[00:02:00] Clay Finck: Truly, I really appreciate having the opportunity to have you on. I’ve had a chance to listen to a lot of your talks, read your letters, and had a lot of fun diving into your portfolio holdings and finding some new names. So I’d like to start this conversation by asking you to tell the story of your father who wasn’t a big saver.

[00:02:17] Clay Finck: He wasn’t a big investor, but he ended up investing in an IPO in 1992. So please tell the story of how this came about, how it played out for him and the lessons you drew from that. 

[00:02:29] Shree Viswanathan: Absolutely. Also, before I get started, I do want to thank my friend, Chris Mayer. I believe he’s the one who. Record White AMTU, I play.

[00:02:37] Shree Viswanathan: In any case, thanks to Chris as well. So basically, the backstory to my father’s investment. I’m originally from India. I came here as a student and forgot to buy a return ticket back home. I’m an American citizen, given that both my wife and I have extensive family connections. Back there, we keep going back to India regularly.

[00:02:57] Shree Viswanathan: So earlier this year I was in India, when one of my brothers asked me to sign some papers to transfer my father’s stock certificates into digital format. I was quite surprised by this. First, my father who worked for a large oil company in India before retiring comfortably in 1991 was not a big saver.

[00:03:17] Shree Viswanathan: Second, investing in the stock market was not only considered frivolous, but was also frowned upon, at least within our family. Ever since that trip, I’ve been trying to piece the past together, but I think this is what happened. So immediately after his retirement, one of his friends had urged him to submit an application for some shares in the IPO of this company called Kontak Mahindra, an Indian bank.

[00:03:43] Shree Viswanathan: He reluctantly submitted one for 10, 000 rupees, which is. Approximately $400 adjusted for FX back in the early nineties, and 1992 was the full first year after the deployment of this big bank economic reforms that then finance minister Dr. Lamo on Singh. So India was just beginning to break away from the of socialism, and Kotak was growing at breakneck speed for which it needed capital.

[00:04:12] Shree Viswanathan: So against this background in 92, Kodak announced its IPO and because of high demand for its shares, Not all individuals got what they wanted, what they asked for. In fact, the friend who had urged my father to submit his application, he didn’t get any. The most interesting part of this backstory is not that my father got his allotment or what he did after, which is.

[00:04:35] Shree Viswanathan: Absolutely nothing. So soon after he got the shares, my parents were visiting me here in Chicago. And typically when Indian parents visit their kids in the U. S., they’d come for an extended stay, and they were here for more than three months. So I think this time lag helped him tap into his natural bias, which is neglect of all things financial.

[00:04:54] Shree Viswanathan: Come to think of it, it may not have been just willful neglect. I think he just forgot about this investment. And this was his first and only attempt at being the Warren Buffett of the Wisconsin plan. He never brought it up with any of us. He passed away in 2008. By the way, by that time, this investment had grown to more than 40X and approximately 28 percent return a year.

[00:05:17] Shree Viswanathan: Since none of us knew about this investment, we couldn’t possibly interfere in the compounding process. This investment continued to balloon carelessly. In 2014, Fidelity Investments here in Boston supposedly reviewed the performance of its customers from. 2003 to 2030 and found that the best returns were from its customers who were either dead or inactive.

[00:05:41] Shree Viswanathan: While some say that such a test was never run, I like this test for the major takeaways. Inactive and dead people have outperformed the law in the long haul. So in my father’s case, he was inactive for the first 16 years and has been dead the last 15. In fact, since his death, This, Linley Nussman has gone up another 12x for a total of well north of 500x since 92.

[00:06:04] Shree Viswanathan: Upon this release of this supposedly fidelity run research, this gentleman, John Rickenthaler, I’m not sure if you’ve come across his name, he writes very extensively on Morningstar. He came out with a very interesting statement. He said, the dead have their own drawbacks. For Don Company and Tions need washing.

[00:06:24] Shree Viswanathan: They’re never wrong as investment mentors, though they have their merit, and I thought that was a fascinating statement from John. But essentially, I take away three major lessons from this first market rewards inactivity, whether it’s a result of willful neglect or sheer abdication, doesn’t matter.

[00:06:44] Shree Viswanathan: Second. The power of compounding takes time to exhibit its phenomenal force, and it’s always back end heavy. I’m sure you’ve read Robert Kirby’s paper on coffee can portfolio, somewhat very similar kind of a concept. And third, I’d say never skip school, particularly when the class is about concentration.

[00:07:03] Shree Viswanathan: Had he added a zero… or a couple of zeros, which he was capable of at that time. My father, the current size of this investment could have been monumental to life on as such. It’s just a merely good sized investment. I think it is bookmarked with some very interesting life renewing lessons. So that’s my.

[00:07:23] Shree Viswanathan: experience with that wonderful episode. 

[00:07:27] Clay Finck: Yeah there’s so many lessons and things to point to there. You mentioned Chris Mayer and we chatted about you need to become comfortable with inactivity and make inactivity your default. I was talking to Chris and talking about he’s always reading, he’s always learning, but from an outsider’s view, it doesn’t look like he’s really doing anything.

[00:07:47] Clay Finck: He’s you have to make a inactivity is a productive. Activity in a way is a way of thinking about it. And it also reminds me of the Peter Lynch quote that the real key to making money in stocks is to not get scared out of them. And people feel like they’re doing something productive when they’re trading in and out of stuff.

[00:08:04] Clay Finck: And I think it’s just such a good reminder to make inactivity our default behavior in the majority, if not most cases. 

[00:08:12] Shree Viswanathan: I totally agree. I absolutely agree. And the same statement is being repeated by. Many other investment solvers Charlie Munger, in his own style, he says, it’s not the trading, it’s not the buying and selling where you make money, it’s the sitting on your back that actually leads to significant returns.

[00:08:30] Shree Viswanathan: And people have their own ways of saying this and exhibiting the eventual result. And it’s evident. This is in my father’s case. He’s not an investor. He’s not even a novice. It’s not something that he was ever interested in. It’s just that he happened to accidentally stumble into an investment that turned out to be a phenomenal success.

[00:08:48] Shree Viswanathan: Yeah, I absolutely agree. Being patient long term is the. Great approach. 

[00:08:54] Clay Finck: Before we turn to talk more about how you invest and how you think about different aspects of your portfolio, I wanted to mention a quote here that I found in your Twitter bio of all places from Ralph Waldo Emerson. It states money often costs too much, and I think this really points to the type of person you are and how deeply you think about the world.

[00:09:14] Clay Finck: So I just want to ask you what this quote means to you and your thoughts around it. 

[00:09:19] Shree Viswanathan: Sure. Actually, I have a four part investment criteria at SVN Capital. Before I deploy capital into any one name, I’m looking for an affirmative answer to these four questions. We can cover the Rest of them later if you want, but the one that’s more relevant to this question is a company run by high quality management team.

[00:09:40] Shree Viswanathan: I have a specific order in which I ask these questions. This is the third question in that order. Management team is an important aspect of my analysis, and I try to look at this, determine this quantity from a variety of angles. Honesty, competency, ownership interest, and compensation and incentive structure.

[00:09:59] Shree Viswanathan: As I was mentally preparing to launch this fund a few years ago, I stumbled on this fabulous essay by Ralph Waldo Emerson titled, Compensation. It was totally not what I was expecting. The tagging caught my attention. It was totally not what I was expecting. It’s a great essay on spirituality. He says everything.

[00:10:19] Shree Viswanathan: comes in twos. A good act and the benefit from the act go together. So is a bad act and its repercussions. They cannot be separated. Essentially, if you do good, you get a credit against your name in Karma National Bank. You do something bad, you’re going to have a debit in your account at some point. So anyway, this led me to explore a little bit about Emerson.

[00:10:41] Shree Viswanathan: I didn’t know much about him at that point. That particular stumble onto this title led me to explore a little bit about Emerson. He’s written a number of essays and one other that I came across was this one called Wealth, and that’s where this particular quote comes from. I don’t claim to understand everything he says in his essays.

[00:11:00] Shree Viswanathan: The spirituality angle resonates well with me. Much of it goes over my head. Or perhaps so much stuff going over my head is probably how I became bald. But that particular quote jumped up because my own decision earlier in my life. With respect to money and how this particular quote resonated well with me.

[00:11:21] Shree Viswanathan: That’s why I had used that as a lead quote in my Twitter account. 

[00:11:25] Clay Finck: When I think about this quote, I often think about a lot of us are showing up to work oftentimes to get a paycheck and to get by day to day. And many of our audience have a family, they have a mortgage they have bills that need to be paid.

[00:11:39] Clay Finck: And I think about someone like you. You’ve probably come to this realization at some point where if you want to have ownership over your time, you’re going to need to own some sort of business and to be able to spend your time however you want, because time is very scarce, whereas money isn’t near as scarce as time.

[00:11:56] Clay Finck: So does this quote tie into that of you wanting to pursue a path of money management?

