Andrew Rosenblum, are one or two good investments per year enough?

Andrew Rosenblum, are one or two good investments per year enough?

Here you can find a transcript of my interview with Andrew Rosenblum of Bonsai Partners.


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[00:00:00] Tilman: Hello, audience. It’s great to have you back on my YouTube channel. Today, I’m having Andrew Rosenblum of Bonsai Partners with me. Hi, Andrew. How are you doing?

[00:00:10] Andrew Rosenblum: Hey, Tilman. Doing good. How are you?

[00:00:13] Tilman: Doing great as well. It’s a strange year, but it’s also good because we have the chance to chat via Zoom. I’m currently in Germany and you’re in the West Coast. I think it’s called Carlsbad, the place you’re living?

[00:00:28] Andrew: Yes, it is.

[00:00:28] Tilman: It has a German reference or something you told me before?

[00:00:32] Andrew Rosenblum: Yes, the Carlsbad village section is an old-style German village. I didn’t know that until I moved here, and I thought, “Hey, this is pretty cool,” but yes, we’re sharing some German heritage love.

[00:00:48] Tilman: I think I should visit you one day if we have the possibility to travel again, but it looks good currently with the vaccine coming up.

[00:00:57] Andrew Rosenblum: Bring your surfboard.

Why the name Bonsai?

[00:01:00] Tilman: That would be cool. I can’t surf, but it would be cool to try. I want to start our conversation with two questions. On one side, you have the reference in the back. It’s your Bonsai. Where did the name of the company comes from, Bonsai Partners? The other thing you told me before that you were a short guy and then currently, you’re running a long only fund. How did this turn come and why aren’t you shorting? Maybe let’s start with the Bonsai. Maybe the easier question.

Now it is time to show the disclaimer. You can find it linked below this video. The main message of the disclaimer is always do your own work. This is a qualified talk, but no advice, always do your own work. Thank you.

[00:01:48] Andrew Rosenblum: I’ve gotten a lot of interesting feedback about the name Bonsai. What I had originally thought would be cool would be to use the name Bonsai because it takes a long time in the art of growing one to create something beautiful. In many cases, the bonsai masters themselves, the beauty of the tree is only really apparent after the master even passes away. It takes decades of careful and patient care in order to grow it, but I’ve gotten some really funny feedback. One person that I met said, “That’s a terrible idea to call it that because isn’t Bonsai constricting a tree to keep it small? You’re trying to grow your portfolio.”

I was like, “Wow, I didn’t think about it that way”, but really, names are just that. I think I put a lot of emphasis on figuring out and finding a great name because I thought that would be really important to building a brand, but in reality, the brand that I’m building and any company builds, it’s a reflection of what you do every day. The name is really irrelevant. It’s how you behave and act that makes the name worthwhile. A lot of names are just gibberish, but we know them because they deliver great products to the market. I think I cared a lot more about it in the past, but as my lawyer told me, he’s like, “It’s a cute little tree, you should keep the name.” That’s how it became Bonsai.

Then you asked why am I not shorting stocks anymore, even though I have a history of doing so. You know what’s funny? When I started Bonsai, I started officially and launched in October 2018. I had a blank sheet of paper for the first time. In the past, I had worked underneath somebody. I used to work for a really wonderful fund called Matrix Capital based out of Boston. I was the resident short seller there because none of the other partners wanted to do it. When I started, I was the only junior person at the firm. I actually was the junior person that replaced– not replaced, but the person after Dennis Hong.

Dennis left and there was a year gap and then I came in as this person fresh out of college and no one wanted to do it, so I ended up doing it, but I had this blank sheet of paper when I started Bonsai. I really asked myself the question, “What is it that I’m trying to do?” I think that just knowing what you’re trying to do is really half the battle in almost anything, investing in particular. For me, this pursuit was solely because I wanted to create the best long-term track record that I possibly could. That’s why I went out and I took the risk to go out my own way versus staying at a pretty established place.

When you know what you want to do, then you can work backwards and ask, “Well, how do you do it?” For me, when I looked at my history of shorting, I realized that short-selling doesn’t do what I’m trying to achieve, which is earn very high returns which are delivered through compound interest. It’s very easy to understand how compounding works. I think there’s been so much talking that’s been done about it, but it’s really hard to obtain it. Easy to understand, hard to obtain. When you look at short-selling, I’ve actually never heard anybody describe it this way but shorts reverse compound. Every 10% you make incrementally; it gets smaller and smaller and smaller. If it’s $100 you make $10 and then you’re at $90 and then if you make 10% again you make $9 and then it goes to $8.1. Your returns are actually getting smaller and smaller and smaller the more it works which is the opposite of going long.

When you long the ideal time horizon is the definition of the name. If you own something for a very long period of time, that implies you’re having good success with it by definition. The opposite is true when you short because you want to be in it for as short a period as possible because you’re actually paying the compound interest because markets typically go up. And so then you typically need to have a catalyst and you need to have some sort of insight into why the window of time is really short. My old boss used to say that if you get the timing wrong on a short even if it works later, you are wrong.

And so what I was trying to figure out was how do I obtain that compound interest and I realized that shorting was not the way to do it especially because the return on time is very small. Because if your time horizon is small for a short investment you spend all this time researching, your return is small and the time horizon is small and since I’m a single person running out of southern California, I need to be really, really careful where I invest my time. That’s why I focus on long investments versus going short like I used to while working in another fund.

How he entered a hedge fund right after college

[00:07:07] Tilman: Maybe with reference to this story, the name Bonsai also means growing something beautiful but you know your limits to a certain extent. I want to ask you for “the hack” you did to enter a hedge fund directly after college if I did get it right. What was your way of doing it?

[00:08:41] Andrew Rosenblum: There’s no real hack to be honest. I think a lot of it is luck. I’m very lucky to be where I am today and maybe if you want I can give the origin story that led up to that moment because when you think about any– I’m not a superhero but I love that when you read a comic book or watch a superhero movie, there’s that origin story at the start and it tells you those early moments that imply why the hero behaves the way that they do and operates the way that they do.

I don’t know if you know who Byron Wien from Blackstone is, but he said something that was really insightful. He said, “When you meet somebody new, try and figure out what formative experience happened in that person’s life before the age of 18 because it will color pretty much everything that happens afterward in their life and you will get to understand them a lot better.”

I grew up in a suburb of New York City. That’s where I was born and raised for my first 18 years. My father was an entrepreneur. He had a small pet supply store that he had in Manhattan, and from an early age I never was interested in investing. That was not a thing. I was always interested in businesses. I think that that’s still true today. My interest in investing is a reflection of my interest in companies, and why people buy and sell things, and what things are worth.

[00:10:15] Tilman: It shines through if you read your letters. They are great to read if you’re interested in businesses, but go on with the story.

[00:10:23] Andrew Rosenblum: Even when I was a kid, I got suckered in. Did they have beanie babies in Germany? Did do guys get suckered into that stuff too?

[00:10:31] Tilman: Yes.

[00:10:32] Andrew Rosenblum: Of course, I got suckered into that because I thought, this was this amazing opportunity to buy something on the ground floor and build something that would be worth a lot more in the future. I always had that commercial sensibility to me. It was isolating because I didn’t know any other– I’m talking seven, eight years old.

I didn’t know other people who felt that way, but I made it to college. I ended up at the University of Michigan at their business school and so for the first time I was surrounded by other people who loved business and the concept of understanding why people buy and sell things, why companies succeed, what leadership is. I realized this weird thing. I was just spending all of my time in this– We had this trading room called the Tozzi center where they had Bloomberg terminals and FactSet terminals and all these resources.

