Foresight Active Advantage Podcast Series

Episode 4: Apis’ Investment Philosophy, Stock Selection, Sell Discipline & Short Selling

February 22, 2022 Dan Grioli Episode 4
Episode 4: Apis’ Investment Philosophy, Stock Selection, Sell Discipline & Short Selling
Foresight Active Advantage Podcast Series
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Foresight Active Advantage Podcast Series
Episode 4: Apis’ Investment Philosophy, Stock Selection, Sell Discipline & Short Selling
Feb 22, 2022 Episode 4
Dan Grioli

Dan Barker CFA is a Partner and Portfolio Manager at Apis Capital. Dan is a 25+ year veteran stock picker, having spent his career investing in companies from around the globe.

 He co-founded Apis in 2004 with Eric Almeraz CFA. Since then, the Apis Flagship fund has outperformed the MSCI All Country World Index, net of fees, and with less volatility.

 Dan describes the global small and mid cap investment universe, why companies are inefficiently priced and the reasons why Apis has an edge in finding companies experiencing long-term compound growth.

 We discuss the similarities and differences between investing on the long and the short side.

 Dan takes us though one of the firm's investments from start to finish; highlighting how a truly global perspective helps Apis to find investment opportunities.

Show Notes Transcript Chapter Markers

Dan Barker CFA is a Partner and Portfolio Manager at Apis Capital. Dan is a 25+ year veteran stock picker, having spent his career investing in companies from around the globe.

 He co-founded Apis in 2004 with Eric Almeraz CFA. Since then, the Apis Flagship fund has outperformed the MSCI All Country World Index, net of fees, and with less volatility.

 Dan describes the global small and mid cap investment universe, why companies are inefficiently priced and the reasons why Apis has an edge in finding companies experiencing long-term compound growth.

 We discuss the similarities and differences between investing on the long and the short side.

 Dan takes us though one of the firm's investments from start to finish; highlighting how a truly global perspective helps Apis to find investment opportunities.


Daniel Grioli, Dan Barker

Daniel Grioli  00:10

Welcome to our third episode of the Foresight Active Advantage Podcast Series. Today I have a very special guest join me, Dan Barker, Portfolio Manager at Apis Capital. Apis Capital is a hedge fund based in the US. They manage both long, short, and long-only small and mid-cap global equity strategies. Dan is a 30-year veteran of the markets having invested across a number of roles and spent 20 years with Apis Capital. So Dan's here today to talk all things, global equities, small and mid-cap with us on the podcast. Dan, welcome to the Foresight Active Advantage Podcast.

Dan Barker  00:54

Thanks. Thanks for having me.

Daniel Grioli  00:56

You were saying offline and staying quite cold in the US today?

Dan Barker  01:06

Well, I'm based in Minneapolis, Minnesota, and yeah, it’s cold. I think you guys can think in Fahrenheit, it's about 20 degrees. And we had about an inch of snow today. So getting whitened up for Christmas. And of course, it's a very dark time of year with the sunsets around 4:30. So it's kind of a period of time in Minnesota where everybody works really hard because there isn't a whole lot else to do. And, and then when spring comes, you know, there's a lot of Scandinavians in Minnesota. So they sort of, you know, tear off their clothes and jump in the lake when it gets to be about 60 degrees out. So it's, it's an interesting and you know, part of what makes it interesting is the weather because of the continental climates. So it's pretty hot in the summer and very cold in the winter.

Daniel Grioli  01:53

Now, Minnesota is not exactly known as being an investment centre. How did you come to work with Apis in Minnesota? 

Dan Barker  02:05

Um, well, I did spend 20 years in sort of New York, and I'm from the Midwest originally, and born and raised in Minneapolis went to school in Wisconsin, and my first job out of school was on the East Coast in DC, actually, in an operations finance role at General Electric. Then pretty quickly worked for GE and their pension fund; that was based in New York and London. So I spent about five years in London, maybe five years in sort of the New York area initially, and then back to New York after London for another, another 10 years or so before deciding kind of from a lifestyle standpoint, some personal things in my own family, and my mother was ill and some of the things which got me back to wanting to come back to Minneapolis. Plus, my kids were kind of at an age where they were about to go into high school, and it just sort of fit from a personal lifestyle choice to go back at that time. So, plus I know what we do is very global, there isn't actually, New York isn't the centre of the universe for small-cap stocks around the world. You can make the phone calls from Minneapolis, we have a good airport to get to Asia, Europe, as is required. So yeah, you can do this job from just about anywhere. And in a way, we were well prepared, because, you know, we are still split between New York and Minneapolis as a firm. And we've been that way for the last five or six years. So, in terms of COVID, and some of the changes and work. We were pretty well placed. We were already kind of doing video calls and things like this. And so it was a relatively smooth transition.

Daniel Grioli  03:44

So, you were Zooming before it was even a thing?

Dan Barker  03:47

Yeah, yeah, it was Skype, Skype video. But Zoom and Teams is sort of where we live now as everyone does, I guess.

Daniel Grioli  03:55

Right. So tell us a bit about Apis. Its beginning and when you joined and what you set out to do when you help start the firm. 

