The Smattering Podcast 74: Alex Morris of TSOH Investment Research Services

The Smattering Podcast 74: Alex Morris of TSOH Investment Research Services

/Jason Hall: [00:00:00] Hey, everybody. Welcome back to The Smattering, where we ask the hard questions about investing. I'm Jason Hall, joined as usual by the voice of the people, Jeff Santoro. Giuseppe, my good friend, how are you?

Jeff Santoro: I am doing well.

Jason Hall: How are you, sir? I'm good. I'm good. I'm excited. We have a special guest on.

We're going to introduce him in just a minute here, but before we do, we want to do our normal thanking all of the people that have given us reviews. We appreciate that, especially the five star reviews. Three star reviews we don't love, but you're honest. Thank you for the honesty there. Jeff.

Jeff Santoro: Yeah, we will take any review, but preferably five stars. But yes, as, as we say, often, if you could give us a star rating, if you could write a review, that really helps us get the podcast in front of other people and expand our audience. So we are eternally grateful.

And sign up for our newsletter. You get a transcript of the podcast every Saturday at the same time the podcast drops, and you get random [00:01:00] things that Jason and I want to talk about on Sunday mornings. So, if you haven't signed up for that yet, the link is in our show notes and we would love to have you as a newsletter subscriber as well.

Okay, housekeeping out of the way, Jason, why don't you introduce today's guest?

Jason Hall: So our guest, somebody that I've found on Twitter, it's been a number of years ago, and it's one of those things where the kind of esoteric part of the name of his Twitter account, and the service that he offers now- Twitter account came out first- really got my attention. The Science of Hitting. I'm a huge baseball fan and it immediately piqued my interest.

And this is Alex Morris who runs TSOH, The Science of Hitting, TSOH Investment Research. Alex, thank you for coming on.

Alex Morris: Thanks for having me guys. I'm excited.

Jason Hall: Yeah, we are too. We are too. So before we get into what TSOH Investment Research is, that's one of the things that we'll definitely do is give you an opportunity to talk more about your [00:02:00] service, who it's for, and kind of make that pitch, I do want to talk about where you started before you got to where you are.

So let's talk about your origin story, where you started, your professional background. Before you launched TSOH Investment Research.

Alex Morris: Sure. Without going back too far, when I was in college in the late two thousands,

Jason Hall: Wait a minute. We want to know about your middle school. I'm kidding.

Alex Morris: Well, middle school, I was getting decent grades, but I was not investing. Unlike Warren Buffett, I started a little bit later. So, but when I went to school, I honestly had no idea what I was going to do with my life. And my dad's a plumber. So the first thing I chose is building construction.

And as I remember it now, it's been a while, but as I remember it now, I took a physics class that was very, very difficult. I don't know if my dad could pass it or not to ask him, but for me, that was that was enough reason to question whether or not this was the route for me to go down.

Around that same time, a buddy and I had stumbled across the Berkshire Hathaway letters, and I started becoming quite fascinated with Warren Buffett and Charlie Munger. We actually, we actually drove to the annual meeting one year from, from Gainesville, which is, as I remember, it's like 25 hours each way. And we were, we were typical college kids with no money, so I think we slept in Walmart parking lots. I think my mom got us a room one night in Omaha. So thank, thank you to her for that. So we could avoid one night in the car. But yeah, so that was around. I want to say 2008, 2009, and I've really just been hooked ever since.

When I was getting closer to graduation at the University of Florida, I was trying to figure out how I was going to get a job in the industry. And one of the things I started doing around that time was writing online as a way to, you know, bolster my resume and hopefully find a job. I managed to find a job in Jacksonville, Florida at a small RIA. And I eventually moved to a larger RIA in Savannah, Georgia, and working as an equities analyst throughout that entire period.

I was writing online by that point under a pseudonym because the finance industry typically are quite cautious about [00:04:00] regulatory concerns and things like that. So I was no longer writing under my own name. But as we, as we got up to 2021, you know, after about a decade in the industry, I really enjoyed what I had taken away from writing the ability to meet people, the ability to talk incredibly frankly about what I thought and why I was doing things.

And, you know, I looked around me and saw what people like Ben Thompson and, and Scuttleblurb were doing. And I, I thought maybe there's, maybe there's a path for me here. So in April 2021, I launched the service and thankfully, two and a half years later, it's, it's still a ongoing business.

Jason Hall: That's, that's fantastic. As somebody that walked away from the corporate world to pursue a path where you get a little more control over your own destiny, I, you know, I, it's a big step, right? It's a big risk you're taking on, but massively rewarding when it works out for you.

What, one of the things, Alex, I want to talk a little bit about that I think it's just a compelling thing [00:05:00] that a lot of retail investors, down the street, regular people don't understand is when you have these whether you're, you work for a an RIA, whether you work for an investment bank, there's different kinds of, of analysts that do different things and that serve different gods, so to speak.

So I would love to hear what kind of analysts were you, who were you serving and maybe talk a little bit about the different things in the industry that I think is something that can really help our listeners out.

Alex Morris: Yeah, the role I was in, it was very traditional RIA type of clients, which, which, as I've seen, typically is more, mid large mega cap type companies, companies that you're trying to buy and own for long periods of time. Either by choice or because of dealing with those pesky tax issues that arise as, as names start doing well. It's one of the funniest things I saw over time in the RIA business. And, and now personally, to some extent is, people holding on to positions largely to avoid the capital gains and those [00:06:00] positions, many times-

Jason Hall: Tax avoidance as an investment strategy. At some point you hold on to underperformance simply because your capital gains have become such a large portion of the size of that position. Right? And it's, it's big numbers we're talking about.

