Investing Unscripted Episode 82: Misfit Alpha: The Best Stocks You’ve Never Heard Of

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Jason Hall: Hey, everybody. Welcome to the very first episode where I actually say, Hey, everybody. Welcome to Investing Unscripted. I'm Jason Hall joined as usual by the voice of the people, Jeff Santoro. Jeff, are you still the voice of the people, even though we're now Investing Unscripted?

Jeff Santoro: I am. I was cool with the name change for the podcast. I would not be cool with a nickname change. I am still the voice of the people. 

Jason Hall: Okay. All right. That's fine. We'll keep you that we're joined by someone who is very familiar to people that watch our YouTube channel, Tyler Crowe. I do a lot of videos with Tyler. We're going to do a bit of an reveal with Tyler here.

It's already been made public, but it's not something Tyler's really promoted. But before we get to that in this conversation with Tyler, we've got a little bit of housekeeping. 

Jeff Santoro: Quick housekeeping today. As Jason referenced, the podcast is now called Investing Unscripted. So we do have new ways to contact us.

It's actually all the same accounts, but the names have changed. So on Twitter we are now InvestingPod. How is that [00:01:00] available to us? I'm dumbfounded that no one has ever taken the handle InvestingPod on Twitter. But it is ours now. So if you want to reach us there, At investing pod, we have a new email address, which is very easy to understand.

And remember [email protected]. We still have the YouTube channel, exact same location where it was just a new name. So those are the places to find us most easily. And as always, we appreciate ratings and reviews and sharing the shows with your friends and family. That's it for the housekeeping.

All right, Jason, let's introduce one more-- 

Jason Hall: One more thing. One more thing. Our other social media accounts too. We've, we're starting to get those more regularly updated and using those as well. Twitter kind of sucks. And some of these others seem like they're picking up. So if you want to find us on TikTok or Instagram, Threads, all of those other ones are @InvestingUnscripted.

So all of the other ones, Twitter's the only one that's different. So you can find us on-

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Jeff Santoro: LinkedIn. Even LinkedIn. We are [00:02:00] everywhere. 

Jason Hall: We have a LinkedIn page. We are official. We are every Everywhere. Okay. Tyler Crowe. Hey buddy. 

Tyler Crowe: What's going on? You know, it's nice. I get to be the first guest on the new named podcast, or at least when you're recording it it's you bring in somebody for the SEO juice and it's me.

So I'm glad to hear that. And the idea of like, oh, well he hasn't, been very actively marketing. It's just cause I'm lousy at marketing and sales. Let's admit it. Like, it's not like I'm actively hiding it. I just kind of suck at that part of the job. 

Jeff Santoro: Well, we're going to turn that around today, Tyler, this is the- 

Jason Hall: No, we're not. We're going to turn it around for one hour. 

Tyler Crowe: This is the intervention. 

Jason Hall: There you go. Yeah. So Tyler, again, welcome on. People that follow our YouTube channel, they're definitely familiar with it. 

You and I do a lot of videos and one of the fun things about doing videos with you, Tyler, is that you do, I'll bring a normal company that people are familiar with, and you'll bring some weird, obscure Minnesota utility. I mean, you'll just bring something nobody has ever heard of. And it's a Minnesota [00:03:00] utility that corporate name is completely different from the actual brand of the utility that the customers actually know.

It's like you intentionally find companies that people are like, what is that? 

Tyler Crowe: And it's a gift. Really.

Jason Hall: You have another part of that. That is why you're here. You know, I keep pausing giving you a chance to talk and then immediately interrupting you. It's-

Tyler Crowe: We're good at this. 

Jason Hall: What I want to talk about, because you've been on the YouTube channel. You were on the podcast about a year ago, but you've started up something in the past year called Misfit Alpha that is really interesting, because it's really, the core of it is those unknown, misunderstood under the radar, sleepy companies that have absolutely been massive, massive winners. And I want to talk about your background, your history, and then the research project that you did that Led you to create Misfit Alpha.

Let's start with your background. 

Tyler Crowe: Okay. Well, I kind of fell into the investing thing. I feel like a lot of us have, you just, it becomes this one thing where all of a [00:04:00] sudden money means something and investing seems to be the way to make it happen. Somebody who- 

Jason Hall: It consumes our life. 

Tyler Crowe: Become obsessed with it and start talking about Minnesota utilities. But what, but this, my background, I guess, is, I had an engineering background, wasn't really too jazzed about engineering, went to business school. This was all during the Great Recession, so jobs weren't exactly readily available for recent college graduates at the time, and at the time I got started on blogging networks the Motley Fool had a kind of a Beginners blogging network to allow people to get started, and I just got noticed there and just it sort of took off.

I carved out a niche in, I guess you could say oil and gas energy for a while with a background in oil and gas. I worked on oil spills for a little while while I was in grad school. And so I felt like I knew the energy niche relatively well, and it was an under covered, under appreciated part of, I would say, financial media.

And so, it was [00:05:00] a unique angle I could carve out for myself as an investor and as a writer. And I think we're going to talk about this a little bit on this one. There's like us, the investors, and then there's us. Doing our jobs in financial media, and I think a lot of what I have done with this new project is my rebellion against financial media a little bit, and we can go into that if you want, but it's, so for the past 10 years I've been working with Motley Fool, I've gone through a lot of different, worn a lot of different hats in the business either through writing, through kind of the things, the forward facing things that we see here, like videos, like writing things like that.

