Ep694: Carter Malloy – Valuation Is Not a Reason to Invest

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 in investing you must take risk 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. Join me go to my worst investment ever.com and sign up for our free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast hos Andrew Stotz from a stocks Academy, and I'm here with featured guests Carter Malloy Carter, are you ready to join the mission?

Carter Malloy 00:42
Absolutely.

Andrew Stotz 00:43
Let me introduce you to the audience. acre traders acre trader CEO Carter Malloy grew up in Arkansas farming family and has had a lifelong passion for agriculture and investing. before founding acre trader, he spent five years as part of the founding team of a successful global equity investment firm. Before joining in 2013, Carter was a managing director with Stevens Inc, a large private investment bank, where he was an equity research analysts a lot what I did like what I did in my past, at Acre, Trader Carter has successfully raised over $60 million in series B funding and grown from 20 employees, and 100 to 120 employees across the company's two business divisions, which include acre trader, the farmland investing platform and acres of land research platform. Carter, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Carter Malloy 01:44
Thanks, Andrew. That's a very personal question is sorted out. Hi, let's see. So the thing that I care most about, I put aside my family, which is the always number one, which is I think about bringing value to the world. While I'm excited about investing in farmland, I think that bringing value to rural America, in rural communities around the world is incredibly important. What I focus on as a manager of a business is helping people to be the best version of themselves. And so helping all of us that I work with, and the partners throughout our business, to try to be more introspective, and try to improve ourselves as much as we can, so that we can all bring value. So I would hope that the people that I work with bring a lot more value to the world. And I expect that they will bring a lot more value to the world, and I will individually. And that's really exciting to think about.

Andrew Stotz 02:40
It's interesting, because when you think about business, you know, people that come to business, come to the job deliver, you know what you got to do, and then go home and all that. And one of the things you know about living in Thailand is that you realize it ties are not motivated by money. What's, you know, money's important, but what really is motivating for them is to have a working environment with people that they like. And one of the things that I always found a little bit difficult when I first came to Thailand was that at Pepsi, where I worked in Los Angeles before I came here, on the weekends, you know, you'd never spend time with your colleagues, you would just go home and do your thing at night and all that. But in Thailand is really important that you know, you've spent some time together and then they like to do like outings where they're everybody goes out together. And now I really started to understand that it is about developing personal relationships and how much better life can be and how much better work can be. I'm just curious, when you're talking about like bringing out the best in yourself, how does that manifest in your life and in your business?

Carter Malloy 03:43
Anything that pretends to equate to growth, right, so trying to get better. And like, of course, you're faced with that often constantly, but continuously trying to improve oneself. For me like, well, I like that, in that personal growth stories. I like to learn and I like big, big researcher. And I also enjoy practicing music and playing music, personally, outside of work. But both of those are sort of these never ending journeys that you can go on to try to better yourself and just just get a little bit better. If you're working on a low base, as I often am, especially within the world of music, it is really, it's encouraging to get to make some advancements at points.

Andrew Stotz 04:27
Yeah, and I think for the listeners out there, it's a great motivation to say like, what is it that you are committing to improving yourself and the other part of it is that it's never ending. There's always opportunities to improve. I'll just share a little personal sports story. Something when people ask, ask in a group, you know, they say, tell us something surprising about you that nobody knows or something like that. I say, Well, I was in jail when I was 14 years old, and I almost killed myself at the age of seven seen. And then I went through three Drug Rehabs for the whole period of my high school senior year. And, and then I got clean and sober at the age of 17. And I've been sober for 40 years. And so even though medical marijuana is pretty, pretty hip now in Thailand, you'd never find me consuming it just because it would set off a Malstrom in my life. But the point is, is that when I started really focusing on improving myself emotionally, you know, which is really what it was about rebuilding relationships, and emotionally, I can say, from the moment that I got sober and started to get clean, and really start to see life differently today at the age of 57. Now, I just see that there's just always opportunity to continually improve. So I think it's an inspiration, what you're saying, for all of us, you know, to just say, how do we keep getting better? Well, thank you. Yeah, so I appreciate that. Now, before we get into the big question of the podcast, I really want to understand more about what you're doing. So maybe you could just give us a breakdown of kind of what, how I particularly because why should somebody be interested in investing in real estate? I mean, come on, there's a stock market, and there's this and that, and, you know, why do I even need to be interested in that? And then how are you providing that, you know, platform and that opportunity for people to to get involved?

