We Study Billionaires Podcast: Current Market Conditions & Investment Opportunities w/ Derek Pilecki (TIP758)

Clay Finck (00:00:00):
I feel that only a true master of their craft can make money shorting a stock and then turn around not too long after and go long before it becomes a multibagger. So that's exactly what you did with Robinhood. 

Derek Pilecki (00:00:13):
There were two environmental reasons why they missed the quarter, and I just thought they were temporary and it traded down to the $8 where I bought it and they still had that $8 of share in cash. Also, technically it had built a big base I had covered in March of 22, and from March of 22 to November of 23, the stock was flattish and it had built that long base. So I got fortunate that it took off soon after I bought it, and that was just good timing. Good luck. 

Clay Finck (00:00:48):
Before we dive into the video, if you've been enjoying the show, be sure to click the subscribe button below so you never miss an episode. It's a free and easy way to support us and we'd really appreciate it. Thank you so much. Welcome to the Investors Podcast. I'm your host Clay Fink, and today I am happy to welcome back Derek Palki. Derek, welcome back to the show. 

Derek Pilecki (00:01:08):
Hey Clay, good to see you. Thanks for having me back. 

Clay Finck (00:01:11):
So I've really been looking forward to this conversation as I definitely enjoyed our last discussion about a year ago where you shared your humble beginnings of launching a fund all the way back in 2008, just weeks before the collapse of Lehman Brothers. And since we last spoke, you rounded out 2024 with a 41% return net of fees and through July of this year you are up another 21%. So it's looking like you're well positioned to have three years in a row of really strong performance. And that can even tend to be bad news for all of us because usually after a few good years, you tend to see a down year across the entire market. So before we dive into my set of questions here, I'd like to give you a chance just to comment on your recent performance and some of the things that you're seeing in the markets today. 

Derek Pilecki (00:01:57):
Yeah, I think the story over the last three years is really I navigated Silicon Valley and First Republic's failures pretty well In 2023 I was underweight regional banks and after they failed, I drastically increased my weights in regional banks just doing a lot of work on where the deposit franchises int across the country and the valuations got extremely cheap. So that was one big driver of returns over the last three years. I worry about the same things you do like three years of strong returns, is it over or do we have some reversion to the mean? And when I look at the overall market, I mean it looks expensive to me generally just as an observer and even within the financial sector, I look at the very large cap stocks, JP Morgan, progressive visa, they look expensive to me. But then when I look at a lot of small mid cap names, they're single digit still. 

Derek Pilecki (00:02:50):
And so how does that resolve itself? Can these small stocks do well when the big stocks underperform to get reversion of the mean or will everything go down and the big cap stocks will just go down more than the small stocks? I don't really have a good answer. I don't know how this seems like we're getting the effect of so many passive flows into the spy and all that money's going into the s and p 500 stocks. You have the Russells lagged for years. All these mid cap stocks don't really have sponsorship and have cheap valuations. I don't know how that gets resolved, but I think over time I've just gotten comfortable of if I own cheap stocks, good things happen. And so I'm not looking at my portfolio and saying, oh, I wish I could sell this stock. I wish I could sell that stock. I still have an ideal list of things to buy of cheap stocks that look interesting. So I don't know exactly how it's going to play out, but I'm not running for the hills, but large cap stocks look rich to me. 

Clay Finck (00:03:46):
Yeah, that's definitely well said and it's played out well for you to definitely stay long in the market and not try and hold too much cash and whatnot to the best of my understanding at least. And you've previously mentioned that you'd like to find stocks that have a clear path to doubling over the next three years that would equate to essentially a 26% return compounded certainly a high bar. How about you share an example or two of how this ends up working out in practice? Because I know you're fairly agnostic to buying, say quote value stocks or quote growth stocks. And I even think back to my days of playing sports where my coach would tell me to just take what the defense gives you. You're not trying to be married to a certain way of playing or a certain way of investing. You're simply taking whatever the market is willing to give you. 

Derek Pilecki (00:04:37):
Yeah, so I mean that rule of thumb of a double in three years, sometimes it works out faster than you expect and sometimes it doesn't work out at all. So I guess I want to give you both good and bad examples of that. And so I own Carlisle Carlisle private equity manager, probably underperformed its peers since it's been a public company. They botched the CEO transition from the founders to the next generation five or six years ago they did a second attempt. They hired the former CFO of Goldman, Harvey Schwartz to come in. And so at the end of 22 it had really underperformed KKR and Blackstone and was trading for 10 times fee related earnings just exiting out the carry, just what did they earn on their management fees. And I think Blackstone was like 22 or 23 times at the time, and KKR was at 17 times and at the end of the year, I just like to look at different sectors of what stocks have lagged the sector and is there a reason. 

Derek Pilecki (00:05:35):
And I noticed at the end of 22, Carlisle had lagged its peers and it was at 10 times earnings. People look for catalyst, I think CEO changes for underperforming stocks are generally good catalysts or can be good catalysts. And so I thought there were some easy things that Schwartz could come in to do, especially since I thought Carlisle's expense structure was too high. So I bought the stock and I think I paid $29 and here it's straight a little less than three years later, it's 65. So it's been a double in three years. I guess an example of something that hasn't worked or maybe it hasn't worked yet, not the three years, is I bought PayPal 18 months ago. Cheap value stock, a lot of value managers own it, valuations come way in. Again, CEO changes catalyst, the guy Alex, Chris came from Intuit, he ran the QuickBooks franchise. 

Derek Pilecki (00:06:25):
I thought he could refocus the spending internally to focus on three core products and it started to work. They had a hiccup reporting Q4 earnings this year. So the stocks unchanged since I bought it. Maybe it's up a tick, but it's certainly not a double. So sometimes it works, sometimes it doesn't. And then a name like Robinhood, which we'll talk about in a little bit, that happened a lot quicker and in a greater size. So I think that rule prevents me from trying to be too cute and buy names that I think I'm going to make 20% on. It is just like you only have so much capital and I really want to focus on the ideas where you can make substantial money and you can tie up a lot of capital trying to earn 20%. And so I just try to avoid those ideas. 

Clay Finck (00:07:10):
And over the time period that you've managed your fund, many would say that value investors generally have not done too well. Buying cheap stocks just has not worked the way it has in the past. And I have this theory that value investing has always worked, but the key of value investing is buying companies that are actually undervalued instead of focusing on the value factor of low price to book and whatnot. So how about you talk a little bit about how you think value investing has evolved in your view and how you've been able to successfully apply the fundamental principles of value investing in an era where it seems that just so few have been able to do it effectively? 

