[00:02:17] Pierre-Olivier Langevin: There was not much to see in terms of track record. There was almost none. The firm was starting. And from my point of view, I wanted eventually to leave industrial design to pursue that investment career. But I saw it as something that would come far away in the future. And so I would do industrial design as my daytime job and on evenings and nights, I would do investment.

[00:02:41] Pierre-Olivier Langevin: And so I, Carl Simard and Danny Foster, they were attracted to my profile. So they founded Medici two or three years before they met me. And I was writing a financial blog just to have connections and speak with people. People that know fundamental investing, they were attracted to my profile, just as I wrote that blog and Carl Simard on his side was writing in the local newspaper in Quebec and Montreal.

[00:03:06] Pierre-Olivier Langevin: And he would talk about businesses, good ROE or return on asset businesses. I recall that he even wrote a paper about if Warren Buffett invested in Quebec companies, what are the business he would look for? And I recall names like Alimentation Couche-Tard, a CGI group. And he thought positively about some of the same things as I do.

[00:03:30] Pierre-Olivier Langevin: So, seeing the markets as a way to buy businesses, not pieces of paper. But I think what was most unique about Medici and how we started is there was no star investor leading the way. So I think most investment firm today are born from an employee from an investment firm that chooses to leave the firm and go on its own.

[00:03:54] Pierre-Olivier Langevin: And so he knows the recipe, he knows the processes, and he would find people on back office functions to help him keep looking at stocks during the day and so on. So there was no process like this. Everything had to be done. Even Carl Simard, who founded the company, he did not came from another investment firm.

[00:04:13] Pierre-Olivier Langevin: He learned actuary because at a young age, what they taught him at school, it was basically that the markets were efficient. And you could not generate any meaningful alpha over the longterm. So he was like, okay, so if nothing can be done there, then I won’t pursue that career. And so all the process we had to learn them, Carl, and then he did know they had to have great people, great processes in terms of investment.

[00:04:41] Pierre-Olivier Langevin: We just looked at what the best we’re doing. If you want to be good at hockey, you should watch a Connor McDavid or Sidney Crosby videos. That’s the same thing for investment. You should watch Warren Buffett. You should watch Phil Fisher or Charlie Munger. Anyway, I remember Carl and then he asked me on my first interview, do you manage your own money?

[00:05:02] Pierre-Olivier Langevin: What is your return so far? And how do you calculate your return? And I was like, gosh, I was thinking about hard questions to answer. I was like, well, that’s super simple questions. But what I learned later, maybe a year or two after is all the people that were interviewed, they didn’t even invest with their own portfolio.

[00:05:21] Pierre-Olivier Langevin: They would buy mutual funds. They would do indexing. And so when you think about investment, probably even more in Canada and Quebec, it’s fascinating to see how much industry participants aren’t even trying to beat the market. And even the ones that say they do try to beat the market, you look at mutual funds, there’s 7, 500 stocks in that.

[00:05:43] Pierre-Olivier Langevin: And so if your best idea is, I don’t know, 4 percent of, of your portfolio, are you really in the business of having significant, meaningful returns? So of course you’ll underperform. If you charge fees and you’re close at indexing, you’ll underperform. So I was surprised by that. I said, well, here comes a great business that’s coming at me.

[00:06:04] Pierre-Olivier Langevin: We could add value if we do it properly.

[00:06:08] Clay Finck: That’s wonderful. And yeah, I think you mentioned sort of the team aspect of not having sort of one all star running the show. And I think that’s one of the unique things about Medici and how you’ve managed to generate these outsized returns is you use this investment committee to make investment decisions.

[00:06:26] Clay Finck: So I was curious if you could talk about how the committee works, how it’s used to generate investment ideas, and then how an idea eventually enters the portfolio.

[00:06:34] Pierre-Olivier Langevin: The committee in itself is not doing much research work. The research is done by analysts and amongst the five members of our committee, there’s three analysts that are mainly working full time looking at stocks and stuff.

[00:06:50] Pierre-Olivier Langevin: And so the reviewing is done by the committee and all the buy and sells decisions are done by the committee. By the way, having five members, we feel like it’s the good amount of people, too much people. It’s mostly like a survey of public opinion. You don’t want that. Okay. You want a team that’s nimble enough to be able to take bold decisions.

[00:07:13] Pierre-Olivier Langevin: And if you’ve got 10 person around the table and you want to put 10 percent of your money in a stock, it’s going to be a quite hard task and having only one people on the flip side, the problem is we want to avoid failure. And if you end up putting 25 percent in a single stock, because you’re super confident in a given investment and you don’t have anyone to challenge you, if you fail on that idea, then you could lose a bunch of money.

[00:07:41] Pierre-Olivier Langevin: And so being able to put 10 percent in a stock is significant enough, but having a too small committee would put us at risk, we think. And going into our strategy, because the strategy is being applied by analysts, but also by the committee. We’re fundamental investors and all the members of the committee are really investors on themselves.

[00:08:04] Pierre-Olivier Langevin: They have their own portfolio, they make their own decisions for their own money. And when we find something attractive, we want it to be significant. So we own maybe 15, 20 stocks, more or less. We’ve got only one strategy. Okay. And we’re bottom up generalists. So tech, pharma, financial, industrial, we would look at all those kinds of.

[00:08:24] Pierre-Olivier Langevin: Companies, although we tend to shy away from biotechs resources, highly cyclical with fixed costs or highly speculative, not revenue generating. We would shy away from it or the latest fashions. You think about beyond me, cannabis industry, cryptocurrencies, and pharma. So we didn’t invest in any of those things.

[00:08:45] Pierre-Olivier Langevin: And there’s basically four criteria that we would look at good and sustained return on capital. Ideally, even during recessions, meaningful, and durable and durable as an expanding competitive advantage. And the third one is having good managers that are able to reinvest for the long term and attractive rate of return.

[00:09:09] Pierre-Olivier Langevin: And if you’ve got all those three, it’s great. You got a great business. But we’re investors and we’re there to make a return and a return that’s better than the benchmark. So we need to buy at a reasonable valuation. That’s key. The key learnings that we made inside the investment committee over time, and that circles back to your initial question.