Carter Malloy 06:28
So the first is the why, in our case, not just real estate, but rather obscure or real estate called farmland, right land that grows food, fuel and fiber. And so why get interested in that beyond the fact that it is interesting that we do those things, and it's fun to be part of the support rural communities and fun to support farmers and their growth. From a portfolio standpoint, most folks are familiar with his word diversification. And many folks are familiar with the idea of risk adjusted returns, right? In the world of farmland, we are not out looking to make big hits, right, we're not out saying you're gonna double your money next year, like this is not a get rich, quick scheme. In fact, we, we try to view it as the opposite. We're looking for steady compounding of capital. And as most of the great investors of all time will tell you, that is a really powerful thing, right? Things that Einstein quotes, like, compounding of capital is the eighth wonder of the world. And that is a what we're specifically after as a business is that slow and steady wins the race?

Andrew Stotz 07:33
And what would be let's say, what would be your estimate of what someone would expect in farmland? I don't know over the next 10 or 10 years is that 3%? Is that 8%? Is that 12%? What would you say is where you think the growth can be in that space?

Carter Malloy 07:51
Well, the last 10 or 20, or 30 years has been like low double digits, call it right. So something similar to the s&p or or real estate, the commercial real estate as an example. However, it has shown far less volatility in those asset classes. So it has not moved up and down quite as much just made a little more stable and how it's produced those returns. History is not necessarily how the future will play out, right. And we always make sure that understand these risks, investing in anything. But we're certainly intrigued by that, that consistency of historical performance.

Andrew Stotz 08:25
And that even if the return was, let's say, 5% over the next 10 years, and the volatility was almost zero, very limited, I'm sure. It's not a huge amount of volatility in that, that lack of volatility, basically, and maybe the counter cyclical nature of that, to some extent, can add a lot of value to a portfolio to reduce that the volatility in the overall portfolio and improve the risk adjusted return. Tell us how you're providing like the ability for people to get access to that, you know, through the app and the software, the website, that type of stuff.

Carter Malloy 09:02
Totally. So we talked about why farmland and plenty more, we can continue talking about lots of resources on our website as well at Acre trader.com. But the hull is fairly straightforward. Our team and our both team of underwriting professionals as well as data science professionals have really deep understanding of the world of land. And so they find a whole lot of properties and occasionally one is interesting. And that moves through a very long process of underwriting ultimately makes it to our website. And for the investor what that means is rather than going and investing in a million dollar piece of property and then hey, congrats, you get to manage a farm. Like it's a non starter for most people. We are met you on our website, invest maybe 10 or $20,000 into a single property and get exposure then our team takes care of things from there in terms of management payments, etc. And you as the investor can make money in two different ways right one As through rent or revenue share with the farmer. So some income each year. And then you can also make money through appreciation, right, so the actual underlying value of that land goes up over time, those two things combined as well as produce that return of 11 or 12%, here in the last 2030 years,

Andrew Stotz 10:18
and that plot, let's just say you acquire a new big, attractive plot that you've gone through all your research on that plot. It's not like that plot enters a pool of many plots. It's that plot is a separate company, and then you get a portion of that company, or how does that explain how that works?

Carter Malloy 10:37
That's correct. So, plot of lands, let's take a $5 million farm and a winery in California, as an example, that would go into a unique LLC. That LLC, then the investors that we call a special purpose vehicle, right or corporation entity, so the investors would invest in that entity. So the entity owns title and has the direct ownership of the land, has common documents to government, etc. And the investors own a portion of that.

