Ep663: Benjamin Claremon – Know What Kind of Investor You Are

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win investing, you must take risks but to win big you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. So join me go to my worst investment ever.com and sign up for my free become a better investor newsletter where I share how to reduce risk and create grow and protect your well fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Ben Claremon. Ben, are you ready to join the mission?

Benjamin Claremon 00:38
I am ready to join the mission.

Andrew Stotz 00:41
Let me introduce you to the audience, Ben joined Cove street in 2011, and has been a co Portfolio Manager for the classic value, small cap plus strategy since its inception in 2016. His background includes positions on the long and short side of hedge funds, as well as commercial real estate, finance and management. Ben is the proprietor of the value investing blog, the inoculated investor, the founder of the 10k Club of Southern California and the host of the podcast compounders, the anatomy of a multi bagger at Ben, take a minute and tell us about the unique value that you bring to this wonderful world.

Benjamin Claremon 01:24
Oh, wow, that's a big question. I assume you're talking about from an investment perspective. And not, you know, other things. Let me say this, I have a passion for investing. I fell in love with investing in the whatever, mid 2000s and left a family business to pursue a career in investing. And I guess one of the things that I've thought has been really important it was to find ways to give to the community, right, as opposed to looking for things to take from it, find ways to give. And so I started my career in some, in some ways, with an investment blog called The inoculated investor. And it was, it was my crazy decision to go to the Berkshire meeting in 2009. And try to take down notes from everything that Buffett and Munger said, and for anybody who wasn't familiar with the Berkshire meeting, back then there were no there was no webcasting, there was no transcript, you had to be that or know what was said, or you had someone's notes. And I took it upon myself to try to be that person who provided the notes. So I did that for a number of years, I launched a blog with that. And then I developed a following in the value investing community. And so that was my initial contribution. And these days, I just like connecting people. So the 10k Club of Southern California is a group of value investors. It's about 175 people on the list, we get together periodically, over time used to be a lot more during COVID hours are pre COVID. But um, you know, we just like connecting people like making, you know, I like serendipitous relationships and partnerships. And I just think being a node and being a connector, you know, is a way of giving, you know, kind of giving to the community that I value so much. And that hopefully, you know, serendipitous things happen for me as a result of that.

Andrew Stotz 03:18
And tell us about the podcast, just so that the audience can understand what they get some going and listening.

Benjamin Claremon 03:24
Yeah, thanks for that. So the podcast is called compounders. We interview public company CEOs about how they're building their businesses. So it's a holistic interview. So anything from culture to capital allocation to competitive dynamics, mergers and acquisitions, we're just we're talking about everything, because business is not just building business doesn't it's not just one thing. Businesses are about people. And it's important to consider the people side, in addition to the things that you know, traditionally, finance people care about, you know, margins, returns and capital allocation. So, yeah, we've done about 30, some interviews with public company CEOs. You know, I wish they would come out a little more consistently, but sourcing guests in this space is really hard, just in general, because there's so many gatekeepers that prevent you from getting to CEOs. But I'd encourage anybody listening, anyone who's, who thinks that, you know, interviews of public companies, CEOs within investor lens, is something that they would enjoy, I encourage you to go to compounders and see if you see if there's any companies that you're interested in learning about via the podcast.

Andrew Stotz 04:31
Yeah, I mean, it's, it's funny because I teach a valuation masterclass. And I, the students all want to know the numbers. And it's like, if you want to become a great investor, it's about seeing the story in the picture. And the numbers are just a reflection, the management decisions, and the management discipline and the management execution and ultimately, the management action is what drives those numbers. And if you can predict that right, then you're going to be you know, probably in pretty good shape. A, what are your thoughts on that?