But I've also done some, 

Jason Hall: You've been a writer both on the free side, you've written behind the paywall, you've edited. You continue to edit, you worked on SEO for some of the real estate investing service that the Motley Fool is doing. 

Tyler Crowe: Did some website startup, did some website optimization, stuff like that.

Yeah. [00:06:00] So. I learned that- 

Jason Hall: You've done a lot of different things and then that's professionally. So let's talk about the path that the professional side and then your personal side. Let's talk about the kind of inner relationship there and. 

Tyler Crowe: I think as all of us, we've made a ton of mistakes early on as an investor personally. But I think one of the big transformations that I had as an investor was the fact that my wife works for state department. And so I ended up spending a lot of time living overseas and as a result saw a little bit of a different world. I lived six years Sub Saharan Africa.

I'm currently living in a former Soviet, one of the Soviet republics and it just kind of, you get away a lot from like the U S tech central Silicon Valley style of investing because it just, it's not really existent in other places. And because I was so far removed from it, I needed to look for other places.

I needed to look for things that I could be more familiar with and could understand a lot [00:07:00] better versus kind of that boots on the ground that you would have. Being just a citizen in the United States watching CNBC or, being an observer of media there. 

And so I don't want to call it like the, I went up to a monastery and was left by myself, but I think a lot of what I have done over the past six, seven years has been a rather solitary sort of thing. And so I needed to wait, find ways to kind of carve out a way for this to make sense for me. 

And this is where I ended up on that end, was gravitating towards undercovered, underappreciated businesses that have done spectacularly but don't get the attention that you see on CNBC that you get in, when you go on to Yahoo Finance or things like that, and especially on search engines. And that's a rant we can save for another time. 

Jason Hall: Yeah, I want to say, I want to say thank you, Tyler. Because there was one thing that you did in your, this was when you were in sub Saharan Africa. You were [00:08:00] very early in some opportunities there that you introduced me to. So I was, I want to say thank you. 

I was far earlier than most people that lost money on Jumia.

Tyler Crowe: Yeah, that one was years. I lost a ton on that too. So don't feel bad. 

Jason Hall: But I think it's interesting because I bring it up a little bit to tease you, but also because you talked about making mistakes along the way of this process. And I think the key is, the reason I want to mention that is because you don't always have to be early on really big ideas to do well.

So let's talk about how that's something that as you made mistakes, but also as you learn and you found winners that led you to this. I think you spent about a year really doing a lot of deep research to really understand who you are as an investor, as well as try and find like a common theme and calling out common elements among really big winning investments.

Tyler Crowe: Yeah. So I want to say like mid 2022, right around when we started to see like the big decline in tech, I guess. Or we [00:09:00] call it, it wasn't quite a bear market. I don't know what you want to call that period from like late 2021 through 2022, where things started to go downhill. I, one thing I just noticed was there was a lot of consolidation.

Jason Hall: It was a bear market.

Tyler Crowe: Yeah. Okay. So the bear market. So it seemed to me like there was an awful lot of consolidation of ideas where the things that you're reading that the companies that you're hearing about all started to narrow down to this really small subset of companies, whether that's because that's where the opportunity was, or that's where the people who were well versed enough to write about them and to speak about them just happened to gravitate towards those companies for one reason or another.

It just seemed to me like there was this, sort of a lacking of discovery of new ideas. And one thing that, you've had Bill Mann on previously and a lot of other investors, Jim Gillies in particular, I know we're talking to Motley Fool analysts here, but they're people who have really cut their teeth in like small caps, [00:10:00] micro caps going in a lot of places people haven't gone.

And it really made me think. So, where has alpha, over the really long term. And when I say that, I mean companies that have over the very long haul substantially beat the market. 

Jason Hall: . I want to define that term alpha because people hear it and a lot of times it's become conflated with just making money in the stock going up.

Alpha is specifically outperformance versus a benchmark. So the S&P 500 goes up 20%. Alpha is the stock that went up 25%, 5 percent is the alpha, right? Let's be clear. We're talking about outperformance of your benchmark. 

Tyler Crowe: Yeah. And so what I did, and this, it sounds very crude, but I basically spent like four months and I went up and down, looking at four to five thousand companies and just looking at their long term performance since inception.

I tried to focus on things that had track records of like more than 15 years. So I know I've just I missed some things along the way. But the idea being, what [00:11:00] are durable businesses that have been around for a long time and have just created long term wealth that has beat the market.

And it was, I wanted to focus specifically on the things that either writers weren't talking about, that Wall Street analysts weren't talking about, and why. Because it's not like they were just all huddled around, $ 75 million nano caps that making a lot of money or that it was, you know, some popular, they were all in tech.

What was interesting to me was like where it came from. There were segments of the market that worked really well. There was some that didn't and why the companies in those markets ended up -or industries, I guess is a better way of saying instead of market- why they ended up working.

And Misfit Alpha has been the project of taking that long list of companies that have outperformed and starting to dig into the ones that very, [00:12:00] very few people talk about.

Jeff Santoro: So I think where I wanted to take the conversation next is to talk about the why of what you do. I think you touched on it a little bit. It makes sense intuitively from the perspective of trying to outperform the market to find stocks that do that.

But I think there's probably some people listening who say to themselves, I really like Investing in the companies I know and I've heard of, or maybe that I use in my own life. And there's certainly plenty of famous investors who've done really well investing in mostly well known companies. So I guess what is the why behind what you do? Like, why do you think it's so important that anyone listening take the time to consider some of these less covered, less well known companies as they build out a portfolio?