Andrew Stotz 11:10
And then what happens with it? Are you looking like Warren Buffett looks for companies where there's a guy, a man or a woman who's running it, and will probably be on it for the next 20 years, or do it are people selling this to you to exit what they're doing.

Carter Malloy 11:25
So the way we approach the market typically is with a farmer. So it's the secret of our business, we are, we are a farmer first. And we have a broker dealer as well, that allows us to work with that farmers, they have real financial interest in many most of these deals. So that is how we source is rather than us going and knocking on the door and landowners. We knock on the door, the farmer say, Hey, you want to grow your business. We're like an equity finance partner to you. So we can go out and help you acquire land, and the farmer may not have $3 million to go buy a neighboring parcel, B may have a little bit of money he wants to invest in that deal. It also can earn some financial incentives as well along the way. So it's a very unique and very powerful program and alignment of incentive between farmers and investors.

Andrew Stotz 12:18
That's interesting, because if you're focusing, some people will imagine that you'd be focusing on just finding land and good land and doesn't matter who's you know, doing that. But the point that you're talking about is like, how do we find good farmers who want to expand what they're doing? provide them the capital needed to do that? And then you know, and then let them get on with what they're doing. So in a sense, there's you're investing in, you know, an entrepreneur,

Carter Malloy 12:48
you got it, we're investing in business, people are investing alongside business people, I should say, absolutely. So

Andrew Stotz 12:53
I have one of my clients in Thailand, what they do is they, they have, they bring their technology to landowners. And they basically say, we're going to grow corn on your land. And you just give us the biggest pie that you have. We've got our equipment, and it's within a certain catchment area, so that our equipment, we're going to be rotating around and we're super efficient. We don't burn the crops, we don't leave any waste there. We pack it up on bales, we use that in our own facility for biofuel and all that. So what they're looking for is kind of, you know, a land owner that wants to continue to own the land, but that wants to generate more income out of it. Does that model exist in America? Or how does that how does it work in America for that?

Carter Malloy 13:39
Yeah, in many places, so about 40% of us farmland is rented. Right? So non non owner operated. So that's like a trillion dollars of farmland. It's a very large amount where that is rented out. So that's often like, just like the building that I sit in today I am here in downtown Fayetteville, Arkansas, I love the place that I work. I don't own the building. I haven't we have a business inside of the building. But we rent this building from somebody else to do it.

Andrew Stotz 14:10
One other question before I get into the big question of the podcast, because I just find it fascinating what you're doing. And you know a bit about Thailand. And we talked about that before we turn on the recorder. One of the things about Thailand that I could see is that what was happening was, and it happens in all the development of countries where people move from farms to factories. And then we get basic infrastructure in place. And then all of a sudden, you get a 10 year boom. In an economy. It happened in Thailand, it happened in Vietnam, it's happened in China, now China's growth is slowing. And now you got all these people in the factories and all of a sudden you realize, well, we don't have many people that run these, you know, farms in the family farms in Thailand. It's almost all small scale farms can be 300 years that family has been farming that plot. And when I first came to Thailand I was like All this needs to be consolidated and it needs to be, you know, bring commercial farming. And as I've gotten older, I've realized there's some downside downsides to commercial farming, whether it's related to efficiencies related related to chemicals related to, you know, that type of stuff. But when we had the pandemic reaction in the world, where governments were shutting them, companies, businesses economies, one of the things that happened was that millions of Thai people in Bangkok, flocked to the bus station, and they got on buses, and they went back to their family plot. We don't have a social security system here, we don't have that kind of thing, that safety net. But what they do have is their small little plot that they're barely hanging on to and their grandpa and grandma or mother or father's. And I now all of a sudden see that there is some value in helping farmers maintain and farming families maintain their you know, their plots. And I'm just curious, like you, you're in a much more advanced situation, of course in America, but I'm just curious about your thoughts on that whole topic.