Alex Morris: Yeah. So it is one of the things I noticed is, huh, it's interesting that these very large positions that people hold are the best performing names that they've had for a long period of time. And there's some of the best businesses in the world.

And, you know, there's a component of that as we look at an index, for example, and why it's why it's such a tough hurdle. Right?

So, so, yeah, it was more long term focus, you know, well known names. Not, not much of any short term trading, things like that.

Jeff Santoro: So I wanted to pivot to when you made the decision to do the, launch the investment service and do the newsletter full time and leave that part of, of your working career. There's a lot of financial and investing advice, and there's a lot of pseudo advice out there and a lot of free things you can get, which is [00:07:00] great on one hand, but then you have to be careful about it on the other.

So for people listening who might be newer to investing and are just getting into it, and they're probably overwhelmed by the volume of content out there. Is there any, anything you've learned in your journey to give advice to people? Like, how do you weed through it? How do you know what's legit? How do you know what's just some guy trying to make a buck and selling you a bill of goods?

Alex Morris: Yeah, I'm talking my own book a little bit, and it speaks to kind of my, the different take I have when I launched my service versus some of the other things I saw, but I think transparency and consistency are incredibly important. And it's, it's the idea of having something to really base the decision on versus someone kind of pulling the wool over your eyes. So, so I think those are, those are hugely important.

And, you know, even something that just is, is logical in terms of the thought process. And maybe it's harder if you're a newer investor, but with a little bit of time under your belt, you start to appreciate how difficult it is to do things like short term [00:08:00] trading and basically trying to outguess other market participants.

And, you know, if you're really honest with yourself about a lot of these services, I think you can see that maybe there's, there's something there that may not be totally up to snuff.

Jason Hall: Yeah. One of the, one of the challenges and I've talked about this, Jeff, probably more than you want to hear, but I say follow the money a lot.

I mean, we've done a lot of episodes talking about things like incentives, whether it's financial incentives or just the, the everyday incentives that drive us and our actions. And I think that's one of the big challenges with the, the influencer, social influencer sphere or the newsletters that are out there paid or free, you know. Because it's two very different business models that both can be very effective. But when you have these different business models, you're serving, again, you're serving different interests.

And understanding how somebody makes income I think is really valuable to understanding what is driving their incentives and their decisions, whether it's the [00:09:00] CEO of an independent oil company or somebody that's got a newsletter that they're charging a fee, or somebody that has a free newsletter, can definitely explain how they're... If you understand how they're compensated, it's going to help you figure out their actions.

And I want to compliment you Alex, a little bit here. Because I think one of the things that I appreciate about what you do is you talked a little bit about transparency and talking your own book.

TSOH Investment Research is entirely talking your own book. This is, this is your invested wealth that you're writing about. And it's full transparency of where your wealth is invested in addition to things that you're researching that you maybe don't own too. Let's talk a little bit about what you've built, and why you built it the way that you did.

Alex Morris: In terms of the service?

Jason Hall: Yeah.

Alex Morris: Again, I think it was I was starting with a blank canvas, and I saw an opportunity to create something that I thought may have some commercial appeal for the right type of subscriber. But I also knew that it gave me the [00:10:00] ability to be incredibly transparent and honest and to say things that I wanted to say.

And that includes, you know, one hand, I made a mistake on ABC. Or oftentimes, you know, hey, this is a new company I started researching three weeks ago. I have certain thoughts about it, but I don't have anywhere close to all the answers, and I don't know on some of the key questions, and this will be, you know, an ongoing learning process to some extent.

And one of the great things about the service is having really high quality subscribers where some of those questions, people reach out and, you know, share their two cents on a topic. Or maybe they introduce new questions that I may have overlooked that kind of need to be answered as part of the analysis.

So, you know, it's, I didn't know exactly how it was going to turn out when I set it up this way, but it's been really helpful in terms of reinforcing kind of a continual learning. And it's one of the, I think it's become one of the mainstays of the service is, you know, hey, if you want to know about Dollar General, a company that's going through a bit of a rough patch at the moment, there's, you know, two years of write ups about what I [00:11:00] think this business is over the long term, my thoughts on what's happening at the moment. Again, I may or may not have answers to some of the key questions. But you can see the consistency of the thought process and in the situations where it's no longer correct basically. You can see me very clearly address what I think may have gone wrong or kind of what I'm looking for as we, as we look out to the future.

Jeff Santoro: It reminds me of one of the things that I've, like my BS detector when it comes to all the content out there is usually, if someone's telling me I should do something versus someone is sharing with me their thoughts on something. And one of the just to give you one last compliment. And then I swear I will stop doing it. But I-

Alex Morris: Keep going if you want.

Jeff Santoro: No, but I heard I heard you on the Chit Chat Money podcast several times, but one time in particular, I believe you guys were talking about Roku. And what I loved about the conversation was, the gist of the whole thing was kind of like, I don't really know yet, like I'd like here are the things I think [00:12:00] are, are could turn out positively, but here are my concerns. And it was just really refreshing to have it be just a conversation about an investment that there is no sure outcome for anyone to, to really know. Versus like, this is a buy, or this is a sell, you know, something like that.

And I think it speaks not only to the transparency and honesty in your service, but also just a way for new investors to weed through all the content out there. And it ties also to what you were saying, Jason, about like follow the money.

Alex Morris: Yeah, that's one of the, Roku is a very good example of this, where the learning experience of truly trying to understand companies, which is pretty simplistic, but I've come to appreciate it a lot more than I used to.

Understanding companies in an industry requires an understanding of kind of the overall value chain and different players. And by the way, that's always changing to some extent. Right? So it's, you know, building that up more and having a more full understanding of what exactly is happening and what's changing and why.