Derek Pilecki (00:07:53):
Yeah, that's a great question. I've been really shocked by the performance of growth versus value over the last few years. And the Mag seven are such good cashflow businesses and have such big moats, they've really driven the growth stocks and to the detriment of value stocks. So the quality of the businesses have been just so phenomenal. I think some value investors forget or sometimes don't apply momentum as a factor that drives returns. So really the ideal thing is value plus momentum drives returns. It's not just cheap. You have to have some kind of, the stock has to be moving. And so I think the classic value investor error is buy too early, sell too early, something looks cheap. We can all pull up a chart and see, oh, that chart looks ugly, but value investor's like, oh, I don't care about technical analysis, it's cheap, I'm going to buy it. 

Derek Pilecki (00:08:47):
Whereas I'm more just aware of technicals as a thing in the market. I don't buy charts, but I look at charts, we all look at charts. I think the most dangerous is a fundamental analyst who claims they don't look at charts. And then first thing somebody does when they mention ticker is they pull up a chart, we all do it right? And so by default you're doing technical analysis when you pull up the chart. So I learned this from one of the PMs early in my career I worked for Clover Capital and Mike Jones who ran Clover Capital. They had a great fundamental analysis. And then when growth and value went different directions in the late nineties, they reevaluated their investment process and they said, we're classic value investors. We buy too early and we sell too early. If we like a stock, we're going to wait until we see some kind of base in the chart before we start buying the position. 

Derek Pilecki (00:09:39):
And on the exits, we're not going to just sell when things hit our price target, we're going to wait and we might sell a little bit at the price target, but then if the chart looks good, we're going to let momentum run and maybe the market will walk out way beyond our expectations. So we're just not going to cut off our returns. That goes back, it's the same thing of Peter Lynch of you don't want to cut your flowers and water your weeds. All those sayings kind of get to the same thing of you have to let the winners run. So I think that's something that I've applied pretty well and I do it from a risk management standpoint. If I buy a stock and it goes against me, I don't automatically buy it. I just think, okay, the market's telling me something. It's not that I will never buy a stock that's down, but I just am very disciplined about saying, no, I have some edge to buy a stock that's gone against me and that's kept me out of dumping a lot of good money after bad. So those are just some things that I think about that other areas I see value investors making, 

Clay Finck (00:10:41):
When I look at the chart for PayPal, it sort went into the stratosphere back in 2021 when everything's taken off, it goes from a hundred bucks a share to over 300 a share. And then once that sort of tech bubble popped in November, 2021, you see PayPal stock just comes straight down the way it was going straight up. So when it comes to PayPal, you're sort of waiting for it to form a base before you get comfortable entering and you look at some of those catalysts like the CEO change. 

Derek Pilecki (00:11:10):
Yeah, so I thought the base had been formed last year. I bought it maybe April, may last year we had the CEO change. It had based for a couple years, hadn't gone anywhere. It wasn't really making L lows. And then the stock started working late last year and then had a setback this year with the fourth quarter. Wasn't that good? They've had a couple of okay quarters since then. A little bit of deceleration in the business. They have one business that's growing that's relatively low margins, so it's driving the overall company's margins lower. People don't love when margins are declining. So I'm not adding to the position here, it's still around where I bought it. It's not making new lows. So you could say this base is still forming, but I need more evidence that it probably will be a better buy to buy it at 90 after we've got some confirmation of good news or good things happening. It might be less risky to buy it higher and let the market tell you that they fixed things and it's on a good momentum path. 

Clay Finck (00:12:12):
So earlier this year, April 25, markets were really dropping like a rock due to the tariff talks. And with the benefit of hindsight, it looks fairly similar to the drop we saw in March, 2020 in terms of the severity and the duration. Right? At one point the s and p was down around 20% before swiftly rebounding. And to take advantage of this, you would've had made changes to the portfolio rather quickly. And it's tough to make some changes if you don't have cash to fund one position, you're going to have to sell something else. So talk to us about your level of activity during this period and how that might've impacted the portfolio at large. 

Derek Pilecki (00:12:52):
Yeah, I mean I wouldn't say I was relatively active when things are moving, I try to be judicious about how I act, but I am not afraid to, if I see opportunities to move stocks. So in the two days after Liberation Day, the KRE regional Bank index ETF was down 13 or 14% two days. And I think that's the playbook that macro investors have of recession risk goes higher, sell regional banks. And I have a fundamentally different view, this is not 2006, 2007 as far as what the credit books look like at regional banks. The capital and liquidity is so much better than it was then. I don't think in the next recession banks are going to fail. I just don't mean there might be a few banks that fail, but I just don't think it's going to be the whole industry goes down. And so I used that. 

Derek Pilecki (00:13:42):
It was a little scary. I was like, okay, what is he doing with these tariffs? Is he really trying just to crash the economy? And clearly in the following week it was clear that he didn't want to crash the economy and he was going to not be dogmatic about imposing those numbers. I think the catalyst was he gave a delay, like a 90 day delay. And so that pushed out the tariffs from April to July. The market rallied there. But when we got that indication, I covered a lot of my regional bank shorts. I'm long a bunch of regional banks, I'm shorts from others. Ones that I think don't have as strong a management have higher valuations, may have done an acquisition that I don't love. So I'm just generally short of a bunch of regional banks, but some of 'em got down to eight times earnings and as much as I might not like the management or some deal they did at eight times earnings with them being down a lot in recent days, I covered a bunch of regional bank shorts and so that benefited me. 

Derek Pilecki (00:14:39):
They ripped higher after the delay or the pause and the tariffs being imposed. But those are super stressful times. It's where you make the performance, you can make a lot of performance those by smart, but you can also mess things up and your emotions affect your decision making. So you just have to take a deep breath and say, okay, if I was the only investor in the fund, what would I do? Try to ignore that I'm dealing with people's money. I don't want to put too much more pressure on myself. I'm already down. Just let's do the smartest long-term thing we can and just trying to manage those emotions. 

Clay Finck (00:15:17):
And then also earlier this year I attended the Berkshire Hathaway annual meeting in May and at the end of the q and a buffet announced unexpectedly that he would be stepping down as CEO of Berkshire at the end of the year. And I know that Buffet has had a big impact on you going off memory. I think you mentioned last time that after reading his letters you decided that you wanted to become a fund manager. You can correct me if I'm wrong there. Perhaps you could talk more about how Buffett has influenced your investing over the years. 