[00:09:30] Pierre-Olivier Langevin: Having the discipline to hold your winners and winners. It’s not necessarily stocks that went up eventually that converge, but winners for us is business that can compound because they know how to reinvest. And as they reinvest their earned capital, the moat is increasing. And so I wish I had been able to understand the importance of reinvesting earlier in my career.

[00:09:57] Pierre-Olivier Langevin: I was all about trying to find the best moats, but sometimes you can have moats that doesn’t allow you to reinvest enough. And so your return, although it’s a great business that you own, your return are not necessarily as good as I might’ve wished at that time. And so the committee being a group and being focused on compounding always gets you back to that idea.

[00:10:21] Pierre-Olivier Langevin: Can that business compound? We sold Apple, we sold Costco, and there’s a bunch of business we sold. And we were like, gosh, we left so much money on the table. So I guess we’ve learned the hard way, but we haven’t sold one company. Probably your audience is well aware of Constellation software. We’ve held it since 2012.

[00:10:40] Pierre-Olivier Langevin: So it’s been 12 years. And it has been expensive much of the time and being able to see the quality of the business and having that criteria of reasonable valuation, a stock could be expensive, the business could be good, and you could keep it as long as it’s reasonable. And so the committee really helped us learning what stocks should be kept and which one should be sold depending on the valuation.

[00:11:07] Pierre-Olivier Langevin: It’s really hard to find true compounders. So when that happens, they won’t stay cheap much of the time. So you have to accept to own them at more expensive valuations. And maybe the second key learning would be you research first, and then you try to buy at a reasonable valuation, not the opposite way.

[00:11:27] Pierre-Olivier Langevin: Sometimes as investors, we try to see to things that have gone down. But if you don’t know the business and things I’ve got down, you got two things to figure out. You got to figure out the business, how it works, what’s the management, what’s the perspective, the longterm perspective, but the other thing you need to figure out is what’s the problem.

[00:11:46] Pierre-Olivier Langevin: Is it temporary or permanent? So you’ve got two problems to figure out. And what we’ve learned over time is when you do that process the opposite way. So trying to find things that have gone down, you’re rushing on research. You’re going quick because your thinking is, oh, well, the stock might go up and I could lose the opportunity.

[00:12:05] Pierre-Olivier Langevin: So we add our best investments, looking at companies for years and banging our head on the table and say, gosh, when am I going to buy that thing? It’s super expensive. And it always been that way, but things happen, problem happens in life. And maybe five years later down the road, you have your opportunity.

[00:12:24] Pierre-Olivier Langevin: There’s a problem, but you can focus on the problem and figure out if you want to buy or not.

[00:12:30] Clay Finck: Yeah, so many great points there. I liked the point you made on just these truly exceptional businesses can be very rare and we should be very reluctant to sell them. And one of the ideas I’ve sort of thought about recently is people can look at a company’s multiple today and it might be higher.

[00:12:47] Clay Finck: Then what has been in the past and when you compare today to the past, it’ll say, oh, like the company’s more expensive, but if the company’s done very well and the stock has performed is up 3, 4x over the past number of years, then that would tell you that the previous multiple you’re looking at was a mispricing because you know, something was being underestimated with that company’s future growth.

[00:13:09] Clay Finck: So looking at multiples can be a tricky game sometimes with these exceptional companies.

[00:13:15] Pierre-Olivier Langevin: It’s like a muscle that you need to flex. The more you know about the business, and the more, if the business is great quality, the more you come up to the idea that multiple isn’t that important. It might look expensive, but if you know that company is able to reinvest at 20 percent rate of return, they’re generating a lot of cashflow.

[00:13:35] Pierre-Olivier Langevin: They’re reinvesting most of the cashflow generally, even a 30 times P if you have such a business, it could prove to be cheap. But, you know, so reasonable is, is like, it’s not black and white, so it’s a judgment call, right?

[00:13:50] Clay Finck: You talked a bit about moats there and with investing, one of the tricky things is we can find ourselves in these eco chambers where you’re talking to the same people and you’re all spouting many of the same talking points.

[00:14:03] Clay Finck: How about you talk about how the committee has helped you find these exceptional businesses with truly sustainable, truly durable moats and competitive advantages. I’d love to learn more about this.

[00:14:14] Pierre-Olivier Langevin: Although no research is done directly at the committee level, we assess the research and we ask a lot of questions and figuring out a mode is, it’s not always clear inside of your head when you get information that’s interesting, but having to put it on the paper, having to write it, because if you’re going to present at a committee, you got to write something.

[00:14:38] Pierre-Olivier Langevin: And as you write it, you lay it down on the paper. You see if it doesn’t fit. You’re like, hey, there’s that aspect that I forgot or this or that. Your first committee is your own committee because you write it on a piece of paper. And there’s four other person waiting for you that are going to grill you, questioning you on what you laid out on the paper.

[00:14:56] Pierre-Olivier Langevin: So it’s really a game changer. I don’t know how many investor, individual investor listened at that show, but having other people questioning you, there’s always aspect that you will forget when investing. And I have the chance personally to have those four people that are rushing me on the question.

[00:15:15] Pierre-Olivier Langevin: When I lay out a new idea, it’s a game changer, really. And as a committee, what do you want, even as an investor? Do you want to form your opinion on a single judgment or do you want to consult other opinions? And whether a moat or not can be easily disrupted, you can figure it out many different ways.

[00:15:36] Pierre-Olivier Langevin: Life experience can bring you stuff. Knowledge of an industry comparison with other industries. You might relate to some things that might be comparable. Past history, things happen in a given business and you could learn from that. And one of the thing that the committee could be useful to is saying to art.

[00:15:56] Pierre-Olivier Langevin: Sometimes you’re passionate about what you do. You want to learn stuff and you’re not sure that you can understand a company, but you’re willing to work on it. But you got four other person looking at you. And they’re not able to give you any good questions because they don’t know what’s happening. So sometimes it could be an indicator that you should maybe not pursue your investment idea because nobody’s going to be able to challenge you.

[00:16:20] Pierre-Olivier Langevin: And we might do a mistake. I think Clay, you like Charlie Munger. He said, I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart. So what do you want? And having five pair of eyes looking at a mold. And figuring whether it’s going to change fast or slow.

