Show Us Your Portfolio: Mike Taylor | Inside the Investment Strategy of a Hedge Fund Veteran

[00:00:00] You get rich or die trying. So that's about it. And that is a very dangerous place to be. And that's where guys fail because they keep looking and say, it's so cheap, but it's so cheap, but it's so cheap. I got to get bigger. Every day that I turn the lights on and get to work, I'm wrong. I'm gonna be wrong about a whole lot of stuff. But when I look at the P&L at the end of the week, at the end of the month, has it outperformed? Being a successful portfolio manager.

[00:00:30] It requires not just having a plan, but also being the chameleon. When you got the nuts, you better be big. And so I won't say how big. Yes, I will. So big that I get a little sweat on my forehead at night, just before I go to bed. And then I know I'm big enough.

[00:01:01] So you become a better long-term investor. Jack Forehand is a principal at Validia Capital Management. Justin Carbonneau is a managing director at Life and Liberty Indexes. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Validia Capital. In this episode of Excess Returns, Jack and I sit down with Mike Taylor, portfolio manager of Simplify's Pink Healthcare ETF, to talk about his personal approach to investing.

[00:01:24] From what he learned at working in some of the world's top hedge funds to investing in healthcare and the qualities companies need to have in order for him to have high conviction, we talk to Mike about all these things and much more. Mike brings a thoughtful, humorous, and sometimes edgy approach to this Show Us Your Portfolio episode. As always, thank you for listening. Please enjoy this conversation with Simplify's Mike Taylor. Hey, Mike. Thanks so much for joining us on Excess Returns. We appreciate it. Hey, thanks for having me. So today we're going to talk about your personal portfolio, your approach to investing.

[00:01:53] We do these episodes where we jump on with folks like you and talk about how you think about investing, how you think about managing your portfolio. I know the conversation will bring us to investing in healthcare, the Pink ETF you run for Simplify. We might get into some macro-related stuff and how you're thinking of the markets and how that's influencing the way that you're positioned maybe in the ETF, but also with your personal investments.

[00:02:21] So really appreciate it because sometimes these conversations, since we're talking about someone's personal approach to investing, it's a little bit different than maybe how you run the ETFs publicly, let's say, because that's obviously a strategy that has a specific theme or whatever. Your personal approach might be somewhat different. But where we like to start with these is just at a higher level.

[00:02:46] So when you think about your personal long-term goals, what are you trying to achieve with your investments? Get rich or die trying. So that's about it. But I want to suggest – well, I actually mentioned that Pink is very much like my personal book because I'm one of the largest shareholders in Pink.

[00:03:10] So I treat it as if it is my own money and my own investment because it really is and it has an impact, just like all of you investors. And so I think that you will find, at least in the healthcare investing world, in the ETFs and the actively managed funds, I think that I am the only one who has a material holding in their own ETF.

[00:03:33] And I think that makes a tremendous difference, especially when allocation of alpha or putting on extremely idiosyncratic bets, which we have an incredible number on right now in Pink. Just how important – this is sort of outside the personal word, you want to go outside the personal portfolio a little bit.

[00:03:51] But when looking at various strategies, how important is it for you to know that the person managing the portfolio has some skin in the game in terms of they're buying their own fund or strategy? When I look at my peers or competition to Pink, essentially – and many PMs are better than others, as evidenced by the performance dichotomy.

[00:04:22] But almost none of them have any material skin in the game. And they are there really trying to prolong their career, collect their check. And really, for the vast majority of portfolio managers, a great outperformance is 200 basis points, and that's a good year. So if the group is up 10%, you're up 12%, that's tremendous.

[00:04:47] And so they're not really striving for material outperformance. They're just relative outperformance that's okay. And as evidenced by – if you take a look at the past three years of performance, and I may be wrong on this. You may be able to correct me. I think that Pink may be the only fund that has outperformed the benchmark. So – and that's a big reason why we have a five-star, morning star rating.

[00:05:18] And of course, I should add that all of the fees, the net fees from the Pink Fund, go to a great cause. They go to the Susan G. Komen Foundation for Breast Cancer, and as does my compensation. So I'm compensated through this fund by the performance. And I think that that is a great delta between me and peers so that when investors come in, they know that it's not just their money in there. It's my money in there.

[00:05:45] And that's much different than all the other guys, gentlemen, ladies, that do not have skin in the game. And what do you think about your retirement – how do you think about retirement? Do you think about it in such a way that, you know, you have retirement plans? Or what do you think about when you're retired? Is it, like, relaxing? Or is it, like, do you plan to try to work for as long as possible doing what you do?

[00:06:11] I'm laughing because I just had this conversation this weekend with one of my guys. So for many of you viewers who may not know, I was in the hedge fund world for a very long time. And most of my career was at Citadel and at Millennium. At the time, I didn't know that that was unique. It was just an incredible opportunity.

[00:06:37] I went and did that at Citadel, and then Millennium made me an offer that I simply could not refuse. And I worked the remainder of that part of my career there. I didn't know until later that that – it's sort of like the Harvard versus Princeton of hedge funds. And that it is the biggest guns, the brightest minds, and a very grueling environment for most with a very high fail rate.

[00:07:03] But if you're successful there – unfortunately, I was – it can turn into a tremendous career. And I trained a number of folks in healthcare that are now running money, some of them extremely large money. In fact, I think I kind of added it up. Of the people that I trained and worked for me, they constitute about 15% of the entire healthcare hedge fund world now.

[00:07:28] So when I talk to my guys every morning, we find out what we're doing, what's going on, they massively move markets. My God. So it's really wonderful. One of them, a very close right-hand fellow of mine, was saying to me that they either want to change their dynamics of compensation or go and do it themselves or retire. And that was a wonderful conversation I had.