Tyler Crowe: So I would say there's two things. I think from the understanding of businesses that work really well, because even if you don't necessarily understand a business, there are industries and businesses out there that have just produced spectacular returns. And you don't have to [00:13:00] know it intimately to to really have a firm grasp it.

And I want to give an example. It was actually the first company I wrote about for this. The company is Arthur J Gallagher. And they're just an insurance broker. You just hear that and you go, oh man, that's going to be one of the more boring things you've ever heard of. Right? You just, you broke- 

Jason Hall: I'll wake Jeff up after you finished talking.

Jeff Santoro: Yeah. I already fell asleep, but continue. 

Tyler Crowe: That's what I assumed. I mean, brokering insurance contracts for businesses and writing renewed contracts. Like oh, hum, go to sleep. 

But this is what was fascinating to me. And this is the lesson that I think investors can take away from this. Arthur G Gallagher and Costco more or less went public within like a month of each other, right?

And Costco is a business we all know relatively well, if you've got a Costco membership, you end up spending way too much money than you want there. And every single time you're like, man, why don't I own more shares? It's been a spectacular business and it's covered. Ad nauseum in the market. 

Jim Senegal is revered. There has been Harvard business review studies done on it. There's nameless, not [00:14:00] nameless, but a large amount of people covering it on Wall Street. Since its IPO, Costco's generated about 20,000 percent returns on a total return basis. Absolutely fantastic. 

That same company I was just talking about Arthur G Gallagher, same time, it's more than doubled the return of Costco.

It's a, it's more than 40,000 percent returns over that same period of time. And this is a company that most no one pays attention to on a regular basis and certainly one that, we in the financial media, when we're writing the 5 to 7 fantastic stocks for 2023, it's rarely ever going to get covered, right?

Because how do you get excited about insurance companies or insurance brokers? Even they don't even underwrite and it-

Jason Hall: Well it's a little echo chambery too, right Tyler? 

The reality is that we as writers in the financial media broadly, it's a little bit of you have to be the loudest shouting voice. And it helps if you're shouting into a room where there's already a lot of people [00:15:00] listening, so you write about Alphabet or Meta or Apple, Microsoft, Tesla. Whatever the hot investing topic du jour is, EVs had their moment, solar's had its moment.

And that doesn't mean you're always writing about good investments. You're writing about popular investments, right? 

Tyler Crowe: Yeah. 

Jeff Santoro: And by the time they're that popular the price has gone up because everyone has found them and piled in. 

Tyler Crowe: Certainly true. And, this is, I guess, where I take my stabs at internet search, where internet search is not necessarily, Google isn't evaluating what is written on these best stock idea pieces for what are actually the best ideas.

They just happen to, they correlate that term with the companies that happen to get written about a lot because it's just a word association. If those are frequently showing up in best stocks- 

Jason Hall: Exactly. This is where the cycle comes in. Lots of people are searching for those popular stocks [00:16:00] already. They're typing the name of those stock in, whatever stock. So if you write an article that 5 Best Stocks for 2024, and you mentioned three of those stocks that are popular. Google is going to come, you know what it's going to do? It's going to serve your article in that person that's searching for that stock.

Jeff Santoro: It is pretty wild. It is pretty wild though, that was a great example Tyler, that you gave of a company that doubled the return of Costco, but yet no one has ever heard of. 

Like that, that just, I think is a really salient example of how disconnected the, let's just call it like the mainstream financial media is from some really, great companies that just no one's ever heard of.

Tyler Crowe: And that's it. To me this is why my rebellion against that in the idea of like I want to give a voice to these companies. 

And in terms of not only do I want to profile them and get people on people's radars but I also think because they're so undercovered and because so little attention is given to a lot of these companies, there's a higher probability [00:17:00] of finding mispriced assets. Anybody who is has any sort of bent of value investing, part of having a mispriced asset normally means that something is either wrong or people are grossly misunderstanding and sometimes that misunderstanding is Nobody's heard about it or nobody's covering it on wall street for one reason or another, and the probability that you can find winning investments.

It's like, making poker bets. When you have a pair, you're obviously going to bet more than if you have absolutely nothing in your hand, because you're, there's just a higher probability of something being mispriced versus something that's in the S&P 500 that has loads and loads of money being tossed into it through 401ks through index funds. Or the 10 largest companies because any individual investor who wants the 10 best stocks of 2024 happens to pick out that in the list and four of them happen to be, Meta, Amazon, Google, Alphabet, [00:18:00] what have you.

And so I think those two things combine into what could make this work over the long term of just focusing on that. 

Jeff Santoro: And I'd be willing to bet without even looking at it Tyler that over that history of time that you pointed out that Arthur J. Gallagher doubled the return of Costco, it probably traded for a much cheaper valuation if not for all of that time I would guess a large portion of it for the exact reasons you just stated. 

Tyler Crowe: Yeah, I mean I Arthur J. Gallagher, maybe not necessarily, but a lot of the companies that I have profiled, it's certainly true where you'll look at it and you'll see below market valuations. But at the same time, the returns have been so good that, hey, stock goes up, baby. 

Jason Hall: I will confirm on an earnings basis, Arthur J. Gallagher has consistently, since they IPO'd has consistently traded for a lower price to earnings multiple than Costco has. You're right Jeff. You should take over or Misfit Alpha because you gave a better answer than [00:19:00] Tyler did. 

