[00:03:00] Kyle Grieve: So Jeremy is the Chief Investment Officer of Right Tail Capital, and one of the coolest things that I came across when researching you was your fee structure.

[00:03:09] Kyle Grieve: I’ve always loved Buffett’s 0/6/25 fee structure that you’ve adopted. Can you break down the fee structure in a little more detail and discuss why you think this is the optimal way to align yourself with your partners? 

[00:03:21] Jeremy Kokemor: So I remember hearing about this fee structure years ago, and it always just jumped out to me as something that is unique and could potentially create quite a bit of alignment.

[00:03:32] Jeremy Kokemor: So first, what the fee structure is is exactly what you said. So there is no management fee. As in the investment management industry, management fees are pretty common. And so the only way that Right Tail will generate a fee under this structure is to have positive performance. And that performance needs to be over 6% per year.

[00:03:56] Jeremy Kokemor: And if it is over 6% a year, then right deal’s fee ends up being 25% of whatever performance is above 6%. For instance, if the returns in a year were 10%, you would just do a simple 10 minus six is four times 25%, and the fee to right tail would be 1%. Now, you mentioned the concept of alignment and also the concept of fee structures.

[00:04:20] Jeremy Kokemor: And in my opinion, there isn’t really a perfect fee structure. I’m a big fan of Morgan Housel and his book, The Psychology of Money. And he does a great job of describing how we all have very different feelings and histories towards money. And it’s probably, just decades of what did our parents teach us and our grandparents and what did we grow up with and not grow up with.

[00:04:46] Jeremy Kokemor: And I’m very just cognizant that I’m not going to be able to create the perfect fee structure, and I don’t think that a fee structure is the only way to create alignment. There are several ways that I’ve tried to create great alignment at RightTail. One is just my wife and I continue to be the largest investors at Right Tail, both in terms of the dollar amount and likely we’ll always be the number one investor in terms of percentage of our net worth.

[00:05:14] Jeremy Kokemor: So for me, that’s a really important way that I’m aligned with all of my investors. But then it also gets into like just simple day to day habits of, I want to be in the best frame of mind, making the best long term decisions for our investors. And so whether it’s things like physical exercise or meditating, just things that help me be a little bit better and in a better frame of mind day to day, I think all those things help create great alignment.

[00:05:47] Jeremy Kokemor: But you’re right. The fee structure is one that I hope creates some great alignment with everyone. 

[00:05:53] Kyle Grieve: Yeah. I really like those intangible ways that you’ve created an ability to be partnered, truly partnered with your partners. But I’m interested in knowing, so I look for people using your fee structure and, I could probably name the amount of people that I know of that do it on one hand.

[00:06:07] Kyle Grieve: So it’s not very popular. So I’m interested in knowing why you think this is such a kind of rare way to structure a fund. 

[00:06:15] Jeremy Kokemor: I know you’re a big fan of Mohnish Pabrai, Kyle and I remember hearing him speak once years ago on a podcast and just talking about how he used the same fee structure and how he has positively cloned a lot of the great things that he’s learned from Buffett and Munger.

[00:06:34] Jeremy Kokemor: And he was talking about the fee structure. And I remember him saying something along the lines of I tell everyone who’s thinking about starting an investment firm to use this fee structure, and it creates good alignment. And if you do it, good things will come over time. Like it, it may be hard to think of not having a management fee, But good things will happen over time.

[00:06:56] Jeremy Kokemor: And then he goes on to say, no one ends up doing it. And having lived, through having this fee structure for the last almost two years, I would surmise that maybe people don’t do it very often because it is hard, to not have a steady stream of income. And for most folks who decide to start an investment firm, They likely have done a good job at investing and they’re, there’s something that has given them confidence and hopefully there’s a deep passion there as well to want to go out and share their investing talents with investors.

[00:07:32] Jeremy Kokemor: other folks, but a lot of us have not run a business before. And a lot of us have probably had some, maybe a lot of success in our past lives, both in investing and, in our school studies and things like that. And for me where day one, I was managing maybe three or 4 million and had three or four investors.

[00:07:54] Jeremy Kokemor: There are some challenges and it takes a little bit of a rewiring to go from being paid well and having sort of a steady salary and a year end bonus to saying I’m not really going to get paid at all for the time being. And it really is going to be based on performance. So I would guess that one of the reasons that people don’t do it is because it’s just very hard to stomach that.

[00:08:20] Jeremy Kokemor: And then secondarily, I’ve seen a lot of folks who have started investment businesses who have invested a lot in the business, either they’ve built a big team up front. Or they get the shiny office space in Midtown Manhattan, wherever it might be. And that can create a certain amount of pressure as well.

[00:08:41] Jeremy Kokemor: And it may even create so much pressure that it changes your investment outlook or it changes how long term you can really think. And, so I was like, look I don’t want to do any of that. I want to keep expenses low. I can, hopefully do the best job possible. within the framework of this fee structure and create as much alignment as possible.

[00:09:05] Jeremy Kokemor: But that would be my one guess as to why maybe more people don’t do it. 

[00:09:09] Kyle Grieve: So I know you actually do have a fee only option for your services as well. What made you want to add this feature to your services? 

[00:09:17] Jeremy Kokemor: Sure. It goes back to a bit of what we were discussing with just, each individual maybe having different preferences regarding money and investing.

[00:09:27] Jeremy Kokemor: And a really close friend of mine who works at an endowment, I remember years ago, he was saying, Hey, you might just want to, you might just want to offer investors a choice, like people might appreciate that. And so what I tried to do was to come up with a fair management fee only option that would hopefully have the two structures be, relatively equivalent.