[00:12:04] Shree Viswanathan: Absolutely. And again, I know for many things in my life and many other investors lives, Buffett is the North Star. If you go back in time, you’ll see that’s how he designed his life. He wanted to have control over his time. There’s a fantastic interview with Charlie Rose.

[00:12:20] Shree Viswanathan: That’s still widely distributed, but he shows us Diary and everything is empty. He keeps his time to himself. But to answer your question specifically, yes, that’s a primary driver. But I wanna tell you something about this other author. There is this fantastic author in India. His name is. Condell Wall the last name is a little bit long, but Vishal, V I S H A L.

[00:12:43] Shree Viswanathan: is the first name. He writes extensively, and he’s written a number of books. There’s a book called The Sketchbook of Wisdom. Fantastic, easy read, phenomenal book. It’s more a coffee table a book. But there’s a chapter in it called Seize The Day, and he says, imagine you have a wonderful friend who deposits $86,400 into your account every morning.

[00:13:06] Shree Viswanathan: This happens daily, 365 days a year. The only condition is that you can’t save that deposit. You must spend it that day and end of the day it goes down to zero. The friend deposits another 86,400 in your account the next day. What would you do with this money that is handed to you every day? And question is, would you think carefully about how you would use this money?

[00:13:30] Shree Viswanathan: Of course, $86,400 and. Day is a lot of money. Now it says replace that dollar with time A day has 86,400 seconds. Again, you can’t save the unused time. It’s gone at the end of the day, but a new time deposit is made to your account. This is a fascinating little example to help think about how to spend your time.

[00:13:53] Shree Viswanathan: I love hanging out with my friends. I love doing these types of. calls, talking to my investors, but most of my time I try to manage it according to my own interests. My own design is entirely mine. Much of my day is spent time reading, thinking, a lot of spiritual pursuit involved in there, and think people wanting to have control over time.

[00:14:17] Shree Viswanathan: And this is a good sort of an example to keep in mind. Steve Jobs has mentioned. A similar kind of an example in his own way. There are many different examples, but this one sort of resonated well. And so I’ve designed my life to suit my style and this particular endeavor, managing SVN Capital, the way I manage it, concentrated, long term, patient, global, allows me to use that time as I find appropriate, that time decay of 86, 400 seconds.

[00:14:47] Shree Viswanathan: I use, I allow it to take at a rate that I’m comfortable with. 

[00:14:52] Clay Finck: I wanted to turn here and shift to one aspect of your fund, which is the global perspective. You had mentioned to me that your portfolio at SVN Capital has not only nine names. Five are in the us. Two in Poland, one in Sweden and then one in France.

[00:15:09] Clay Finck: So having that global perspective is quite important to you, given that four of the nine are outside of the U. S. all in Europe, actually, and you have a very high bar in what can make it into your. portfolio. So I’m curious if you could touch on some of the most important things that investors should understand, maybe they’re based in the US like I am.

[00:15:30] Clay Finck: And then they’re looking to venture out into Europe. They really like some of these businesses. What are some of the hurdles they need to get over before making an investment internationally? 

[00:15:39] Shree Viswanathan: In one sense, I would say it’s the quantity of the people running the company, but that’s just what one sense response.

[00:15:46] Shree Viswanathan: There are many other pieces that. Come into arriving at that point. For me personally, I told you I have this four part investment criteria and they’re always the same, irrespective of where the company is located. us, Europe, Asia, wherever, and it goes in the same order. For instance do I understand the business?

[00:16:05] Shree Viswanathan: Of course that’s the basic question. Second, is it a high quality business? We can dig into that later. Quality is defined both in quantitative terms and in qualitative terms. And then, is it run by an honest, competent management team? Skin of the game, which I’ve already covered. And then, is it a reasonable…

[00:16:25] Shree Viswanathan: To help me focus my efforts in finding these multi bagger opportunities, overlay a few constraints on top of this. Now, we know that accounting is the language of business. I believe being a CPA, having studied accounting at a graduate level, and worked as an accountant for a few years, I think all that sort of helped me understand this language a little bit.

[00:16:46] Shree Viswanathan: So I look for companies that follow either US GAAP, which is only in the United States. or IFRS, International Financial Reporting Standards. But there are more than 110 countries that follow IFRS. So I overlay a couple of other constraints. I want the companies to be filing their financials in English, which completely takes out Japan from my map, for example.

[00:17:11] Shree Viswanathan: Even though it’s a country that’s very attractive, I’m always interested in it. 

[00:17:15] Clay Finck: Why do you have the English requirement given we have things like a Google translator? Surely there’s something more to it than you don’t know Japanese and such. 

[00:17:25] Shree Viswanathan: Yeah. So I think that’s a great question. Given the kind of the type of investments I make and the time period that I invest for one of my Primary criteria is to try and understand the management team wanna be able to have the conversations with them, understand what they’re saying.

[00:17:43] Shree Viswanathan: Of course, there are tools like Google Translate that will allow me to translate a few things, but Google Translate also has its own constraints. There’s only a certain amount that you can translate at one time. And in fact, I can use Japan as an example. I’ve been interested in this country, it’s a phenomenal opportunity, and a few years ago, I actually looked at a few companies, picked one, and I hired a translator to actually have this conversation with the management team for me.

[00:18:12] Shree Viswanathan: I sent all the questions. It was an expensive ordeal, but I wanted to go through the motions and see if this is something that I can push forward. So I actually hired this translator. She was very helpful. She was fluent in English. She’s a Japanese lady. And we went back and forth a few times with the management team.

[00:18:30] Shree Viswanathan: Both the management team and this translator were quite supportive of this whole effort of extending the time horizon by the number of conversations and the time that they were spending. Eventually, I had her translate a few documents, not all of them, and eventually I asked the question of whether there would be any kind of a document that the company will file in Japanese that cannot be seen.

[00:18:54] Shree Viswanathan: That I will not be able to understand or I will not be able to access. This particular company said yes. And that was the end of my journey on that front. Long story short, I want the companies to be in English because I want to understand who they are. Now, here we are. on a zoom call, even though you’re, I’m in Chicago, you’re in Lincoln, Nebraska.

[00:19:15] Shree Viswanathan: I can understand you. You can understand me. Even this conversation is a little less efficient than meeting face to face. Me being able to see the black of your eye and you in the reverse will give us a lot more information than is evident even in this conversation. So when you have. A situation like what I described, I think, I personally think, for my efforts, there is no one right way to do all these things, right?

[00:19:42] Shree Viswanathan: Yeah, we know, for example, Buffett is invested in these five large Japanese trading companies. He’s been invested in other investments in Japan before. I am not sure what his criteria is. This is how I have designed my life. I want to be able to remain comfortable when I deploy my capital, my investor’s capital, say that I know what I’m investing this into.

[00:20:05] Shree Viswanathan: Those constraints limit me down to a few. And the third constraint that I did not finish up was, I want to be personally comfortable with the local governance. Loss the IP loss. So that sort of takes away any country that has expropriate, private property, much of South America, many other Asian countries for that matter.

[00:20:26] Shree Viswanathan: I personally want to be comfortable and there are many other countries that I’m currently not interested in invested in that have notated private. Not yet, at least, but I just don’t have any edge in those countries. And so I stay away from them. So that’s why I have limited myself to North America, Western Europe, and I’m increasingly looking at India, which I’m sure will come up in our conversation later today.

[00:20:52] Clay Finck: Yeah, let’s turn to that. Actually, you were born in India and presumably you would be able to get more comfortable. with maybe some companies there rather than say a Japanese company. Do you expect your portfolio to eventually expand to India? And where are you at on in that research process?

[00:21:11] Shree Viswanathan: Yes, I’m very interested in the Indian market and I’m actively working on a few companies. By the way, I’m not legally able to start trading in India at this point. And though I’m from India, I’m an American citizen and the local equivalent of SEC. It’s called SEBI, Securities Exchange Board of India has certain constraints, regulations, many hoops that I need to jog through before I can get approved for trading in India.

[00:21:38] Shree Viswanathan: Going through that process at this point, but not there yet. They tell me I’m just a couple of weeks away, be that as it may. I’m interested in this country and working on a few, but no, I don’t have to necessarily add a new name to the portfolio at this point. I have nine names. It doesn’t have to be India per se, just happens to be what I’m working on.

[00:21:58] Shree Viswanathan: But yeah, I’m constantly on the hunt for great businesses that fit my investment criteria. And I have. Zeroed in on a few at least a few in India at this point. Actually on that front, I just got back from India a couple of weeks back, spending almost two months. There was both personal and some due diligence work.

[00:22:18] Shree Viswanathan: There’s some puts and takes from my, what I call as a short stay. Unlike in the past, the current economic environment is robust. I’m sure you’ve heard about the demographic profile. Yes. 1. 4 billion people, largest country on earth today, but about 50 percent of that 1. 4 billion or less than 25 years old.

