Investing in the Future of Health Care with Mike Taylor

[00:00:00] Welcome to Excess Returns, where we focus on what works over the long term in the markets. Join

[00:00:04] us as we talk about the strategies and tactics that can help you become a better long-term investor.

[00:00:08] Justin Carbonneau and Jack Forehand are principles of the ability of capital management. The opinions

[00:00:11] expressed in this podcast do not necessarily reflect the opinions of the ability of capital. No

[00:00:14] information on this podcast should be construed as investment advice. Securities discussed in the podcast may

[00:00:18] be holdings of clients of the ability of capital. Hey guys, this is Justin. In this episode of Excess

[00:00:21] Returns, Jack and I talk with Michael Taylor, manager of the Simplify Healthcare ETF, Ticker Simple Pink,

[00:00:26] PI-NK. We talk to Mike about his background and transition from a scientist to investment

[00:00:30] professional. We get an overview of how he categorizes the healthcare sector, where he's finding

[00:00:35] opportunities, and how he looks to drive long-term shareholder value by picking healthcare names

[00:00:39] with upside. One really cool thing about the ETF is the profits from the fund help support the

[00:00:44] Susan G. Coleman breast cancer organization, so there's a charitable drive as part of the fund's

[00:00:49] mission and existence. As always thank you for listening please enjoy this discussion with Simplify's

[00:00:53] Michael Taylor. Hi Mike how are you? Thank you for joining us today. Thank you so much for having

[00:00:58] me. It's a pleasure. We wanted to have you want to talk about healthcare investing,

[00:01:04] how you go about selecting healthcare companies for the portfolio that you run some of the interesting

[00:01:10] trends in the industry, and then just how you kind of go about thinking building up portfolio

[00:01:17] of these healthcare companies and stocks. If we have time maybe we can get to some of your views

[00:01:23] on the macro economy and the economic backdrop toward the end so hopefully people want to hang out

[00:01:29] and stick around for that, but I think to start let's just because this is very neat. I don't

[00:01:34] think there's anyone else doing this in the ETF space correcting the firm wrong here, but the ETF

[00:01:41] that you're in charge of that you run the Simplify healthcare ETF ticker symbol pink. I believe it's

[00:01:47] the only ETF that donates its proceeds to a charity. Is that correct from what you know? Yes,

[00:01:56] pink is the only ETF to my knowledge that is of the true essence of impact investing where

[00:02:05] the fees, the net fees and my compensation all go to the Susan G. Coleman Foundation for

[00:02:11] breast cancer. So it is a way for investors to do well if not great and do good, if not very good

[00:02:20] and good for humanity. Well, we're sure there's a great backstory in terms of the idea like where

[00:02:25] did you get the idea to do an ETF that gives the proceeds to charity? It actually came brainstorming

[00:02:32] with Mike Green a number of years ago and I don't know if you're familiar with Mike Green, but he plays

[00:02:37] a very large role at the Simplify family of funds where he's a part manager, a part owner

[00:02:42] and a wonderful guy. And he helped food greatly to put this together. And you know, hey do you

[00:02:51] want to do something entirely different? And the answer was well, heck yeah, what do you think?

[00:02:56] And so we concocted this and my goal was to deliver superior performance

[00:03:04] at a fraction of the cost and for it all to go to charity. And it seems to have worked out well.

[00:03:11] Now, it's sort of charity I should disclaim, I think I am the largest shareholder in pink.

[00:03:18] So out the check it changes from day to day but I should be around the largest shareholder

[00:03:23] in pink. So our incentives are aligned, it's my money too. So I treat it like my own personal account

[00:03:30] in healthcare and that way everybody else also gets to benefit from what I'm doing

[00:03:38] as of course the charity Susan G. Coleman. Yeah, we're big fans of Mike by the way, Mike

[00:03:42] spent on the podcast a few times he actually was our guest about two episodes ago. How did you

[00:03:46] decide to use the Susan G. Coleman foundation for your charity? Do you have a personal connection to

[00:03:51] that? You know, I don't but there hasn't been anyone who isn't touched by cancer and breast cancer.

[00:03:57] Every family has been. So it's important that everyone is touched by it but also Susan G. Coleman

[00:04:03] has the greatest reach. And if you take a look at where this pink is going, it's going to a place

[00:04:10] where the checks could be quite substantial coming out of it. And we needed somebody who could

[00:04:16] actually take that check and do something meaningful with it. And that's why I needed to be a

[00:04:22] large charity, something that I could get behind. They do an awful lot of primary research in

[00:04:27] breast cancer. And I understand that and I everyone has been touched again by breast cancer myself

[00:04:35] included though we haven't had anyone in my family. I don't know any family that hasn't been

[00:04:40] touched. So it was very important for me to be able to give back and give back in a big way.

[00:04:46] And it's something that has a, well, a sustainability to it. Meaning that I don't have to go

[00:04:52] write a personal check for a million dollars every year. I'm making it right here for them

[00:04:58] and making profits for everyone else at the same time. So what I'm really giving of is my time.

[00:05:04] Yeah, you know, it's a great charity. And as you mentioned, all of us have been touched in some way

[00:05:08] or another by breast cancer. So it's really cool what you guys are doing. I believe you are the

[00:05:13] first scientist we've ever had on the, on the excess returns podcast. Which is just another

[00:05:18] reminder to me that I'm not smart which happens a lot in these, in these episodes. But I'm

[00:05:22] wondering if you could talk a little bit about what you did? Like what kind of scientist were you?

[00:05:26] Well, so I was the first crop of molecular biologists. The ones that actually had a textbook

[00:05:34] that was called molecular biology. And I didn't realize it at the time. This is 25 years ago.

[00:05:40] And it realized how novel that was to come onto Wall Street with a molecular background.

[00:05:45] And I ended up focusing in on a virology and gene therapy, the very beginnings of gene therapy.

[00:05:51] Now we have a number of mechanisms and compounds that are out to treat diseases and form a gene

[00:05:58] therapy. But 25 years ago is just a pipe train. And it's so wonderful to see that many, many things

[00:06:03] that I worked on 25 years ago are now in humans and doing justice. So how did you, how did you end

[00:06:10] up at a hedge fund transition to a scientist to a hedge fund? Well, it's, it's kind of a funny story.