I used to spend all my time playing video games when I was younger. Now I was spending all my free time in this 20 by 20 room, maybe a little bigger than that, a 50 by 50 room, talking with maybe five other people about investment ideas. I figured I wanted to do it for a career. Ultimately when I graduated, I graduated in 2010, which was right after the financial crisis. It was a tough time to try and break into a hedge fund. I took a gamble.

I took a bet on myself because I believed that it will be worthwhile. I decided that rather than go the conventional route, which was taking investment banking job or a consulting job or a job at one of the big three tax firms. They all came to my school to try and get undergrads, and those are great jobs. They’re amazing places to start your career, but I knew exactly what I wanted to do, and I didn’t understand why I needed to go to an investment bank and do deals for people in order to invest in stocks.

I went on Bloomberg and like some people, much to their chagrin, they will leave up their email addresses in their accounts. I just figured out, what are the 13-F’s that I’ve been following that I think have interesting portfolios, let me make a list of a hundred of them. Then I’ll take those people who have the email addresses, I can figure out who to email on the analyst team and send them my best investment idea. I ended up sending a hundred investment ideas and I was like, “Hey, I’m undergrad at the University of Michigan, I love your portfolio and approach to investing, would you be willing to talk to me? My best investment idea is here. Hopefully it’s helpful to you.”

That led to a lot of conversations and it surprised me because that’s not who I am largely. I’m not this cold calling maniac, but when you really believe in something, you do your best to try and make it happen. It ended up where a number of people would get on the phone with me. They tried to give me advice. A lot of them weren’t interested in hiring me, but they just wanted to talk to this kid who was gritty and trying to run through a brick wall.

Ultimately, there was one person and we had ended up having this really long conversation about the investment idea I sent to him. It was a short idea, of course, and he probably spent a half hour just ripping it to shreds. I thought, wow, this guy is amazing. He just knows everything about this business. This is just what hedge fund analysts are like, they’re just so smart and good, but at the end of the call, he said, “Hey, Andrew, enjoyed the conversation but just so you know, not only is your short thesis wrong, I own the stock. It’s my biggest long position. I cover the sector, so have a great day, bye.” Click.

I thought for sure that I had blown it, but ultimately over time he ended up calling me back and said, “Hey, Andrew, I’m looking to hire a junior person as a trial to see if this would work, would you be interested?” I cut him off and I just said, “Kyle, you know I am.” I went out and I bought this tiny car, this used car that smelled like cigarettes because it’s all I could afford and I threw all my stuff in which I didn’t have any stuff by the way, it was just a couple of things. I moved up to Boston, sight unseen, and found an apartment with five other guys. I ended up staying at Matrix for five and a half years.

From investing to cancer research

[00:15:12] Tilman: After that, you went into cancer research. Why did you take this turn?

[00:15:19] Andrew Rosenblum: I’d come back to what I said earlier, which is, I’ve always had an interest in companies. I just found that investing was the most authentic way for me, and interesting way for me, to get to learn about a lot of them. I think one of the things that’s really cool about investing is the learning cycle it’s not really long. When you’re working on one thing. It takes a long time to figure something out. In investing, it’s like a sine curve where you’re constantly learning new things. Then once you kill an idea, you can take the lesson learned, or if you invested in the past, take what you learn and apply it to the new and new areas. I love that. I also have ADD brain. Just working on one thing for a long time, I thought it was challenging.

Over the five years that I was investing, in the back of my mind, operating and investing were joined at the hip. I always wondered, what it would feel like to build something. Similarly, I had my quarter life crisis. I was just like, Man’s Search for Meaning. What am I doing? Can I do something that’s really meaningful? Not like investing for large institutions and foundations and endowments isn’t wonderful, but is there a way that I could do something that really matters. Where my hands are literally on it.

One of the wonderful things that Matrix did was, they host these events with some of the executives associated with the companies that they invest in. They got this big box at Fenway Park, which is where the Red Sox play. They had all these people together. I ended up meeting this gentleman named Diego Miralles. Diego was this very senior person who worked at Johnson & Johnson. He was their Global Head of Innovation. Adaptive Biotechnologies, which was a company that Matrix had invested in, put a good amount of money into. That money was essentially, not side pocketed, but it was segmented to build this new business inside of this genomics company.

They had this wonderful technology that allowed them to profile the immune system of a person. They could actually say for the first time, like, “Here’s the composition of someone’s T and B cells”, but they didn’t have amazing ways of monetizing that. They hired this guy, Diego, to build this new business that would find and create drugs and therapies that use that technology.

I met Diego at this Red Sox event. He was looking to build a team. Adaptive had this office in Seattle, but he had this mandate to build something where he was located in San Diego. We just hit it off. I think he heard about me. I had heard about him, because I didn’t lead the diligence on Adaptive, one of my colleagues did. We got introduced. We just started talking. He’s just this crazy charismatic guy. He’s like, “Look, come build this company with me. We’ll change the world. You’re going to move to San Diego. You’re going to love it. It’s going to change your life.” And  “We’re going to find therapeutics that are going to change the world.”

We pretty much had a handshake agreement on the spot. Of course, he’s like, “This is what we’re going to do. You’re going to fly out. You’ll get to see the office that I just leased. You get to meet–” I was literally employee number two. Well, three. He had hired a scientist to run the effort. That he worked with the J&J. Then he hired me to build the business with him and help him be, I don’t know, the COO, or CFO in a box. In this tiny business as part of a larger organization.

What was really cool that we were doing, was we ultimately created a platform for identifying cancer immunotherapies, because what Adaptive has is this technology that allows you to effectively barcode T cell receptors, which are these arms that protrude off of a T cell. T cells are this wonderful part of your body called the adaptive immune system that’s able to find these exquisite pathogens. These bad things in your body and attack and kill them. For the first time, what Adaptive could do was profile them in really high throughput.

Our thinking was, if we could figure out which T cells– If I have cancer, Tilman, it’s a representation that my body wasn’t able to identify and kill the tumor that was growing in my body, but it’s very possible that you or someone else actually has a T cell that could attack and kill my cancer. If we can engineer precisely that T cell and create a therapeutic drug that I could technically get infused into my body, it would be curative. We know it works, in theory, because that’s what your body does every day. It just means that I didn’t have that right T cell or cocktail of T cells in my body. It was on the bleeding edge. It was so interesting. It was genomics. It was immunology. It was oncology. I felt like I was building something wonderful.

Maybe you didn’t ask this part, but the segue at the end and how I went full circle and came back to investing was this decision on whether or not we spin out the business and have a separate company. Because that’s the reason why we were in San Diego, it was the promise that theoretically we would be able to raise money ourselves and be a self-sustaining entity, still under the Adaptive umbrella, but management, they wanted to sell the business, rather than invest all this money into it. We ended up shutting down the San Diego office.

It left me in this crossroads where I decided, “Hey, what do I want to do?” I wanted to go back into investing. It was, “What are my pathways to do that?” Pathway number one, which is really nice and what allowed me to say yes so quickly was Matrix really wanted me to go to Adaptive to help them build out the business, which ended up being a great exit. They ended up selling the business to Genentech. It was this blockbuster deal that the Adaptive team brokered. It was amazing. We did it in a really short period of time.

What Matrix said was, “If it doesn’t work out, come back.” I had the safety net which made taking the risk a lot easier. I was at that crossroads where I needed to decide, “Do I go back, or do I move forward in my life?” I think for most people, you just don’t want to go back. It’s nothing against Matrix. Matrix was the dream job of dream jobs for me. I would have worked there for free. Frankly, they knew that, and they didn’t offer me much when I started. I loved working there. I worked from the bottom of the bottom and I made it. I made a name for myself and I ended up driving an impact for the firm.

It’s unbelievable. The amount of learnings and things that they challenged me on were huge. I started very value-focus, like in the traditional Graham and Dodd and Buffett, and then I was in this tech fund where they were on the bleeding edge of everything. It really challenged me to think about, “What does quality mean? What does a great business look like?” I grew so much. It was like being in a sandbox and playing with a bunch of toys and having an adult slap my hand when I picked something up that was probably some crappy company that was at a cheap price.

