Alan Olsen: Welcome to today’s show. I’m here visiting here today with Randy Barron. Randy, welcome.
Randy Baron: Thank you. I’m glad to be here.
Alan Olsen: So Randy, for the investors, you have a remarkable background and set of accomplishments as a portfolio manager. But can you take us up on your timeline? And what brought you to where you are today?
Randy Baron: Well, I don’t know how deep you want to go. My very first job was as King Kong in the Empire State Building, which not many people know. But yeah, I, for 25 years, I’ve been a stock picker, which is what I do. And now I run international kind of best ideas all over the globe. portfolio for a firm called Pinnacle associates. So Pinnacle associates, was founded in 1984. We are all employee owned with no debt, and a real history of small mid cap picking. So we’re kind of looking for best ideas anywhere in the world, under $5 billion. And you know, what’s really interesting about our approach is that we’re stock pickers we don’t do shorting. We don’t do derivatives, we don’t do leverage, it is plain vanilla. And so the things that become our Northstar are things like quality of management, for example. And so my background, about two and a half decades ago, I started after kind of the traditional JPMorgan, everything route with a with a stock picker, the American belly, and kind of came from that school, where we really did kind of Graham Dodd Buffett style approach. And I was a telecom and media analysts kind of just sourcing cash flows and looking for all of that. And then about, I don’t know, five or seven years ago, I came to the realization, and you’re very kind to point out to performance kind of followed with that, that disruption, and kind of new form platforms have a real space. So if you kick take that traditional value paradigm, and shift it on to growth or growth at a reasonable price, you could find some really, really interesting and transformative ideas. And that’s kind of been the arc of the narrative.
Alan Olsen: You know, not everyone gets to that number one position. How would you characterize your approach versus how others approach things when you’re trying to identify disruptive technology and value driven insights stocks,
Randy Baron: I’m, I’m reminded of the Churchill quote, you know, never give up, never give up, never give up. And that’s the truth, the work is the time that goes into it. And we’re fortunate because of our investor base, that the arc of time that we look at, is at least three to five years, but someone once gave me a great definition of infinity. They said, infinity is a place it’s so far away, if we’re running farther, wouldn’t really matter. Which is to say, I’m graded monthly, I’m graded quarterly. Absolutely. But at the arc of time that you’re approaching a prospective investment in, there’s one that I’m sure we’ll talk about, amorous I literally think of in a 20 to 30 year time frame. And so, you know, how do we find those ideas is we do a lot of truffle, hounding our noses in the dirt, we’re digging it out. And we do a lot of time and, and the way that I prefer to invest, is if I find a management team and a concept that intrigues me, I’ll do some work on it, and I’ll put a little bit of money in. And then over time, quarters years, we’ll find out, are you the type of management, or the type of person really that can deliver on what you’re setting out with goals and expectations and all of this. So we have a, for example, we were the first US investor in a UK listed stock called re analytics, the stock is up probably five or six times in the last two and a half years. And everyone always comes Oh, they say, Alan, you know, you’re a great stock picker, this thing is up. But they don’t realize that our average cost basis is probably only up to two and a half because again, it just seems from a fiduciary perspective, you’ve put a little in, they do well, he put a little more they do well, like that, to me. Seems prudent. And you know, we’re not in often we’re under the same foxhole. So how do I tell if you can handle the stress if you can deliver if COVID-19 happens that you can still execute one of the kind of feathers in my own cap that I’m really happy with as it if I look at the portfolio in December of 19, so pre COVID today, it’s 80 to 85%. The same names mean we didn’t run or fly, we had these relationships with management’s we had the arc of time we understood what they were doing. And that allows from a management perspective, they love shareholders like that, because I’m not lending on my shares to short, I’m not calling you with red letter words, unless you do something really dumb. You know, maybe we’re going to check in once a month or once a quarter to have a dialogue. But I want to leave you to run the business. And that’s kind of how we’ve been able to frame that out a little bit.
Alan Olsen: For the investors coming in, which are typically high net worth individuals and family offices. What timeframe do you ask of? In other words you don’t want someone popping in and out of your fund, you want to have some time given? So typically, what is the what are the terms of why would she’ll accept the money? Is there a minimum that comes in? And? And then what do you ask?