[00:06:18] So I was a scientist and I did drug development in this arena around virus,

[00:06:24] gene therapy. And I was about 28 years old. And you wear a lot of hats when you're at a small

[00:06:31] biotech company doing this. And that's what I was doing. And we were successful in a very small

[00:06:39] group of us and getting two drugs into the clinic, into humans. But I didn't know how remarkable

[00:06:46] and rare that was for a guy 28 years old. You know, I was in the lab till 2 a.m. all the time.

[00:06:52] And it's because it was just a destiny, a journey, an adventure. And I remember we had a big party

[00:06:58] and my boss, I was actually pretty disappointed because I thought these two gene therapy

[00:07:04] drugs that we made were going to fail in the clinic. And they did actually later a couple of years

[00:07:10] later because that was the beginning of myself being critical about science and saying yes,

[00:07:15] I made this. It's totally not going to work. But they had to go forward with it anyway, because we

[00:07:20] had to keep the company going. And a little bit eye opening to me and my boss at the party said,

[00:07:25] Mike, I've been doing this for 40 years. You should be really happy. I've never gotten anything

[00:07:31] into the humans and in the clinicals saving me 40 years as a peak of my career. And I looked at

[00:07:37] myself and thought, Oh, there's got to be more than this. It was one of those moments that 28

[00:07:44] years old where I had to really think critically and say, wait a minute. Do I really want to do this

[00:07:50] for the rest of my life, be in a laboratory working on very idiosyncratic things and esoteric

[00:07:57] that nobody understands except for a group of 15 people. And the answer was not really. And so I

[00:08:03] started a scouring process and say, well, what can I do? What else is out there? And I discovered

[00:08:08] that this job existed had no idea. Had no idea you could take that knowledge and go and pick stocks.

[00:08:15] I didn't even know what a hedge fund was. So I said, well, I have to learn this finance thing.

[00:08:20] I hear it's important. So I went to business school, get learns this financing and then I learned

[00:08:25] very quickly as I went to Wall Street. Oh, that financing, it actually really isn't important

[00:08:30] until 2008. And then you learned everything you learned in finance was wrong.

[00:08:37] So it's really been a, you know, right from the get go trial by fire where I landed in a spot at

[00:08:43] Oppenheimer funds who was kind enough to take me and that was a very big operation. I got

[00:08:50] very fortunate in the stocks that I picked. I picked a little HIV company with some crappy compounds,

[00:08:57] but when you added them together, they would have a profound effect. And that was our bet.

[00:09:01] We ended up owning 5% of this little rinky dinky company 25 years ago called Gilead.

[00:09:08] Oh, yes. And so we owned about five or six percent of that company and it, you know,

[00:09:13] went up whatever 50 times, a hundred times. And honestly they thought I was a lot smarter than I

[00:09:18] was and they made me the head of health care at probably 31 years old at a very, very large

[00:09:24] mutual fund. And really took them from there. At that point, it was the true trial by fire because

[00:09:31] I didn't know anything about anything outside of drugs. And so I had to learn what an HMO was,

[00:09:38] what distributors were, what MetTech was. And, you know, and really diverse. So I am broad

[00:09:44] now. And I was fortunate enough that I learned it fast enough that I could be successful before

[00:09:50] I got fired. And that's really what the business is about is learning fast enough to be successful

[00:09:57] before you get fired. And that was really how I ended up doing that and moving forward.

[00:10:04] There was a management turnover in at Oppen-Ever Funds, I think, in 04. And I said, oh my god,

[00:10:11] this is just too volatile for me. I think I'm going to go somewhere safer. I'll start going to

[00:10:15] hedge funds. And that's how I ended up at edge fund thinking that that was the safe. It's interesting.

[00:10:26] You know, we see this all the time with our guests. We see people who come from areas outside of

[00:10:31] finance and that are very, very successful inside finance. I mean, do you think that gives you

[00:10:35] like an edge? The fact that you're not like a traditionally trained. I mean, I guess you went

[00:10:38] to school for it, but you're not a traditionally trained finance guy. You came from somewhere else

[00:10:42] and had the discipline of that coming with you. Yes, I know. Yes, in that I can, especially in

[00:10:51] realm of anything science, I can see hurdles frequently that others can't. And I understand

[00:10:57] end markets and how these drugs will be used sometimes much better than others.

[00:11:01] And I've made most of my career off of those things for the past 20 years. But no, in the sense that

[00:11:10] I come in with a chip on my shoulder, meaning that oh, I already know this. I know how this is

[00:11:15] going to play out because that's not how stocks play out. Sometimes you can see incredibly

[00:11:21] tragically horrific decisions being made that will send a stock up north for years

[00:11:28] before it craters. And all the whole thing about investing is not just knowing what's going to

[00:11:34] happen, but when and the when is the key to humility and that you might have figured it all out,

[00:11:41] but that doesn't mean you're going to get the stock right. And that's the hardest part.

[00:11:46] And I'll give you a great example about Moderna, that would be a fine example. There was a modern

[00:11:51] rocket ship and cratered. And I was very vocal about this on a program such as Hedge I on this

[00:11:59] coronavirus where I was completely convinced it was laboratory made immediately. As soon as I saw

[00:12:06] most of the genetic sequence, I was just like this absolutely could not have happened in nature.

[00:12:13] Lone voice, but turned out to be pretty much the case which is happy that they work out and we can

[00:12:20] now point fingers which we should be doing. But aside from that Moderna had a wonderful vaccine

[00:12:26] as did others. And I had to figure out which one was going to be successful. And more importantly for

[00:12:30] how long and my view was they'll get the first wave. And then they will never be able to make a

[00:12:36] vaccine again that is potent against the current variant whichever that is sweeping through the world.