Benjamin Claremon 05:03
You're preaching to the choir. So I also guest lecturer at both UCLA, and Cal State Fullerton here in Los Angeles or in the Southern California area. And one of the things I always highlight to the students is that good investing involves marrying the qualitative and the quantitative. When you're young investor, the quantitative part is so easy, it would say like, you can look at historical multiples, there's a bunch of numbers, and you can say, well, I, you know, historically looking, this is what this business was. And this is where it's traded. And it's, it's easy just to, you know, put together some kind of quantitative assessment of the company. But it's a qualitative stuff that really matters. I think, over time, you know, paying the right price is important as you're an investor, but also the qualitative stuff is going to drive value. And so I'm always telling them, you know, before you spend hours and hours trying to model a company, understand the qualitative stuff side first, and your quantitative model, or whatever the manifestation of your quantitative work is, should reflect your qualitative understanding of the company. And I think for younger investors, that's a really hard thing to do. But I try to try to impress upon them the importance of a repeatable process that really drives an understanding of the qualitative side that can then inform the quantitative side of the investment, the investment process. Yeah, you

Andrew Stotz 06:20
know, as a sell side analysts, all my career, I met with so many fund managers, and at the time, I mean, I started as an analyst in 1993, at a broker here in Thailand. So I had fund managers from around the world, from the US from the UK from everywhere, and coming in, it was just fascinating, you know, talking to so many different, I'd say I did at least 1000, or more company visits with CEOs and fund managers, you know, over my career, and the thing that I can say is that there are some great fund managers who do not have a model, they basically see they're trying to put pieces together and create this mosaic concept, you know, like, and trying to see the big shifts. I remember, there was one guy who understood Thailand very well. And in 1996, I went to London, and I met with him and I was in the lobby of his office, and he came out and he said, I just really need to know the only only question I have for you, Are you positive or negative on Thailand right now, and I said, I'm negative. And he's come on in. And he really wanted timing. Yeah, he really wanted to explore that. And basically, after that, he made a huge bet on the Thai baht and shorted the Thai baht, which then went down by 50%. And he made a ton of money. So you know, it is about the story. It's about the themes, it's about the ability to execute. It's about the ideas, you know, we're on the same, we're in the same, we're in agreement. So let's talk, let's talk a little bit about, you know, we're going to take a little bit different tack, in your case with this podcast, because you got so much experience that we're going to kind of talk some about some framework and some some ways of looking at things and all that. So why don't you take it away?

