Here you can enjoy our conversation with Alex Kopel of Rowan Street Capital. We have discussed how he moved from classical value stocks to businesses that drive change.
We have discussed the following topics:
- 2Learn more about Interactive Brokers
- 3Frustration with the traditional way of managing money
- 4The beginnings of Rowan Street
- 5Zero management fees
- 6Dealing with smaller returns in the beginning
- 7Creating stability as a founder
- 8Choosing the right partner
- 9The downside of having a partner
- 10Finding consensus at portfolio building
- 11Factors for choosing stocks for the portfolio
- 12Valuation challenges
- 13Change & investing
- 14Dealing with change
- 15Community Exclusive
- 17Revising the process
- 18"Moat" and "Change"
- 19Defining high-quality businesses
- 20Exceptional opportunities
- 21Never going back to Wall Street
- 22Personal growth since leaving Wall Street
- 23Thank you
Learn more about Interactive Brokers
This episode of Good Investing Talks is supported by Interactive Brokers. Interactive Brokers is the place to go if you are ever looking for a broker. Personally, I use their service. They have a great selection of stocks and accessible markets. They have super fair prices and a great system to track your performance. If you want to try out the offer of Interactive Brokers and support my channel, please click here:
Frustration with the traditional way of managing money
[00:00:38] Tilman Versch: Hello, audience. It’s great to have you back. Today I’m having Alex Kopel of Rowan Street on. I want to start with my first question. Alex, frustration has led you to found Rowan Street. Where did this frustration come from?
[00:00:55] Alex Kopel: The frustration basically came out of this feeling that both me and my co-founder, Joe Maas, who I’ve known for about 15 years now, we actually met back while we were studying for our CFA exams back in the day. We both ran into this frustration that we could not manage money the way we would do it for ourselves for our clients.
I worked for a number of big Wall Street banks, and so did my co-founder. That was our frustration. Here’s the truth that we found—all the effort, and time, and energy on Wall Street is currently spent on asset gathering. And because of that, the effort is focused on short-term relative performance and what I would call nurturing a client’s emotional well-being while creating this illusion of safety that’s not even there.
That almost always comes at the cost of reducing clients’ long-term investment returns, and sometimes pretty drastically so. We all know that in order to perform better than average, you have to pretty much stand apart from the crowd and do things very differently from what everybody else is doing. However, that behaviour invites periods of underperformance from time to time, and that underperformance tends to be pretty disastrous if you’re trying to retain client assets.
What the average manager does in the industry is trying to engineer the portfolio in order to retain client assets. And basically, mediocrity is the result. So, those are our frustration. That’s why back in 2015, we tried to do things differently and set up Rowan Street. From day one, we have a structure and the compensation system that is geared towards or allows us to focus almost exclusively on the long-term compounding of client assets and not asset gathering, which in turn allowed us to focus on thinking and acting like business owners and not salespeople.
What the average manager does in the industry is trying to engineer the portfolio in order to retain client assets. And basically, mediocrity is the result. So, those are our frustration. That’s why back in 2015, we tried to do things differently and set up Rowan Street.Alex Kopel
The beginnings of Rowan Street
[00:03:34] Tilman Versch: How did your structures look like when you decided to build Rowan Street to achieve the goal of great performance?
[00:03:42] Alex Kopel: We started off really slow at the beginning of 2015. We just started with our personal assets, and we took in some very close friends and family. The majority of the fund was actually not invested while we developed and executed our investment strategy and developed our internal processes. We didn’t start taking outside capital until about 2017, when we were ready for it.
We set it up from day one in terms of compensation as we don’t charge any management fees at all. For us, it’s not about growing and gathering assets. All our compensation comes from performance.
It’s as simple as—if our clients make money, we make money. If they don’t, we make nothing. From that setup, everything becomes completely different. Your focus is different. The way you spend your time is different. The kind of clients that you take into your fund, they’re completely different from the rest of the industry.
If our clients make money, we make money. If they don’t, we make nothing. From that setup, everything becomes completely different. Your focus is different. The way you spend your time is different.Alex Kopel
Zero management fees
[00:04:59] Tilman Versch: Why did you go for the zero management fees?
[00:05:00] Alex Kopel: Zero management fee was basically a way for us. Just like I said, we want to get away from the focus on how many assets we have and try to constantly grow our assets and bring in new clients because when you’re charging the fixed percent (2% or whatever it is), basically, you make money, whether your performance is good, whether your performance is not good. You will still make money. You make money in positive years, down years, as long as you have assets in your portfolio.