Carter Malloy 16:14
So we've seen that the books moving out of rural America for 100 plus years, right, with mechanization, plus urbanization and mechanization on the farm, and then urbanization trends in general. What's fascinating is the extreme majority, like extreme extreme majority of farmland plots here are the same. They're their family owned, they've been families for generations. And we're, we're like, generally very happy about that. Right? It's great to have. And we say it's a business earlier, as an entrepreneur, as a farmer, that's usually a family business, right? Where they may have additional labor as well, or additional employees within the group. But it's often families. And that's, that's a wonderful thing to be a part of, and for us to help. That's who we work with, right? We're working with these types of folks to grow their business. And that's, that's an exciting place for us and exciting value to bring to the Arlo sector of the economy is that we can truly create Win Win outcomes.

Andrew Stotz 17:18
And these families are acid, land asset rich and probably cash poor, in that they don't have a way to monetize or get any value out of the land that they have. And so I suspect, there's some good opportunities for them to upgrade what they're doing and be able to get some cash to put their kids through school or what other other things. So sounds like, really exciting. So just remind us, where's the best place for people to go to learn more? I know, you talked, you told me about your LinkedIn profile, which is one place, and I'll have a link to that in there and remind everybody about the website that they should go to learn more.

Carter Malloy 18:00
Yeah, acre trader.com is our website pretty easy to find? Yeah, there's a ton of material on there.

Andrew Stotz 18:07
And I'll have links to all that in the show notes. But now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstance leading up to it, then tell us your story.

Carter Malloy 18:20
So I spent about a dozen years and equity investing both as a sell side analyst and as a buy side investor. And I worked at a fine, there's about a billion dollars of assets under management, I spent a good amount of my very, very concentrated, very deep dive investing, spent a lot of my time on the short side, so betting against companies. And that can be a really painful part of your career, right. Generating alpha is hard, generating absolute returns, dollar returns is even harder when markets are going up. But it's an important part of many strategies to be able to hedge within your portfolio. So I had lots and lots of bad and really bad investments over the years. But one sticks out because there was a lesson learned there. So lots of folks will tell you about betting against frauds and how dangerous that is because as an investor, you may have 10 or 20 stocks in your portfolio that you're shorting. But against the people running that fraud, they got one bet, and it's that fraud and they can outlast you. And so as a general statement, you know, we didn't chase a ton of frauds. We chased like, okay, businesses being valued as great businesses where the numbers were too high. There was one particular company. They were a healthcare software business. And I had a thesis we as a company had a thesis around the macro developments, both cyclical and secular headwinds that this company faced and the company is a fast growth software company, right? So to top off the fact that like, hey, there's these real pressures on their business that we don't think the rest of Wall Street is seeing or the investment world is seeing. The stock is really expensive, the valuation is crazy, crazy high. So anyway, I started digging into it, I started meeting with the company CEO, and this guy was unbelievably impressive, like really, really good. And started, like doing the deep digging that we would do on the second third level bench inside of the company, that people that work there and their culture. And it was like, Alright, this is a really well run business. But hey, you know, we still think these problems exist for their, for their business as a whole. And so I then began to make there to actually I can stop and say, long story short, I lost most of the principal, because the stock almost doubled on us, before recovered, and it kept running. So lost most of the principal of that particular investment. And there were two primary learnings there. One is, I felt myself was waiting for her gravitating towards that evaluation argument. And valuation is not a thesis. Valuation is an important part of your work, right, and they can support an investment decision. But you never lead a conversation by saying this business, this stock is expensive, or it's cheap, that is not a reason to invest in the story, right. And, again, it can be a supporting piece of information, it should be a part of your calculation in terms of position sizing, etc. However, in this case, I felt myself more and more leaning on that as it became part of my thesis. Oh, well, yeah, maybe that stuff's not that great, but it's still really expensive. So number one is like terrible flaw of letting that creep into the thesis. And the second was, don't bet against really good management teams. And then the inverse is true as well, right? Don't bet for really bad management teams, because they can absolutely an often do determine the outcome. And this guy kicked my butt. And then some they put up despite all these pressures were, we were proud, right? It's like, oh, the operation was a success, but the patient died anyway. Right? It's like, we the thesis ended up being good. But because of these two things, one, the street didn't care about valuation, there's a homerun business. And two, is this team executed so well. So be cautious in investing around management teams and around valuation, those things can really be overlooked when making important investments.