[00:22:39] Shree Viswanathan: That’s almost 2x the current population of the U. S. India is the leader in digital payments, for example way more than China’s, way, way more than U. S., but more importantly, what that means is this digital payment is. Capturing a lot of revenue in the tax network. So a significant difference relative to what has happened in the past.

[00:23:00] Shree Viswanathan: And then, of course, the geopolitical attraction, the world’s largest democracy sitting next to China, while the Western world is looking for an alternative. All that is working in the company’s favor, the country’s favor. On the other hand, the public market valuations appear to be high relative to the country’s own history, and definitely compared to the developed world.

[00:23:21] Shree Viswanathan: On top of it, what I also noticed this time was at least among the business communities, other investors, a few of them that I met in the money class, there is a level of Overconfidence that’s bordering on arrogance, in a sense that people feel that India has arrived and that it can’t be relegated to an also ran status by the West.

[00:23:42] Shree Viswanathan: Years ago, Buffett talked about the ABC of business decay, arrogance, bureaucracy, and complacency. I think that’s applicable to countries as well. So that’s something that I would be mindful of. So having said all that, the positives seem to outweigh the negatives. And so I’m still starting these companies while I’m keeping an eye on these other factors.

[00:24:06] Clay Finck: Related to investing internationally more broadly, I’m also curious to get your take on on the one hand if you opened up to more ponds to fish in, presumably you may find More high quality names. On the other hand, many people speak to the higher valuations that are in the US. So presumably you could get more attractive valuations for similar quality businesses overseas.

[00:24:32] Clay Finck: So I’m curious to get your take on how this sort of weighs into your thought process and your approach and your take on the quality names you can find internationally and then the valuations that relate to those companies relative to the U. S. 

[00:24:45] Shree Viswanathan: Yeah, I’ve pondered that myself prior to launching SVN Capital.

[00:24:49] Shree Viswanathan: For example, I spent time as an analyst portfolio manager in a couple of different platforms here in Chicago. All my time was spent on U. S. names, but many of those businesses had a lot of international exposure, but the analysis was primarily U. S. centric. And for me to expand into this. International or a global approach.

[00:25:09] Shree Viswanathan: It does raise a question. However, given my background, the way I think about compounding wealth over time, U. S. is the primary driver of that idea, but it’s not the sole owner. That concept has been exported very nicely to many other countries. Europe’s much older, not sure financially back in the days it was richer, but.

[00:25:31] Shree Viswanathan: In terms of the capital market development, Europe has gone through that transition. And we are increasingly seeing that in Asia. Related to that question, I would cite this interesting study. I’m not sure if you have heard of Dr. Henrik Bessembinder. He’s a professor from Arizona State University. In 2017, he released a fascinating paper with a very provocative title.

[00:25:57] Shree Viswanathan: The title was Do Stocks outperform treasuries. So it’s a little bit of a digression relative to your question, but I’ll come back to that. He released this paper in 2017 asking if stocks outperformed treasuries. And on the face of it, the question may sound irrelevant, but then he dug into it, you’ll see that he went back to 1926, brought it all the way to 2016 I believe.

[00:26:22] Shree Viswanathan: And that was a good, long, 90 year stretch. He evaluated the market and he concluded that barely 4%, only 4 percent of the stocks outperformed the treasuries. The rest either were at the treasury level or even worse. So that was a fascinating study to highlighting a few things. We’ll cover that detail later.

[00:26:46] Shree Viswanathan: But looking at this report, there’s this fund out in Edinburgh, Scotland called. Daily Gifford. They invest globally. They saw this report and they were very interested. They went to the professor and said, Hey, we like this analysis. Can you actually repeat this on a global scale? And he went back and redid it on a global scale and found out that barely 3 percent of the stocks outperformed the local treasuries over time.

[00:27:12] Shree Viswanathan: The point is there are, first of all, there are A few quality businesses that do outperform over a long stretch of time. If there is a business that’s generating a healthy return, by definition, it starts attracting competition, which means returns get arbitraged away. But there are a few of these businesses that can defer such reversion to main for a variety of reasons.

[00:27:35] Shree Viswanathan: competitive strength, it could be the brand. It could be many other things, but the point is there are a few that can defer such a reversion and it’s not just us, but it also happens globally. That’s number one. But the more interesting aspect is there are only a limited number of companies that can do it.

[00:27:52] Shree Viswanathan: And so my view is I’m combining the 4 percent that he found in the US and the 3 percent that he found in the, on a global scale. And I want to arrive at. a portfolio that I can understand that I’m comfortable with that can generate an healthy return over a stretch of time. So that’s how I have put the portfolio together.

[00:28:11] Shree Viswanathan: And that’s how I’m developing this portfolio. That’s why it’s global. 

[00:28:15] Clay Finck: Got it. And I had another point I wanted to tie in here that. It really relates to the story of your father and remaining fully invested and staying invested for the long haul. In your Q4 2022 investor presentation, you said it was a fantastic time to be invested in the market, despite 2022 being a really rough year for stocks overall.

[00:28:37] Clay Finck: And then you fast forward just six months and your funds up. 29. 3 percent net of fees as of the end of Q2 2023. And that’s not to say that the bear market’s necessarily over that we saw in 2022, but it addresses the need to remain fully invested because just about any point in time, there’s always going to be people that have a strong case for stocks to go up.

[00:29:00] Clay Finck: And there’s probably going to be another strong case from somebody else just as smart that stocks are bound to go down, but really who really knows what’s

[00:29:10] Clay Finck: tend to have this confirmation bias of they’re seeking out the information that they want to use to confirm their existing beliefs, whether they think the market’s going to go up or down. So I’d like for you to share the research you use to back the claim that it’s wise for investors to remain fully invested in high quality businesses, even if we’re in what feels like tumultuous and really difficult times.

[00:29:34] Shree Viswanathan: Yeah, but before diving into my answer, again, allow me to digress a little bit. I’m going to cite this book, Money Game by Adam Smith. This is not the old one. This is actually George Goodman who uses the pseudonym Adam Smith. Fantastic book. In it, he says, the first thing to know is yourself. Otherwise, the market is an expensive place to find out who you are.

[00:29:56] Shree Viswanathan: I think that’s an excellent point. The way I choose to do it is different from many others. For example, one important point is the investment time horizon. Ideally, my horizon is time infinity, but in reality, it’s 7 to 10 years at least. While It’s widely agreed upon fact that holding equities for the long term leads to better investment outcome.

[00:30:19] Shree Viswanathan: Several factors drive investors to take a shorter time horizon, leading to more trading. In fact, the average holding period of a stock on NYSE has come down from almost five years. In 1970 to less than eight months now, thanks to social media, high frequency trading, everything that’s happening in the market these days keeps going down.

[00:30:41] Shree Viswanathan: And in fact, when I talk to prospects, when I talk to my investors, I always try and cite these three Ts that I think are the bane of invest. turnover. Now, the average mutual fund, for example, turns over 116 percent a year, which means every single position is bought and sold at least once within the year.

[00:31:01] Shree Viswanathan: That, of course, leads to high transaction costs and that in turn leads to higher taxes. But most pernicious of all is the fact that such actions unnecessarily disrupt the process of compounding. Back to your question about what did I use? to back my claim for being fully invested. I’d say there are at least three different data points going from macro all the way to the portfolio.

[00:31:26] Shree Viswanathan: Again, going back in time, if you used S& P as the proxy for the market, there is empirical evidence to show that the market is up approximately 65 to 70 percent of the time. This is, I believe, one of the, Reasons why shorting is such a difficult exercise. I myself, I don’t short or use any derivatives or any, anything else to lever up the portfolio.

[00:31:49] Shree Viswanathan: It’s a simple, long only portfolio of high quality businesses, so that’s number one. Number two is in 2022, while we were going through this market turmoil, increasing interest rate, recessionary potentially. Recessionary environment. JP Morgan Wealth Management released an interesting chart that showed how remaining fully invested from 2002 to 2022, approximately 20 years in s and p 500 would’ve generated approximately say nine and a half percent.

[00:32:18] Shree Viswanathan: But if you missed the 10 best days, your returns. would have been cut to 5. 2, almost half of what it would have been otherwise. And it actually keeps getting worse if you miss the 20 best days, 30 worst days, and all that. The other, the punchline, I believe, in that release from JP Morgan Wealth, is the other interesting point that they make, which is 7 of the 10 best days.

[00:32:42] Shree Viswanathan: Occurred within 15 of the 10 worst days, it’s actually worth repeating. 7 best days occurred within 15 of the 10 worst days. And essentially it means things get bunched up. Good days, bad days, they all get bunched up together. So instead of coming in and out, it’s better to endure the pain of a drawdown and then enjoy the benefit of reversal.