Jeff Santoro: Even a broken clock is right twice a day. 

Jason Hall: Yeah, but you're a digital clock. So Just zeros flashing zeros Sorry, that's mean you're flashing eights. 

Jeff Santoro: Thanks, man. 

Jason Hall: Yeah, no problem. 

All right Tyler. So there's the why which kind of to sum up that why it's, sure you can do- The whole idea, Jeff and I, we've talked about this before. I think this is important, talk about the toolbox here for a minute. Is the idea, it should be, unless you really just enjoy the pursuit and you want to manage your own portfolio. Or you're specifically trying to accomplish certain things like build a portfolio based on generating dividend income. Generally, if you're DIYing a portfolio. You should, your main reason should be because you can do better, you want to do better than whatever your indexes are, S& P 500, NASDAQ, whatever it is, right?

So that's part of the why, right? I think that's a big part of it is you can find the Arthur J. Gallagher's that are twice as good as the Costco's, which a lot of people are going to say, well, that's one of the best [00:20:00] investments ever. And yeah, here's one that did twice as good. 

Let's talk a little bit about the how. Let's talk about, obviously a lot of the work you do again, we don't want everybody to fall asleep here. So let's not get all the way into the weeds. 

But talk about your discovery process. Just from the first steps, what you're looking for. Maybe anything that's different in the approach that you're taking versus what other people are doing.

Tyler Crowe: Well, I started backwards, which is never great when you looking at past performance, but what the idea was for like six months, basically it was like, okay, compare the returns of this company to the benchmark, or in this case, the S&P 500 and just compiled a list. And right now, I think the list that I have is somewhere around 350, 450 companies, which in my view had delivered significant premiums or significant alpha to the market.

It wasn't, like, Oh, maybe 25 percent better over 20 years because that's just like that could change with evaluation or something like that. [00:21:00] So it's not the most scientific thing I know that I missed some things here and there and I'm sure there's a lot of young startup growth companies that I'm obviously going to miss because of this process but that after doing- 

Jason Hall: I want to circle back to that. Remind me to circle back to that because I have a question that is tied to that.

Tyler Crowe: Sure. And so after compiling that list, that's when I started just looking and being like where did high percentages of companies that did extremely well come from, and where were the ones that they didn't come from? 

I think this is something that you and I have danced around a little bit on, on YouTube videos is like the automotive industry. It's sucked for a really long time in terms of total returns for investors. 

Jason Hall: Specifically automakers, right? 

Tyler Crowe: Automakers. Is not good for investors. Yeah. Right. But a lot of media attention.

Media companies outside of maybe one or two, hasn't been great comparatively. There's a lot of other industries that, like I said, not a lot of people probably pay much attention to [00:22:00] that do fantastically.

If you just look at medical supply companies, not necessarily like biotechs or pharmaceuticals or anything like that, but just like the companies that make the syringes or the companies that make, the vials that your vaccines have to come in because it has to be a specialty type of glass or something like that. Insurance brokers. Industrial manufacturers, things like that.

Regional banks as well, although I've been so scared of actually trying to learn regional banks. Every single time I opened one, I'm like, I don't know if I want to do this, but it, you could start-

Jason Hall: I love regional banks.

Tyler Crowe: I know you do. But I just wanted to like, dive in and see like, okay why did these industries do so well and why are they so undercovered?

And then I've just started plucking through and starting, like just digging into 10-K's and proxy statements. And everything on these companies as I go along and just documenting what I see in them. 

And try to find the interesting ones that, maybe they're the ones that [00:23:00] outperformed in a lousy industry, or maybe they just happen to be tied to a fantastic industry that has done well over a really long time that doesn't get the appropriate attention from the market. 

And there's no real scientific way that I've gone about this. It's more or less just been like, hey, this looks like a fun one I want to talk about today. Even though I guess by definition of fun, it's way different than a lot of people. Because I think you've seen some of the things I've written about. But that I- 

Jason Hall: Directionally, it is the kind of fun that a lot of people listening to this podcast like to have. 

Tyler Crowe: And so I'll just go dive in and see what has made this company tick.

Jason Hall: So I'm going to push back a little bit. I think your approach is maybe a little more scientific than you're giving credit. I think you're trying to downplay yourself a little bit. But I think the reality is that you're starting with a smart process. 

 I'm going to, I'm going to crib David Gardner here a little bit. One of the co founders of Motley Fool and investing legend. Didn't exactly build his his legend based on picking weird, obscure insurance brokers like Arthur J Gallagher or some of [00:24:00] the other companies that you've written about.

Tyler Crowe: I feel bad. We're like dumping on Arthur J Gallagher. I'm sorry, guys. If anybody's who is associated with that company, we're sorry. We're sorry. 

Jason Hall: I'm not sorry. I think it's wonderful because it's proof that there's, I wanted to bring it up for two reasons because number one, it's evidence that there, it's a reminder again, back to the toolbox. You don't have to build the same toolbox as, somebody else. 

There's so many different ways to achieve success investing and to generate better returns than the market that work for you. And then Tyler, I think you're doing that. 

The reason I wanted to bring up David specifically is a really simple quote from David. Winners keep winning. He's talked about that before. Peter Lynch has talked about that before. 

And of course, we're all tainted by the disclosure that the regulators have put out there that we feel like we have to say. And that's, past performance is no indicator of future results.