However, if those fixed management fees are at zero and all you are charging is a performance fee, then your focus turns on compounding your clients’ assets over the long run. We obviously have a high watermark. So, if we lose clients’ money, then we have to make the capital whole again before we earn another dollar. So, not only do we focus our mind on long-term compounding but also focus our mind on protecting clients’ assets from permanent impairment of that capital, which fixed performance fees don’t do.
If we lose clients’ money, then we have to make the capital whole again before we earn another dollar. So, not only do we focus our mind on long-term compounding but also focus our mind on protecting clients’ assets from permanent impairment of that capital, which fixed performance fees don’t do.Alex Kopel
Dealing with smaller returns in the beginning
[00:06:26] Tilman Versch: With this system, you have to be competitive and focus on great returns. If you’ll think about the first two years where you only had your own money and small investment from close friends and family, your compensation is quite far out sometimes. And maybe if you have one or two lumpy years, it can get quite challenging with the compensation. You also need to cover your cost of living. How do you manage this?
[00:07:01] Alex Kopel: Absolutely. That’s actually an interesting question because it was very difficult in the beginning. We were advised against it by numerous people because that’s just not the industry practice. That’s not how people do things.
We obviously had our own capital and our own savings, to begin with, but in the first few years, we weren’t making any money at all first of all because we had very low cash flow. Our only capital was our own and some of our friends and family. And also, the returns were only 25% invested because we’re very slow and deliberate in investing our money.
We weren’t making much money, and that creates kind of a hurdle for the majority of doing that because if you’re not getting paid, and you cannot be paid for several years, that kind of routes out a lot of your competitors. They’re trying to do the same thing.
Also, it instilled a lot of discipline in terms of how we manage our expenses of the fund. We probably have one of the lowest expenses in the industry. We didn’t start off with nice fancy offices and a team of analysts and Bloomberg terminals or anything like that. Since we weren’t getting paid in the beginning, we tried to keep our expenses as low as possible. We worked from home, didn’t get any fancy subscriptions. Our research was done going through original materials that were published out there for free. We didn’t have Bloomberg terminals, and we had sort of different contracts with people we outsourced at very low cost in the early years.
It instilled a lot of discipline in terms of how we manage our expenses of the fund. We probably have one of the lowest expenses in the industry. We didn’t start off with nice fancy offices and a team of analysts and Bloomberg terminals or anything like that. Since we weren’t getting paid in the beginning, we tried to keep our expenses as low as possible.Alex Kopel
It was a very lean operation, but now that we’ve been doing it for six years, it’s very helpful because we’re still writing that way. We’re much bigger now, and we are making money, but the mindset is still the same as when we founded it.
Creating stability as a founder
[00:09:20] Tilman Versch: Let me add another question. How are you creating stability with this system, especially in the first two years or three years? There was always the risk you wouldn’t succeed. Besides, with this model, you don’t have any income to cover even your basic living expenses.
[00:09:50] Alex Kopel: Sure. Again, when we started off, we both did have savings to live on. It was enough to get us through the first couple of years because we knew that we were going to make money in the long run, but we weren’t counting on making money in the first two or three years. So, we had enough savings to set us up that way.
Again, we were advised against this, but we are to believe that if we focus on the long-term compounding of our client’s assets and we have this mindset of business owners, and we acquire a bunch of businesses in the portfolio that could compound for us in the long run over the next five-plus years, we will deliver the results. And if the results are delivered, we’ll get paid. It’s basically kind of riding the lean operation living off our assets.
We were advised against this, but we are to believe that if we focus on the long-term compounding of our client’s assets and we have this mindset of business owners, and we acquire a bunch of businesses in the portfolio that could compound for us in the long run over the next five-plus years, we will deliver the results. And if the results are delivered, we’ll get paid.Alex Kopel
I had to actually move. I used to live in San Francisco. I had my job with big banks, and I was earning pretty good money getting the bonuses. I could afford the San Francisco cost of living. I actually had to make a decision to move to Sacramento, which is a suburb. I mean, it’s not a suburb, but it’s about two hours away, and the cost of living pretty much is half, maybe even less than half over there. So, I had to reduce my expenses significantly, maybe by more than half, in order to get through the first few years. It also helps you to be much more disciplined in your own finances as well as funds.
Choosing the right partner
[00:11:44] Tilman Versch: You also made another decision to partner with Joe Maas. Why did you decide to see this guy more than your wife or girlfriend?
[00:11:56] Alex Kopel: Well, I wouldn’t put it in those terms. I don’t think of them as my wife or girlfriend.