[00:33:07] Clay Finck: It reminds me of March, 2020 because That’s one of the more recent events. March, 2020, everything was going crazy. Markets are just dropping like a rock and hitting those limits. And naturally our tendency is maybe I should be selling right now because there’s lockdowns and when really that’s the time likely to be buying as long as you have that long term approach.

[00:33:28] Shree Viswanathan: Absolutely. In fact, again, I think this was a real test. or a real exercise that Fidelity went through. I saw something like, soon after that drawdown, Fidelity ran this exercise and they found out that the individual shareholders who were 60 years and older that held a brokerage account in Fidelity, who were 60 years and older, were the most nervous.

[00:33:50] Shree Viswanathan: They are the ones who cleaned out of their equity portfolio during, soon after that, during that and soon after that period. Think about that. It’ll take ages to recover what they have lost. and they’re already 60 plus. In any case, back to your question, I think the third point that sort of backs my position is the collection of these high quality businesses that I have.

[00:34:12] Shree Viswanathan: When I look at the portfolio from a portfolio level, I adjusted for the weights within the portfolio. Now, these are high quality businesses. High free cash flow growth of more than 20% high return on enlisted capital, around 20% again, and high interest cover that is these guys have very little to no depth on the balance sheet and all that.

[00:34:34] Shree Viswanathan: When you compare that to say, the market of s and p, these metrics are meaningfully higher than what the market offers when the underlying fundamental economics of these companies continue to remain strong. I was and remain convinced. that one will follow the other and it’s not the fundamentals that will follow the stock price.

[00:34:53] Shree Viswanathan: That’s why I advocate remaining fully invested. 

[00:34:57] Clay Finck: I wanted to talk a little bit about ego as well. I know this is something you’ve thought a lot about and with many things in life, as with investing, oftentimes the biggest enemy isn’t something external or somebody else, but it’s ourselves. Can you talk about how important it is to understand the impact of ego when it comes to investing?

[00:35:21] Shree Viswanathan: Yeah, this is a deep question. It’s very close to my heart. It’s how I live my life, but it’s widely accepted and it’s well known that ego is the source of many problems in life, particularly in the investment arena. Ego is the primary source of problems. It makes you overconfident, makes you think you know something when you really don’t.

[00:35:40] Shree Viswanathan: From the moment one wakes up in the morning till one shuts the eyes at night, this process of reinforcing this ego goes on. There is a subject. I, for example, like this picture, the object, or it could be many other situations. There is a subject and an object relationship. That’s essentially… Establishing and reinforcing ego.

[00:36:03] Shree Viswanathan: That’s what gets this process started, I believe. A number of years ago, I read this book called A Search in Secret India by a skeptical British journalist named Paul Brunt. Back in the 1930s, he visited India looking for a solution to this. spiritual aspect of life. I finally found this saint in South India.

[00:36:24] Shree Viswanathan: Much of the last third of the book is about this particular exercise. The saint’s name was Ramana Maharshi. Maharshi is essentially a great saint. It’s a Sanskrit word for A great saint. One of this saint’s methods helps eliminate that ego by asking who is asking that question? Who is that I, that subject that’s raising this relationship?

[00:36:47] Shree Viswanathan: Look at who is experiencing that benefit of looking at that picture or whatever that object may be. Enquire as to who is experiencing these things and the mind quietens down and helps eliminate. or at least reduce that ego. Observe the observer and reduce that ego. That’s the essence of his teachings.

[00:37:06] Shree Viswanathan: When I read this book the first time, I merely appreciated it and didn’t give it much thought. But years later, I came across a good podcast in which the guest highlighted this book and I went back and that’s when this light bulb went on and I got hooked ever since of a following the saints teachings.

[00:37:24] Shree Viswanathan: So that’s how I combat this every day. Trying to tamp down that ego a little bit. 

[00:37:30] Clay Finck: You’ve stated that you spent or you spend 30 to 60 minutes a day doing some sort of meditation and you called it a ego reduction exercise. Talk to us about how this works in practice. 

[00:37:46] Shree Viswanathan: It’s an individual exercise for a number of years when I was working in downtown Chicago, raising kids, buying a family.

[00:37:53] Shree Viswanathan: I used to find it very difficult to get this time. Now that I’m running my own fund, this is part of how I’ve designed my life, right? This suits my needs and how I’m able to spend this time. I’d say I spend a lot more time than just 30 to 60 minutes these days. It’s an exercise in which. I’m looking at my thoughts as if I’m looking at a different person.

[00:38:13] Shree Viswanathan: So the mind’s proclivity is to wander the realm. And so we have all these thoughts. In fact, an average man has about 30, 000 thoughts a day. That’s a lot. If I can catch myself… Thinking a thought, if I look at that thought as if it’s a different entity, it quietens me down. In fact, Phil Jackson, the former coach of Bulls and Lakers, he’s written a fantastic book called My Hope Dreams.

[00:38:37] Shree Viswanathan: He goes through all this. He’s a very spiritual person, by the way. That exercise of looking at that thought, tamps the ego down, helps me quieten that process a little bit. Now I don’t catch it every time, what I increasingly do all through the day. In fact, I find it a little easier in the mornings than the afternoons and later in the evenings.

[00:38:56] Shree Viswanathan: As John Woodman, the former Basketball coach, UCLA basketball coach said good things take time as they should. We shouldn’t expect good things to happen overnight. Actually, getting something too easy or too soon can cheapen the outcome. So this is a tough process, a tough exercise, but I’m sticking with it because I think I’m seeing improvements.

[00:39:15] Shree Viswanathan: One tangible evidence in myself is I used to. I have large swings in the amplitude of my emotions, getting very upset when a stock in the portfolio goes down or y versa. I can see that amplitude reducing quite measurably over the last few years. Now. That’s how I go about it. 

[00:39:34] Clay Finck: I’m thinking more about this ego and you just mentioned the emotional aspect.

[00:39:38] Clay Finck: Is there anything else when you look back to the very first day you purchased a stock. to today where you’re seeing the benefits really shine through this ego reduction exercise because 60 plus minutes per day compounded over many years. I’m sure the compounding effects of that have just been tremendous on your end.

[00:39:56] Clay Finck: So I’m curious if you could point out some of the major benefits you’ve seen over the years through these exercises. 

[00:40:03] Shree Viswanathan: Absolutely. It comes back to designing my life the way I want it. For example, when I hit the gym, I hit the gym almost five times a week. I used to listen to podcasts.

[00:40:17] Shree Viswanathan: I do put on my air pods and it’s on noise reduction mode and it’s just me, my thoughts and my goal. And just continuing to focus on those thoughts helps me with the rest of the day. I spend almost all my time, for example, this year I’ve made only one major change to the portfolio. Much of that was done by April of this year.

[00:40:39] Shree Viswanathan: I asked new capital that’s come in. I’ve added them to. The existing names but a portfolio level change, there was only one and that’s all by design. I wanted it to be a portfolio of collection of high quality businesses where I don’t make too many changes. Though we know, for example, in a dynamic system, not sure if you’re an engineer, engineers typically, agree immediately.

[00:41:03] Shree Viswanathan: They say, we know, in a dynamic system, more moving parts will lead to increase. possibility of things going wrong. It’s the same thing with us as human beings when we have in a, in our ecosystem, when they make too many decisions, there is a higher likelihood of things going wrong. I believe that’s the reason why.

[00:41:23] Shree Viswanathan: Steve Jobs, for example, for the longest time, had just a blue jeans and a black turtleneck. At least one less decision for him to make during the day. And I try and make all these small nuances to how I think and how I operate. All that, I think, has been possible because of this focused effort on my part to tamp down that ego, to do this, to be constantly aware of that thought and how I create.

[00:41:52] Clay Finck: I think this is a good transition point to talk about the level of concentration in your fund. You talk about an engineering concept where the more things you introduce, the more headaches it’s going to lead to. And concentration is definitely a key part of how you operate your fund and your portfolio.

[00:42:08] Clay Finck: And many investors, they speak to all the benefits of concentration, but I think there’s very few that actually Live it out, at least in the manner you do of only having nine names. So another idea that sort of relates to this is you’ve talked in the past about your background and your upbringing and having this very conservative upbringing.

[00:42:31] Clay Finck: And you want to approach investing in a very conservative manner. So it may be somewhat surprising to some of the listeners to hear conservatism and only having. Nine names. So can you speak to how you came to develop this very concentrated approach and then eventually become comfortable with it and seeing it as a very conservative way to invest?

[00:42:52] Shree Viswanathan: Yeah. In my background, prior to launching SVN Capital, I was at advisory research. and Chicago based storage franchise and another one called Keeley, asset management, particularly an advisory that I spent a majority of my time. The founder, late Mr David Heller, is what I consider him to be my guru for what I do for a living these days.

[00:43:14] Shree Viswanathan: Taught me everything about investing, concentration. Even though the concept of concentration was very different, the way he came at it and just the approach to portfolio management, but over time, I’m sure you’ve come across It’s not just. Profit and Munger, but many other successful investigators who have shown us this path of arriving at a high performing portfolio through this concentration model.