I was able to learn, and then they gave me autonomy to find the short ideas that I wanted to hunt for. It really allowed me to express myself as an investor and to learn about my process and to test it out and see repeatedly, “Hey, is this working?” I was getting this feedback loop. If you have an investment philosophy and you want to see if it works, test it out on short ideas during a bull market. If you see it consistently working, that light bulbs just starts flipping there like, “Hey, maybe what you’re doing, there’s value to it.” That’s what Matrix taught me.

Ultimately, what I decided to do at that point in time was go my own way. I did that because it came back to that moment that we described earlier, which was I wanted to be able to generate the highest returns that I possibly could. And I don’t think it’s possible for any investor to achieve that, frankly, if you’re working underneath somebody else. It has nothing to do with Matrix. Matrix is amazing. I just felt if there’s a Venn diagram with my universe of great ideas and the head of my fund’s, that overlap I thought would be closer to one-to-one. Instead, it’s this tiny overlap.

You have to really manage up to try and get ideas into the portfolio and you have to adapt your style. I wanted to be unencumbered. I wanted to invest in the way that I thought was right. That way, I could generate the best returns that I’m capable of. That’s how I came to start Bonsai.

How Andrew is able the generate the best return

[00:24:29] Tilman: You have to tell me more about the way you think that’s the right way of investing. How you generate the best returns and what are the best returns for you.

[00:24:43] Andrew Rosenblum: This is going to sound so trite and stupid that it even needs to be said, but I’ll say it anyway, and I’ll share my thoughts on it and how I think in a way.

I’m looking for great businesses available at great prices. I know that sounds so obvious, but I feel today, there’s this really strange dichotomy that exists between people looking for great prices and people looking for great assets. It’s like, which side are you on? Are you a value investor? Are you a growth investor? It’s this false dichotomy that exists, and my view is: if you want to earn truly spectacular results on an idea, it’s just not good enough to find a great company. It’s just not good enough to find a great price. You have to have both.

I don’t know if you’ve ever watched one of those bank heist movies where they’re trying to get into the vault, and they’re like: “open up the vault!” Then the bank tellers are walking in, and they’re fumbling with the keys, and they have two sets of keys, and there’s two different bank tellers, and they stick them into the separate holes, they look over their shoulder, and they twist together. It’s like that. Unless you have both of them, you’re not going to get into the vault.

I can’t say I have a lot of originality around what a great company looks like. I think Matrix really helped me to understand the dynamics of high barrier to entry businesses. Because underlying almost everything is the economic theory that the more competition you have, the lower the returns you will have. There are lots of ways that you can keep out the competition from those barriers to entry like network effects, brands. That has been discussed ad nauseam, and I’m looking for all the same things that most people are, but the area that I’d say I’m doing a little different, hinges on the same topic as before, which is, I’m not just looking for things that have high barriers to entry. I am.

I’m looking for those companies that have stocks with high barriers to investment. It’s the exact same line of thinking, because if I want to generate high returns, just like that company is generating higher returns, I need things that keep out my competition. If everybody else sees what I can see, the price will be really high, and that sucks out the excess return in this stock. What I’m looking for are these wonderful businesses that have long runways for growth, great ability to return cash to shareholders. Could be asset light, could be asset heavy. There’s a million different ways, but there’s something to it that keeps out my competition.

The way that I would describe different barriers to investment is, they can be either physical barriers or they can be intellectual barriers. A physical barrier is something like a geography that maybe just doesn’t have as much competition in it, which is probably why you realize that most of my stuff isn’t in the US even though I’m in the US. I tend to think that it pays to go where the opportunity is. It could be a language barrier, it could be a liquidity barrier. There are all these things that are– these physical things that keep people out. I think those are the easiest to understand.

I think the most interesting ones are the intellectual barriers. Because a lot of times when you look at a great business, it’ll often be mispriced because maybe there’s some a mystery to it that you need to solve and figure out the answer, or it could be onerous uncertainty, new competition. A lot of times, you’ll find great businesses that they don’t want to explain why they earn supernatural returns. Because they’re smart. They know that if they put that in their annual report and presentation, then all these other competitors are going to come out, so they try and obfuscate the truth. Those are some of the best opportunities too, where when you look at it on paper, you’re like, “either they’re hiding it in their financials or they’re hiding it in the paragraphs.” The MD&A of the annual report.

I relish the opportunity to take those high barriers to investment and through my research process I try and break them down. I tend to think that I go where others aren’t willing to go, and I do what others aren’t willing to do, and that allows me to buy those great businesses at a great price. Maybe just a historical example from my time at Matrix, which I thought was really interesting, where we executed the strategy without even knowing it. One of the neat things of working at Matrix, it was seeded by a venture capital firm called Matrix Partners, which worked across the hall from us.

They were the early investors in SanDisk, and FedEx, and Apple, and all the networking companies around the dotcom boom, and so they gave David money to manage. We had this– It was a loose partnership where the venture capitalists could help us understand what was going on because they saw the earlier stage businesses. One day, one of them went to David and said– because we were looking for software-as-a-service companies early on in the progression to the cloud. It was still a controversial thing in 2011/2012. David had this vision that this is the future, and he got that so right. One of the partners went to him and said, “Hey, have you ever heard of this company based out of New Zealand called Xero, X-E-R-O?” All of us were like, “What? I never heard of this thing.” They’re like, “Well, you should really take a look. I think it has all the characteristics that you’d be looking for and that their metrics are great.”

David had– I think it might’ve been me. I don’t even remember if I worked on it or not for a little bit but some of the analysts started looking at it. It’s this sticky business that provides tax software to CPAs. They help you file– I don’t know if that’s the case in Germany. If you guys use accountants to file your taxes. Here in the states, you often go to a CPA. They do all the work for you.

The cool thing is when you link up with a CPA they put you on a subscription. They have all these channel partners that are just evangelizing the software for you and it’s incredibly sticky because you don’t want to change our accountant. We loved the business. We underwrote this business and we’re like, “This is fabulous.” Then we did this weird thing where we looked at the price and because no one had heard of this sleepy New Zealand company, it was trading for around a $130 million market cap. It was tiny. It was minuscule.

If you compared the valuation metrics to the US comparables for software as a service business, it was an order of 10 greater price-to-value multiple. I’m talking multiple, not valuation. Everyday David, and my hat goes off to him. He was buying every single share that he could find on the public market. We were 80% of volume every day buying up everything we could find. Eventually he led a PIPE in the business where we gave them a nine figure check.

I think in aggregate we got 20X return on that, maybe not every chunk of capital, but today it’s a $12 billion business but we were buying it $100 million and that wouldn’t have been possible if it didn’t have these barriers that kept out other investors. Now everybody knows about Xero but the key is having that great business at the right price. It allows you to get those supernatural returns.

It’s just by coincidence that Redbubble happens to be in Australia. I think some of those similar barriers were apparent to me there because a lot of people had just never heard of it.

The scalability of Bonsai Partner’s approach

[00:32:40] Tilman: That’s very interesting. How scalable is your approach?

[00:32:49] Andrew Rosenblum: Let me go on a bit of a tangent and I’ll explain how my thinking has evolved over time. Scalability is not the first thing that I think of because again my goal– This is an optimization problem, when you start an investment business. Unfortunately there’s the asset optimization problem and then there’s the return optimization problem. I had to choose, and my philosophy at the end of the day ended up being: I want to maximize my IRR not my AUM.

