Please enjoy this transcript of my conversation with Dan Roller, Founder and Chief Investment Officer of Maran Capital. In this episode, Dan and Daniel discuss buy-and-build companies, investing in special situations, and how becoming a better investor is similar to training for an Ironman competition. From Episode #21 of Outliers with Daniel Scrivner. Transcripts for other episodes can be found here.
“What you need to do, I think, is constantly update your thesis as you go, which can allow for longer holding periods, because things do change. And at the same time, I go into investments with a multi-year horizon—but my thesis might be disproven fairly quickly.” – Dan Roller
In this episode of Outliers, I’m talking with Dan Roller (@Dan_Roller) about the power of buy-and-build companies, investing in special situations, interesting value-oriented opportunities in SPACs, and how becoming a better investor is similar to training for an Ironman competition.
Dan Roller is Founder and Chief Investment Officer of Maran Capital Management, a boutique, value-driven investment manager with a carefully crafted portfolio of companies, including Clarus, Scott’s Liquid Gold, Turning Point Brands, and Pure Cycle. Prior to starting his own fund, Dan honed his investment philosophy and process for over a decade working in research analyst and portfolio management roles at well-regarded hedge funds in New York City, including Credit Suisse First Boston and Impala Asset Management.
Daniel Scrivner (00:00:06):
Welcome, I'm Daniel Scrivner, and this is Outliers, where every week I sit down with an entrepreneur investor or iconoclast to dissect what they've mastered and how they see the world, digging deep to find the ideas, patterns, and perspectives that we can all put to use in our own lives. Today, I'm thrilled to have Dan Roller of Maran Capital Management on the show. Maran Capital Management is a boutique values-driven investment manager that I've been following intently for the last few years.
Daniel Scrivner (00:00:32):
I love the way that Dan sees the world, and I never miss reading one of his investor letters. In this episode, we go deep on how becoming a better investor is similar to training for an Ironman competition, why Dan focuses on what he calls “buy and build” companies and some of his favorite historic and recent examples there, his approach to investing in special situations and what defines a good or bad opportunity.
Daniel Scrivner (00:00:54):
I get his thoughts on SPACs and why he sees some interesting opportunities in that world today. Dan is a remarkable investor. Before he founded Maran Capital management in 2015, he worked as an analyst for over a decade at firms like Credit Suisse First Boston, Impala Asset Management, Avesta Capital Advisors, and Scopus Asset Management. As always, for links to everything discussed, as well as the show notes and the full transcript of our conversation, visit outliers.fm. Finally, here's the bit where I remind you that nothing we discuss should be considered investment or financial advice.
Daniel Scrivner (00:01:25):
This conversation is for informational and hopefully entertainment purposes only. Please do your own research and come to your own conclusions or speak to your financial advisor before putting a dollar into anything we discuss. Now, let's jump into this incredible episode.
Daniel Scrivner (00:01:45):
Dan, I've been looking to this conversation for a long time, so thank you so much for joining me.
Dan Roller (00:01:50):
My pleasure. Thanks for having me.
Daniel Scrivner (00:01:52):
I thought maybe a cool place to start would be talking a little bit about how we met, and that was a couple of years ago, I happened to be in New York for this MOI Global event called Latticework. I might ask you to set up what MOI Global is in a second, but I know that we've both been a part of MOI Global. It's been an incredible experience. Then after meeting, I obviously followed your investor letters and it's just been really fascinating to follow along, but can you start just by setting up, I guess, a little bit of an introduction to MOI Global and how you've enjoyed being a part of that community.
Dan Roller (00:02:22):
MOI Global, the MOI stands for the Manual of Ideas, and it was put together by a gentleman by the name of John Mihaljevic. I'm probably butchering that name. It's essentially a place for value-oriented investors, a community for value-oriented investors to come together, share ideas, and interact through a series of different types of events. So, there are podcasts and in-person events and newsletters, so just various ways for folks to get together. I've actually presented at a handful of their ideas, or a handful of their Idea events over the years. I've participated in others, learned a lot from the community. It's a great community of value-oriented investors and I would recommend anyone interested to check it out.
Daniel Scrivner (00:03:07):
Yeah, and I think the website, I guess I could check it really quickly, but I think though, if you just Google search MOI Global, you do have to apply for a membership, but they have a lot of free stuff. For anyone that, that sounds interesting to, definitely go check it out. I thought it would be good, so we're going to spend all of today talking about your firm, Maran Capital, and how you approach investing there, and the fund that you run, and some of the fascinating investments that you're in, but before we get too deep into that, I thought it would be great to just ... If you could just do a little bit of a sketch of your background, because you have done a lot of things.
Daniel Scrivner (00:03:36):
You worked for a lot of different asset management firms as an analyst before founding it. Can you just talk about, I guess your background, and the kind of period leading up to founding Maran?
Dan Roller (00:03:44):
I'm a Denver native. I went to school at Duke University. I studied electrical engineering and computer science. Really, how I got into investing was, while I was at Duke, I joined the Investment Club. There was a sign on one of the bulletin boards around campus that said “make money,” and it was an advertisement for the Investment Club. So, I turned up, I had never really done any investing of substance prior to that point. I turned up at the first meeting. I was really hooked right away. I was an eager freshman who was the only eager freshman who took the board of the Investment Club up on their offer that any member of the club could attend the board meetings and just sit in the back and listen.
Dan Roller (00:04:22):
So, I started attending the board meetings of the Investment Club, and started to learn, and listen. Eventually, the following year I joined the board and then I wound up running it as one of the two co-presidents my junior and senior year. That arc of over four years at college, while I was learning how to code and studying computer science and electrical engineering, I was also really digging into investments as a hobby and participating in the investment club. That's really what launched my career, was the interest gained at that kind of serendipitous encounter. I started gearing my life experience towards investing, doing various internships and then moving to New York directly after college to go work in the industry.
Daniel Scrivner (00:05:05):
One thing I want to make sure that we touch on is you majored in electrical engineering and computer science. In a lot of ways, that seems related to investing, or at least you're going to use some of those same kind of mental models and skills, but can you talk a little bit about, was investing this thing you discovered and then you just fell in love with it, and how does that background play into how you invest today?
Dan Roller (00:05:25):
Electrical engineering in a way is applied math. It's applying math to the physical world of signals and systems, but computer science is an interesting way of thinking, especially computer programming is an interesting way of thinking, where you have this set of tools in the form of a programming language, or you have very basic commands. Out of those very basic commands, you can build up really complex systems. More complex than you could imagine using classes and layering and various constructs. It's a series of mental models that have been really important to me in my career as an investor, but not because I use coding to help me invest.
Dan Roller (00:06:03):
I'm not writing algorithmic trading programs or something like that. I think it's more of this, the constructs of how do you start with these very basic tools, these basic commands? How do you name a variable and get it to do something? It's been a very valuable background to have, despite not being directly applicable day-to-day in investing. There really isn't a direct connection. Investing was something that I think, like you said, I just kind of discovered. I read the value investing canon. I read Buffet, and Graham, and Munger, and Phil Fisher, and every book I could get my hands on in college.
Dan Roller (00:06:38):
So, value investing resonated with me right away. We could talk about value investing and what that means later on, because I think that a lot of people have this mindset that there's either value investing or growth investing, and I don't think that's the right framework. It was one of those things where I was just immediately hooked on this idea of analyzing businesses and studying companies. Yeah, so I ran with it.
Daniel Scrivner (00:07:04):
Can you set up just some of the groups that you worked at before founding Maran? I guess anything notable, anything worth calling out, any lessons learned, anything that applied in the future.
Dan Roller (00:07:14):
After college, like I said, I moved to New York, and my first job was at Credit Suisse First Boston in the equity research department. I was studying the transportation sector, and particularly the freight railroads, kind of a seemingly boring industry to many, but also a critical part of the global infrastructure--cyclical, but also with elements of stability; capital intensive. So, interesting place to get my start, but really, I wanted to be on the buy-side. I wanted to be an investment firm. I had the opportunity to, because my boss left Credit Suisse to go help start a firm, I had the chance to go over to the buy-side after just a year.