[00:16:39] Pierre-Olivier Langevin: It could be disrupted or not. Do you want to do that stuff alone or you want to do it as a team? You got to be open minded if you do it as a team, if you’re a young investors in the year 2000 and you are using web crawler, AltaVista, Google, and all that stuff. You would probably see how the phone book industry would be challenged, whereas an older investor that wouldn’t use those technologies at that time, the search queries probably would think, yeah, the phone book business is the best business that ever existed.

[00:17:12] Pierre-Olivier Langevin: You don’t want to be that person. At Medici, when AI came down, we had an AI expert coming and presenting to the committee and even the rest of the team, because we use now AI to upgrade our own internal process. But having the expert, we went from, oh, Google is gonna participate in the AI industry and it’s gonna be a force for them because they’ve done it.

[00:17:36] Pierre-Olivier Langevin: They’ve done it already. And we were like, oh gosh. Having that presentation, we were like, okay, they will participate, but they will be one participant amongst other, they will not be the only game in town. And so having outside expertise and having people being able to bring in outside expertise is key.

[00:17:56] Pierre-Olivier Langevin: An investment committee could do that. And if I could add a little more, not all modes are equal. And when the committee figures out modes, as we’ve learned to work with each other, we figured that some modes are expanding and some modes aren’t or even shrinking. One example is O’Reilly Automotive, which is probably a business that you know well in the U. S. We looked at it many years before we bought it. It was, I think, in 2018. Amazon laid out the news, or officially or not, I don’t remember, that they would get into the aftermarkets auto parts industry. And so O’Reilly went down, and then we bought it. But some of the members of the company were like, okay, that’s a fair price. That’s fine. But as the stock recovered over the next two or three years, we were like, okay, we should sell it because, there’s not much growth coming and they won’t be able to grow and we should sell it as it’s well valued, but there was another side of the thesis that was, we really learned from it, looking at the numbers, questioning the management, but also circling back with the members of the committee, it’s that yes, the market seems mature.

[00:19:11] Pierre-Olivier Langevin: But there’s many players that haven’t done the investment, doesn’t have the distribution infrastructure to give out parts quickly. And every time O’Reilly opens a new store, they’re displacing a legacy store, a mom and pop shop store. So even though it didn’t look like they had the capacity to open store many years in front of them, they did have that.

[00:19:35] Pierre-Olivier Langevin: And so we had some people from the committee that said, no, there’s more growth upcoming that we think. And having that debate inside and having the patience to keep it, although the valuation might look like it’s not reasonable, we made great return and we still own O’Reilly today.

[00:19:54] Clay Finck: Man, you really struck a chord with me there.

[00:19:57] Clay Finck: Just having other people to talk about investing with and talk about these very complex subjects like moats. I had realized upon joining TIP that investing is just can be a very lonely endeavor. And it reminds me of the community we launched recently, which is called our TIP Mastermind Community. It’s been such a valuable resource to me.

[00:20:17] Clay Finck: Just to sort of have people to surround myself with to talk about these complex subjects, talk about companies, talk about moats or investment strategies. And I think it also ties in well to my next question, because one of the other aspects of your firm that I found particularly interesting is that your firm proudly states that many of your analysts, many of your portfolio managers actually didn’t come from the investment industry.

[00:20:42] Clay Finck: I’m curious to get your take on if you think this can offer some sort of advantage for your firm, whether it be the ability to think more independently or knock down some of the conventional thinking that academia can teach us or what are your thoughts on that?

[00:20:57] Pierre-Olivier Langevin: Yeah, I think with labor shortage, let’s say first and foremost, that if you find someone good coming from inside the industry, you don’t really have the luxury of not taking him or there’s good people coming from inside the industry.

[00:21:09] Pierre-Olivier Langevin: So my point is not to trash it. against it, but our industry, at least in Canada, I don’t know if it works the same way in the U.S. but it’s much more about selling than investing. So if you get people from inside the industry, experience people, they’re probably well aware of how to sell a fund to a client investing, maybe not as well at school.

[00:21:34] Pierre-Olivier Langevin: They learn us the efficient market hypothesis. So circling back to the first question at the beginning, you learn that you cannot beat the market or you shouldn’t try to beat the market. And so the people that end up learning the fundamental investing, the concept of intrinsic value and having a margin of safety when buying assets.

[00:21:57] Pierre-Olivier Langevin: Okay, it’s the one that I figured it out by themselves. They come from outside the industry. Generally doesn’t mean someone at school wouldn’t have the curiosity to pursue fundamental investing, but yeah.

[00:22:12] Clay Finck: I think another good point there is tying back to that interview question is like, show me your portfolio.

[00:22:17] Clay Finck: What have you bought? Why’d you buy it? How is it done? It’s essentially asking, like, it’s getting to the point of, is this person truly passionate about investing? If they’re buying a mutual fund with 5, 000 companies in it that has all these fees, maybe they aren’t as passionate about investing as they might say they are.

[00:22:33] Pierre-Olivier Langevin: You might be passionate about financial planning, for example, but investing, I’m not sure, not sure. And so one of my colleagues, Eddie, he’s my partner. He was so happy to get that portfolio management course at university. He was like, oh, wow, I’ll learn investing. And he already invested by himself, by the way.

[00:22:52] Pierre-Olivier Langevin: So yeah, I’d seen it like, as a way to enhance learning and he just figured out that, wow, it’s all about standard deviation and beta and Greek letters thing. He was like, I’m not investing in Greek letters. I’m investing in dollar sign. It’s not Greek, it’s American. So we’re joking about it. And by the way, maybe one idea that is worth saying about the investment committee is it’s not going to be a good committee if it’s run by a dictator.

[00:23:21] Pierre-Olivier Langevin: If it’s one person taking the decisions and the other person are just there to give out opinions, but there’s only one person who decides. What it’ll do to the long term is those people that are just giving out opinions, they won’t trust the process and they won’t speak out their minds because anyway, it doesn’t have any effect on the end decisions.

[00:23:42] Pierre-Olivier Langevin: The person will end up deciding what he or she wants. And it might sound cliche, but the diversity of opinion has to be encouraged. We have a culture of actively looking for disconfirming evidence. So there needs to be people seeking, even though the person presenting has to be seeking for contrarian feedback.

[00:24:05] Pierre-Olivier Langevin: He has to expect it. And that can lead to heavy debates. And so you need to have a group of mature people that can get along, even though we have a heavy debate. When the committee is over, everyone can get along. Not every people are able to do that. And one funny thing is we have the devil’s advocate practice.