I felt that if I demonstrate excellence on the IRR side the AUM follow because of the scoreboard takes care of itself ultimately. Knock on wood we’re off to a good start on the IRR side. Over time we’ll have to scale up. What I noticed– I have this cork board that I put up on my wall in my office. I didn’t show you this and you can’t see it. What I did was, I went back and I did an audit of everything that I failed at. Every name that I either invested in that had a bad outcome because I made a mistake at the outset or a name that I didn’t end up investing in but I spent a lot of time because that is a failure too. Wasted time can be a big issue.

I have this tombstone tiles where I have all these different names, and I asked myself: “what are the similarities there?” What are the threads that I can pull on in terms of themes that I got wrong. One of the things that I tend to do poorly is I bought a lot of smaller businesses that didn’t have the ability to scale. I got lured in. I actually do not have a lot of cases where I paid up too much and it was dead money for five years.

The biggest thing that I struggle with is buying small things that ended up going nowhere. The other thing that I think is interesting, I would underwrite: “If I bought this today, would I be comfortable owning it 50% down?” The real question I should have been asking myself, and now I do is: “Would I want to still own it if it was a hundred percent up?” Not about wanting to buy something to sell it later, finding something that, ultimately, when it reaches that 100% up point in time, the business was fundamentally better at that point and the intrinsic value is consistently growing.

I’m getting better at buying things that ultimately are scalable. I think you don’t have to be a bottom feeder in order to make the strategy work, even though some of the smaller things are attractive. I actually think it doesn’t pay to do that $100 million market cap investing in the United States because we have this incredibly robust venture capital ecosystem.

What’s unique about Australia and New Zealand is, they don’t have that, and so a lot of these companies– maybe it’s changing. I would assume it’s changing, but at least back when the cohort of companies that I’m investing in were looking for money after series A, there was nobody there. One of my companies IPO’d at 1 million of revenue, and then I think Redbubble IPO’d– I don’t I don’t remember the exact revenue number, but it IPO’d at a market cap of maybe 200 million Australian dollars?

What that does is, it allows the public equity investors to capture more of the economics. I think in the United States, there’s a lot of traps here. Also, I used to think that the bigger the company, the more there would be– the more analyst coverage there is, the less mystery there is. You probably saw in my last letter, I bought a large cap company, and I don’t think that it’s exclusively in small companies, but you have to be buying things for the right reasons. Just to answer your question about how scalable it is, I think it’s pretty darn scalable.

I’m not looking to be the biggest fund, I’m just trying to generate the biggest returns. As long as I can compound my knowledge faster than I grow the asset base, then the returns will be safe. If I don’t, if I end up raising way too much money faster than my knowledge gets better and the opportunity set presents itself, then it will be a detriment to my returns. That’s the thing I’m optimizing for, so I will not let that happen. One of the things that I thought was really interesting, I don’t know if you follow– Do you know who Chuck Akre is?

[00:37:19] Tilman: Yes.

[00:37:19] Andrew Rosenblum: He’s a great investor. He does these quarterly calls, which can be really, really good. Someone asked him, “Chuck, when are you going to close the fund?” Because I think he was at $7 or $9 billion dollars at the time that they asked that question. And he’s like, “I’m really glad you asked me that question, because when I started, people asked me: ‘When are you going to close the fund?'” I think he launched with maybe $100 million or $200 million, and he used to tell people he was going to cap it around $300 or $400 million.

It’s the same notion that I was talking to before about when you hit your price target; the business gets better. He was like, “By the time I made it to $400 million or whatever, it was, I just got so much better by that point in time that I was able to accept more.” My hope is that I continuously keep getting better because that’ll allow me to scale. It’s not so much the opportunities. There are just tons of opportunities out there, and I do think that especially when you have a global mandate, and you’re willing to not put yourself into this tiny little box, it means that there’s just a world of opportunity, and so I’m not concerned about scalability for at least a long time, because I’m still really small.

How to invest in a niche

[00:38:35] Tilman: That’s a good point. One thing you already mentioned a bit is the question, if you’re going to these niches where nobody else invests, how do you make this niches change? Like people want to invest there because they have to buy the stock from you to a higher price later in the game. What is needed that these niches change and the businesses get recognized by others?

[00:39:06] Andrew Rosenblum: What a good question. I don’t have a definitive answer, but I have my impressions. My view is that the truth always comes out. I told you, I did a lot of shorting. The truth always came out. You can’t hide the truth. If something’s a great business, people are going to figure it out. Especially in market economies that are so efficient at allocating capital. It’s been said numerous times, but the past is always perfectly priced, and the future is often mispriced. The key thing that I’m trying to do is: I’m trying to find great businesses that people just don’t realize it yet.

I’m not looking to convince anybody or evangelize, but I know that when the business executes, people will figure it out. It’s like that notion of, “you’re smart, and I’m right, and eventually, we’ll see the same thing.” Because I know that there’s lots of smart investors out there, and investors all talk. The thing that’s a mystery now won’t be a mystery in the future when it’s generating a significant amount of profits in the future. If I have a long enough time horizon, I don’t need a catalyst. I don’t need to have a view of when it happens. I just need to be in the game. I love it when people just don’t know that something’s great. That is my opportunity.

Maybe just to double click a little bit on this, because it’s something that I’ve been thinking about a lot recently, a lot of people spend their time thinking about these really high-level grandiose topics. I think even there was a fund recently that– not sued, but threatened to sue somebody for writing about “compounders.” They’re talking about “platform economics” or other high-level things that can apply to hundreds of different companies.

At least for me, I found that when you go really, really deep onto something, it actually gives you the opportunity to see something that others aren’t able to see.

In my opinion information that’ll make you a lot of money needs to have two things: 1) it needs to be rare and 2) it needs to be valuable. Rare and valuable. It can’t be one or the other. I think a lot of these high level universal ideas, they’re valuable, but they’re not rare because you can come to the same answer from fifty different angles. They’re often very easily communicated over a cup of coffee.

What I end up doing is I end up going really, really narrow and deep into a single business or an industry. I want to get to know the nitty gritty because you don’t know where those moments of insight come from. I think that if you have a really concentrated portfolio, it allows you to go where others aren’t willing to go, not just in terms of the names, the stocks, but actually the detail and the information that you can uncover to try and find the truth.

I think that if I wasn’t doing this for a living, I’d probably be an investigative reporter or something like that because I love being on the hunt to figure out what is the truth in these weird mysteries. You’ll learn to train your spider sense to identify: “Hey, I found something that’s insanely valuable that nobody knows.” If you can just find a few of those moments, it gives you the opportunity to bet big on them because that person who has, 1% position or a 2% position on an idea, they’re not going to be willing to devote months of their life.

Sorry to go on all these tangents. I think that in investment management– Who came up with the rule that we need to have a 30 position portfolio or a 50 position portfolio? Because it doesn’t make any sense to me. It’s a way of absolving yourself of responsibility, because let’s say you have a 2% idea in your portfolio and it’s an abject failure and it goes down 50%, you lost 1% for the portfolio, but we both know the market moves 1% in a single day!

What are you betting on? Are you betting on the market? Are you betting on your ability to do differentiated research and pick certain stocks? My ability to be really concentrated, it allows me to transcend a lot of my competition in a way. To bring that idea full circle, I dive really deep into these little niches. I uncover these valuable nuggets that allow me to see value that others can’t and then the value will be presented to the market over time as the business executes. Hopefully.

The positions in Andrews’ portfolio

[00:43:45] Tilman: This also refers back to the point where I came up with the scalability question because, to go that deep, it’s hard to find the right answers. It’s also a problem. I talked with Fred from Hayden Capital, that he’s also looking for these “hunters” and these hunter characteristics are hard to find. If you look in the future, say we talk in 2030, I’m going to ask you about how many positions did you have in your portfolio and what was the median number of positions you had in your portfolio? What might you answer?