Benjamin Claremon 08:11
Yeah, thanks. So I like talking about my mistakes. And I think it's the best way to learn as an investor is to reflect on your mistakes, understand what went wrong, what went right. Was it a process problem? Was it just a bad outcome and a good process. And so I'm always trying to, I'm always trying to assess, you know, why things went wrong. And importantly, take a step back and figure out how I can avoid making the same mistake over and over again. Alright, don't just look at it from an idiosyncratic basis and say, well, this with this company, this went wrong and with this company that went wrong and take a step back and see if there's some meta thing that's happening, some either flaw in the process or flaw in the philosophy, or inconsistency in either of those that is leading to mistakes. And listen, every investor makes mistakes. The goal, I think, as an investor is to limit how much money you lose when you're wrong. Because this is a game where, if you're right 60% of the time, you're probably you know, an all star or a Hall of Famer, especially if that when you're that 40% When you're wrong, you don't lose that much money. And so the goal, once you know you're going to make mistakes, it's not to make the same mistakes over and over. And I think what separates the best investors from the rest is the ability to grow from mistakes and learn, but not dwell on them for too long, have a short memory, not have like, not have the kind of the catalyst for the mistake, but just don't, don't say Don't kick yourself because for months and months because you made a mistake, because I think it just you have to be willing to recognize that you're going to be wrong sometimes and you have to move on. So I have this really good, favorite quote by I'm from Charlie Munger, where he says, Just tell me where I'm going to die. And I won't go there. Right? So, you know, obviously, we'd all love to know where we're going to die. So we won't go there. But in the investment world, in the framework of investing, I've learned where my personal returns go to die. And so I don't want to go there. Right? So that's part of avoiding whatever it's about avoiding mistakes. Ideas go to die, yes, where good ideas go to die. And so, you know, instead of, we're going to talk about a couple of investments that are at least at least one for sure, when it was, you know, a very big mistake. But I thought it might be instructive to take one step back and say, Okay, well, let's think of categories of investments that other people may may experience, or maybe, you know, companies that kind of companies you might invest in, where, you know, my mistakes could be instructive, as opposed to just one idiosyncratic example. So if I look back on my career, I would say, first and foremost, the place where I've lost the most money and been the most, you know, made the biggest mistakes are with companies that are not getting more valuable over time. So these are businesses that are facing secular headwinds, or outright secular decline, businesses for which time is not your friend, right? Every day, this business becomes worth a little bit less. And, you know, there's this allure to buy these companies when they're cheap, and say, Well, I know that time is not my friend, but the valuation is totally washed out, it's totally out of favor, it's ridiculously undervalued. And then you sell a business like this, when the valuation goes from extremely depressed, to merely depressed. And, you know, I have found that is very difficult to do that consistently, right, businesses that are not getting more valuable, over time, tend to throw curveballs at you that you might not been expecting, whether it's a balance sheet issue, whether it's a capital allocation issue where it's a management change something, you know, like, it's like trouble breeds other trouble. And, and so, you know, when you're investing in a company like this, and it doesn't work, this is worse than a value trap. To me, when I when I use the term value trap, I'm saying, you know, some stock that's cheap for a reason, and you own it, and it just doesn't go anywhere, because of certain headwinds of or issues with these companies that I'm discussing, that are getting hit with distinctive, secular issues. intrinsic value declines, and the stock price falls with it. And it's one of the situations where, at 50, it looks cheap, at 25, it looks cheap, and 10, it looks cheap, right? At every level, it looks cheap, and it's enticing. And that next investor comes in and says, Well, I'm going to call the bottom. I've found in my own investing. And as my philosophy has changed a little bit, I found it hard, if not impossible, to bottom ticker stock of a company that is deaf, definitively getting less valuable over time. And I think it's hard to establish a true margin of safety. When intrinsic is intrinsic value is falling over time. It's like catching a falling knife. Well, intrinsic values here, right? This is this is the this is like this is as low as it could go. And inevitably, the stock goes below that. And so, you know, and I'll say, as I take a step back, like I don't wake up looking for such situations, I would much rather invest in better businesses. But now we can talk about one specific investment and I could talk about what went wrong with it. Yeah. So there's a company that I've been relatively public on the company's Lucent Technologies. ticker l UMN. And this is a company we own a co STS, so just an FYI on that. And it's been a terrible mistake. I was public about it. I thought that there was a distinctive margin of safety. I thought the management team understood how to create value for shareholders. And we'll talk a little bit about what happened. But you know, I just want to stay upfront. It's been a mistake, you can go listen to me on podcast talking about it. It's been a mistake. Okay. So let's, let's just let's just get it out there, because there's no, there's no pink elephant in the room here. Right? We're addressing it. So the thesis with lumen was that there were valuable assets that can be sold at much higher prices, or much higher multiples in the current valuation. And that capital allocation changes could increase the value of a company relative to the current stock price.

Andrew Stotz 14:34
And when you say there was valuable assets that could be sold. You mean there was some divestiture they could sell? Okay.

Benjamin Claremon 14:41
That is absolutely this is a company that, you know, its core businesses, connectivity, business and consumer connectivity. And in the business side, there were assets outside the US that I thought had a fair amount of value. And so it'll talk a little bit about what's happened but you know, I just thought that the Business connectivity side and the service, the business services side, were worth a certain a fair a fair amount more than then the stock was trading for. And it didn't almost didn't matter what was happening on the consumer side, which they own legacy, a lot of legacy copper connectivity assets, which are without any question declining as more people have fiber. But I was looking at a situation where the sum of the parts value was much, much higher if they could just unlock the value via divestitures. And, amazingly, that's exactly what they've done. They've sold three businesses, all of which were at multiples higher than the stock price, and the business assets at much higher values. And you know, what, the stock is still down, and it's down a lot. And so