[00:07:56] And I'm screaming at the top of my lungs, what the hell are you thinking? Retirement's not – we don't retire. There's no retirement. We don't do it. In fact, my best-case scenario – and I've always said so on the desk because people would ask me, well, what's your plan? You know, you're not going to do this forever, blah, blah, blah. I'm like, no, no, no. Best-case scenario, I leave this desk in a body bag. And that would be fantastic.

[00:08:21] That's a wonderful exit because even when I go on vacation, I'm just like, God, I can't wait to get back to the desk. And that's just how it rolls for people like us. You just really, really love it. You love the mental intrigue, the curiosity, but also the challenge of being wrong and still making money. That's the hardest part because I always think of myself as every day that I turn the lights on and get to work, I'm wrong.

[00:08:51] I'm going to be wrong about a whole lot of stuff. But when I look at the P&L at the end of the week, at the end of the month, has it outperformed? And the answer frequently is yes. And I'm like, huh, I'm wrong. And I still outperform. Okay, we've got something good here. Let's do it. Let's go. And I love that part and that mental challenge that's endless.

[00:09:14] And it really, in healthcare, it takes not just the scientific acumen, the mathematical acumen and listening and understanding and driving and putting puzzles together. But at this point in my career, it's really a whole macro view. As you know, healthcare is frequently a ping pong ball between utilities and tech where they're either buying one or selling the other. And it's back and forth, back and forth. So you really need to know, did NVIDIA miss the whisper?

[00:09:44] Yes. Did they miss the guidance whisper? Yes. Is it putting in a lower high, even though the news is incredible? Yes. What does that mean? Well, everyone, healthcare is underperformed for three years and Apple is down and NVIDIA is putting in a top and Tesla put in a double top. And those are the big names that everyone else is involved in to the nth degree. What does that mean for healthcare? Well, that is an approach that my peers do not employ.

[00:10:14] Justin, I have to say, get rich or die trying the first question and leave the desk in a body bag for the second is the best answer we've ever received. Those are really both fantastic. I wanted to ask you about, you mentioned Citadel Millennium. And I'm wondering, when you think about building your own portfolio, are there any key lessons you think about from your time there that you've learned that you apply to how you manage your own money? Yes, absolutely.

[00:10:40] So when I had a medical issue that forced me to step away from the desk a while ago and dismantle my team. And fortunately, I got all of my guys got incredible positions and went and ran with that. And now they're sort of the titans of healthcare now. And I'm very proud of them. But Millennium wanted to keep me on, even though I couldn't come to work anymore, to fix broken toys.

[00:11:10] And because I'd been there for a long time, I developed a lot of relationships and trained a lot of very remarkable people. They said, maybe you could do that for our guys that are getting in trouble. Because I mentioned to Millennium many, many times, you shouldn't have fired that person. You shouldn't have fired that person. I'm glad you fired that person. But usually it was just performance-based and they let people go.

[00:11:34] You do have the instance where you have a four-sigma event, a five-sigma event, meaning sort of one in 10,000, one in 100,000 events. Where, you know, someone gets a long wrong, they get a short taken out. And then a week later, they get their biggest short taken out. Boom, they hit their limit, you're fired. Well, that's sort of a five-sigma event. And you really shouldn't actually fire that person.

[00:12:00] In fact, you want to wait three weeks and then triple the size of their book. And I explained to them why the math behind that. And the math behind that is, okay, if you got destroyed on a five-sigma event, that means all your peers got destroyed on it too. Which means many of them are getting fired at the same time or reduced at the same time.

[00:12:24] So over the next three to four weeks, all the names are going to go absolutely crazy every day as people are liquidating their books and downsizing and getting fired. And by the way, you saw this in consumer over the past two years. Two years, consumer has been a disaster because of GameStop and others, of total insanity and books getting unwound. So you had this series of five-sigma events. Everyone got fired.

[00:12:49] But if you can find that right window and triple your capital, well, there's nobody else on the other side. They all liquidated. And now you can make a fortune. And I'll cite a fellow who just did that was Jack Woodruff at Candlestick Capital. I happen to be an investor from day one there. Brilliant guy I know from Citadel. And he had a really rough two years of very low returns. Not negative, but low.

[00:13:15] But he did it in a sea of disasters of hedge funds being unwound and people being fired left and right. And that was largely because of the COVID money and retail being able to barrel in and do crazy things, which they did. And he put up a unbelievably magnificent year last year. And the reason was everyone else got fired.

[00:13:36] So what I would have to say, long story short, on PMs and the mistakes that they make, and I've seen this many, many, many times, them getting fired for that one in 10,000 reason is what happens about 50% of the time on why hedge fund managers fail. It's because of that. And frequently it's outside of their control.

[00:14:03] But usually they're a little bit green and they don't know that this is going to happen. Meaning when you get trades wrong in size, what the aftermath is going to be of a zillion books unwinding around you. And frequently the center book at the hedge fund unwinding on top of you, literally selling your book. And they don't realize the magnitude that that will, what will happen there. And so there are ways to work on that.

[00:14:31] And that's especially about what's called risk reversals, which will be derivatives trades around your positions. And that's something that I would do. For instance, I would have a gigantic short. I know it's probably going to work. And I look at the, what if? And so what I'd frequently do is put like a 25% risk reversal out of the money. Meaning 25% out of the money.

[00:14:54] I would have a put or I would sell a put versus my short and buy a call 25% out of the money. Just as a quote unquote, oh shit, sort of precaution. And that actually saved me a lot of money many, many times in instances I never expected. So that was one strategy that I use. And the failures in hedge funds don't deploy that strategy because they don't know or don't know any better.

[00:15:21] The second one of failures and what failures look like. Value stocks that never go up. And that is it. And I'll tell you what the thesis is. We are schooled. We go to school. We learn, you know, dividend discount model. We learn about free cash flow and Warren Buffett.