[00:43:37] Shree Viswanathan: Even though I went in research Chicago, which is, I call it as the citadel of cap capital as asset pricing model, Eugene F who got his Nobel a few years ago for this concept of no free lunch, even though that’s the second best decision I made in my life. to go to University of Chicago. I don’t necessarily practice that.

[00:43:57] Shree Viswanathan: I, in fact, practice the exact opposite because of how I have learned lessons from some of these stalwarts. There’s a gentleman by the name of Dave Contessaria out of Valley Forge, Pennsylvania. Highly successful investor, very concentrated. Joe Rosenfield of Grinnell. Back in the days, he was one responsible for bringing Warren Buffett onto Grinnell’s board.

[00:44:19] Shree Viswanathan: Very concentrated portfolio. Lou Simpson of Geico. In fact, as time progressed, Progressed, even though Lou was a little more diversified as time progress, it became even more concentrated. So many other names who have done it this way and all that sort of led me back to, I referred to this exercise, to this research paper by Dr.

[00:44:38] Shree Viswanathan: Hendrick Peon binder to put numbers around that research. From 1926 on, he said there were, it was $47 trillion of wealth that was created. Fascinating data. 47 trillion was evenly split between 83 companies that created 23 and a half trillion. And the other 23 and a half trillion was created by 25, 584 companies, essentially pointing to again, barely three and a half, three and a half, 4 percent of the companies generating that, that return.

[00:45:10] Shree Viswanathan: That sort of, he dug into many other details, but to give you specifics here, four, Items jumped out for M at least. Strong cash generation and accumulation, rapid asset growth, high R& D, for example. These were important items that sort of contributed to those 83 that sort of generated at a time. That’s what I’ve gone after.

[00:45:32] Shree Viswanathan: companies in the portfolio today. Not only do I understand what they do, but they generate high return on incremental capital. High return is anywhere in the high teens to 20 plus percent. Not only do they generate high return, but they also have significant opportunity to reinvest. Almost all of them reinvest back into the business.

[00:45:52] Shree Viswanathan: A couple of them actually put 100 percent of their free cash back into that business. Now that’s an important metric. The combination of high return and reinvestment. That’s what leads to value creation over time. Cause these are companies that are owner operated. It’s either the family or the founders that are running it and they have vested interest in the decisions that they make.

[00:46:13] Shree Viswanathan: And almost invariably all these balance sheets are devoid of debt. If we know one thing that sort of kills companies. It’s leverage. It’s financial leverage. As I said, I don’t use any additional debt or any sort of a derivative to juice up the returns. And I don’t want the management teams to use any debt either.

[00:46:32] Shree Viswanathan: Not any debt. And I don’t want them to get too excited about that. In fact, the most appropriate, sometimes people ask me, what’s the most appropriate capital structure for a company? I say that’s dependent upon the sleep pattern. It should allow the management team to sleep well. It should allow me to sleep well.

[00:46:47] Shree Viswanathan: That’s how the capital structure should be designed. And there are very few companies that fit that mold. And not only have these stalwarts proved that to us, Bessenbinder’s research on the US and global scale has proved that to us. and I’m seeing it within the portfolio. Yes, there are many other companies that have certain profiles, similar profile, but they fall into categories that I don’t understand.

[00:47:09] Shree Viswanathan: I’m not an engineer, for example, I’m not an engineer by training. And so some of the tech software, I’m not a medical professional. And so I don’t understand the biotech for my industry. So there may be companies in that, in those spaces. That fit the rest of the criteria, but not necessarily supporting my need for understanding those businesses.

[00:47:29] Shree Viswanathan: So I put all that together, it comes down to just a handful of businesses. And the more I spent time getting to know these companies, the companies. The competitors, the industry, the management team, the more I spend time doing all these things, obviously I’m gaining more confidence, and that allows me to remain concentrated.

[00:47:52] Shree Viswanathan: And that’s how I arrive at this concentration question, and I believe that is the most appropriate way for outperformance. Somebody wanted to generate just the market return of 9. 5 percent out of S& P 500. It’s not a shabby return at all. I’d say for most people, that may be the most appropriate. But I believe if we pick and choose the quality from that group, S& P 500 or Am ACI or whatever that may be, and stick to these few investment criteria.

[00:48:22] Shree Viswanathan: We can arrive over time. We can arrive at a number that’s much better than the market. 

[00:48:27] Clay Finck: I also wanted to ask you about one of the names in your portfolio, which meets many of the characteristics you just said, stellar balance sheet. Minimal debt actually has a hundred percent reinvestment rate and is reinvesting at roughly 20%.

[00:48:43] Clay Finck: That name is Dino Polska out of Poland, and you don’t need to get into the nitty gritty specifics of Dino here. Actually, my colleague and I plan on doing. deep dive into this company on the podcast here in the near future. And a full disclosure to those in the audience, I’ve recently purchased shares in Dino Polska in September and October in light of the share price taking a beating recently, at least in doing research on Dino Polska, you’ve talked about it a little bit, and I was really interested to hear your take on it because it’s in your portfolio as well.

[00:49:16] Clay Finck: One thing that really stood out to me is you mentioned that Dino Polska reminds you of Walmart. in their early days. So I’d love for you to expand on the similarities between Dino Polska and Walmart. 

[00:49:29] Shree Viswanathan: Absolutely. I’m sure you’ve read Sam Walton’s autobiography that he wrote right before he passed away.

[00:49:34] Shree Viswanathan: It’s a fantastic story of entrepreneurialism, the opportunity that America gives for people like that. And specifically about the growth of Walmart. The initial days of Walmart was obviously focused on rural markets, rural parts of the South. Of course, today it’s a much larger company, it’s in much bigger cities as well, but in the earlier days it was primarily rural and small town America.

[00:50:01] Shree Viswanathan: Let’s pivot to Poland. Poland has a very interesting demographic profile. And this is an important component of the thesis itself. In most countries, when the country starts developing, the opportunity set for the people would be more plentiful in bigger cities and towns. And so you would see people leave small villages and towns to move into these bigger cities and towns.

[00:50:25] Shree Viswanathan: And that was a natural progression. We’ve seen that happen in China. We’ve seen that happen in many countries. Continued, in fact, even in Ukraine, the urbanization rate. The rate at which cities get populated relative to the rest, the urbanization rate was in the low 70s before the war, of course, and generally in the West, U.

[00:50:44] Shree Viswanathan: S., U. K., and even in South Korea, for example, these are all well north of mid 80s, low to mid 80s is the urbanization rate in these developed markets. Ukraine is in the 70s. Poland, for the longest stretch of time, has been around 60 some percent. In fact, it’s even slightly less, depending upon how you slice and dice the size of these cities and towns.

[00:51:08] Shree Viswanathan: And it’s not something that’s happened recently. It’s always been this way. And it’s a sort of an interesting aspect to how that fits into Dino. Dino Polska is a grocery chain focused on rural markets of rural and small town markets of Poland, where Dino’s competition has been primarily mom and pop stores until recently.

[00:51:28] Shree Viswanathan: There’s been some competition from a couple of the bigger players more recently, but nothing really meaningful yet. So that demographic dynamic sort of fits very nicely into this. Story of how Dino has been growing. Dino was founded in the late 90s. It’s grown from approximately 110 stores in 2010 to a little north of 2, 300 today.

[00:51:51] Shree Viswanathan: A good high 20 percent compounded annual growth rate. Invariably, all that growth has been in this rural market. And what he has been trying to do, what Tomasz Biernacki, the founder who’s still the chairman of what they call the supervisory board. He owns more than 50 percent of the stock. What he’s trying to do is set up these small stores in rural markets.

[00:52:13] Shree Viswanathan: Each store caters to only about three to 5, 000 people. And as soon as the store starts servicing more than say 5, 000 people, they open up a new store down the road and that’s how they’ve grown. Organically, there is no acquisition involved, and they’re letting these small towns, the stores populate these smaller towns, and they’re letting the smaller towns grow into the stores.

[00:52:34] Shree Viswanathan: That’s the primary point I wanted to compare relative to Walmart, when I said This reminds me of the early days of Walmart. 

[00:52:43] Clay Finck: One of the big questions or looming thoughts when I think about investing in a company like this, on the one hand, all of their grocery store chains are in Poland and Poland right now has a quite a bit higher inflation rate than the U S I just looked up the data and their inflation sitting around 10 percent reported numbers.

[00:53:01] Clay Finck: And then the U S reported CPI numbers around three to 4%. So you have the aspect of the business. A hundred percent of their stores today are in Poland. And then also if you’re purchasing the shares, you’re purchasing the shares in that local currency. So the Polish Zloty. So you also have the risk of that currency going against the U S dollar.

[00:53:20] Clay Finck: So I’m curious if you could paint a picture on how you think about maybe currency exchange risk in general and the inflation risk that it goes along with that. 