And unsurprisingly, that is not [00:13:00] always the easiest thing to say definitively.

Jason Hall: Yeah. Let's, let's kind of stick with this theme a little bit here. Mentioned Dollar General and talked about the way you've built the, the entire kind of internal framework of TSOH. Let's talk about a stock, maybe an investment that you were, have been wrong about so far and maybe the learnings, maybe what you've taken away from it, just as a good example.

Alex Morris: Yeah, we can use DG. You know, it's a name where I followed the company closely for a number of years now. I think I have a pretty good understanding of what they do and why it works. And as part of that, I think it's very important to have some feel for that as a customer, as someone who's actually seeing the value proposition in real life.

It's one of the reasons why for me, I kind of shy away almost immediately from retail names that are based outside of the U. S. only because if I can't touch and feel it, I just really struggle to get that level of [00:14:00] comfort in terms of what are the competitive dynamics here? What is the value proposition? Really what are the trade offs associated with what they're doing versus any other player in the space.

On DG, I think I have a pretty good understanding of what that looks like for a large percentage of the chain. You know, it's a situation where the stock, like companies in almost all industries, I've learned over time, which I did not suspect when COVID started, but COVID has seemed to touch just about everything that I look at, at least it's a company that saw significant tailwinds at the beginning of COVID and subsequently, there's been pressure on the non consumables part of the business.

Which is kind of the secondary part of the business anyways, in terms of how that has been trending for a long period of time, but it's still an important part of the business in terms of driving unit economics at the stores.

What's happened more recently is some of the sales trends in particular, in my mind, at least on the consumables side of the house have started to lag what I personally view as [00:15:00] their their closest competitors in terms of Family Dollar and Wal-Mart. Wal-mart's a little bit of a different animal, but I think there's definitely certain types of trips where they compete with each other, not all trips, but certain trips.

So, yeah, the gap between DG and their main competitors has widened pretty significantly, specifically in terms of consumables comps. That's with some things going on at Dollar Tree that are new and potentially changing some of the competitive dynamics and as is often the case in retail when sales come under pressure, you start to see an outsize hit on profitability as well.

So it's a name where, you know, the market started to imply a certain level of certainty and for growth in the business at the highs that now looks much less certain. And you get the you get the double or triple whammy of all those things going against you, and you have a stock it's down, you know, over 50%.

But you know, it's interesting. It's one of my main learnings over time as well is living through these situations and thinking about how to react to them.

As a younger investor, I probably came at [00:16:00] things from the mindset of, let's just say you have a portfolio of two securities, right, and ABC goes up 5% and XYZ goes down 5%. If nothing's changed in terms of the actual underlying businesses, then you just have improved IRRs at one and worse IRRs at the other. And you would presumably be buying into the higher IRRs, and selling the lower IRRs.

And I've become much slower at making that action than I used to. And I think that reflects a lot of learnings in terms of both sides of that equation, which we can dig into more. But that's kind of how I think about it now, which is certainly very different than how I thought about it a decade ago.

Jason Hall: The Dollar General story, I have to say it's one that to me is just maybe one of the companies that I've been most surprised about, about how quickly their fortunes turned. Because it seems like the entire value prop, the market they were going after, the changes they were making in their stores, [00:17:00] all made sense. Thinking about trying to build a business that's a little more recession resistant, serving more of the kind of the customers in the areas where they're in retail deserts, right? They don't have access to maybe like the groceries, right? Like the freezer aisle and stuff like that, that they were putting in. They all seem really, really smart.

But then the dynamics have not worked. I did a. Video for our YouTube channel with Tyler Crowe that we're going to run probably with about the same time this episode comes out. And one of the things Tyler talked about was how like their inventory turns, basically reduced an entire turn a year since like 2018 or 2019.

And at the same time, we've seen margins come down, operating costs have gone up, debt's gone up a lot, and that's not a good mix. And it's been just surprising to me what's happened.

And I think it's interesting, right? Because you were talking about the price comes down and nothing seemed, if nothing's changed, you maybe choose an action there versus the price [00:18:00] has gone up and nothing's changed.

And it's interesting how you've talked about maybe slowing the process down of really evaluating what's going on. And this is one, man, it's starting to move into that too hard pile for me.

Alex Morris: Yeah. I think it's one of the, it's one of the realities of investing, right? And even if you own a business, and I see this a little more now as I think about what, you know, what if TSOH was a stock and how would the market reaction be at different times to, you know, subscriber growth or revenue growth in a given month or quarter as time went on. And, you know, you sometimes think, oh, the people running it have perfect foresight into what's happening there. And I think the reality at times is that's just simply not the case. I mean, it's just, it's sometimes things start moving in ways that are unexplainable and you sometimes have to wait to get a, to get better information to make a decision.

And, you know, for me, again, this kind of falls in that category and I have very long periods of time where I think it supports a certain view about the business. But that does not guarantee that every [00:19:00] three months, six month period is going to align with that, that outcome.

And also, by the way, you know, companies can see things happen and adjust. And if you don't have effective leadership, then that's also a major problem that can lead to issues. So there's a number of moving parts as always.

Jeff Santoro: So that, that almost is like a perfect segue into a question I wanted to ask, which is about, what kind of tools do you have in your toolbox to navigate not only just tough markets generally, but when specific stocks that you have researched and perhaps bought yourself or, written positively about in your service when they hit rough patches. What kind of tips or tricks have you sort of developed? I think you touched on one a little bit by saying you've become a little bit slower to take action when you see some of the things you just talked about.

But is there anything else you've learned along the way that you think is a, is something that anyone can pick up on in terms of navigating difficult times in the market?