Andrew Stotz 15:50
because it's getting rid of its valuable assets,

Benjamin Claremon 15:52
yes, what's left? And so that's exactly right. Maybe the remain code should trade at a really low multiple. And so you never know, from the outside looking in, and you're looking at some of the parts analysis, like, you know, maybe maybe what's really happening is that there what if, once you sell all the remaining assets, right, you've sold everything good, and those got those multiples, but the the multiple other wrinkles way lower than you thought it was going to be. And that's basically what's happened. In addition to that, there were big taxes on the asset sales. So they have huge tax bills coming this year, which is really hurting their free cash flow numbers. I think more than anything else, there's just been a continued decline in the rate in the remaining businesses, which I underestimated. I had thought that this company had hit a bottom in its core kind of business connectivity business, and especially in the US. And we haven't found that bottom yet. And as a result of that this company, which had a little bit too much leverage has been unable to deliver, even as assets are sold, right? So if you're just the math is usually pretty good. If you have if you're trading for if you're if you're like four times levered, and you sell a business for seven or nine times EBIT dot that should be delivering event. Well, when you include the taxes and the working capital, it just ended up not being a deleveraging. Ben. So it's just frustrating thing where we were totally right about the capital allocation trajectory. We were totally right before anybody was even talking about this company shedding assets, because there's this looming as a merger of level three technologies. And CenturyLink. And I said in a podcast a couple years ago, that they were going to undo the merger. And that's exactly what they've done. Now, the problem is that, even in selling the best assets, it's like, the market has just assumed that the rest is garbage. And the stock trades as such. So

Andrew Stotz 17:44
was there something like the, as you analyze the company, you got to know the management and you got kind of sucked into that, that, hey, there's value here. We're gonna be uncovering this as opposed to being skeptical about the operating business?

Benjamin Claremon 17:59
Yeah, I mean, I think to some extent, they did exactly what I would have wanted them to do is look at the business, see what's core and what's non core, see if you can get high multiples for businesses, and then divest to to like, you know, to get down to a core and then focus on the core, the problem is, maybe they took their eye off the ball, the core a little bit. And if you look at their core enterprise business, it's continued to shrink at a pace that I just never expected, given all of the connectivity demands that we've seen in the world today. I mean, pricing has been an issue for them. But, you know, we're seeing all kinds of new, you know, all new demands for connectivity, whether it's edge computing, whether it's everybody's remote and distributed, you would think that enterprise connectivity would be a growth area, it has not been.

Andrew Stotz 18:45
So let's, let's review the lessons that you learned, like, how would you summarize that?

Benjamin Claremon 18:49
Yes, so this has been, you know, this has been more than a, for me more than just a single mistake that, you know, I can chalk up to, you know, you know, investing in a bad business and, and, you know, the next time it'll be different. This kind of was a seminal moment for me as an investor, I started my career as a Ben Graham oriented investor. And, and for anyone who's not familiar with Ben Graham, he was a, he was looking for statistically cheap securities, by the way, this is This is Warren Buffett's mentor and the father of value investing. He was looking for statistically cheap securities, he didn't really care as much about the business, he was looking for things that were you know, worth way more that you just sold their current assets than the current valuation. Right. And so, you know, that net style investing was how I was introduced to value investing. And that's, you know, it with that as your as your kind of your framework, what you're focused on is just cheapness and you're looking for things that are cheap and, and don't necessarily worry about the cheap for a reason, right. And that to me, I've just this mistake, along with some others, has really made me cut off the entire set. The companies that are not getting more valuable over time. So if there's a distribution of companies from, you know, you know, best to worst, and with, you know, the degree to which they're they're destroying value or they're shrinking, being, you know, being categorized as the worst, I've just decided to cut off that whole side of the market. And now my process starts with a simple question, does this business look like it is getting more valuable over time, and it has a chance to compound and hence the name of the podcast. And if not, I don't waste my time anymore. And honestly, I've been sleeping better at night. This experience is like, you know, it's not just one thing, but the experience of lumen has really highlighted the kind of investor I want to be. And for sure, other people can make money investing in disrupts distress devalue situations, and that's fine. Like, you have to know what kind of investor you are, right, and what fits your temperament and what fits, you know, allows you to sleep well at night. And so I've decided to focus on better businesses, and concentrate my efforts on stocks where my intellectual capital can build as I research them. And what I mean by that is that when you buy something that is meant to be sold, you don't build any intellectual history that can be used over time, by it, and you're out, you may never own it, again, all the work, you've done, understand the competitors and the customers and the industry in the management team, you know, you make some x percent return or not in the case, maybe if you're wrong, and you're out. And I would rather spend the time on a business I can own for years, that's a much more tax efficient approach. And that, you know, for any taxable investments, but also that knowledge that you gain, initially just builds and builds and builds and builds over time as you own something for longer. And then you've got his long intellectual history with company so that, if it has, if you own it, or you don't own it, if it has a mini recession of some kind, because all businesses do the due to the vicissitudes of markets, we'll have some kind of mini recession, or we'll have an April, March, March, April 2020, when everything is down. And if you have that intellectual history, you're just you're in much better position to buy it when people are, you know, well, Mister markets giving you an opportunity to own it. And so what, and so whether that's buying more of a stock, you own on the way down, because you have confidence in it, and you have a long history, or a business that you spent a lot of time on, never had the chance to own. And then all of a sudden, boom, you have March of 2020. And there's a business that you've always wanted to own, it's on sale. And, you know, I just I think in an environment like that, the last thing you want to be doing is dumpster diving, in secularly declining businesses, what you want, is you want to use an opportunity like the that that, you know, the the, you know, either the financial crisis, or the COVID. situation, to buy the best businesses. And so, you know, this is, this is kind of my transformation as an investor and to like, really what I would say, say waving goodbye to Ben Graham, and investing, you know, in kind of investing in a way that Phil Fisher, or Charlie Munger, who's Warren Buffett's partner, really, you know, kind of embody, like lumen for me, it was a seminal moment where it's just like, This is not I figured out the kind of investor I want to be. And if you look at the portfolio manage today, like it reflects that, that change. And you know, I, I would love to go back and change all of those things that I you know, all those mistakes I made, but I wouldn't be here