[00:12:05] Tilman Versch: No, I don’t mean it that way. What I meant was the time you spent with him is a lot, I think.
[00:12:10] Alex Kopel: Yeah. We met back when we were studying for the CFA exams. There’s this boot camp up in Canada, which is right before the CFA exams that go for about a week, so you live in the dorms and you eat dorm food, and you go to class for eight hours a day, and then you take two mock exams. So, we actually got to be roommates in that boot camp.
We were level one and level two so we kind of kept in touch throughout the years. He lived in Seattle. I lived in San Francisco. Eventually, back in 2014, we kind of accidentally met up in this one training we were doing for a financial software. It was up in Seattle, and we kind of met up and started talking about the vision of what I wanted to build over the next 20 years, let’s say. He was kind of thinking along the same lines.
What was very good about our combination is that our skill set is very complementary. I’m very much an analytical guy. I do all this really in-depth research. I like to spend most of my days reading and studying companies and thinking about companies and industries, and just reading annual reports and books.
What was very good about our combination is that our skill set is very complementary.Alex Kopel
Joe was a little bit older than me. He had much more savvy as an entrepreneur because he started a couple of financial businesses of his own, so he was very knowledgeable in terms of how to set things up with all the right people that we need to bring in. He was much more skillful in the business development part of this, which you really need.
You want your partner to be exactly like you are. You want your partner to complement your skills that you may lack where you’re not as good at. And so, I found that in Joe, and he found that in me.
The downside of having a partner
[00:14:30] Tilman Versch: Is there also any downside of having a partner? It’s a bit mean to ask this question. He isn’t here but let’s try it.
[00:14:38] Alex Kopel: Downside of having a partner. Well, there could be. However, we were fortunate I would say that we haven’t had much of a downside because we are just very good. I started off doing it from California. He was in Seattle. I moved up to Seattle for a couple of years so we can operate from the same office, but we’re also very good at working from different offices in different locations. We’re very understanding of each other’s process and personality, and mindset.
The downside of having a partner? Well, there could be. However, we were fortunate I would say that we haven’t had much of a downside because we are just very good. We’re very understanding of each other’s process and personality, and mindset.Alex Kopel
Joe knows that I’m a thinker. I like to spend most of my days reading and thinking about things and trying to structure my portfolio in a very focused way. I try to develop really solid, strong convictions of companies that we will put in our portfolio. And of course, we discuss them together, and he asks really good questions, but he gives me the freedom to play my game and to be my best, and I give him the freedom to do what he does best.
Again, it’s rare to find a partner that complements you so well, but I think we’ve been very fortunate from the past six years of riding this thing together.
Finding consensus at portfolio building
[00:16:07] Tilman Versch: If you have a team, how do you go about setting up your portfolio? How do you make a consensus? How do you nominate for your portfolio? How do you negotiate conflicts with, let’s say, position sizing? How do you decide if a stock or player should be added to your team? Do you have a process? How do you go about this?
[00:16:34] Alex Kopel: Sure. I can’t think of any incident where we actually had conflicts over this because, again, Joe is very good at letting me play my game. He knows my strength. He knows what I do best. The main thing is we’re in agreement on pretty much 100% of the line on how we want to manage our money and the investment philosophy and investment process. We’ve honed it for many years before starting the fund. We worked on it quite a bit in the first two or three years to make sure we were on the same page.
The main thing is we’re in agreement on pretty much 100% of the line on how we want to manage our money and the investment philosophy and investment process. We’ve honed it for many years before starting the fund. We worked on it quite a bit in the first two or three years to make sure we were on the same page.Alex Kopel
This philosophy of 10 players on the team or getting all the best all-stars in our team is we’re pretty much 100% aligned. Joe and I both do this, but I spend the majority of my time on this as I try to find the most extraordinary opportunities, the most extraordinary companies to put on our list that we would like to own, and from time to time, we get an opportunity to own them.
As I’ve described in one of my previous letters, I think it was back a couple of years that if we have this ten-player all-star team with ten positions on average in the portfolio and they’re all incredible companies with very wide moats and incredible management teams and just a long runway for growth and reinvestment opportunities, it’s pretty hard to compete with them.
So, any new player that comes in has to compete with the existing eight or ten companies that we have in our portfolio and that we know incredibly well. It’s a very high bar to get over. These companies need to do either significantly better or need to have a much better management team, much more opportunities for growth and reinvestment, or something special about them that if one comes in basically, we have to take one out.