Derek Pilecki (00:15:49):
Buffy has been super important to my investing career. So I read Roger Lowenstein in the making of American Capitalist, which was really the first Buffett biography that came out in 1995. The internet really was just getting started then. So there wasn't as much information about Buffett as there is now. And so that was really eyeopening to understand his career and his investing. And so I really appreciated that. And then when I went to business school at the University of Chicago, one of my classmates, Dan Klowski, who used to run the Janus Contrarian Fund, he took us all to the Berkshire Hathaway meeting. So I went to the May, 2000 Berkshire meeting and it was right at the peak of the internet bubble. So it was super interesting. At the time Buffett was 69 and it was so surprising to me. He was so energetic and so jovial and thoughtful about his answers. 

Derek Pilecki (00:16:42):
And I just thought it was a huge gift that you have this billionaire super investor who's sitting on stage answering all questions for six hours. And so I guess that was also the meeting where he said, if I had a million dollars, I guarantee I can make 50% a year. And that was, it's a shocking statement. It's easy to dismiss it of it's arrogance, but I took that comment and thought about it, what would cause him to say that? How would he do that? And looking back early in the buffet partnerships, I know that he had much higher turnover than he does now. I mean he's due to size, he's buying high quality companies and owning them for decades. But when he ran much smaller sums, he was turning over his portfolio and you can either make a lot on a stock or you can make a little bit on a lot of trades. 

Derek Pilecki (00:17:31):
And I think if he had a million dollars, he'd make a lot of small smaller trades, and I don't mean smaller 10 or 20%. And he'd buy things and they'd be up 40 or 50% and he'd just cycle of the portfolio. And then he'd also use leverage He used in the early days of the Buffet partnership, he uses leverage at Berkshire. It's just float leverage. It's not debt leverage. And so I'm thinking about those things, how could you do that? So in the early days of my hedge fund when I was trying to put points on the board, I turned over the portfolio some and then there's, I'm just not afraid of trading when there's opportunities and kind of just hearkening back to that buffet quote of turnover can generate returns. And so I think a lot of investors just think, oh, you have to be buy and hold and you get wedded to these positions. 

Derek Pilecki (00:18:22):
If it's not working, you don't need to stick with it. You can move on to the next thing. Another idea, sometimes you see a lot of opportunities, you're not stuck in your existing positions. You can turn over your portfolio and that will actually generate higher returns. Now there's certain environments where with trending markets or things that are not moving a whole lot, turnovers not helpful, but in markets that are moving, opportunities present themselves and turnover is not bad. So I think the other thing that struck me that Buffet said that I don't hear a lot of people talking about it at one EO meeting. I don't remember if it was definitely in the early two thousands. I don't know if it was 2001 or 2002, but he said something along the lines of if he had to change anything in his career, he would've been more optimistic in taking more risk, which is pretty amazing for him to say because he's known as a permeable, he's super optimistic about America and the economy and he's long stocks in a leveraged way. 

Derek Pilecki (00:19:18):
And so for him to say, I should have taken even more risk, I think that I don't hear people talk about that, but that has changed how I think about the economy. I think there's a lot of people who are talented in this country and around the world that are acting in their own economic interests and that creates value for them and for the economy and for the stock market. And so I think it's better to be a permeable than a perma bearer, right? Optimism makes you more money. And so I try to remember that. I mean, being bearer sounds sophisticated and you've figured something out, but the timing of that is so hard. And so it's better to be optimistic. And I use a little bit of leverage in my portfolio. I invest in some companies that are not the highest quality and I'm trying to be long-term optimistic and good things happen to the ones that are optimistic. So those two things like how would you get 50% a year if you managed a million dollars and being long-term optimistic, those are two things that I've taken away from Buffet that I don't hear a lot of other people talking about. 

Clay Finck (00:20:28):
Jim Rohn once said that you're the average of the five people you spend the most time with, and I really could not agree with him more. One of my favorite things about being a host of this show is having the opportunity to connect with high quality like-minded people in the value investing community. Each year we host live in-person events in Omaha and New York City for our TIP Mastermind community, giving our members that exact opportunity back in May. During the Berkshire weekend, we gathered for a couple of dinners and social hours and also hosted a bus tour to give our members the full Omaha experience. And in the second weekend of October, 2025, we'll be getting together in New York City for two dinners and socials as well as exploring the city and gathering at the Vanderbilt One Observatory. Our mastermind community has around 120 members and we're capping the group at one 50. 

Clay Finck (00:21:24):
And many of these members are entrepreneurs, private investors or investment professionals. And like myself, they're eager to connect with kindred spirits. It's an excellent opportunity to connect with like-minded people on a deeper level. So if you'd like to check out what the community has to offer and meet with around 30 or 40 of us in New York City in October, be sure to head to the investors podcast.com/mastermind to apply to join the community. That's the investors podcast.com/mastermind or simply click the link in the description below. If you enjoy excellent breakdowns on individual stocks, then you need to check out the Intrinsic Value Podcast hosted by Sean O'Malley and Daniel Monka. Each week, Sean and Daniel do in-depth analysis on a company's business model and competitive advantages and in real time they build out the intrinsic value portfolio for you to follow along as they search for value in the market. 

Clay Finck (00:22:23):
So far, they've done analysis on great businesses like John Deere, Ulta Beauty, AutoZone, and Airbnb. And I recommend starting with the episode on Nintendo, the global powerhouse in gaming. It's rare to find a show that consistently publishes high quality, comprehensive deep dives that cover all of the aspects of a business from an investment perspective. Go follow the Intrinsic Value Podcast on your favorite podcasting app and discover the next doc to add to your portfolio or watch list. Yeah, that's so well put. And I just love how you looked at someone like Buffett and you launched your own hedge fund, being the sole investor at day one, just figure it out trading a lot when there's a lot of volatility and whatnot, being willing to bet big when you find the right opportunities, and it certainly worked out well for you. And Buffett is also an investor in the financial sector. He is been very involved with insurance and the big banks has major investments in that arena, and that's exactly what your fund is focused on is the financial sector. And this can be pretty broad. You have banks, brokers, asset managers, insurance REITs, et cetera. What pockets of the market are you finding the most opportunities today? 

Derek Pilecki (00:23:40):
Yeah, so I think small mid cap banks are still an opportunity and I think they became an opportunity after the Silicon Valley, first Republic Implosions and they've done okay. I think there's more to go. They're still cheap relative to their history. I think they still have the headwind of the yield curve and with the yield curve, I think about really what benefits the banks is the spread between the overnight rate and the five-year treasury. So right now that's inverted. It's five years, like 360 8 and the one month treasury is like 4 0 8, so it's a 40 basis point inversion. If that was steeper, I think that banks would make more money, their margins would be wider. If we go back to seven years ago, 2018, that spread was 80 basis points. And so the overnight rate was 80 basis points below the five-year rate, and now we're 40 basis points inverted. 