[00:12:43] And the big reason for it was was that the sweep would take about four to five six months to come

[00:12:51] through. And by the end of that time, well Moderna will be done developing their new variant of

[00:12:56] the vaccine just in time to match a variant that has already left the human population. So they

[00:13:02] will never be able to meet on time the variant coming through. And I knew that and I knew that

[00:13:09] that but I knew that while we were vaccinating people that Gen 2 3 4 this would be zeroes or near

[00:13:15] zero sellers. And so I had to put the bet on on the back end, but heck if you put it on too soon,

[00:13:22] you could have been out 500% being short that for that move up. So yes, it's great to have a knowledge

[00:13:31] of the basis of where you can get in trouble on how it's going to play out, but that can hurt you

[00:13:35] if you don't get the timing right. So I always have to stay very cognizant of what the world is

[00:13:42] going to do to these stocks and figure out what they think. And then more importantly when are

[00:13:47] they going to figure out what pink or any nose. And that's the inflection point. For instance,

[00:13:55] we owned a zero position in Moderna on the way down and a zero position in Pfizer on the way down

[00:14:02] as everyone thought these vaccines would be much better. And that saved our investors about two

[00:14:08] to 300 basis points of performance. And that you can see that in my in the competition. And there are

[00:14:16] two major large healthcare specific funds that are out there the trade as an ETF. And the performance

[00:14:25] there is a meaningful delta between pink and the competition. And a lot of it is because of choosing

[00:14:32] when not just being right, but choosing when. Yeah, it's interesting. You know, we're quantum investors.

[00:14:37] We're factor investors. And I was just thinking as you were giving that answer like this is probably

[00:14:41] the sector where the quantum investing probably works the worst of anything. Thinking about what you

[00:14:47] have to think about for these even though they establish drug companies to think about if they're

[00:14:51] going to be successful, but then going down to the ones that have drugs, you know, they maybe aren't

[00:14:54] profitable. You know, this is really not an area you could have probably apply a quantum

[00:14:58] investing. I mean, do you have any parts of your process? Were you screened or do anything like

[00:15:02] that? But it was just all the ground up building up to your positions. Well, for the most part,

[00:15:08] there aren't names that surprise me, meaning. Oh, well, Pfizer's screening XYZ. So I should buy

[00:15:16] that. No, I know exactly what Pfizer is doing, what they've been doing where they're going and

[00:15:22] they're pipeline. So I'm not going to screen something and something's going to jump out of me and

[00:15:27] you need to own this group. Sometimes you'll see great discrepancies, which is so rare, but we did

[00:15:34] see that in 22 as COVID was still a problem. Nobody got their medical procedures done. And so MedTech

[00:15:43] companies did absolutely terribly additionally, they had inflation problems where the cost of titanium,

[00:15:49] the cost of all these inputs increase the cost of MedTech products, but MedTech bills, hospitals

[00:15:56] at a fixed code. So they didn't have pricing power. So they had this huge problem where they had

[00:16:02] increased costs and no pricing power and slowed down in volumes. So MedTech got absolutely destroyed

[00:16:08] in 22 only to recover now in 23 and to now. So you had to be cognizant of that macro sort of factor

[00:16:18] and then put it on when the time was right. So I suppose I do sort of try to understand the

[00:16:25] high level events that are happening. But for the most part, under normal circumstances, it's a very

[00:16:32] very bottoms up space with very low correlations in their businesses between each other. Even though

[00:16:38] they trade together as group frequently, it's not really the right way to look at it because the

[00:16:43] businesses frequently are quite different. Can can you talk us through kind of within the sector

[00:16:50] break out like we've talked about drugs and pharma. You have MedTech, but what are the major

[00:16:56] I guess industry categories that make up the sector if you try to sum them up in the top,

[00:17:01] I don't know maybe five to eight would you say? Well, I'll do it in three. Okay, right?

[00:17:07] You have drugs and people say pharma, biotech, spec format, not it's all drugs. Just drugs because

[00:17:15] they all the same intellectual property issues and and and durations. So drugs and then you have

[00:17:24] MedTech. MedTech is everything where there is stick and something in you are doing surgery or

[00:17:30] or of filling a bin of tools inside of a hospital, right? And so that's MedTech medical technology.

[00:17:38] And then lastly, I group the delivery of care that's HMOs. That's hospitals. That's going to be

[00:17:45] the distributors and also I distribute I put in that too the tools component where it's the hardware

[00:17:53] that gets sold to the drug makers to do all the sort of research and discoveries all over the world.

[00:18:00] And so that's how I view the world is drugs, MedTech and then everything else.

[00:18:06] Which is just a quick side note. My wife had her ACL repaired basically probably a year and a half

[00:18:12] ago at this point. And you know, walking into one of those circle centers, it is like a revolving

[00:18:19] door and I was just like thinking to myself, if you want job security in this country,

[00:18:24] I mean, it seems like that's one of the places to be. I don't know correct me if I'm wrong,

[00:18:28] but it was like people just coming in and it was almost like use car salesman type of

[00:18:33] tactics. It seemed like for that kind of stuff. I hope you didn't get the undercoding because,

[00:18:39] you know, that's the way we know we did get up sold on that. She's a creep up. I swear.

[00:18:49] Yes. And that's called an ambulatory surgery center. And that is part of the delivery of care. And

[00:18:55] there's been a great growth in this in part because of the reimbursement, which is a little bit

[00:19:02] different than had you get this in a hospital. And then it actually ends up being more profitable

[00:19:09] if you have your own standalone center. So there's always gaming going on for the codes

[00:19:15] of how you deliver care and those codes are set by Medicare. So we have a huge boom in ambulatory

[00:19:22] surgery centers. And it's actually worked out really well because you do have that high turnover.

[00:19:29] And a lower infection rate. So for instance, hospitals have a much higher infection rates because

[00:19:36] you have truly sick people sitting there for really long periods of time getting really weird bugs.