Andrew Stotz 23:37
today without death. Exactly. That's, that's our path, we each have our own path that we go down. And when you split from your mentor, or the person that you learn a lot from, it's a little bit like I always explain to young people, like people come in, they say, they imagine that they want to learn drums, and then they bring this amazing drum solo by Neil Peart or whoever that would be. And they say, I want to do that, can you teach me that? Like, well, we got to start at the basics, because very rarely can you go to that level without getting the basics down. But then once you get the basics down, then you go your own direction. And I think that's one of the things I take away a couple of other things that I'll take away, that I'll mention that I liked what you said. So I wrote down, don't make the same mistakes, grow and learn from mistakes, and don't let them scar you. And I think that that's the last part about don't let them scar you because you have to revisit things in the world of investing in the world of life. So that's a key thing. And the next thing I wrote down was, yeah, like company's not getting more valuable over time. And it made me think, you know, there's a season for everything you've got, if we just look at one measure return on invested capital as an example, we know that every company is going to go through ups and downs are going to go to a long term, maybe upcycle. Could be a long Don't turn down cycle. It could be cycles within that. I mean, I was just explaining this to some students in my valuation masterclass about look at the ROIC of Microsoft. I mean, they're heroes right now. But, you know, 510 years ago, their ROIC was just a little bit above their cost of capital. And so there's cycles, and maybe what I'm hearing from you is, kind of understand what part of that cycle you want to invest in. And I think what I'm hearing is that you feel more comfortable in maybe that upcycle, then trying to figure out where that down cycle is going to turn. And I'm thinking about invent event investing, which some people love that. I don't like that because you know, you just like you say, you don't create a repeatable process. So that's another thing I was just thinking about is like, Fine, your investing style on the lifecycle of the business. And then there's a couple of last things I would say. The first is taxes, we often forget the impact of taxes. So for everybody out there, whether it's in your personal life, in your investing life or in your business life, remember, the impact of taxes can be enormous. The other thing is that my mom always says, just because it's cheap, you don't have to buy it. And that is a big lesson for me. And the final thing I thought was kind of funny, when you were talking, I was thinking, okay, the general knowledge, is that okay, in when an m&a deal goes by the company being acquired, don't buy the acquire? And what about in a divestiture? Yeah, by the company being sold, if you could? Those are my thoughts, anything that you would add?