Dan Roller (00:07:51):
Over the next 11 years in New York, I was, as you mentioned, at a couple of different firms on the buy-side. The firm that I joined my boss at was called Impala Asset Management. It was founded by Bob Bishop who had previously been the CIO, or very senior at both Soros and Tiger. He worked for Julian Robertson, so you could say that Impala was a Tiger cub. That was really where I laid the groundwork of thinking about being an investor, thinking about value. It was a firm that focused a lot on cyclical companies, and so we thought about peak earnings and trough earnings.
Dan Roller (00:08:26):
We thought about replacement costs, the old Wilbur Ross framework of buying businesses at a third of replacement cost. We thought a lot about buying businesses when they didn't have any earnings. So, the PE, if you looked at your screen, was infinity, or hundreds of times, because it was at a cyclical trough. Then maybe selling them when this PE on the screen was 10 times because it was at a cyclical peak. It was a great foundation, and that's where I really made the transition from being a more junior to taking on a more senior analyst role, and then launching my career onto becoming a portfolio manager thereafter.
Dan Roller (00:09:02):
I think that one of the things that the Tiger mindset teaches you, that framework of Tiger Global and Julian Robertson is, that when you have an investment thesis, when you think about an investment, you need a way to track whether it's working out without just looking at the stock price. We thought a lot about trying to come up with the right metrics to track, to determine whether our thesis was on track without just looking at the stock price, because the stock price could do lots of things in the short term. You don't necessarily want to determine your success or judge, whether you were correct in something or not, based on what the stock price does in the short-term.
Dan Roller (00:09:39):
I think that was something that I've carried with me is trying to have this framework for determining whether something is working out without looking at the stock price, and it might be based on earnings, or volumes, or pricing, or whatever the thesis is based on, but it's not what the stock price is doing in the short-term.
Daniel Scrivner (00:09:56):
It's fascinating. So, it's like identifying some sort of an underlying metric that will be pointing in the right direction if things are playing out, and then you're looking at that for signal, because yeah, obviously the stock price itself is just a ton of noise most of the time.
Dan Roller (00:10:09):
Exactly. It may be improving a competitive advantage or strengthening a brand, and so it might not even show up in earnings in the short-term. Maybe a company is investing more. I think spending time to think about how you're going to determine whether something is working out or not is something that ... Some people spend not enough time on, and that was something that was really drilled into me at an early stage in my career.
Daniel Scrivner (00:10:31):
It's fascinating as ... I go off on a tangent in a second, but over the weekend, I was doing some research in a company that I haven't looked at in a little while is Bic in France, which makes lighters and pens. Since I last looked, the business has definitely deteriorated and their earnings are starting to decline, and they have a whole deck around how they're gearing up with a series of goals around 2022, and it seems like this would be a perfect instance there, because effectively, it's a business with plenty going for it, but it certainly had some short-term kind of headwinds. They're saying they're going to turn it around, and so I don't know, trying to take that approach and think about what would some of those underlying metrics be so you know that, that's happening. It seems super fascinating.
Dan Roller (00:11:09):
It's not easy to think about short-term metrics, and quarters can be noisy, and what's the right time period over which to determine these metrics, which is why this is a challenging endeavor.
Daniel Scrivner (00:11:20):
You have that 11-year period where you're learning a ton. You're at a handful of different firms. It sounds like you went from an analyst to being more on the buy side, and you eventually go on to found Maran Capital Management. I'm always curious, one, I imagine that's obviously just a super critical point in your career. Take us inside your head. Was there a moment that you felt like you were finally ready? Was it just taking a leap, and do you have anything to share about what it felt like to finally kind of launch off on your own endeavor?
Dan Roller (00:11:45):
After Impala, I worked at a firm called Scopus Asset Management, which was also in New York, as a portfolio manager managing maybe three to $500 million as part of a broader portfolio. It was great. The team was great. I had a lot of autonomy. I was able to invest, for the most part, in the way that I thought was the right way to invest for a long time horizon, concentrated portfolio. But at the same time, doing this on my own was always something that I wanted to do. I think that there are still various institutional constraints or various changes that someone would make if they really had the license to set up a firm to do it exactly the way that they would want.
Dan Roller (00:12:24):
I think there's a combination of factors. One is I had the personal capital saved up to be able to take the risk. This was in the second half of 2014 and early 2015. I had a four year old I think, and a newborn. We moved from New York back to Denver, had our second baby, and I launched the firm, all in like a six month period. Certainly a risk, but it was a risk that I thought I had to take based on my drive and desire to ultimately do this for myself and do it the way that I wanted to do it. You asked about the arc of my career working at various funds in New York.
Dan Roller (00:12:58):
I think there's a couple of commonalities. A few I mentioned. One is trying to invest in a concentrated manner, trying to invest with a long time horizon, but another angle that was a recurring theme, or another element that was a recurring theme through that time was the focus on special situations. When I was in New York managing larger pools of capital, there's a lot of competition. There's 30 analysts covering ExxonMobil, or Dow Chemical, or Microsoft, or Apple. How do you get an edge? One thing, that even when I was focused on larger companies, the way that I attempted to get an edge was in looking at special situations, and so we can come back to this.
Dan Roller (00:13:34):
But what I mean by special situations is basically some type of corporate event, be it a spinoff, a merger, or change in management, change in industry structure, rights offerings, warrants, a whole laundry list of various corporate events that can cause a company to be mispriced. I was focusing on not just where I could find value, not just where I could find growth. How could I find them for a cheap price? Typically, or frequently, it was because there was something external going on that was creating the opportunity.
Dan Roller (00:14:03):
I brought the rigor developed at working at these funds over the years, combined with this thesis about concentration and a long time horizon and various elements. But I brought that with Maran to the small and micro-cap part of the market. Basically, I said, what hunting grounds do I want to compete in? Do I want to compete against firms with scores of analysts, huge research budgets, or do I want to compete in a part of the market where they just can't play, in the smaller micro-cap part of the world? I really do think that it's a less efficient part of the market.
Dan Roller (00:14:35):
To be frank, there's a lot of low quality companies that are small and micro-caps, and so there's perhaps more that you have to weed through, but there are also these gems of companies that I think fly below the radar screen of many other firms. That's really what the thought process was and the thesis to set it up Maran is to apply the frameworks that I had developed to a less competitive part of the market.
Daniel Scrivner (00:14:59):
I'd love to dig into two things that you covered there. The first one, I guess, would be, on choosing your hunting ground well, which I think is just a fascinating idea. Something I've been thinking about a lot recently is how most success, if you really boil it down, this could be success of a fund or success of a company. If you boil it down, there are often all these kinds of surface level things that are cited around why that success happens, but at the end of the day, typically, if you drill down far enough, it's a structural success.
Daniel Scrivner (00:15:24):
An example of that would be you choosing to hunt in this very inefficient part of the market. I imagine that as a potential structural advantage. Can you just talk a little bit about how that's played out and how that's worked for you so far, and any lessons learned or any insights?
Dan Roller (00:15:39):
I've thought about what my areas of competitive advantage are. I do think there are structural advantages. There's a structural advantage to my firm being small. Right now, we manage just under $20 million. I think the plan is to cap the fund at under a hundred million dollars to be able to continue to play in this hunting ground. I think that a smaller amount of capital is a huge structural advantage versus competing against firms that are managing billions. Again, if you're managing a billion plus, or tens or hundreds of billions, the universe of investment opportunities is smaller. You can't make a meaningful position in a $200 million company if you're managing $15 billion or something like that.
Dan Roller (00:16:19):
I think a small size is a structural advantage. I think the fact that I'm a single decision maker is a structural advantage, versus having an investment committee, or teams of people that are all trying to decide whether to invest in a company or not. I think that I've set this up to where there's a single decision maker, and I think that's an advantage I do think that choosing the hunting ground, choosing the size, choosing the approach, another structural advantage is the alignment of my limited partners, the alignment of my capital partners. The vast majority of our partners are in a five-year lockup share class.