[00:15:48] And they deploy capital based on essentially returns on equity versus a hurdle rate or a risk premium. And if it is positive, it's a buy. But when you're running a hedge fund, you do not have the duration to realize that truth. And you've seen it many cheap stocks that stay cheap for years.

[00:16:18] And then all of a sudden they work. And you say, wow, that took a long time. And I totally forgot about it. And now it works. And that is an incredible, painful situation. And that's where hedge fund guys go to die. Because what they forget is that if you're in a stock that is down, say it's August, September, and you're in a name that is down and out and cheap.

[00:16:43] It is held by other PMs that are down and out and being forced to sell or getting fired. And so now you own a book of people getting fired. And that is a very dangerous place to be. And that's where guys fail because they keep looking at it and say, it's so cheap, but it's so cheap, but it's so cheap. I got to get bigger. I got to get bigger. And I say, who else owns this? What kind of person? Well, this person might own it. That person might own it. And how are they doing on the year? Total crap. I'm like, yeah.

[00:17:13] So you basically own a loser's book. And that is what kills them because you have the academic side of the brain that says, it's so cheap. Buy, you know, dividend discount model. I'm going to get paid on this. And then the other side that has to remind you, no, you're buying a book of people that are getting fired. We can rename the value factor, the people that are getting fired portfolio. It might not be attractive to investors in the ETF stuff.

[00:17:43] And you have to keep that in mind. I keep those things in mind. And a big reason why I do is that I have been throughout my career surrounded by at least 100 people that have been fired around me. Like literally within arm's distance around me, probably 100 over my career within a 40-foot talking range had to have been at least 100 fired around me.

[00:18:11] And those are the two primary reasons why they get fired and don't make it. Take a step back to your overall portfolio. When you look at your overall portfolio at a high level, do you own the asset classes? I mean, a lot of people who follow this probably own something like a 60-40 portfolio. Do you own like the kind of asset classes everybody else does? You have your stocks. You have your bonds. You might have a little bit of commodities and gold. Does it look like that or is it very different?

[00:18:37] Extremely different because I don't have an allocation model personally because I've done – look, I do this full time. So I'm different than a regular investor who has a day job. This is my day job. And I watch the screens and I read for 12-plus hours a day for 25 years.

[00:18:59] And so I can always find more alpha than I really could in a bond book unless I have a material bond trade. And there very likely is one coming together. And I would augment around doge, actually. It's going to be around doge and what happens in the cost-cutting of the government. And that's going to have a profound impact on bonds one way or the other.

[00:19:24] Currently, the bond market is saying Trump is going to overspend and he's going to lose control of the yield curve. And that's kind of what it's gearing up to do, as evidenced by the long end of the yield curve, trading at a premium well above the inflation rate. So that is telling you things are going to get a lot worse. Or let's just say worse. If they're going to get a lot worse, the yields are going to explode and bonds are going to sell off and the whole market's going to implode. Eventually. And probably this year.

[00:19:54] So there's a trade around doge. And so when I think about bonds or gold, I actually think about derivatives trade around trades around it that are very time sensitive, meaning it will be around this month. It'll be around these events and this will spark the cascade. And that's what I'll be thinking about. But so far as a long term core holding, personally, no, don't do it. Just not my bag. I always have names and ideas that can deliver superior returns.

[00:20:23] God, I hope so. Does your equity exposure change a lot over time? Like if you look at your portfolio over the past decade, has it moved a lot, the amount you have allocated to equities as a whole? Well, my net exposure does. So I can run the pink book and then a hedged book personally, whether it's through derivatives trades or straight on ETFs or stocks. So it can be a variety of ways.

[00:20:51] But yeah, my exposure varies quite a bit. I was, you know, as evidenced and very publicly so wildly bearish in March of 2020 before COVID broke out. Wildly bullish coming out of it. And when the vaccines came out and I was probably 500% net long in certain ways. And then meaningfully bearish in 22.

[00:21:20] Anyway, the margins were completely unsustainable across everywhere. And so I was very, very bearish for that. And right now, I'm neither. Let's just say I'm bi-curious. I am trying to pick a, I'll know more over the next four to six weeks on what's going to happen.

[00:21:47] But it's going to be pretty binary in my view on what happens. If Trump, if this White House is going to spend like mad, stocks are going to work for a pretty short period of time. And then the bond market is going to force them to spend less, I think. And that'll happen this year. So there's going to be a trade there.

[00:22:08] The inverse, if they do get sensible about spending, and that would require, in my view, about a $800 billion cut to spending. But adding back in about a $600 billion tax cut program.

[00:22:27] But the net-net feel to the fiscal economy, and this is the fiscal spend that goes into the economy, it'll feel like a negative $600 billion cut to government spending. And that's my own napkin numbers on the back of a napkin. The markets will like that.

[00:22:48] And in fact, small cap will actually be very good because I think bond yields will drop precipitously off of that because nobody believes it, that that could happen. It would be a shock that it's actually going to happen. But within about a quarter, we'll see the impact of the negative spend. And that will actually hurt stocks. So there'll be a number of trades in there that I'm thinking about how to sequence it based on the events that are coming.

[00:23:16] How much do you feel like over time, how long or short you are, your opinion on the market overall drives your performance? And how much of it is alpha relative to the individual positions you actually hold? That's a great question. Believe it or not, it's usually the alpha in my names. I'm sure net-net, I've been a good picker on direction of the market.

[00:23:42] And I realize that when I come out and I say I'm bullish or I'm bearish, that can change very quickly. So when you hear me with, let's say, a snapshot of what I'm saying right now, that may not be what I'm thinking three weeks from now. And it's not because my ideas are so poorly formed that I just change my mind every time. It actually has a lot more to do with the sequence of events like I'm articulating to you.