[00:24:24] Pierre-Olivier Langevin: When there’s a new investing idea that is expected to be shown at the committee, we would pick a name in a bucket and that person would be the devil’s advocate. So it’s only mandate is to be short on the stock and figure out all the bad things he could say about the thesis. And what we’ve noticed is that over time we don’t really need to pick a name because the four other ones are actually devil’s advocate and even the person presenting the idea is a devil’s advocate in itself because he would lay out the positive and he would talk about the risk because what better ways to lower the level of debate than by yourself as a presenter saying what doesn’t work in my own thesis?

[00:25:08] Clay Finck: So I wanted to take the opportunity in this interview to discuss a couple of Medici’s holdings. Being based in Montreal, you inevitably discover some of the companies north of the U. S. border, one of which is Dollarama, and Dollar General has been talked about quite a bit over the past year or so in the U. S. given how the share price has performed. So when I looked at the returns for Dollarama and Dollar General, It’s like a night and day difference over the past 18 months, which was honestly quite a surprise for me. Generally, you’d think if there’s a slowdown in retail more broadly or some pockets of retail, it’d be affecting many of the players.

[00:25:46] Clay Finck: So when you look from the start of 2023, shares of Dollarama are up over 60 percent while shares of Dollar General are down around the 50 percent range. What is Dollarama doing that’s different than Dollar General?

[00:25:59] Pierre-Olivier Langevin: I certainly know Dollarama a little more than Dollar General, but we have visited Dollar General quite a few times when we come in the United States.

[00:26:07] Pierre-Olivier Langevin: So I could definitely comment. Dollar General, they have a wider selection of consumables. Whereas when you look at Dollarama, within the consumables category, they will only have the low price, best deals items that it can find out. Dollar General, they will bundle offers and do promotions. Dollarama, you don’t see any promotions.

[00:26:30] Pierre-Olivier Langevin: You see everyday low price, no advertising. There’s absolutely no advertising. Dollar General, there’s many formats for a single items. Dollarama, almost no big size, especially in the grocery category. You will find a small size. If you want more, you buy two, you buy three. Dollar General, their core audience, from what we understand, maybe we’re not totally right about this.

[00:26:55] Pierre-Olivier Langevin: These are people buying their grocery, shopping grocery, where there are sometimes not any other options, small villages. Dollarama, the core audience is people that need everyday stuff. Housewares, cookwares, staples, electronics, arts and crafts, toys, tools. And so on. So it’s really a general merchandise store.

[00:27:18] Pierre-Olivier Langevin: The people that are economically constrained, they might want to shop grocery, but they’re not the core audience. They’re the minority. There’s many, many difference that I see, but I could lay out the difference with the result in the margin, if you wish.

[00:27:35] Clay Finck: So I have here that Dollarama’s net margins around 17%.

[00:27:42] Clay Finck: And then contrast this with Dollar General, their net margins are down to four percent. They were ranging around six or seven, so they’ve come down with some of the slowdown they’ve been experiencing. Why is Dollarama’s margin, why are they able to command such high margins?

[00:27:57] Pierre-Olivier Langevin: Again, Dollar General, 81 percent of their revenue comes from consumables, and we know consumables are lower margin product.

[00:28:06] Pierre-Olivier Langevin: At Dollarama, it’s 46%. So base rates, Dollarama, if they had just that difference, there would be a better margin for Dollarama. Dollar General, they have grocery stores like Margin. Dollar General is not a grocery store. Dollar General, 4 percent of their revenue comes from direct imports. So most of the stuff, the inventory that’s coming in at Dollar General is coming through a distributor.

[00:28:33] Pierre-Olivier Langevin: And you have to pay, the distributor is cut of the profits. Dollarama, 50 percent of the products comes from direct imports. So that’s a huge difference. Dollar General, you will see a heavier mix of national brands. And so if you buy national brands, there’s maybe less bargaining power that you can flex with those big players.

[00:28:56] Pierre-Olivier Langevin: If you visit a Dollarama store, you’ll see that there’s a much higher private label mix. Dollarama is known for their knockoffs. You look at the chocolate bar stand, you won’t see any Mars chocolate bar. You’ll see Meteor, which is absolutely the same thing, but it’s not made by the company that does Mars.

[00:29:18] Pierre-Olivier Langevin: And they like to keep it simple at Dollarama. There’s no frozen food. There’s no fresh food. So the energy bill inside the store, inside the distribution infrastructure, is much lower because of that. The logistic, think about it, you have no fresh product. You have no refrigerated product or frozen. So the freight, the transportation, you transport by train.

[00:29:41] Pierre-Olivier Langevin: It’s cheaper. You don’t need to transport every one or two days because you have no fresh food. So it’s less freight intensive. So it’s less expensive to move stuff. The beverage inside the stores, they are all, almost all on the shelves. They’re not refrigerated. And they’re the perfect concept for self service cashier because there’s no age restricted products.

[00:30:08] Pierre-Olivier Langevin: There’s nothing being sold by the pound, so you don’t need to have a balance and with a code that you input on your checkout. Everything has a barcode, so the throughput can be really fast on self checkout and you can get labor efficiency because of that, that keep it simple style. And even when setting price, many of the items that they will sell, they have their own price tag printed on the packaging.

[00:30:32] Pierre-Olivier Langevin: That means the product would sell at the same price in every store, whether or not the store is in Toronto or, I don’t know, in Sudbury. In Canada, there’s not much room for a new entrant. They already densified their footprint inside the major cities. The competitive landscape is much easier also, the dollar stores industry is 50 percent less penetrated in Canada than in the U. S. So there’s still room to grow, but they have scaled up. I mean, Dollar Tree is the biggest competitor with 250 stores in Canada, and they’re not growing. And Dollarama is more than six times that amount. So the moat is just too big. If you want to compete Dollarama in Canada, the best way is you would have to buy Dollarama.

[00:31:18] Pierre-Olivier Langevin: And since they’re publicly traded and they have, quite a nice multiple, I guess there’s no one willing to do that.

[00:31:26] Clay Finck: So we talked earlier about the power of high reinvestment rates at high returns on capital. I see returns on capital for Dollarama are in the 20 percent range and it’s been quite a strong performer over the years.