[00:44:32] Andrew Rosenblum: Let me take another circuitous route to answer your question. I’m really bad at going direct because I have this ADD brain that works like a web. I know I’ll lose this line of thought if I don’t blurt it out right away. One of the things that I’ve been thinking about a lot and it could just be because I spent a lot of time on Redbubble, is I’ve been trying to figure out what other industries are similar to the discipline that we’re doing.

I think one of the disciplines that actually has a lot of similarity is the world of art. I think that more often, you see more scientific comparisons. When I was in business school, it was very formulaic. Here’s what CAPM is, here’s WACC, DCF, all these acronyms, and it’s a very scientific thing.

You asked me like, “2030, what’s the world look like?” Is there anything more artistic than being a soothsayer and trying to predict what the world will look like, what companies will do, who will be successful? I think that this is an artistic pursuit more than a scientific one.

I think that there are attributes of scientific theory that are really important, especially with the scientific method. The reason why I bring up art to answer this question is, I’ve been thinking about this too. If you’re a musician, and someone asked you, Which musician you think will come up with a better album? Artist number one, who says ‘The album will be a reflection of my inspiration,’ or artist two, which says, ‘I’m going to have a 12-track album, and each of them are three minutes long.’ And then they work backwards to create these three-minute sound bites, versus artist A who might make ‘Dark Side of The Moon,’ or whatever, and they have a 12-minute long song, and then a two-minute long song.

It’s all based on this sense of inspiration and these epiphany moments, which I think that’s how invest great investing is done. You get these aha moments.

In my view, if I look at my history, I probably get one or two of those a year. Maybe the cadence is more or less. My view is that if my holding periods are hopefully infinite, that’s the definition of great investing. If I have a three to five year holding period, you can work backwards to say, “What is the output of the portfolio if you’re finding ideas on that cadence?” So, we zoom forward 30 years, my view is that the portfolio management will be the output of what I found, not the input of what I’ve mandated that I need to have on day one.

I think a lot of people take the opposite approach. They say, “I need to have 15 positions on day one when I launch. What’s your day one portfolio?” A lot of investors asked me that question. I was like, “I don’t know,” And they’re like, “I’m not going to invest with you. If you don’t have 15 ideas on day one, I’m not going to invest with you.” I don’t think I’ve ever– I think I have had 15 good ideas total since I started 10 years ago, so how the hell am I going to have 15 good ideas?

The way that I position the portfolio and how I expect it to look, it’ll probably be somewhere in the realm of 5 to 15 ideas. It’s hard to know what 20, 30 years from now looks like, but that’s ideally what it would look like. A lot is going to change. I’m not trying to be an empire builder and build this big important company, but I imagine that maybe I want to do more work in China, and to do that, maybe I’ll actually have to be a team of two instead of one.

I don’t know how you juggle that because I know that there’s a lot of weird dynamics when you build a team. There’s good and bad.

A lot can change, but if I was just to keep the status quo, and keep progressing that one to two per year cadence over 15 years with that time horizon I outlined, that’s probably the size of it. Conviction will be the determinant of how big certain things are, but there’s not a lot of balance in my portfolio today. Hopefully, that’ll change over time.

[00:48:45] Tilman: What I found interesting maybe it’s also in reference to the idea of the web. You thought about your brain, is that you have like– If I look at your portfolio, it’s a mix of a semiconductor manufacturer software service company for public warning systems. Have I got that right? Leader in genomic sequencing instruments and reagents. Two-sided marketplace, Redbubble, and a church-giving processor?

It’s a huge array, and where are the knots where you hang up these ideas and connect them, and is there a pattern in them? How do you get comfortable with this huge spread of industries?

[00:49:32] Andrew Rosenblum: Of course there are certain things that are similar about them. I won’t even talk about how they are similar from a business model perspective, but what’s universal beneath all of them is that same view that this is a great business available at a great price. A lot of those businesses have had barriers associated which kept the price low.

The biggest thing is, they have to be businesses that I can get to the answer. There are a lot of businesses out there that I just can’t possibly know whether or not in the future it’s going to be worth significantly more or not.

One of the things I truly believe, I don’t think I’m the smartest person, but I think it’s much more important to have intellectual honesty over intellect. Every one of those names I know deeply because I’ve spent a lot of time doing differentiated research on it to get to understand and know the truth about it.

I might be wrong, I’m not going to be 100% right on all of them but I’m giving myself the best chance to not fool myself by using a really rigorous scientific approach to– the scientific method you take a null hypothesis and you try and disprove it. And when you have that short seller’s mindset, at least when it’s wired in your brain for a while, you’re very skeptical and you’re trying to kill your ideas.

I think that’s really important because a lot of investors out there who invest in, maybe they love the SaaS space and they buy a zillion of them at really high prices and they just believe it’s going to work because they have a really high price target and they believe the growth will be sustainable. Even though they may not know that that is actually going to be true.

Yes, these software businesses are fantastic; to use Warren Buffet’s analogy it’s like a huge castle with a huge moat. The reality is this castle has been built on sand. These businesses change very quickly, and they say: “never build a castle on shifting sands.”

I think the logic that, we have these LTV economics for a customer and it’s going to be true 20 years from now, they’ll stop investing and they’ll get these great, mature margins and they’ll put a huge multiple on it. The moat comes from spending all that money and the instant that you stop spending that money, the sands underneath evaporate.

For me, I just need to be really intellectually honest about what I know and what I can underwrite, and that process is woven through all of it, but each of those ideas I came to through a unique pathway. I think that the idea generation process, if you want to talk about it, it’s a serendipitous one. A lot of people view it as this machine that you crank out ideas if you do step one, two, and three.

It’s actually not that, it’s very much the serendipitous randomness process, and you can increase the odds of luck happening, or serendipity happening, if you just do certain things including just paying attention. Some ideas I literally was just walking through, the other day I was walking through the grocery store and if you’re just “always on” you’ll look down and say: “who makes that palette that all that food is stacked upon?” Maybe I should look that up when I get home.

The answer of course is Brambles which has this amazing business where they rent out pallets all across the world through this brand called Chep, another Australian company. Or just by talking to people, creating a network of other investors that share ideas, or by reading about things that are interesting to you. Then just always being on and talking to people and asking them who else they respect.

It creates that web, like you said, of ideas that will naturally come to you. You can’t control when they come but you can control whether or not you’re paying attention. Maybe to beat a dead horse a little bit, to talk about art again, but who do you think is going to create a better album? A musician who has messy relationships, maybe a substance abuse problem, they love to travel, they have interpersonal issues inside the band? Or the artist who goes into their studio every day from nine to five and eats the same turkey sandwich every day?

The odds of inspiration happening is greater in option A than in option B. I think the same is true for investors. The web that you’re painting, there are all these discrete moments. One of my first investment was in a company called Aspen Aerogels. I found Aspen because I was just interested in material science. One day, I saw Bill Gates posted his annual favorite books and he posted this book called Stuff Matters. Which I thought was neat, I was like, “Oh, I want to learn about stuff.” [laughs]

[00:54:27] Tilman: Welcome to the nerd club.

[00:54:31] Andrew Rosenblum: They even had a chapter on chocolate because the author is amazed, it has these solid properties, yet it’s melting in your mouth and how you make chocolate. He had this entire chapter on this topic called an Aerogel. All an Aerogel is if you want to conceptualize, it’s like a block of Jello, do you have Jello in Germany, or is it called something else?

Then if you take Jello but you suck all the liquid out and all you have is this solid block with all these holes of air. The author, he portrayed this magical substance because it’s the best insulator on earth.

If you have a block of aerogel and you put in your hand and you take a blowtorch, your hand will be fine. It can survive heat and cold, extreme temperatures. I got interested and I said, well, is there an aerogel company? Of course, I did. I just Googled, “aerogel company,” and lo and behold, I found that there was this company called Aspen.

