Please enjoy this transcript of my conversation with Robert Cantwell, Founder of Upholdings, the first hedge fund in the U.S. to convert into an ETF (exchange-traded fund). We discuss ETFs, why operators make the best investors, and why Robert believes now is the worst time to invest in innovation. From Episode #23 of Outliers with Daniel Scrivner. Transcripts for other episodes can be found here.
“I think the best investors are operators and the best operators are investors.” – Robert Cantwell
In this episode of Outliers, I’m talking with Robert Cantwell about his thoughts on ETFs, how great investors tend to think like founders, and why blockchain is his latest investment interest.
Robert Cantwell is the Founder of Upholdings, the first hedge fund in the U.S. to convert into an ETF with the launch of Compound Kings (KNGS). Robert started his career as an Analyst at Elevation Partners, which was co-founded by U2’s lead singer Bono. He then worked at the long/short hedge fund Meru Capital before serving as Everlane’s CFO for 5 years. Robert founded Upholdings in 2019 and launched Compound Kings (KNGS) in 2020. To date, Compound Kings has dramatically outperformed the S&P 500.
Daniel Scrivner (00:00:00):
Robert, I am so excited to have you on Outliers. Thank you so much for joining me today. Thanks for the time.
Robert Cantwell (00:00:05):
Great to be with you.
Daniel Scrivner (00:00:07):
You and I connected previously, we've chatted about a bunch of stuff, and I'm super excited to go all over the map today. Just to share a little bit of the background behind this conversation, I reached out to you at Upholdings Investments because I saw the launch that you guys did and ended up investing in Compound Kings, which is your first ETF. And from my perspective, there's a massive transformation going on in the ETF space that I think is really exciting, and I was excited to have you on to explore that. Any thoughts on ETFs?
Robert Cantwell (00:00:37):
No, of course. Yeah. But thanks for having me, Daniel. The interesting thing about the ETF space is, it's almost entirely passively managed product, which are these heavily diversified, low cost index funds, which, in and of themselves, is an incredible investment product. But most of actively managed money is still sitting inside of mutual funds. I was very surprised to learn that, I went deep on it, I learned that over the past couple of years, the SEC has been opening up its legislation to allow active managers to really use the vehicle. Because, for a long time, they've been really careful with using ETF because, is it going to trade at huge discounts? Are there ways to manipulate it that are going to hurt shareholders?
Robert Cantwell (00:01:19):
And the indexes have helped prove out that the vehicle is in fact as good as advertised. And now, we're at the very early stages of active managers coming into the vehicle. And I'm fortunate that I'm relatively young, I have a long career ahead of me, and we can be patient and take the long-term view that there's going to be five to $10 trillion of assets moving into actively managed ETFs over the next 10 years. So, if we think we have a good way of doing it, we can, at a minimum, help lead the way and help show folks that there's a lot of opportunity here.
Daniel Scrivner (00:01:52):
Yeah. And we're going to come back around and talk about, I know this is the first ETF, there will be more, but we'll come back and talk a little bit about the strategy there. But I was just going to thread one little detail in, which is, yeah, just in the last week, one of the stats I saw is, Dimensional Fund Advisors has, I don't know, something like $30 billion in mutual funds, and they are actually going through an incredible transition right now where they're taking all of those from mutual funds over to ETFs. And it seems like that is happening. Are you seeing more other active managers move from mutual funds to ETFs? Is that kind of a shift that you're seeing?
Robert Cantwell (00:02:24):
I think it's going to happen in a few different ways. The mutual funds converting to ETFs is a no-brainer. Vanguard's been doing that for a decade now, of taking their index funds that ran on mutual funds and converting them into ETFs to get favorable tax treatment on a lot of their winners. And so, the mutual funds are just playing catch-up to Vanguard. Now, the big question is, are those actually going to be the actively managed products that people are relying on in the future? And the challenge with the mutual fund conversions is, they're bringing their entire balance sheet over. So, hello, thousands of companies, and you're just looking at things that feel a lot like the index funds that are out there.
Robert Cantwell (00:03:06):
And eventually, I think, they're going to figure it out, and they're going to learn, you're going to have to run very concentrated funds with well-defined strategies, and let investors pick. And managers are going to have track records, investors are going to get to pick managers or pick strategies, and the funds are going to differentiate themselves based off of those experiences and track records and concentration limits. And that's where, I think, the game is really to be played in the actively managed ETF framework and mutual funds converting, SMEs converting, other large advisories launching $3 billion ETFs. That's just a tax efficiency game. I don't actually think that's a, we're building the products that people are going to invest in in the future.
Daniel Scrivner (00:03:47):
I think that's a wonderful point and super well articulated. And one of the things that you've mentioned there that I'd love to talk about a little bit more is just the concentrated nature. Because yeah, you're right, I think most of the ETFs you see, just most, I feel like the vast majority of investment products you see are, I don't know, use heavily diversification. Just this idea of more and more and more and more, and end up with massive portfolios that I'm sure probably track pretty closely to the index. So, talk a little bit about, I guess, how you see that differently and why concentration is important, and maybe even what concentration looks like for you.
Robert Cantwell (00:04:21):
I like the question. One of my favorite investors of all time, Roger McNamee, who I was very fortunate to work for, the greatest investors, they're cool owning one stock. Now, the problem is, there're investors who are usually not comfortable owning one stock, because owning a single stock brings a little bit more volatility, but you're obviously positioning yourself in such a way that there's potentially a very big outcome. And I actually like to think that's actually how a lot of founders operate. That's it. Like, that's one stock, that's 95% of everything they're going to make in their life is that single company. And I think investors that push the envelope and think as much like a founder as possible, there's always that, people use the word best idea, but it's really, is there a really high return on investment opportunity for where the company is deploying capital and the price of acquiring those shares today?
Robert Cantwell (00:05:14):
So, yeah, Roger was always funny because he was like, "Robert, I know you. If you could, you'd put everything into one, maybe two stocks, but there's a lot of limitations in the market that are going to prevent you from doing that." So, to share a couple of the constraints, the number one is the IRS has a concentration rule that says, no more than 50% of your portfolio can be made up of 5% or greater positions. The lawyers explain this very nicely, which is, in the top 50% of your portfolio, you can either own two quarters or 10 nickels. And if you're ever plowing through WhaleWisdom or one of those sites one day to see what all the hedge funds and mutual funds and all those guys own, you're normally going to notice that that phenomenon is being respected.
Robert Cantwell (00:05:59):
Because if you break that, the fund's got to pay taxes, and then the investors have to pay taxes. So, you open up this whole double taxation funnel. That IRS limit is what really sets the kind of maximum concentration opportunities for funds. And so, as I said, you're typically looking at not two, but really five to 10 companies that you're trying to get to represent half of your portfolio. That's where a lot of your research is focused, that's where a lot of the potential outperformance of your fund is focused, and that's how we're running account bankings.
Daniel Scrivner (00:06:31):
Yeah. I have never heard that analogy or stat of an investor owning one stock, being very familiar with it, or very similar to an entrepreneur that's going all in on this company that they're building. But I know a lot of people that are doing that strategy and I love that analogy. One of the things I'd love to talk about a little bit is, not to make it on me for a second, but I've always really liked the idea of concentration, but I personally have a really hard time getting to the point of saying, "This one thing is it." For me, it's more comfortable, it makes more sense to think like this small basket. So, how are you able in your own process, so, clearly, fund aside, and IRS limitations aside, I guess, how do you think about getting that much conviction? Can you get there all the way on one security? Are you more comfortable with the handful? I guess, where do you line up, I guess, on that spectrum?
Robert Cantwell (00:07:22):
I think more people actually have this conviction, then realize they're doing. The employer that people choose to spend all of their working hours working with determines most of their wealth accumulation. And this is challenging because you have people that change jobs a lot, and that gets murky, but those people rarely compound a really big bag of wealth over time. But for folks that find a business, find the industry, find the thing that is natural for them, they like doing, and they stick around, they do it for 15 or 20 years, if you're doing that in online advertising, you're going to make more money than if you're doing that in coal generation. That's a bad... I don't think that-
Daniel Scrivner (00:08:05):
No, I think that works.
Robert Cantwell (00:08:07):
... fits particularly well. So, to answer the question on how to, I don't actually think about conviction, I think about, "These are the set of securities that I think are the best opportunities to invest in in the market, given their prices right now." And we have our models on each, and we have our expectations for how they're going to perform over the next five to 10 years. And the market's prices are moving around all the time. And the IRR that we think we're going to get for each one of those opportunities dictates where it falls in the portfolio. So, for example, you'll notice in our portfolio over time, at times, our largest position is 5% of the fund, right now, it's about 11% of the fund. We can push that as high as 15 to 20%.
Robert Cantwell (00:08:48):
And when you're seeing it in those more extreme zones, that's happening because the relative price discrepancy between where we see our best security as trading, relative to all the other stuff we have to choose from, it just means that the gap in value is so extreme that we're willing to concentrate more on the portfolio against it.
Daniel Scrivner (00:09:08):
So, it ends up being a stack rank exercise at the end of the day. You have to stack rank those investments and opportunities.
Robert Cantwell (00:09:15):
And the other thing is the bigger the company is, the bigger a piece of your portfolio it is. So, Berkshire Hathaway's seven and a half percent of our portfolio. That thing could easily be 20%, because I'm owning a railroad and an energy business, and Apple, and insurance. That's four stocks that just happen to be in a single ticker. And I think it's important that investors are always looking through to what they actually own in these pieces. I always think of an investment portfolio as, what is the company that I own, if I were to pass through all of the items on the income statement and everything, all the assets and liabilities on the balance sheet, and then you weighted average that by how you own each position, and in the end, you have a company?