Alex Morris: Yeah, I think for me, you know, one of the, one of the things I think about is even with a portfolio that's [00:20:00] relatively concentrated by, you know, traditional standards, call it 10 to 15 positions. Those positions, generally speaking, are not aligned with one another. It's not like I have, you know, 60 percent exposure to one trend or one economic consideration or something like that. They're, I view it, at least in the Charlie Munger world view, as being reasonably diversified in terms of a business owner.

You know, the other is maintaining that long term mindset. You know, the third one, it speaks to kind of what you just said there is not becoming overly focused on stock price moves to the upside or the downside and just accepting that, you know, Hey, this thing might move another 10, 20 percent in either direction. And my only goal from here is to continue making decisions that are in alignment with a long term perspective, and that I think are likely to deliver reasonable rates of return from the next decision.

And you know, that's just slowing down. And I frequently talk about this John Hampton post, you know, when to average down. And it [00:21:00] was either in that post or in a follow on post he talks about instituting these rules where he's basically given a certain amount of portfolio that he's allowed to bet on a given situation with the added caveat that over a period of time, say, as an extra year goes by, he's given another 100- 200 basis points that he's allowed to invest now, because the situation has matured a little more, he has a little bit more clarity on whether or not the thesis is actually working. And that idea makes a ton of sense to me.

I've completely got out of the mindset of, you know, I just added to ABC. Another week or two has gone by and it's down 5%, I'm going to add more. I just don't know how material or useful that truly is. To the extent that it is material, I don't know how useful it is. And if it's a material, I don't see why it's really worth doing.

So you can wait for more data, more information to come out to then go, okay, is this incrementally positive or negative relative to what I was thinking previously? And then you can make a decision then. And, [00:22:00] you know, I often come back to pick, I'll pick Microsoft because it's a name I know the prices. On, you know, I bought it in 2011 and prices were 24 bucks, 26 bucks, 28 bucks, whatever. In hindsight, it's like, okay, well, who cares whether it was 24, 28. In the moment, 24 and 28 sounded like extremely different prices. And that thought process can obviously get pushed to an extreme. But I think it's that mindset of, okay, when I look back in 2028, 2033, am I going to be happy that I bought more of this company? Or is this something where I'm just trying to trade the next 25 percent move or something like that?

Jason Hall: Yeah, no, I think that's big. I mean, we could almost just take this one question and answer. And that's, that's the podcast episode.

That's it, right? Focus on business, actionable business things and not price action. I think that's kind of the core there. And it's, but it's so hard, because [00:23:00] the reality is everything that we see in the financial media is basically built on price action.

I mean, that's, that's the entire thing that drives people's interest, whether you're watching CNBC with the ticker run along the bottom, or you're reading articles coming out of Seeking Alpha, the Motley Fool, other outlets. These are the things that people want to see that is driving engagement. So it's really challenging to flip your mindset there. So that's good. One, one of the things that I would like-

Alex Morris: Real quick, let me add to that, add to that too, because it's one of the, one of the things I saw in the finance world and the RIA world. And I assume it's, it's very similar in other places where you, where you have clients, you know-

Jason Hall: Your phone rings when prices move.

Alex Morris: Yeah. And, and I don't know is not considered an adequate answer in that situation. But the reality is there are times where I don't know is the answer to the question. Or I don't have certainty, anywhere close to certainty. I'm betting on certain characteristics about this business over the long term that I believe are still valid, but they may or may [00:24:00] not be still valid and I'm going to hopefully determine that with more clarity over the next 3, 6, 12 months.

But again, that's a way of thinking that's very difficult to get by with when you think about something like an RIA business where, you know, the performance of the portfolio and things like that are certainly relevant considerations, but holding onto assets and not having returns that deviate too far from a given benchmark over, you know, a period of time, as short as 3, 6, 12 months is a very relevant consideration to kind of what's the primary goal of the business, and understandably so.

But if you're not held by those constraints, you should think about what that means in terms of the way that you can think and act that may be advantageous to you.

Jason Hall: I think that's that's a good segue to the question of shifting away from those who are managing others money or those who are managing the message to the street and thinking about individual investors. What do you see is the advantages and even disadvantages that [00:25:00] regular down the street investors have?

Alex Morris: Yeah, I think to that line of thinking, I think it really, in a major way, depends on the game that you decide to play. I mean, to the extent that you're day trading or, you know, betting on what the, if EPS is going to beat by a penny or miss by a penny next quarter, I just think you're at a, you're at a massive information disadvantage, whether it's credit card data, access to management. Stuff that's just blatantly illegal. You know, there's a

Jason Hall: That never happens.

Alex Morris: Yes. So I, I just think that's an incredibly difficult game. And that's before getting into tax considerations and plenty of other things. You know, in terms of, in terms of-

Jason Hall: That information, it's not even just the access to it. The bottom line is that a quant fund, they're reacting before you can even open your web browser.

Alex Morris: Yeah. Yeah, exactly. Exactly. And I don't, you know, I don't know how much I guess it depends on on the person. I don't know how much confidence you could have in that game. If things start to go against you, how sure you can be that [00:26:00] you're actually doing something that's sensible and continuing to work. That would be for me, that would be an incredibly difficult question to answer.

You know, on the flip side, if you take more of a long term view, I think you're betting on things that, you're betting on things where informational advantages are, informational advantages in terms of things that can be very easily quantified and kind of updated. Those informational advantages when you take it to a long term perspective, it moves into things of understanding consumer preferences, understanding competitive advantages, et cetera. And I don't think that the advantages in those arenas are nearly as heavily weighted towards the professional investor.