What was neat about Aspen was they didn’t invent the aerogel. One of the things the book taught me was that great inventions happen all the time, but they’re rarely commercialized. It’s hard to actually make them usable at scale. With an aerogel, if you have this solid brick that could be an insulator; it wasn’t very useful because if you touched it the wrong way, it just shattered.

The innovation that Aspen came to find was, imagine if you have that liquid Jello that you pour into a bowl, they also put this little blanket inside of it, imagine a fleece blanket, and they pour the liquid Jello on top. Then they suck out the liquid, and what that did was make it a flexible, bendable, cuttable insulation. They created this composite aerogel blanket that made it usable worldwide.

They built this amazing new technology off of something found in 1930, when aerogels were discovered, but no one had used until Aspen came around in the late ’90s to commercialize it. Something like that, that’s how the web is working in my mind. I’m just always on because it’s what I love to do, and we can talk about Aspen, the good and bad about that one, but I think it’s just a fun journey to try and figure things out.

The discovery of RedBubble

[00:57:01] Tilman: We have a comparable story of a company in Germany, it’s called va-Q-tec. They are building vacuum panels for insulation as well, and they figured a process out where the vacuum panels stay high quality for years and years and years. They also are tradable on the stock market, you can invest in them and their vacuum panels and the vacuum services are part of the vaccine against coronavirus, because the vaccine has to be cooled to about minus 70 degrees. They will be a huge winner from this; they’re already a huge winner this year, so you could look into them if you’re interested as well. But maybe let’s go to deep dive into Redbubble. I already showed you that I have some Redbubble, things in my room. [laughs]

[00:57:56] Andrew Rosenblum: I love it.

[00:57:58] Tilman: This is a pillow cover and this is also these warming stripes are also from Redbubble, they show the global warming. Maybe let’s start with the question, how you discovered the company and what made you dive deeper into it?

[00:58:17] Andrew Rosenblum: I think it’s just another excellent example of the serendipitous process working. I first invested in Redbubble in 2019, I believe early 2019, but I first heard about it five years before. 2014, I was at Matrix and I was looking into, I’m sure you’ve heard of Zillow Group, I was doing my research on Zillow, and I thought, hey, this is going to be my big long idea that finally makes it into the portfolio. I’m going to do all this research.

I found this great entrepreneur based out of Australia. His name is Simon Baker and he created one of the great Australian tech companies called REA Group. He got seeded by Rupert Murdoch to create this property portal, where effectively everybody in Australia that’s looking to sell their house, they post their listing. I think is the domain name, but REA group, is the name of the company.

It’s the best business I’ve ever seen because it requires no capital and the agents actually who sell the REA software, oh not software, but the listing, they get paid a percentage of the price. They have this mandate that they can raise prices every year and selling your home is so infrequent of a sale that, you’d be silly not to post it on the internet because that’s where 80% of every home search starts. If you’re looking for price discovery, you’ll make far more if you pay the $200 or whatever it is, on REA.

I talked to this guy. He built this multibillion-dollar company. He educated me on Zillow to the nth degree, I learned so much from him. He told me “I do marketplace investments.” I just remember thinking myself, “I want to know every single thing that this guy invested in,” because he’s that good. Of course, I stalked his investment fund where there is public information. I found that he was on the board of this small Australian company called Redbubble in 2014.

I remember going to the website and being like, “What the hell is this? This is just a bunch of garbage. Why are there all these memes and nonsense pictures?” I just didn’t get it. I thought it was just a website that sold crappy items. You fast forward to late 2018. I forget exactly how I found it. I think I literally just did a screen for Australian tech companies. I was just bored one day. When you get bored, just make a long list, and then go from company to company to company to company and just ask, “What are they doing?” I do that from time to time.

I just remember being like, “Wait a second. Redbubble? That crappy Australian company? That’s public?” I also saw it was down ~60% that year. I was like, “Well, now that it’s public, let’s see what their pitch is and what they do.” That’s how I got introduced to the story.

Let me just explain what they do and why I found it interesting and why I think it’s a really neat business. Redbubble, it’s actually a three-sided marketplace…

[01:01:59] Tilman: If you’re okay with it, I will share my screen with this website open. I enter the search for stock market. We see some of the things they have. So you can get all the– They have this max with–

[01:02:19] Andrew Rosenblum: Not the best example, but maybe if you type in: “Avocado,” I think you might get a better– Because a lot of this stuff is memes right here. Let’s see.

[01:02:33] Tilman: That’s a sticker. Sorry. I have to change this.

[01:02:40] Andrew Rosenblum: See if it works.

[01:02:41] Tilman: Yes.

[01:02:42] Andrew Rosenblum: Independent artists are creating these designs. That’s the part I didn’t understand. There are memes, like the ones you see, there are hamsters or whatever. All these things, some independent artists somewhere made it. It’s really impressive what Redbubble has done to bring together this world of– they brought together in one place, a place where independent artists can go to try and monetize their artwork.

What I think is really interesting about Redbubble, and I think there’s some similarities to Uber and Airbnb, in that they’re tapping into this underutilized asset base. In the case of Uber, there are people’s cars, which maybe aren’t being driven to their full utilization, or someone’s house, which may have extra empty rooms, or they have a second house that’s just lying there.

Across the world, there’s this universe of artists, these independent artists that create these great designs, but they’re just lying fallow on their hard drives. It’s just sitting there utilized. If the artist wants to sell that art, historically, what they had to do was create a web presence themselves, build a website, get an audience somehow, create content that’s shareable, get people to come, that whole rat race.

From there, they have to actually buy inventory and get it printed on things, like shirts or whatever they want to sell, mugs, and then when an order comes in, they have to go to the post office and send it out, and then when there’s a problem, they have to give them their phone number, and field angry calls, and then send out a replacement. That was a lot of work, and they probably earned around 50 cents on every dollar that they sold.

What Redbubble did was say, “Hey, we’re going to create the place where independent artists can go to upload their art and we will do the rest.” The value proposition that Redbubble offers to artists is huge. There’s this “new” technology that probably came out 10 years, 15 years ago called Print on Demand. And this is just another way of saying: an efficient way of printing out individualized pieces of artwork and designs onto different canvas types. Be it a shirt, like you have that print in the background, you have your Warren Buffett and Charlie Munger pillowcase.

[01:05:25] Tilman: This is the pillowcase. Let me-

[01:05:28] Andrew Rosenblum: You can put the pillow in. They came to the realization, or it was a revolution. What Redbubble decided to do, was to create a platform that enables the use of print on demand. Rather than historically, you would bring the artwork. You design something yourself and you get it printed on a shirt. Let’s say, your local soccer team, you want to have like “Rosenblum’s footballers,” or whatever.

Instead, you can go and actually tap into this universe of wonderful art that can get printed across, I think today it’s around 100 different canvas types. From pillowcases, shower curtains, shirts, sweaters, socks, skirts, aprons. They have duvet covers; they have masks, jigsaw puzzles. They have all these different blank pieces of canvas, physical items, that they can literally print the design onto.

The artist loves it because Redbubble is able to aggregate traffic for them. They don’t have to create a website. They instantly get their design ported over onto 100 different canvas types. They don’t have to invest in the inventory. Then this is the really cool part that I think is really underappreciated. Unlike most marketplaces, Redbubble does not charge the supply side a fee.

What Redbubble does is, it pays a fee. The person who’s getting a take rate is actually the artist and not Redbubble. What’s really cool is if an artist uploads something. Let’s say they want to design a T-shirt. By default, the split is something like this. Don’t quote me on this. I’m going off of memory. It’s something like, 20% of the sale goes to the artist, 30% goes to Redbubble, and 50% goes to the fulfillment partner, which is not Redbubble because Redbubble doesn’t make anything. They have this network of partners that print and ship for them. That covers the physical cost of the item, the printing, the shipping.