[00:53:31] Shree Viswanathan: Sure. Yeah. Let’s take the inflation point first in most emerging markets, you’d see inflation to be slightly higher than what we see in the U.

[00:53:40] Shree Viswanathan: S. or generally in the Western world. It’s just the nature of the growth and how their local central governments, the federal reserves of the local countries continue to control their currency. It’s all, everything is intertwined and Generally, I see higher inflation in those local markets, emerging markets, but particularly after Russia invaded Ukraine and February 24th, 2022, the entire central European, most of Europe, but particularly the central European Union.

[00:54:08] Shree Viswanathan: Eastern European market has gone through a gut wrenching move. You had 8 million people come in as refugees into Poland. Polish people with their big hearts took many of them in their homes. Government in position at that point. By the way, there was an election just a couple of days ago and we have another instance of The bloodless change of government most likely happening in Poland as we speak.

[00:54:34] Shree Viswanathan: In any case, the government stepped up and started giving financial incentives to these families that were taking in these refugees. All that meant there was a higher level of money circulation within the country. And of course, This was leading to higher inflation across the board. Wage inflation, food inflation, you name it, there was higher inflation.

[00:54:54] Shree Viswanathan: In fact, inflation was as high as almost 20%. It hit as high as almost 20%. Not too long ago, but… As we have seen over the last few months, across the board, inflation has started coming down. As you rightfully pointed out, inflation currently is around 10 some percent. 10 year interest rate locally has come down more than 50 percent from what it was same time last year.

[00:55:19] Shree Viswanathan: All that is pointing towards reduce level of inflation. First of all, I do accept higher level of inflation for markets like that. And so that leads to the second question about currency and FX risk. I personally don’t hedge any FX risk. As you said I have four names outside the US, two in Poland, one in Sweden, one in France.

[00:55:40] Shree Viswanathan: I don’t hedge any of them, I just let the natural edge to play out, particularly given the long time horizon that I’m planning. I believe. Currency natural hedges will take care of itself, particularly hedging the FX risk would be even more onerous, expensive, and time consuming because they move around so much within a short span of time, and I let it play out over time, but then again, as soon after the war started, the Zloty, which was about three and a half zlotys to a dollar moved to as high as five zlotys to a dollar.

[00:56:10] Shree Viswanathan: It’s now closer to 410, 420. All that again reflects the sense of, not quite normalcy, but closer to normalcy as we speak. relative to what it was in February, March of 2022. But that also requires another point to be highlighted. The sovereign balance sheet in Poland is actually even better than Germany’s.

[00:56:31] Shree Viswanathan: Debt to GDP in Poland is even less than 50 percent. Even better than Germany’s, which is supposedly the most frugal within. The EU. You’ve got a population base of approximately 36 million, about the size of California, about 8 million gay men, most of them have moved on, about 2 million continue to reside there, they’re integrated well into the system, society, and You have a balance sheet that’s better than even Germany’s.

[00:56:56] Shree Viswanathan: Political wrangles continue to happen. Not sure how this is all going to play out from a macro standpoint within Poland, but the company continues to execute on its plan of growing its store base within rural markets. Competition continues to remain, I’d say lackluster, even though Piatronka, which is the biggest competitor, biggest player within the country, has started opening up smaller stores, direct, indirect competition to Dato.

[00:57:23] Shree Viswanathan: It’s still not meaningful enough to impact what Dato is doing around the country. I accept the full inflation. which is now trending in the right direction going down. FX risk is something that I accept going in, allowing natural hedge to play out. But even there, we’re seeing improvements relative to what it was around the war.

[00:57:43] Clay Finck: And I think it’s also important to mention here just the incredible value proposition that Deno offers to its customers. I’m looking at the prices they offer the lowest, oftentimes the lowest prices in terms of any of the grocery store chains. They’re very convenient because there’s these small box stores that are oftentimes very close to their target consumers.

[00:58:03] Clay Finck: Whereas many of these other stores are larger boxes, more centralized within these cities, and then they offer pretty much everything. The average. Polish person needs. One of the things that stood out to me is that they make sure they always have the meat counters, whereas many of these other grocers don’t have that.

[00:58:18] Clay Finck: So the selection is also really good. And to tie in the inflation piece here again, the key to these big winners and these big compounders is their ability to continue to earn high returns on capital. And on the inflation, maybe squeezing some of the lower end consumers were today they might be purchasing.

[00:58:39] Clay Finck: some level amount of groceries. And then the next year they just aren’t able to purchase as much because of high inflation. And then I could also see a bit of a tailwind where some of the higher end grocers, Dino steals share from them in light of higher inflation where consumers push down to lower price grocers.

[00:58:56] Clay Finck: So I’m curious your thoughts on how inflation might impact their returns on capital over time. 

[00:59:01] Shree Viswanathan: Yeah. In fact, before this question, you started talking about how you’ve started buying Dino because the prices have come in. In the last month or so, particularly after their Q2 update, primarily impacted by inflation and slower growth.

[00:59:17] Shree Viswanathan: I’m less concerned about the slower growth and the impact, potential impact of inflation. I am concerned in that, in any retail investment, retail by the way, I think, is one of the most difficult sectors to be consistently outperforming in. Many successful investors have had their troubles in that space, but in spite of it, I’m more optimistic about A deal for a variety of these reasons.

[00:59:41] Shree Viswanathan: But the most important metric in retail is the like for like sales or the same store sales relative to inflation. And generally speaking, in the west, we don’t necessarily bring inflation into that equation ’cause inflation is generally has been low. But in the case of emerging markets fallen, particularly given that inflation has been high, we do want to compare that relative to that.

[01:00:02] Shree Viswanathan: It’s been a positive spread over time, but more recently in that Q two release that they did that spread. Come in, quit meaningfully. That’s poorly. The reason why the market has reacted the way it has stocks down more than 30% since that release. I’m less bothered about that because as I said, inflation has started coming in.

[01:00:22] Shree Viswanathan: We’ll see this play out over time. And number two, their value proposition is, first of all, source. Products locally as opposed to sourcing products from bigger manufacturers. And as a result, they have fewer private label compared to Beonca, the largest operator. And more importantly, they also have a policy of following the biggest discount to Theron’s, most particularly price increases.

[01:00:51] Shree Viswanathan: On certain products, they watch how beer Broca is increasing its price on certain products and they replicate it. Even though Dino is offering their products to the rural and the small town market, similar or same amount of percentage increases what they push through. On the other hand, I don’t believe.

[01:01:09] Shree Viswanathan: I’m not 100 percent certain on this. I don’t believe they do take the prices down when their broker takes its price down. So that sort of allows them to keep a relatively healthy margin, particularly relative to the inflation in the local markets. And so that’s one reason why I’m not concerned about that.

[01:01:26] Shree Viswanathan: The second aspect is the slower store growth that they have announced recently. It’s not something that came out as a surprise. They had been talking about it for a little while. I’m sorry. Notice that the debt level went up slightly. About a year ago, they started talking about opening up the second meat processing plant.

[01:01:46] Shree Viswanathan: That debt was essentially going to support the opening up of this meat processing plant. And as a result, because interest rates locally had started going up, they wanted to be able to fund ingrown with our minds and these shorts is that something you cannot is that something you cannot pass up a documentary they have the programme Longer stretch of time, but that’s what gives me the confidence that I don’t get too excited about the inflation scenario and not too worried about the slower store growth.

[01:02:24] Shree Viswanathan: Inflation scenario is reverting slower. Store growth will revert. I’m not saying it’ll go back to opening up another 300 some stores a year. It’ll probably be slightly lower than that, but they have enough room to continue to increase the number of stores from the current 2300 that they’ve got. 

[01:02:42] Clay Finck: I’d like to also tie in.

[01:02:44] Clay Finck: the valuation of Dino because it really points to your investment strategy and it’s a very important piece. It’s actually the last valuation is the fourth of your four criteria and investment framework. And I talked to some of my investor peers and a lot of them will say this is a fantastic business, but you’re paying a Optically high multiple, and you’re going to have to use relatively high growth assumptions for an extended period of time.

[01:03:10] Clay Finck: And in order to justify paying that sort of valuation, I just checked. And it looks like the P E multiple on Dino Polska for example, today is around a 28 or 29. And I’d be interested to hear how you think about investing in these companies that trade at a premium trade at these optically higher valuation multiples.

[01:03:29] Shree Viswanathan: Absolutely. And we can use Dino as a good example. And it’s an important aspect of, it’s the fourth and still an important criteria for me, but before I deploy capital, and that’s a transition that I have made over time. Years ago, I told you I came from advisory, where I was trained to think about valuation as the primary driver.

[01:03:49] Shree Viswanathan: And then move on from valuation to many other factors. I’ve completely flipped that order today when I, as I’m running SVN Capital and keep valuation as a, as the last of the four criteria. And in the case of Dino, for example, what gives me this? Yes, relative to the low multiple companies that you may come across, Dino’s historical multiples have been high.