That’s not a very easy thing to do if you’ve been following a company, for example, for three or four years and you are very well convinced. That’s not easy to kick it out, take your capital gains and put a new star on the team. So, it’s usually a gradual process if we do decide to do it if the player comes in at a small weight.
In one of my letters, I’ve mentioned I’ve been a hockey player since I grew up in Moscow. I use a hockey analogy where this player gets very little ice time. And as we get more and more confidence in this player’s game and how he complements the overall team and the overall game of the team, then the player gets increased ice time, which means increased portfolio waiting for more and more of our capital. And eventually, that player has the potential to be an all-star in the team. He makes it up to be a quarter position on the portfolio.
Factors for choosing stocks for the portfolio
[00:20:01] Tilman Versch: What is the performance huddle you give the player before you let him on the ice?
[00:20:07] Alex Kopel: From day one, we wanted to compound our clients’ capital. That’s our long-term goal—to compound our clients’ capital at double-digit returns over the long run. So, over the long run meaning more than five 5 or 10 or more years.
Any player that comes on the team has to be able to compound that rate for a long period of time. We place great importance on the internal compounding of the company. So, there’s an internal component of the company, so the company has to be able to grow its revenues and earnings over a long period of time, at least double-digit returns.
And then, the second part of this kind of component engine is also the price that we pay for the company. Obviously, we try to pay a fair price. Basically, we’re not trying to go after cheap valuations, but we just try to simply not pay too much. And if we do pay too much, that can work against that long-term compounding over the long run. So, that definitely plays a factor. But again, our long-term goals, that double-digit compounding over a long period of time.
[00:21:41] Tilman Versch: How do you make sure that too much isn’t too much? We’re coming from this cheap world as investors being nurtured with this idea. But if you think about Google or Facebook or other things, stocks, they always didn’t look that cheap.
[00:22:03] Alex Kopel: Sure. No, that’s actually a great question. It’s something that I think I’ve evolved pretty tremendously in how I think about that since I started the fund because I also come from the world of Buffett and Graham and value investing. And that’s how I actually got interested in this business. And that’s who I learned from. So again, in the 20th century, in the old century, paying the low price for certain assets was basically like 40 cents or 50 cents on the dollar is basically the way you made your returns.
However, I’ve evolved that thinking quite a bit over the years. We realized that the valuation of companies is not our stronghold, and probably it’s nobody’s stronghold, especially in the 21st century with the cover of technological and platform companies that we have going on right now. And the rate of change that’s going on. I don’t think it’s anybody’s stronghold to actually assign value to a certain technology company. You would not know what Amazon was worth in 2010, what Netflix was worth in 2011. Although you could value, for example, maybe an oil company or with some acid-based company back in the day, it is significantly better.
We realized that the valuation of companies is not our stronghold, and probably it’s nobody’s stronghold, especially in the 21st century with the cover of technological and platform companies that we have going on right now. And the rate of change that’s going on. I don’t think it’s anybody’s stronghold to actually assign value to a certain technology company.Alex Kopel
So, valuation is not our stronghold. Let me actually come back to that. If you focus first on the valuations, what I found myself in is I was tied to this difficult situation or subpar companies that were very difficult to understand. Basically, when I focused on the valuations first, I got involved in these difficult situations that didn’t really play out well over the long run. So, I shifted my focus towards basically extraordinary businesses. That’s why I spend probably 95% of my time on it.
The theory behind that is if you find extraordinary businesses, which there are very few actually out of thousands and hundreds of thousands of public companies out there, and they’re managed by super-smart shareholder-friendly management with a vision and passion. These things tend to compound at very high rates of return over the long run, and if you’re a long-term holder, you will likely do incredibly well with these companies.
For example, it was pretty much a great price to pay for Amazon at the end of the years if you look over the past 15 to 20 years. There was never a bad time to buy Amazon. However, you know, we just try not to pay too much. So, for example, when the valuations get overly exuberant, meaning they discount something completely unrealistic into the future. This is the kind of situation that we try to stay away from, but when we do find a business that we really would like to own, a fair price is good enough for us. And even paying a little bit of a premium is good enough for us because these kinds of quality companies almost never come at a discount.
Change & investing
[00:25:51] Tilman Versch: I brought a quote from one of your letters. Maybe you can read it out. It’s still loading at the moment, but maybe I can also read it out. Do you want to go ahead, or should I? Because it’s your words.