[00:19:42] Really weird infections that fester and they're hard to get rid of. Well, you don't really want

[00:19:48] somebody coming in for an ACL reconstruction on a floor with people that have chronic long-term

[00:19:57] infections and sepsis and all that because there's a probability that you the ACL person is going to

[00:20:02] pick up one of these horrible bugs. So actually separating out those in or units from the stay

[00:20:08] in units like hospital was actually a really good idea. And sometimes the government

[00:20:15] is a little thoughtful like that on occasion. They'll get it right. So kudos to them. But yes,

[00:20:21] it is, it's like a restaurant, right? Turn them and burn them. You got to turn these tables.

[00:20:27] Get them out of that chair. You know, take the anesthesia down so we wakes up real quick. And

[00:20:32] there's business. It's business. And in America, that's a beautiful thing.

[00:20:39] Before we ask you more about how you construct a portfolio, I just wanted to ask you about what's

[00:20:42] going on at healthcare at a high level. I mean, it seems like there's a lot of world-changing

[00:20:45] things going on right now. It seems like a decade from now we're going to have innovations

[00:20:49] that we might not even imagine are possible. And I'm just wondering since you're inside of this,

[00:20:53] like what do you think you're most excited about in healthcare as we move forward like in the next

[00:20:57] five to 10 years? Well, there's a lot that's an incredibly good question and very pertinent.

[00:21:05] And I think we should put to it first that innovation is the key. Innovation

[00:21:13] cannot happen with a heavy government hand. Innovation cannot happen when the

[00:21:22] when let's say when the government chooses the drug price, for instance, if government came in

[00:21:28] and said, we're going to have national healthcare and we're going to choose the drug, there will never be

[00:21:34] innovation again. And this is what happened in all the other countries where very little is

[00:21:38] discovered outside the US anymore in almost every realm of healthcare. It is here,

[00:21:45] the United States, the polls off about 95% of all innovation. And so all the other

[00:21:50] farm-about tech businesses outside the US for the most part cratered in comparison to what the US

[00:21:57] has been able to deliver. And part of that is that painful pricing issue, right? Where oh, it's

[00:22:03] too expensive. Well actually for the most part what's so expensive is everything new. That's

[00:22:09] what's really expensive. These drugs go out patent in 15 to 17 years and they become generally

[00:22:14] very much cheaper. We're paying that premium of patent life in order to get innovation. Today

[00:22:21] the pick to sure is GLP ones. An amazing innovation that actually came out seven years ago.

[00:22:29] They just developed it and it was available seven years ago. They just made the dosing a lot better

[00:22:35] over the past seven years to make it so it could be used for everyone, for the masses with the once

[00:22:40] weekly or even more infrequently in the future injection. So innovation is really the key to our

[00:22:49] success and the United States success. We export all this innovation all over the world

[00:22:54] and it's a building block to build the next thing which brings me to the next thing. And the next

[00:23:00] thing is we're in a golden age, a renaissance of discovery and development. We are able to take now

[00:23:08] from the where to the whiteboard up now to my left but take from the whiteboard a concept

[00:23:16] to the clinic in a period of two to three years. And that's like when I back in the day 20 years ago

[00:23:24] it would take seven years to do that and we do it with much much better fidelity, meaning that

[00:23:30] we know much more about the compounds. We know much more about the toxicity. The animal models are

[00:23:36] far better, meaning that when you take it into the clinic and put it into humans, you have a

[00:23:40] pretty good idea what the risk really is. And so the hit rate on getting into humans and meeting

[00:23:46] successful is very, very high now. For instance, it's pretty rare for a drug to fail in phase three

[00:23:55] clinical trials now because we know so much about it by the time we get to phase three.

[00:24:00] 20 years ago things failed in phase three all the time. And that's really the progress of the

[00:24:07] the machinery and the science and the models all put together have generated incredible returns.

[00:24:15] So we're in an extremely exciting spot right now where we are starting to understand metabolism

[00:24:23] or understanding cancer. And the next thing we're going to really take a big leap on

[00:24:30] and this is a little bit distance, not but in our lifetime. It is going to be aging, true aging as

[00:24:37] to why. And there's amazing early science going on this to here to try to figure that out.

[00:24:44] And I have all of my own personal views on where it's going to go and I'm watching very carefully.

[00:24:48] But that will be the next really big innovation will be aging. And that is going to change

[00:24:56] the face of humanity to have us age more gracefully over much longer periods of time.

[00:25:04] Everything will change and that will probably be the beginning of humans.

[00:25:11] Well, let's just say an incredible leap in technology. Just imagine if so many of our scientists

[00:25:17] that were brilliant, they could turn their career into three or four X the duration. That would

[00:25:22] just be absolutely stunning outcomes for science and progress for humans. So that's going to be the

[00:25:28] big, big thing in healthcare over the not too distant future. But in the meantime, we have tremendous

[00:25:33] treatments now for niche indications, not just big ones like GLP but rare, rare things to treat,

[00:25:41] rare, rare kinds of dishains muscular dystrophy, for instance. And many other very rare diseases

[00:25:47] that only affect 15, 20,000 people. But we can modify their lives if not cure them or effectively

[00:25:54] cure them are these things with the drugs that are on the table right now and coming out very soon.

[00:26:00] So it's just mean, incredibly exciting time in healthcare.

[00:26:04] So you think on the on the aging, we're going to be able to actually slow down the aging process

[00:26:08] once we better understand it? Is that the idea? Yes.

[00:26:12] That's very and so you think that that could lead to a significant increase,

[00:26:14] you know, both in lifespan and probably health span as well.

[00:26:18] Okay.

[00:26:19] It has a lot to do with the quiescence. This is my view but I do read up on the don occasion.

[00:26:26] But I believe it has a lot to do with the quiescent cells.

[00:26:31] The humans and actually all animals have a energy saving mechanism for when your cells start to

[00:26:39] sputter out and die. They don't actually die. They just kind of hang out there and go idle.

[00:26:44] They call quiescence. And the reason why they stay that way and go idle is because it costs so

[00:26:50] much energy for your immune system to walk in, kill it and clean it up. So by the time you're 60,

[00:26:56] 70, 80, 100 years old, your body is jam packed full of these quiescent cells and your organs no longer

[00:27:03] function. Your skin looks old. That's the reason why your skin looks old. It's all these quiescent

[00:27:07] cells piling up on each other because it's much more energetically efficient to leave them there

[00:27:13] rather than spend all the energy to clean it out and fix it. So I think that's going to be one of

[00:27:19] the giant directions that science is going to take us in cleaning up those quiescent cells

[00:27:23] and we'll see our organs and skin and everything improve.