[01:04:14] Shree Viswanathan: Today, at this price, I think it is even more attractive. Given my expectation of future growth, and I’ll address that growth in a second, but using PEE or price to book or EEV to EBITDA multiple, whatever metric that may be, it’s. Typically a quick back of the envelope computation to help us keep some sort of a guardrail, and that’s all that is, but in most of these situations where we have these high quality businesses performing at a high level, I think we need to use a slightly different, not necessarily saying give up on valuation, but slightly different approach to thinking about valuation.

[01:04:51] Shree Viswanathan: So let’s use Dino, for example, as I said, they have 2300 stores, 36 million people. 2 million from Ukraine. If you exclude that, you still have 36 million people. I told you about 60% of the population lives in 50 to 60%. Let’s use 60 is in smaller towns to rural areas, and that’s about 23 million people.

[01:05:13] Shree Viswanathan: Dino is services three to 5,000 people per store. You take an average of about 4,000 people to a store, that 23 million or 4,000. leads you to something around 53, 5500 stores that Deno can get to. Of course, in this analysis, I’m assuming many other things. No competition, nothing disruptive in terms of Deno’s growth.

[01:05:34] Shree Viswanathan: No other war or many other macro factors that may come into play. Those are completely out of my control, out of our control. And so we have to think about the potentiality using these numbers that I’ve thrown up. And in any business, Competitive analysis will be the most important aspect of how I think about the future.

[01:05:54] Shree Viswanathan: I think it was Winston Churchill who said, the farther back you see, the farther forward you’ll be able to look. And so if you look back at how the company has performed, of course, it was a much smaller company back in 2010, has grown with almost very little to no competition in the rural markets. Today you may say there are competitors like Biatronka who are coming into these rural markets.

[01:06:16] Shree Viswanathan: And that may be true, and the dynamics have changed. Law of large numbers is also working against them. But given this dynamic of doubling from 2300, more than doubling from 2300 stores over the foreseeable future, and each store Each mature store, they’ve opened a little more than 1, 000 stores over the last four years.

[01:06:36] Shree Viswanathan: And it takes about three to four years to break even. And a mature store generates mid to high 20 percent return on capital. And it’s interesting when you look back at the most more recent performance, those 1, 000 some stores that have been open over the last few years, they haven’t started contributing to the bottom line yet.

[01:06:56] Shree Viswanathan: When you overlay all these pieces, Stores that have been opened, the future growth that’s coming, and each store generating that kind of 20 plus percent return, and the company not paying any dividend or buying back, but reinvesting every cent, every penny back into the business. That’s what allows the company to continue to create value.

[01:07:15] Shree Viswanathan: When I look forward at Dino from here on out at, it’s a three hundred and eighty three fifty today, allowing for slower growth goal. The next say. Year or even 18 months, but going back to a slightly healthier growth as the company brings down the existing debt on the balance sheet when they’ll be able to think about capital in a slightly broader sense.

[01:07:39] Shree Viswanathan: All that leads to the next, say five years or so, cash generated over the next five years or so. Relative to this current price back into an IRR of something into the high teens and low 20 percent from here. So that’s how I think about valuation. The current multiple of, I think, next 12 months EPS is only about 19 times the LTM.

[01:08:01] Shree Viswanathan: It’s slightly higher than that, but that’s all back with the envelope metric. What I’m looking for is the cash generation capacity of this business. Is that stable and strong enough, or is there a force lurking in the dark that can disrupt this cash flow generating machine? I’m not convinced that there is one at this point yet, and so I’m not necessarily forecasting it into the next.

[01:08:25] Shree Viswanathan: 10, 15, 20 years. Even forecasting it into the next five years is a big challenge. But as I said, looking back over the last few years allows me to get some comfort in terms of thinking about the future. That gives me the confidence. That gives me the ability to say this is a business that can continue to generate healthy returns over the foreseeable future with enough room to grow.

[01:08:48] Clay Finck: And another interesting. aspect that wasn’t even mentioned is that they have many neighboring countries with similar characteristics in terms of the consumer base and the types of consumers that they are. A few I’ll mention here is Czech Republic, Slovakia, Lithuania, and maybe potentially Ukraine.

[01:09:08] Clay Finck: The situation gets better there one day. So it sounds like you aren’t even really considering say five plus years out, they might be expanding big time internationally, but today they are solely focused on Poland because there’s still that huge opportunity for growth there. And even if you don’t even consider the international expansion, there’s still a lot of potential growth ahead.

[01:09:28] Shree Viswanathan: I personally would like for them to just stay within Poland. That’s a market, that’s the home base, that’s the market that they know well. That’s just my personal preference. Company doesn’t have to necessarily satisfy my individual request. But yes, there are. If you look at the map of Poland, the western part of Poland borders Germany, then the southwest is Czech Republic and Slovakia.

[01:09:51] Shree Viswanathan: The eastern side is Ukraine, Lithuania, Belarus, and even a little bit of Russia. The west is a lot more prosperous than the east. The western part of Poland is where the company got its start. And if you look at the store base, it’s more dense. Within the Western portion. In fact, just last year they opened up the first store in the southwest port of Poland.

[01:10:14] Shree Viswanathan: Poland is broken up into 16 states and the eastern 4, 5, 6 states are less prosperous relative to the west ’cause they border Ukraine, Lithuania, Belarus, and they just opened up their first store in one of the eastern states. There is more room there, but expanding outside. Poland. It is a possibility. I think Czech Republic is one market that may be, that may have much closer demographic profile and perhaps even certain operating environments that are similar to Poland.

[01:10:46] Shree Viswanathan: Biedronka, as I mentioned, the largest, which is about 28, 30 percent of the market. It’s a company controlled by a Portuguese company called Geronimo Martins. They have publicly announced that they’ll use Poland as the base and start Thinking about Slovakia, which, as you rightfully said, has certain features similar to that of Poland.

[01:11:07] Shree Viswanathan: I think for Dino, it may be Czech Republic, but many things will have to fall into place. One of the things that Dino does is they own the land on which these stores stand. They get the land from agricultural from farmers in agricultural neighborhoods, spend time, money, takes about 18 months or so to get the permits to make them approved for commercial use.

[01:11:28] Shree Viswanathan: And those types of things need to be available for them to start replicating what they have accomplished in Poland. But they don’t necessarily have to go there to even Describe what I’m talking about. There is enough room within Poland itself to continue to grow. 

[01:11:44] Clay Finck: It’s really interesting, a bit earlier you mentioned the quote the further you can look back, the further that you can look ahead, and I’m reminded of Taleb’s book, The Black Swan, and the Turkey example where All things are well until Thanksgiving hits.

[01:11:59] Clay Finck: And that reminds me of the situation right now in Ukraine and whatever effects that might spill over into Poland and you can look back in history and make assumptions on what’s going to happen, but sometimes the totally unexpected can happen. So could you also talk about how you became comfortable investing in Dino and investing in Poland more broadly, given the conflict to the East of them in Ukraine?

[01:12:23] Shree Viswanathan: Yeah, actually my investment in Dino and in Poland was way before this conflict even started. Another small investment I have in Poland is a software company called, it’s now called Text. It used to be called as LikeChat. In any case, before I spent time in some of these markets, Sweden and Germany are closer to.

[01:12:45] Shree Viswanathan: The Western world, Poland, obviously has a different profile. I spent an enormous amount of time reading up on Poland. I visited Poland, of course, last year, a few months after the war started. But before that, I spent time reading up on Poland. It’s a fabulous country, has some fantastic history. It’s one of the few countries that has actually made the leap.

[01:13:05] Shree Viswanathan: According to IMF, has made the leap from developing to developed market and many factors have helped the country move in that direction. I live in Chicago, as I said, Chicago has the second largest Polish population outside of Warsaw, and many of whom actually are involved in construction related work.

[01:13:24] Shree Viswanathan: I’ve spent time in real estate before, before my B school, and in fact. Right before the war started, I was actually redoing my kitchen and the entire crew was Polish. I spent time talking to them. They shared a few videos. A few of whom were going back and forth between Poland and Chicago. Many factors come into play.

[01:13:44] Shree Viswanathan: When you want to understand the market, I think it may be better to actually go live there. Again, allow me to digress a little bit. I finished reading this book. Robert Caro is the famous two time Pulitzer Prize winning author who wrote about Robert Moses and Lyndon Johnson, particularly when he was working on Lyndon Johnson, who’s from a small place in Texas, Robert Caro is from New York.

[01:14:11] Shree Viswanathan: He decided that he was having trouble collecting information about Lyndon’s earlier days. and he decided that he and his wife will move into this small town, Texas. It was incredibly helpful in his process to gather more data. So that’s just an aside. That’s what happens when you really want to know the place.