Derek Pilecki (00:24:35):
So that 120 basis points swing is a big inversion, a big headwind for the regional bank. We get a little bit of steeper yield curve with a few more rate cuts, which it looks like we're going to have, and I think banks can make more money and then the multiples can also go up. We also have deregulation coming, bank mergers are getting approved faster. I think there's going to be more m and a activity. I think another area that's super interesting is we've talked about with PayPal is FinTech. So FinTech names, they used to be growth names in 2021, they've fallen out of favor. Everybody hates FinTech. The valuations are super compelling. They're cheaper than the big banks. So a lot of single digit PEs in FinTech, whether it's WEX or PayPal or global payments. And so they convert a large majority of their net income to free cash flow. 

Derek Pilecki (00:25:26):
I just don't think it's sustainable that the valuation stay down here. And then the third area I would say is I've started investing more in European banks. European banks have been terrible for 15 years, 15, 16, 17 years. So finally last year I've owned Barclays for about six years. Last year it worked. I looked around at other European banks and started buying the French banks early this year. And the French banks I had for two this timing, but the BMP was trading for 60% a tangible book and Society general was trading for 35% a tangible book. And the CEO was 50 years old and had been in place for two years. So again, as CEOs catalyst change, so they've both worked this year and I think there's more to go and on European banks. So those are the three areas I've been most focused on recently. 

Clay Finck (00:26:18):
I'm glad you mentioned interest rates there because we're recording here on September 18th. Yesterday the Fed announced a 25 basis point interest rate cut. And in your letters you wrote last month that you believed that the Fed should cut interest rates twice this year, which is likely 50 basis points total. So what signals do you look for to determine these sort of interest rate changes other than maybe just the yield curve and how do you see these interest rate cuts impacting the economy? 

Derek Pilecki (00:26:48):
Yeah, I think interest rates are restrictive at this level. I think we have a bifurcated economy. We have the AI non-interest rate related sectors. There's humming along just fine. And then we have interest rate related sectors like whether it's housing or autos that are struggling. And so existing home sales we're bouncing here just below 4 million units a year. Whereas in 2021, I think five and a half million existing homes were sold. And also real estate development has really struggled with higher rates. Developers just haven't wanted to borrow at 8% rates to build new apartments or build new warehouses or whatever we have. So the construction economy is lower. And so I think we really need rate cuts to help the interest rate sensitive parts of the economy. I'm frustrated with the conversation around inflation. I think there are three big parts of the economy that are driving persistent inflation and none of them can get solved by higher rates. 

Derek Pilecki (00:27:51):
And when I think about it, it's housing, college education and healthcare like higher rates is not going to make healthcare prices go down or the growth of healthcare prices go down neither is it going to affect college education and the housing with the land use regulations and the nimbyism and the people, the zoning practices and how long it takes to get things entitled, higher rates aren't going to fix those problems. In fact, it makes 'em worse. We've had to slow down in apartment construction, so how does that get lower housing prices if we're not going to build apartments? And so I think there is a disconnect here between rates and inflation and what's really going to change inflation if we want to get inflation down the Fed can't fix those problems, how do we fix those problems like hospital administration staff in healthcare has exploded compared to the number of doctors. 

Derek Pilecki (00:28:45):
Why is there so much more bureaucracy on healthcare college education? And same thing, administrators and colleges have exploded compared to teachers. We have so much technological improvements, but we teach the same number of college kids, like the big elite colleges, Amit, the same number of students in 2025 as they did in 1990. That's crazy. We can deliver education so cheaply now. Why are we limiting? Why do we have capacity constraints on that? And prices would just come down if we could just use online teaching to educate more people. So higher rates are not going to fix those inflation problems. I think there's also huge deflationary forces in the economy. The internet is still deflationary, globalization, globalizations maybe having a little bit of pullback with the tariffs and the immigration changes, but internet is still a huge deflationary force and I think AI is going to be a huge deflationary force in the economy. I think rates should be lower. I don't think it's going to create too much speculation. Maybe there'll be a little speculation, but the IPO market's been dead for four years. I really don't think there's a problem at the moment. I know that people are worried about private credit or just some sectors like that, but I really don't think that inflation's going to rocket just because they cut rates two times the rest of the year. 

Clay Finck (00:30:11):
Yeah, I believe that Powell said that he was really looking at the job market when it came to lower interest rates, wanting to help stimulate the economy in light of a tighter labor market. What's really puzzled me over the past few years is how real estate has reacted to mortgage rates going up so much in 2020, I believe people were getting interest rates below 3%, and then just recently you see some mortgage rates at around 7%. That is a significant increase in the cost of interest. Yet the home prices overall haven't significantly come down. And part of that's just there's not a lot of activity. Some of the more pricier markets like Austin, LA and some of those markets have come down a little bit. How do you think the interest rate cuts are going to impact mortgage rates and maybe the real estate market overall? 

Derek Pilecki (00:31:07):
Yeah, I think 30 year mortgages are around six and a quarter today. And so I think if we get a little bit of steeper yield curve, like the short end keeps going down, I think people could potentially switch into five one arms and I think five one arms will get down to below five point half, maybe 5%, and I think that'll improve some activity. I think we have a lot of regional differences, like you mentioned Austin and la. I think any of the COVID boom markets, central Florida, Nashville, Boise, Phoenix, all boom during COVID, and I think they're all pulling back here. So I think the inventories are increasing. I think prices at the margin are down a tick. I think they'll continue to tick lower, a lot of supply and a lot of people have to move back to work in the office. They can't remote in to work anymore. 

Derek Pilecki (00:32:00):
And then we see New England, the inventory in New England is almost non-existent as far as homes. And so that's super interesting to me. For a long time, new England people were leaving New England and now it's hard to find a home in New England. And so I don't know how that gets resolved. I don't know if there's going to be a lot of building in New England or how that gets resolved, but I think some of those COVID boom markets will continue to trend a little bit lower and hopefully they'll get saved by lower rates and there'll be more activity, but it's hard to really tell how things will move, but I think that it's likelihood prices are lower, maybe they don't go as low with lower rates. 

Clay Finck (00:32:41):
Jumping back to your recent performance, you're one of the few managers I've chatted with who has been pretty successful with shorting stocks. So at the end of 2024, you had some fairly significant short positions relative to the overall portfolio, and during that year, both your longs and your shorts outperformed one of your benchmarks, the financials index. What were some of the key reasons for your shorts doing so well in a market that's going up? 