Dan Roller (00:16:54):
So, they understand what I'm doing, they understand that I'm investing in smaller cap companies, which admittedly may be more volatile, but with a long time horizon, and they share that time horizon, and so it gives me the license to be opportunistic, take advantage of volatility. Whereas I think some fund managers, if they have monthly liquidity or maybe their partners are asking for their capital back at exactly the wrong time, as opposed to letting them invest through the cycle. I thought a lot about how to set things up structurally to give me the best chance of succeeding, to give me the best odds to outperform.
Dan Roller (00:17:28):
So far, I think those decisions have been important. I could have raised more capital, I think, on less good terms, but it's been important to me to have this partnership mentality, where my partners understand what I'm doing, and it's been great.
Daniel Scrivner (00:17:41):
It could also be a structural advantage, I imagine, but just having that concentrated portfolio. I wanted to talk about that for a second, because something I've been thinking about a lot recently, and I've been looking at different models of it, and I would just love to hear your take and how you think about concentration, how you think about the total number of positions you want to have in a portfolio, and how you think about waiting. I know those are very big questions, so we can just stay a higher level.
Daniel Scrivner (00:18:03):
But the reason I'm curious is one, it seems like concentration is not ubiquitous in terms of what it means. For some people, that means they only hold 10 positions. For others, it means that they maybe have a portfolio of 30 or 50 positions, but there's a ton of concentration in the top 10. Can you talk a little bit about, I guess your kind of thought process and perspective there, and how you approach that at Maran?
Dan Roller (00:18:25):
Philosophically, high level, the idea is that your third best idea or your first best idea is probably a lot better than your 50th best idea. At some point, there's diminishing returns to adding incremental securities into a portfolio. I think we're probably all familiar with various studies that have been done that show that, at some point around 20 positions, there's a real fall off in the benefits of diversification. I have friends that have five stock portfolios. I've heard of funds that might have one position that's 60% of the fund, or something like that. I think there's a variety of approaches here.
Dan Roller (00:19:02):
Typically, I would say that we have run with 10 positions that have made up 90% of the capital. Right now, our top handful of positions are probably each between 8% and 12%, or 8% and 13% of the capital. I think it allows us to focus on our best ideas, but at the same time, there are benefits to diversification. Sometimes my seventh best idea actually does outperform what I think is my best idea. Concentration isn't beneficial for the sake of concentration. It's probably better to have more positions if they're equally good, but that's a huge constraint.
Dan Roller (00:19:37):
If you really had 100 positions that you thought were a hundred baggers, or were just amazing risk reward, it's probably better to have all of those than just two positions, but it's rare to find really good ideas. I think that, where I've come out on the balance between how many truly good ideas I have at any given time and allowing for some diversification, because we'll all be wrong on things occasionally, it's kind of that 10 core position sweet spot. But again, the special situation element can lead to smaller positions or shorter term trades.
Dan Roller (00:20:12):
Right now I have a basket of a handful of securities. So, we have a longer tail at the moment. We have a basket of maybe eight or 10 stocks that make up, actually right now, it's 20% of the portfolio. I think at times things move around. Part of the advantage of being a single decision maker and doing things the way that I think are right, is it allows for opportunism. If I see an opportunity to have a basket of a number of things that make up 20%, I can do it. There's no set rules. I haven't gone out and said, we're only going to be in this style box. We're going to have 80 to a hundred stocks. We're going to be in this quadrant on the style box.
Dan Roller (00:20:45):
Allowing for some room for opportunism in the market is important, and shifting sources of value, shifting markets. You can't be too rigid for too long in this business.
Daniel Scrivner (00:20:54):
I love that you have that approach. I know not everybody does, but I love that you have an approach where you can scale and you can be nimble and you can pursue things that are seeming to emerge in the market. I think we're definitely at a point in time now where there's some interesting things. I think we might loop back around to this later on the interview, but there's some interesting things that have been happening in the market. I think the widespread popularity of SPACs is one of them, and we might loop around there, but it's super interesting. I'm curious, so we talked a little bit about what that portfolio looks like.
Daniel Scrivner (00:21:21):
One question, and this may be a shot in the dark, and you may not even have a great sense of this, but something I wanted to try to capture was you are managing, at the end of the day, an incredibly concentrated portfolio, but that doesn't mean you're only following a very small number of companies, or you're only looking at a very small number of companies. I guess, can you talk a little bit about how many companies you might look at in a year or in a quarter? Because I imagine, there's probably a dual track of, there's always ongoing research and exploration, and then you also have a portfolio to manage. Can you talk a little bit about that overlap on the research side?
Dan Roller (00:21:54):
The top of the funnel, with respect to the research processes, is very broad. It's not particularly systematic, so I'm not running screens. I've never had success running a screen of, show me all the stocks with the price to book of this, or a price to earnings of this. That's just never worked for me. The top of the funnel is pretty ad hoc. It's a lot of following interests, right? I'll read an article or I'll be studying a company, and I'll learn about one of their suppliers, or I'll learn about a competitor, or I'll have an investment in one region of the world, in an industry, and then I'll learn that there's a company doing something similar in Sweden or in Korea, or something like that.
Dan Roller (00:22:38):
It's funny because a lot of allocators, there's this idea of asking the question, is your investment process repeatable? Do you have a repeatable process? In a way, the answer is yes, it's repeatable, but that doesn't mean that it's systematic or based on, again, going back to the computer science, based on algorithms, or based on a quantitative approach or screening. A good investment comes about when you're combining a prepared mind, you're combining this baseline of preparation of having studied business models, frameworks. There's an element of pattern recognition.
Dan Roller (00:23:12):
I think you need to just sit there and let a lot of things come through the top of the filter. There's a lot of value that's added between the top of the funnel, or the top of the filter and the bottom of the filter. Not in screening the universe for the top of the filter. A key to learning is interest. I think it's really hard to learn something that you're not interested in. If you are passionate about something, if you go down a rabbit hole, it's really much easier to learn about that topic, and so I think interest drives a lot of what I do.
Dan Roller (00:23:41):
I've probably encountered fantastic investment opportunities, but for whatever reason, they just didn't light that fire for me, and I didn't pursue them to the same way that maybe it did for someone else. I think that there does have to be this element of passion or interest or curiosity that drives part of the process. I'll miss things that I'm not interested in, but then the things that I'm interested in, I'll probably study harder than anyone else, and put two and two together on those. I think there are certain themes, certain elements. One common theme across our investments over the last five plus years I've been running the fund is this idea of “buy and build,” this framework of "buy and build" of companies that are pursuing organic growth as well as acquisition-driven growth.
Dan Roller (00:24:24):
We can come back to this and talk a little bit about some of the ways that, that's manifested my portfolio. I probably look at hundreds of companies a year. I think I have research files on over 400 companies. Now, that may just be three notes on a word document from something at some point, or it could be hundreds of files and updated Excel models and different things. The top of the funnel is very broad. I read a lot of esoteric materials. I read a lot of books. I read a lot of things that people probably wouldn't think about being pertinent to investing, but some of the most powerful frameworks that I've come across in recent years have been from books written by physicists or books written by various authors that aren't related to investing.
Daniel Scrivner (00:25:05):
Do you mind sharing one of those?
Dan Roller (00:25:08):
One book that's been very powerful for me and that I've re-read several times, it's a book by the physicist, David Deutsch called The Beginning of Infinity. It's a fantastic book. It covers a lot of ground. It's pretty dense. There's parts of it that are quite dense about quantum gravity and quantum physics and the structure of the universe, the structure of the world. But he gets into computing, universal classical computers, the mind as a computer. Then he gets into political structures, the nature of beauty. I mean, it's philosophical in a way.
Dan Roller (00:25:41):
It may have sung to me more than it might for others, given my background in electrical engineering, which like I said, is applied math and applied physics. But I think it's accessible to a fairly wide audience. It might be somewhat challenging, but it's just a book that probably gave me more to think about more mental models than certainly any book on investing that I've read in recent years. It's funny, I think that, when you're first learning to invest, and when I was in college first learning to invest, I read every book on investing I could get my hands on, [but now I spend more time reading] behavioral finance or physics or history, or other topics.