[00:31:40] Clay Finck: I look at their financials as of late and I see that a lot of their operating cash flow is repurchases. And then they do have a bit of growth CapEx. So I’m also interested in hearing your take on your outlook for the company from here and what you see in terms of store growth and what keeps you holding on to the stock.

[00:32:01] Pierre-Olivier Langevin: The stores are leased. And so they don’t spend on real estate that much, which can be quite expensive in terms of CapEx when this is the case. And so the CapEx are minimal. It’s lease improvements, it’s equipment, systems. So it costs less than a million dollars to open a store, at least in Canada. So I guess the reason they, it looks like they reinvest not quite much of their money.

[00:32:27] Pierre-Olivier Langevin: In opening store is solely because it doesn’t cost a lot. If you enter a store and you look at it, there’s nothing fancy about it. It really doesn’t cost a lot. And the other thing is maybe an accounting issue. It’s not an issue. It’s just the way the accounting works. They own 50 percent of a business in Latin America called Dollar City.

[00:32:48] Pierre-Olivier Langevin: But it’s reporting at the equity method. So if you look at CAPEX, the CAPEX bill, it will only be the CAPEX for opening new stores in Canada, but they’re opening quite a good amount of new stores inside dollar city, but since it’s at the equity method, it will only be reported on the cashflow statement when the Laramie Canada will put in new money inside dollar city.

[00:33:13] Pierre-Olivier Langevin: It happened maybe once or twice over the last five years. So you won’t see it. So there’s probably more CapEx, adjusted CapEx that you would see. And just to give you a good idea, Clay, the store count in Canada is growing four to 5 percent every year. But if you bake in the pro rata shares of Dollar City.

[00:33:34] Pierre-Olivier Langevin: It’s more like seven or 8 percent a year. That’s quite a good clip, a good growth pace for a business, seven, 8%. So we feel like they’re running as fast as they can, but they still have the luxury of having excess free cash flows. So it’s reasonable to think that they’ll continue to do buybacks, although they’ll probably try to keep the leverage stable.

[00:33:56] Pierre-Olivier Langevin: Or maybe a little lower. And from an historical perspective, it’s hard to blame them for repurchasing shares because the stock went up 30 percent CAGR since their IPO, I think 14 or 15 years ago, so we can blame them for that. From our opinion at Medici, we would tend to think that we would prefer to see them buying back opportunistically.

[00:34:21] Pierre-Olivier Langevin: Although there are not much opportunities and keep maybe a little more cash for eventual and adding new countries, international expansion. But, again, I think it’s pretty fair what they do with the capital.

[00:34:36] Clay Finck: Yeah. Thank you for expanding on that. That makes sense. They’re able to grow without a lot of potential reinvestment, which is also a very great position to be in when looking at a company.

[00:34:46] Clay Finck: One of the other big winners in your fund has been Meta, which in my opinion is one of the most interesting case studies of investor sentiment over the past few years. So today, Meta shares are just under 500 a share. And in November, 2022, it was under a hundred dollars. So we’re up over five X and just under two years, but this was not an easy stock to just hang on to.

[00:35:11] Clay Finck: When I look back at 2022 revenues declined in three straight quarters, which, it’s just a gut wrenching period for investors that are used to a company that was growing at 30 percent plus for many years. And today you still have a large stake in meta to the best of my knowledge, which I think is the company you added to in 2018 during the Cambridge Analytica scandal.

[00:35:34] Clay Finck: And then in 2023 alone. You had outlined in one of your investor letters that Meta contributed six percentage points to your returns in 2023. So obviously it’s been a key contributor during the year alongside companies like Constellation Software, Lumine, Amazon, and Alphabet. So given that Meta is still a sizable position today, talk to us about what you’re seeing in the company and what keeps you in it.

[00:36:00] Pierre-Olivier Langevin: I think it’s maybe fair to start with a little bit of context on what happened in 2022. So yeah, revenue did decline. If you look at the numbers, if you exclude the effects impact, it was growing slightly, although not up to the amount that you’ve alluded in your question. And still growing despite the COVID overhang, the mean reversion of digital advertising, the TikTok emergence, Apple’s privacy change.

[00:36:30] Pierre-Olivier Langevin: So that was a lot of face wind. And yet still, Meta was still able to grow XFX top line. I think that speaks volume about the quality of the business in terms of numbers. And the other issue was the major, the leverage, by the way, where they were doing, pursuing a lot of eye rings and the metaverse expense that we’re getting a little bit out of control at that time.

[00:36:55] Pierre-Olivier Langevin: And maybe Zuckerberg was caught into the fear of missing out as the digital economy improved with the COVID. He says, well, maybe we need more staff down the road and my competitors are doing the same thing, so let’s do it. But he self corrected pretty quickly and recognizing that he went too much with hirings.

[00:37:15] Pierre-Olivier Langevin: And it became clear, by the way, when the layoffs happened in December 22, that the stock was still super cheap, but we would see leverage coming back over the next few quarters because laying off 20 percent of your employees in a business like this one with leverage, that’s magic to the numbers. Yes, the stock went up with the announcement, but we were like scratching our head and like, why is it not going up more?

[00:37:41] Pierre-Olivier Langevin: And so we were really bullish at that time and it had less than 10 times earnings multiple. So it was really a great investment, but you have to figure out that those things were mostly temporary, which was not that easy to do. So circling back to competitive advantage, if we exclude WeChat, which is a network where the vast majority of users are China based, which is not an addressable market for Meta.

[00:38:09] Pierre-Olivier Langevin: Meta owns four of the six most popular social media website by monthly average users. Facebook is number one, WhatsApp number three, Instagram four, Messenger six. So there’s YouTube and TikTok, which they don’t own amongst those six. So every new initiative can be leveraged into these four platforms that no one else has.

[00:38:30] Pierre-Olivier Langevin: It can even, if you think about threads, the network they’ve launched, which is quite similar with X Twitter. It can even increase their odds of winning on that network because they’re inter winding it with all the other platforms. And so they are built to win in that regard because of their outrageous dominance of the social media environment.

[00:38:55] Pierre-Olivier Langevin: If you think about competition, you might have a chance of building the next TikTok, but how about building two or three platforms like these? What are your odds of success? We think it’s likely zero for the short, mid and even the longer term. Again, think about it. There’s the algorithmic feed today.