Derek Pilecki (00:33:09):
Yeah, I mean, shorting is hard. I think when I look at 2024, the financial index was up 34 ish percent. My longs were up about 43%. My shorts were up 21%, so I still lost a lot of money on shorts, but on a relative basis, and I use a little bit of leverage and I'm net long. So that's how you get to the performance. I think shorting has been an iterative improvement over the years. And so to respect momentum is when shorts are going against me. Shorting is hard because you want to, as a value investor, you want to short expensive stocks, but those can also be stocks that have momentum. It's trying to find a mix of stocks that are just not good values and stocks that have headwinds against them. And so just trying to constantly improve. I think the shorty environment's been hard for the most of the history of the fund that a lot of the bad financial companies got wiped out during the financial crisis. And so any company that survived the financial crisis had some staying power. And so there weren't a ton of shorts there. But during the SPAC craze of 2021, there was a lot of new financial companies that came public, a lot of mortgage companies, some fintechs that came public that were bad values. And so that improved the opportunity set. 

Clay Finck (00:34:33):
And other than utilizing shorts, one of the more contrarian parts of your strategy is that you're able to get comfortable with some holdings in the portfolio using some leverage on the balance sheet. In the good times, this can look really good, but if we ever come across a major crises, then that's when these highly leveraged businesses can find themselves into trouble. So how do you think about managing leverage at the company level so you don't get caught on the wrong side of things when the crisis inevitably hits? 

Derek Pilecki (00:35:04):
Yep. I think I've made money investing in highly leveraged companies. It's not super easy. I think, I guess I'm comfortable investing in a stock and not being guaranteed I'm going to make money. I feel like I have a higher tolerance to own losers than other managers maybe. So I don't know how things are going to turn out. And losing control of leverage or having an adverse outcome due to leverage is certainly a way to lose money. And I've been comfortable with that risk reward of the upside that the leverage presents versus the potential downside. But they don't all work out and they can quickly unravel, but it also keeps management focused. And so when they have high leverage, they tend not to do dumb things because they know their margin of safety is low. So I don't recommend that for everyone, but that can be a benefit of investing in companies with higher leverage. An example right now is some of the FinTech companies they've bought back stock and levered up to do it, and so they've stopped making acquisitions to pay down the debt. So hopefully that works out for them. 

Clay Finck (00:36:16):
And as a financials fund, you benchmark yourself against the s and p 1500 financials as well as the s and p 500. So when I look at the top holdings in the financials index, this includes companies like Berkshire Hathaway, visa, MasterCard, and the big banks. I was actually surprised to see that this index was up nearly 30% in 2024. Given the backdrop of higher interest rates, I would expect that you sort of highlighted the difficult environment for the smaller banks of an inverter deal curve. So I would expect generally higher interest rates would lead to slower loan growth for companies like JP Morgan, bank of America, but the big banks seem to have done quite well the past 12 to 18 months. So talk about some of the dynamics that play here in the industry. 

Derek Pilecki (00:37:03):
So the big banks got a huge gift from Silicon Valley and First Republic failing. There were the flight to quality, and there biggest banks because of their regulatory position, they're too big to fail. And so the people depositors are moving deposits and accounts to the big banks. So they've had this tailwind of low cost deposit growth, which is a big win. And then there was a little bit of watering down of the Basel three capital rules. So there was a set of capital standards that were proposed for the big banks that were onerous and the stocks were priced because that capital rule was going to get implemented, and then it got reduced. And so the banks rallied when that capital rule got reduced. And then they also had the benefit of at end of last year, I think they responded well to the incoming Republican administration thinking that there'll be a deregulatory environment and more m and a. 

Derek Pilecki (00:37:58):
And so I think some of the stories I hear from bankers about how the regulators act during the previous administration, I think that a lot of those behind the scenes pressures get lifted with the current administration. So I think the banks reacted favorably that they can focus more on business. You're right about loan growth. Loan growth with higher rates has been lackluster, and hopefully that's one of the things that we'll see going forward is accelerated loan growth. But when rates went up, borrowers just like, I'm used to paying 5%, now you're asking me to pay 8%. I just don't want the loan. And plus a lot of borrowers had liquidity from the COVID boom, and so they just used their own internal liquidity rather than borrowing at high rates from the banks. But you're right, the loan growth has been not that exciting, but the capital rules and the potential for deregulation have helped the big banks. 

Clay Finck (00:38:50):
Yeah, it's interesting that you highlight flights equality and this capital and some of these deposits going towards the big banks because you've highlighted that you're overweight. The regional banks, and I sort of think of regional banks as these mid-size banks. They're bigger than the smaller community banks, but smaller than the largest national banks like JP Morgan, bank of America. So one of your top holdings is First Citizens Bank shares, which we discussed back on episode 6 69. They're one of the larger regional banks family run, very good company and very good compounder. So talk more about what makes the regional banks an attractive hunting ground for you in light of the comments you've just made of this flight of deposits to the bigger banks? 

Derek Pilecki (00:39:36):
Yeah, I think regional banks are interesting because the valuations are so much lower than the big banks. So normally the big banks are the cheapest and followed by mid caps, and then small caps are the most expensive due to m and a potential better growth prospects. But right now we're inverted. The big banks are the most expensive. Midcaps are in the middle, and the small banks are the cheapest. And so I think that gets fixed with the change in the slip of the yield curve. I think a steeper yield curve will make the smaller banks more profitable because they have a higher percentage of the revenue from spread income where the big banks have more fee income. And so I think that increase in spread income, there's not a cost associated with it. So if their margins expand, they don't pay their people more, they may pay the executives bigger bonuses, but for the most part, most of that revenue drops to the bottom line and it'll have a bigger effect on the small banks. 

Derek Pilecki (00:40:26):
And then I also expect the valuation differentials to go back to normal, where the smaller banks have higher valuations than the big banks, but there's definitely economies of scale and banking. So we really need the more m and a. We still have 4,000 banks in the country. When I first got in the business, we had 13,000 banks. We're down to 4,000. We're the only economy in the world that has this many financial institutions. Canada has a dozen or five large ones, but a dozen most banks. And so we will see more consolidation and really, JP Morgan's a remarkable company. They're the biggest bank and they're taking market share. So they entered Boston, Philadelphia and DC without buying any banks in those cities. They just started opening branches and they're just taking share. I think they even opened a branch in North Dakota. So now they have a branch in all 50 states, but their tech platform, they can spend more money and they have the best apps and they're just taking share. They're easy to do business with. And so B of A is taking share. Some of that's from Wells Fargo. Wells Fargo's had this asset cap, so they couldn't grow, but they're also taking the big banks, the big two are taking share from the small mid cap banks. If we don't have more consolidation, it's just we're going to get consolidation through organic growth of JP Morgan and B of A. And so we need to make cap banks to get together to have real competitors to those companies. 