Andrew Stotz 22:55
And where is that? Is that company just continuing to roll? Or do they hit any hard times over the years? Are?

Carter Malloy 23:01
They've hit some hard times? Certainly, I would say the stock is still probably 2x higher than it was where we initially invested and went up a whole lot after recovered. It's coming back down some, but I'm rooting for him. You know? I'm cheering him on, I hope that they are super successful.

Andrew Stotz 23:20
Yes. It's something about when a CEO kicks your ass that you think okay, yeah, okay, pretty good. Maybe I'll share a couple of quick things. I think you, I love what you said, valuation is not a thesis. And I've actually never heard that before. And I teach valuation and been in the industry for a long time. So I really liked that. I'm going to talk to my students on Friday about that. And but now, on the other hand, the valuation, as you said, can be supporting so one of the companies I've been looking at when I'm talking to my students, and they're doing valuations of his Toyota. Toyota is like getting hammered, because they're not joining the Evie bandwagon exactly the way everybody wants them to do. And they're getting a bad score. And they're ESG because they're exposed, some of their factories could be exposed to floods, you know, yeah, Thailand, and all a cold country where they have a huge number of factories, the whole country was flooded in 2011. So, you know, I see that the valuation now has been pushed down to one times price to book, meaning you're getting all the future value, basically, pretty much for free. And it's a long history of the number one car company in the world, the pretty much the most consistently profitable, and well run company. So betting against it, you know? And so my question to you in that particular case, like, valuation feels like a thesis. But I think what you're saying is if there's not other fundamental things that are you know, driving that, then valuations is going to be a tool, it's just going to be another input. How would you help us apply what you've learned from that, to, let's say, a situation like I've just described.

Carter Malloy 25:10
So I would suggest that evaluations should inform your position size, right? Like, alright, you got 100 theoretical dollars, your maximum position size is $5. That price to book price to earnings, Evie to EBIT, da, however you want to look at valuation across a large spectrum of metrics, and measurements, that should help you determine whether that you have a thesis, and then the valuation can determine as my position size 012345. Right. But that can help drive the sizing of decision anywhere from literally not going to do anything I'm not going to invest to I'm going to make it the biggest investment I've ever made. So the valuation can, and should I, in my opinion, influence your position size. But like, if you just tell me Toyota has a one times book ratio like so what like they go destroy book value, like that book value can be cut in half in the next three years, I'm making it sound like, like, that's a, that's not a reason to invest or to not invest now. And I think they can double book value, or I think they can maintain book value, and capturing capture digital future growth, because of x, y and Zed reasons, this becomes interesting. Yeah, it is. We have like a rule of like, we discussed valuation of an investment at the end, right? Like, we're going to talk about the thesis and everything else. And then the last slide, or slides in your 50 or 100 Page investment deck can be about valuation. And because it informs how, how big we're gonna go here, we want to go make a big, big investment or small investment or none.

Andrew Stotz 26:43
So let's go back in time, and now think about a young person who is in your shoes now and go back in time and look at it based upon what you learned from the story that you've just told us and what you've continued to learn. What would be one action that you would recommend that listener of ours would should take to avoid suffering the same fate?

Carter Malloy 27:05
All right, don't invest in single securities. It's like, like, I think the like, as a professional doing it for 12 or 15 hours a day. Okay, that's interesting. Maybe you can convince yourself you're smarter than the market. And then maybe maybe over a period of next five or 10 years, you'll actually outperform the market. Otherwise, statistically speaking, it is unbelievably unlikely that you, Mr. Mrs. Investor, over the next decade, are going to beat the market by casually investing in single stocks as an example. So I would always have we encourage people to invest in ETFs, then if you want to go gamble, right? And you know that the odds are stacked together people go to casinos all the time. And like they factually the odds are stacked against you, but they enjoy doing it. Okay, that's the same thing in public markets. If you enjoy researching and you enjoy the deck and you enjoy investing in individual securities than like an in you know that the odds are stacked against you and you're gonna underperform. Like, like like, statistically you're very likely to underperform the index. Go have fun, knock yourself out and have a good time. And if you really really love it, and you do that for a while, make it your career, go, go go all or none is sort of the way I would feel about investing in stocks and bonds and probably most things in life like Don't Don't be halfway to stuff.