Daniel Scrivner (00:26:15):
I love that, because for me, one thing that I think, I've often felt like I'm in the minority on, but it's just this belief that at the end of the day, everything's interconnected. For a lot of people are like, well, why would I waste my time? I want to be more successful in investing so I should just be reading more annual reports, or more letters from other fund managers, or doing more due diligence on my own. But in my mind, I'm really with you there, where I think that what you're doing is just taking your thinking and turning it really three-dimensional by having all of these other related ideas and related lenses that you can use to look at stuff.
Daniel Scrivner (00:26:47):
Is that how you think about it? And I guess, any thoughts on that concept of everything being related and no worries about not just studying more in a specific area?
Dan Roller (00:26:56):
It's critical to just read and think really broadly to be a good investor. This concept of "mental models" is perhaps thrown around a little bit too much these days, and it's kind of a joke in some circles that people have gone too far down the rabbit hole of studying "mental models," but it really is an important framework. I think that coming up with a good investment thesis is the combination of a prepared mind, of having some kind of a framework, some kind of a latticework on which to understand the world with the idea. The idea comes through the top of your filter and you need some process to understand the business. The construct of the business model, the network effects.
Dan Roller (00:27:35):
If you haven't studied broadly, maybe it's human behavior, maybe it's psychology, maybe it's network effects, or other things, I think that you're likely not going to be in a position to determine whether a company will be in a position to be successful over time. I like reading what I call business biographies. So, a couple that come to mind, I loved Biz Stone's book about Twitter - he was one of the co-founders of Twitter - called Things a Little Bird Told Me. I thought that was a fantastic business biography. Then I also really liked Creativity, Inc. about Pixar. That was a great one. Physics, math, biology, I've been reading a lot of biology lately, how mitochondria work and cell biology, super fascinating.
Dan Roller (00:28:17):
Again, there's probably no direct relationship to investing, but I think that you never know where some synapses are going to connect in the brain and spark an idea.
Daniel Scrivner (00:28:27):
I'm just going to start repeating that going forward, you never know where some synapses are going to connect. I want to ask one more question and then we'll dive deeper into kind of “buy and build.” Some of the strategies that you really focus on at Maran, one of the questions I wanted to ask was, we were preparing for this and we were talking about what we might discuss, and one thing that came up was this idea of that investing is the process of building up, and that there's some similarities and overlap with something like training for an Ironman. Can you flesh that out a little bit more?
Dan Roller (00:28:55):
In college, I was a runner, and I started just going for runs, going to run around the golf course or something, and eventually wound up training for marathons. I guess endurance athletics has always been something I've been interested in. After lots and lots of running, I started beating myself up and beating my knees up, and I decided that a triathlon would be maybe less damage to the knee joints or something. I took an unconventional approach of doing the following items in the following order. I signed up for an Ironman and then went out and bought a bike that weekend and went for my first ride.
Dan Roller (00:29:29):
So, I jumped straight into the deep end with this idea that I would try to do an Ironman triathlon, but what I found with training, and this is similar to running and a lot of other tasks is that the first weekend, I went out and I rode for 10 miles, and I rode my bike for 10 miles. Then the next weekend, I went out and I rode for 15 miles, and then 20 miles, and 25, and 30. It is interesting the way that the human body is super adaptable, but this slow building up of endurance -- strength bodybuilders, or strength weightlifters follow a similar approach, linear progression. You lift 300 pounds, and then the next week you try to do 302.5 pounds or 305 pounds.
Dan Roller (00:30:11):
With training for the Ironman, I think the bike ride is 120 odd miles. It's funny, it's been a while. You can build up slowly and the body adapts. Again, in various pursuits in life, I think that you can kind of get this compounding effect, and I think knowledge compounds in a similar way, and studying business models compounds in a similar way. Maybe the first time you study a semiconductor company, you don't even know what questions to ask. You read an annual report. You start to think about some frameworks for the industry, how many competitors there are, what are the margins like? What's the margin structure like?
Dan Roller (00:30:47):
Then after a year of studying semiconductor companies, you can just be in a different universe with respect to the knowledge. That's so daunting to think, well, how am I going to ever do a 12 hour race? Where you swim for an hour, then you ride your bike for six hours, and then you run for four hours or something like that. You can break it down into little components. This weekend I need to go ride 40 miles, and then next weekend it's 50, and you just build up. Charlie Munger called it lollapalooza effect, where you can create this dramatic, extreme effect by building up in small pieces.
Dan Roller (00:31:19):
We talked about computer programming at the beginning. Again, you take a very basic set of commands: for loops, the naming of variables, the four mathematical symbols. There really aren't that complicated set of rules that are available to computer programmers, but you could just build up, build a small function, and then a series of functions in a class, and then a series of classes in an object, and then a series of objects in a program, and a series of programs relating to each other. You can create this really dramatic complex system out of these little building blocks.
Dan Roller (00:31:49):
I think there's some commonalities with training for endurance events, building strength, and then with building knowledge, and building a framework to have success at various pursuits. I don't want to overstretch the parallels. I don't want to try to overstate the parallels between training for endurance events and computer programming and building up of knowledge with respect to investing or other topics, but I do think there are some commonalities that are interesting to think about.
Daniel Scrivner (00:32:17):
I think there are a lot of commonalities, and I think one of those is—something that I love that you focus on that I also find fascinating are companies that take this “buy and build” approach. Maybe in a second, we'll get into a few of those examples, but it's both a small universe, but it's also not that small. It's a somewhat popular model. One of the things I wanted to dig into there is that we talked about this very classic example of Warren Kanders and Armor Holdings. Would you mind sharing for people, maybe just the foundation? What do you think is really interesting and compelling about “buy and build” companies? And then maybe to set up an example of one, if you can flesh out that Armor Holdings example.
Dan Roller (00:32:53):
The term may have originated with a company called Watsco, which was, or still is an HVAC supply company. They talked about this concept of “buy and build”—of buying additional HVAC companies in different regions, as well as organic growth. I think you could apply the framework to lots of different companies, and some companies might like the term better than others. But it's funny, people ask, who are your role models as investors? Who are the people that influenced your approach? I think there's some famous investors that people might point to.
Dan Roller (00:33:22):
But one of my real mentors in the business isthis gentleman named Warren Kanders, as you mentioned. He took a little micro cap business called Armor Holdings. In fact, at the time it was called American Body Armor. It was a company that made bulletproof vests, holsters, accessories for the law enforcement industry. I think when he came onto the scene, he bought a large block of the company, 20%, 30%. It was tiny. I think it had a $5 million book value, sub $10 million of revenues.
Daniel Scrivner (00:33:51):
I think it was like 78 cents a share or something like that.
Dan Roller (00:33:56):
75 cents a share, I think, was his purchase price on the block trade that brought him into the company. Over the course of 12 years, he turned it into well over a hundred bagger, and wound up selling the business for $88. So, it was a hundred bagger in 12 years. I think it's a 45%, 50% CAGR.
Daniel Scrivner (00:34:12):
And it's $88 a share. So, from 75 to 88.
Dan Roller (00:34:16):
75 cents to $88, over 100X. The strategy was this “buy and build.” So, you have this small business, $8, $10 million of sales, not making a lot of money, and you think about both organic growth as well as value creating M&A. This was an extreme example. I think we probably shouldn't all base our worldview on the possibility of recreating this. Right next door to the concept of “buy and build” is the concept of a levered roll-up. The world is littered with levered roll-ups that got too levered and failed, and so I think there's kind of a fine distinction there between the categories for success and the extent to which a company is using leverage is a critical component here.
Dan Roller (00:34:55):
It's an unheralded industry, law enforcement accessories. They started doing up-armored limousines for dictators in various countries, or politicians in Brazil, or different things. They had amazing results without ... It wasn't a dotcom startup. It wasn't Google or Apple, and obviously there've been fantastic returns in parts of the technology sector, but there've also been fantastic returns in Monster beverage—Monster energy drinks, and various other parts of the market that people don't associate with that level of success.