Clay Finck (00:41:58):
It's interesting you highlighted that some of the big banks are still opening branches. I think back to my dad, he loves stopping by his small community bank. I don't know how often, probably at least once a week he's stopping by just to say hi to his banker and whatnot. And I'll occasionally go to a bank just to pick up cash. The physical location, it's convenient. Not too far for me, but when I think of people younger than me, I'm 31 years old. I'd imagine people that just are getting out of college, I'd imagine a lot of 'em either haven't been to a physical branch by their own will or they just use the online banking and whatnot. How do you see the online banking market developing? I know there's a lot of online banks being launched. It seems like every year I see a new one come out. So talk more about how that space is developing. 

Derek Pilecki (00:42:47):
Yeah, you're right. Branch traffic has declined every year since 2010. So less people are going to branches even though the big banks are opening branches, they're in new geographies. I think if you look at DC, I think JP Morgan has about 20, 25 branches across the whole city of dc, some Virginia, Maryland, dc and I would guess 20 years ago if they entered DC, they'd probably have to have 80 branches. And so now they can cover a city. You don't need to go to a branch within two miles because you only go to the branch a few times a year. You could drive 10 miles to drive to the JP Morgan branch because you only do it twice a year. So you can cover more geographies with fewer. And so that increases the competitive intensity of the industry. We used to have interstate branching laws where JP Morgan couldn't just enter Virginia. 

Derek Pilecki (00:43:39):
When those interstate branching laws went down, people banks could enter new geographies without buying banks or without, or just letting them go into any geography at all. So the competitive inten is increasing in banking. Online banks are, they're real threats of profitability of banking. They're paying higher rates, they're easy to do business with. There's ways that they give you credit on your deposits faster than the legacy banks. The online banks are just going to take share. So it's another way to increase the competitive intensity of banking. And when I say increased competitive intensity, that means margins going down, returns going down. So I think the long-term trajectory for banking is lower returns, and that's why banks aren't the greatest thing. I run a financials fund, but I would never just say, Hey, let's go invest in the KRE together for the next 20 years. That's not a great strategy. There's some banks that are well run, we can invest in them. We can invest in banks when they're cheap. We can't just invest in the average bank for the next 20 years. It's not software, it's not semiconductors an average to below average industry where returns are going down. So I'm just aware of that. I'm not a permeable on banks. There's times to own them. I think right now is the time to own them, but it's not always the case. 

Clay Finck (00:45:03):
Yeah. I almost wonder if you're not giving the banking sector enough credit. I know you find a lot of good banks that are out there and you look at the large banks, the mid-size and small ones, and you say, Hey, there's quality banks within all these segments, but I'm going to buy the cheap ones. And that's what I also appreciate about your strategy is looking for potential and opportunities for multiple expansion in generating returns for your investors. And it seems that within your fund, you'll have say the really high quality businesses, like the first citizens of the world that are bound to grow for a really long time might not be the cheapest company either. And then you also have, we've mentioned plenty of stocks today that they're just too cheap. Once they reach a certain valuation, you're happy to part ways with them. What do you think that sort of mix looks like in your portfolio of some of these high quality names you can see yourself owning five, 10 years from now? And other names that you'd be happy to part ways with? If the valuation reached a certain level, 

Derek Pilecki (00:46:05):
I think it's like 30 or 40% names that I kind of think of as enduring. I'm going to hold them for a long time and then 60 or 70%, it's like their first sale at the right price and keep that turnover the portfolio and move it on to the next cheap stock or cheap sector within financials going. I think that's probably the mix of, I worked for a man before I started my fund. I worked at GCM and the PM that I worked for was a guy named Herb Bes, and he used to preach, if you ever own a stock and a great company, never sell it. And so very much a Charlie Munger investment style of, and so I do keep some of my portfolio and stocks that I'm like, I just want to own the stock for a long time. 

Clay Finck (00:46:54):
So let's talk about Robinhood. So I feel that only a true master of their craft can make money shorting a stock and then turn around not too long after and go long before it becomes a multibagger. So that's exactly what you did with Robinhood. This is a stock you bought in November of 2023, and you actually still hold a smaller position today. Not as big as it once was, but since November of 23, the stock is up over 14 times in less than two years. It's just not very common. You see a stock go up that much, let alone own a stock that goes up that much. So let's walk through this story. It was in 2021, Robinhood went public, and at some point after that you ended up going short the stock. So talk about what you were seeing at that time. 

Derek Pilecki (00:47:40):
Yeah, I mean, I think the response to the environment, there was a lot of speculation. The SPACs were coming public. There was a lot of junkie companies coming public and a lot of inflated valuations and just a speculative frenzy in 2021. And so shorting Robinhood, I thought the valuation compared to where they were in their business was high and they were losing a ton of money and the valuation was high, and I just thought the speculative bubble was going to recede. And so it was an easy way for me to participate in the downside there. And I shorted it down. I knew they had $8 a share in cash, and I shorted it from 25 down to 10, and then at 10 with $8 a share in cash. I was like, there's no the short's done. But I continued to follow the company. I like brokerage businesses, and I was impressed with the changes they were making to the business. 

Derek Pilecki (00:48:35):
They put up a couple of profitable quarters by reducing costs, introducing some new products. I really liked their product roadmap for introducing new products. I was like, they could accelerate customer growth with all these new products. And then I just got an opportunity, they reported to the Q3 of 23 earnings, and there were two environmental reasons why they missed the quarter, and I just thought they were temporary. And it traded down to the $8 where I bought it, and they still had that $8 a share in cash. So just being flexible and understanding the business. And also technically, it had built a big base I covered in March of 22, and from March of 22 to November of 23, the stock kind of was flattish and it had built that long base. I got fortunate that it took off soon after I bought it. And that was just good timing, good luck. But they had built that base. I didn't think there was much downside and had it kind of treaded water put in, it marked its time to make a move higher. 

Clay Finck (00:49:36):
And what really stands out to me here in your approach, and I think a lot of the alpha you're generating in the fund is just being aware of sentiment. You can have a great company that isn't a great stock to buy, and you can have an average company that can be a great buy because the sentiment is just so bad. So in 2021, sentiment overall across all any technology stock was just too much. And it was assuming you believe that markets are rational in the long run, then it can make for a good short in your case. And on the other side, when a good company just gets way too far beaten down, it's trading near tangible book value that can make for a lot of asymmetry because the sentiment is just so bad. So talk more about you buying it in November of 23 near tangible book value and then how the company developed since then and became a huge multibagger. 