[00:09:50] Jeremy Kokemor: And so what I came up with was a 1.25% management fee and so the break even between the two structures in any single year would be 11%. And there have been some interesting takeaways and surprises of kind of offering the choice, one, I would say my ability to predict what someone might choose is near zero.

[00:10:16] Jeremy Kokemor: So that’s been, that’s been fun and just interesting to see. And then another thing that has surprised me is just, that where I sit today and I’m fortunate to have. 46 long term like minded investors who, have invested alongside me. And we’re roughly 50 % in one fee structure, 50 % in the other fee structure.

[00:10:39] Jeremy Kokemor: So hopefully that lends some credence to maybe the structures are relatively comparable. And then I really just want each investor to pick the one that will make them happiest. And however they think about things. 

[00:10:55] Kyle Grieve: You alluded earlier that, that with your fee structure, you can’t have a cushy corner office in midtown Manhattan, whereas some of these more AUM based fee structure companies, they can afford that because they have a lot of money coming in.

[00:11:07] Kyle Grieve: And that’s just the way they run their business. But with the way you run yours, what kind of general differences do you see between the way you run your fund and, some of these more AUM based fee structures? 

[00:11:20] Jeremy Kokemor: I can certainly speak about how I do it, Kyle. And in general, I just try to be very thoughtful around, where I would like to, allocate investment dollars or expenses, and it all works well for me.

[00:11:34] Jeremy Kokemor: And I believe gives me the best odds of, showing great long term investment performance. For the time being I have a home office and I really enjoy working from home, as a lot of what I do on a day to day basis is reading and thinking I need a quiet, comfortable space and working from home works really well for me.

[00:11:56] Jeremy Kokemor: And I was very fortunate to have, some experience working from home largely due to COVID because before that, I wouldn’t have guessed that, I could be as productive working from home. So that, that would be one thing that I would mention as maybe something where I could see, potentially having an office or some shared office space or something in the future.

[00:12:19] Jeremy Kokemor: But I love my current setup. And then when I think about where I do want to allocate expenses. It’s really with, my investor’s thoughts in mind and it’s, being thoughtful about different research services I subscribe to and and things of that nature, but I have everything I need.

[00:12:38] Jeremy Kokemor: I feel like it’s set up well, And I often think about, Buffett has a great line about, more about when he’s analyzing two businesses in the same industry. And, he’ll say gosh, like one might have a cost structure. That’s 50 % of the other companies in the industry.

[00:12:56] Jeremy Kokemor: And we might all say they’re in the same industry. And Buffett makes the point that no, they’re actually like two. Very different businesses. And why that’s important when, folks, think about right tail or when I do, it’s just that I’ve set the business up to just give myself incredible longterm investment duration and staying power.

[00:13:20] Jeremy Kokemor: And a lot of these, little decisions, end up being very important. 

[00:13:25] Kyle Grieve: So you mentioned in a previous interview that you aren’t a fan of putting yourself into a value or growth bucket. So I tend to agree with you on this as, value and growth are both important to success and investing and, you can get value in both high and low growth businesses just as you could overpay in both high and low growth businesses.

[00:13:41] Kyle Grieve: I’m interested in just understanding a little bit more about how you factor this into the types of investments that you make. 

[00:13:47] Jeremy Kokemor: It’s funny. I think about all the investment management interviews I’ve done over the years. And, some of them I would get asked pretty often, what type of investor are you or you value or growth?

[00:13:57] Jeremy Kokemor: And I didn’t really have a great answer at the time. I knew that I was like very uncomfortable every time that question was asked, cause in my mind I was thinking one, I’m pretty flexible, but you know, aren’t we all just trying to find like good investments, that are going to, make money over time.

[00:14:15] Jeremy Kokemor: And yeah, and Buffett has talked a lot in his letters about both value and growth being very important to how you would even, potentially think about valuing a business or considering an investment. In super simple terms, I really want to find an above average quality business and buy it at a fair to below average price.

[00:14:39] Jeremy Kokemor: That’s all I’m trying to do, in simple terms, and we can get into, more details around how I think about that. If I have to pick one over the other, I care more about the quality side than the price side, but you know, I always want to be thoughtful to each situation that I see, but in general, I want to find high quality businesses and allow them to continue to create value for Rytale and for us shareholders over many years at a time.

[00:15:09] Kyle Grieve: And so you mentioned there that you like buying at a price that’s, hopefully at or below the price of the market. So I’m interested in knowing how you mitigate risk by using the price that you pay for a business. 

[00:15:22] Jeremy Kokemor: I love a lower price. And I’ve had many colleagues over the years who might define themselves as like a more traditional value investor, which I would define as, maybe a low price to earnings multiple or some sort of, near term valuation metric that is jumping off the page as being low.

[00:15:44] Jeremy Kokemor: And so I’ve mostly learned and been fortunate to work with folks like that. And so I love a lower price. There’s nothing wrong with that at all. Would love to find a fantastic business at a very cheap multiple. But again I just really focus on, paying a fair and hopefully it ends up being a below average price for each great business.

[00:16:07] Jeremy Kokemor: I also think there’s a lot of margin of safety. The price that you pay is one, sort of factor of margin of safety. Another, I think is the quality of the business. So a lot of the businesses that I own, Kyle, have great balance sheets. They have great management teams and they have certain competitive advantages.