[00:24:10] There are a lot of variables on the table right now. And in about four to six weeks, it's going to become much clearer. And then I'll have a plan. Right now, I think that things are going to continue to work through earnings. And then there'll be the anticipation around the things that are coming in the budget. And then they have to get it through. And that is going to be probably a train wreck. And that'll be around the end of April, May.

[00:24:40] And we're at the end of January. And everybody knows, as I like to say, that's about three months from now. And three months from now is literally three careers from now in the hedge fund world. So I have a lot of room to change my mind on how to approach this.

[00:24:57] But I would suggest being a successful portfolio manager requires not just having a plan, but also being a chameleon and being able to change your plan very quickly and having the latitude to do it. And you need to be a chameleon in order to excel. Yeah, it's interesting. You'll see on CNBC, people say, like, I saw Stanley Druckenmiller and he's long or he's short or whatever. And then they don't realize that three weeks later, he might be something completely different.

[00:25:25] And, you know, people take those things as gospel for like a long term thing when a lot of times they're not. Yeah, they're not. They're not because he's in the same camp that I am, that there's an incredible number of variables that could change the equation. Frequently, the end equation. Well, like, for instance, Japan. I have no idea how they get out of this. South Korea. I have no idea. China. I have no idea how they get out of this.

[00:25:53] And it is a demographic bomb that is now for the first time being recognized in their currencies and starting to be recognized in their interest rates. Look, in the case of Japan, they have. No choice versus the dollar, but to colossally devalue. And demographically, they don't have a choice either.

[00:26:21] They're going to have far less output moving forward every five years to every 10 years and every 20 years. They're going to have far less output, meaning GDP that's not government. Far less output, no matter what. And the only way they can try to make up for it is government adding into the GDP. But the problem is, that's all borrowed money. And in the case of Japan, it's been printing press borrowed money.

[00:26:49] And now they have the situation where you've had your cake, you've eaten it too, and now it's time to vomit. So they're in the vomit stage where they're trying to raise interest rates to keep their currency up. At the same time, printing money and buying stuff. See, it's stuff that doesn't make any sense. So they're doing the dance of, yeah, this doesn't make any sense, but I'm just trying to buy time.

[00:27:16] That's what they should literally get on TV, you know, the BOJ, and literally say that. Just watch the plates spin. I'm just trying to buy time. Watch me dance. That's it. And you have the same case in South Korea, Japan, all throughout Southern Europe. Germany is actually not terribly different. France is a basket case. And you really have to do all of this relative to the USD, US dollar.

[00:27:42] And the one thing that we have going for us is that we have the latitude to bring millions of people legally and with great value into our country. And they assimilate and excel. And that's like impossible to do in France and Italy and certainly in Japan and absolutely in China. You know, what's the waiting list, by the way, to get into China? Yeah, exactly. There's a waiting list to get out.

[00:28:12] So, uh, so I think we're at the end of the road and, and you, the reason why I mentioned this is because of Stan Druckenmiller and him having views that will change on the fly. I am very certain that he's watching exactly what I'm watching on these demographics and that these currencies are dead versus the USD. And there's no way to get out of it. Yeah, the dollar might move left and right and back and forth and so forth.

[00:28:39] But net net at the end of every six year period, the dollar will be stronger against all those currencies because I had no idea how they get out of this. So those are big, giant, like adult long events. And this is something I tell my son, Max, uh, who sat on my knee trading stocks with me since he's three years old. He's 17 now. Your entire adult life financially is going to be ours was all about, uh, innovation in your hand.

[00:29:07] That's our generation. You know, when we were kids, at least when I was not even a kid, when I was a young adult, there were no cell phones. And then we had a smartphone, you know, uh, Jesus Christ. When I got my first cell phone, I couldn't even physically walk and talk at the same time. It was so awkward. I would stop to have a conversation because I really couldn't get the whole thing down to that core. My wife still makes fun of me.

[00:29:31] Uh, but his life, my son's life, your children's lives is going to be about single parents with no kids aging into the afterlife. And, uh, demographics that completely destroy the, um, the monetary system that we have in place. I'm wondering, going back to Pink for a second, you obviously have a ton of expertise in healthcare. You manage Pink. I'm wondering how you think about in your personal portfolio sizing healthcare.

[00:30:01] Because on one side, I could say you're an incredible expert in healthcare. You should have a ton of healthcare in your portfolio. But I guess there's probably a tendency also to maybe have too much healthcare in your portfolio because you know so much about it. So, like, how do you think about sizing the sector when you think about your overall portfolio? Well, I have a ton of Pink. So, that's really, really what I'm thinking about is what I have opposite of Pink. That's all. And that's, that's really what I think about is how to do that.

[00:30:26] And, uh, so, uh, but, uh, and then, and then of course, outside of healthcare, uh, I do have a number of things that I'm interested in. Um, but so far as sizing. My sizing in ideas, uh, probably are much different than other people's sizing of ideas because I do it full time.

[00:30:50] I will have acutely large structured positions that are frequently around events that I'm trying to figure out. And sometimes they are a long-term, um, like for instance, um, you know, I think Amazon, Amazon is actually in a very good position. I think that they're going to have a good quarter and it's going to squeeze.

[00:31:15] If I take a look at the relative performance, it has performed, uh, actually almost dead in line with the rest of the group. And, uh, minus Apple, which I actually have been very bearish, uh, for exactly the reasons why it's falling apart. Business in China stinks and, uh, and their phones are not actually terribly innovative anymore on a sequential basis.

[00:31:40] And it's trading at 27 times forward and essentially has no growth. Uh, you could have also said that thesis for the past three years. So the difference between now and then is Warren Buffett sold. So that's it. That's it. That's, that's why it worked. If Warren Buffett didn't sell, the stock wouldn't be down, uh, from this high.