[00:39:14] Pierre-Olivier Langevin: It’s not based on social graph. If you want to create a good feed, it’s going to be based on computing power and generating and figuring out what is your interest with the information you get from the app. So it takes at least two or three years to figure this out and many billion dollars worth of CapEx.

[00:39:33] Pierre-Olivier Langevin: You need to build a user network, so you need to have good content. If you want to have good content, well you better be lucky or you better maybe have some form of content subsidization, and that costs money. Again, probably a couple billion dollars. Again, safety and security Meta has invested $20 billion since 2016.

[00:39:54] Pierre-Olivier Langevin: $5 billion alone in 2023. Okay? It’s not like 10 years ago. You need to have safety and security. There’s election integrity. There’s undesirable stuff happening on the platform. If you don’t do the investment, you could have hefty fines from the European Commission. And those fines are based on your international revenue, not your profit, not your local profit.

[00:40:17] Pierre-Olivier Langevin: So really the revenue. So it could be quite risky for a new platform not to do those investments. So again, it costs many billion dollars. I think it’s just hard to scale quickly. The monetization, it’s hard to figure it out when you don’t have the advertiser base. And Zuckerberg has mastered the art of monetizing.

[00:40:38] Pierre-Olivier Langevin: But you know that you will have Zuckerberg against you trying to monetize faster than you. So, good luck. And then maybe the last one, the safety and security is going to slow you down much, much more than it used to be the case five and 10 years earlier in the past. And so with all that, it’s hard to figure out how Meta’s moat could be greatly challenged.

[00:41:00] Pierre-Olivier Langevin: Google plus tried and they add the financial capacity. They add many other tools that they could intertwine it with the Google account, the Gmail, the maps and so on. And yet they failed. TikTok had its chance. Snapchat also, TikTok risk being banned in the U.S. and what have they done in security? I’m not sure they have done enough.

[00:41:21] Pierre-Olivier Langevin: It’s probably easy for me to say that today, but Meta pretty much closed the gap on the reels. So I’d say good luck for the next one would want to challenge Meta on that. I think we’re probably close to a golden age of social media.

[00:41:36] Clay Finck: I think part of the meta story and the shift in narratives is almost like a shift in capital allocation and where they’re focusing their attention.

[00:41:46] Clay Finck: So throughout the 2010s, you could say pretty good capital allocation. They focused on kind of what they were really good at. And then Zuckerberg had this big shift in his focus to the Metaverse where he spent 40 billion. A lot of shareholders, or I guess the narrative was that he’s just throwing money down the drain.

[00:42:05] Clay Finck: And what’s the use of all these cash flows of these is just going to throw them towards something that potentially shows no promise of any payoff at all. We’ll see, but maybe you could talk about, yeah, the growth opportunities and then how meta approaches capital allocation in 2024, given these lessons they’ve learned over the past couple of years with regards to the metaverse.

[00:42:24] Pierre-Olivier Langevin: So the growth opportunities, there’s the use of AI. It’s just too big not to talk about it. There’s probably five elements within the use of AI. First one is they will increase internal efficiency. So security programming, less labor intensity. Second one, they’ll increase the ROI on advertising. So we see it with Advantage Plus, the quick audience testing, finding the best visuals, the best text as the AI learn about how you publish stuff.

[00:42:55] Pierre-Olivier Langevin: It’s going to be meaningful. Third one. Increasing the recommended content. So we already have proofs that the recommended content increases time spent, and then the ad load, if we can say it that way, versus the social graph, and they already made the capex to have more recommended content. So it would likely help them grow further.

[00:43:19] Pierre-Olivier Langevin: Four is the offering of free AI tools to users and it’s unmonetized for now, the AI tools, but we’ll see later down the road. And five is really selling a virtual customer service agent to businesses. So it’s a whole new addressable market. If you think about it, you would be replacing human labor or some of your human labor to do customer service.

[00:43:43] Pierre-Olivier Langevin: And you would replace it for probably a fixed cost or a monthly cost. And it will probably be a fraction of the salary of a human. So that’s major if you think about it. And that’s a key for even meta, if they wish. So to get out of not get out, but diversify from advertising, selling another kind of services to businesses.

[00:44:07] Pierre-Olivier Langevin: And outside of AI, there’s click to message advertisement that is going well. There’s business messaging on WhatsApp. Instagram is still growing. You see it in court filings. We have had the numbers from Instagram. It’s 30 percent of their revenue base, and it’s growing mid teens, even in the 20s. There’s 46 billion in cash, despite 37 billion in our annual R& D.

[00:44:33] Pierre-Olivier Langevin: 16 billion of Metaverse losses, 27 billion of CapEx, and yet they still have amazing margins. Pre R& D and pre Metaverse loss on the income statement, they have an 80 percent EBIT margin business. And so most of it is discretionary in terms of R& D and Metaverse. And the business still returns 15 to 20 percent return on capital, despite all that.

[00:45:01] Pierre-Olivier Langevin: So yeah, Clay, I agree with you. There’s a bunch of capex that are being done and we’re not too sure about the outcome, but yet still, it’s a really nice business. Even with all those spendings. I think I’ll have to quote Zuckerberg on the Q4 2023. He said, we’re still well positioned. Now, because of the lessons that we’ve learned from Reels, and I decided that we should build enough capacity to support both Reels and another Reel AI service that we expected to emerge, so we wouldn’t be in that situation again.

[00:45:35] Pierre-Olivier Langevin: And at the time, the decision was somewhat controversial and we faced a lot of questions on CAPEX spending. So those elevated CAPEX that we’ve seen over the last two or three years, Meta went from playing defense To playing offense in two short years, that’s amazing. And it wouldn’t have been possible without all those CapEx.

[00:45:57] Pierre-Olivier Langevin: And Zuckerberg he works both on the long and the short term. He’s been buying back 63 stocks within that period. Maybe his timing wasn’t perfect. The average price he paid for those buybacks were probably quite interesting. And so those elevated CapEx, they are totally fungible. Most of that is servers and computing power.

[00:46:21] Pierre-Olivier Langevin: They’ll be able to train much bigger AI models, a recommendation systems, upcoming AI tools that he would want to create. They’ll have the capacity to do that. If it doesn’t pan out, they could improve safety. They could monetize treads faster. They could create new tools for advertisers. So I don’t think in our era, it’s a sin to have more computing capacity than required.