Randy Baron: It’s the right question. And in fact, when we were structuring and then restructuring and thinking about the best way to do it, you know, early on in that process, I made a decision that I would never put my own capital into something with a lock up, it just doesn’t feel right to me, I know, from the financial architecture perspective, why you would want to lock if it makes sense. But again, we’re not dealing in distressed assets, or things that are illiquid, or things that I’m going to need three months to get out of. So for us, we have monthly liquidity, which I think is a real boon. And, you know, for us, it’s a conversation. So for example, Alan, let’s say you’re a high net worth guy, you and I sit down and talk. It’s not certain that we’re the right fit, right? And so it’s not as much about saying, alright, you need to commit for two years. No, it’s Do you understand what we’re doing here? Do you respond to it almost on a visceral level, such that when there are the vicissitudes of Mr. Market, ala COVID-19, you know, I didn’t get one call for redemption, that timeframe. And I think that speaks to the investor base, understanding what we’re looking for. And, and by the way, I should also stress, because it’s small, mid cap, the things that we’re owning, are not Verizon, or Comcast, or these behemoths, where the Goldman Sachs analyst is gonna have a team of 12 people that will always be able to do channel checks and door checks and know it better than, you know, me and my little team of three people will be able to, we want to be on the other side of it to find those smaller companies that are call it 200 500 million a billion dollars at the start, and are going to grow to five or 10 or 20 billion, which we’ve been lucky to find some of those. And I think our investors appreciate that that’s a differentiated process, and therefore they’re willing to tolerate some volatility. I mean, we concentrate on our top ideas, by definition, we’re volatile, but we define risk, which we’re always mitigating as the chance of permanent capital loss. So in other words, if we say, you know what, even though this stock is priced, for an event, like a chapter 11 event, we think the markets wrong for a whole host of reasons. And then we’re willing to wait it out and kind of see it through and our investors understand that.
Alan Olsen: Is there a certain percentage of the portfolio that’s allocated into venture capital, or in recent
years, we’ve had these special purpose acquisition, corporations or spax, come in.
Randy Baron: So we are all public equity. So that’s the first thing I would say there’s nothing, there’s no private equity. There’s no mezzanine financing. There’s, again, what I said at the outset, it’s kind of boring, my wife always laughs at plain vanila stock picking, that’s what this is. But what we do sometimes because we have these relationships with management’s is we’ll be invited to participate in a pipe or a private investment in a public equity. And the pipes that we do, are if there’s a public equity already out there, we know the management, they want us to participate, they’ll come and say, Hey, listen, will you and your investors be willing to, to come and to give some money at a discount to the public price in something that there’s no lock up on the trades immediately, just so we can have you even more embedded in our shareholder base. The funny thing on spax and by the way, in my career, this is the third or fourth iteration of the blank check company, it’s always called something different. You know, I always laugh because they can get projections. You know, this phrase, anyone can make a PowerPoint, there’s no sec regulation, there’s no perspective that you need to go and vet. So it’s like, you know, ah, you know, I got to paint some things and some pictures and there’s no real accountability to it. What I do find interesting of late is that some of the specs have had their the pipe portion of that not funding and that’s kind of been a newer trend that’s happening, but again, we’re not going to get caught up in any of those. shenanigans, if you will, and we’re looking for really solid, defensible things where I can pull up A 10 q or a 10k. And I can say, Hey, this is how you’re reporting, let’s drill through it. And by the way, that also speaks to why despite the fact that we’re global managers, another thing that your listeners should be aware of, is that we’re not we’re very underweight Asia. So Japan is 34% of the global small cap benchmark. That’s a legacy of the 80s when Japan was kind of that thriving economy that it was at the time. And, you know, we spent a lot of time trying to get in touch with Japanese companies to visit with Japanese management’s because, again, management is that’s our Northstar. Well, you know, we hired analysts that would read Japanese, and but the end of the day, what we realized is, we couldn’t access the financials in a defensible way. In other words, I couldn’t look at the source data and say, Okay, this is where cash flow is right? We couldn’t get access to management in a way that would make us comfortable. And so over time, I mentioned Churchill before, we’ve kind of evolved to what he would call the Commonwealth countries, where a lot of the places that we invest today