[00:32:04] I think, I think, uh, so I really do structure things that are different than others. Some are longer term, bigger positions. Uh, but for the most part, uh, if it is a risky position, I will have a small size, meaning if there's a binary risk to it, I'll have a small size. Or I will have an options trade, uh, around something like that.

[00:32:28] Not even that frequently, but otherwise on execution stories that are, I think are going one way and are really differentiated and meaningful. I will have a very, uh, sizable position with, uh, options derivatives overlay and many different ways to structure it. And I spent a lot of time on trying to figure out when others are going to figure out where these events are.

[00:32:51] And I tend to make my most money when folks aren't acutely aware of the when and, and cashing them off guard because options are mispriced. And I'm always scanning for that mispriced situations, really cheap ball. And, and don't get me wrong. If you look at my book right now, maybe 6% of it is in derivatives, very small.

[00:33:18] So a relative to a regular hedge fund buckets, probably pretty modest. So it's really just straight, uh, ETFs and, um, and stocks. And believe it or not, uh, I actually listened to, uh, hedge eye every day, uh, because I don't know. If you'll ever listen to their product, the call, it's absolutely sensational. It is the best piece of wall street, anything I've ever seen in my career.

[00:33:48] So I listened to that every morning. I'm taking notes and then I'm calling my network of pals to find out on what do I not know? And that's, I mean, they're calling me. I'm calling them because we're always trying to compare notes. It's a little club. One of the things I know from following you on Twitter is you tend to have some high conviction positions. Um, there's obviously one in particular that people ask you about all the time, but I'm

[00:34:14] wondering just, just taking a step back from that when you have these high conviction positions, what are the types of things you're looking for in an individual stuff that leads you to have a high conviction position in it? Oh, wow. Wait. Oh, it's right behind my head. There they are. Number one, NPS, new product story.

[00:34:41] Number two, I got to look because I can't see it without my glasses. So number two, uh, mixed shift geographic expansion. These are the only ideas that are long ideas. And that mixed shift usually refers to pricing power. So we have a new product story, which is the most important thing because whether it's positive or negative, uh, new product stories and figuring out what a market's going to be

[00:35:11] and what pricing is going to be is really the most important investing thesis for a long. Then you have a mixed shift or geographic expansion where one product is growing versus the others inside of your portfolio products, but the pricing is different. The margins are different. And so you can have a positive mixed shift, uh, and then geographic footprint expansion. That is a powerful one.

[00:35:36] The next one is a, uh, management turnaround story, uh, where you have an asset and better management came in to work with that. In fact, one of the, what you will find to be larger positions in the pink book, um, it's not quite there yet, but it will be, uh, is actually a management turnaround story, uh, coupled with a material mixed shift, which I'm really excited about.

[00:36:06] And, uh, nobody sees it coming and that gets me going. Uh, so whenever you can get two together, a management turnaround and a mix shift, shift, oh, we got something going on there. And then, uh, next is a rollup. And I don't love rollups, but, uh, frequently rollups can deliver incredible amounts of alpha based on scale, uh, uniform pricing and margin.

[00:36:32] Uh, thermal electron is a great example of one of the most successful rollups I've seen in the past 20 years, uh, in healthcare. And then lastly, and I hate this one because this is why people get fired and any analyst that comes to me and says, but Mike, it's so cheap. Too cheap to ignore is the last one. Uh, and, and I got on occasion.

[00:37:00] I will do that, but I just grit my teeth when I do it. And that's my least favorite. And so when you're thinking about what are the characteristics, those are the characteristics that I'm looking for a new product story with pricing power, uh, ideally a moat that goes around it. That's why it's a new product story because nobody else has it. You have a moat, um, and mix shift geographic expansion management. That's great.

[00:37:30] Or it turns out to be great because we got new management and those are all the things that I'm looking for and sort of a recipe for a successful long. What would be the first, if you, a new name came across your desk, you were interested in it. Like what would be the first three steps you would do to start investigating like that name? Like, would you go to the company website and look at like their latest management presentation?

[00:37:55] I mean, yeah, that process for the, for the novice who says, oh, somebody likes the stock. What does this stock do? Uh, I urge you to do, uh, it takes time and I apologize to all your listeners. This job actually takes time. And if you're lucky full time, um, you, uh, before you go through the queue, the 10 K and

[00:38:20] so forth that those actual filings, uh, read the pitch book on their latest presentation. It'll be on their website and usually a webcast and listen to it. Listen to the most recent one. And then take a look at the stock and say, what happened to the stock? How did the story work? Okay. This makes sense, but what happened in the past are all the people down and out in this name? Have all the people made money in this name?

[00:38:47] Uh, was there a huge move in this name up or down and then go back and find out what happened on that day and why? So now you don't know the story. All right. You can say, okay, it went down here and this is why, but they turned around their, their, uh, their sales force. And now it's starting to work. Okay. Well, what's the TAM? Well, where can it go? What are the competitors? And then look at the holders, the holders list. And that takes a little homework, but I know most of the holders for essentially every name.

[00:39:15] And I know what their flavor is. Like what kind, like for instance, a Fidelity is much different than a Cotu. A Stan Druckenmiller is much different than a Millennium. Frequently they'll own the same names, but you know, they have a different mind on how they invest and why they invest. And so then I understand, okay, these are the players at the poker table and you can get an idea as why they own this sort of things. You understand the story.

[00:39:44] Now you go into the numbers and start doing the real work. And that's really how I'll do it to, uh, approach a new name. Now, fortunately for me in healthcare, especially, or let's say the top stocks, like I know why GE has been outperforming. I understand why utilities have been outperforming. I know why Apple stinks. I know why Nvidia missed these whisper numbers.