Robert Cantwell (00:09:53):
And our company grows about twice as fast as the S&P, it's valued at about the same, and it converts cash pretty close to the same levels as the average company in the S&P.
Daniel Scrivner (00:10:06):
Yeah. I love that. And I have so many questions, I want to keep going on this line, but I need to stop myself because I want to make sure for everyone listening, that may not be familiar with you, familiar with Upholdings and Compound Kings, that we set a little bit of that backstory. And so, to take a little bit of a jump back, when we were prepping for this interview, I was just blown away by your background. And you started out as an investor, moved to an operator position at Everlane, obviously went back to the investor position with Upholdings. Can you give us just a little sketch of your background, where you started, and a quick sequence of events of what led to you founding Upholdings?
Robert Cantwell (00:10:41):
Sure. I've really always been an investor, I just hid inside a company for a little bit. I started out in private equity. Private equity is really great at training valuation, so, building working capital models down to the day or the week, and it really forces you to intimately understand how the numbers flow through each of the statements. The challenge with private equity is, you don't learn how to create a company, you don't really learn how to grow a company, you learn how to extremely efficiently capitalize a company. And that is a very specific tool that is only needed for certain companies at a certain point in their life.
Robert Cantwell (00:11:19):
After that, I worked at a long-short hedge fund, and this is a little bit the opposite of the private equity business, because you're learning how to trade a security, as opposed to, because you're not even getting the level of information required to be able to model it down to weekly cashflow metrics or anything like that. So, on the hedge fund side, it's much more interesting to learn about how other people choose to value your security that you're considering investing in. After a couple of years at long-short fund, I always personally aspired to being a part of helping build a company, investors stepping in and taking a big stake in a business and telling them, this is how they're supposed to be doing things, never struck me as natural, unless they themselves had actually built a company, hopefully, in the same industry as the one that they're trying to coach, and Everlane was a really cool opportunity for me to get to join the team when they were about 10 people.
Robert Cantwell (00:12:15):
And my wife, when I moved out to San Francisco, she worked there too, and we grew the business to more than 200 people, hundreds of millions of revenue, and it was a really great experience. And there was a funny moment at some point when I was there, when I realized, "Whoa, it's way more fun building a business than it is just managing a portfolio." So, when I came back out of all this, it was, "Well, how do I do both?" And Upholdings is really a manifestation of those two things where I'm building a new company in investment management and running a portfolio that I think is the way that actively managed ETFs ought to be managed going forward.
Daniel Scrivner (00:12:49):
I want to, I guess, step through each one of those milestones and give a little bit more color. So, to go all the way back to that first private equity piece, I love that analogy of, you don't learn how to operate a business, but you learn how to very efficiently capitalize a business, because I think that's an amazing succinct way of explaining how private equity approaches business building or value creation. Were there any other surprising lessons or stories that came out of that experience?
Robert Cantwell (00:13:17):
The private equity firm I worked for had one fund, and that didn't exist after that. I was surprised investors were not better company builders.
Daniel Scrivner (00:13:25):
And do you know why is that? Part of that is, I imagine, they think analyzing a company gives them some sort of interesting purview into how to build and operate a company. Is that kind of your sense of why they're not good at operating? Or, I guess, any other insights there?
Robert Cantwell (00:13:41):
That's a good way to say it. Investing is a very lucrative business. You make a lot of money investing. And the challenge of making a lot of money is that you're less price sensitive. And businesses are the opposite. Businesses that create and thrive are ones that find opportunities where there's an opportunity to deliver a higher quality product at at least the same price, if not better. And in order to do that, you're having to find the lowest cost ways of operating, the lowest cost ways of coming to life. You don't get to go and hire a $500,000 a year analyst, you have to ask yourself, "Well, how can I do this with an hourly contractor? Is there a way to deliver value if that's all I get to start with?"
Robert Cantwell (00:14:20):
And that's kind of the experience that I think a lot of investors don't have, which limits them into building their own businesses. I was just very surprised how much investors in professional services tend to think about, "What am I making out of this? What am I charging?" As opposed to, "What is the market share of the investment business that I'm running? How competitive are the fees relative to everyone else in the marketplace? And am I moving the investment industry forward with the investment products that I'm bringing out?"
Daniel Scrivner (00:14:45):
Yeah, man, that's a great way of saying that because, yeah, you're right, I mean, even in that, just with that list you just provided, it's clear that they're not really operating it or viewing it like an entrepreneur trying to deliver value, trying to really understand the space in the market that they own. And they're kind of special superpowers. To then jump forward to that long-short hedge fund, which, just to play that up a little bit, was Bono's hedge fund, Elevation Partners, I believe. And as we were preparing for this, you had one amazing quote that stuck with me and has rung in my head over and over, which is, routinely, you found yourself much more impressed by Bono, in his business acumen, than by anyone else in the room.
Daniel Scrivner (00:15:24):
So, I'd love it if you could just expand on that a little bit and share a little bit more of the experience and some stories there.
Robert Cantwell (00:15:30):
Sure. For technical clarification, it was the private equity firm where he was one of the six partners there.
Daniel Scrivner (00:15:36):
Robert Cantwell (00:15:36):
But in all of the six partners, they had incredibly very incredible careers in their own rights. And half of them were investors, half of them were operators. At first, everyone thought Bono was a showpiece. And he was calling in every single Monday meeting, he was reading all the investment materials that we were getting. And I was blown away at the business instincts and I feel so fortunate to have gotten to be in a room where he's talking and it's coming out of the speakers. He had a really great instinct. People tried to rely on him. They thought, "Oh, we'd have Bono. He's really good at marketing. So, let's lean on him for marketing." His product instincts blew me away.
Robert Cantwell (00:16:14):
Palm was a really big investment for us. We made a large investment in Palm early on in the smartphone days. And he and Roger dug in really deep on the product with the company, and it was incredible. They both went to the headquarters of Palm on a regular basis to review both roadmap and marketing strategy with them. They actually got in the weeds on all of it. And what was so cool about it was that they almost never focused on the numbers. They weren't focused on the income statement, they weren't thinking about the balance sheet. This was product only. And I think that was a really big learning for me, was understanding that... Because again, if your founders are not thinking about their income statement and balance sheet, they're thinking about the product that they're selling and whether or not they're in a really cool industry to fulfill that or not. And that was one of the things that I got to see from him that I certainly wouldn't have expected going in.
Daniel Scrivner (00:17:04):
That's amazing. And sorry for mixing that up. So, maybe just to set that up correctly then, can you talk about the long-short hedge fund that you were at, and I guess, any learnings, any insights that you took away from that experience there, moving from private equity over to the official hedge fund side of the equation?
Robert Cantwell (00:17:20):
Sure. The reason that I did it at the time was a lot of the companies that we had invested in at Elevation were then going public. So, we were early investors in companies like Facebook, we narrowly missed the deal on Skype. We overly haggled on price with Daniel EK at Spotify, and missed out on that. Oops. Don't over-optimize on price at that early stage of a company.
Daniel Scrivner (00:17:43):
Probably didn't matter.
Robert Cantwell (00:17:45):
Yelp was another important one. What was fascinating about the experience was getting to witness the transformation that companies make, going from raising capital from private investors once or twice a year, to, we're a public company with a stock price that is traded daily, and the news is going to talk about us all the time. And how much does that affect the team that we've got running the company and in the product and roadmap and all the things that it's going to take to still be successful? And even the best companies, I mean, Facebook had a really hard first 12 months as a public company. And the really fun thing about the market that we're in right now is that after 20 years of having a declining number of companies available for investment in the public market, that is finally beginning to turn around.
Robert Cantwell (00:18:36):
So, people that are like, "Oh, SPACs are good, SPACs are bad," don't care. They're bringing more companies into the market. Most of them are going to have a really hard time being public companies. That's, for public market investors, give us more options.
Daniel Scrivner (00:18:50):
Robert Cantwell (00:18:50):
Many of them are going to struggle. We're going to get plenty of opportunities to buy great businesses at great prices. We don't have to invest today. I think that's the great misconception with IPOs and SPACs is just because they're in the news, that doesn't mean right now is the moment you're supposed to buy it.
Daniel Scrivner (00:19:06):
Yeah, that's a great insight. Anyone would say, but yeah, I mean, I feel like for a lot of people, they see SPAC as an... I've talked about that or thought about that as, it's just another launch pad that's helping take companies from private companies to public companies. And yeah, to your point now, between direct listings, IPOs, and SPACs, all of those, whether you like individual deals or not, are wonderful things, because they're all clearly helping improve the opportunity set in the market.
Robert Cantwell (00:19:31):
People complaining about high prices is one of the dumbest things to me. Just don't buy it. No one's forcing you to participate, just sit there.
Daniel Scrivner (00:19:43):
Sit there and wait. Clearly, we're seeing a little bit of that play out at the moment. One of the pieces that I was—just kind of jumping next to your experience—and one of the things I loved about your background is just that you switched from being an investor to an operator, and back to an investor. And I'm super curious, when you made that switch, were there any ahas or oh my gosh moments of just finding that operating a company was very, very, very different from being on the outside and looking in at these businesses? So, just when you made that switch, if there was any.
