebody, whether in equities or in real estate or in any asset, a value investor is somebody who’s trying to get more for his or her dollar than he’s- he or she’s paying for an asset. And so I don’t think… Pe ratios work great for mature businesses, but they can be highly misleading.

CHRISTOPHER TSAI: As Thomas Phelps would point out in 100 to 1, they can be highly misleading for rapidly growing companies. So I do a lot more work on the cash flows of the business. And thinking not just about, again, one static year of earnings, but where are earnings going, and what is the company doing with assets that might not yet be running at full capacity?

CHRISTOPHER TSAI: Businesses that have assets that are not producing cash flow yet, but have the potential to produce a massive amount of cash flow or earning power, that’s very important to me. And it’s often under-recognized by the market because it can’t be screened for. It requires doing some deep work.

STEPHEN CLAPHAM: Yeah, the deep work is… Too rare in our industry. It always surprises me.

CHRISTOPHER TSAI: That’s the fun part. It’s deep work.

STEPHEN CLAPHAM: So listen, if you were, a young analyst were to call you up and say they wanted a job and you said, well, no, we don’t have any vacancies right now. And they say, well, how could I learn? What book, practice, training, would you recommend to a young person thinking of getting into the industry?

CHRISTOPHER TSAI: It’s so important, I think, that one reads the right books. And in the right order.

STEPHEN CLAPHAM: Oh, interesting.

CHRISTOPHER TSAI: I think that if you read in the wrong order, it can really mess you up as an investor. And so I would recommend reading foundational books first, such as Ben Graham’s Intelligent Investor, specifically focusing on chapter 8 and 20, which deals with…

CHRISTOPHER TSAI: Emotions and margin of safety. I would recommend training the mind to think long-term because the real money is in the waiting, not in the trading.

CHRISTOPHER TSAI: In order to train your mind to think long-term, I would highly recommend one deeply internalizes the words of Thomas Phelps in 100 to 1. So I’d recommend his book, 100 to 1. And along those lines, I’d… I’d recommend Phil Fisher’s Uncommon Stocks and Uncommon Profits. These three books really, I think, are foundational.

CHRISTOPHER TSAI: And beyond that, I think learning about psychology, as Charlie Munger would say, the misjudgment of how we approach certain situations. I think we need to all read Charlie Munger’s Poor Charlie’s Almanac, which was put together by my friend Peter Kaufman.

CHRISTOPHER TSAI: Fabulous book. And then I would highly suggest investors get away from nonfiction and start thinking a little bit about spending some time reading some fiction. And fiction should be an equal part of an investor’s journey, if you will.

STEPHEN CLAPHAM: That’s very interesting.

CHRISTOPHER TSAI: An equal part.

STEPHEN CLAPHAM: I was very pleased with myself last year. I read 36 books. I only read one fiction book. And I said to myself, you know, next year, 2025, make sure you read more fiction. And of course, we’ve just passed the halfway point.

STEPHEN CLAPHAM: And I’m thinking about, well, publishing my, well, I’ve got into the practice of doing when the sub stack is in the halfway point, or when people are going away for the summer holidays. List the books that I’ve read in the first half and, you know, things that I like and things. And so I’ve, I’ve written that sub stack and there isn’t a single fiction book.

CHRISTOPHER TSAI: So I’ve changed that.

STEPHEN CLAPHAM: I’ll have to change that. So any good, have you got any good tips off the top of your head reading anything?

CHRISTOPHER TSAI: There’s, there’s so much wonderful fiction. But when I read fiction, I’m naturally inclined to pull investment nuggets out of it in some way or another. So it’s, it, yeah. Marcel Proust, the monumental French author who wrote In Search of Lost Time, that book is a series of books.

CHRISTOPHER TSAI: It’s very lengthy. But had I not read that book, I would not have invested in Tesla. And Marcel Proust says in that book that the real voyage of discovery is not in seeking new landscapes, but in having new eyes.

CHRISTOPHER TSAI: And to me, when I read that, I thought, you know, we really need to approach valuation in a world of rapidly changing business models and technological innovation in terms of seeing companies in new eyes, you know. And that might mean thinking about how cash flows might be penalized today, again, in order to create higher intrinsic value later, or how cash flows might be used in a way.

CHRISTOPHER TSAI: That is different than in a traditional manufacturing business. So there are nuggets to take to each person’s own will from fiction, but it’s so pleasurable to get one’s mind off of. Numbers and just reading pure non-fiction.

CHRISTOPHER TSAI: And Marcel Proust captures so much of humanity, what it means to be human. He captures why people do things with such precision, such genuine insight. And ultimately, what he’s doing from our investor perspective is capturing all the cognitive biases that make us do stupid things in the stock market. Well, so in search of lost time bar, Marcel Proust.

STEPHEN CLAPHAM: I’m not sure that I’m going to be taking Marcel Proust with me on holiday, but, listen, it’s fantastic to talk to you. Fantastic to get Marcel Proust recommended in the podcast for the first time. Thank you so much.

CHRISTOPHER TSAI: Thanks so much, Steve, for having me.

STEPHEN CLAPHAM: Oh, I forgot to ask you, where can people find you?

CHRISTOPHER TSAI: Find me where? Online?

STEPHEN CLAPHAM: Yeah. You know, people.

CHRISTOPHER TSAI: Traditionally want to follow up and look you up so once in a while once in a while when i think i have something smart to say which is not very often i i can be found on x at at psycapital and our website psycapital.com has some of our research papers and four or five or so of our annual letters and is updated quite regularly brilliant thank you so much thank you Steve.

STEPHEN CLAPHAM: I really enjoyed talking to Christopher. I didn’t ask him why he holds Apple, which I think is a sell, or why Markel, which I like, is one of his top five positions. The fact that he can run a portfolio whose average PE is over 60 times and outperform the market is proof that conventional focus on valuation may be overlooking something.

STEPHEN CLAPHAM: I really liked his argument that you need to do the deep work. So much of that analysis that I see is really quite superficial. For myself, I obviously am digging deep enough to get my head around those multiples. But I hope you enjoyed this podcast, which is the first one we’ve done in a video-first format. Let me know what you think, especially if you watched it.

CHRISTOPHER TSAI: Thanks, as ever, for your support.

STEPHEN CLAPHAM: Which is aired for your education and entertainment only.

CHRISTOPHER TSAI: Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: Thank you for listening. I hope you enjoyed this episode. It would mean a great deal to me if you could please share this with just one friend and feel free to spread the word by subscribing or even leaving a review on Apple Podcasts or Spotify. Thank you for your support.