[00:46:46] Pierre-Olivier Langevin: It’s probably a great assets to have today in our technological era. And maybe the last point I want to touch on for that question is the metaverse. So many people see the Metaverse or Facebook Reality Labs as it will work or it won’t. But it’s not a single project. There’s the haptic or neural command systems.

[00:47:08] Pierre-Olivier Langevin: So how do you communicate with your device using not your voice, no keyboard, and maybe a wristband. Okay. That’s what they are likely going to do. There’s the AI investments and it’s already contributing to the core business. And AI investments was originally from Facebook reality labs. There’s a rise on the social media, immersive social media, the augmented reality device, such as the Ray Ban glasses.

[00:47:34] Pierre-Olivier Langevin: They’re selling it out. I mean, they’re quite popular. And the immersive experience inside of businesses, if you want to meet people, you’re a multinational, you want to meet with your partners, but they’re at the other end of the world and you don’t want to travel by plane. Well, they have a partnership with Microsoft for that.

[00:47:53] Pierre-Olivier Langevin: So there’s some stuff within Facebook reality labs that, that are going to be useful and some other stuff, probably it will be a write off, we’ll see, but it’s not all black and white.

[00:48:05] Clay Finck: I think this transitions well to my next question on one of my favorite mental models from Warren Buffett. He says, if you don’t plan to own a stock for 10 years, don’t even think about owning it for 10 minutes.

[00:48:16] Clay Finck: I’m also reminded of Jeff Bezos talking about focusing and betting on things that aren’t going to change instead of asking what a lot of people are going to ask is like, what’s the next big thing? What is going to change in the future? So maybe you could talk a little bit about how your team gets comfortable with how much change a business like Meta could be seeing over the next 10 years.

[00:48:38] Pierre-Olivier Langevin: It’s not an easy question. There’s two major forms of change that we have to contemplate. The first one is new forms of content. And we’ve seen it historically switching from text based status to stories, stories to short form videos. So I think we’ve got a great track record from Mark Zuckerberg and his team that they have the assets and the capabilities to ride on those change.

[00:49:09] Pierre-Olivier Langevin: And especially with those CAPEX that we’ve talked about, they have many computing power that allows them to be able to be in front of the next change that will happen. And those changes might happen two or three times over the next decade. And we’re pretty confident on how Meta will adapt to it. The other form is really the form factor.

[00:49:32] Pierre-Olivier Langevin: So for example, switching from desktop to mobile, that was a form factor. It doesn’t happen every time it might not even happen within the next 10 years. So riskier, lower occurrence. And for us, it’s still unclear what’s going to disrupt the mobile phone. The glasses, the mixed reality headset, they’re still engineering issues.

[00:49:56] Pierre-Olivier Langevin: The expert that we’ve consulted on that is the battery packs, the size, the heat that’s on your face, the weight on your head, the fact that it’s ID immersive and it’s big. They’ll probably figure it out someday, but they don’t have the solutions right now for all those challenges. So the change in the form factor might not be coming over the next.

[00:50:17] Pierre-Olivier Langevin: Three, four, five years, it might take a little longer and apart from gamers, it’s still unclear what are the great use case of having those, this immersive experience with quest or the vision pro. Maybe some people thought that the watch could eventually disrupt the phone, but clearly Apple has taken on that market.

[00:50:38] Pierre-Olivier Langevin: And Apple is wise enough to not cannibalize it. It’s on phone and they made it an additional tool that you might want to use, but concurrently with the iPhone or jointly with the iPhone, I should say. If you think about Mark Zuckerberg, he’s 40 years old. He should already get an award for its proven capacity to react to change.

[00:51:01] Pierre-Olivier Langevin: All the shifts that we talked about, desktop to mobile, text to pictures, to stories, to short form video, the political turmoil, the election integrity, those were massive crisis and they had to invest in security in a major way. The fight with Apple’s privacy change. And today with recommended content is even stronger than before with the cookies and the tracking technologies.

[00:51:29] Pierre-Olivier Langevin: He already gets a huge award for its capacity to react, and he’s probably not even at its prime. He’s proven also that he’s trying to make profits. You could be a good visionary and adapt to change, but not make a profit. And you have to adjust all this and that on the income statement. He’s not in that business.

[00:51:49] Pierre-Olivier Langevin: If he hired too much, he would lay off people. And the main reason that is for nimbleness. Again, that capacity to react to change, having less staff on board and the capacity to buy back shares, not everyone is able to seize that opportunity when the stock is going down and he reacted quickly.

[00:52:10] Pierre-Olivier Langevin: So I guess as long as Zuckerberg is in control, we’ll be fine.

[00:52:15] Clay Finck: Yes. Love him or hate him, what he’s done and to be able to start such a incredible company that’s such a young age is just quite remarkable.

[00:52:24] Pierre-Olivier Langevin: And still being at the helm, by the way. Because the skills you need at 20 years old to build from scratch a company and the skills to operate a company with many tens thousand employees, wow, that’s not the same thing.

[00:52:38] Pierre-Olivier Langevin: It’s quite different.

[00:52:40] Clay Finck: Yeah. Each stage of their growth requires very, very different skill sets. So you own three of the U. S. Big tech companies, you have Meta, Alphabet and Amazon. Which of the three do you foresee to have the strongest growth prospects in the underlying business over, say, the next five, 10 years?

[00:53:00] Pierre-Olivier Langevin: That’s probably the hardest question that you’re going to ask me today. Super hard to figure out. They’re all highly powerful, dominant businesses. We feel like Meta and Amazon are pretty close to each other. In terms of longer term future growth and Alphabet is probably on the third rank, although it’s really a great business.

[00:53:24] Pierre-Olivier Langevin: So starting with Amazon, they own the rails of e commerce. And they have the ability to be the most convenient player. And for anyone who would want to be as convenient as quick on delivery and at the lowest cost, there’s many billion dollars separating them from that. And so I guess they would probably be still dominant in e commerce in 10 years.

[00:53:50] Pierre-Olivier Langevin: And e commerce is still growing and taking shares from traditional retail commerce. E commerce as a percentage of retail sales in the U. S. went from 10 percent to 16 percent over the five last years. And it’s pretty much the same trend in the rest of the world. And this is growing high single digits.