Derek Pilecki (00:50:31):
Yeah, a couple weeks after I bought the stock, the SEC approved the Bitcoin ETFs, so the crypto market started taking off. And so Robin Hood's one of the few ways to participate in the crypto market without owning Bitcoin directly. And so they got some benefit from there. And then their product innovations, they had customer growth accelerate customer deposits went from 18% of assets to 40% of assets during 2024 it was. And so that really got growth going, and they continued to introduce new products and activity ramped up. And then crypto trading exploded after the election, and they've continued to introduce new products. And some of the products are a little bit shocking that until the fall of 24, you couldn't open up a joint account with your spouse. You each had to have individual accounts. So some products were not rocket science, they're just getting around to all the things you need to offer as a brokerage firm. 

Derek Pilecki (00:51:30):
But they introduced features trading. I think they're just introducing short selling in the coming days. And then this goes back to, I held onto the stock for a long time. I started hedging it late last year and through this year, and I'm almost completely out of position. I still have a tag end piece if it becomes a meme stock, and I'll benefit a little bit, but you could argue it already has become a meme stock to some extent, but it's just avoiding that value investor mistake of selling too early, hit my price target, I'm out just market, can take stocks a lot higher than you think. And then also the stock got up to, I think it was like $30 late last year, and I did, I think earnings estimates were about a dollar 50. And I looked at the models and I could get the $3 in 2026. 

Derek Pilecki (00:52:25):
And so I was like, okay, the stock's way up at 30 bucks, but I can see in two years they can earn three bucks. It's 10 times earnings that even though it's made a big move, there's still a lot of upside here. So my three bucks estimate for 2026 had some pretty bullish assumptions about customer growth and training activity. And so was, I'm not saying $3 is the base case, but I'm just saying, okay, what are other people seeing? What's the potential upside? And just being comfortable of like, okay, ignore where the stock's been, where could it go and what are people looking at it? People who are buying the stock at these highs, what are they thinking? And just being comfortable with momentum and stocks that are moving higher probably continue to move higher, but that's an uncomfortable position for a value investor just letting stocks go up. But it's what you have to do to keep your returns intact. 

Clay Finck (00:53:21):
And the past couple years, I think one the lessons for me is just understanding how powerful operating leverage can be. So a few examples that come to mind of some businesses that maybe don't care about profitability since they're early on in their life cycle. And then once they've built up their customer base, then they can start to pull these profit levers. So a few that come to mind are Uber, Spotify, and Robinhood. So looking at Robinhood financials, for example, if we just look at the net income line 2021, they were losing over $3 billion. 2022, they're losing a billion, but in the last 12 months, net income is 1.7 billion. So as revenue's growing, the profit side can really ramp up significantly since a lot of their, they can have a low cost base, right? Since it's very much a tech platform. So that's one of the lessons I think that I get from looking at a stock like Robinhood when the market doesn't appreciate the level of operating leverage and just being patient with letting that profitability come through the bottom line. 

Derek Pilecki (00:54:26):
I think that's well put. There's another stock that I have that has a lot of operating leverage and a lot of financial leverage is anywhere real estate, and this is the old Realogy, they own Coldwell Banker, and that is a fixed cost. They run it as a fixed cost business, and then the commissions are variable based on volumes of real estate transactions. So this stock is way down from where it was a few years ago when the housing market was booming. And I think people are just coming around to the fact of like, okay, you have financial leverage on top of operating leverage and the EBITDA numbers could explode here if we get back to 5 million units of existing home sales. But I agree with you, operating leverage is a lot of times underlooked as a potential upside. 

Clay Finck (00:55:16):
So I also wanted to be sure to mention Interactive Brokers. I'm a very happy customer of Interactive Brokers. They're in the discount broker business in the broker business just like Robinhood is. And they are founder led and their founder owns a significant part of this business. And I believe that's one of the concerns with this business, I think is what's going to happen with a lot of the shares he owns. But I've been a bit disappointed not to participate in this stock's spectacular run over the past couple of years. They've been organically growing their customer counts over the years and the market's finally taken notice. I'd be curious to get your thoughts on Interactive Brokers. I don't believe you've owned it, but you have looked at it based on what you've said off air. 

Derek Pilecki (00:56:02):
Yeah, I do own a few shares in the mutual fund that I manage, but I don't own it in the hedge fund unfortunately. It just was a little bit too disciplined on the price I was willing to pay and it ran away from me. I was looking at it the December of 23 after I bought Robinhood, and it's been a phenomenal stock and it's a great business. I've been a customer too. I use it as a prime broker. They've been super helpful in helping me with my business. I think they keep costs slow. I think the fixed cost nature of their platform gives them a lot of operating leverage. I think it's a conservative balance sheet. I think their credit rating's higher than Morgan Stanley's. And so I think that's super interesting as far as a safe place to custody assets. So I think it's very efficient and it's a great business. 

Clay Finck (00:56:48):
I wanted to also be sure to touch on WEX Inc. So in your most recent letter, you highlighted your thesis on this company, and for anyone that's interested in checking out Derek's commentary, he sends out his letter to those that sign up on his website, and it's been very useful for me to follow along. So talk a little bit about WEX Inc. What's this company do and what's your thesis on adding it to the portfolio? 

Derek Pilecki (00:57:13):
Yeah, so WEX is a financial technology company. They issue fuel cards. So they have three businesses. 50% of the business is fuel cards. So you own a fleet of trucks with your service business. You give all your drivers a WEX fuel card, they have to type in a password and the car mileage or the truck mileage when they get gas and just reduces waste or shrinkage on your part is owning a small company fleet. They're not filling up their personal car with the gas card and they give you a lot of data of how to evaluate your drivers. And so that's been a good business. They've used some of the cash from that business. They bought two other businesses. They have a health savings account business, which is a high multiple business that provides low cost deposits. They actually have a bank where the low cost deposits from the health savings accounts fund, the receivables from the fuel card business. 

Derek Pilecki (00:58:05):
So there's nice integration there. And then they have a corporate payments business, which has had some struggles. About half the corporate payments is about 20% of the business and half of that 20% is servicing online travel agents. And both Expedia and booking.com have brought some business. And so that's been a little bit of struggle, but the stock has not done anything for eight years. And so the valuations come way in. It's trading for eight times ebitda. They did a tender offer at $154 a share earlier this year. They've publicly stated they're not making any more acquisitions because they're going to focus their free cash flow on paying down the debt that they took out, the buyback shares. The CEO bought some shares. There's been an activist involved for about three years. And so I feel like the activists is watching management and the management's aware of the activists, so they're not going to do anything that is shareholder friendly. 