[00:40:11] I know the expectations are, and I know virtually every healthcare name there is. So I'm sort of at a different advantage where I already know the soap opera. I already know who owns this, why, and where the stocks are and so forth. So I don't have, I mean, I have new names coming to me every single day. In fact, I was just looking at one today. You guys will laugh. It's called Grindr. Oh, you guys already know what that is. And, uh, but, uh, uh, meaningful.

[00:40:40] God, I'm going to get myself. See, uh, meaningful, sticky client base. And, um, and, uh, uh, pricing power. And, and it's much different than all the other dating apps publicly traded and, uh, geographic expansion. And believe it or not, there's actually a medical rationale behind it too from Gilead, such as

[00:41:07] a once, uh, twice a year anti-HIV drug with a hundred percent efficacy that's going to be coming out. That is another massive backdrop to that app. This might be really, really, really, really big. All right. So now I go and do the work, but I have asymmetric information. I understand a drug that's actually going to help this tech name.

[00:41:35] Who would have thought that a drug helps a tech name work? That doesn't make any sense. Well, now we have like idiosyncratic mental alpha. Other people don't understand this. Good. Now I have something in the back of my head, some sort of mojo that I can figure it out. Now I get the, I talked to two, three tech guys about it today. And that's kind of the beginning, getting on my network, talking to other people. Cause I, not because I want to know, oh, you like the stock. That's not what I care about. What I care about is, do they know it?

[00:42:05] Have they done any work and what is their sort of thesis that they're putting together? If not, have it already. And then I start comparing and I don't use that as my basis, but I want to know who is at the poker table, what their cards are and how they're thinking. So that's how I'll approach things. And that's a great example of one I was working on today. So yes, I'm doing all grinder healthcare.

[00:42:31] I do every space and I'm intellectually curious about everything. I really enjoy it. And I think that that helps the pink performance tremendously ultimately. And I think that shines through now in through thick and thin as we've seen pink perform for the past three years. How do you think about with, with these high conviction names? How do you think about like a maximum position size? Cause I know you have, you have some names on Twitter. You talk about that. You feel like might be, you know, 10, 20 X names eventually down the road.

[00:43:00] You probably have very, very high conviction, obviously. And how do you think about what's too much to hold given that things may go against you on that? Well, when you got the nuts, you better be big. And so I won't say how big. Yes, I will. So big that I get a little sweat on my forehead at night just before I go to bed. And then I know I'm big enough.

[00:43:29] That's really it. It's, is it troubling me when I go to bed just a little bit? And then I say to myself, nah, you'll be all right. Then I'm big enough. But if I'm not sweating it, I'm not big enough. You have to sweat it. And I like that. I like that sweat. It's one of my favorite things in the world. It's kind of like Christmas morning. Is it coal?

[00:44:00] Or is it a Bugatti Chiron? It's coal. Just one more for me before I hand it back to Justin. And this may not be as relevant for you because of the way you run your personal portfolio. But one of the things we've debated a lot on these shows is this idea of international exposure. You know, people, a lot of people feel like they have to have this chunk of international exposure. It hasn't worked for a really long time relative to the U.S. Like, how do you think about that? The role of international exposure in a portfolio?

[00:44:27] It has so much to do with what the dollar does and energy. On an idiosyncratic basis, meaning picking stocks internationally, I generally shy away from it for good reason. In the U.S., we have a magical law called Regulation FD, fair disclosure.

[00:44:54] And so management can't tell you legally what's actually going to happen on the quarter. But outside the U.S., it seems like they tell everyone but Americans. So they have massive asymmetric information versus what we have. So that is a big reason why I shy away from a lot of international opportunities. But I am involved meaningfully when I see it in international things.

[00:45:22] But it's usually on an idiosyncratic basis, unless you have an instance like an Argentina that is having a seismic shift in the allocation of what is GDP and what is going on with debt. Those are very rare instances where I will be involved.

[00:45:40] Or in the case of like Japanese bonds or yields or something like that, where South Korea, South Korea has a birth rate per woman of 0.7. 0.7 in one generation. They'll be on track to have a 50% contraction in their population. Holy crap. I've never seen a trade like that before.

[00:46:10] China is not much different. Japan is not much different. Italy is not much different. This is astonishing. There is a trade here. And it's going to be really long run. And if it goes against me to a degree, I'm not sure how I'm not going to be wrong over the next three years after that. So I will invest internationally, but I don't think of it as an allocation. It's very idiosyncratic. And why?

[00:46:38] We're in a seismic shift moment in what equities are going to do over a very long period of time, in my view, because of these demographics. And I've been watching this for 20 years, debating with Ed Hyman at ISI that China is a doomsday device, which he and I differed on for a very long time.

[00:47:05] Because his view was, well, you're taking somebody out of a rice paddy or a shack somewhere that never has seen a television. And now you give them a sewing machine and they're incredibly productive. And he was very right off of that. But now it's the other end of it, of a command economy that has wildly misallocated capital. And you're seeing the aftermath. China can't grow at all. And they have a giant debt bomb hanging over their head that is gargantuan.

[00:47:35] And they have a closed economy, meaning that you can't get your money out. And American companies that say they have, oh, we have $10 billion in cash sitting in China. Can't get that out either. So China is a, I think, I mean, ultimately, I think China is just the bubonic plague, ultimately. And will end and maybe reemerge through revolution at some point.

[00:48:04] That's typically what happens. It'll get so bad. But in the meantime, Xi is doing exactly what he normally should do. Much like Venezuela, you vertically integrate the entire economy into the government. I don't like how these companies are running themselves. So the government's taking over. And that's what has started in China. And that is to consolidate power. Because when you're at a Schlitz or you're at a beer, the party is over.