Dan Roller (00:35:26):
It's a great exercise. If you look at the top 30 returning stocks of the last 20 or 30 years, it's not just these tech darlings. It's not the top five handful of tech names that would come to the tip of your lips. Now, they may be on there, but there are examples across many, many industries. It's not certainly been our exclusive strategy, but again, you think about these frameworks and these areas where things rhyme, “buy and build” strategies have been something that we've come back to and invested in over time. One of our top holdings for the last five plus years, since shortly after I launched the fund, has been a company called Clarus Corporation, which is Warren Kanders’ next vehicle.
Dan Roller (00:36:04):
So, he sold Armor Holdings. He has now been building in the public markets this vehicle called Clarus Corp with a similar framework, right? Organic growth, building brands organically, and then smart bolt on acquisitions. We own one in the non-sugar sweetener business called Whole Earth Brands, which recently came out of a SPAC, or a busted SPAC. It was a SPAC that broke deal. So, this idea of a special situation leading to a core holding with a “buy and build” framework. We own a company called American Outdoor Brands, which was a spinoff from Smith & Wesson's outdoor products group.
Dan Roller (00:36:39):
Again, it's kind of a special situation creating the opportunity. The spin-off, there were forced sellers, but they're pursuing this “buy and build” framework. Then another top holding, again, this is a portfolio of roughly 10 core positions. About half of them are in this “buy and build” framework. But another longtime holding is a company called Turning Point Brands, which is in the “other tobacco products” and tobacco-related products business. It came onto my radar screen initially as a broken IPO. It came public and it broke deal price. You got these forced sellers, people that "played the deal," and it didn't work, and so they're just moving on, just selling out.
Dan Roller (00:37:17):
Again, a special situation creating the opportunity, but with this “buy and build” mindset. It's definitely been a recurring theme. There are other themes that we focused on, but “buy and build,” I think has been a very interesting part of our hunting ground, and it's something that I now have, again, a number of mental models around that I think helps me evaluate those companies.
Daniel Scrivner (00:37:38):
I think one thing that I find fascinating about this space is, when you list off some of those names, if people aren't familiar with the brands underneath each of those companies, those companies sound like weird shell corporation names, almost, and then you dig in and you actually learn these incredible brands are ultimately owned by this kind of overarching entity. So, we'll come back to that in a second, but one of the things that I wanted to dive into, just going one layer deeper is kind of again, maybe thinking structurally, what helps these to work.
Daniel Scrivner (00:38:05):
I think one of those is this idea you talked about that there's organic growth, plus then they're bolting on these acquisitions, and some people refer to that as inorganic growth or value added, and there are a bunch of different terms there, but clearly, it seems like there needs to be this engine in the business, which is that there is something there that is naturally growing that's then spinning off cash that allows them to reinvest in bolt-on businesses, which then spins off more cash. Am I getting that right? And can you talk about that engine that helps power?
Dan Roller (00:38:34):
That's a great way of thinking about it. We call it a flywheel as well, getting this flywheel working. I think that's exactly right. You have a core business that's growing, that's hopefully spinning off cash, not requiring cash to grow, and then you can use that cash to reinvest both in organic growth, as well as potential acquisitions that are value accretive. There's another component here which can come into play, which is that when a company in this mold is working well, it may have an equity cost of capital that is favorable to acquisition.
Dan Roller (00:39:05):
In other words, if a company is trading in the market for 12 times EBITDA, because people perceive it as a good business that's run by a good capital allocator that's growing, they may be able to buy smaller peers for four times EBITDA. If you have that type of disconnect between one company's cost of capital and then the cost of deals available to them, that can create a pretty powerful flywheel. Again, going back to Watsco, HVAC servicing and installation, etc, you can go buy small HVAC companies for very low multiples, but if you're trading in the public markets with a real equity currency, you can use that currency at times.
Dan Roller (00:39:42):
That's one thing that's interesting again, about the Armor Holdings story, is he was creative in the capital that he used to build this business. If you look back, the share count went up by almost 4X over the course of this hundred-plus X in the stock price. There was a lot of dilution. He started with X shares and wound up with 4X the number of shares, but because he was doing really accretive things with the equity issuance along the way, it still created this amazing result; but other times he would buy back stock. I think, again, there's a mental flexibility just as I have, as a portfolio manager, good corporate managers have, there are times to buy back stock, there are times to issue stock, there are times to invest in organic growth, there are times to do M&A.
Dan Roller (00:40:26):
I think that it's rare that you have a really great manager with this skillset to think across all of these different vectors, but when you do, it can create a powerful result. That's why I think management is critical in these types of investments. You really need an alignment and the right type of thinker, because a lot of corporate managers are just good at running their business. They're good at operating, cutting costs, etc., and capital allocation is an afterthought. So, I think that in these “buy and build” stories, capital allocation is a critical component of their success and needs to really be a primary skill set of the leader of the business for it to work.
Daniel Scrivner (00:41:04):
Which is super hard to underwrite, but I think it's a great point there, which is inherently, these are, I don't know if you want to say the word risky, but these are higher risk strategy, and so one of the ways to de-risk that is clearly by having a great manager there, by having someone that can pull on all these levers at the right time. One of the things that I also wanted to talk about was, so inherent in this idea of buy and build, is buying. Typically, conventional wisdom on acquisitions would suggest that most acquisitions don't work out, most acquisitions don't end up being a creative. They end up being, all things considered, neutral to value destructive at times.
Daniel Scrivner (00:41:37):
I know, I think we focus probably too much on the value destructive acquisitions, but are there examples you can think of, of “buy and build” strategies gone wrong that can help elucidate or draw out what it takes to do a “buy and build” strategy right? Or I guess thoughts on how that goes off the rails, and how a company can be successfully good time and time again at doing these acquisitions?
Dan Roller (00:41:58):
I think that this concept of a levered roll-up, which is maligned, in some cases, is very similar to this. Some could say like, well, you're just talking about levered roll-ups. There's no difference. It's just a difference in term, but not a difference in action between a levered roll-up and a “buy and build” strategy. Probably the most famous recent example of a levered roll-up or “buy and build” strategy gone awry is Valeant. A lot of people thought that Valeant Pharmaceuticals was run by an “outsider” CEO, an owner operator, an excellent capital allocator, and turned out to be a disaster.
Dan Roller (00:42:33):
I think there are some nuances that I think are important to try to pay attention to, but there are risks. So, I think leverage is a key component. Alignment is a key component. This concept of “skin in the game”, do you have your own money and a meaningful portion of your own money invested alongside your shareholders, or in the case of a fund manager like myself, invested alongside one's LPs. If I add to this point to the number one area where these things go wrong, it's with the use of leverage. Clarus, for example, the current Warren Kanders vehicle, has very little debt.
Dan Roller (00:43:03):
That's done with this strategy by using cash flow to make acquisitions rather than take on a lot of debt. I think the debt is probably a half a turn or something on this year's numbers. Whereas you see cyclical companies pursuing the strategy, like there've been a number in trucking, I think. Trucking companies are buying smaller truck businesses, and you get levered four or five times, and then you get a downturn, and your EBITDA gets cut in half, so then you're levered eight times and the whole thing falls apart. Again, Turning Point Brands is another example. It's a very stable core business; some of their businesses date back 150 years.
Dan Roller (00:43:37):
So, you have this very, very stable core business that can support some leverage, and there is a little bit of leverage there, but they haven't gone to the extremes that you see in some of these things that blow up. I'd say the number one way that you can get in trouble with this kind of strategy is through excess leverage.
Daniel Scrivner (00:43:53):
That Clarus example's fascinating because they employ such a little leverage because getting leverage, especially if you are, I think the bar has fallen so low, I was going to say, as long as you're profitable, but I don't even know if that's the case anymore, but leverage is so easy now. I'm guessing some of that is potentially lessons learned. Some of that's just wanting to pursue a little bit of a less risky strategy, but there's something pretty remarkable there about the fact that they are acquiring and growing, but they're using such a little leverage, it seems like a lot of discipline.