Derek Pilecki (00:58:56):
And I think valuations come back up. So it was weird. They closed the tender at the end of March and then with Liberation Day, the stock traded through the tender price, and so it traded down to $120 a share, which was kind of crazy to me given that the company just bought back 10% of the shares at 154. So it's up from that. The stock's trading around a hundred seventy, a hundred seventy five right now. It's still eight times ebitda. I think we just need some more time. I think management's also doing a good thing of reinvesting a little bit in the business. They've started spending some more marketing dollars in the fuel card business and have also hired some salespeople in the other two businesses. So I think revenue growth is going to accelerate here, not in huge fashion, but I think at the margin it's going to be positive. I just think the valuation's too low. A year ago the stock was at $240. We could easily get back there with no problem. 

Clay Finck (00:59:54):
Yeah, I think some of the things that stands out to me about this company, I just think being in the financial space, you sort of benefit from having the opportunity to just look at a lot of boring businesses that aren't doing a lot, right. I mean, wex, it's not a high revenue grower. You're not seeing exploding earnings like you are at Robinhood, but you are seeing some things happening under the hood where an activist is getting involved. You're seeing this catalyst of more share repurchases and whatnot. And like you mentioned, the stock trading down to one 20. Sometimes the market just does some silly things just on short-term concerns, whether it's the economy concerns around fuel prices dropping, fuel volumes dropping and whatnot, and someone like you coming in and taking advantage of those unique opportunities. 

Derek Pilecki (01:00:39):
Yeah, I mean, it is a 4 billion market cap company. It's not the largest company. People don't talk about it. I mean, the stock hasn't done anything. It's flat for seven years. It's a lot of investor apathy about it. And so I think the tender offer for me was really what sparked taking another look of like, okay, that's a special situation type event of buying back that much in stock and really kind of putting the handcuffs on themselves that you can't do anything with your cash except pay down debt at that point. And so that's a real stake in the ground. So I think that's the catalyst. And a lot of people don't respond to events like tender offers that are clear signals that there's value there, or at least management and the board thinks there's value. They also issued a press release or I think in they said the tender offer that nobody from management or the board of directors was going to sell into the tender. So that's a pretty strong statement in itself. 

Clay Finck (01:01:38):
So tender offers are something, to my knowledge, don't happen all too often. For those in the audience that might not be familiar, could you just explain how this works and what a tender offer is? 

Derek Pilecki (01:01:49):
So the stock was $170 and management wanted to buy back a bunch of stock. And so instead of going to a brokerage firm and buying shares every day in the market, they said, okay, we're going to make a tender offer. Or they make a filing with the SEC and they say, okay, a month from now we're going to buy 10% of the company this many shares, and we're going to buy it somewhere in the price between 150 and $170. And investors can go to their broker and say, I would be willing to tender my shares at $160 or 150 or 170, and they look at what price is the clearing price of to buy all 10% of the company shares. And in this situation, it was 154, so relatively hit the low end of the range. So investors, shareholders were willing to give up their shares at a relatively low price. 

Derek Pilecki (01:02:41):
So it just shows that management and the shareholders had different views of the value of the company. But I think that to buy back that much of the stock in one swoop, the management had to be super confident that they weren't overpaying. And I think that was a pretty strong signal that they thought in that range of 150 to 170, they were getting a good deal of buying in those shares. And so buying back that much stock helps EPS growth because you have fewer shares of the same net income. The valuation was low enough that the cost of the debt, the fund, the tender offer makes the transaction was low enough that it was accretive to earnings growth. But there aren't that many tender offers out there. There's a handful each year, but it's a good source of ideas because companies don't tend to buy back that much stock unless they think the stocks undervalued. That's not always the case. Not all tender offers work as far as owning the stock, but a lot of times they do. In fact, I think I first learned about tender offers when General Dynamics in the early nineties did a tender offer, and Buffett bought the stock because of the tender offer. He thought that was such a strong signal that general dynamic stock was cheap when they announced the tender offer, he bought the stock. 

Clay Finck (01:03:58):
So it seems that part of the dynamic of a tender offer is the company wants to buy such a significant portion of the shares, it's more efficient for them to do going the tender route rather than going out and buying shares in the open market saying they're buying 1% or 2% or whatnot. So that's sort of the dynamic of the tender is they're buying a significant portion of the shares back. Is that right? 

Derek Pilecki (01:04:23):
Yeah, that is exactly right. You can get a lot more shares in a faster amount of time. 

Clay Finck (01:04:28):
And what's also sort of interesting to me about this, your investment thesis here is part of the thesis is that one reason why the company's at such a discounted valuation is because of the leverage on the balance sheet. And if management's going to be paying off some of this debt over the coming years, then you would expect some multiple expansion naturally from that. So that's sort of one of the catalysts you're looking for in looking for a rerating. 

Derek Pilecki (01:04:54):
A lot of times, one of the things that makes private equity so profitable or have high returns is the use of leverage. And we've talked about leverage a few times, but this is another example of this is a company with leverage, and this is almost like a publicly traded LBL. The leverage isn't as high as what private equity uses. It's only three and a half times. It's not five or six times, but three and a half times, there's plenty of leverage to get leveraged returns from the stock, and investors will discount the stock while it runs with high leverage. But then as the leverage gets paid down, they get a little bit of growth and the debt gets paid down, it de leverages naturally, and then investors will be more comfortable putting a higher valuation on the company. 

Clay Finck (01:05:37):
Excellent. Well, Derek, I really enjoyed this conversation. Again, very informative for our listeners. Always enjoy bringing you on. Before I let you go, how about we give the audience a final handoff here on if they'd like to learn more about you and your firm, where should they go? 

Derek Pilecki (01:05:52):
Yeah, if you would come to gator capital.com and sign up for our newsletter, or you can send me an email, derek@gatorcapital.com, be happy to send you our investor letters. I won't spam you. Just send out four letters a year with one stock idea in each letter and just something that I'm doing in the portfolio or some insight that I think I have that hopefully will be additive to your investment process. But I appreciate you having me on the show. Again, you're super generous with your time and your questions. I appreciate you, clay. 

Clay Finck (01:06:22):
Excellent. Well, thank you a lot, Derek. I really appreciate it as well, and hope we can do it again eventually in the future. 

Derek Pilecki (01:06:29):
Sounds great. Thank you. And so you kind of have to flip your thinking based on the environment. The famous source quote of he questions another money manager. You go to the office because you think you have to do something every day. I don't go to the office every day. I just go to the office. The days where there's something to do, I think it's similar to that. There's times in the market where it's very stressful and there's a lot of volatility and there's things to do, and you have to focus on a very short period of time of what's going to happen. And then there's periods of the time where the markets are relatively calm and there's not much to do. And you can be longer term and have a longer term focus. And I think October oh eight was the peak of you need to focus today on making money today.