[00:26:08] Alex Kopel: One of the biggest revelations for us that year was in the past. Our thinking was heavily influenced by Warren Buffett in this 20th-century success of finding businesses. They are highly predictable and do not change very much. Observing the rapid technological investments and the emergence of the platform companies in the 21st century that have had tremendous influence in our lives and are disrupting almost every single industry out there has pushed us to evolve our value investment approach to the 21st century.
We realized over, and over that, in fact, change is the driving force for creative destruction and value creation. Thus, we needed to spend more and more time understanding change and the people behind it rather than trying to find businesses that are unlikely to change over the next five to 10 years.
Dealing with change
[00:27:05] Tilman Versch: I think the most important word from this quote is change. So, how do you put change or devaluation of change or the thinking about change in your investing framework? What instruments do we have to measure change and predict it?
[00:27:36] Alex Kopel: Change is a given. If you’re not changing, if the company is not evolving, it’s not making any progress. It’s not innovating. If it’s not thinking at least 10 to 20 years ahead, it’s not going to survive in today’s pace of change. And this is exactly why I wrote this in the letter. Those are a huge departure from what Warren Buffett honed his success in the past century, where he was looking for businesses that are like Wrigley chewing gum or Coca-Cola. They don’t change very much. It was very predictable what this business was going to do over the next ten years or the kind of service or a product is going to sell over the next ten years.
Change is a given. If you’re not changing, if the company is not evolving, it’s not making any progress. It’s not innovating. If it’s not thinking at least 10 to 20 years ahead, it’s not going to survive in today’s pace of change.Alex Kopel
However, in today’s environment, from what you see in the platform companies that you saw, they are starting to sell books is now in the cloud. A company that you first start seeing your mailing discs in compact this over mail continue with blockbusters is now the biggest player in Hollywood and has the biggest budget in Hollywood. So, these kinds of things are very difficult to predict over the long run, but you can kind of have a little bit of a sense of the mission and the vision of the founder of the company and the culture where this train is basically going. That’s why I try to spend a lot of my time on is basically understanding the history.
In my research, I typically try to go very deep, and I try to understand the founding history of the company. I try to understand why the founder did what he did, what problems he was trying to solve from the beginning, and what his vision was and what the typical principle foundational principles that he founded the company based upon and what his vision really is and that vision typically tends to evolve from all the founders as they grow the company and they start to see new opportunities. They start to go into different industries and different product lines, and different service lines. That is extremely difficult to predict as you’re looking out ten years.
However, what’s easier to look at is that foundational kind of under workings of the company. That basically starts with the founder and the Cultural Foundation and the cultural values of the company. It’s very intangible. When I was working for these large Wall Street firms and even when I started the fund, I tended to focus a lot on numbers and spreadsheets and financial statements and trying to do the valuations and come up with price targets. That’s typically what everybody does in the industry. However, I’ve learned that that’s completely unimportant. Although if you’re trying to make long-run bets. What is important are other intangible things. And those intangible things you can’t read from a spreadsheet. Obviously, spreadsheets and numbers are helpful in understanding whether the managers of the company are delivering upon the vision and what they promised. However, the intangibles come from really studying the company over the long run, studying, listening to a lot of interviews with management, listening to a lot of earning calls, trying to read between the lines, to see what they said five years ago, and what they’re currently executing upon. Its kind of conviction is something that’s developed over the years. It’s a little bit like love and trust that is earned over the years and either goes stronger the longer you own the company or dissipates. So, it’s very intelligible. It’s very hard to place any kind of number.
[00:32:11] Tilman Versch: So, what factors have strengthened your conviction and what factors have lessened your conviction? Maybe you can also think about two examples, PRR Group, PRAA Group, and Spotify or you can answer based on the examples, or we can go to general factors if you have general factors in mind.
Hey, Tilman here! I’m sure you’re curious about the answer to this question. But this answer is exclusive to the members of my community, Good Investing Plus.
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Without further ado, let’s go back to the conversation.
[00:33:15] Tilman Versch: What were your mistakes in the last years?
[00:33:23] Alex Kopel: So, there’s definitely been plenty. There are lots of mistakes that I’ve made. If I tend to think of those, my biggest mistakes, if I focus on my biggest mistakes, they were actually mistakes of omission, which means that we passed on a number of opportunities that were right in front of us. That completely fits all our investment criteria. We could understand the business. It fit all our three-part kind of compounding machine engine, but we didn’t pull the trigger, or we kind of sowed in our assets and did not pull the trigger, and that actually cost our shareholder base quite significant money.