Robert Cantwell (00:20:15):
Yeah. When you asked that question, immediately, the faces of the people that I got to work with came to mind. And again, I'm going to keep picking on investors here, but investors or this industry where their resume-focused and they're like, "Did they go to the best school? Did they get the best grades? Let's give them a job because they're going to be good at analysis." But when you're building a company, again, that's the furthest thing from identifying value and opportunities and building a team. And I was really blown away at all the non-finance people. It was a really cool breath of fresh air and getting to work with the talents of a designer, versus the talents of a software engineer, versus a recruiter.
Robert Cantwell (00:20:56):
And I think that was a really enlightening experience. And I mean, it makes me, this is going to sound absurd, but I'm like, why didn't I get to work on something in college that taught me how to work with people that have different skills at different things, and then there's this product that we all contributed to, that is like the sum of all of our different little expertises to deliver? I think that somehow needs to be more prevalent.
Daniel Scrivner (00:21:21):
No, I mean, it's a beautiful thing. And when you're on a team with incredible people, and you really do feel like you're making a small contribution, even though you're working your butt off. I mean, it's an amazing feeling.
Robert Cantwell (00:21:33):
Yeah. And I went through 30 years of my life without having an experience like that. And that was a big, cool wide-eyed open moment for me.
Daniel Scrivner (00:21:43):
One of the things that you underscored a little bit there is, which you hear all the time when you hear interviews and if you listen to interviews with venture capital investors or early stage investors is, they clearly, just to pull out a couple of things, there's not a lot of data to make decisions about investing in a company if you're investing early stage, and so, a lot of that process ends up being qualitative. And that qualitative pieces, typically, they look with disdain, or at least incredibly neutral at people with a lot of credentials, kind of, you have gone to the right school, had the right background, and they care much more about, "Are they really passionate about this idea? Will they run through any obstacle to be able to figure that out?"
Daniel Scrivner (00:22:19):
I'm guessing that's what you're referring to, of just seeing all of these different talents and being around people who came from very different backgrounds, but just being really impressed by working on a team like that.
Robert Cantwell (00:22:29):
Yeah. There's a nuance in there which is highly dependent on the industry in which the companies are going to be competing in, and the capital intensity of the business that you're trying to build. Because, for the earliest stage investors, they have to invest in a lot of things. And they sound like absolute investment geniuses years later, but the reality is, they had incredibly low hit rate. They just participated early enough to get to the handful that were complete outperformers. Again, they sound brilliant for having been there since the very beginning. But that does not come from the ability to know that two people were that much better than two other people they could have invested in, that comes from an investment process where you're spreading yourself across a lot of things.
Robert Cantwell (00:23:15):
So, this may become a little bit more of an inane conversation, but what are the things you probably... Sequoia, Don Valentine, always talked about, "Just give me a really big industry or give me really talented people." And I think that's the best place to start, especially if you're investing in that early stage. Now, if you've jumped all the way into the public market, you need to evaluate, even if a company is really profitable and generating a lot of cash, what's their governance structure? Are they actually interested in growing shareholder value? Because there are very profitable companies that can turn a bunch of cash, that don't give a shit about growing shareholder value, or they're not very good at it.
Robert Cantwell (00:23:52):
And those are two different things that the early stage investor doesn't have to spend a second thinking about, because the company is not working on that. So, I don't know, I just painted the two most extreme ends of the spectrum with respect to what are the characteristics that you have to evaluate as to whether or not the investment is a good one or not. And the nice thing about being on the public side is, because you can get to that level of detail, you get to be right more often.
Daniel Scrivner (00:24:19):
Because you have much more data in your process.
Robert Cantwell (00:24:21):
You get to make fewer investments, and you get to concentrate and do all that good stuff accordingly. So, it's almost like, from the most mature company, if you want, you can just own Berkshire Hathaway in your portfolio probably for the rest of your life and be fine, and as you move earlier and earlier stage, you need to add diversification to the portfolio because there's too many random possible outcomes that can happen to an individual company.
Daniel Scrivner (00:24:43):
Yeah. No, that's a great point. And one of the things, just to, I guess, maybe transition a little bit, maybe this is the moment where we do that, of trying to paint a picture of how you arrived at the portfolio that is Compound King. So, just to, I guess, start off, can you share a little bit about, for anyone that's not familiar, I mean, the name says a lot, but what are you looking for at a meta-level? What's the portfolio that you're trying to put together? And then, the last piece is, I would love it if you could just give a little bit of color on some of the companies in the portfolio, because it's everything from Berkshire Hathaway to some of the latest and greatest kinds of earlier stage technology companies.
Robert Cantwell (00:25:22):
The simplest line on what is a Compound King is, it is a company that is financing itself. So, first off, it's not continuing to tap outside investors for capital, it's either leveraging up assets or generating its own cash flow to fund its own growth. And the second piece of that is, it actually has growth that's interesting to invest into.
Daniel Scrivner (00:25:47):
So, there's places to deploy that capital, maybe to say.
Robert Cantwell (00:25:49):
You got it.
Daniel Scrivner (00:25:49):
Robert Cantwell (00:25:49):
And so, a Compound King is self-sufficient and it has plenty of investment opportunities left. And I like to think of it as, they're actually doing the investing for us. We're along for the ride with their employees and other shareholders in that. And we can, if you want, we can go into more about how we think about the funnel of all the criteria that we work through-
Daniel Scrivner (00:26:10):
We'll get there.
Robert Cantwell (00:26:10):
... in order to get there. But at the simplest level, that's what it is. To your second question about how the portfolio is constructed, it's changed. I mean, in the two years that we've been managing this fund, it's already changed quite a bit. I mean, our top five positions used to be, Stitch Fix, Airbnb, Pinterest, and those companies are far too expensive relative to the type of cash they can generate over the next decade. And we're at a moment where these not quite trillion-dollar companies, but really high market share players with lots of cash, are strangely, one of the only things in the market that have pretty good prices.
Robert Cantwell (00:26:53):
So, we've got, the three at the top right now are, Facebook in the U.S. Facebook is going to have, it's only going to take another five years or so, to get four billion people using some collection of its platforms.
Daniel Scrivner (00:27:09):
The entire planet.
Robert Cantwell (00:27:11):
It's unbelievable, the road of monetization opportunities that they have over an audience of that size. And they're the one, if you ever really want to get into it, they're the one company that satisfies each one of our nuanced criteria on defining a Compound King better than any other business. And remarkably, the price is still good. That's probably the one stock where if you had to put it away and open it up when you have to pay for your kid's college, that's probably the one. The second company is Alibaba. Alibaba has, if you start studying their market share of each of the businesses that they operate in, Alibaba's funny, they're like, "We won't get into an industry unless we can command at least 30% market share." Which is unthinkable for the companies in the U.S. that have to compete against Legacy, we have to compete up against other new entrants.
Robert Cantwell (00:28:02):
Alibaba, with more than a trillion dollars of commerce trickling over all of its platforms, more than the entire e-commerce market in the United States. It's too big of a number for me to even completely comprehend and understand and break into all the possible segments, but it's important enough to understand how they position that business to be able to capture a lot of that. And they've done an incredible job of positioning themselves at the most valuable parts of the chain, payments, advertising and marketing, the marketplace itself. Those are individually extremely valuable companies, for less than 30 times cash flow. The Chinese government's going to pick on them a little bit, fine them for a handful of things. Where we get our news on China's we actually get Chinese periodicals, and we get them translated into English, because the U.S. reporting on Chinese companies is just absolute garbage. It's so heavily politicized.
Robert Cantwell (00:28:54):
You don't actually really know what's happening with the company, you don't really know the conversations that are taking place between the government. You started asking me about companies, so, this is going to really drag on.
Daniel Scrivner (00:29:05):
No, this is great. Keep it up.
Robert Cantwell (00:29:06):
And the third one's Berkshire Hathaway. Berkshire Hathaway is near and dear to my heart. I mean, any investor, even if they don't like them, respects Warren Buffett and what he's done to be extremely deliberate with his decisions, writing an annual letter. Now, people say, "Well, he only writes an annual letter, he doesn't write query letters." He does a lot of press. And that press is an enormous substitute for investor communication. And I'd argue, it's been a much more effective substitute for investor communication than most of the CEOs that are getting on quarterly calls and drilling through stats that no one is listening to. So, he's done a lot of things really intelligently.
Robert Cantwell (00:29:45):
Now, speaking to the business itself, I'm impressed he finally turned the corner on share buybacks. To share an example, Apple, Apple never traded at that great of a multiple, because Steve Jobs wouldn't share any of the cash that Apple generated. They were begging for a dividend, they were begging for share buybacks. And coming up on the end of his time on this beautiful planet, he finally started to open the door a little bit. There was a little bit of dividends, there was a little bit of share buybacks. And it didn't take long. I mean, it was maybe 18 months after, because poor Steve wasn't there to personally wrangle the entire board and tell them what was actually going to happen, and the board was like, "Well, this is a rational thing to do." And they started buying back $20 billion a year of stock.
Robert Cantwell (00:30:34):
And over the last eight years, revenue's up like 60 or 70%, and the stock is up seven or eight times.
Daniel Scrivner (00:30:44):
It's been incredible. Yeah.
Robert Cantwell (00:30:46):
The share repurchase is a very, very powerful thing for companies that have a very steady cash flow generation. And Berkshire is, amazingly, the modern opportunity of that, where, for the first time, he opened the door, he bought back 5% of this. People keep saying he hasn't made a giant acquisition, he made one of the biggest acquisitions of his life. He's turned the corner. I mean, if he's buying back three or 4% of his biz, Berkshire, in one of the most expensive markets in the world, could be one of the only double digit compounders over the next five to 10 years. So, I'm so excited that we get to have Berkshire as a big part of the portfolio, because those are some sleepy businesses that are in there.