It can be, because what the reason these companies that have generated vastly better returns for a sustained period [00:25:00] of time is because they've built really powerful economic moats and the good ones stay disciplined and they stay focused on their core business and they're smart about the way they return capital to shareholders, right? Buying back stock when it's cheap. Paying a dividend with excess cash instead of going on an acquisition spree, or maybe being really good serial acquirers if that's a thing that they know how to do well, right? 

So it's the same thing, different. And the reason I want to bring that up is I think your approach is a little bit scientific, or maybe there's a kind of a craft to it.

Because what you've done is you've started by saying, okay, let's really filter this down to these enormous winners, and then let's look for the characteristics of each of these businesses. That is the result that has generated that result. And then can they continue doing it? ? That's pretty powerful.

I think you have some basic questions that you try to answer with every single write up that you do in Misfit Alpha that all kind of talk about these common themes. So I want to give you more credit [00:26:00] than you're giving yourself, Tyler. 

Tyler Crowe: Well, thanks for that. I do recognize that there's sometimes I just go down wormholes and it doesn't necessarily- not every single company is the same. Like I haven't found some common pattern between every single company that I've written about, but there are like a couple of themes that you touched on a little bit that, things that have worked well, and what others.

And serial acquirers is a great example. Because one thing that I all too often, I think we as investors spend a lot of time being very optimistic about acquisitions when that hasn't actually historically proven out. If you look at companies that make acquisitions, like 70%. At least around 70 percent of acquisitions actually fail to create value for shareholders. 

And there's a lot of companies out there that we tout it's like, Oh, there is game changing investment. Well, that game changing investment [00:27:00] probably is going to end up being a writedown seven years from now. 

But the companies that have over time run this playbook of small bolt on acquisition, consolidating these very fragmented industries, has been one of the common themes that I've seen. Across companies that have done this incredibly well, Arthur G Gallagher being one of them because we keep talking about them, there's some I haven't talked about, but like Danaher is a great example of a more known company people talk about when in terms of serial acquirers doing something incredibly well they're another example of that.

And there's a couple other companies-

Jason Hall: It's funny, right? We say Danaher more well known, and 95 percent of people still have no idea who Danaher is. 1 percent know of them because they look for them as an investor. And 5 percent because they have heard the name because they saw it somewhere or they have a third cousin twice removed who works for Danaher.

Tyler Crowe: Yeah, sorry. I guess I, I should say more well known on a sliding scale because if I've heard about it more than three if more than four people have [00:28:00] mentioned it to me and be like, Oh, that's way too well known. 

Jeff Santoro: So let me ask this question, Tyler. Let's say someone's been listening to this and now they're super excited to try to find all these uncovered and under appreciated companies out there.

Obviously the first thing they should do is subscribe to Misfit Alpha, which will be in the show notes. But if someone wants to just go down this road on their own, are there any pitfalls? Are there any things that you would advise investors to keep an eye out when fishing in these kinds of ponds?

Tyler Crowe: Yeah. And it's, it, that we have a, aside from this podcast we, you, the three of us have a little bit of a text thread going, and it's something that I constantly berate you about Jeff. And that's to read proxy statements and to understand the motivations of management of a company. I think it's pretty apt that we use Charlie Munger quote, which is, show me the incentives and I'll show you the outcome. Because the strange thing to me, and this is something, a weird tangent, I'm sorry to-

Jason Hall: I'm going to use this as an opportunity [00:29:00] to promote episode 49 of Investing Unscripted back when we call it ourselves, The Smattering.

Episode 49 from April of 2023: are your goals the same as your incentives? 

We talked about this exact same thing. And because understanding incentives will help you understand why perfectly sane people do completely irrational things. 

Tyler Crowe: Exactly. It's funny. I've been rereading The Intelligent Investor. It's Benjamin Graham's book. I've also read a lot of the Peter Lynch books, some of the other, I guess you could say, famous investing books over time.

And something that's very rarely talked about much is the proxy statement and the, specifically, management compensation and what that can actually mean for your business or your investment more specifically. Because as much as we like to think that every single management team is like out there fighting the good fight for you as a shareholder, that's not necessarily the case.

 If the way that management is incented to do their job is not in alignment with the per [00:30:00] share value of the business, there's a more than decent chance that management could destroy shareholder value pursuing a bigger bonus check. 

Jeff Santoro: Could you give some, could you give some specific examples? Cause I did take to heart your gentle ribbing about my ignoring proxy statements and started to look at a few. 

And I know that there's some egregious things that are obvious even to me. Like one that I've heard other people say that if executives are being incentivized by revenue growth, for example, that's an easy metric to manipulate if you want. You could just go buy another company, no matter what that does to your business and all of a sudden your revenue goes up. 

So other than that are there specific ones that you think are red flags and maybe some that are yellow flags and then others that are green flags that are good things you like to see? What are some specific incentive examples that you look for?

Tyler Crowe: I think there's, I wish this was like the gold standard. I feel like I wish that every proxy statement, every management compensation had this built into [00:31:00] it, but it doesn't. I think that over the long term, there should be some sort of component in every management compensation table that says your three year rolling return on investing capital has to be higher than your weighted average cost of capital.

It's almost like in when you play poker, if you've heard of jacks to open, like you have to have this minimum to actually receive anything or to be even able to play. I think it should be that the only way you could be eligible to actually receive your bonuses. You have to have a rolling three year average of your return on invested capital better than your weighted cost.