So, mistakes of omission are pretty much the number one mistake I’d say that I’ve learned from and that I’ve made over the past six years of running the fund. Another huge mistake is selling too early. I had also found from experience that one of the big lessons that I learned is that if you own a great extraordinary business, the time to sell is almost never.
Mistakes of omission are pretty much the number one mistake I’d say that I’ve learned from and that I’ve made over the past six years of running the fund. Another huge mistake is selling too early. I had also found from experience that one of the big lessons that I learned is that if you own a great extraordinary business, the time to sell is almost never.Alex Kopel
We actually made that mistake with Chipotle. Chipotle is one of the companies that we’ve owned, and we’re lucky to pick it up at a very nice price when it was experiencing the health issues that were going on in their kitchens back in 2016, 2017, and all the scandals that were going on. We purchased them at a very attractive price. And then, we actually sold it only six months later when we made 80% profit. We made a profit of 80% in six months, and we decided it was a great time.
We decided the stock was overvalued, and we decided to take our profits only to see it become another four-bagger since then as the management executed and the company continues to be great. So, this Wall Street term, you never go broke taking a profit, is complete BS. In my mind, it actually couldn’t be further from the truth. Selling Amazon or selling Netflix was always a mistake if you were lucky enough to own those. Those are, I think, the two biggest mistakes that I’ve really learned from.
Revising the process
[00:36:12] Tilman Versch: Looking at these mistakes, what did you change in your process? What did you now do differently?
[00:36:22] Alex Kopel: I think my process started significantly changing in 2017. That’s why I made this really abrupt shift from like I read in that quote from one of my letters from the Graham and Buffett value investment approach of the 20th century and looking for undervalued companies to actually studying greatness. That completely shifted not only my mindset but how I allocate my time.
In this day and age, if you’re focused on cheap companies or companies that are statistically cheap, you’re basically spending a lot of your time on companies that have problems. They’re not great. That takes away from all the time that you can be spending on studying great businesses, studying winners that actually deliver year after year, and the management team that is winners.
In this day and age, if you’re focused on cheap companies or companies that are statistically cheap, you’re basically spending a lot of your time on companies that have problems. They’re not great. That takes away from all the time that you can be spending on studying great businesses, studying winners that actually deliver year after year, and the management team that is winners.Alex Kopel
Back in 2017, instead of kind of shining these businesses because they were labeled as technology and their pace of change was too fast, or they were unpredictable kind of businesses as labeled by the typical value investors, I actually spent a lot of time studying them. I read a lot of books, and I actually went back.
One of the third first things that I did was I actually went back and read Jeff Bezos’s letters all the way back to 1997 from the first letter, which for some reason, I’ve never done. That kind of hit a light bulb switch in my head because the guy pretty much laid it all out there, even in the early years, what he’s going to do, his vision, how he was going to do it, the way he thinks about it. It was all out there. They’re kind of the early signs, obviously. Hence, inside this 2020. But there’s a lot you can learn by studying these kinds of this kind of scum companies and studying greatness. You can learn a lot of ingredients there. Even in the early days, they’re required for a company to be extremely successful and to compete against all the much bigger companies with much bigger resources, for example, like Spotify did. That’s outlined very well in the book. That was a huge kind of shift in my kind of thinking, my mindset and approach, and how I spend my time.
“Moat” and “Change”
[00:39:09] Tilman Versch: In the way you describe companies, you still mentioned the word moat. How does this fit with your framework of change? How do you think of moat and the ability to make a change in the company?
[00:39:25] Alex Kopel: Moat is something that’s been termed by Warren Buffett but has been pretty much used very widely by pretty much everyone. It can mean very different things. I think the moats that were typical in the 20th century before we had all these internet and platform companies developing like they are today, where it came from, brands came from, possession of some physical property came from. Basically, the moats were very different from how I judge moats today.
The moats today come, in my opinion, from me starting companies for quite a long period of time, come from the mindset and the culture that the founder develops early on and the values and the principles that he instills in the company early on because, from day one, it’s a given this company is going to look very different in a year from now and three years from now, and especially it’s going to look very different from five years from now. It’s very unpredictable where this business is going to go, what industries and verticals it’s going to participate in.
However, that’s one thing that kind of stays constant, what I found. For example, one company that gets a lot of kind of negative media press for obvious reasons and gets a lot of backlashes is Facebook and Mark Zuckerberg for a lot of ways he manages the company, but if you really study what he has done, and how he put together Facebook and his visions that he had for the company, from the early days as a founder, it has not changed very much. He’s a very mission-oriented guy that is willing to stay the course no matter what kind of hurdles come his way or what kind of competition or what kind of scrutiny comes his way. He is pretty much unwilling to stray away from his mission. I think his biggest advantage is his focus. Everything he does with his day, every piece of energy that he spends is focused on that mission. That never changes. Whether he was trying to build Facebook out of his dorm room in Harvard and nowadays trying to develop Metaverse, what he was focused on and his vision and the way he runs his company never changed.