And again, to, even to the extent that it is, as a general way of thinking, I just think they're very hampered by the consideration of what they have to deal with, with clients, in terms of, you know, letting positions become too large, letting a position go down by X percent before we start getting phone calls, et cetera.

And you can, you know, you can effectively block those things out completely when you're managing your own portfolio. [00:27:00] So, so it's a huge advantage. It requires a different way of thinking about what investment opportunities you want to look at though, what's worth researching. In my mind, when you're coming from that lens, doesn't really start with a 52 week low list. It starts with a business quality and what can I understand.

Jeff Santoro: So what I wanted to ask about and it's, I think it's a little bit related to everything we've been talking about in terms of the reaction to price movements. You guys are both right in the sense that the financial media operates in a world of price movements. And sometimes professional investors need to as well because like, as you said, Alex, people get phone calls when the price drops and things like that. But also just from like the regular person perspective, especially if you're a novice. The price movements is what you notice when you open your brokerage account and you have less money than you did last week.

So what I'm curious, what your thoughts are, Alex, either personally as a, you know, investing your own portfolio or just as you think about writing up stocks for the service, how you think [00:28:00] about valuation?

Because I go back and forth a lot with this and think about, that if you have a truly long term perspective on certain companies, you can get away with some valuation sins if you hold long enough. Now, I'm not saying this is advice, but you can. The reality is you probably could have bought Apple overvalued several times over the past decades, and it turned out okay. And I know some people who won't even look at a stock if it doesn't have, X, Y, and Z in terms of valuation. So I was just curious like where you are on that spectrum and and maybe how you think about that.

Alex Morris: Yeah, I've I think the Bill Nygren worldview of 5 to 7 years out what's a normalized, you know, EPS, free cash flow number look like, and how does that compare to a, you know, normal, whatever market multiple, whatever you'd like to call it. I think that framework to me makes a ton of sense. Depending on how strict you are around that, I would certainly be more lenient than some in terms of what that has to look like in terms of a [00:29:00] specific number, you know. If the average was 15 and something was, it's going to be trading at 18 or 20 on that five year number for me, that would not mean it has to 100 percent be out of the portfolio.

But I don't think it's very different in terms of thought process. Maybe it's extending a little bit more benefit to duration or quality aspects of certain businesses where I think that rule may be a little bit too constricting. But I think that's a a generally sound way of approaching it in my mind. And for me, it kind of helps to, and I can't remember the exact time period, but I have relatively recently moved to 100 percent invested at all times in terms of an equity allocation. Which moves everything from a thinking about things in terms of absolute hurdles, to a everything's just a relative opportunity cost question. Which helps to, for me at least, to make that thought process a little bit clearer.

Jason Hall: So I have a couple of follow up questions on that. Hope I'm not springing them on you too much. But one of the [00:30:00] things I've been thinking about a lot. Yeah, I really started cutting my teeth as an individual investor, perfect timing, during the global financial crisis. So it doesn't get much better to be, late twenties, early thirties, really full bore going after picking individual stocks. I mean, back then, you couldn't, over the past dozen years, you couldn't swing a dead cat without buying a handful of multibaggers. It's just been wonderful.

And one of the very real reasons is the cost of capital environment was incredibly favorable for stocks in two ways. The two ways that I see it.

Number one, cheap money, cheap capital, right? When capital is cheap, it can boost your returns if you allocate even reasonably well, you can boost your returns. If you can borrow money, cheap, right? Bonds haven't been a favorable game. There's been a lot of money that's risked on since really 2010, 2011, just simply to get better returns and yields than you could [00:31:00] capture. If you're running a big pension fund, you've had to shift money just to, to meet your minimum thresholds to pay for your pensioners.

And so it's a substantial amount of money in these large organizations that hasn't really thought about fixed income. A lot of it's moved to alternatives, but I guess my point is multiples for equities have probably been above average broadly. So investors in stocks have benefited two ways, cheap capital as a borrower, cheap capital for secondaries and higher multiples. You get better, you've gotten better returns.

So I'm curious how you're thinking about like the dynamic between higher yields from fixed income, potentially higher interest rates for a longer period of time, and the dynamic between the multiple for stocks. And the, I'm not asking for a prediction, five, 10 years, is the market going to underperform long term, I'm not asking for that, but I'm asking how [00:32:00] you're thinking about that dynamic with the service and also with your own personal investing in equities.

Alex Morris: Yeah, I think about it, my takeaway from everything I've read and thought about this over a long period of time, which I don't know, like many things in investing, I don't know if there's a definitive answer.

I've long believed that the most logical thing to me is an asset allocation that's set based on somebody's ability and willingness to bear risk. And having that allocation, let's say 60/40, I think it's perfectly reasonable to say, I want to, I want a band of 10 percentage points in either direction, but then sticking to that. With the idea of being, you know, you go through a period like we did from, let's go back a decade from whenever the market just peaked, you're going through a period where you're, you know, you're rebalancing, you're rebalancing in a fixed income as stocks do incredibly well. That doesn't feel great during parts of that, but during other parts of it, it feels much better than what the alternative would have been.

So that's generally how I think about just the broader asset allocation question, just [00:33:00] in terms of ability and willingness to bear risk. You know, on the, on the broader point in terms of companies, specifically, it'll be interesting to see if we go through a sustained period where it's, it's different from what it had been, and, you know, you could think of media companies as an example. If the cost of debt goes up, let's say 500 basis points, I mean, it will take some time for fixed term paper to roll over.

But if the cost of debt increases significantly there, there has to be some way to to cover that shortfall. And the answer is going to be pricing or getting out of the business-

Jason Hall: The money has to come from somewhere, right? That's the key.