Daniel Scrivner (00:31:30):
So, on that one, was it, in your mind, if they weren't in the mode to be purchasing back some of their shares, would you not be interested in the business? Was that something that actually helps you turn the corner and say, "Okay, yes, this now makes sense to be in the portfolio, or at least, it was a nice boost"?
Robert Cantwell (00:31:46):
When we talked on that kind of list of things and creating shareholder values, a very important one down the list, one of the risks, one of the biggest risks to owning Berkshire is, it just continued to accumulate a cash pile. Accumulating a cash pile depresses your return on equity. I mean, it's a very simple law of financial statements. And so, I would say that Berkshire is a very high quality business that I've always been open owning. This feature enables us to own it at a higher concentration than we otherwise would be able to, because of the likelihood of shareholder friendliness in the ensuing decades.
Daniel Scrivner (00:32:25):
I love the way you articulated that, and I love how passionate you are about people actually deploying capital, as opposed to putting it on a balance sheet, which makes a lot of sense, obviously, given your background, but that is not what I typically hear. I typically hear, I don't know, share buybacks are bad, share buybacks or value destructive. And clearly, I mean, just to stop right here for a second, anytime you're deploying capital, whether to an acquisition or anything, there is the chance that you may miss the mark that is all over the place, but that is not at all specific to share buyback. So, I'd love it if you could just expand on your thinking there, just help everyone understand why that is not a bad way to deploy capital. Dispel that idea.
Robert Cantwell (00:33:02):
Sure. This is a little bit more of an open-ended question around balance sheet management and capital deployment. Private equity will teach you, and this is what Steve Schwarzman was one of the most famous for doing is, you don't want any cash on a company's balance sheet, you want as little as humanly possible. Cash is super expensive, it gets inflated away. You want debt. You want to lever it up. You want to give yourself an opportunity to increase your return on equity. So, in the private equity world where they're allergic to cash, they want no cash, they want as much debt as possible, and the minimum amount of cash that it just takes to keep the lights on at the business, because the more debt you have, the more you're increasing the return on equity for the business.
Robert Cantwell (00:33:53):
How a business deploys any excess cash to shareholders is a very difficult decision. And dividends are one of the most inefficient things in the world because you have to pay income taxes on it right away. And shareholder buybacks, the challenge of shareholder buybacks is, companies have turned them on as programs as if they were dividends. And that is dumb because share prices move all over the place. And the best companies are very tactical as to when they're actually, so, again, to use my lovely famous Warren Buffett, he almost to a T, once his shares started trading below about 1.2 times book value, that was when he started the share repurchase game, which for the first time revealed how much Warren thinks his business is actually worth.
Robert Cantwell (00:34:47):
And in this past year, I mean, it was down almost like 1.1 or 1.15 times book value, and that was when you saw the biggest purchase ever. So, there's a whole bunch of benefits as to why share repurchase is good. Number one, it benefits all shareholders equally. You're not sending capital to a preferred stock holder necessarily, or shrinking the capital stock, you're doing the opposite of dilution. For every startup in the world that is so panicked about having to dilute their company as they're raising capital, you understand that share buyback is the opposite of that. It's a really good thing for everyone that continues to own the company.
Robert Cantwell (00:35:23):
The second thing is obviously the tax treatment piece of it, because he's giving you value, or not he, the board of directors, in authorizing the repurchase, and then purchasing it at a price that is below whatever the intrinsic value of the company is, which is difficult to measure. But if you're running the company for long enough, you start to develop a good feel for what the intrinsic value of business is. And so long as you're doing it below intrinsic value, you're delivering actual value to all shareholders in an equivalent manner, all the same time. REITs actually, real estate investment trusts, are a really simple demonstration of this, because they own property, there's a lot of income tax rules where they have to deliver 90% of what they make to shareholders, otherwise, they don't get this beautiful REIT status of not being taxed at the corporate entity.
Robert Cantwell (00:36:09):
And what REITs do is REITs have book value. And if that book value, if they are trading at a premium to their book value, they're like, "Whoa, cool, let's go, let's issue more shares, we're trading at a premium to book value, and then let's go buy more buildings." Because what they're doing is that's a very low cost way of getting capital, because they're able to get capital for more than what their buildings are worth. And if the opposite happens, and you saw a good amount of this during the last year with the pandemic hitting, and people were afraid that no one's going to go into an office ever again, and for the first time, you started to see some commercial office REITs trade at a discount to their book value, which meant, that's the public market saying, "Your buildings are worth less than your balance sheet says they're worth."
Robert Cantwell (00:36:47):
And the REITs are saying, "Well, this is the greatest thing in the world, because now, we don't have to go and buy new buildings anymore, we can just buy our own stock back because we're buying buildings at 20% off." So, I think the real estate example helps frame it in a very tangible way, but then you take that and apply that to how a company with operating earnings, they have the opportunity to do exactly the same thing.
Daniel Scrivner (00:37:09):
Yeah. And I love that. That REIT example, I think, is amazing. Because, yeah, you're right, anytime clearly that you're, and you see this all the time today where a lot of companies whose valuations have never been higher, and CEOs of those companies aren't dumb, they know that they are in a fortunate position and they have this kind of inflated currency with which to go out and purchase other companies. And you're seeing people do that, which makes a ton of sense. And I love that as well too because it helps aluminate, yeah, you're right, the opposite of a share repurchase, where you're taking advantage of where you're priced, and being priced below your value is the exact opposite. It's going out and making acquisitions of things with kind of this inflated capital.
Daniel Scrivner (00:37:49):
Clearly, just from hearing the way that you talk about Berkshire Hathaway, the way you talk about Warren Buffett, I imagine that you appreciate a lot of how he runs that business and how he thinks about the world. Are there other investors that have inspired you? And can you share a little bit of what that looks like for you? Who do you think is doing something interesting? And who have you felt like you've learned from, or at least enjoyed following along and observing?
Robert Cantwell (00:38:12):
For sure, my favorite investors of all time are those that have also built businesses. Warren Buffet is talked about as an investor, but he very much is a founder. He just happens to have acquired the business that he ran. John Malone is a very close second in that same regard. It's confusing, is he an investor? Or, is he a founder? I think that the line is gray enough that it doesn't really matter. Of course, I've mentioned Roger McNamee. I think one of the things that was so great about Roger is, again, being just so focused on product and living with the product. Anytime we'd consider an investment, we always start with the customer.
Robert Cantwell (00:38:54):
So, even if it's insurance, go and buy the insurance. If it's a car, go and test drive the car. If it's solar panels, go and apply for a solar panel installation at your house, go through the process. Would you do it? Pull the trigger. And so, I think, whether or not you are the customer yourself, forcing yourself through the experience and deciding whether or not there's actually any incremental value to you, or just starting to talk to the customers if you're having to deal with the product, say, for example, in energy, where there's upstream and downstream players where I can never be a customer. But you can always get-
Daniel Scrivner (00:39:27):
You're not going to process petroleum?
Robert Cantwell (00:39:30):
All right. You got it. That was way back in the day when we did... I can't believe I'm bringing up the Palm Investment again, that it didn't really turn into anything, but the customer was Sprint, and Verizon, and T-Mobile, and AT&T, they were the ones that were buying the phones, not the end customers, because ultimately, they were going to push whatever phones they needed to push. And so, in those examples, we had to go and talk to the carriers themselves and say we were the customers in that case.
Daniel Scrivner (00:39:55):
I'm super curious if I could ask one more question on that example. Remember that very well when Palm was really popular and the model back then was very different, where today people are buying phones directly, the carriers are effectively financing them, and the end customers are much more the actual customer than the carriers now. But I'm curious, just to go back, what were you discovering in those conversations? Obviously, we all know how Palm turned out, it didn't turn out as successfully as I think some people hoped that it would, but it was successful for a long while. So, clearly, it had a few things going for it. What did you feel like its niche or its value? What were you hearing in those conversations? I just find that fascinating.
Robert Cantwell (00:40:35):
Well, this was pre-iPhone. The iPhone came out in the first half of 2007, and we started looking at the investment in 2005. And we were looking at it and saying, there was actually a surprisingly small number of companies that were competing at... Everyone knew that the smartphone was coming, and you had a very small number of companies actually competing against it. RIM was really fading, and they were really trying... They weren't willing to rip out their keyboard, which was really holding them back. So, you had Palm, you had Apple, and then you had this amorphous thing that was Android, where Google was saying, "We're basically going to open source our software and let anyone build a phone against it."
Robert Cantwell (00:41:14):
And so, Palm, like Apple, were the only players to say, "We're going to take a completely vertically integrated bet on the stack, and that you have to own the whole thing in order to deliver the experience." And when I look back on it, I think a lot about, we had, as a firm, so many things right. The problem was, the investment firm was not set up in such a way to invest in a collection of what were the best opportunities to participate in at the time. So, we were a private equity firm that had a little under $2 billion of capital under management, and was supposed to deploy that into eight private-ish opportunities.
Daniel Scrivner (00:41:51):
Very small number.
Robert Cantwell (00:41:52):
And that meant, not getting to buy common stock. And we could have had a position in Palm, we could have bought a couple hundred million dollars of Apple common stock and not cared about the competition between those two companies. And that was one of the biggest things for me when I got to the point in my career where I could go and do a private equity fund, or do a hedge fund, and none of those were really right for me, because I think that we were far too limited in what you could actually invest in. And we talked a lot about concentration at the beginning of this. As I mentioned, the earlier you are in the formation of an industry, the more companies you have to invest into.