[00:16:26] Jeremy Kokemor: And oftentimes these businesses, because of how they structured themselves and because they’re not so worried about how they’re going to pay off their debt and things of that nature, that when tough times do come for the economy or that industry specifically, A lot of times these companies can actually play more offense than their peers can, and that’s exactly what I think we should be rooting for, as long term investors.

[00:16:56] Jeremy Kokemor: And so what I’ve found is, a lot of times there’s a great margin of safety. And, just having these awesome businesses that will figure out ways to win and gain market share when everyone else maybe is playing with one hand tied behind their back or something like that. 

[00:17:14] Kyle Grieve: So I think most investors have a few general principles when it comes to their core philosophy.

[00:17:18] Kyle Grieve: You already shared that you obviously place a massive emphasis on quality, but. So for some, for instance, someone like Chuck Acri, he has his three legged stool, which I’m sure you’re familiar with, which is by extraordinary businesses with talented management with great reinvestment opportunities and histories.

[00:17:32] Kyle Grieve: So I’m just interested in knowing, outside of quality, what is the essence of your investing philosophy? 

[00:17:37] Jeremy Kokemor: I think you hit the nail on the head, Kyle, that, that is a lot of it. When I think about quality, I think about a couple of things. So one, quantitatively, The two things that I care a lot about are how long is the company’s reinvestment runway?

[00:17:55] Jeremy Kokemor: And then secondly, what incremental rates of return can a company invest their capital? So the companies we invest in, they’re producing cash flow each year, and then they can decide what they want to do with their cash flow. And I want to find the companies that can invest that capital thoughtfully and intelligently.

[00:18:17] Jeremy Kokemor: And have it produce even more, capital and cashflow for us. And, if that happens, we’ll end up creating a lot more value that way. So again, quantitatively, I care about the reinvestment runway. I care about the returns on incremental capital. Now, there’s a lot that goes into that qualitatively, but, a simple way to frame it would be to say, that, I want to invest in companies that have sustainable competitive advantages or some sort of moat.

[00:18:46] Jeremy Kokemor: That allows them to generate these high incremental rates of return, because as we all know, we live in, a capitalist economy and whenever there are good rates of return, that is probably going to attract, more capital and more competitors. And so it really does, there need to be things that are special that allow, these positive characteristics to exist.

[00:19:13] Jeremy Kokemor: and to exist for many years in the future. 

[00:19:17] Kyle Grieve: So I know that you own two investments that are both excellent performing stocks and great businesses, but go about allocating capital in slightly different ways, which you just discussed. So these two names are O’Reilly Auto Parts and NVR. So I’m interested in knowing how do you forecast the future fundamental developments of these businesses in terms of growth and capital allocation?

[00:19:37] Jeremy Kokemor: In some ways, I would say that O’Reilly and NBR have a lot of similarities. They’re both companies that I’ve found to be very much kind of long term thinkers, in terms of how they plan, in terms of how they allocate capital. Both companies tend to have employees who have been at these companies for very long periods of time.

[00:20:03] Jeremy Kokemor: And we can maybe we can maybe guess like some reasons why that might be. One is they both have a history of success, so it’s probably a bit of a fun environment to be in when you work at a company that’s been very successful. O’Reilly is interesting because, they’re based in Missouri and, so maybe they have certain advantages just based on where they are.

[00:20:27] Jeremy Kokemor: But they’ve done an awesome job. They’re new CEO, as someone who is young and has a lot of energy. And I believe his first job at O’Reilly was right out of high school, basically helping to unload some of the trucks. NVR is, headquartered, maybe an hour and a half, two hours north of where I live in Richmond, Virginia, and has a big presence in the area.

[00:20:51] Jeremy Kokemor: And so I’ve been fortunate to meet longer tenured employees who work at NVR and same thing there, there, there are certain things that NVR does from a compensation standpoint, like they tend to issue options every four years. And so just in terms of, having these options that vest over a longer period of time, I think that perhaps creates a bit of long term thinking as well.

[00:21:17] Jeremy Kokemor: So those are maybe some of the things they have in common. You’re right. I would say they allocate capital a little bit differently. O’Reilly, O’Reilly is often building new stores or investing in their distribution capabilities. And if we were to look at their financials and look at. The last 10 or 15 years, their returns on incremental capital have been phenomenal.

[00:21:41] Jeremy Kokemor: I used to think of that industry as one where O’Reilly and AutoZone and Advance Auto Parts as the three bigger players. I used to think of it as they were all slowly gaining share from the mom and pops who maybe have less scale, or maybe they could carry less inventory during a challenging period like COVID when supply chains were disrupted.

[00:22:07] Jeremy Kokemor: The mom and pops likely have less advantageous financing terms and things like that. But, more recently things have changed where, advance has likely had some challenges for a long period of time and has been a more acquisitive company. And now it looks like O’Reilly is gaining share in a big way from advance.

[00:22:28] Jeremy Kokemor: And probably even, maybe gaining some share from AutoZone as well, which is also a well managed and really great company. To segue a bit to NBR, so it’s funny, both of the companies repurchase a lot of shares. Both of the companies have done very few acquisitions. Although, with O’Reilly, you could point to some.

[00:22:50] Jeremy Kokemor: There was one that they did about 15 years ago that ended up being a home run, but these aren’t companies that are doing acquisitions every year. And NVR is just very thoughtful around, they came up with a different model about 30 years ago, after almost going bankrupt during the savings and loan crisis.

[00:23:09] Jeremy Kokemor: And they ended up feeling like. Owning the land that they build their homes on was the riskiest part of the capital allocation, framework for a home builder. So they said, Hey, we’re not going to own the land anymore. What we’re going to do is work with local land developers and we’ll buy an option to build on the lots that they develop.