Alex Morris: Yeah, yeah. So it's either raising prices, it's, you know, getting out of DTC and licensing all of your content. It's getting out of the business completely and selling yourself to somebody else. You know, there's a number of different ways that can play out, but I think as always with things that are just bucketed as more macro related, I think there's always, as I think as Warren Buffett has said, and then what is kind of the follow- on question, what, what happens as a result following that and you know, we'll see.

I [00:34:00] guess another way of asking that question is, was cheap money or, you know, an interest in chasing subscribers, the best thing that happened to the media companies generally? Or was it the worst thing that happened in terms of, in terms of where they end up over the long term. So.

Jason Hall: Depending on the company, maybe depending on the company, maybe both right.

Alex Morris: Yes. Yes. Yes. So, not the easiest questions to answer, but if you flip that, and what does that look like 5 years from now, if rates have moved to a permanently higher area, it could be interesting to see how that potentially helps change things.

Jason Hall: Let's talk a little bit about your process inside TSOH.

So you find a new stock that you're interested in, or maybe an old stock that's come back up on your radar. What does that process look like for you? And what do you, as a member, what is it, what does it look like? So there's your process kind of making the sausage. And then as a member, what is the sausage that's being served?

Alex Morris: Yeah, I'll give a current example. Cause maybe that'll make it easier to walk [00:35:00] through. So I'm, we're, I'm looking at Vita Coco currently, which is basically the leading coconut water brand at least the United States and a few of one or two countries in Europe.

When I start looking at a company like that, they went public fairly recently, so I'll start with, I'll start with the S-1 and I have kind of standard Excel models that I build. High level financial data, a lot of KPIs for the given business. A lot of things that I'm tracking over as many years as I can possibly pull, basically just to get a real sense for what has happened to this business. What have been the underlying drivers? Is it a volume? Is it volume growth? Is it pricing? What are the margins look like? What's the cost structure look like? Everything like that.

As I'm doing that, I'm digesting every possible YouTube interview I can find, old Bloomberg articles, you know, whatever it may be. Anything I can about the founders, the company, et cetera. And I purposely try to start with the old things first to get a, to get my head in a place of, okay, this is where it was at this period of [00:36:00] time, what questions would I be thinking about? What would I be worried about and asking myself as we look forward?

So in the case of Vita Coco, as an example, they make certain statements about private label and their S-1 that leads you to believe that they viewed it as a very strategically important business to get into. And I can appreciate why they believe that. As you move forward to today, from the most recent quarterly call, they announced that they were unable to come to terms with their largest private label customer. And they've kind of shifted some of their thinking in terms of, are we purely a branded coconut water company, or is private label a very significant part of what we do, an important part of what we do.

So, this is a good example in my mind of how, as you start moving forward, you see how the thought process may be evolving. You have your own thoughts on, on whether it's logical or not, and, you know, you can build that all together to kind of get a sense for how the narrative changed over time and how the business changed over time too, as well with the actual results.

In terms [00:37:00] of what I deliver to subscribers, it's, you know, a history of the business in a very concise way, I frequently link out to things that if someone wants to, you know, read in more depth about a given topic or a given data point, they can easily find that. But I'm going to try to make it as concise as possible for their sake. So I'll walk through the history of the business. I'll talk about the key business drivers over time and how I'm thinking about the business looking forward.

And then to the extent that is something I have any interest in at all there'll certainly be some common comments around, you know, valuation, potentially modeling, and just getting a sense for where the business is at today and how I'm thinking about where they're looking to go in the future.

As I kind of said earlier, a lot of these, a lot of these projects, tend to run together, at least as time goes on and, you know, for example, in the case of Vita Coco, I'm, I'm learning a lot of things about their business that I think are important to prior work that I've done on Fevertree. And I'm seeing some similarities and some differences that are more interesting to me now that I've done the work on a company that's, you know, somewhat similar to similarly [00:38:00] positioned in terms of size and things like that.

Jason Hall: So I want to say between those two businesses, I prefer Fevertree because I have substantial deep experience using their product. Fevertree makes tonic water, by the way. So really interesting company.

But no, on a serious note, I just want to go back and, so thinking about your part of the process or your behind the scenes, part of the process there's some things that I really appreciate that I think are really valuable because I think the narrative of a company is really important.

So Coco went public late 2021, I believe, probably about a year and a half, roughly almost two years now, I guess at this point, this is probably about two years ago when the S-1 dropped, I guess is the point that's when it first came out.

So you get to read what they say they're going to deliver. What they said they're gonna do. You find those interviews on YouTube, the other the conference appearances, the presentations they give, all of that stuff.

And then you get to find out with your process. Are they hitting those KPIs? Are they delivering on [00:39:00] that what management says we're going to do? Or are they having real problems and the world has changed around them and they're having to navigate it? Okay, they're navigating it pretty well. Or are they moving the goalposts because they've got some great salespeople, but they're really not good executors.

I mean, that's kind of what it sounds like to me is what you're, it's like a long term bullshit test is kind of what it sounds like to me.

Alex Morris: Yeah. I mean, it's similar. It's funny, it's kind of similar to what we're talking about in terms of you're looking at a Substack writer or anything like that. It's this consistency of, kind of the vision and the story that's being told. And then to the extent things are changing, why are they changing? And what does that mean? And, you know, in addition to S-1's, there's things like investor days and other source material that's very helpful.

You know, it also is very helpful, for example, in the case of Vita Coco. They went public, as you said, in 2021, when you look in the S-1 and some other sources, you can get pretty good data to about 2019, but that's obviously not a very long history for the business. So as you start digging through, [00:40:00] do other things over time, like articles that were written in 2009, 2010, when Coke and Pepsi were making pretty significant inorganic investments in the coconut water space. You start to get more data in terms of how big this market may have been, for example. And that shed certain insight that, that you wouldn't have if you were just looking at the S-1, right? If they didn't give you great historic financial data.