Robert Cantwell (00:42:33):
So, if you had the smartphone insight in 2005, you figure out your portfolio of RIM, Apple, and Palm, and maybe Google, and you stay really close to developments in the industry. And any distribution of securities in that portfolio, well, it turned out great because, Apple, depending on the days that you choose to start to measure, has been one of the greatest investments in the past 15 years.
Daniel Scrivner (00:42:56):
I love that example of, you know directionally this is where it's heading, you don't need to try to be a genius and try to pick the one thing that's going to win, and instead, you can just make probabilistic bets on a handful of those ideas. And it sounds like, in your mind, that's something you do earlier on when the future is unclear, when things are a little bit fuzzier. That's not what you would do when something's a later stage and everything's clearer.
Robert Cantwell (00:43:20):
Daniel Scrivner (00:43:21):
And so, when things are clearer, then you are truly trying to understand the players in a space and determine what one bet to make there.
Robert Cantwell (00:43:29):
Daniel Scrivner (00:43:29):
Yep. That makes a lot of sense.
Robert Cantwell (00:43:30):
Which is usually, it's like, you really only want to own the leader.
Daniel Scrivner (00:43:34):
Robert Cantwell (00:43:34):
And so, the question is, how good is the price on the leader? Is the price good enough that you can own the leader? If not, pick another industry.
Daniel Scrivner (00:43:41):
This is totally a shot in the dark, but is there anywhere else in the world right now, and I'm thinking of things like mRNA and the kind of medical space, there's a bunch of firms I know working on that, and it seems very similar, where it's not as fuzzy, now we're using that, there are a handful of these companies that are out doing this, but is there anything else in your purview that feels smartphone-ish, where you're thinking it makes sense to have a kind of probabilistic series of bets there? Just curious if any of that is showing up on your radar.
Robert Cantwell (00:44:11):
I have two comments on this. One is, I manage Compound Kings, which, if you remember the first criteria is companies that are already funding-
Daniel Scrivner (00:44:20):
There we go.
Robert Cantwell (00:44:20):
... growth. So, this fund that we're running, we certainly have the flexibility to step into opportunities if we see them, but I'm going to make a second point, which is, I believe we're at one of the worst moments in history to invest in innovation.
Daniel Scrivner (00:44:37):
I would love to hear more about that.
Robert Cantwell (00:44:39):
There's two things, it has to do with this concept of investing in technology. Investing in technologies, to me, is not an investment. An investment is putting capital into a business that has a model that is going to generate cash, and then we're going to get to decide what to do with that cash later. Keep making the company bigger or return to shareholders, whatever. Technology is a tool that business will use along the way to pursue market opportunities and do things. But to call technology an investment, you'd have to be like a patent investor, where literally, your job is either pursuing lawsuits against people that you think are touching your patent without paying you a license, or you're actually in the business of selling physical technology, which obviously Apple does a lot of that, selling productivity devices and things like that.
Robert Cantwell (00:45:26):
So, what does that mean? Or why I think right now is the worst moment in time to invest in innovation is because just because there is innovation happening, it doesn't mean there are great investment opportunities against said innovation. So, using the internet as a really loose example. In the early 90s, all the communication companies were talking about it. AT&T is like, "Yep, the internet is going to come. We're going to figure it out. It's going to make our existing business even better and bigger." And then AOL comes along and they're like, "Well, AT$T you didn't figure it out, but we figured out a way to do it over your phone lines through this comically sounding dial up modem."
Robert Cantwell (00:46:06):
And for a period of time, it's like, "Oh my God, AOL is the way to get on the internet. Look at this. What is this going to do?" And then AOL had a relatively short life and it wasn't until Google said, "well, hold on, we're going to index a bunch of information on the web." Facebook said, "Well, what we're going to do is we're going to create a really seamless way for people to contribute content. And we're going to build this totally modern form of media channels." And media networks, "Well, that's a good business model." And no one at the dawn of the internet said, "Oh, the internet is going to develop these cable TV like channels that sort of carve out their niches and then do the same thing of having content and having viewers, and then monetizing it through advertising."
Robert Cantwell (00:46:46):
That wasn't in anybody's mind. So, I see that now happening where there's folks out there that are saying, "We have more new technology things than ever before. The world is all of a sudden changing faster than it's ever changed before." I think that is really dangerous thinking. And now obviously, I'm a bit of a later stage investor, but I am more than happy as I mentioned back when we were talking about the specs to just patiently sit around, wait for some good business models to actually be architected around the use cases for some of these technology scenarios. So, and the prices just got awful. So that's why I'm a little bit on the sidelines there.
Daniel Scrivner (00:47:34):
They love that again, super interesting differentiated point of view, just to try to expand on that for a second, maybe one way of thinking about it is all this talk about, I don't know, technology is almost a way of just saying the total addressable market is getting larger or the constellation or the universe of these companies is getting larger, but it's not saying that there are clear winners yet. And it sounds like in your mind, it's like you don't about that. It doesn't matter about numbers you are looking for, again, you go down that checklist and yeah, I would totally agree with you, especially thinking over the last year, there are very few companies that have come public that have met any of those criteria that you listed to be in the fund.
Daniel Scrivner (00:48:08):
And so, it sounds like, yeah, directionally, you don't disagree, but clearly that's not at a point where you're going to invest in those because you're not comfortable with evaluations and you're not comfortable with the business model.
Robert Cantwell (00:48:20):
And now that I've been a curmudgeon, I will share a couple of things that I am in fact excited about. I think Blockchain is going to do some really cool shit. And we're at a moment where I think there's some confusion because Blockchain gets muddled with Bitcoin and those are two totally different things. Bitcoin just happens to be a thing that is taking advantage of this thing that is Blockchain. There's going to be a whole bunch of other things that take advantage of Blockchain. So, two examples of young companies that I think have the potential to change what our future like are certainly Coinbase. And then even a company like Apex Clearing, Apex Clearing is going public through SPAC and STB. And again, it's too expensive to participate in the company today, but for all this like babble about, "Oh, is Robin hood worth a lot of money?"
Robert Cantwell (00:49:10):
Here comes public.com. Wait a second. What about Futu and a FinTech holding, Tiger Brokers, over here in Asia and brokerages are famously bad business to invest in. We had the same thing happen in the late 90s. And you've seen a history of mergers and acquisitions and divestitures and shutdowns because brokerages are often these leverageable ways of playing market cycles. So, the very worst moment to invest in a brokerage is when the market is its busiest. So, I have a little worried about people that are helping bail out in a Robin hood and stuff at the moment, but Apex they're one of the value investors always say, "I want to sell the pickaxes to the gold miners." I don't care how many brokerages there are. I'm enabling them to exist because I enable account opening and I enable security clear-
Daniel Scrivner (00:50:04):
Robert Cantwell (00:50:05):
Which all of them need. So, I think those are two companies that, again, and then in the Coinbase example of, I think Ray Dalio said it really nicely, which is Bitcoin is an option on a potential store of value in the future. But only time will tell us if it is in fact the next gold or not. And Coinbase again, it is simply the best platform for owning or trading or moving cryptocurrencies. And so as an investor, I'd love to see the entire stock market move to Blockchain. Market hours are sort of a very bizarre thing. Like market prices really do move all the time even if the market is not open, that's why we have these openings where it's like the market up or down. And it's like, the valuations are always moving. And I hope that's one of the big learnings with something like bitcoin, is that you can actually have securities trade 24 by seven and the world does not crumble.
Daniel Scrivner (00:50:59):
Yes. And it trades 24/7 around the globe in all of the different exchanges that exist and yeah. That you can do that and it's not crazy. And it actually kind of works.
Robert Cantwell (00:51:08):
Hey, if I'm the CFO of Facebook, you better believe I'd love for my stock to be trading 24 by seven around the world. You've taken my liquidity from, I forget if they're on the NASDAQ or New York Stock Exchange, you've taken my liquidity from one domestic stock exchange that operates a strangely short workweek to global all the time. Anyone could participate, they can do their own research and decide to participate or not in the growth of business.
Daniel Scrivner (00:51:32):
Yeah. I love that point of view. I've been scribbling down notes the whole time, and I have to come back to one thing you said a little while ago that connects to your background as an investor and an operator. And you brought up John Malone and I would think most people listening, I'm sure know who John Malone is. Maybe we can give a little bit of color there, but you said one point, which is people look at someone like John Malone, someone like Warren Buffett and I kind of asked the question, are they investors, or are they an operator? And it really is this blend. And I've been thinking a lot because I think that's interesting of, what are the superpowers that someone can bring to the table if they have some competency as an investor and they have some competency as an operator?
Daniel Scrivner (00:52:13):
Do you have any thoughts there thinking specifically about someone like John Malone or Warren Buffett about how that's fundamentally a little bit different than somebody who is just a pure operator, just entrepreneur?
Robert Cantwell (00:52:24):
It's a really great way to ask the question, because I think the best investors are operators and the best operators are investors. And so, if you think about, what is an operator's job? CEO is not a great job because you've got a board that's saying, "We've got all these investors. We've all picked this goal, CEO, go do it." And then the CEO's job is like, "Well, I got to figure out who are the people that are going to do it? How much money do I need to do it? Do I have the resources to achieve the goal that I have single-handedly been asked to deliver to the board? So, the CEO being the operator in this story, the reason why I think the best operator is an investor is because they are now tasked with, for the smallest amount of resources delivering the biggest possible outcome.