[00:48:32] Well, the government takes over everything. And you've started to see that in Japan, where they're doing it with the printing press, where the central bank is taking over the companies little by little, buying more and more. Well, now they own 10% of everything in the Nikkei. Why aren't they telling these companies how to run? Eventually, they will. And that is how these things are going to end. So I do have like a long story short on international investing.

[00:49:01] There are trades out there, but net net. I like where innovation is permitted, where you can have new product stories with moats around them and IP and management that are free to expand, excel and innovate. And the U.S., there's nothing like it. In fact, there's nothing even close.

[00:49:23] I wanted to ask you about just some other asset classes just to get your views on these to see if you hold these in your personal portfolio. You may or may not. But do you invest in gold or commodities at all? I do. And badly. Every time I touch gold, it's the wrong thing. And so I should be like the counter, contra gold fund, the Mike Taylor contra gold fund sponsored by Jim Cramer. You know?

[00:49:53] And so I have some very, very close friends. The fellas at Seawolf Capital. I don't know if you know them. This is Porter and Vinnie Daniels. And my goodness, are they so good at that. That is so damn impressive in my mind. And I talk to them about every 72 hours. And my goodness, they're smarter than me. And that's that. So I really just don't do it. I look at for my list.

[00:50:23] Like my list right there is what I live by. And you can't have a new product story in gold. Do you have any investments in startups, private companies, private equity, anything like that? Anything outside the portfolio? Yeah. Yes. I have a number of real estate investments. And really that came about from COVID.

[00:50:48] When COVID came out, I got in touch with some friends that were doing a development, pretty big size. And I said, you need to go out right now and find a distressed hotel in the best location with an 80-year-old owner who needs to get out. And that's what they did. I got involved with hotels through a surrogate. They did it.

[00:51:16] But I fed them the idea because this COVID thing is going to resolve within two years and you're going to kill it. And they did. My goodness, did they kill it. So I do multi-unit housing very selectively and hotels. And the other side to the multi-unit housing that I wanted to be involved in was the wage growth. Because I knew coming out of COVID we were going to have meaningful wage growth, but I didn't know how to trade it.

[00:51:42] And I guess I should have just owned Walmart. So that was a trade. But now we built a whole bunch of multi-unit housing with a partner. It's much more tax efficient to do that. And I financed a partner to do that. And he's been very successful at it. We've had about 20, and it grows every year.

[00:52:11] But we came out of it with about an unlevered 18% cash return. So sort of like a bond with some maintenance that you have to enjoy. But unlevered a tremendous return. And that was really on the wage hikes. That was my trade. And it worked. So yes, I'm out there.

[00:52:34] I also right now am chairman of the board of a dental roll-up in Florida. And I only nod my head chairman of the board because I have to negotiate with some of these guys. And every single one of them is a one-off. But again, I'm looking at an idiosyncratic instance here in Florida. I had two friends who sold their dental practice and wanted to do it again. And they said, where do we do it?

[00:53:04] I said, Florida, 100%. And you'd say, okay, a lot of old people were vain. Perfect. No, no, no. We're not trading that. We're trading a housing disaster in Florida. Florida, because of the HOA rules and that they have to spend a ton of money to revamp all the housing in Florida. It has had a tremendous pressure on real estate. And real estate in Florida now is down double digits. When's the last time you ever heard of that in a booming market?

[00:53:32] Well, and it's because of these HOAs. It's had a profound impact and just begin a profound impact on discretionary. And that will affect dentistry to the negative. But it's only going to last for about two to three years. And then we're going to come out of it extremely strong. So we're going to be able to buy dental practices at a discount throughout Florida. And that's really how I had an idea of a macro trade, how it's going to play out.

[00:54:00] Look at the assets around me and people that I know and help them set up with a business and an economic strategy. So that's what I literally look at is trades that I have difficulty manifesting through stocks. I will try to find it through privates and do that. So that's what I do. And I have a bunch of other stuff too, but those are ones that are easy to explain what I'm doing.

[00:54:22] So, and I enjoy doing that because as you know, I ran a hedge fund and believe it or not, hedge fund people don't actually make anything. And I'm very excited to have actually made things, these homes and these buildings. These are the things that people live in and I can change their lives and make them better. A lot like Susan G. Komen, I can take some broken dental practices and turn them around and, you know, make a great profit for the dentists involved.

[00:54:52] And the investors and give the patients and clients better product. And that's what really excites me is leaving a mark that is better than when I arrived. And that's just the wonderful part of what I can do now, now that I'm not running a hedge fund. As we wrap up, we have two closing questions we always like to ask. And then what I always ask is about things you spend money on that you invest in that maybe you don't expect a return from. So I always give my example. Oh my God, what a great question.

[00:55:20] Yeah, well, we talked about before this, you actually might have a lot of stuff for this, but I'm a big sailor. I have a racing sailboat. It's a horrendous investment, obviously. Oh, you're a freaking genius. I have tons of fun with it. I have a beer on Wednesday night. I get so much out of it. So I'm wondering, is there anything in your life like that? That may not be the greatest investment. In a surprise move, I love cars. Cars are rolling art.

[00:55:49] And there's so many. I just always love cars and know everything about cars. Because I'm, you know, as a hedge fund manager, you're sort of a student to the world of learning how things work and what they do. And I have a great appreciation for art. So I have several cars that I really enjoy. But I will urge your listeners. My first really big auto purchase. You'd say, oh, well, how much of your income did you spend on this crazy car obsession?

[00:56:18] My first really, really, really big year. I splurged because you can't take it with you. And I went and bought myself the Ferrari that I wanted. I used to be a Porsche guy. And then I got into a Ferrari. And I was like, oh, my God, this is so much better than a Porsche. Holy smokes. Listen to that sound. I love this. I bought it. I splurged on myself 0.8% of what I made in a year.