Andrew Stotz 28:32
It's great advice. So let me ask you what's a resource that you'd recommend for our listeners

Carter Malloy 28:41
for general investing, there's not enough reading you can do. Like actually reading if you want to be a good investor, like understanding what CFA is read is a good start. So this was your study books for CFA Level One. If you're already getting bored you this isn't for you don't like like, if you go read those books and you find them interesting. You should go and ask for it sounds like fun. If you don't, don't tell me about oh, I bought McDonald's because it was $100 out of $115 like that, that does nothing for either of us. So study man like if you like it, go study and don't go study the heavy stuff. Don't read heroics books about Warren Buffett like you should still study Warren Buffett too. But you're gonna you're unlikely to be that kind of a hero. So don't don't fancy that you're going to be the next Warren Buffett's. Unless you are willing to go study and learn a lot

Andrew Stotz 29:39
harder. You're the first one to recommend buying the CFA study guides like sweater as an example. And I have a funny story about that in 1995 When I was studying CFA, I was among a small group of people in Thailand that were doing that and Mr. Swisher the guy I don't remember I don't remember much But I remember the guy came to Thailand. And he arranged an event where he would do a weekend crash course for us like he did in the US. And there was about four people in that room. And then I remember the last thing he said to us, I'll never come back to Thailand, but it's really nice to meet all of you guys. And yeah, so but definitely having been involved in CFA all my career paths CFA in 2001, was a volunteer in our CFA society when we started in 2003, and rose to become a board member of vice president and then a two term president of the CFA society. Tonight, I have a course on teaching about CFA ethics, I just think that it's great advice. So if you're out there, and you're thinking about, you know, I really want to, you know, I'm an engineer, and I've been having some fun and all that, dig into that course material, because it really is the best contemporary, you know, Compendium, compendium of material that you should really know. And if you find that fascinating, then take level one and pass level one, you know, you may decide that that's all I need. And that's fine, but great advice. And that's very unique advice. Okay, last question. What's your number one goal for the next 12 months?

Carter Malloy 31:19
Um, I would have to break that into two parts, right? My number one goal, as a person is to spend more time with my children. So I'm too obsessive about work. And this rules my life. So yeah, that's the easy number one goal that I try to continuously optimize towards is recognize my kids will hopefully be in my expect them to be in my life for the rest of my life. I do not believe that my current job will do the same. So you know, when I'm 90, I don't think I'll be working at this company. Oh, maybe I won't be but So optimizing towards family is incredibly important goal of mine this next year.

Andrew Stotz 32:08
Yeah, I brought my mother to live with me, my father passed away about seven years ago, and she's 85 years old. So we've spent seven years of our lives together every single day. And I didn't. neither of us expected that we would be in each other's lives to this extent, to the end of our lives. But as you've just said, No matter jobs come and go, businesses come and go, we make them successful, we sell them, we grow out of them, whatever. But if we can do right by our families throughout all the period of time, it means that all of our life, our family is a great component of it. So it's a great, great reminder for everybody, for everybody listening and viewing, you know, you're never, ever going to regret investment in family relationships. It's just something that I highly, highly encourage everybody and Carter, I think you've given us a good reminder of that. So listeners there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you're not yet join that mission, just go to my worst investment ever.com And join the free weekly become a better investor newsletter reduced risk in your life. As we conclude, Carter, I want to thank you again for joining our mission and on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Carter Malloy 33:45
This has been fantastic. I sincerely appreciate you.

Andrew Stotz 33:48
I appreciate having you on 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 hose Andrew Stotz saying I'll see you on the upside.