[00:27:28] And the other one I want to follow up with is cancer, you know, because that's obviously one that's

[00:27:32] as we mentioned at the beginning, that's touched a lot of our lives. And do you think five,

[00:27:35] 10 years from now we're going to have been made major progress in terms of our ability to prevent

[00:27:39] treat, you know, do everything we need to do around cancer? Yes. You know, very likely 20 years from

[00:27:46] now, cancer will be a for most indications just a disease that you endure much like an upset

[00:27:57] stomach. I don't know. You take your medicines for it and pretty much have a normal life or as

[00:28:02] normal as you can. We've seen this happen in many indications already, for instance, multiple myeloma.

[00:28:08] Multiple myeloma was a type of blood cancer where you would die in about five years and enough

[00:28:15] unique interesting drugs had come out over the past 15 years where people don't die from multiple

[00:28:22] myeloma anymore. They die from old age. And so now that you got people multiple myeloma,

[00:28:27] 20, 30, 40, well not 40 years out. But on drugs now we have them on 20, 25 years out. And the

[00:28:34] condition is in check because of the drugs. That's what I think it's going to look like where they're

[00:28:39] very well may not be a cure to it, but you learn to put it in check and live with it and live your

[00:28:47] life. Eventually there may be a cure. But I think in our lifetimes 20 years from now, it'll just be

[00:28:52] a past that you have to get treated. We're all seeing a lot of innovation in AI right now. How

[00:28:59] how much of an impact is that having in the healthcare space? Well, it never it never wasn't there.

[00:29:06] AI is not new. AI is only new to everybody because you can talk to a computer now and it tells you

[00:29:12] what your homework is, right? It'll help you cheat. And and that's why everyone's excited about AI.

[00:29:19] But AI's been there the whole time using computers and references to try to find things that humans

[00:29:26] can't see easily. And so there's always been tools employed by many companies to try to do just

[00:29:33] that to spot things that human can't see correlations and such. So it's really just a progression.

[00:29:40] Maybe they're more interested in it now because it's very busy and they'll spend more

[00:29:44] infrastructure on that. But it never wasn't there. It's always been there as long as the technology

[00:29:51] was there to do it, we were doing it always. You mentioned ozempic in the GLP one drugs,

[00:29:58] what everybody is talking about right now? How significant do you think the impact they're going

[00:30:02] to have going forward is substantial. I mean for disclaimer, I'm on one. I'm on Mongero by Lily.

[00:30:13] I think that's the best molecule of the bunch and it's helped me out an awful lot.

[00:30:20] So the I'll tell you, the big market, we already know what they're developing it for. There's a lot

[00:30:27] of new indications to come out and of course weateloss but there's a whole bunch of other things

[00:30:32] that go with that. The quality and productivity of your nephrons or kidney issues.

[00:30:38] And then there's everything, sleep apnea to many other things that can be treated by losing weight,

[00:30:46] simply losing weight. The way that this molecule and system works is that it

[00:30:52] fools your body into thinking you are a fuller. That's all. So you end up eating less in a nut shell.

[00:31:00] That's what it does. It's very well tolerated. But right now the impediment to it is going to

[00:31:07] be government, the Medicare covering GLP ones for the elderly. It's not covered. So you have millions

[00:31:16] of people that should be on a GLP one, not able to get it. And good news for them is they also

[00:31:23] happen to be millions of registered floaters. So I believe that it will be covered by Medicare and

[00:31:30] the not too distant future. And that's when you'll see millions of new patients coming on.

[00:31:35] And look, if you can lose that weight, you will have improved cardiovascular factors,

[00:31:44] diabetic. I mean, you just go down the list. They'll be finding things in the data that they didn't

[00:31:50] even anticipate. Maybe it has an impact on Parkinson's disease, maybe Alzheimer's. Those are things

[00:31:56] we can't find a direct correlation to right now, but you might be able to find it in the data.

[00:32:00] When they mine the data, 80, 70 years from now, it might become clear that there's a trend.

[00:32:06] I think it's an enormous category. And the way that I look at it,

[00:32:13] I look at a lot of fast followers that are out there and there's not a lot. There's a handful.

[00:32:19] But at issue is there are all going to be four years behind the Lylea and Novonordisq.

[00:32:24] And I really don't see anybody displacing them for the foreseeable future.

[00:32:30] I think it's a two-player market, and that's it.

[00:32:34] When you talk about all this stuff going on in healthcare, I was thinking it's good we have experts

[00:32:38] like you to build portfolios. And I don't have to do it because it seems like it's a challenge.

[00:32:41] You've got established companies with established drugs. You've got companies with drugs

[00:32:44] that are way out in the future. You've got these three different areas. How do you think about

[00:32:48] looking at all that and coming down to a process to build a portfolio?

[00:32:52] Well, I do a real bottom-up and a shotgun approach. And then I look at everything.

[00:32:58] I don't have a theme. I'm reading constantly and monitoring what I like to call the soap opera

[00:33:04] that is the whole scientific space in healthcare. And I will find inconsistencies.

[00:33:13] So it's not just... And usually it's around new product stories or geographic expansion,

[00:33:19] things like that where I can model it out and figure out something that the street doesn't quite

[00:33:25] see or understand. And I'm a bit more aggressive with pink because I treat it like it's my own money.

[00:33:32] And I'm here to have meaningful gains. And that's how I approach it. And so sometimes I'll have

[00:33:40] physician sizing that's a little bit larger than my competition. But it's always there for a reason.

[00:33:47] And a very, very specific reason. So and I think that the results demonstrate that.

[00:33:55] And so is it purely bottom-up? I mean we talked about those three groupings before. Do you think

[00:33:59] I like at the top high level I want exposure to each one of these? Or do you just think I want

[00:34:03] to get good companies and I don't really care. You know let it fall the way it falls.