are Canada, South Africa, the UK, Australia, places that share cultural norm, share language. And that’s ended up proving to be really prescient, because it here’s here’s the end of the arc, there are today, a lot of U.S. based management’s U.S. based companies that are opting to access the capital markets. For example, in the United Kingdom, they may be too small to do a NASDAQ listing. But they’re not too small to do a ame, which is the London secondary market listing. And the thing I like about the fact that these us management’s are doing that as A. when you list in the UK, no leverage allowed. Think about that in the US, you could have something levered three to five times easily at IPO. Here, these companies had that net cash. So if and when I mean, gravity affects everything when the market comes down. I’d rather be in the stock that has a net cash balance sheet and the thing is levered three to five times just all else equal. But I also like the fact that when you look at like just to continue the UK example, the footsie versus the s&p, they’re very different indexes, right. So like the Fang heavy s&p, people are always shocked to talk about the footsie. 2% of the footsie, which is the UK market is tech 2%. Think about that, versus 30 plus percent in the US. And therefore, when you look at the divergence of performance, it’s the reason that we’re finding all these opportunities abroad because the tech lead us recovery from COVID. disruption was amazing zoom existed before but no one really used it. That kind of disruption exists a lot of other places in the world, but they have not gotten the valuation rerating outside of the US, so I’m buying comparable companies that you find in the US comparable management’s for maybe four to five multiple points cheaper, I mean, that is jaw dropping. And then over time, when you ask about how do these returns work over time, you know that there’s a great country song where you start your fence post, I’ll start mining we’ll meet in the middle.That’s all it is.
Alan Olsen: If you limiting the number of investments because it’s hard to I mean you’re very hands on with these CEOs and managers and how many companies you prefer to work with inside of a fund.
Randy Baron: So, couple things, I’m going to approach it from the investor perspective and then the company because one of the things that we also do from an investor point of view is we do a lot of separately managed accounts. So an investor come to us with as little as 250 or $300,000. But specific needs, you know, for example, socially responsible investing is so the topic does your but not everyone, if you look at the classic ESG not everyone looks at environment and social governance is saying you may care a ton about water safety, right? I may care about gender diverse in the board. So we can kind of really cater specifically to people, obviously that the funds themselves have a higher threshold to come into. Our concentrated approach yields about 40 positions in a fully diversified in a fully diversified strategy. The reason We did that is when we did a traditional kind of bell curve 70 to 80, named, we realized what was hurting performance at that time was the tail. In other words, it wasn’t position one or two or three, it was position 65- 70-72 that we’re dragging down in combination cumulatively. And so. So for us, we really like to be high conviction investors. And so therefore, our top 10 ideas could be, you know, 60 to 70% of a portfolio inaccurate. I mean, that’s a very concentrated
Alan Olsen: An average size investment going in is what?
Randy Baron: Average size probably about three, three and a half percent of the portfolio going in. However, some of these names I’ve mentioned, like analytics, and amorous those are 10% positions, and certain clients call us and say, Hey, we are and by the way, not to link to under but there’s a few type Randy Barron and amorous there’s a great podcast that I did it for an hour and a half shows how the sausage is made and stock picking. And there are people that come to us knowing our knowledge of and say, Hey, listen, we want we think an versus Amazon in 1993. We want that to be 15% 20 Klein directed, in which case we’ll go higher, we don’t have a ceiling above which we won’t go. Our ceilings are more on the opposite side, which is we don’t really do merging markets for the same reason I kind of talked about Japan, I remember looking at a I mentioned at the outset, I was a telecom guy and I used to look at Argentine telecoms, I was so impressed because you could buy these things for two times cash flow, right? And in the US, if you could buy a telephone company for two times cash flow, you don’t even go look at it, you just buy it. Right? You go? Well, here’s the kind of philosophical question if you’re buying a two times cash flow, but the Argentine peso is devaluing it at 80-100% a year, what are you really paying in real terms? And by the way, trick, that’s a trick question. There’s no answer, because we don’t know where it’s going to stop inflating. And so for us, we realized we didn’t really need a ton of emerging markets exposure to get kind of that tip of the spear type return, we can find that just by being in disruptive industries. So it’s been, it’s been an interesting ride. Yeah.