Robert Cantwell (00:53:15):
And I like to think that a lot of people underestimate that companies are making investment decisions at every level of their income statement and cash flow. So, people that they're hiring, the sizes that certain teams are getting, the benefits packages that they're sending out for employees, their brand advertising versus their performance, advertising budgets. Those are all investments. And they're making ROI decisions at every step of the game, in any place that the company is outlying and expense or cash. And then on the reverse of that saying, the best investors are actually operators. I think you'll hear this from, especially within the VC community, because in the VC community, the job is how many deals did we actually see that got done? And how many of those do we participate in? That is an operator's job. That is an operator problem of how do we construct this business in such a way to seal off those deals?
Robert Cantwell (00:54:06):
And then do we have enough capital or do we have the team that was actually able to sneak our way in to participate in it? And at a bigger level, I use the Buffett, I use the Malone examples, as they have built these enormous businesses around this thing that is an investment business. And Warren has done it in his way with a single entity, Berkshire. Malone has done it with this incredibly complicated constellation of tracking stocks in his way. I think if the ETF existed many, many years ago, John Malone, might manage a single ETF because the ETF allows you to move between your businesses without forcing that tax incident immediately on people today. So, I'm getting away from it, but it's investors that build a process because oftentimes [inaudible 00:54:57]investors are like, "What's your biggest idea? What's your biggest conviction?
Robert Cantwell (00:54:59):
And the best investors are like, "That is not the thing that is going to result in me delivering a better than index return for you reliably over time. I will beat the S&P 500 for you over time because we hire well, we have our investment criteria. Everyone follows the plan. When stocks go down, we review the security. When they go up, we review the opportunity." And they have a very defined process around how they manage money and that's repeatable and scalable. And that's what I would say.
Daniel Scrivner (00:55:29):
I had to love that answer. And the piece that really resonated with me, I just wrote it down is investors that build a process. And that's something I'd love to talk about and explore, particularly with Compound Kings and with Upholdings. And you and I talked about this a little bit just before we started recording and the kind of prep call. So, I'm guessing even some of those things—you listed reviewing a security when it goes down, reviewing a security when it goes up are potentially in your process. Can you just go super high level and maybe frame up? And may be a good example would be just focus on one security or and it can be one that's in the portfolio. Now, it can be one that's not, but gives us a sense of how that process kind of plays out from, I guess, seeing something that may be roughly interesting all the way, having it become a part of the portfolio.
Daniel Scrivner (00:56:16):
And we don't have to get super deep into that, but every investor has a process. You're clearly very process-oriented. I'd have to explore that and what that looks like at Upholdings.
Robert Cantwell (00:56:26):
What's cool about investment processes is that there is a wide range to choose from. So, historically, let's call it, the traditional value investor process is reading lot of newspapers, reading books, reading 10Ks just-
Daniel Scrivner (00:56:44):
Robert Cantwell (00:56:46):
And at some point in that reading process, there's something that seems compelling or interesting, or maybe what you're reading the newspaper is misunderstood about the quality of the actual underlying business. And then the value investor just goes insane on that one company and learns everything they possibly can about it. So, we're going to use that as one extreme. I'm going to use quantitative traders on a completely other extreme where they're saying, "I don't care who's running the company. What I do is I have a lot of really smart mathematicians. I've got good engineers and I've got some investment analysts and they're building these models, they're studying what's happening in different markets, they're doing the Ray Dalio thing of understanding what happens in this market.
Robert Cantwell (00:57:31):
How does it affect this thing in a different time zone on the other side of the world? And they're trying to find these diversified trades that they can place. And I'm sure that they have rules or they say, "We want to be running at least a few hundred experiments a year to get to 10 to 15 things that we think are going to work." And it's very quantitative. I think of the process that we run as being kind of somewhere in the middle between those two. So, because we're mostly in the public market, that's a lot of securities to have to potentially consider. One thing we do to narrow down is we say primarily US and China. Now, the company doesn't have to be based here, but the US and China have to be critical end markets to those businesses.
Robert Cantwell (00:58:15):
So, Adyen, Spotify are great examples of non China, non US businesses for whom the United States and probably China are incredibly important to their futures. So, the first thing we do is we narrow the moat a bit with that. And the ways that we borrow from each of those processes is for things that are, let's study, what's happening, country-wide across indexes, across recent IPO's, across stocks that have traded down in the last 12 to 18 months. Those are things that we look at on a repeated basis. So, we have monthly reviews and we have quarterly reviews in which we're scanning changes that are happening, whether those are changes in underlying fundamentals or changes in the stock price. And those sorts of screens create opportunities for us to be able to find the things to then dig and go really deep on. And so that's, then we borrow from the value investor side of it.
Robert Cantwell (00:59:07):
And what's cool about the investing business is you have no idea what you're going to be working on six months from now. I think that's the number one thing that attracts people to this business, is the minds that just it's a pure curiosity business. And they allow the business of investing to pull them in the thing that they're supposed to be spending time on. And that's where I think the value investors, they do get it a bit right, sort of allowing these completely unpredictable confluence of factors to pull them into making an investment. But with all the technology that we have today, I think you have to do both. I think there's just, easy is not a good word for it, but there's enough technology that's out there to be able to build the tools, to keep a bird's eye on everything that's happening.
Robert Cantwell (00:59:52):
So, I think one of the biggest things we do, sorry to ramble on it, is that, it's missed opportunities, which is stocks that have, you look back to the last couple of years, they've completely outperformed. You look back on it and you're like, "Dumb, that thing satisfies all of our investment criteria. Why weren't we a part of it?" And those are often the most valuable things because you then change your investment process. You're like, "Ah, here's the thing that was broken. We had this cashflow screening trigger that was needlessly punishing stock-based compensation. And when a company's IPO is becoming a mess, that's why we missed these. And it could be something that dumb and that small, but now our tools are more powerful.
Daniel Scrivner (01:00:38):
I love that bit about one tracks right back to the whole concept of investors that operate from a process. And if you have a process, you have something that's repeatable, you have something that is a machine and you can go and work on that machine and tweak that machine and be able to get different results out the other side, which makes a ton of sense. And it makes a lot of sense in the context of your portfolio. One thing is I'd love just to drill down a little bit further on, you had one example there, Adyen, and we've talked about a little bit earlier, just how much people misunderstand the Chinese market, how much people misunderstand Chinese technology companies. Does your process... And I know you even mentioned earlier, looking at local periodicals from China and getting them translated as a way to get more of that route more correct information. Talk a little bit about, how does that process look slightly different if it's a Chinese company versus a US company?
Daniel Scrivner (01:01:28):
And just generally what people miss there, because I do think, I love seeing that there's so many of those in your portfolio. And I similarly agree. I think a lot of people just have very wrong ideas about Chinese companies in general.
Robert Cantwell (01:01:40):
It's funny. James Anderson over at Baillie Gifford made a comment recently about how it just surprises him over the negativity that Americans have towards Chinese businesses. He's like, in some cases they're building better companies. It's funny to hear that from someone that lives in a completely different country having that perspective of these two countries competing against each other. One of the big experiences for me was when everyone was growing really fast, we recently crossed 50 to $75 million of revenue. And we were exploring whether or not we were going to open more physical stores in the US or lean more into growing internationally. And I went with a member of my team and we spent a couple of weeks in China meeting with a number of different potential distribution partners because we certainly weren't going to do it ourselves.
Robert Cantwell (01:02:26):
And we spent a lot of time with Alibaba. We went really deep with them. They made all kinds of proposals about running our business there. And it's a funny way they operate their business because what they'll do is, it's true, they open up that market to you. They run all the logistics, they make it really easy. They'll do some early marketing stuff to promote and get the brand out there. But then if you want your brand to ever be seen ever again, you have to pay an enormous amount of money to prioritize your brand or your product inside any of the Alibaba services. That was one of the huge light bulbs going off. And I'm like, "Oh my God, they have built a better business than a marketplace because it's not just a marketplace, it's an advertising platform."
Robert Cantwell (01:03:09):
And for them to be that dominant, they never call themselves by the way, an advertising platform. But that's absolutely what they are. That's why their cash flow margins are so much better than just a simple marketplace. That's why they've thrived so far beyond anything that eBay has ever accomplished. So, I got to see something like that. And I was like, "Ooh, okay. They have the ability to construct business models that are even better than some of the business models we're paying attention to in the US. Let's pay really close attention to the other ones." In general, because there's not quite as many companies to choose from as there are in the US but that's going to change over the next few decades.
Robert Cantwell (01:03:50):
They have this new star market, which is mostly biotech and healthcare companies, but that's going to keep opening up the doors for other businesses to look at in the future. My challenge with a lot of the companies that are currently growing very quickly there at the moment is their heavy, heavy reliance on marketing. I've never liked having to make the bet that a company is going to scale its margins because marketing is going to get better over time. I've always made the bet that product is the thing that can scale. So, I tend to avoid opportunities, even like pin Dodo that are heavily reliant on using, because that marketing hides a lot of shit.
Robert Cantwell (01:04:27):
It hides how much they're discounting their products because that's where promotional stuff goes. It hides how much they're paying to bring new customers onto their platforms. And I don't know, I haven't seen it. I haven't seen that marketing is a thing that scales when it's your biggest expense item, the product should be so good that the market is there to enhance, not drive your revenue.