What the artists can do, is that default 20%, there’s actually a sliding scale. What they can say is, if it’s a sticker and the sticker costs $1, they don’t want to earn 20 cents for their work. They could say, “I want a 50% or 100% commission.” All that does is, when they slide the scale, that underlying price goes up that the customer pays. The artist is in full control of how much they earn or not on a particular product. Of course, when you raise the price, demand will go down, potentially.

The nice thing about Redbubble, and we can talk about the demand side and why it’s really valuable there, is that there’s a very high propensity to pay when you find something that expresses who you are. When you find that unique thing, Redbubble is not the cheapest. It’s actually reasonably pricey. They don’t deliver fast. You pay for shipping, but at the same time… I showed it to you before Tilman, here, hold on. I bought this cool mask. It just came last week. The design is of the constellations.

I thought it was so neat that I ended up paying $25 for it shipped. I thought about the price for a second, but I was like, “that mask is so cool. I have to have it even though it’s probably twice the cost of another mask.”

Anyway, the artist is earning the take rate that they choose. All the artist does is they upload their art; they pick out which products they want it printed on. Then they just wait for the money to roll in. They get a check every month. Redbubble has become the de-facto place for artists, independent artists, to upload their work.

Then, to talk about the product-market fit on the demand side. Redbubble focused solely on the artists from the start, but once they built this wonderful library, and they built this fulfillment network that fulfills all of the orders and it prints it out on all these different product types. They built up this wonderful platform for the customer. That’s people like me who are buying, rather than making the art.

The reason why I think it’s really unique and why Redbubble is going to be a lot bigger in the future from a revenue perspective, this isn’t a stock call by the way. This is just why I own it. For me, I think the revenue will be bigger in the future because it’s hard to see a future where fewer people are buying products that express who they are.

Today, most people are buying these mass-made products and they wade down aisles hoping and praying– not praying but hoping that something someone mass-produced will fit their personality.

What Redbubble offers is this personalization engine. If you want avocado or something, there’s a zillion designs. I’m sure even if you typed-in “avocado ninja,” there will be something. There’s a million different random things that will help you express your quirky personality.

That I think has amazing potential. And that’s enabled by print-on-demand and these independent artists. They’ve expressed that deep product-market fit through their revenue growth over the years, which has been very strong.

The last part– I focus so much on why it’s a great fit for the customers and the artists. From an investor’s perspective, it’s a really beautiful thing because it has this amazing business model too. The first thing that I think is really attractive about it — there’s another print-on-demand company that does a really good job called Cimpress, but Cimpress, which owns Vistaprint, they own all their own facilities for printing and shipping things.

What Redbubble realized was there’s a lot more value to being the platform that hooks up to this network of, I think they have around 50 fulfillment partners today, that print and ship. It’s asset-lite, it has a negative networking capital cycle which sounds like a bad thing, but really all that means is they get the money first before anything is ever made.

Redbubble, in Warren Buffett parlance, gets “float.” It’s like an insurance company; they get the money first before they have to pay it out in claims. They end up paying the artists at the end of the month, and they pay the fulfillment partner in the process of making it. It’s very cash-generative. They earn 30 cents on every dollar which is a margin that’s charged to the customer. The way to think about it is there’s a 20% margin and at 30% margin. 20% goes to the artist, 30% to Redbubble. The customer willingly pays that 50% total margin because they found a unique product that expresses who they are.

At the end of the day, you get this wonderful business that’s very cash-generative and doesn’t have a capital heavy infrastructure. Then just generally speaking, the runway for growth is really significant because their brand awareness in their largest market (the United States), I’ve done survey work, and I think the company’s done survey work, it’s only 10%-15%?

Most people have never heard of it. I think that this is something that is really powerful even if you’re just buying for yourself, but I think it’s the ultimate gifting engine. If you know somebody and they like something, you can send them something really unique that probably they’ll enjoy. Those are the reasons why I think it’s interesting.

Etsy vs Redbubble

[01:13:08] Tilman: Have you thought it through compared to Etsy? Because you have this painting of Etsy behind you and it’s also a point to attach at this point. I think what I find interesting is that they position themselves in a space of art production that’s industrial to a certain extent. They can build this scale and mass production and combine it with art which may or may not be as strong as Etsy, but what is your take on this?

[01:13:37] Andrew Rosenblum: Etsy built something that’s awesome. It’s such a great business and it’s further along in its maturation cycle, but remember when I told you about that example where the fund I worked for bought Xero and it was a factor of 10 cheaper valuation? When I did the work on Redbubble and when I originally bought it and even when I bought more of it– Etsy is the closest comparison, right?

Redbubble is earlier in its journey, probably longer runway, maybe, but when you compared the valuation for this quirky Australian company that no one had ever heard of, it was around a $200 million Australian dollar market cap, compared to the behemoth Etsy.

The way I was comparing it was as a multiple of their gross profit because sometimes the profitability gets obfuscated by the cost structure. Then the revenue numbers weren’t comparable between Redbubble and Etsy because for Redbubble it looks like they have this really small gross margin because their revenue line is actually their GMV: their gross merchandise value. Etsy’s revenue is the net revenue from their GMV and so it’s apples to oranges.

If you just compare the gross profit dollars to their market caps or enterprise values, I think at the time that I bought Redbubble, Etsy was trading around 20 to 30 times. Pretty pricey. Redbubble was trading for two times.

It was an order of magnitude– I don’t know. What is an order of magnitude? Is that 10 times? It was 10 times less expensive for a business that I thought had a much longer runway and ability to scale. Of course, I looked at Etsy and I thought it was a cool business, but the thing that kept me out was I didn’t really see what the mystery was that I was trying to unlock. I think Etsy is a great business and everybody knows it.

That’s where I was at with that one and, of course, I’m kicking myself that I didn’t buy it when it went down a bunch in March, but instead, I bought Redbubble because it’s what I knew. Of course, I compared it to Etsy and I think that Etsy is attractive but I think if I’m looking to earn those superlative returns, maybe I’ll own Etsy at some point but I think it has to be really attractive both from a price and a business quality perspective. The price kept me on the sidelines.

RedBubble’s management

[01:16:01] Tilman: In your letters, you don’t talk that much about management and it sometimes shines through in some parts of the letters but that brought me to the question that less talking about management. What importance do you see for management in general and what importance do you see for management here at Redbubble?

[01:16:23] Andrew Rosenblum: It’s tough. Well, Redbubble I think has great management and I’ll get to that in a minute. I think there’s nothing new here to hear that I think founder-led businesses are superior because there’s a lot of alignment of incentives. Just go back to what I said before: if you’re looking for information that’s going to earn you a lot of money, it needs to be rare and valuable.

I think that it’s pretty consensus these days to go for founder-led companies and I think that everybody’s looking for founder-led companies. I prefer them, but in my opinion, I have to wonder how much of that you’re giving up in the price.

Also, just from my experience, I’ve learned that there’s a highly misused term called “the law of large numbers” and all “the law of large numbers” actually tells you is if you have a really large sample size, you can reasonably use that sample to understand what the outcome distribution might look like. I think when you’re underwriting a single person versus underwriting a company which has hundreds or thousands of independent actors all marching along one marching order, you can much more accurately predict how the company will behave than what a single person will do.

I’ve actually really struggled at underwriting people. I think it’s obvious to understand people’s intellect, but I found it a lot harder in terms of understanding whether or not people are going to make the right decisions and whether or not they’re going to be aligned with your thinking.

Probably my single greatest failure as an investor came from misjudging a management team and it shook me to the core. It made me ask myself whether or not I have the ability to judge management teams well at all outside of wondering: “hey, are you doing the right things? Do you seem like a reasonable person? Are you intelligent enough to be able to make good decisions in the future?”