Benjamin Claremon 26:39
Yeah, I mean, I think there's, there's a lifestyle, as you said, there's a lifecycle for all businesses, and you need to understand where our company is in its lifecycle. So, you know, I focus a lot on moats and competitive advantages. And, you know, I'm ideally looking for businesses, businesses with sustainable competitive advantages. And there's an entire universe of companies that have historically strong moats that are being chipped away at some, at some rate, right, some faster than others, right, like, obviously, Kodak and is a good example of a company that had new tremendous moat and lost it relatively quickly, as digital photography. And eventually the iPhone replaced most almost all forms of photography, right. But then there's other businesses I'll talk about that come in, like Western Union, which has an incredible little 200 year brand, right, like people synonymous with sending remittances all over the world, but it's just being chipped away, you know, from all different directions, their share, and their moat. And their pricing power is coming down as a result of that. So there's a universe of companies with strong historical moats that, you know, have a moat trajectory, which is probably negative, but trade very cheaply, and generate a ton of cash. And so the question is, what do you do that? Right? Can you capital, allocate your way into higher returns through share shrinkage, through you know, whatever it is, or cost cutting, I just think that's a really, really tough life to live and valuation, valuation isn't going to protect you, if that moat starts to shrink faster than than you were anticipating. And you almost have to, like I like to joke about when, especially when, in the case of something like a Western Union, like when I was we owned it for a little while. And my contrarian thesis is that, you know, instead of negative to top line growth, it's actually plus one. And the truth of the matter is, if that was true, and it could maintain multiple that was a huge difference evaluation. But as I've, again, you know, thanked Mr. Graham for all that he's given me in terms of investing. Like I just said to myself, like, why am I trying to play that game? If I'm saying definitively this business is not getting more valuable over time? It is very credible competitors who are just chipping away at it day and night? Well, why even play that game? more concentrated portfolios? Why don't you choose, you know, 2025 of the best companies in the world? That, you know, in this mid cap world that is that a lot of which are probably under the radar for most people? Right? And then why not focus on those versus getting stuck in what could be a value trap? Or even worse, a distinctive, you know, secular decliner? Yeah, and so I think, I think Moe trajectory, and it's something I've I've literally liberally stolen from the guys that WCM in who operate in Laguna Beach down here in Southern California, like, I love the idea of thinking about no moat trajectory and trying to figure out with any business is a stable, is it expanding? Is it contracting? And if it is contracting, you know, don't think that a cheap valuation is going to protect you from you know, the what's going to happen over the next X years.

Andrew Stotz 29:43
I was just thinking, before I get to the last question, I was just thinking that next time you go to the playground kids try to play on slides that are downward sloping rather than upward sloping, you'll find it a lot more pleasurable. Last question. What's your number one? goal for the next 12 months.

Benjamin Claremon 30:03
Oh, I mean, it outside it, obviously there are no, there are personal goals I have, we have a three year old. And so I, you know, I want him to be happy and healthy and growing. But in terms of the investing side, I just I want to get my goal is to be a better investor in 12 months than I am today. And my goal, you know, if you extend that out five years, I want to be a much better investor in five years than I am today, such that I can look back in five years and think I didn't know anything about what I was doing. Every five years, I want to look back and say I didn't know a thing about what I was doing. Right. And I think that's, that's, you know, how do you do that? You acknowledge your mistakes. You are thoughtful about process. And you're thoughtful about understanding when you make mistakes. And when you're successful. Was it good process good outcome? Or was it a bad process, good outcome, because bad process, good outcome is not repeatable. That's just good luck. happens to all of us. We're both lucky and unlucky, but I want to have a good process. And then, you know, if it's a bad outcome, that's bad luck. But if it's a good process, good outcome, that's really what that's the quadrant that I'm trying to be in all the time. And so everything that I do on the investment side is focused on like just being consistent, repeatable, thoughtful, reflective, when I'm wrong, and then being willing to learn from other people, right? Like, there's not one way to make money. And people do it in all different kinds of ways. They do it in small caps, they do it in large caps, they do it in concentrated portfolios, they do it in hugely diverse portfolios, right, and what can you learn from other people's success? And just you know, this is the cool thing about this industry is that people share so much of what's made them successful, and you can just pick and choose and steal very liberally, and to create your own frame and understand what my new investor you are. I think I'm pretty far into that maturation process. But hopefully, in five years, I'll look back and realize that, you know, this was just a starting point.

Andrew Stotz 32:11
As we conclude, Ben, I want to thank you again for joining our mission. And on behalf of AST Arts Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying I'll see you on the upside.