[00:23:33] Jeremy Kokemor: And they end up probably paying a slightly higher price for these options, but the flexibility that it gives them, far surpasses, whatever little bit they give up in the near term and they have just done a fantastic job over the last 30 years. It’s been an amazing investment.

[00:23:52] Jeremy Kokemor: I’ve been fortunate to be an NBR investor for much of the last six years. With O’Reilly, it’s been much of the last four years. So even predating Rytale, these are companies that I’ve been studying for a long time. I’m happy to go into any more detail about those companies or how they allocate capital.

[00:24:12] Jeremy Kokemor: But that’s a bit of a summary. 

[00:24:14] Kyle Grieve: Yeah, I would love to know more about, especially NVR, because NVR and is the poster child for, for share buybacks and creating tremendous shareholder value through share buybacks. So would you maybe be able to go through that in a little more detail for the audience?

[00:24:29] Jeremy Kokemor: Absolutely. It’s funny. One of the things that is funny is so NVR gets grouped with all the other home builders, and it was a bit like the Buffett quote that we talked about earlier. They do look a lot like other home builders. They build homes, but their businesses are structured very differently.

[00:24:49] Jeremy Kokemor: And so NVR just has a lot less capital tied up on their balance sheet. And I’ve learned over time, too, that while I think most investors associate NBR with this lack of land ownership and this asset light strategy, there are many little things that I think NBR does really well, and it helps them to turn their inventory of lots faster, They come through on their commitments to the land developers.

[00:25:20] Jeremy Kokemor: So I’ve talked to land developers who are like, look, I’ve worked with all the big guys including NBR. And NBR always does an amazing job of doing what they say they’re going to do. And so I don’t mind having a bigger portion of my business with them because I know they’re going to get it done on time.

[00:25:38] Jeremy Kokemor: It helps me plan my business. And I bring all this up to say that a lot of times when I see sell side analysts talk about the home building industry, they’ll often make a relative value comparison and say gosh, like the other home builders trade at one times book value, or they trade at six to eight times earnings.

[00:26:03] Jeremy Kokemor: And then you look at NBR and the multiples that it trades at are much, much higher. Okay. So that’s one point. The second point would be we could look at NBR stock price performance over pretty much any period of time over the last 30 years. And even if you said gosh, it’s not fair to look at some of those early years where they were going through a business model change and there was a lot of risk and the investment community couldn’t understand it.

[00:26:33] Jeremy Kokemor: I would say it’s been very clear, for a good portion of that time, maybe at least the last 20 years and the NBR stock price performance has just been phenomenal. So we have this issue where the valuation looks optically higher, is optically higher.

[00:26:47] Jeremy Kokemor: But the stock price performance has also been really amazing. Would say the market has never really had the valuation correct for NVR. And it’s a business that, historically has had returns on invested capital well north of 30%. And even though it’s traded at a big premium to the other home builders, It has still during most of that time, largely traded at a discount to kind of the average company in the S&P 500 500 business.

[00:27:19] Jeremy Kokemor: And I would say it’s a well, above average company than most of the companies in the S&P 500 and albeit it can be cyclical, right? When we came out of the great financial crisis it was a slow, there were less homes being sold because we just had too much inventory. So we do need to be, thoughtful around the cycles.

[00:27:40] Jeremy Kokemor: But putting that aside for a second, NVR has taken all this cash flow and has just re bought or just re purchased many shares over time. And I’ll get the, yeah, I won’t get the number exactly right, but I think today NVR has maybe like somewhere around three and a half million shares outstanding, which is just an absurdly no, a low number, and it’s one of the reasons.

[00:28:07] Jeremy Kokemor: Of course, they could have chosen to split the stock or something at some point, but you know, it’s one of these unique stocks that has a really high share price around 7, 000 a share. But that share count is about as low as I could think of for kind of a decently sized publicly traded company.

[00:28:26] Jeremy Kokemor: And you’re right, they’ve created a lot of value by just repurchasing their shares over a long period of time. 

[00:28:33] Kyle Grieve: I know you’re a fellow fan of concentrated portfolios like myself. So I’m always interested in learning more about investors’ past and why they settled on concentrated portfolios, because, it’s not something that you necessarily learn in school.

[00:28:44] Kyle Grieve: I mean, it’s something that you learn just from studying the grades yourself, I guess. So I’m interested in just knowing, why was it that you settled on a portfolio, a concentrated portfolio of say eight to 15 names that you’re at now? 

[00:28:54] Jeremy Kokemor: And you’re right. We don’t, we typically don’t learn this at school.

[00:28:58] Jeremy Kokemor: We normally learn about the benefits of diversification and it’s interesting because most of the literature I’ve read, suggests that a lot of the benefits of diversification Especially if you’re not investing in, the same business across all the stocks, but you get a lot of the benefits of diversification once hit 10 stocks or something around that.

[00:29:19] Jeremy Kokemor: So that’s one thing that I find interesting, but concentrated investing has always just felt very natural to me. It took me a while to be able to articulate that, but what I noticed over time was, for example I worked at T. Rowe Price out of Harvard Business School and T. Rowe is a fantastic firm.

[00:29:40] Jeremy Kokemor: There, I was only covering a few industries. So I wasn’t a generalist like I am today. And I was probably covering 30 to 40 companies in those industries where I was tasked with kind of being the expert on these companies. Contrast that with what I was doing in my personal account, which, at any period of time, I probably had 10 or 12 investments that I thought were really going to be exceptional, and that always felt fine.