We owned this company and I’ll say the name of the company at the end. When I was at Matrix, I was the junior analyst working with a senior analyst who is a great investor, and he was guiding me through this investment. It was in the healthcare space. We were a top 20 shareholder of this company and the company was just executing like crazy. The stock was up 100%, 200%, but every time we reached out to them, we wanted to speak with the CEO or CFO, they rebuffed us each time saying, “Look, he’s just focused on the business” and we loved that. We absolutely loved that this guy wasn’t wasting his time talking to schmuck investors and we were constantly trying to get him on the phone.

Eventually, we get a meeting with CEO and CFO. I fly out to their headquarters on the East Coast in New Jersey. We get to the lobby; it’s not the nicest office. They take us to the boardroom; it’s not fancy at all. There are chips in the table, the seats are old. We’re like, this is amazing. They’re really running a lean mean machine. The CEO comes in, CFO comes in. It’s a principled discussion. Every question we ask; we’d been owning it for a year or more; we had thoughtful questions. They answered everything we asked with the most disciplined thoughtful answers I’ve ever heard.

Even at the end after I walked out of that meeting I said to the person I was working with, and I was like, “That was the best in management meeting I ever had.” He looked at me and was like, “Aren’t they incredible?”

Lo and behold, that company was Valeant. And the people that we were talking to were lying to us about the facts and figures that we were asking them about. It shook me to my core because one of the things that I thought I could do reasonably well, and people have told me that I can do reasonably well is: I’m good at empathizing with people and understanding body language, etc.

It’s just something that I’m fascinated with, and I try and understand people. I think it’s important. But I just got that so wrong that it really made me question, “Can I do that in any effective way?”

Fortunately, we sold Valeant long before its collapse, so it wasn’t that we were caught with egg on our face, but it was a mistake in our lapse of judgment at the start in terms of understanding these people and what they were doing. Of course, they were telling us they weren’t raising prices. We thought this was largely a volume growth story.

In terms of not talking a lot about management teams, I actually don’t know how good I am at picking them, but I prefer to have founder-led teams with aligned incentives and clear thinking. The person who ran Redbubble and currently runs it and has run it, I think they’ve been in existence for 12 years or so, and he’s run it all except for one year. He’s the founder. He’s a great person named Martin.

Martin is really principled. The person who he hired for that single year or two, I don’t remember, was his COO who was with him for a long time. I also think he was really principled and good. I think more than anything, the thing that they impressed on me was they’re actually good people. I was really impressed by that.

When COVID-19 came out, and they came out with the mask product really fast, they thought, “Should we even do this at all? Is it unethical for us to profit off of this?” What they decided to do was, for every mask they sold, they decided to donate one. I thought that that was just a wonderful reflection of what their values are. If you can recreate a culture of a company and understand what’s important to these people, it can give you a window into their soul in a way.

These are really ethical good people who they really care about the artist. They built this for the artist; they really care about their customer. They care about their impact on the environment. They try and be carbon neutral with everything. You wouldn’t do that and sacrifice in the short run unless you thought it was worth it, and so I’m really impressed by them.

The CEO came back on an interim basis at Redbubble. They’re going to find a new CEO for full-time because this guy wants to retire. We’ll see. Hopefully, they have good judgment and their ability to find somebody new. Look, I had a bad experience in the past. Maybe I’ll get better at underwriting management teams, and I’ll write about it later in my letters.

Final thoughts on Good Investing

[01:23:20] Tilman: Maybe that’s the reason why you’re cautious with saying something about management teams. For the end of our interview, do you want to add something we haven’t discussed? It might be interesting for the viewers.

[01:23:35] Andrew Rosenblum: Yes, there’s one topic that– I think it’s a perfect time for me to stick my foot in my mouth and really piss some people off because I’m good at that. And I’m saying that facetiously. I think the reason why I’m talking to you in the first place, Tilman, is, there are a number of people who helped me along the way. Especially when I was getting started.

You know what’s weird? The vast majority of those people who were really helpful to me at the start and got nothing in return, they’ve all been guests on your show. Dennis Hong, Cliff Sosin. I don’t know him personally, but Rob Vinal helped me a ton. The MIT folks helped me a ton. All of these people helped set my mind right.

You’ve interviewed or work with all of these people, and I thought to myself, you call it Good Investing TV. It’s not just about “good investing,” but these are also good people. There aren’t a lot of examples of the good guy winning in this business, and so I just wanted to be able to maybe give a little back to someone else and maybe help them to learn. That’s how I preface this answer.

My view of investing– I’m going to weave in something that I said before and then I’ll get to the– Again, the web is going–

I’m going to weave in something that I said before about being an artist with a concept that I’m going to weave in right now which is: please don’t copy Warren Buffet and Charlie Munger. I’ll get to why I believe that. I love them, learn from them, read everything that they do, but don’t copy them.

One of my favorite quotes that I found recently is from Pablo Picasso. He said, “You must learn the rules as a pro, so you can break them as an artist.”

Sorry about the motif about art, it’s just been rolling in my mind. If you think that investing is an art form you have to ask yourself how am I going to break the rules? You have to break the rules if you’re going to be a spectacular investor and when I think about any great artist, they’ve all done something to break the rules and what that allowed them to transcend the competition.

If there is a motif from this discussion, it’s that if you have a lot of competition, they are going to erode away the profitability of that strategy. In the parlance of art, the currency is attention.

There’s this museum in Barcelona that I saw called the Picasso Museum, and you get to see all of his early work where he did all the same stuff that everybody else did. He painted in the impressionist style and you wouldn’t have known that it was Picasso. He did not stand out. But what he did was, he was a masterful artist and then he figured out: “What is it that I know how to do? What is it that I’m uniquely capable of doing, and how do I break the rules to break out and be different?” And he created the cubist style, and it could be Lady Gaga wearing meat as a coat or whatever the hell she does that gets her attention.

I think it’s similar to the world of investing, if you want to win, you have to learn how to break the rules and beat your competition to do something different. A lot of people they mistake the notion of learning from somebody, as copying somebody. Because it’s human nature to copy what works. It’s this cycle of: something works, it attracts competition, and the thing that worked no longer works in the future.

It’s this game of the adaptation that we’re in, the world of investing, and so you need to be able to figure out who am I? What am I capable of? And what am I going to do differently?

If you are a physicist, and you’re studying about Isaac Newton and you learned his laws, would you go out and sit underneath an apple tree hoping that an apple would fall on your head? Would that be the thing that got you to your next breakthrough in the world of Physics?

No, because in life, the problems worth solving are not going to be found by following in someone else’s footsteps. Every Physicist has to learn about Isaac Newton and Einstein, but then they shouldn’t copy these people. You need to take the lessons that [Buffett and Munger] are presenting and you need to adapt it to your personality and the opportunity set that is out there today. There is a reason why they are buying tech stocks, Berkshire that is, because they are learning. They are adapting. They are not staying static.

You need to figure out where those packets of opportunity are and what you’re uniquely qualified to do in order to break out from your competition. One of the things that Peter Thiel said that I really like is, “Great companies don’t beat the competition, they remove themselves from the competition entirely.” I would suggest and ask of anybody, what are you doing to remove yourself from the competition and have a sustainable edge, and break the rules? That’s what I would say.

[01:29:01] Tilman: It’s not only breaking the rules, like being outstanding, standing in a place that’s not in the crowd. If you want to have another picture for this point. At this time, I want to say thank you very much for taking the time and having the interview with me and I think there’s much in it people can learn from, and I hope we have the possibility to chat another day, again.

[01:29:31] Andrew Rosenblum: Thanks, Tilman. Good to connect.

[01:29:33] Tilman: Thank you.

[01:29:34] Andrew Rosenblum: All right.

[01:29:37] Tilman: Bye to the audience, bye-bye.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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