Alan Olsen: So entry fees, if an individual comes and says, Hey, Randy, I’d like you to manage an individual portfolio for me and what is your, what is your benchmark or requirement for? For you take that on as a client? How much? How much do they need to have?
Randy Baron: Well, as I mentioned, in the separately managed accounts, a quarter million 250,000, that’s where we start at, obviously, we go a lot higher than that you mentioned 7.4 billion as a firm overall. But I don’t want to bury the lead. For us, it’s about philosophy. If you are someone who likes traditional stock picking in a time proven way that we’ve kind of have a bottom up approach that works over time, and you’re not going to run for the doors. If there’s a downturn, then, you know, that’s kind of a conversation that that’s the type of investor that we look, we look for long term partners in the business. Like if I’m owning a stake in a business, I view that as I’m owning a minority share of a business. I want to therefore be invested with partners who understand that and want to own fractional shares in a business is going to compound intrinsically over time. The best kind of anecdote I regard on this was Jeff Bezos didn’t become Jeff Bezos by tracking the s&p. So while we do mark to a benchmark app, so that’s how we get graded. That’s how we get categorized as the top global small cap manager in the world. That’s, that’s wonderful. Truthfully, that’s not really what matters to me. What matters is absolute return, kind of absent miss fertigation. And the fact that we’re going to keep looking for these types of companies in all sorts of different sectors that can deliver over time.
Alan Olsen: In today’s market, we see a lot about spax in the news, and which has piqued the interest of some of the investors. What is your take on it, and how do you approach an investment with this back in mind?
Randy Baron: Sure. So obviously, at our asset size, we get pitched a lot of specs. I do think in many ways, this has been the year of the spec. I don’t know if that’s the Chinese kind of actually here but it feels like that in many ways. As we said before, you know, spax have been around for a blank check companies have been around for a long time, which is what a spac is. It feels in many ways that we are at the tail end, maybe the sixth or seventh or eighth inning of that iteration. You know, this year of course, we had Shaquille O’Neal and you know, all these other kind of names, just put their names on, some of that would then get priced up. What’s interesting is that specs do allow a path to value so I mentioned earlier, amorous AMRS. It’s one of our top holdings, we’re known for this name, well, amorous is in a space called synthetic biology. Fine, AMRS direct comparable gingko symbol DNA just listed three weeks ago gingko came public via the largest speck in history 17 and a half billion dollars. And it’s funny, the valuation I mean, by the way, it’s trading today 240 times revenue, which you kind of roll your eyes and say nothing in this world to trade 140 times revenue, except, and here’s here’s the narrative that totally ties in to what I said before, but anyone can make a PowerPoint, New York Stock Exchange symbol DNA given three weeks ago, Friday list and on the tapestry of the word is but you know, in the front of the stock exchange, they put up the logo and the symbol, and they have a tapestry for lack of a better term. It’s a picture of a Tyrannosaurus Rex, saying we can make anything and I literally turned to someone who said if they can make dinosaurs, it’s worth 140 times revenue, right? The point is spax allow to capture a Zeitgeist, this moment that we can capture a narrative, we can encapsulate it, and we can try and monetize it, I think there will always be ways to access the capital markets. I mentioned UK, for example, no one’s picked up on the fact that US companies are increasingly going to the UK because I didn’t mention this before. There’s no quarterly filing requirements. So think about this, if you’re a small company call it $10 million in revenue, right per year starting out. And you don’t have to pay because you don’t have to quarterly cycles of filings, lawyer or accountant audit fees, you’re saving about $750,000 $2 million a year on 10 million revenue that ain’t nothing, right? And so the point is, you’re always going to see the capital markets evolving in a way that they’re going to try and eke out value in an efficient way and I think spax serve that purpose. I’m not anti SPAC we haven’t really done them per se because I just that they’re not sec audited, I can’t really go in and check the numbers against something. But the concept of actually accessing the capital markets, I think it’s prudent and works overtime.
Alan Olsen: So Randy, it’s been a pleasure to have you with us today for people wanting more information on Pinnacle associates how to go about them.
Randy Baron: They could send an email my email is firstname.lastname@example.org
Alan Olsen: Been visiting here today with Randy Baron of Pinnacle associates, Randy Thank you.
Randy Baron: Thanks Alan, Have a great day.