[01:14:30] Shree Viswanathan: I think it may be helpful to go live there. I wish I was able to go spend an extended period of time in Poland. I’d continue to go, but I haven’t spent the kind of time that Robert Kohler spent in Texas before he wrote that book. But I’ve read up a lot. talked to a lot of Polish people. I talked to the company itself, Polska.

[01:14:48] Shree Viswanathan: I’ve talked to many industry experts that have come from Biedronka. Unfortunately, I haven’t come across anybody who has left Dino Polska itself that’s been able to. Talk to me, but a few other grocery chain operators in Poland. I’ve been able to talk to those people. I’ve been able to collect a lot of information from a variety of different sources, and that’s how I’ve been able to get comfortable with the country, with the people and particularly this company.

[01:15:17] Clay Finck: It’s interesting. You mentioned the privacy of Dino Polska’s management. If my memory is correct here, the founder started the company in 99 and. He ended up taking on external funding to fund their growth around 2010. And the founder still owns 51 percent of the shares. He’s known for being very private.

[01:15:40] Clay Finck: So presumably you haven’t met with Dino’s management team, although you would prefer to do you just really haven’t been able to, and you’ve had to get a lot of your information from other sources. 

[01:15:50] Shree Viswanathan: Yes, I have not met him. I have exchanged regular snail mail. conversations with him. I hope to be able to meet him during one of my trips, but the companies I are, he’s very comfortable in English.

[01:16:04] Shree Viswanathan: The CFO is not quite as comfortable in English, but generally speaking, the management team is reticent when it comes to Engaging with the market. I think it’s primarily driven by how Tomas Bisky the founder, sets the tone for the rest of the team. The IR guy is the eyes and mouth of the company, and you’ll engage with us anytime we want, but Tomas doesn’t generally meet with investors.

[01:16:30] Shree Viswanathan: I hope to be able to crack that code one of these days. I don’t know when, 

[01:16:35] Clay Finck: and oftentimes when this is the case, it’s maybe a company that’s just so large and they have so many different things going on, like Dino Polska. around a 9 billion USD market cap. It’s not a company that’s getting attention from all these big name investors.

[01:16:51] Clay Finck: And I’m sure they are strapped for time in terms of all the work they’re doing and expanding their business. But I think it points to their focus on what really matters. And that’s the fundamentals of the business and minimizing a lot of the noise and like speaking with Wall Street and such.

[01:17:06] Shree Viswanathan: I actually, in one sense, it’s annoying to not be able to see the black of the eye of the decision maker. But, in another sense, I appreciate the focus on the operations. Some time back, Todd Combs, he did an interview with Michael Mauboussin in Columbia. They just, it was a breakfast meeting.

[01:17:26] Shree Viswanathan: Michael was asking about a number of the things that he has learned after moving over to Berkshire, blah, blah, blah. It’s a fantastic read if you get the transcript. But one of the things that Todd says in that interview is, an interesting question I ask management teams is, what are the things that you would not be doing if you were private?

[01:17:47] Shree Viswanathan: And why are you not doing them? Invariably, this investor communication is one thing that pops up as one of the top items that they would not be doing if they were not public. And so here’s Dino Polska, which is another a few companies like that. They don’t like to engage with the management team. In the case of Dino, yeah, they don’t need to raise any capital.

[01:18:09] Shree Viswanathan: They did raise debt for that meat processing plant, but generally they’re not in the business of raising capital. constantly, and they’re not in the business of promoting their stock. They do want to provide the correct information to the market, marketplace. And so they do conduct an earnings call, in which the CFO and the IR guy will go back and forth.

[01:18:29] Shree Viswanathan: But outside of that, they don’t like to engage with that, with the investor community. And I do sincerely appreciate the approach. But yeah, that was an interesting point that Todd brought up in his conversation with Michael Mauboussin. And. On the other hand, there are a few companies, even today, I wish they were not quite as engaging with the market, constantly talking about their company, about the market, about the management team, blah, blah, blah.

[01:18:54] Shree Viswanathan: I would like for them to actually be a little… Less talkative. 

[01:18:59] Clay Finck: Shree, I have one more question I wanted to ask you before I let you go, give you the final handoff at the end. At the very start, you mentioned Chris Mayer. It’s an investor that you know, and it sounds like you guys keep in touch and run ideas by each other.

[01:19:13] Clay Finck: And you also have a few names that intersect Dino Polska being one of them. And to the best of my knowledge. Chris’s portfolio has a sizable allocation to serial acquirers. And for those who aren’t familiar, serial acquirer is a business model whose futures growth is essentially predicated on make continuously making these acquisitions constellation software is.

[01:19:35] Clay Finck: That’s one sort of prominent example that we’ve talked about on the show, and a lot of our listeners have taken interest in learning more about, but Sri, you don’t own any serial acquirers in your portfolio, and I’m sure you’ve done plenty of research around this, given that you talked to Chris from time to time.

[01:19:50] Clay Finck: So I’m curious to get your general thoughts on serial acquirers and what’s kept you out of them today. 

[01:19:56] Shree Viswanathan: Yeah, you’re right. Chris and I, we go back a while and we keep talking about our portfolios and ideas and all that, and he does have a few more serial acquirers than is typical for me. I wouldn’t say I don’t have any.

[01:20:09] Shree Viswanathan: I know Heinkel is one that I own. It is a serial acquirer, although their acquisition program is slightly different in that this doesn’t happen all the time, but in most of their acquisitions, they don’t Acquire 100 percent of the company, acquire 70 80%, leave a slug for the selling shareholders to remain vested.

[01:20:30] Shree Viswanathan: That’s a slightly different business model compared to most other serial acquirers. That’s a feature that I like, but I would say this is more a personal deformity that I have. That’s holding me back. And I told you I went into to Chicago. Ever since I graduated from Chicago, I’ve been in a number of different number of companies.

[01:20:49] Shree Viswanathan: Each one of ’em has been acquired, was a commercial bank as an investment bank, and then even asset Managers Advisory and QLA. Each one has been acquired and it’s interesting that none of those acquisitions have panned out well for the acquirer, perhaps it’s. The source of that deformity in me. I’m also reminded of, Buffett used to write these very interesting letters back in the days.

[01:21:13] Shree Viswanathan: It’s unfortunate that he doesn’t write those types of letters these days, but there was one that he quoted many years ago. I forget, it must have been in the mid 80s. He said, he thinks about acquisitive growth. He said, I’m reminded of this country singer, Bobby Bear, and which he said, I’ve never gone to bed with an ugly woman, but I’ve sure woken up with a few.

[01:21:32] Shree Viswanathan: In any case, I’m not saying I’m completely opposed to it. There’s a McKinsey book on valuation has talked extensively about the type of acquisitions that pan out well over time. There’s an interesting author website. I think his company is called Scott Management. He has put together certain features of serial acquirers.

[01:21:54] Shree Viswanathan: That he thinks do it the right way and have actually made it work over the long term. But it’s just a combination of acquisitive growth, not necessarily panning out over time based on my experience. And yes, I’ve been wrong. Mark Leonard Constellation has been a phenomenal success. There are a few Swedish serial acquirers that have done it right and I’m not in any of them.

[01:22:16] Shree Viswanathan: So I’ve been wrong so far, but maybe over time, as I continue to spend more time looking at these companies, and actually some of them have also come into the, have also declined by 20, 30 percent over the last few months, particularly the Swedish ones. You never know. I may actually change my opinion, change my thought process.

[01:22:37] Shree Viswanathan: Life as an investment manager is always a question of being a learning machine. I’m not a machine yet, but I continue to. Spend time trying to learn. This may be one thing that I may learn over time. I am a slow learner. I know that. 

[01:22:51] Clay Finck: Being a serial acquirer and being successful for decades, it’s an incredibly difficult task.

[01:22:58] Clay Finck: And it’s one of the Chris Mayer names just studying one of their managers. They talk about this learning journey too. They’re continuously learning, continuously trying to. figure things out. And I think we’re all in that boat, but Sri, I don’t want to hold you too long. It’s been one of my longer interviews here, and I want to give you a handoff here to give you a chance.

[01:23:18] Clay Finck: If anyone in the audience would like to learn more about you and SVN Capital and. Any other resources you’d like to share, please give them to hand off to where they can do

[01:23:38] Shree Viswanathan: Thank you. I warned you up front that I do tend to talk a little more. Thanks for having me and for people to follow me. My website is www. svncapital. com and my email is shree@svncapital.com. And as you said, I’m also on Twitter at @SvnCapital, I  would love to connect with your followers and I can’t thank you enough for having me here today. And I’m extremely sorry that this ran way too long. 

[01:23:55] Clay Finck: No, it definitely didn’t go too long. I thoroughly enjoyed it.

[01:23:59] Clay Finck: And I thought this was probably a good cutoff point and maybe we can continue the conversation at some point in the future. 

[01:24:04] Shree Viswanathan: Absolutely. Thank you. And look forward to staying in touch.

[01:24:08]  Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or re-broadcasting.