[00:30:11] Jeremy Kokemor: And I would say, look, with a lot of investing, There are many ways to make money. There is no, one right answer, but I think a lot of investing is a personal journey to figure out, what makes the most sense for each of us. And somewhere in that eight to 15 range is the sweet spot for me.

[00:30:34] Jeremy Kokemor: And today at Rytale, I own, 13 different positions. And it’s fantastic. It allows me to concentrate my time on these names. When I find a new name, which I’m sure we’ll spend some time talking about, I can compare it to the 13 I already have and try to find a new investment that will come in, above what I think the return potential of the average holding could be within that 13.

[00:31:02] Jeremy Kokemor: And then when those investments do well, One of the benefits of a concentrated portfolio is that it can have a really punchy, impactful performance on the returns. And also no position is so big that I’m losing sleep about it at night or that when something goes wrong, because things will inevitably go wrong with some of these investments.

[00:31:29] Jeremy Kokemor: We’ll have an impact on the portfolio, but it’ll have a modest impact. And then if we think really long term, I would expect that, it’ll probably be more like a handful of these investments, or maybe even a slightly lower number that will really have just the dramatic positive impact on the portfolio.

[00:31:48] Jeremy Kokemor: On the downside if I have an 8 % position and it, it goes down 25 % and we lose 200 basis points or 2 % of performance, that may not be fun in the short term. But I think when we’re looking back on it 10 years from now, we’ll probably be talking about the companies that have grown to be multiples of the original value that we invested.

[00:32:12] Jeremy Kokemor: And those will have a much bigger impact on kind of the overall return profile. 

[00:32:17] Kyle Grieve: A question I’m fond of asking professional investors like yourself is how they prefer to enter positions. Do you like taking, smaller positions to start and then adding as you gain more and more conviction and knowledge of a business?

[00:32:28] Kyle Grieve: Or are just piling money in as as fast as possible to get to your desired, let’s say 8 % position size. 

[00:32:36] Jeremy Kokemor: For me, it’s situation dependent based on a few factors. One is, I would say prior knowledge of the business and industry. So if it’s a business that I really feel like I know well, or maybe I’ve invested in it in the past, that would maybe make me a little bit more comfortable in terms of making it a slightly larger position up front.

[00:32:56] Jeremy Kokemor: So that would be one factor. The second factor would be, just how great of an investment do I think it might be if it, if it looks incremental to the portfolio. And like I said, trying to find ones that are not better than the 13th position on the portfolio, but hopefully more in the top half, which is another way that I think about, You know, kind of margin of safety and avoiding incremental sinking, but if it really looks exceptional, that might argue for a larger position as well, but I’ve learned over time that no matter how much work I do upfront on a business and the industry that it’s in and its peers.

[00:33:38] Jeremy Kokemor: There are always things that I overestimate or underestimate, and I learn more as I own the business and as I get, more reps with the company and just understanding what they do. And that has, that is something that over time where I’ve said, Hey, I’m open to starting off with a larger position, but a lot of times, I may just start with.

[00:34:02] Jeremy Kokemor: Something that’s maybe around a 5 % position where, it’s still a reasonably sized position. And over time, if things unfold positively, and most of the things that I thought going in play out, I’m totally fine, adding to the position, even if it’s gone up a little bit, provided that I think the long term opportunity continues to be there for exceptional returns.

[00:34:27] Kyle Grieve: So I’m also interested in knowing what is the desired market cap, let’s say, of your dream business? 

[00:34:33] Jeremy Kokemor: I’m very flexible when it comes to market cap, but if I really were to say, the dream business. And I would hope that when you and I are talking again in 10 years, I would hope that I’ve found an extra one or two smaller businesses to invest in.

[00:34:51] Jeremy Kokemor: And if I can do that, and I think I’ll be able to over time, if I can do that, then You know, who knows A, that could imply that there’s a longer reinvestment runway, if it’s a smaller business, it may be less well known, less discovered and trade at, a less expensive valuation, that would be attractive too.

[00:35:11] Jeremy Kokemor: So those are all the positives. But I’m also, I also go in with a fair amount of skepticism around smaller companies as well. Some companies are small and they, they tell an interesting investment story, but you know, you look at the history and they’ve been small for a really long time, and old habits and industry structures and things.

[00:35:32] Jeremy Kokemor: Those are hard to change, not to say that they can’t. When I’m going through and doing the analysis, I do want to be able to study the history of the business and how the returns on capital have evolved over time. And sometimes, not always, sometimes there’s a bit more history and it’s a bit easier to study.

[00:35:53] Jeremy Kokemor: For a business that’s slightly larger. So I would say, I really am very open minded and I don’t mind investing in larger businesses that can still compound that, the mid teens or higher rate of return over kind of a multiple year period. That being said hopefully, as we talk in many years time that I’ll find, I’ll have found.

[00:36:16] Jeremy Kokemor: One or two additional smaller companies that might have all the benefits of those larger companies, but maybe even have a longer reinvestment runway and higher return potential. 

[00:36:28] Kyle Grieve: And so just for the audience, what would you consider? Because, different people have different definitions, but what would you consider a small company in terms of market cap?

[00:36:37] Jeremy Kokemor: My smallest investment today is probably around 5 billion of market cap. So I would probably put a range on it of, maybe 500 million to 5 billion in market cap, something like that. 

[00:36:51] Kyle Grieve: So depending on the levels of turnover that a portfolio manager has, they may have a great year making, zero investments, or they may consider it a great year making dozens and dozens of investments.