[00:34:06] It changes. Sometimes you do have to be very cognizant of that sort of grouping and benchmarking.

[00:34:14] But most of the time I think that you don't. You really want to be doing a true bottom-up approach.

[00:34:22] And because that's the only way that I'm going to outperform them. For instance,

[00:34:27] if you look at the benchmarks and then look at my two nearest competitors,

[00:34:31] they have a portfolio that looks very much like the benchmarks.

[00:34:35] And so what that tells me is that they're not really interested in outperforming too much

[00:34:41] just a tiny bit and that's good enough. Well, for pink and for our charity,

[00:34:45] that's not good enough. We have to do a heck of a lot better than that. And it's also my money.

[00:34:51] So I treat it as if it is mine and I bet just like that I did for the past 20 years in running a

[00:34:58] hedge fund. I guess the obvious answers you're not doing shorting anymore but other than that what

[00:35:03] is the biggest difference between when you ran the hedge fund and what you're doing with pink?

[00:35:08] Or is it very similar?

[00:35:11] It's different. It is much less volatile. The names that I have in our book,

[00:35:25] the ones that say have binary risk to them are smaller and the fewer of them.

[00:35:32] And so a big reason to that is that I can't hedge it. So I could do very exotic things when

[00:35:39] I was at a hedge fund. I have a view on something out of a view on timing and then I go out there

[00:35:44] with a 10,000 calendar call spread. And I was known as one of the very large option traders

[00:35:53] out there in healthcare. And I actually said people don't do options anymore.

[00:36:01] Except for like the daily ones on the ETFs but as I watched it in the names there aren't as many

[00:36:06] options traded anymore in individual names. Kind of surprising. But yeah, so it is different

[00:36:12] and that the risk profile is different because the hedging profile is different.

[00:36:17] The risk that I do put on it is out there for a very specific reason. And frequently it's

[00:36:23] something that the street doesn't understand yet. But I do get a lot of questions on it like when I

[00:36:28] do something in the book it appears the next day publicly that I did this or I did that.

[00:36:34] And I get a lot of calls on it since I what are you thinking with this right because all the hedge

[00:36:37] fund guys they know who I am. I mean, I competed against them for 20 years. This is screening

[00:36:42] against your public holdings to see what we're adding and stuff. Yes, what are you doing? Absolutely.

[00:36:46] One day later, yes, whatever I'm doing they're watching. And it's good. Look, I have a lot of

[00:36:53] people that I've trained and work with. There's many of the people that have worked from here very

[00:36:58] successful running their own hedge funds and or there are very large books within a giant hedge fund.

[00:37:05] And I talked to them every day. There's my best friends. We're all still part of critical mass

[00:37:10] which was the fun that I ran. How do you think about concentration? We run concentrated

[00:37:16] portfolios and we're always striking this balance between, we want to be very concentrated but we

[00:37:20] also want to think about like we've got end-ingesters using these things and they've got to be able to

[00:37:23] stick with whatever it is we're doing. Like how do you think about concentration when you're building

[00:37:28] a portfolio like this? Well, I submit when you got the nuts, you've got to go big. That's it.

[00:37:35] When you see something that is some of the street doesn't understand and it's very differentiated

[00:37:42] you don't have to go big then at that moment right. You have to go big as soon as they start to

[00:37:49] figure out what you already know and you'll see it in the stock. And that's that's frequent what

[00:37:55] I'll do. You never want to be the first one who's buying into a good idea because you'll never get

[00:38:01] the bottom, you'll never get the bottom. And same thing with exiting, you'll never get the top.

[00:38:07] My goal is to get the in-between and sometimes that in-between can last for years rather than months.

[00:38:14] So I think it's awful lot about that but I'm very cognizant that I'm not going to whip it around

[00:38:18] and do it with perfect flair. So frequently I will wait until I see it and then I understand

[00:38:26] what everyone else is seeing. They're basically seeing the homework that we already had done

[00:38:31] and then taking action. So we typically start with a small position and then you'll kind of add

[00:38:37] over time. Is that your typical profile? It depends. I'll give you an example this week.

[00:38:44] I bought a five four percent position in Cooper companies. This was last week, late last week.

[00:38:52] It's a contact lens maker. One of about three. It's kind of like an oligarchally. If you

[00:38:58] want cartel, I think it's more a cartel. The contact lens cartel and Cooper companies is a share

[00:39:06] gainer because manufacturing is an issue for all these guys and a price taker. The whole group

[00:39:14] is taking small price. So I look at where the street is modeled. I look at what they're doing

[00:39:20] and there's a big disconnect. I've been watching a stock, watching a stock and it came in very

[00:39:25] sharply into the quarter and I was like, they're all wrong. This is just hedge funds getting afraid

[00:39:30] shaking it out and I walked in with a four percent position overnight and they smoke the quarter

[00:39:37] and they're going. In fact, the street numbers didn't come up enough. They only came up to 8% growth

[00:39:42] for this year and 7% for next year. This needs to be in the low double digits 11 to 12. Well,

[00:39:47] that has a profound impact through the P&L. So I now have a five percent position in Cooper.

[00:39:53] I think it needs to go up about 40% between here and your end. So normally, I don't put on 4%

[00:39:59] overnight but the opportunity was there because they sold this thing, 8% to the quarter like a

[00:40:04] straight line over two or three days and I said, they're all wrong. This is the entry point. Go

[00:40:10] and I don't always do that but I have to look we're here to make money right? So sometimes I have

[00:40:16] to do it because the market is telling me I have to do it. How do you think about valuation? I mean

[00:40:22] that would seem like an interesting thing with these types of companies. I mean, you have to figure

[00:40:25] out what the street thinks about what's going on versus what you think about is going on. But how

[00:40:30] do you think about valuation like an evaluating potential opportunities in healthcare? Well,

[00:40:35] in healthcare there's basically two, huh, I'll give you an example.