[00:56:48] And that was it. You know, sub 1% of what I made that year. So I was very fortunate in that I saved over 90% of everything I made throughout my career. And that was a huge difference between myself and my peers. Because I was acutely aware throughout my entire career that every day could be my last day for a million reasons. I could have a Five Sigma event, a string of Five Sigma events.

[00:57:15] I could find out that an analyst of mine engaged in insider trading. I could find out that a boss of mine engaged in insider trading, which I had no idea about. By the way, that has happened to me twice in my career where my boss is engaged in insider trading. I had no idea and only found out frequently years late. Well, frequently only twice. But I found out years later when the court cases actually came up. And I was like, oh, my Lord. So you don't know in a hedge fund, it is very topsy-turvy.

[00:57:45] So I saved all the money that I had thinking that I would, you know, exit stage left instead of a ideally body bag. I'd be fired. And that would be the worst case scenario. I was fortunate. I was never fired. I put up a successful year every year that I've run money. So I've been very fortunate. That guard, it takes a lot of work and a lot of chameleon about me to reinvent myself. When it doesn't work.

[00:58:13] But so far as spending, I keep it down, especially on myself. In fact, the only thing that I've spent an ungodly amount of money on, my son is a race car driver. And to my misfortune, he's a very successful race car driver. And that has cost a lot of money to get him positioned to excel. And we do thank our sponsors so much, too.

[00:58:41] And we have a number of sponsors that have wanted to put their name on his car because, well, this year he'll actually be on Fox Sports. And, you know, we might have 500,000 people watching this thing on the roads and the racetracks and the ovals now. He races the development stage of IndyCar. So just below IndyCar. And he's the current world champion in junior IndyCar.

[00:59:07] And he looks forward to being a world champion in the most advanced stages and hopefully finding his way in the short term onto the IndyCar grid. And I do hope that for him. And honestly, I would never spend this kind of money on myself. But I am a I am a parent. And and as all the parents know, most of you out there who are watching, you will do things for your children that you would never do for yourself. And I'm guilty.

[00:59:38] That's awesome, Mike. So in closing, we like to ask sort of a standard closing question, which is if you could impart one lesson that you've learned in building your portfolio to the average investor, what would that be? Well, let's make it timely because everyone needs to know this. Bubbles are.

[01:00:06] Bubbles because people don't know that it's a bubble. And if you're old enough and I am that I witnessed the 2000 bubble, which was a giant CapEx build out of fiber to wire the world because tech and communications was going to change everything. It did. But the build out that occurred created at that time the biggest bubble we'd ever seen of a wild investment.

[01:00:35] And it lasted from 1993 all the way to 2000. And there were a number of reasons why I won't go into all those reasons. A lot of it had to do with the insurance on debt, which was another innovation. So you sort of had that build out rocket fueled by funded by debt that was insured. And so it could grow even more. Uh, I witnessed that and nobody really saw that was a bubble until it was a bubble.

[01:01:02] And then that was followed by a housing bubble. That was a government, uh, led, uh, government financed government organized in many ways. And an incredible number of bad actors, none of which went to jail. In fact, nobody went to jail because the conspiracy was so large that you couldn't put anyone in jail because the dastardly deed was so widespread.

[01:01:28] Australia has actually functioned under a similar bubble for 20 years. These go on for a long time. Sometimes China, similar bubble, a shorter period of time, but the bill, you know, they poured more concrete in a year in China than the U S had in a hundred years. Give you an example of a disparity, the egregious, uh, spend.

[01:01:53] Um, we're in the fiscal government spend bubble. Uh, and we're probably at the tail end of it. The reason why we're at the tail end of it is because they are starting to call uncle on our debt. And, uh, yields have risen above the inflation rate, which tell us that they're calling uncle. And nobody knows that it's a bubble. And that's why it makes it a bubble.

[01:02:21] Uh, because what's different between this time and other times of government, acute government spending. Is that in previous years, for instance, the 2008 crisis, where we had a lot of government spending to fill a lot of holes. 2008, 2009, 2010. They were acute and short lasting. So once you got a lot of government money plowing in to patch up the economy, uh, Walmart would do well.

[01:02:47] And a lot of companies would do well, but they knew that this was ephemeral. And that it would subside and we would go back to a steady state. What's different this time is that that has turned into a steady state of massive overspend for about eight years. And, and so Walmart and all these other vendors have actually built excess capacity in order to service that demand from the government overspending.

[01:03:15] So when the government reduces by hook or by crook reduces spending, um, they will have a collapse in margins because they built excess capex in order to meet that demand. And that is very, very different. So my urge to your listeners is, and I'd love to tell them, well, always dollar cost average and buy the dip and things like that.

[01:03:44] I will be a little bit different this time. And then I will say, we are very likely functioning at the tail end of a massive spending bubble. And the bill is coming due and you see it in the bonds and it's going to go one of two ways. Either they are going to cut government spending, uh, bonds will react. Everyone's going to like it for a short period of time. And then we will have a meaningful correction because of that reduction in spending.

[01:04:11] Or they will continue to spend as is and the bond market will force their hand. And then we will have a massive correction. Either way, in my view, we're probably going to have a meaningful correction. So I'm sorry to end it on a gloomy note. I am very positive on American innovation. I'm very positive on healthcare innovation and excellence. Uh, but I think that we are going to have a very rocky 18 month period.

[01:04:43] Thank you very much, Mike. We appreciate it. Thank you so much for having me. I really appreciate it. And by the way, just the best questions. A plus. Thank you, Mike. This is Justin again. Thanks so much for tuning into this episode of XS Returns. You can follow Jack on Twitter at practicalquant and follow me on Twitter at JJ Carboneau. If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube or leave a review or a comment.

[01:05:13] We appreciate it.