[00:37:00] Kyle Grieve: So You’re obviously concentrated so I can guess where the answer is going to be here, but how many new investments do you try to add per year and what would a perfect year look like?

[00:37:10] Jeremy Kokemor:  I underwrite each position over a potential three year holding period. If we were just to say, Hey, what’s 12 or 15 or whatever number of investments in the portfolio divided by three or something along those lines, it would suggest that, maybe in a given year, there are only a couple of new investments.

[00:37:30] Jeremy Kokemor: So I often describe it as, saying, Hey, I think it’s probably zero to three new investments per year. I recently made a new investment, but prior to that, I really hadn’t made one in about a year. So that’s just one example from a very small, kind of sample of time.

[00:37:49] Jeremy Kokemor: But the goal is really not to have a specific number of new investments a year. One, I would say the goal is really to just get more knowledgeable on different businesses and different industries and each year that goes by to be able to share with you, hey, these are the industries where I feel like I’ve learned a lot over the last year and that may be helpful for a new investment.

[00:38:16] Jeremy Kokemor: It may be helpful for a current investment where I, learn something or about some type of idea that I could apply to the rest of the portfolio, or it may be some learning that really comes to fruition in several years of time when You know, maybe a new opportunity comes up or the price drops a lot, whatever the case might be, there are a lot of ways that I think building that library and knowing more industries, in a more knowledgeable way can just really benefit over time.

[00:38:48] Jeremy Kokemor: The other thing I’d say about the topic of turnover is, when I look back over my career, some of the times that have been most fruitful for finding new investments. Is when there are a lot of challenges and weaker performance in the market, the early period when COVID first happened in early 2020, that really just created some amazing investment opportunities where, there was a great business and a great management team and a great balance sheet.

[00:39:19] Jeremy Kokemor: And all of a sudden, for whatever reason, the stock was down 50 % and if you could, get some level of conviction that the business had enough cash to survive a very challenging period of time and that their competitive advantages were going to be at least as strong or maybe, even get stronger.

[00:39:41] Jeremy Kokemor: That, an example like that or that type of period where there’s a lot of dislocation, there might be even, more turnover because you just have this very rare opportunity to really upgrade the return potential of the portfolio. Those are rare, but they absolutely happen. And, I want to be, I want to be, ready and willing and knowledgeable enough to act when those opportunities come up.

[00:40:08] Kyle Grieve: I wanted to move on to evaluation because you have some interesting evaluation methods that I wanted to go into. So you mentioned that you’ll break down the internal rates of return of a potential investment using some simple bond math. So I’m interested. Can you please detail this evaluation method for the audience?

[00:40:25] Jeremy Kokemor: Sure. Sure. And feel free to ask any questions if I get a little too in the weeds or I’m not describing it well, but simply we’re always trying to figure out what cash flows and investment is going to produce over its lifetime and then value those cash flows. And one way to do that is to try to think about owning an equity like you might think about a bond.

[00:40:47] Jeremy Kokemor: And so You know, the way it, the way owning an equity can be similar to a bond is if you say, all right what is the coupon payment that the bond kind of pays to the owner each year or a couple of times a year? And so I would say that’s very similar to the cash earnings that the stock or the company generates.

[00:41:05] Jeremy Kokemor: So the cash earnings yield for the business. And then the second component would be, okay for a company, those earnings might grow over time. So what’s the current cash earnings yield? And then how might we evaluate the future growth? So that would be to like, just keep it simple and think of it in two ways.

[00:41:23] Jeremy Kokemor: And then we can further break down that growth component, which I think is a really fun thing to think through. And so that growth component, I would say we could break down into two factors as well. The first factor would be growth that the company can achieve without reinvestment. And so good examples of that type of growth would be something like Moody’s Bond Rating Business, where they have this dominant position in the market.

[00:41:52] Jeremy Kokemor: There’s probably going to be a little bit of volume growth in the market over time. Maybe it’s 1, 2, 3%. And because they’re so dominant, and because, having a rating from Moody’s or S& P helps lower the interest rate that an issuer of debt might achieve they could raise the price a little bit each year because it’s still a great value for the issuer of the bond, Moody’s they’ll grow a little bit without arguably really needing to reinvest.

[00:42:21] Jeremy Kokemor: Another example would be Visa and Mastercard where they’ve grown for a long time, just as So much of the world’s payment has shifted from cash to credit cards and they have the credit card networks. That’s the first component of growth. The second component of growth, some companies have both, some have one or the other, some have neither.

[00:42:40] Jeremy Kokemor: But the second component is the reinvestment component. And so there what I try to do is say, how much can this company reinvest each year? And at what rate of return can they reinvest? So to use some simple math, let’s say a company could reinvest a hundred dollars at a 20 % rate of return. So you’d multiply those two numbers together.

[00:43:03] Jeremy Kokemor: You’d come out with 20. So that’s effectively 20 of new earnings. And then you could capitalize that, that new earning stream that is hopefully being created each year by the company’s reinvestment and capitalize that at some earnings multiple. So to wrap it all up, I would say, you can look at this bond math and say, all right, cash earnings yield plus growth without reinvestment plus growth from reinvestment.

[00:43:33] Jeremy Kokemor: And I add those up and I get to a potential IRR for the investment and that’s one way I like to look at valuation and it has been very beneficial for me, particularly thinking through the growth components and especially that reinvestment component. Because I think that is a piece of the analysis that often gets lost when investors are just talking about company A trades at a 15 times P.E. and company B trades at a 20 times P.E. And when you really try to go through some of the reinvestment math, they just, it just shows how great companies, even if they may look to be a little bit more expensively valued can still be the better investment over many years. 