[00:40:44] A long thermal electron, TMO. Thermal electron and all the other tools companies like it

[00:40:51] have guided to a hockey stick and growth in the back half of the year because the front half is

[00:40:57] going to stink. Now why they all think we're going to have a hockey stick event in the back half

[00:41:03] of the year and growth? I have no idea. I literally have no idea. I think they're all just looking

[00:41:09] at each other like yeah, back up right? Right? Right? It's trading at 25 times forward for a single

[00:41:18] digit grower. So Apple is trading at 24 times forward for a no-digit grower.

[00:41:30] I'm not sure how much valuation makes sense in this market and if I simply invested on valuation

[00:41:38] metrics, I would have underperformed horrifically just terribly and our investors would have been very,

[00:41:45] very upset. So it's really my job to understand when valuation matters and when it doesn't matter so

[00:41:53] much. Basically what I'm looking for in a nutshell is simply meaningful earnings revisions

[00:42:03] to outer year numbers. That's what I'm looking for and it's going to happen around usually new product

[00:42:10] stories or pricing or a market expansion that many don't see and that takes place in MedTac

[00:42:18] in drugs and all of them. That's really what I'm looking for but betting on valuation alone is

[00:42:30] a very, very good way to put up very, very bad returns. Just wondering about that idea you

[00:42:36] talked about with valuation because that's something like those of us that are trying to

[00:42:39] fundamental investors have been thinking about for a long time. This idea that fundamentals and

[00:42:43] valuation matter a lot less in the market than they used to and there's a lot of reasons for that

[00:42:47] including some of my Greens work who we just recently had on but I'm just wondering what you think

[00:42:51] about that idea that you fundamentals matter less in the market when you're evaluating individual

[00:42:55] companies than they used to in the past? Well, what we're talking about in valuation is essentially

[00:43:04] discounted future free cash flows. That is what valuation is. How much am I paying for those

[00:43:12] future cash flows? We've gotten into a world over the past 15 years where we now have two

[00:43:20] generations of investors that have never seen a down market and the view is that the government will

[00:43:27] never let stocks go down ever. History, disemories but you get these moments in time where

[00:43:39] valuation doesn't matter because the government has not let stocks go down

[00:43:45] and it's very important to learn from that and listen to when they might be faked out

[00:43:51] when the government can't come in to overspend by two and a half trillion dollars.

[00:43:58] That time is very likely next year. The street doesn't know it and I'm asking myself right now

[00:44:05] when are they going to figure it out? And that's what I'm spending a lot of time or at least

[00:44:09] a lot of thought on when are they going to figure it out? Do we have impossible counts for 25?

[00:44:15] We have a high yield wall of refiyes that are going to be ugly as all heck and it's just going to grow

[00:44:20] every year for next year. And then we have a growing commercial real estate disaster that's underway

[00:44:28] which is going to affect virtually every mid-sized bank in the country. Those are all going to be

[00:44:34] really big issues to think about and valuation may come into play at that time. So for our

[00:44:39] pink investors, I am cognizant, I'm watching and we'll get it right. I wanted to go back to

[00:44:48] the point on binary risk. And I'm thinking a lot of investors out there, retail investors in particular,

[00:44:56] you know they dabble in these biotechs and every looking for this company has this blockbuster drug

[00:45:02] and is it public yet? You get the stories that people think they're going to find an ex-skiliad.

[00:45:10] But just talk about that concept of binary risk and why it's so important in managing risk,

[00:45:16] particularly with some of these types of companies.

[00:45:20] Well especially in the drug arena, we're actually faced with binary risk all the time and you don't

[00:45:25] know it. I'll give you an example. Do you remember that drug called Viox by Merck? It was a

[00:45:32] pain drug, a COX2 inhibitor. And it probably never should have been approved because it caused

[00:45:40] serious GI issues but it caused a heck of a lot more than that. It caused heart issues in the

[00:45:47] data and they pulled a drug overnight, just goodnight and Viox, the pull from the market

[00:45:53] and massive lawsuits and so forth. And so a company as big as Pfizer or a Merck rather that was Merck's

[00:45:59] drug absolutely blew up and nobody saw it coming. And you know it's down 30% in a day.

[00:46:05] And that is one of the issues that we always deal with in the drug world is that stuff can go

[00:46:11] wrong that you couldn't have seen coming. It's rarer for the MedTech world because you don't have

[00:46:19] what I like to call a purple eyeball, meaning if you look at enough patients in a study you're

[00:46:24] going to find somebody who has a purple eyeball that's unexplainable and the drug needs to be

[00:46:28] pulled from the market. And that's that I'll always joke about that on the desk where is the purple

[00:46:32] eyeball, where is the purple eyeball. You don't get that in MedTech. You only get that in the

[00:46:37] drug arena. So we actually deal with all the time binary risk whether we know it or not

[00:46:43] especially in the drug arena but there is a lot of money to be made, a lot of returns to be made

[00:46:51] in getting these sort of things right and when I do bet on it, I usually bet quite small because

[00:46:57] I find the real money is made not on a binary event, all of it's made after the event.

[00:47:03] There's only so many people that can play that binary event meaning hedge funds and retail

[00:47:08] but the really big money is made figuring out what the actual end market is going to be

[00:47:13] and what that will look like over many many many years. That's really where the vast majority

[00:47:18] of my money is made. And the company you mentioned earlier Cooper while they're not probably

[00:47:25] susceptible to that binary event, they do have me as part of the arm twisting with as a contact

[00:47:31] where they are. I think I've probably bought years and years of contacts from those guys at

[00:47:37] 300 bucks a pop and there's no other options out there so you're taking the dailies.