Daniel Scrivner (01:04:49):
No, I think that makes a lot of sense. And just to build on top of that, one way that I think about kind of advertising and marketing is, it's almost like an anti-gravity machine. It hides the true underlying fundamentals of the business because it just adds a nice sheen. Everything looks better. The number of customers that are coming in looks better, the number of people that are trying your product looks better. And yeah, typically if you shut that off and I've seen this in a private business and it was super eye opening for me to just see how different the metrics and the fundamentals look when we had advertising and marketing really ramped up and we had it off.
Daniel Scrivner (01:05:19):
And in my mind, the way that kind of equates is when you shut off advertising and marketing, what you're seeing is the true steady state of the business. And then on top of that, you can layer on top kind of marketing and advertising. But to your point, I think it's a great point. It does hide a lot there.
Robert Cantwell (01:05:35):
By the way, that's one of the scariest things about the market that we are currently participating in. The share prices of companies that are not yet generating cash flow have outperformed at a level not seen for a very long time. And that means that none of these companies are being asked to be rational with how they are acquiring their customers. They're being given at least a temporary get out of jail free card, go ahead, Tesla, raise more money from your shareholders. Now, they technically don't advertise a lot, but I'm sorry. Extra features into cars that are non essential to the function of the car is advertising. Ask any product marketer, features that are used to distinguish your product from other products, but are not essential to generating any cashflow flow to your business, that's marketing and they're lying. So, too many companies because of the valuations that they're trading at, are not going to be forced to cut these marketing budgets yet.
Robert Cantwell (01:06:42):
And that results in the party getting bigger and hotter. And this is where I think, some of the old guys that are complaining and saying, "This next crash is going to be bigger than the last one." They're kind of right, because when you enable schemes like that to build on top of themselves, the eventual crash is a little bit harder, but all that said, but it's important to be participating in the market. People should be buying individual securities, learning all their own lessons. I'm not a don't play or do play, but I think it's important to study very carefully the things that are happening.
Daniel Scrivner (01:07:13):
Yeah and sounds like, to your point there, just to maybe build on that in your mind, you always want to be invested in making it super simple, going back to your point about how it makes no sense. And it's the worst position you can be in to be all in cash. You probably almost never want to be all in cash or super heavily in cash. So, it sounds like your view is, you want to be taking advantage of the opportunities that make sense, but clearly, especially in a market like we have now in the back of your mind, that voice is very loud. Just being mindful of what's actually happening and trying to, I guess, position yourself in the most ideal way.
Robert Cantwell (01:07:43):
I don't think Berkshire Hathaway is going to be a top three position for Compound Kings for most of its life.
Daniel Scrivner (01:07:53):
That makes sense.
Robert Cantwell (01:07:54):
Berkshire outperformed the S&P 500 by 50 or 60% in three years, four years, five years following the '98, '99 tech bubble. And it's a rare moment in time when a company that big and that diversified can actually potentially outperform an index of that size.
Daniel Scrivner (01:08:10):
I would love to explore a little bit of that decision because you mentioned earlier that clearly was not in the portfolio, was not a top three position and you made a very intentional decision to take some of these very high valuation, low cash flow generation companies and swap them out for companies that you saw in a more advent... Was that like, I guess to walk that back a little bit, how does something like that evolve? Is it something where you have a suspicion, then you're playing that out? And then is there an impetus where you're like, okay, here we go?
Robert Cantwell (01:08:38):
So, this is where you have to rely on the process because if you rely on yourself, you're going to make bad decisions. An investor can very quickly turn on a company and then want to dump the whole thing. But that is almost never the right thing. The only situation in which it's like a drop the whole thing immediately is if somebody broke the law or there was something that you just got completely duped on. But normally building a security takes time, exiting a security takes time. And that way you're also being careful to not overly rely on just one brain to do it anyway. So, your question is about what happens when securities are moving up or moving down quite a bit on you and how does one have an investment process that helps you exit security and enter another?
Robert Cantwell (01:09:24):
So, I'll use an example. Pinterest is a great one. We started acquiring shares of Pinterest. First one, it was training and kind of in the low 20s. We started doing some interesting research on it because social networks are great companies. Pinterest was doing a few things, they had under monetized their international customers, but actually were doing a decent job in the US. And so just from an execution standpoint, all the company had to do was, for a moment in time, all they had to do was do better on international and they justified their share price. And then you have sort of the opportunity on top of that, which is, well, if they really keep executing, because they've only recently built their own self-serve ad platform, hey, they're not going to become the next Facebook or Instagram, but they can sure make Twitter look stupid for not having figured it out.
Robert Cantwell (01:10:15):
And they're building in their own independent meeting network and things like that. So, and then, during the coronavirus thing the stock is now falling below $20. There was nothing about the coronavirus at the time that led us to believe that the long-term opportunity for Pinterest had changed and we bought a lot more. And then in the months that followed, it was one of the COVID winners and the stock we had four to five times return on our investment in less than 12 months. And then you have to ask yourself the question, "Well, has the circumstances changed that the market opportunity for this business is now four to five times larger than we estimated it as recently as a year ago?"
Robert Cantwell (01:11:10):
And we did the work, we spoke to experts that have built businesses like this, and we could not find a way to pump our numbers enough in the future to get to a point to justify the price. And it's very rare to sell a company on valuation that you usually kind of want that to be the last thing that you do because at a minimum, you at least wait it out until the company itself hits its first wall because they often will keep growing and growing and growing until they get there. But that was a good example, we got to extremes. That was on the selling side. So, on the buying side, and this is where the screens come in, which is when you're in a market where most things are going up and in particular, it's a lot of like the questionable business models that you'd screen through some of them and those are the ones going up the most, and that makes it kind of fishy.
Robert Cantwell (01:11:59):
And we're just studying well, which stock prices haven't gone up a lot. And there's a bunch of, it's not a bunch of energy companies on there, energy has been a particularly difficult category for investors over the past few years, a bunch of insurance businesses. And because of the increasing catastrophes that have been happening in the US insurance companies are a little bit like investment banks, they're not that transparent about their liabilities. So, it's difficult as an investor to really know. And funnily enough, insurance and energy look at Berkshire Hathaway sitting there. And so they were sort of the victim of these things that were affecting 40%, 50% of their business.
Robert Cantwell (01:12:43):
And I mean, you talk about the market share, the quality of the team, the sustainability of cash flow in the future opportunity for other investments that they've made to appreciate. And as I mentioned earlier, they were trading at the cheapest price to book in a very, very, very long time for that company. So, that was a very unique moment to get to, like I said, I don't need to go into Berkshire again but not talking about it.
Daniel Scrivner (01:13:13):
I'd be okay with it, but you're right. I think we've, we've talked about it a good amount. So, we can keep it there. I want to ask one more question and then we can start moving into some closing questions, but just knowing from chatting with you before, and this has been an amazing conversation just to see how you see the world and what your process looks like. And it's been fascinating. So, I want to explore a little bit of what the process looked like for you getting to the thesis of what Compound Kings was going to be? What was that criteria, those three things? And I'm not expecting that there's a light bulb moment where you just suddenly had the aha. It seems like the accumulation of everything you've learned.
Daniel Scrivner (01:13:50):
I mean, to be super honest, it seems like the accumulation of everything you've learned over the course of your career now applied to investing in this, really wonderful combination, but can you talk a little bit or share some of the origin story of how you get to a thesis that you're like, "This is it, this is what I want to be doing"
Robert Cantwell (01:14:07):
Well, the first thing I have to say is I'm building an investment company. Upholdings is an investment company, and I'm not going to be in the investment business very long if the first fund that I am operating is not a reliable place for investors to get to participate. And all of the investment strategies out there, high market share, cashflow compounders at attractive prices, over long periods of time has time and time again, been one of the best ways to outperform the S&P. Every investor's goal is how do I take less risk and get higher return? And when you're focused on a company, some of it has to do with building the business. There are other funds that I am very interested about assembling, but I've been running this fund for two years. That's a relatively short period of time. Their performance so far, we're fortunate.
Robert Cantwell (01:15:07):
The intent at the beginning was let's start the fund and let's double the fund from a performance standpoint in the first five years, that'll be good enough, more than double than the first two years. And a lot of that has to do with a lot of the things going on in the market, but it's our responsibility now not to blow that. And we continue to benchmark, and this is what I love about having a benchmark is the S&P very well could go down and we've very may well could be dragged down with it. But our responsibility as investors is to either be positioned where we're not going to go down as much as it goes down, or when there are moments of reprieve that were significantly outperforming what the S&P is doing.
Robert Cantwell (01:15:48):
And we're not going to get either of those exactly right every time that the market moves in either one of those directions. But if we're following our investment process and we're being really diligent about the prices that we're paying, that performance compounds. And that's why, like I said, Compound Kings is really the flagship vehicle for Upholdings. And so long as we prove that we can build an investment process around a single fund, we then earn the right to get to do additional funds later on.
Daniel Scrivner (01:16:14):
You earn the right to take more risk. That's one of my favorite little, I don't know, euphemisms. Can you share a little bit, you talked about it right there at the beginning of, help us understand, or I guess have a little bit of an inkling of what you're after building with Upholdings. So, clearly it's an investment company. It's got one ETF today. What is your goal for where this is kind of heading? And can you share, and it's totally okay if you can't, but can you share even directionally the stuff you're interested in and stuff we may see you explore in the future?