Dan Roller (00:44:24):
I think discipline is actually the right word. It's a critical component here, is having the discipline to know a good deal from a bad deal, and not a lot of managers can pull this off. I mean, again, I think you're right. The statistics are very clear that the majority of corporate M&A is not value creating. It's neutral to destructive, and so I think that, in the world of companies that are doing acquisitions, I think that you're right, as an investor, you have to be careful to choose the right ones, and it can be very powerful when it works, and with the right managers, and so I view myself as investing alongside some of these managers, and comes back to something we talked about earlier is, what are the signposts for success, and an investment that you need to weigh out a priori as an investor.
Dan Roller (00:45:09):
One of those is doing good deals. I think if you're invested in one of these companies and they do a deal and it doesn't make sense, that needs to be a pretty immediate red flag that this is not what I thought it was.
Daniel Scrivner (00:45:20):
I'd love to talk a little bit about the companies that two of those examples own in particular. I think the ones that I've been fascinated about just by learning more about them is Clarus and then Turning Point Brands. Can you talk a little bit about those brands? I guess, one thing I'm curious about is how much of what led you to invest in this is the sub-brands and how much of it was just the kind of overarching management strategy.
Dan Roller (00:45:45):
With respect to Clarus, it was really me following Warren Kanders into his next public venture. It actually came about through a special situation as well. In 2015, the primary brand in Clarus is Black Diamond equipment. This is a company that makes climbing harnesses and ice axes, climbing shoes, apparel, carabiners, backpacking backpacks, things that are used in our neck of the woods here in the Denver-Boulder corridor.
Dan Roller (00:46:11):
That does resonate with me, right? I grew up doing all of these sports. I still climb. My six and 10 year old daughters are on the climbing team here. So, the brand resonates with me, but really, it was the manager that drew me to this. But the way that the opportunity to invest came about was that he put the business up for sale in 2015. It owned a couple of other brands at the time as well. It owned Gregory Backpacks and POC, POC helmets. Rather than sell the whole business, he wound up only selling two out of the three pieces.
Dan Roller (00:46:37):
I think a lot of arbitrageurs had come into the stock. The stock was around $10 a share, and they were hoping he would sell it for $12. They were hoping for this little 20% pop. Instead, when he said, you know what? We're going to sell two, we're going to take this cash. We're going to reinvest, focus on the core Black Diamond business, like I said, a lot of the arbitrageurs just sold out price agnostic. They were forced sellers in a way when their thesis changed from being a quick arbitrage to now a multi-year turnaround, or multi-year investment cycle.
Dan Roller (00:47:08):
So, the stock fell, not just from 10 to where it was prior to the hope that it would be sold around seven, but would end up falling all the way to $4 a share. So, there's this dramatic reaction to this lack of a deal, but it was still the same core business. Black Diamond has been around for 50 plus years. It was founded by Yvon Chouinard who founded Patagonia. This was the original Chouinard Mountain Equipment, the hard goods business. So, you have this legacy business, great brand reputation, 50-year brand, that because of this corporate event was trading at a very cheap price, and at the same time, had a fantastic capital allocator at the helm.
Dan Roller (00:47:45):
The stars really aligned there on this one. I guess I would contrast that a little bit with the Turning Point Brands with respect to how I came across that. This was one where the brands helped me underwrite it more so than the management at first. But as I said, the opportunity to invest in this, at what I thought was a favorable price, came about because it was a broken IPO as well. The core brands atTurning Point Brands are Zig-Zag, which makes rolling papers - so, roll your own cigarettes or roll your own cannabis products - as well as chewing tobacco, and moist snuff, and various oral tobacco products.
Dan Roller (00:48:18):
They have a number of brands that date back, as I said, hundred plus years: Beech-Nut; and then Stokers is maybe 70 years. These really historic brands, hundreds of millions of dollars, probably, of advertising has been spent on these brands over the decades. It was very levered. Because it was such a stable business, the prior owners were running turning point brands with six turns of leverage. If you look at the S-1, and I did this, it showed the prior five years of EBITDA leading up to the IPO, and it was $50 million plus or minus $2 million every year for five years, and so they had levered it up six times, $300 million of debt against that $50 million of EBITDA.
Dan Roller (00:48:56):
So, the IPO was a de-leveraging event. They were raising capital to de-lever. The primary shareholder was buying shares on the IPO at the IPO price. Typically, with an IPO, you see the insider selling shares. They're taking some money off the table. In this case, the primary owner was buying more at the same price that IPO investors were getting. Then there was a broken deal. Like I said, it priced at, I forget, $10? And it traded down to seven or eight right out of the gate. I thought it was kind of this aligning of the stars of this unusual IPO situation, where the major shareholder was buying more. There was a de-levering event, which was going to allow the company to reinvest in his brands and pursue this “buy and build” strategy from a much less levered point of view.
Dan Roller (00:49:42):
Then you have this broken deal, which creates a great price. That's one where all of those factors were the primary factors, and then over the last several years, I've been able to get more comfortable with management and their capital allocation prowess, as they've done great deals. This is a perfect example. There's a lot of different elements that we could talk about with Turning Point. But if you're a small "mom and pop" tobacco producer, and with a subscale brand, you're competing against Philip Morris, Altria, you're competing against these majors. There are increasing regulatory burdens.
Dan Roller (00:50:17):
The FDA is making it more difficult for small brands to exist. There aren't a lot of buyers. You can't sell toPhilip Morris because they don't care about your $4 million of EBITDA, but Turning Point does, and so the average purchase price that Turning Point has been able to pay for some small bolt-on brands has been very favorable. Again, with Turning Point, you have this dynamic of, they can trade in the open market at 10 or 12 times EBITDA, which still seems very cheap or reasonable for a company with this kind of stability and organic growth prospects, but they've bought businesses for four to seven times EBITDA.
Dan Roller (00:50:51):
The first deal they did out of the gate was a small regional tobacco brand and they paid four times EBITDA. I think that's an example of this flywheel. They actually have an issued equity to do these. They've issued a convert, so I still think it manifests itself in their low cost of capital. But the idea is that they have been able to buy things very cheaply because of the structure of the industry.
Daniel Scrivner (00:51:13):
I love both of those examples, and one of the things I love there, and you touched on it earlier, and I thought it would be great to come back around to it is, just the concept of value versus growth, and how, rather than versus, you can have value and growth. I think in both of those, what I love is, there's clearly a value element, where something was broken. There was some sort of a mispricing element to both of those companies, both of those securities. Then at the same time, there's obviously these enormous growth prospects, some sort of a value component existing and potentially still existing.
Daniel Scrivner (00:51:40):
Also, in this same company, a growth component of existing. Can you talk about, I guess your view of that, value and growth, and just any kind of meta thoughts on how you think about those two things, and are they really different?
Dan Roller (00:51:53):
I think a lot of people's minds just go haywire when they start thinking about this value versus growth debate. It's this Charlie Munger quote, or the Buffet quote, all sensible investing is value investing. You want to get more than you're paying for. Growth is an input. Growth is an input into the value of a company. I love growth. I'm a value investor. I'll say that, I'll admit that. Maybe it's been a dirty word over the last couple of years, but growth is an input into valuing a company, so are margins, so are returns on capital, so are a lot of other things.
Dan Roller (00:52:23):
I talk about this idea of buying compounders priced like cigar butts, right? Companies that could compound value can grow organically, but they're priced, for some reason, like a cigar butt. I think that, in the case of Clarus at $4 a share after this broken deal, or Turning Point Brands kind of on the broken IPO, these are each examples where I was able to pick up compounders, and Zig-Zag, both of the core businesses with inside of Turning Point Brands, Zig-Zag and Stokers are growing double digits. These are 10% plus top line growth rates on top of the stability, expanding regionally, expanding markets. It's great.