Nobody does this, by the way. This is kind of my pipe dream. I wish that everyone did. But I think what you end up seeing all too often, which again goes back to that idea of Things not necessarily aligning, right? You see a lot of growth, operational income growth or total growth, EBITDA growth, revenue growth, things like that, absent any sort of per share guardrail [00:32:00] that basically says, you need to grow operational income per share or free cash flow per share or something that's going to preserve, give some sort of meaning to your equity to management, right? Like they can't just dilute you into the sun to, build up the size of this business and be empire builders.

So one thing, aside from my pie in the sky, I think if you can find companies that have per share value or per share metrics in their executive compensation tables, that's going to be one of the things that is going to be more indicative of something that's going to do well for you.

And then, like you said, red flags, revenue, incentives for acquisitions.

One of the companies I've actually highlighted In Misfit Alpha is a chemical manufacturer called Balchem. They focus almost entirely on food products. They invented a thing called microencapsulation. If you've had Like time release gel capsules for your medication [00:33:00] that was they invented that and it was an incredible business that, returns on capital were fantastic for years.

And then right around the mid 2010s, all of a sudden, things really started going sideways and they started going on this huge acquisition spree. And you can go into 10 years of their proxy statements and see the year that they changed it and said, we want you to acquire and grow operational income regardless of on a per share value and you can watch from like the moment that thing was signed to watching their returns on capital decline there, the stock performance goes sideways.

And it's just an example of how something that's, even has been good historically can go sideways if it's not taken care of in the right way by management. As individual investors, we don't have the advantage of like hedge funds or investment firms, who've got these armies of analysts who can, go interview management and actually like, to use that old [00:34:00] way, shake their hand, look them in the eye and judge a character of them. 

We don't have that as investors. We've got the internet. We've got proxy statements and SEC filings. And if there's one thing that is going to give us insight into how management thinks, it's in the proxy statement, probably more so than anything else that we can, that is publicly disclosed.

Jason Hall: I worked in outside sales for a long time before moving into investing. And I can tell you every year every company that I worked for in outside sales, whatever the corporate focus was, our comp plan was very specifically tailored based on the products and services that the company wanted us to sell. You got paid more money on the things that the company wanted you to do. 

And the challenge, I think one of the challenges with management, when you have your salesforce that's good because management can use that, can create that incentive typically for good corporate behaviors because it can [00:35:00] generate more returns.

Sometimes you get law of unintended consequences and you get Wells Fargo, right? Where you end up with massive fraud because you've incentivized your entire customer facing force. Create fake accounts. 

But the challenge, Tyler, with management compensation is a lot of times guess who's on the board? Guess who a lot of times is the chairperson of the board?

The CEO, right? A lot of times you'll have other executives that are also board members as well. So you have this conflict of interest baked in. Where the board, right, these are the fiduciaries. These are the people that have a legal obligation and legal responsibility-

Tyler Crowe: Allegedly. 

Jason Hall: To act in the best interest of the owners. 

Tyler Crowe: Allegedly.

Jason Hall: Allegedly, right? But they do, that's, it's, you say allegedly, but it's true. That is, whether they're held to that standard legally is another issue. But you get a conflict of interest where you have the people who are being managed by the board, the executives of the company, who are also making the decisions about how their compensation is structured, right?

And sure, they try to put up [00:36:00] firewalls, right? Where you have a compensation committee where those people are not a part of it. But they talk to one another. They're colleagues, right? And it does- 

Tyler Crowe: Family members. Sometimes they're family members. That's a nice one. 

Jason Hall: Yeah. But the key, I think the key, like you said, it's you know what, let's don't, we can't be old man shouting at cloud about this. You have to understand it as the reality. And understand the compensation and factor it into your thesis for the company. 

So Tyler, I want to circle back. We, I mentioned earlier, you were talking about your process and how you talked about how sure you miss one because you're starting and you're looking at companies over a 15 plus year period, looking backwards. So you're not necessarily going to see newer companies that have done really well and can become the new misfits, I guess you could say.

But there is something you're doing a Misfit Alpha that I think is interesting. And that is, you've started to try to fill in that hole a little bit in your own process and that you are starting to look at IPOs, write a little bit about IPOs.

I want to talk for a minute about that. 

Tyler Crowe: Yeah, it goes back to [00:37:00] the same idea of just going places where people aren't. Because IPO investing outside of the, the most popular IPOs. What are the, been the big ones this year? Birkenstock was a, Adyen was one of the big ones, right? I think, I can't remember.

I, again, I don't really pay attention to the big stuff. And so what, obviously people are paying attention to those, but there are, there's companies coming public every week. And some of them, a lot of them are garbage. I'm not going to lie. It's, it is really like sifting through a dumpster when you're looking at IPOs.

It's a lot of like Chinese companies that. I don't know. I swear there's some cottage industry that's just a- 

Jason Hall: The track record is atrocious for IPOs. Most IPOs destroy value, and a very select group actually deliver per share value over the long term. 

Tyler Crowe: Yeah. And. I wanted to focus on this specifically. Especially undercovered ones [00:38:00] because they're the ones that aren't getting 15 rounds of seed investing from Silicon Valley before they go public, right?

We've seen, we saw a lot of this in 2000, 2020, 2021, where the, there was a lot of these companies that are 7, 8, 9 seed rounds into their existence. Now, all of a sudden going public where a lot of the value of the startup has already been taken by venture capital. And so you can't, you, as the investor, aren't going to see as much of that upside.