[00:44:22] Kyle Grieve: I love that point.

[00:44:24] Kyle Grieve: Chris Mayer was telling me specifically about that, how, you can look at two businesses in the same industry that maybe are competitors and one might be just extravagantly priced on PE, price to earnings or whatever. But when you look at the ability to reinvest at high rates, it makes a huge difference.

[00:44:40] Kyle Grieve: And, you can pay optically a much higher PE multiple for one business. And it’s probably, it could still be, a better deal than paying for the cheaper one. 

[00:44:49] Jeremy Kokemor: It’s a fantastic point and it’s a lesson that I learned so many times over the years and learned it the hard way where it’s often easier, I think, especially when we’re, first exposed to investing.

[00:45:03] Jeremy Kokemor: Where if you’re maybe studying three companies in the industry why wouldn’t you want to invest in the one that trades at a cheaper valuation? And especially if that one that, is at a cheaper valuation, especially if there is a new management team or they’re trying some new procedures that are going to help them close the gap to where that number one player is.

[00:45:26] Jeremy Kokemor: And so you can look at one of those companies and, come up with a case of, wow their earnings are really going to improve and maybe the valuation will improve too, and that’ll be fantastic. And what I consistently saw over time, and obviously there are exceptions, but sometimes I’d come back a few years later and I’d look at that industry again and I’d say gosh that company that I thought was the best.

[00:45:50] Jeremy Kokemor: It’s still the best. It still appears to trade at a more expensive valuation. And it’s been the best stock performance of the three companies. And, so after, making that mistake and learning that lesson several times. It was just a great learning and one that, fits with who I am, as a person and just the same way that I want to try to continue to get better and have lots of good habits and disciplines that helped me do that.

[00:46:20] Jeremy Kokemor: I typically want to invest in companies that are very consistent and do a lot of little things well. And going through this bond math that I just described is one way to, help put some numbers around. something that can be very hard, which is like a quality, it’s, it might be easy to say this is the best company in the industry, but it’s not always easy to say, okay this is actually why based on the numbers, it might end up being the best investment.

[00:46:51] Jeremy Kokemor: And that’s one thing that’s very important for me to try to think through. 

[00:46:56] Kyle Grieve: You’ve also mentioned that you do have a couple of other evaluation criteria that you use in just a discounted cash flow and using just multiples. You don’t have to go too into deep depth into these, but I’m just interested, are you using all three of these kind of in conjunction to make sure that your evaluation is directionally correct?

[00:47:12] Kyle Grieve: Or, do you weight one higher than others? I’m interested in knowing more about that. 

[00:47:16] Jeremy Kokemor: Absolutely. I think through all of them, for me, one of the areas of thinking through that bond math example, where I get uncomfortable is if the multiple is too high, if the current multiple is too high or the cash earnings yield is too low.

[00:47:34] Jeremy Kokemor: And so maybe there’s an example, if we think of a lot of software businesses, a couple of years ago when they were trading at 30 times sales and. You could argue that they were cash flow positive and they were, but they were just investing the cash flow through the income statement, but you know, they’re trading at these really high valuations.

[00:47:53] Jeremy Kokemor: And so someone I think could look at some of this investment math and say they are reinvesting at high rates of return and the industry that they’re in is growing. And so don’t worry about the cash earnings yield not being there. It could still be a good IRR. And so thinking through the current multiples are also, we’re also putting the numbers through a DCF, it will probably make a potential investment like the one I just described.

[00:48:19] Jeremy Kokemor: It’ll be a good gut check that might say gosh, like it, It looks like it’s going to be really hard to make money with this type of investment. So there’s no kind of, I wouldn’t say I use, each of the different methods as a certain %age of the decision, because there’s so much that goes into it.

[00:48:38] Jeremy Kokemor: I need to feel like the company is high quality and is sustainable and hopefully improving over time. but I do like to think through those different methods as, just a bit of a soundness check to say, does this seem reasonable? And, if so, if more of them line up, then, there might be a slightly higher chance that, the investment ends up making it into the portfolio.

[00:49:03] Kyle Grieve: So in an interview from March of 2023, you said that all your investments were in North America, but made most in the US with one being in Canada. So I’m just interested, is this a circle of competence thing or are you willing to eventually invest abroad once you if you know that the country that you’re investing in has regulations that are supportive of shareholders?

[00:49:21] Jeremy Kokemor: That last thing you said, Kyle, is incredibly important. I want to make sure that I understand the rule of law in any place that I would invest. And, the U S is one area where, I feel like we do have really good laws and, it’s a place where entrepreneurship is encouraged and intellectual property is largely protected.

[00:49:43] Jeremy Kokemor: And those are fertile ingredients that, can lead to good kind of economic value creation over time. So you’re right, today I have investments in the U. S. and Canada. I feel like I have a good understanding of those places. I’m open minded to investing in other geographies, but I would need to feel like I had a pretty good understanding that the country was more similar to the US than different.

[00:50:09] Jeremy Kokemor: So is it possible that Right Tail we could end up owning business based in the UK or somewhere in Europe where I feel like we really understood things? Yes, I think that’s definitely possible. I would say what’s probably less likely would be, to invest in an emerging market where rightly so there might be better potential for longer term growth.

[00:50:34] Jeremy Kokemor: But if I don’t understand kind of the rules that we’re playing by, to me, it’s just easier to avoid what I don’t understand, because there are so many great opportunities in the places that I do understand. 