Dan Roller (00:53:01):
Same thing with Black Diamond equipment. Climbing interest is on the rise. People are getting outdoors more, climbing gyms and indoor climbing are becoming more popular. Climbing was added to the Olympics for the first time. I think it was meant to be last year, and now we'll see if it happens this summer in Tokyo, but for the first time ever, climbing was going to be in the Olympics. There's this secular growth trend. Dating back 50 years, Black Diamond has grown at a 10% CAGR for 50 years. It was priced like it was going out of business or something. Growth is great. I just have a hard time paying some of the prices that some companies that are perceived to have high growth trade for in the market.
Dan Roller (00:53:38):
Right now, there's fantastic business models, software as a service, asset light, high growth, but they trade for 10 to 40 times revenues, 10 to 40 times sales. I've just had a harder time underwriting the amount of years into the future that you have to underwrite to justify those prices. You might have to say like this company can grow 30% plus for the next 15 years to justify this price, whereas I like having to say, this company just doesn't have to go out of business to justify this price, but oh, by the way, it's grown 10% for 50 years, and it's a great brand, well-recognized. Just that's the way my mind works. Other people have done really well underwriting higher companies at higher multiples.
Dan Roller (00:54:21):
I've done well underwriting solid stable businesses with growth, with good capital allocation at very low prices.
Daniel Scrivner (00:54:30):
I'm so glad you shared that Warren Buffet quote, because it seems like the perfect encapsulation of, it seems like some people have an adverse reaction to growth when it talks about calling a company, a growth company, but no investor would ever invest in a business if it had zero growth prospects. It's like, you want to have both of those there, and growth is just input. I love that. I love that model. One of the other things I wanted to come back to, we talked about, we discussed kind of covering this in the interview is, I want to try to thread together two things.
Daniel Scrivner (00:54:57):
I know something that you've been looking at is the kind of world of SPACs and what opportunities might exist in that space that you find particularly compelling, and I know that there, there's a lot of different lenses again, that you can use by which to try to, I don't know, make your own sense of SPACs and what seems interesting there or not interesting there, but I know you've taken kind of a special situation lens to it. Can you talk about those two things coming together and how that's kind of manifested itself in some investments?
Dan Roller (00:55:22):
This is the basket that I was referring to earlier is a basket of SPACs, and so we do own a handful of these. I think I'll assume that your listeners know the basic dynamics of a SPAC. They've become much more popular lately. For the prior 15 years leading up to maybe 2019 or 2020, they were really viewed as a backwater. There were lower quality management teams, lower quality sponsors, lower quality deals, lower quality underwriters. The large investment banks weren't involved in these. Just over the last 12 months, they've surged in popularity.
Dan Roller (00:55:57):
I think, at last check, there are over 300 SPACs with over a hundred billion dollars of equity capital searching for mergers, searching for acquisitions. That probably means that with PIPE financing and potentially leverage, or additional capital, or rolled over equity, that maybe there's 400 billion of enterprise value that could be brought public through SPACs in a short period of time. As with anything where there are that many deals in that short of a period of time, I think there's room for inefficiency. Again, just kind of thinking about hunting grounds, I think that there's a lot of SPACs that are going to destroy capital and not work out well, but there are also an interesting asymmetrical opportunity to partner with high quality management teams.
Dan Roller (00:56:44):
One of the critical elements of a SPAC is that investors have the right to redeem their investment for $10 a share up until the merger is consummated. I invest $10 in a SPAC unit at issuance. Worst case, I can always redeem for $10. So, it's a very unique security, and this is kind of where my background in evaluating the warrants and rights, and all of these esoteric corporate transactions comes into play. The SPAC unit is a unique security, and the SPAC common stock prior to a merger is unique security. Then it has this downside put where an investor can choose to redeem for their $10.
Dan Roller (00:57:25):
There's an asymmetry here, right? I invest 10, I can get 10 back. There may be a lot of upside if a good deal is done. I'm thinking about it halfway with the hat of partnering with potential “buy and build” strategies. These management teams are entrepreneurs. If you go raise a SPAC, you have an idea about consummating a merger, or potentially multiple mergers using that capital and embarking on a “buy and build” strategy and entrepreneurial journey. But at the same time, the structure of the securities gives us a pretty interesting inherent downside protection. I think there's a very asymmetrical opportunity with these securities, and that's why I think it's a very interesting hunting ground.
Daniel Scrivner (00:58:06):
One thing we've talked about in this interview is just the concept of skin in the game. I know, from following your letters, that a lot of your holdings you've held for a long time. One thing I just wanted to, I guess, see your kind of perspective on, your point of view on is how you think about holding periods. I know earlier in the interview, we talked about this notion of, when you're making an investment, you've got a thesis, and that thesis is you're looking for data points that don't just exist in that kind of share price. I would guess you probably have some pretty nuanced thoughts there. Anything you can share around how you think about holding period, thoughts on when to sell or tracking theses on kind of your investments?
Dan Roller (00:58:44):
There's this concept of thesis drift, which is generally thought of as a negative. “Oh, you're exhibiting thesis drift. You invested in this company under the guise of one thesis, and now you're starting to believe in this other thesis.” It's thought of widely as a negative when you experience thesis drift. But I think it's actually, it's critical that you constantly update your thesis. A great example is that when we first invested in Clarus, I tried to underwrite for a three-year double, a stock that can double in three years.
Dan Roller (00:59:16):
If I invest in a security at $5 a share, all things equal, maybe I think it can be $10 over the next couple of years, but if a couple of years go by, I need to re-underwrite the thesis as I go, and maybe, now I think it's worth 20, and stocks at 10, and it's still a three-year double. I think that if you go in with a target price, that's too firmly fixed. I'm buying this company for 40 and it's worth 80. Maybe it gets to 75 and you sell it, but really, what you need to do, I think, is constantly update your thesis as you go, which can allow for longer holding periods because things do change.
Dan Roller (00:59:52):
At the same time, I go into investments with a multi-year horizon, but my thesis might be disproven fairly quickly. Let's say I have a special situation where there's a spinoff and a company comes out and it seems cheap, and they have a lot of cash on the balance sheet, and I'm betting on management to do some smart things. If they do some dumb things, I might pretty quickly say, you know what? I was wrong about this and move on. A priori, I would love for a longer holding period. It's tax efficient. You get to know companies well, you get to know managements well.
Dan Roller (01:00:22):
There's a trap of getting to know companies too well so you have to keep yourself honest and maintain the appropriate amount of intellectual rigor, but it really is important to constantly update your thesis as you go. Companies can start new divisions. They can start new businesses. This concept of thesis drift being a bad thing makes no sense to me. This is related, you mentioned the skin in the game concept, I'll just circle back to that as well. What I mean by skin in the game is a large personal investment in the same thing that you're selling to someone else.
Dan Roller (01:00:51):
I love it when my management teams own a lot of stock personally. That's the best form of alignment. I think that it's important for a fund manager to have a large investment in the fund that they're managing, and so that's how we have it set up and I have it set up is that the vast majority of my net worth and all of my investment capital is invested in my fund that I manage alongside that of my clients. When I come across a company where the CEO chairman owns 25% of the business, I love that alignment, because I think that it's likely that he or she will make decisions that are more friendly towards shareholders, given that alignment.
Dan Roller (01:01:27):
Corporate governance is a rabbit hole. There's a lot of nuance. Sometimes large ownership positions can cause companies to have entrenched management or other things. But in general, I think that skin in the game is an important element, and I do look for alignment between the management teams that run our companies and our investments.
Daniel Scrivner (01:01:44):
I love that example you gave earlier around, I think it was Turning Point Brands going public, and rather than actually selling shares, being net buyers. That's something I always enjoy seeing as well too is, not only in compensated primarily through equity ownership and having a lot of equity ownership, but also seeing managers that are opportunistic and kind of being able to see when they think the market is devaluing the business because I think that always sends some interesting signals as well too.
Dan Roller (01:02:10):
In terms of both their personal investments, as well as through buybacks. I just think that you see additional alignment, you also see potentially smart capital allocation decisions.