Robert Cantwell (01:16:45):
I really like Jack Bogle. I didn't mention him as one of the inspirational examples, but Vanguard is a business and Jack Bogle built one of the coolest businesses. And he had a saying, which I'll borrow from a little bit, which is if I had to stamp Upholdings mission at this moment, I would say to sustainably deliver financial achievement to real life investors. And that means that I'm not investing on behalf of institutions or intermediaries, I'm investing on behalf of the individual who is placing her, his capital with us. And that's purely what the business is setting out to do. Now, what the product roadmap looks like, it's just the fun part is, it's Compound Kings for the next five years, and I think that's what's realistic. We're going to be experimenting with others.
Robert Cantwell (01:17:52):
To use Compound Kings as an example, we're able to invest up to 15% of the fund in private opportunities, which means we can participate in late stage pre-IPO growth companies, which is a opportunity that is hardly available to most individual investors and part of the reason why the SPAC craze is getting such enormous pricing. That is an area that I'm most interested in experimenting with, because I think there's the most opportunity. If you think about it from a business perspective of how many investors are participating in that market and how much opportunity is there, there are not a lot of investors. There's an increasing number, venture firms are trying to go later, public firms are trying to go earlier, but it's still a relatively small set of companies that you still see getting those same pre-IPO deals.
Robert Cantwell (01:18:35):
So, I think that tells you that the pricing is probably not right, because there's not enough investors participating in it. And then the second side of it is, we're going to be helping open up this category that individuals are having a hard time accessing. So, I'd say that's the area that I think about the most.
Daniel Scrivner (01:18:52):
Yeah. I love that. I love as you touched on it, and I'm sorry, I didn't bring that up earlier, but was that easy to get into the mandate for the ETF? Because I don't feel like that's very common. So, can you talk a little bit about that?
Robert Cantwell (01:19:03):
Fun question. Fun question. From my one experience now of dealing with the SEC, I am impressed. It did not feel like dealing with government bureaucrats. They ask great questions. They obviously didn't stop us from being the first to take a hedge fund and put it into an ETF. And we had to do tons of audits, to prove to them that this newcomer wasn't lying about anything. So, the private security thing that was a sort of a dream. And it was something I wanted to do. And all the lawyers and everyone I was working with said, "Hey, Robert, calm down. Let's get this ETF into the market. And a year or two later, you've established some credibility you can go back to the SEC and then we'll figure it out. But right now there's not a prospectus sitting out there that has this in it for an equity ETF. You're trying to bite off too many things at once."
Robert Cantwell (01:19:48):
And I was like, "Okay, okay, okay." And then in the process, we're going through with the SEC, the SEC goes, "Hey, so first off, we're cool because you're bringing all of your assets, you're bringing all of your investors and you're bringing your track record into this new ETF. Like that's great. It's a clean deal. Same before, same after just different legal vehicle." And we're like, "Yeah, but there's a problem. We'd been buying some of this Airbnb stock in private markets and it was part of our fun. And we don't want to toy with ETF, which is this perfectly publicly traded thing. So, we're going to take this private security and we're going to put it to the side."
Robert Cantwell (01:20:27):
And the sec goes, "We can't do that." And we're like, "Well, why?" And they go, "You're manipulating your track record." And we said, "You're right." And they go, "You're going to have to bring it into the ETF." And we said, "Cool." So, our perspective is, you can invest up to 15% of the fund and the liquid securities and mutual funds have had this forever. They haven't taken advantage of it for investors like they ought to, but now we've got it. It's a feature that's been built into our fund, we're going to be very careful and deliberate with it. We're at a $10 million fund today, we're going to be careful about locking up investor capital in a place that's very illiquid, but excited to have the flexibility.
Daniel Scrivner (01:21:09):
Yeah. I mean, it's amazing. And clearly you have that competency, you have access to that part of the asset class. And I love how much that ties into what you're trying to do with Upholdings, and I am right there with you where I think that by and large, everyone deserves the right to be able to have some exposure there. They can't because of things like accreditation laws, which I don't think are necessarily bad, but I love that by investing in this vehicle, they can get some exposure to that, by someone that's able to access that asset class. So, I think that's incredible. I want to start asking a couple closing questions and one of those was you and I talked a lot before this interview just about retail investors versus institutional investors.
Daniel Scrivner (01:21:49):
And given the mission of Upholdings in that, either you're trying to clearly build just an incredible vehicle for everyone to access with low fees, that's run incredibly well. Do you have advice or any words of wisdom or any thoughts that you would want to share with the investor out there that's excited about what you're building, sees all these interesting opportunities and really likes what you're doing with Compound Kings?
Robert Cantwell (01:22:12):
Investing is a really cool thing that everyone gets to participate in and have their own journey. And there's obviously tons of other investors that I read about and learned from along the way. And I think the best thing you can get from studying other investors is studying the mistakes they've made. And then step one, try not to repeat those mistakes, make new mistakes. And so I'd say maybe the most common one just to get it out of the gates early is because I do think people should pick their own stocks and live with consequences and learn about it. On the other hand, I think they should also be studying intently what investment managers are doing and understand how investment management itself is a job. And it takes a remarkable amount of time to actually get to picking the security, managing the security well.
Robert Cantwell (01:23:00):
So, I like to think of it as, in areas in which you are an expert, you're probably pretty good at picking stocks. And in areas in which you are not, someone might get lucky, but that's usually a recipe for disaster. But what I find is that, you don't own a stock when it goes down and you feel like you need to sell it because people that know their stocks, see the stock go down and they get greedy. If you're not getting greedy, you don't know the stock well enough. And if you don't know the stock well enough, you're probably not the one to be picking it.
Daniel Scrivner (01:23:39):
Invest where you have conviction, where you have insight and where you don't be self-aware, which I think is a great lesson. And that's something that I've definitely appreciated studying investment managers is, I feel like the best ones have a lot of self-awareness. They really know where they are strong. And I think they have a great sense of where they aren't. One question that we ask everybody on the show is, if there's a person or experience, that's had a dramatic impact on your life if you can share that with us. And this can be, it's just something that shaped who you are today, something that you carry with you and something we can pass on to the people listening.
Robert Cantwell (01:24:13):
Mine's a weird one.
Daniel Scrivner (01:24:16):
The best ones are.
Robert Cantwell (01:24:18):
This happened shortly after I graduated from high school, a friend of mine, because I lived in Indiana and I went to school in Chicago. And so, I had these long distance friendships. The nice friends would come all the way out to Indiana and visit me. And so I was driving my good friend, Richard, back to the commuter rail and he was headed back into the city and there was a set of freight train tracks we had to cross before we got there. And this was semi-rural Indiana so there's no crossing gates or anything. And I was parallel to the train tracks. And there was a train coming, it was coming at us and we're waiting it out (so I was told) and the train finishes, and I had my big 1992 Black Buick Park Avenue. We take a left turn across the train tracks.
Robert Cantwell (01:25:09):
And at that exact moment, there was a train coming from the other direction. And I was in the driver's seat in that giant fork shovel that's in the front of a 30 car train wedges itself into the Buick Park Avenue ultra and pushes it and pushes it and pushes it. And the car rolls for three blocks until the train is able to come to a stop. And as the story was told to me later, there was a volunteer firefighter that was over on the commercial commuter rail track waiting platform that saw it. It was immediately able to get the jaws of life to the scene. They ripped the top off the car. They get me to a hospital in a reasonably short amount of time and two and a half to three and a half days later, I regained consciousness.
Robert Cantwell (01:26:01):
I'm not in any pain and there's a six inch scar in the back of my skull from where they sewed some things back together. That's a very dramatic story that has absolutely nothing to do with investing, except that it's something that literally never escapes my head. And for whatever reason, I draw an immense amount of courage from this experience because you don't get to cheat death. And that was lucky. And I feel that I have treated life both more precious as well as more opportunistically as a result of that, because you only get one shot at this. So, I'm only spending time on things that I think are worthy of spending time on. And I don't know, it's such a weird thing to get a lot of inspiration from.
Daniel Scrivner (01:26:49):
No. I mean, it's a remarkable story. Thank you so much for opening it up and sharing with us. And I think there's a lot of ways it connects to what you're doing today and what you're doing is incredibly mission driven. You're clearly extremely passionate about the business that you're building and in what you're doing. To transition one last question for anyone that's listening that wants to connect with you wants to become a shareholder, where can people go to find out more about you more about Upholdings and Compound Kings?
Robert Cantwell (01:27:16):
Sure. The easiest is upholdings.com. We're new. So, our web presence is pretty clean. Don't be shy about sending us an email, send me an email. Robert@upholdings, we've got a Twitter. We're still testing it out. But yeah, send me an email.
Daniel Scrivner (01:27:32):
I hope that your tweets are literally just tests. Just sending them into the ether, waiting until you get some information back.
Robert Cantwell (01:27:40):
Look, there are a lot of people that are really good at it. And so, we're coming in with a lot of appreciation for how good so many other people are. And there's an aspect of it when you think about your business, which is, do I have something to add here that is better than everyone else is already getting and maybe we'll find out.
Daniel Scrivner (01:27:59):
Time will tell. Thank you so much for your time. Thanks for sharing all the stories with us that you've done today. This has been an incredible episode, an incredible conversation. Thank you so much, Robert.
Robert Cantwell (01:28:09):
Daniel, I will tell you, it is very intimidating having to answer questions from another investor and you were very patient with me. So, thank you so much.
Daniel Scrivner (01:28:17):
Yeah, that was amazing. Thank you so much.
On Outliers, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. Explore all episodes of Outliers, be the first to hear about new episodes, and subscribe on your favorite podcast platform.
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