It's a stark contrast to say Amazon, which went public, I think at maybe $400 million. I know it was a long time ago, but the idea of being like, if you are going to find these big winners, some of them are going to start really small and there are going to somewhere in this morass of IPOs, there are going to be some winners.

And so I've just started taking a look at the ones that look interesting and might actually be something in the long term.

I know that's not the most ringing [00:39:00] endorsement of them. And as I mentioned, they're intriguing. I, in no way would I ever want to buy any of these. They're more just I want to follow them and I want to see where they go.

And it's an undercovered, underappreciated part of what we do in financial media, in my opinion. And I think it's one of the ways that I feel like I can add value to the financial media world is showing some attention to these companies. 

Jeff Santoro: Yeah I'm glad Jason asked about that because I've enjoyed reading those posts that you've done about the recent IPOs. And I think, theoretically, IPOs should be a very exciting and interesting place for investors to look, from the standpoint of what you just said. If you want to catch the next great whatever as early as possible-

Jason Hall: Keyword being look. 

Jeff Santoro: Correct. Yes, but what I was going to say is the problem is all the IPOs you've heard of and get the press attention going back to what we'll be talking about this entire show are the ones that are going to pop 20 percent as soon as they come on the market and be really expensive probably for [00:40:00] a while.

So to find maybe some of the less covered ones that aren't getting all that fanfare. And then I agree with you, Tyler keep an eye on them. It's probably a good place to start. 

All right. So as we wrap here a little bit, I wanted to see if there were any other specific examples Tyler that you wanted to talk about. Whether ones that you've found in your coverage that were really interesting or maybe one that you found that was not.

And you've already mentioned a couple so if you don't want to give away too much of the goods I understand. But are there any other examples of Misfit Alpha companies that you want to mention here? 

Jason Hall: Tyler, there's one that, there's this insurer that I think went public about the same time that Costco did? 

Tyler Crowe: Really? Yeah. They're a really interesting one. 

But funny thing, I'm actually going to mention another insurance company. I know. Give me another chance and all I'm going to do is talk about insurance.

Jeff Santoro: That's alright. I'll stay awake this time. I'll stay awake this time. 

Tyler Crowe: So one of the things that I feel like we've, over time, been [00:41:00] conditioned to think as individual investors, is that very small companies means penny stocks, right? Like if you have a market cap of $200, $175, $220, you're probably a garbage business, you're a penny stock and there might be some corporate fraud.

I know it's a very strong filter. And but it hasn't necessarily been the case. Sometimes there's some really cool and interesting businesses that just remain small because they just want to be what they are, and they don't want to do anything else. And they can still return value to you as the investor. 

And a company that I wrote about relatively recently- 

Jason Hall: I want to pause you right there, Tyler, because I want to spend a second on this because it ties into last week's episode. When we had Joe Magyer on who's at Seaplane Ventures, venture capital investor, spent a lot of years in public equities.

And the reason I wanted to mention that is because the why companies that small are probably not companies and there is a much higher probability that there's fraud, fake [00:42:00] businesses. And that's everything that we talked about with Joe Magyer about how institutionalized VC has become.

Really good companies don't have to fight over capital and be tiny little $200 million companies. They can get money if it's a really good business, right? They're not hiding anything. They're not the struggling startup. There is somebody with a ton of money, billions of dollars that would happily write them a hundred million dollar check if it was a good business.

If it seems too good to be true people, it is. It's that simple. I'm trying really hard not to cuss because I've had a couple of people ask me not to cuss so their wives would listen too, I'm not cussing.

Okay. Put that in your toolbox, people, Tyler, back to you. 

Tyler Crowe: Yeah. So I, to push back on this idea that small company means garbage. One that I highlighted recently was Investor Title, Investors Title Company.

They underwrite title insurance for your house, which again, ho-hum. I think Jeff's already starting to snooze. Cause he, he [00:43:00] muted and turned off his video because he was like, Oh God, this again?

But the idea is it's a- title insurance is not a huge business, right? It's a very unique sort of insurance contract where it's we've done due diligence to say that you are the rightful owner of this property.

And if somebody tries to take a swipe at you, legally we'll cover the costs. That's more or less what this insurance contract does. 

And so it's never going to be a huge business that Investors Title has never even tried to do anything broadly outside of this. They're not doing automotive, they're not doing life or any of the other types. They're like, nope, we're a title insurance company. It's what we do.

We have a float just like anyone else. And we're not going to be Warren Buffett and Berkshire Hathaway and Make 20 percent annualized returns. We're going to invest in treasuries. We're going to have a very conservative balance sheet, and we're going to pay special dividends.

About 60 percent of the [00:44:00] stock is owned by the founding the founders, and they just pay themselves through special dividends. They don't get a lot of like compensation for what they do, and it's been a spectacular business over the long haul. 

Now, yeah. For all the talk of I don't know, maybe blockchain replaces title insurance one day. I doubt it, but I know there's talk, but it's just one of those businesses that has stuck around for a really long time, despite being a small one. And even though it is, a little over $200 million in market cap it's been a spectacular investment over the long term, and it really changes your idea of what a great investment can be for you.

If you're like, well, why isn't it, when's it going to be a billion dollar company? It's probably never going to be. But that doesn't mean it can't be a good investment.

Jason Hall: I'm pulling up Investors Title total returns. I'm just curious.