[00:47:44] Well, actually I used them monthly month of ones but yeah and there's always rebates in there

[00:47:52] and you know but they're still expensive. Yeah, no it's really expensive. The dailies are

[00:47:58] really taking off I don't know why but well it might be because you know that it's kind of

[00:48:05] you use them for a day you discard them and I do know that you know I'm not good about

[00:48:10] when I should be taking these in and out so I think they kind of get dirty and kind of start to

[00:48:14] irritate your eyes. That's when I kind of use that's my signal. It's like okay I've been marinating

[00:48:18] these things too long time to discard them so anyways but yeah I've never used contacts but

[00:48:24] that's helpful. Thank you. So let's talk a little bit more just about I guess the macro landscape

[00:48:29] it sounds like you know you've got some concerns looking out over the next 12 to 18 months what's your

[00:48:36] current where are you on word inflation's act right now? There's a lot of polls and inflation

[00:48:44] I mean the biggest one that I think we're going to have to deal with over the next years is

[00:48:52] declobalization and that is going to have a profound impact on the cost of things being made

[00:49:02] and we're enduring it right now and that's why I think in part the wage growth is pretty sticky

[00:49:08] so I think that that is going to be a problem and not something that the Fed really anticipated

[00:49:14] none of this is part of their model. They have a 150 PhDs and I have no idea what model they're

[00:49:19] putting out because the Fed's been essentially wrong on everything forever you know it's whatever

[00:49:25] this latest data point that's what they say moves forward that's what I literally think how

[00:49:29] how they think so if it's good great we're going to cut rates and if it's bad oh no we're going

[00:49:33] to hike rates or pause you know so they see no further than the data point that happens this week

[00:49:40] so that's a huge issue for us I think inflation has to abate though a bit but it's still going

[00:49:46] to remain sticky I think we're really stuck in a 3% plus environment for inflation and more

[00:49:54] importantly though it's how it affects us in the real world and the real world is our federal

[00:49:59] government has to find another 30 trillion dollars to borrow over the next 10 years or so

[00:50:05] and 45% of it or so has to come from overseas so we're going to have to offer a meaningful interest

[00:50:13] rate in order to get their attention and they're purchased we need it and so it's if they're

[00:50:19] going to run up debts like that and I think they have to we're in a real pickle we're also in a

[00:50:24] real pickle come 25 and we have an economic slowdown that's pretty meaningful at the same time

[00:50:30] what happens when the Fed starts printing money do we turn into a Japan where we just can't stop

[00:50:36] ever printing money and I think that that's highly probable that it'll be politically impossible

[00:50:43] to stop printing money and that's my biggest fear at the same time though it will be tremendous

[00:50:48] for stocks you know if we have a government over spending and printing money at the same time

[00:50:54] and they don't really care about inflation I think that that's that's exactly what's happened

[00:50:58] in Japan where they're like their chair you know they want to get inflation now they get inflation

[00:51:03] oh we can stop printing when no we're going to print even more money they printed more money

[00:51:08] when they got inflation in order to suppress the yield curve so there's an incredible cerebral

[00:51:14] pickle where they want to perpetually lie to us and have us buy it but the story is getting worse

[00:51:19] and worse and worse but they cannot stop printing because all the assets will collapse immediately

[00:51:26] I'm afraid the US will we'll turn into a very same predicament because it's much more politically

[00:51:32] expedient just simply print because stocks go up and then everyone's happy even if there is

[00:51:38] inflation so that's the trade that they'll probably take and that's what I think is going to happen

[00:51:44] you know I don't know if that would have been possible and I don't know if the market really took

[00:51:47] them seriously at the time but there was a point where when rates were like one or two percent

[00:51:52] and Trump was in office and he was saying you know let's issue I don't know how much in debt to try

[00:51:58] to you know lock these low interest rates in and I don't know if mechanically it could have been

[00:52:03] done I'm not that familiar with government issuance and things like that but you know at 5% versus

[00:52:10] 1% you know and where interest rate interest rate expense costs are for the country and might not

[00:52:16] have been a bad that idea um it's been speaking of Trump and maybe politics a little bit I do you

[00:52:22] have any thoughts on the way the market might react to possible election outcomes

[00:52:31] well I think what has happened over the past four years actually uh is a

[00:52:38] an incredible fiscal effort to get uh the current administration reelected

[00:52:44] whether it be not paying back student loans or dumping the SPR when we never really needed to ever

[00:52:51] or uh or running the the financing of the treasury all on the short end of the old curve to

[00:52:58] offset quantitative tightening or wildly overspending during a peak employment period

[00:53:06] in order to goose everything you could possibly imagine right up to November and it all ends

[00:53:12] right after November you know build back better comps um you know the SPR needs to be refilled

[00:53:21] that's the petroleum reserve and uh the treasury is going to be held pretty pretty tough on the

[00:53:28] short end of the yield curve so whoever walks in is getting a flaming bag at dog shit in my view

[00:53:34] and saying thank you come again you know and that's it uh where you're walking into uh uh you

[00:53:40] know a refi cycle and high yield that's crap uh the you're you're a massively overspent government

[00:53:47] which is going to have real difficulty doing an encore next year they remember if they're

[00:53:52] going to do it next year they actually have to have it done this here at a budget for next year

[00:53:56] and my bet is that nothing's going to happen to that degree even remotely so it's already going

[00:54:01] to be cast the 25 is going to be tough so we just have an incredible number of hag winds walking into

[00:54:07] whoever takes office and don't forget we have the trump tax cuts which expire um I think in the

[00:54:14] spring and next year they were only deemed temporary everything everyone thinks forever but

[00:54:19] that's going to have to be trillions of dollars of uh debt that they're going to have to find

[00:54:25] to spend to keep those alive uh and I think there will be great uncertainty at that point in time

[00:54:32] that they will be I think that'll be a big overhang for next year in the in the tape

[00:54:38] flaming bag of dog shit that is the first on the accessor terms podcast yeah you had to claim that

[00:54:44] Mike that's that really me got whoever takes that all the office uh got album got album so

[00:54:54] well listen we um we like to ask all of our guests sort of a standard closing question

[00:54:59] and that is based on your experience in the markets if you could teach one lesson to your average

[00:55:03] investor what would that be the most important thing to being a successful investor

[00:55:11] is booking your gains that's it booking your gains

[00:55:22] also secondarily is also containing your losses but you cannot make money unless you actually

[00:55:30] make money and you do so by booking gains never be afraid of it you can always go back and buy

[00:55:38] it again tomorrow good stuff thank you very much Mike really appreciate it it was a real pleasure

[00:55:43] being here thank you so much for your time thank you