[00:50:47] Kyle Grieve: So you noted in a previous interview that you tend to stay away from biotech. And I’m 100 % on the same page as you here, but I’m interested in knowing some other areas of the market that you’ve just flat out refused to invest in and briefly describe why that is.

[00:51:01] Jeremy Kokemor: In biotech, it’s fairly simple. I think understanding the science can be really important for a lot of biotech investments, and I’ve been fortunate to work with other biotech investors who, are trained MDs, who’ve gone through medical school, understand the science, and I think can do a darn good job of saying hey, the market seems to price in a 20 % chance that this drug will get approved or whatever the case might be.

[00:51:29] Jeremy Kokemor: And I actually think it’s 50%. And, if I have a bunch of these small bets where I think the odds are really aligned in our favor, then, I’ll do really well over time. And that’s just not a place where, I feel like I have the knowledge to invest there. Another area would be something like metals and mining or something that I think is like very commodity dependent, where in general, when it comes to big macro factors.

[00:51:58] Jeremy Kokemor: I think they’re really hard to consistently get right. And for a mining company, or maybe an oil and gas company, arguably the most important thing will be the price of the commodity. And one of the things that’s funny about the metals and mining topic is My first assignment at TRO was actually covering metals and mining, and I had a lot of great experiences, got to meet a lot of awesome people and travel around the world and visit potential mines or mines that were in production.

[00:52:29] Jeremy Kokemor: But, oftentimes these were small cap companies who were trying to build one mine, didn’t have any in production, and they were just always raising capital, always telling a story. And there’s so little they can actually control because, they can’t change the actual rock. It’s either going to be maybe as good as they tell you it’s going to be, or a lot of times not as good.

[00:52:54] Jeremy Kokemor: I know, mining’s a big industry in Canada, and so I, I can see you likely have some experience with these companies, but that’s just an area where. I want to invest in companies where I think I can understand what their advantages are and their ability to repeat those and sustain those.

[00:53:11] Jeremy Kokemor: And so these are just some areas of the market where I’m not well equipped or the businesses aren’t well equipped to provide what I’m looking for. And I’ll definitely miss some along the way because there will be great investments in these areas, but I’m totally okay with that. 

[00:53:29] Kyle Grieve: Yeah, it’s funny you bring up me being in Canada and miners.

[00:53:32] Kyle Grieve: Obviously we have tons of miners, but I’m lucky. I I came across that amazing Charlie Munger quote where when I, early when I first started investing, where he says a mine is basically a hole in the ground with a liar on top. And so that’s guided my my my view on mining. So I stay away from them for the same reasons that you listed.

[00:53:49] Kyle Grieve: But now that we know what you try and stay away from, can you share with the audience what you consider to be in the center of your circle of competence? 

[00:53:55] Jeremy Kokemor: Yeah, I would say what I said earlier, I’m constantly trying to widen that circle of competence and, find other industries that I understand really well.

[00:54:06] Jeremy Kokemor: Certain industries where I have found a lot of these positive attributes, I have owned a few companies that are effectively distributors, but serve different industries, different end markets. But, sometimes you can find an amazing distributor. That has a fragmented customer base and a fragmented supplier base and to their suppliers, they’re an extension of the Salesforce and, can hopefully be very knowledgeable and a good representation of those brands.

[00:54:36] Jeremy Kokemor: And to the customers, hopefully they can provide the right part on time, the knowledge to educate the buyer on what part they actually need and should buy. And if they do all those things well, then, hopefully all their partners are really happy and they can earn a nice economic return too.

[00:54:56] Jeremy Kokemor: So sometimes there are great distributors. There can also be ones that don’t have these qualities. So distributors would be one, lots of areas of business services, software, so those are just a couple of areas where I have tended to find, maybe more high quality businesses over time.

[00:55:16] Jeremy Kokemor: And then there can also be other areas that, maybe due to regulation or other areas can have certain moats, so I’ve studied the railroad industry in the U S or some of the waste companies. And, so there are lots and lots of different businesses and industries that can have, some of these positive attributes and then what we were saying earlier with NBR.

[00:55:38] Jeremy Kokemor: That’s one where I think, maybe a lot of us would say gosh, home building doesn’t seem like a great industry, but then there’s this one company in a cyclical industry that’s doing things in a different and special way. And that can be a really fertile area to find an investment as well.

[00:55:56] Kyle Grieve: Jeremy, just want to say, thank you so much for joining me today. So before we say goodbye, where can the audience connect with you and learn more about Right Tail Capital? 

[00:56:04] Jeremy Kokemor: Absolutely, Kyle. I thank you. It’s been a pleasure and I really enjoyed our discussion. If folks want to learn more about Right Tail Capital, they can reach me in several different ways.

[00:56:14] Jeremy Kokemor: My website is just www.righttailcapital.Com. My email address is jeremy@righttailcapital.com. And I also post from time to time on LinkedIn and Twitter and other places. And really, I just, I love to meet other folks who are similar kind of long term like minded thinkers who love investing. And that can be other, folks who, are running their own investment businesses or people who work in some of the industries I care about.

[00:56:44] Jeremy Kokemor: Or, maybe there’s someone out there who is interested in learning more and potentially investing together. And I just love to meet, other great people who are trying really hard to get a little bit better each day. Those are some ways that, that they can find me. 

[00:56:58] Kyle Grieve: Okay folks, that’s it for today’s episode. I hope you enjoyed the show and I’ll see you back here very soon. 

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