And so, those are kind of the intangible ingredients that I try to look for. Those are not easy, and these things take a lot of time. It’s not something that you can read in the magazine or from the article or from studying some numbers on the Bloomberg terminal.
Defining high-quality businesses
[00: 42:44] Tilman Versch: Rowan Street is one of these investors who’s looking for high-quality businesses. How do you define a high-quality business?
[00:42:55] Alex Kopel: So, high-quality business, again, it goes back to our focus on this compounding machine, and there are three main components that go into the compounding machine. That’s the moat of the business, the management, and the reinvestment opportunities. It has to have all three.
High-quality business, again, it goes back to our focus on this compounding machine, and there are three main components that go into the compounding machine. That’s the moat of the business, the management, and the reinvestment opportunities. It has to have all three.Alex Kopel
I actually borrowed this concept. I didn’t invent it. I’ve borrowed this concept from the acre funds. I must give them credit that it’s an incredible measure that I’ve followed for a long period of time. It’s been a huge inspiration for me, and it was a three-legged stool that he named. The concept was pretty much the same.
The company has to exude all the ingredients, not necessarily to have a wide moat today. But to develop that mode over the long run, it has to have certain ingredients that would make it very difficult for competitors in the future to come in and replicate their business. Obviously, we look for very attractive growth rates, a very long runway for that growth, huge markets, and the management teams that are, like I said, visionary. They’re focused on their mission. They’re able to execute year in, year out regardless, and they’re able to be majority shareholders on the firm and stay invested in the firm, and be very shareholder-oriented. Again, from the opportunities that they have, they have to have a number of reinvestment opportunities and not only to help them but to actually be able to execute on those in a very kind of exceptional manner.
That’s what I would consider very high-quality companies. Those are simple ingredients, but they’re not very easy to attain. If you look through thousands of publicly traded companies out there, even if we take the United States market, for example, we maybe will find less than a hundred companies or even less than that that would fit those criteria. So, there are not very many companies you’re working with. The universe is very small to begin with.
[00:45:30] Tilman Versch: In your letters, you also mentioned the term exceptional opportunities for making an investment. What are such exceptional opportunities for underwriting an investment?
[00:45:43] Alex Kopel: So exceptional opportunities, meaning from the company’s perspective, or from our perspective as portfolio managers?
[00:45:52] Tilman Versch: To make an investment, you’re looking for this. As you said, you’re looking for exceptional opportunities. What are these?
[00:46:02] Alex Kopel: As I said in our previous question, once we identify these kinds of very exceptional companies, which aren’t very many of them, it’s a pretty small universe, we try not to pay too much for them, obviously. We still try to be mindful of what we pay. We’re not a buy-it-at-any-price kind of investor. But again, the valuation part and the price part come after the quality of the business, not before.
From time to time, if you look at the average stock that’s trading, even S&P, if you are high to low ratio is pretty much maybe 70 or 80%, most people are taught that the markets are very efficient. However, in the short run, the truth is very far away from that. Average stock fluctuates, maybe 80 or even more so in the recent years, 80% or 100% or more. So, from time to time, a company may hit a speed bump, or it can start doing something that the majority of the market players don’t understand yet or are not willing to look beyond the next several quarters, not willing to focus on the next 5 to 10 years.
And from that come exceptional opportunities to be able to acquire these kinds of companies at least fair prices because most of the time, these companies are trading either nowadays at abnormal, crazy valuations or huge premiums to what we’d like to pay for them initially. If these exceptional opportunities come, we are very patient and waiting for those, but we try to be very aggressive and execute fast as time is of the essence for us.
[00:48:25] Tilman Versch: How many of such opportunities do you find a year?
[00:48:31] Alex Kopel: We actually don’t do a whole lot in terms of activity. We spend most of our time reading and thinking and not doing so much. From our perspective, if we find only one to two opportunities per year, that’s a successful year. Sometimes we may find zero. If you’re running, on average, a Templar team, and that’s an exceptional team, finding one to two opportunities that could potentially get into that portfolio and replace some of those core holdings is very difficult. If I find one to two, I would think it’s a successful year. Our turnover tends to be pretty low. I would say below 20%. It varies from, obviously, year to year or what happens in the marketplace.