[00:54:12] Pierre-Olivier Langevin: And so if you can keep your moat and get that growth, you could have quite good result. So we think Amazon is going to win in terms of e commerce. Alphabet, Google, they’re probably the greatest business in modern history right now. They’re a tool bridge on the internet search queries. They’re a monopoly, even though they might not want to say that publicly.

[00:54:34] Pierre-Olivier Langevin: They’re so powerful, but the regulators are both ends on the search business. They’re going through massive litigation. Antitrust authorities in the U.S. and the EU are on their back. The search and Google network is about two thirds of their revenue. Gemini will definitely, like I said previously, get their fair share of search, but they will be maybe an oligopoly and passing from a monopoly to an oligopoly.

[00:55:02] Pierre-Olivier Langevin: Yeah, it’s still, even though it’s quite good, it’s still a downgrade from your previous state. And so there could be a multiple contraction. And if you think about everything else Google does pretty much everything they does outside from search is having less margins. And so we could also expect margin contraction.

[00:55:24] Pierre-Olivier Langevin: So what we do at Medici, we would really make sure to bake in margin contraction and not rely too much on multiple expansion in order to figure out if we’re willing to own it or not. And as of today, it is still the case, but as we go further down the road, it might not. We try not to hold too many Alphabet, Google and Meta at the same time, because both business are getting their profits from advertising, digital advertising.

[00:55:52] Pierre-Olivier Langevin: So it’s a way to mitigate risk and most of our digital advertising dollars in Meta for that reason.

[00:55:59] Clay Finck: I wanted to transition and talk just briefly about one more name. So when I first started out as an investor, it was easy for me to get attracted to higher growth. So looking at the metas, the alphabets, the Amazons of the world, and many other companies we could list because you think if a business isn’t growing, then how can the stock perform well?

[00:56:19] Clay Finck: Well, then you run into companies, one of which that we mentioned earlier was O’Reilly Automotive and they seem to greatly defy this logic growing in the mid to high single digits and the stock has been, it’s performed spectacular. There’s no doubt about it. Talk to us about O’Reilly Automotive and what makes them such a special business.

[00:56:40] Pierre-Olivier Langevin: Well, there’s three or four dominant players in the U. S. There’s Napa, there’s Advanced Auto Parts, AutoZone, and O’Reilly. And O’Reilly, how they laid out their distribution is they, many of their DCs are really close to bigger cities, and it’s been more expensive to build them that way. But what we get from that is they are able to deliver in a much more frequent way than even the other big players.

[00:57:08] Pierre-Olivier Langevin: And again, those big players that I just named drop, they are about 50 percent of the market. And so they’re displacing regional players. And what’s great about that business is many retailers, you need to have the best price to win. All righty, and the industry of aftermarket automotive part, you want to get on with your life when your car has a problem, and if the parts are available right now, you’re not willing to shop and see at two or three different place, where will be the best price.

[00:57:42] Pierre-Olivier Langevin: You just want to get on with your life. And the same thing for the repairman, the technician, he wants to turn his base and he’s passing the price of parts to the end user, the driver. And so if he can get the parts quickly, he would turn his base faster. And generally speaking, the technicians that repair cars, if they turn their base quickly, they will end up having better salary and better bonus than if they’re not.

[00:58:11] Pierre-Olivier Langevin: So having the good partner that can deliver to you quickly is critical. And if you think about, for example, AutoZone, which is probably the best peer since by numbers they get great results to their distribution has been planned for do it yourself. So the people that own cars and want to repair their cars by themselves.

[00:58:34] Pierre-Olivier Langevin: Not so much for the technician industry, so they do it for me industry. And if they want to win with that, they have major distribution work to do, and that will cost a lot. They’ll probably do it, but they will need, I guess, at least five years to maybe narrow the gap with O’Reilly. And so seeing that mode is great, but again, circling back to what I said previously, we could have thought that the pie isn’t growing.

[00:59:02] Pierre-Olivier Langevin: There’s so many auto stores in the U S and there’s not any more growth. But if you’ve got a really greater ability to win versus your competitors, what it ends up doing is you’re displacing competitors. So you can keep opening your stores. Your payback isn’t going down much. And if you see it going down, you can slow down on stores opening, but that’s not what’s happening with O’Reilly.

[00:59:29] Pierre-Olivier Langevin: They keep opening stores, even though it seems mature, and the return is still good. So even though the pie is not growing, well, they’re just able to steal market share. And we see it, if you read the calls, you listen to the management, you ask them questions, they’re clearly gaining shares. And so I guess we like the fact also that it’s anti cyclical.

[00:59:50] Pierre-Olivier Langevin: If there’s a major recession coming tomorrow, yes, maybe the first month people will freeze and already will get bad results for that given quarter. But they’re probably the first one to get back because people just stopped purchasing new cars and repairing their older cars and the direct beneficiary of that.

[01:00:12] Pierre-Olivier Langevin: And so we want to be fundamental investor. We want to remain calm when there’s stuff happening in the economy and be able to make good decisions. But having a few stocks like these ones that are more stable can help you remain calm in that kind of environment. So having an already in the portfolio is great to have.

[01:00:32] Clay Finck: Wonderful. Well, Pierre, I greatly appreciate you joining us on the show here today and being so generous with your time and sharing more on your process and holdings at Medici. Please give a handoff on how the audience can connect with you and learn more about Medici if they’d like. And anything else you’d like to share while we’re here?

[01:00:53] Pierre-Olivier Langevin: Well, thanks a lot, Clay, for having me. If people want to reach us, they can go on our website. It’s a gpsmedici.ca. We’ve got a light English version, but since the vast majority of our clients speak French, there would be an enhanced version with lots of media content in French. But the translators are pretty efficient today, so I guess any curious investors would be well advised to go on that section of the website.

[01:01:21] Pierre-Olivier Langevin: You can subscribe to our newsletter and we’re able to serve investors residing in the most major Canadian provinces.

[01:01:28] Clay Finck: Great. Well, I’ll be sure to get all that linked in the show notes and Pierre, thank you again. I mean, this was great and I know the audience is really going to enjoy it, so thank you.

[01:01:36] Pierre-Olivier Langevin: Great. Thanks, Clay.

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