This is, I think this is an interesting one because it's the, the exception that proves the rule. Here's your, back in your toolbox. Here's how you can tell when a [00:45:00] very micro micro cap company is not a financial fraud: When it's been in business since the 1980s and it's generated over 3000 percent in total returns and it generates positive cashflow, right?

There's how you know it's actually a real business versus the fraudy stuff that you find in that same bucket, Tyler. 

Tyler Crowe: Yeah. And there's loads of companies down at these low levels that are cashflow positive generating returns and have done spectacular. Spectacularly for investors and. All you have to do is look, they've been there.

They've just been sitting outside your window, just waiting for you. I don't know, maybe like holding up the boombox like Lloyd Dobler, just waiting for you to pay attention to them because they're there, they're ready for you. Go get them. 

Jason Hall: Say anything Tyler, say anything. 

Okay Tyler, we're just about to the end here, this has been a great conversation. One of the things that you've talked about before is starting to release some of your older content as free [00:46:00] to give people more examples of the work that's in there. I think everything right now is still pretty much behind the paywall. 

Let's take a few minutes here. This is your chance. This is your chance here. SEO marketing pitch Misfit Alpha to us. 

Tyler Crowe: So if you want to find investments that nobody else is talking about that have absolutely smashed the market over the longterm. If you're sick of reading the 500th take on why Tesla is going to do spectacularly. If you are looking at the market these days and saying, wow, this looks really expensive. I don't know where I'm going to be able to find mispriced assets in a market like today. Misfit Alpha, I think, is a place that you want to go.

It's going to be a place that's not going to be covering Tesla. It's not going to be doing Alphabet. It's going to go places that you have never gone before and look for things that you haven't been looking for and didn't even realize where you could find great investments. And if that sounds intriguing to [00:47:00] you, if you think you want to be a little bit different.

This is the place to go. 

Jason Hall: I'm going to add a couple of things onto that too. It's not, I think it's worth knowing too. This is not a stock picking service. This is not, this is more of an investment research, I think is the key thing. You're not giving people two new stocks a month or anything like that.

This is basically you recording some deep research that you've done into these really interesting companies, sharing that, a story about each of these companies and then building on it over time. Again, the IPOs that you talk about too that you do.

What's your typical cadence of material that you're releasing?

Tyler Crowe: So I have, I try to do them when they're available and there is actually something worth discussing. So that's it comes and goes based on what is going public. 

I try to do a profile of a company once a week with some exceptions, where if I see something really interesting, like a question that I've had about the market. I think I did one a while ago on [00:48:00] Dividend Aristocrats and just started digging into the 25 year history of Dividend Aristocrat companies and which ones have actually been good investments. I will occasionally do that instead of doing a profile of an individual company. 

And once a quarter, I release my personal portfolio. Again, not recommendations, but just a little bit of a running journal of what I as the investor are investing in, and how that may shape or change the way that you think about your investments. 

Jason Hall: All right, Tyler, any last words before we wrap this up? 

Tyler Crowe: If nothing else comes from this, I hope that it just makes Jeff read proxy statements. 

Jeff Santoro: I already started my friend. I already started.

Tyler Crowe: If that's all I get from this, I feel like I won. 

Jeff Santoro: Well, let's endeavor. Let's take it up a notch. Let's endeavor to get more listeners to look at proxy statements as well. We can broaden the goal here just a little. 

Tyler Crowe: I mean, sure. If you want to shoot for the moon. 

Jason Hall: Tyler, one last, one last question here. Where do people find you?

Tyler Crowe: [00:49:00] MisfitAlpha.com. I actually have the website so you can go to MisfitAlpha.com. I have kind of drifted away from Twitter, you'll find me on Threads now instead as Misfit Alpha, and that's where you can find this work that I'm doing.

Obviously, you can also find me featured on videos with Jason, where we yuck it up about some industrial companies, and I'll mention something really obscure, like a Minnesota utility, and Jason will make some vague references to something being a misfit.

Jason Hall: I'm a little subversive with that. I do work that in every once in a while. We'll have this all in the show notes. We'll also have all of this in the transcript too. So you don't have to pull over your car, write all this down. We keep it. It's the internet people. We keep things on the internet for you when you're in safer places to get them.

Tyler, you've done something special too for, for Investing Unscripted listeners that are interested in Misfit Alpha, right? 

Tyler Crowe: Yep. So there's going to be a link in the show description to Misfit Alpha, but it's also going to be a discount code [00:50:00] for anybody who signs up via Investing Unscripted will get 20 percent off the annual subscription for one year.

So anybody that joins through you guys get a nice little cut off the top. 

Jason Hall: I want to say this too, just full disclosure. We're not being compensated. Misfit Alpha is not compensating Investing Unscripted. You get a discount. Tyler gets a customer. We get to feel good because we help you become better investors.

So Tyler, appreciate that. We'll have it in the show notes in the description. We'll also have it in the transcript, whatever's easiest for you to get. So be sure to look out for that.

Tyler, really appreciate you coming on and I'll see you on video sometime soon. 

Tyler Crowe: Thanks buddy. We'll see you soon. 

Jason Hall: Okay, everybody. I think we're done. Jeff, we're done, right? This is it. That's it. We are all done. As always, we love to give our answers to these hard investing questions. Have misfits like Tyler come on to share their answers, but it is up to you to find your answers to these hard questions about investing and money. You can do it. I believe in you.

All right, Jeff, we'll see you next time, pal. 

Jeff Santoro: See you next time.