Never going back to Wall Street
[00:49:35] Tilman Versch: Let’s go back to the beginning and reference Wall Street. Let’s imagine after this interview, someone from Wall Street decides to call you and wants you back to work in a firm set up and says you can name the amount. Would you consider it? Would you do it?
[00:50:00] Alex Kopel: I would definitely not consider that. It’s not even considered. Why would I give up something that I’ve built on my own and I love to do every day? I’m pretty much like Warren Buffett, who tap dances to work every day. I really enjoy doing what I’m doing. I have a great partner, great LPs, and I’m doing exactly what I’ve always dreamed of doing since college pretty much and doing it in my own way, on my own terms. I’m running the firm based on my own principles. Why would I ever trade that for doing it for somebody else for more money but giving up on the principles that are so dear to me?
I would definitely not consider that. It’s not even considered. Why would I give up something that I’ve built on my own and I love to do every day? I’m pretty much like Warren Buffett, who tap dances to work every day. I really enjoy doing what I’m doing.Alex Kopel
Personal growth since leaving Wall Street
[00:50:55] Tilman Versch: Maybe let’s go back to the idea of change. And also, think about how you have changed coming from Wall Street. What percentage of your process today is derived from your Wall Street process? How much of your work process then do you carry to this day? Maybe you can mention a percentage or a few examples of the things you used to do ten years ago that you are still doing today?
[00:51:21] Alex Kopel: That’s an interesting question. I would say very little now. Very, very little. The knowledge I’ve learned from Wall Street is I got to see who my competitors are and how the money’s being managed, and what is the typical mindset out there. Because sometimes when I acquire companies, I try to reason with myself why this opportunity is selling where it’s selling out? What am I doing wrong? And be able to understand the flip side, what Wall Street is thinking, how they run money, and how they approach things, and the whole compensation system that Wall Street has got is very helpful. I think that’s the only pretty much helpful thing to me in running the fund.
In my early days, when I first started the fund in 2015, I would say quite a big portion of me was carried over from my Wall Street days because, in my early days, I did focus quite a bit on the macro perspective. I was still reading Wall Street Journals and the Barron’s. Again, when you start a fund, you’re just trying to survive in your early days. The worst thing that can happen to you is you start funding, and the market goes down 30-40%, and you lose all your clients. So, we were very careful in the early days investing the cash and developing the processes to develop that initial track record. That came with pain, a lot of attention. Instead of focusing on the great companies, we were paying a lot of attention to macroeconomics, which was a huge, huge distraction from our returns in the early days. Again, that came from a lot of BS that I have acquired working in my previous life for big money management firms.
When you start a fund, you’re just trying to survive in your early days. The worst thing that can happen to you is you start funding, and the market goes down 30-40%, and you lose all your clients. So, we were very careful in the early days investing the cash and developing the processes to develop that initial track record.Alex Kopel
However, I’ve learned from that, and that completely dissipated them. I would say, today, there’s very little left. One huge difference also, I would like to add is how I spend my time, where typically on Wall Street as a portfolio manager, I would spend more than 90%, sometimes even 95% of my time, in various meetings, meeting with clients, meeting with prospects, company meetings, officers, again, which is completely structured that way because if your goal is asset gathering. However, I’ve always wanted to flip it upside down and spend 95% of my time on actually researching and managing the client’s money and maybe 5% and doing these other things that I need to do in order to run and grow my firm. So, I think that’s one of the things that pleases me the most is how I spend my time nowadays versus where I spent my time before.
[00:54:35] Tilman Versch: Thank you very much for your insights. At the end of our interview, I want to give you the chance to add something we haven’t discussed. Is there anything you find that’s interesting for the viewers that you want to add?
[00:54:53] Alex Kopel: I think we covered a lot of topics. It’s a little difficult to think of something else to add without starting a huge topic that we may go into. So, I would say we’ve covered things pretty well for our first area.
[00:55:10] Tilman Versch: Great! Maybe if you have one or two ideas, you want to just drop them for our viewers for the next interview.
[00:55:23] Alex Kopel: At this point, I would say that’s good. I would leave it as is.
[00:55:32] Tilman Versch: Thank you very much for your time. And thank you very much to the audience for listening to this interview. It was a great pleasure.
[00:55:39] Alex Kopel: Thank you very much, Tilman. Thanks very much for the time.
[00:55:41] Tilman Versch: Bye-bye to you all.
[00:55:39] Alex Kopel: Bye-bye.
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