So it's a number of things like that. Just really consistently building the mosaic and thinking about all these different pieces coming together.

Jeff Santoro: And it seems to me that, that depth of knowledge about the company and the industry is super important because there's very few companies, at least in my experience, that do one thing and never change for the entire history of the company.

Like I think about if, when Amazon started AWS, like, you could have viewed that as being a logical extension of the business and and seen it as a growth driver for the future. Or you could have been like, what is this e commerce company doing playing in cloud infrastructure?

So it's only through an understanding of the [00:41:00] business that you can suss out a change in direction being something that provides optionality, or a change in direction being something that's something else. So I can appreciate that.

Alex Morris: Yeah, I think it's a really good example. That's a really good example too, it's, it's less of, okay, this thing's dumb, this thing's smart. Or they said revenues were to grow 5 percent organic. They actually grew 4. They grew 6.

It's less of that, and more of what is the actual thought process behind all this? Does is it sound strategically when things do or do not go well. What's kind of the response to that? Are they very transparent when things do not go well? If things start to go well, are they ramping up investment and aggressively going after those opportunities? It's understanding that kind of vision from the company. And understanding why something that may make sense for them or that they do that is different than others perhaps should be very reasonable.

I mean, think of Costco as an example. If you just simply screen for it and go, these guys are growing units, these last five years, they grew [00:42:00] units at two and a half, two and a half percent per annum, that's not very much growth for a business that trades at whatever, you know, at the time. They'd be trading at 30 times, 35 times, 40 times. How does that possibly make any sense?

I think as you truly start to understand who they are and what they're doing, it starts to make a lot more sense why, at least for them, it's an incredibly logical approach. And it aligns with just about everything that they do in my mind.

And you can't really get that from, certainly from running a screen. I don't even know what times you can get that from doing an initial pass through on a business where you read about it for a week or two. It's one of those things that it accumulates.

And I often think about, well, the investment did not work out, (but) I often think about Warren Buffett's comment on IBM, where he says, you know, I was reading the annual report for 50 years. And I read the one that came in a few weeks ago on a Saturday. And something about it hit me differently than what I had been reading before that.

And I really think it's that at times, it's that spark of okay, I see this now in a way that I did not [00:43:00] previously.

Jeff Santoro: Yeah, I've, it's... Similarly is that's a reason I sometimes prefer to listen to an earnings call rather than read it. Because I feel like you can pick up a little bit in the inflection of voices or just the energy in which someone's talking about something. And then sometimes you get a totally different vibe in another quarter. And it does make you wonder, like, if the guy just not feeling well today, or is he full of shit, what is the reason I'm getting a different feeling here?

So, just as the last question that I have, Alex, I know you just mentioned a company that sounds like you're newer to looking at, but is there anything else that you're interested in right now that you're sort of intrigued with? Maybe something that you're in the very beginning processes of just, I'm just curious, like maybe a little peek into what's next in your thought process.

Alex Morris: Yeah, again, Fevertree and Vita Coco, I think are both very interesting businesses. I think it's interesting to watch how they've developed over time and, and where their visions lie in terms of where they're looking to go in the future. Particularly [00:44:00] around things like product line extensions or completely new categories, how they think about international and what that growth prospect looks like.

So I'm very interested in those. I've followed and owned companies in the media space for a very long time, and there's a number of different places there that I continue to think are very interesting. But I also expect certain developments to happen at some unknown point in the future that will likely shake things up in a pretty significant way.

And then a third one that is really interesting to me the more that I learn about it is what's happening with Microsoft, particularly in the GitHub Copilot type stuff, or with the Office 365 offerings that have kind of the AI built in. And kind of thinking about what their position is there and what that can become over time.

And you know, I just think as an example, if you look at some of the statistics given on GitHub Copilot in terms of programmer efficiency, and you start to think about what that's worth in terms of dollars and what somebody might be able to charge for that obviously, it may not be that large an offering in terms of the number of people [00:45:00] who are using it, but we could be moving to a pretty interesting place in terms of how valuable some of these tools are.

Jason Hall: One thing that I think is really interesting there talking about Fevertree on one end and Microsoft on the other end, you're talking about one of the most valuable, profitable companies in the world, a real giant, and it's not Fevertree, right? You say Microsoft is anywhere in the world and people are going to know immediately, right? You say Fevertree, very few people are going to know about it and they're very different companies.

But I think there's a common kind of a common thread, a common theme that I see, and maybe this is a big part of-- I'm projecting here. I'm projecting what I think you're some things that you look for are, and tell me if I'm off base here. But whether it's a giant company or it's a small company, you look for companies that either have or building really, really strong moats that are defending or building really cash generative products behind them.[00:46:00] 

I don't think I really have to get into it with Microsoft very much. It's pretty obvious, particularly if they can leverage their enterprise strength into AI. And they could get the lion's share of profits from artificial intelligence, particularly in the enterprise.

And then you look at a Fevertree. And you think about Coca Cola, Monster Energy, even like PepsiCo over the longer term. These are companies that you have that brand that can be a really powerful moat. People will pay a premium for it. You build scale, you get the shelf space, you get the distribution, and then you get all the margins too, right?

So it just seems to me that like, maybe that's the common thread there is you find these moats that are defending really, really high margin, really durable businesses.

Alex Morris: Yeah, I have a number of different thoughts from there. What I wanted to say on Fevertree is I think one of my favorite stats from doing the work on the company was, as you think about size, and as you kind of said, and obviously these are very different businesses for a number of reasons, but [00:47:00] Fevertree's annual volumes last year in terms of cans or bottles sold was roughly 700 million units. And Coca Cola's volumes are 2. 1 billion units per day.