Daniel Scrivner (01:02:21):
We've gone all over the place with this interview, and it's been fascinating. So, I want to come back to just a couple of closing questions, and I think one, and I don't typically ask this, but just because of how much we've discussed, I thought it might be interesting. Is there anything that we haven't talked about that you think this interview wouldn't be complete without chatting about? That could be anything from current market conditions to something that you think is interesting or notable in the news. I guess anything that is on your radar that you think other people might not be paying attention to.
Dan Roller (01:02:51):
I typically don't spend a lot of time thinking about macroeconomics. I think people are worried about inflation and growth and GDP and different things. I typically don't spend a lot of time. I really spend a lot more time focused on the bottom-up of analyzing companies. There were times during the pandemic, obviously that was really a time to focus on something from the top-down and a major change in the world, but I've never made any money thinking about macro and macro trends. I think that focusing on micro trends and the bottom-up is much more important. Again, I'll read a broad variety of esoteric things, but following exchange rates or inflation fears, or commodity prices are generally not something that I spend too much time on.
Daniel Scrivner (01:03:36):
That tracks pretty well. I don't know many people, successful fund managers that spend too much time there, because it seems like it's really easy to have an opinion. Things are constantly changing. We're often discussing stuff that's not actually even real or materialized. It's stuff that could happen or it might happen. I think that makes a ton of sense. One question I wanted to ask too, just going all the way back, thinking back to that question of how investing is a lot like training for an endurance, something like an Ironman. If you're interested in it, you just need to get started, and then once you get started, you can build that base and start building on top of that.
Daniel Scrivner (01:04:10):
For anyone listening, who aspires to be a great investor and is just getting started, anywhere you would point them or any advice you would give them about how to kind of get started building a base?
Dan Roller (01:04:20):
I do think that there are a number of excellent books on investing that probably would form the core of a lifetime of study. Mohnish Pabrai, he wrote a book called The Dhandho Investor. I think that's kind of a very good introduction to investing. He keeps it really simple. But again, Buffett, Munger, Peter Lynch, there's a lot of investment books that I think form the core of a study. But the other two pieces of advice that I would have are to start managing real money is different than managing paper money, or just watching tickers on a screen.
Dan Roller (01:04:53):
I think that it's critical to remember that investment in a stock is ownership of a piece of a business. That's kind of a very foundational part of the framework. These are not just little lines that squiggle around on a screen. I think that there's broad parts of the market right now that are dominated by traders who view stocks as prices that wiggle around on a screen, and it's the greater fool theory. I just think it's going to go higher, and I'll sell it to someone else rather than fundamental, what is this business worth? I own a piece of this business. I own 1% of this business or X percent of this business.
Dan Roller (01:05:29):
Even if it's one share, you own a piece of a business. We take the approach, or I take the approach of, it's almost a private equity approach to investing in the public markets. I try to do the due diligence, as well as have the mindset of, what would I be doing if I were buying this entire business? I might just happen to be buying 3% of it or 5% of it, or 0.01% of it, but the mindset is I'm owning a piece of this business. I think that that's an important category for people to think about is, do I want to speculate on what I'm reading on Reddit, or do I want to approach investing as ownership in a piece of a business? Which I think is the right way, at least with the term investing. We can talk about speculation or gambling or other terms.
Dan Roller (01:06:15):
Then finally, the number one primary source I have -- we don't have Bloomberg; I don't subscribe to anything too fancy -- but sec.gov. Just going to the source documents, going to the filings is a great way to continue to learn about companies. When someone's going public, they file an S-1. There's an annual update every year. I think going to the source probably as early as possible in an investing journey is an important thing to start doing.
Daniel Scrivner (01:06:39):
Not just news stories that are, God knows how many times, removed from the actual source documentation, which doesn't have ... Typically, doesn't have any spin and just has the data for you to analyze.
Dan Roller (01:06:49):
Again, in some of these special situations, you'll see in a footnote that a company is due to receive this cash, or a lot of the special situations come about because I read the footnotes and the market didn't. It sounds kind of cheesy. A great example is last summer IAC/InterActiveCorp was spinning off Match.com. IAC was a $25 billion market cap, very well known...Barry Diller, Chelsea Clinton's on the board. They own 80% of Match.com. They own Vimeo. They own this well-known portfolio. People follow IAC the same way they follow Berkshire Hathaway.
Dan Roller (01:07:27):
So, they announced that they're spinning off Match.com, and it was really complicated. There's large hedge funds in New York with teams of lawyers and analysts, and I still think the market got it really wrong. It was an area where just doing the work and having the spreadsheet and just following it really closely created some inefficiencies. It does happen in large well-followed stocks, just as it happens in really esoteric, illiquid macro-caps.
Daniel Scrivner (01:07:55):
I love that example, and you listed off a ton of great references. I think the thing that I love that you brought up and I'm really glad you brought it up is starting off with that investing is investing in a company. I think if you approach it that way, that naturally creates all sorts of wonderful alignment, where you care about the business, you care about what makes a business successful or not successful, you care about the management team, you care about the decisions they're making. I agree with you. I think that is the basis of very high quality investing, and when you're approaching it with a right analytical rigor.
Daniel Scrivner (01:08:24):
I love that you shared it that way. I'd love to ask you the closing question we ask all guests, which is to share a personal experience that's had a profound impact on you. Just someone or something that shaped who you are today that you carry with you and appreciate.
Dan Roller (01:08:37):
With respect to investing. I think the mentor that I mentioned, Warren Kanders and what he has built, and the way that he has approached value creation has had probably one of the biggest effects on me. It's funny, when I started my firm five years ago, I seeded it just with personal capital. I didn't have any large seed investment. It was really a risk. When I was running the concept by people, I said, oh, I'm thinking about starting my own thing. What do you think? There were people that were very encouraging, but the number of people that actually invested with me at the beginning was small, and it wasn't necessarily the list of people that I would have imagined.
Dan Roller (01:09:13):
I'm really grateful to my partners. Like I said, I think I have great partners in this business who share a long-term approach. They understand what I'm doing. Look, I'm still a one man shop. It's a small firm. All of my investors have trusted me in doing something different and looking different. It's not logging on to Fidelity, or going to a big mutual fund company. It's a little bit different. It's been fantastic to have these partners. They deserve a thank you.
Daniel Scrivner (01:09:42):
For anyone listening that wants to learn more about you or potentially talk about becoming one of those partners, where can they go to follow you and find out more about Maran Capital.
Dan Roller (01:09:50):
We have a website, which is marancapital.com. A number of our shareholder letters or my letters to my partners are there, as well as some additional materials. The way that someone becomes a partner is a little bit more challenging than just going to your E-Trade accounts and creating an account. But anyone can just send me an email. That's one thing that's great about my structure. I think sometimes imposing some constraints, right? I talked about the constraint of limiting the amount of assets that I intend to manage, because it allows me to stay in an attractive hunting ground. The structure of the fund is limited to 99 limited partners. It's some kind of an SEC regulation. I have a relationship with my partners, which is great.
Dan Roller (01:10:28):
You can actually email me, you can actually call me and we'll have a conversation. Some partners I speak with more frequently than others. It's a great dynamic that I think is very different from the majority of the money management industry.
Daniel Scrivner (01:10:42):
For anyone listening that's enjoyed this conversation, I highly recommend you go to Maran Capital website and download and look at some of their shareholder letters. I always find that your letters are super thoughtful, really interesting, and you also just look at very unique, differentiated parts of the market. So, thank you so much for coming on, thank you for your time, thank you for sharing so much with us, Dan.
Dan Roller (01:11:01):
Yeah, it's been a real pleasure. Thank you for having me, and I look forward to staying in touch.
Daniel Scrivner (01:11:08):
Until next time, thank you so much for tuning in. For show notes, including links to everything mentioned in this episode, visit danielscrivner.com. There, you can also sign up for my weekly newsletter, where each week I send out a single email with all of the best quotes, themes, and ideas from the latest episode. To sign up for that, visit danielscrivner.com/email. Just one more thing before you take off. If you enjoyed this episode, please leave a quick review in iTunes or Apple Podcasts. Great reviews help us land great guests. So, if you've enjoyed this episode, take 30 seconds to leave a short review. We would so appreciate it. Thank you so much.
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