Jason Hall: Like an hour of Coke

Alex Morris: it's just, it's kind of amazing to think about what that actually means to sell 2. 1 billion units in a single day every day, but I was kind of amazed by that.

But it also speaks to, you know, my evolution. It's an ongoing evolution, honestly, and it's something that, you know, starting off the RIA industry and, and meeting the needs of what my employers asked for naturally led to a ton of focus on basically large and mega cap companies. And moving down the size spectrum has been, it's taken me a decent amount of time and honestly, it's been a little bit- at times it's felt like a little bit of a challenge in terms of just getting out of a comfort zone that I had been in for many, many years.

So I pushed myself a lot more recently to look at a Fevertree, to look at a Vita Coco, to look at a Cava. And, you know, [00:48:00] it's, I think a big part of it is just getting rid of the preconceived notions about things without actually doing the work.

And I guess one way to say that would be, you know, there's people who have just said Chipotle was a burrito chain for the past 20 years, and it has been a fantastic stock and a very good business for a number of reasons that maybe we're not totally identifiable early on. But there's certain things that they do that make them unique and may make you believe that they're sustainable. And I don't think you can necessarily just know those things without doing the work.

And there's a certain part of this for me that is just letting yourself do the work on a company and accepting the fact that sometimes it may be a dead end, but with not going in with already kind of having the answer. Just trying to let it flush itself out as it should.

Jason Hall: So Alex, one of the things as we approach the end here, I want to take an opportunity to talk a little bit about TSOH Investment Research. What it is, who it's for. And what do you [00:49:00] think people can get out of it that subscribe?

Alex Morris: Sure. So TSOH Investment Research Services, it's my full time job. And as I kind of said here, I worked on the buy side as an equities analyst for about a decade. What I deliver people now, it's published every Monday and every other Thursday, it's complete portfolio transparency. I disclose everything I do before I do it in my portfolio. I disclose returns on a quarterly basis.

And, you know, the output in any given week is deep dives on new companies, updates on companies that are, that I own, or that are on the watch list, you know, typically around quarterly earnings or investor days, things like that. Investment philosophy discussions around things like holding cash or asset allocation or position sizing.

So it's really anything that strikes me as interesting and, you know, again, in this process of kind of continual learning, just digging into these topics or companies and trying to do anything I can to, you know, produce the work to the best of my abilities to get across my [00:50:00] takeaway after spending time on these things.

Jason Hall: So do you think of the service more as, we kind of positioned the podcast as, you know, we like to give our answers to these questions, but it's up to people to find their own answers. Do you view this as a service for people who are just looking to join your service, buy your conviction, and then buy the same stocks and follow along with you? Or part of somebody's investment research process that they should be doing themselves? Or maybe a mix of both?

Alex Morris: Yeah, so it certainly isn't financial advice. It's just solely what I'm doing. And, you know, it's that combination of of transparency in terms of the positions and the outcomes, but honestly, more so the transparency in terms of the thought process. Right? And being very open and honest about, hey, I don't think this situation is necessarily going well, or I don't really know the answer about this certain thing at the moment.

And kind of what I found one of the great surprises of doing this is building a subscriber base of people again, who are very willing to push back or talk with me. And it kind of feels like [00:51:00] it's become a little bit of a continual learning process, but with a community of people to some extent. And that's been, it's been fantastic. I've greatly enjoyed it.

Jason Hall: That's fantastic. Jeff.

Jeff Santoro: I have nothing else to add.

Jason Hall: Thanks, Charlie. Okay, we're Alex, where can the people find you?

Alex Morris: Yes, they can find me at thescienceofhitting. com That's where you can find the TSOH Investment Research Service or you can find me on Twitter at TSOH underscore investing.

Jason Hall: We're going to put those in the show notes folks, so it'll be easy for you to find it there. Of course, we'll have links in the transcript that will publish the same time that the podcast goes out too. So it'll be easy for you to find it. You don't have to write it down. It'll be there. You're driving people. Be careful, all right?

Alex, any last words?

Alex Morris: No, just want to say thank you for having me. It was a very, it was a great discussion. I haven't done a podcast in a little while, so I was scared, but. It was fun to do a great one.

Jason Hall: Don't be scared. Don't be scared. It's good to get out of your comfort zone.[00:52:00] 

Alex Morris: I like writing a little more than talking.

Jeff Santoro: I think we're, I think we're the least scary podcast out there. I'm going to, I'm going to go on a limb and, and give us that title, so.

Alex Morris: I'll give you a five star review, five star review. The least, the least scary podcast.

Jeff Santoro: That would be amazing. Thank you.

Jason Hall: Awesome. Alex again, really appreciate you coming on and hopefully we'll get you back on again sometime. Maybe we can find a company or two to talk about and dig in a little bit. That might be fun.

Alex Morris: Happy to do it. Thanks again.

Jason Hall: All right, Jeff, we did it, buddy.

Jeff Santoro: We did it.

Jason Hall: No second part of our show today, friends. Since our conversation with Alex went pretty, pretty long, great conversation. I hope everybody enjoyed it as always. Give us feedback as we always ask at the beginning of the episode, please give us feedback too. The numbers say that you like it when we have guests on, let us know with your words, if that's the case or not.

And as always, Jeff and I love to give our answers to these hard questions about investing. Have great guests like Alex Morris on to [00:53:00] give their answers. But it is up to you to give your answers to these hard investing questions.

You can do it. I absolutely believe in you.

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

Jeff Santoro: See you next time. ​