Dan Barker  04:06

Yeah, I mean, it was kind of born out of our experiences as mutual fund managers and sort of long-only managers. I had always had the ambition, I guess, to do something like that to have my own investment firm. And, you know, to be honest, I just never had the people, never had maybe the self-confidence to just go off on my own and get a headhunter and hire a few analysts. You know, I wanted to have obviously good people, honest people, but people that I believe are moneymakers, and you know, would do a good job. And so, I have had a lot of offers over my time at GE or at J&W Seligman, which is where I had my second stint. But I think we just had a really good group of people number one. There were also some factors at the time; the firm I worked for was very long into tech. They had grown, and through the technology bubble of the 2000 period had kind of exploded, and then obviously we all know what happened, the tech bubble imploded. Now we were just this sort of odd group in the corner doing international and global funds, we ran an emerging market fund as well as a global small-cap fund. But the firm was having issues. I don't want to say, you know, there was no great opportunity cost, let's say to leaving. But I said, just as importantly, was just the opportunity to have really good people. And we thought or really, kind of, again, born out of that long-only experience, what we saw as sort of an opportunity to make what we thought was kind of an ideal product; a product that would really leverage and kind of have this flexibility to go wherever the research took us globally, we were comfortable with, with investing. Oh, actually, the one place we didn’t have a lot of experience, investing, ironically, was the United States. But that was easy, you know, we’d always invested internationally and what we kept finding all the time was that we learned something in one place that would help us understand something else somewhere else. But because of our mandate, you know, we were restricted if it was a small-cap fund, and you’re doing work on a small-cap company, and you learn something that gives you an edge and a large-cap company. Well, you’re not, you can’t invest in that you’ve got to stay in your box, stay in your lane and invest in small-cap stocks, or just the same in emerging markets. You’d maybe find a company in India, and because of that, doing all your work surrounding that Indian company, you go, wow, I’ve just learned something about this US company. And it’s given me a real advantage and understanding that U.S. company that U.S. people don't see or appreciate because they’re not looking at India. And yet, what can I do with that? I'm an emerging market investor. So you know, it was very frustrating. At times, we'd say, oh, wait a minute, I have this huge information advantage, which I've generated because I'm thinking about things globally. But because I'm boxed into this emerging market fund, and only paid to invest in emerging market companies, I'm kind of stuck there. And then I've got to just kind of, I could go to my colleagues across the hallway and say, hey, you guys, you know, this is a really interesting opportunity for your U.S. funds, you should, you should take a look at this. And here's why. But there was no way to express that ourselves. So for us, it was just this really exciting opportunity to just go wherever the research takes you, to go wherever you get the most leverage to your research, who cares where the headquarters is, let's just focus on these global situations where we can bring that global perspective and, and take advantage of that global perspective. So that was the kind of inspiration I guess for starting Apis.

Daniel Grioli  07:39

Okay, so there's this global perspective, that sounds like it's a key part of your investment philosophy, being able to look across markets, to see companies in either in the same industry or different parts of the value chain within an industry vertical and use those insights. Are there any other key points to your investment philosophy that you think are worth highlighting?

Dan Barker  08:07

I think the other ambition we had was created, especially in hedge funds, was to have a product where we could put, you know, our entire net worth, invested into it, and not really worry about market direction. I think we felt and certainly, in a long enough time frame, you could put your entire net worth in a long-only emerging market fund, and probably do just fine. But, but would you generally want to do that? You know, maybe not. And so this opportunity to kind of create products that were generally low net, that our Flagship fund is maybe run, you know, 40 to 60% net, and maybe the Deep Value fund runs a little bit longer than, you know, maybe a little 50% type net or 60% net, But to have a structure where, you know, we could make money long, make money short, and have you know, not be slaves necessarily to market direction or be terribly worried and something that would, you know, stock picking which is what we said we would be good at, drive most of what you get. Clearly you know, we're going to be impacted by market direction there's no way around it, but to be able to kind of mute that somewhat and let stock picking really drive your returns was kind of the other I guess, you know, the main ambition of launching these products. And we have you know, we eat our own cooking, we're invested you know, outside of my home or car, all my net worth is in our three products. 

Daniel Grioli  09:31

That's something that's important and I hear that quite often when I talk to fund managers like you that are that have gone on to set up their own business after having worked for a larger firm is that there's very much this focus on all right, well now I'm doing it and I'm going to take everything that I've learned, the good and the bad from working in a larger firm and I'm going to build something that I feel comfortable putting, you know having a lot of skin in the game, in the skin in the game whether it be reputationally, but also investing your assets into and that seems to be a key driver across a lot of boutique fund managers that I talked to it. I think it feeds into results too.

Dan Barker  10:21

Yeah, I think the other thing you have to understand when you have a small investment firm is it's really just a small business too. And, you know, there's a lot of aspects to you, as I kind of developed myself, I was at GE, I had the luxury of just kind of being an analyst, being a portfolio manager and not having to worry about a lot of admin, although there's politics everywhere. And then you move into a more senior role at another company. And of course, you need to hire people, and you need to do more marketing and put yourself out there. And so as you develop those skills, I think, too just kind of seeing GE, which had, you know, strengths as a firm and an operation and J&W Seligman, which has its strengths and weaknesses, as a firm and you kind of learn, you see the contrast in different businesses, and you kind of say, I can do this, it's all kind of about building that confidence in yourself. But yeah, I can be a good investor, but I also won't be overwhelmed by the operational task, which is also pretty significant. And, and, you know, what is at the bottom of, at the end of the day, just a small business.

Daniel Grioli  11:21

You mentioned very briefly in your answer that you have two long-short funds, one's Deep Value, and now a long-only fund, can you give us a brief summary of the similarities and differences between the three funds?

Dan Barker  11:35

Yeah, absolutely. They're all very much related. And, you know, I sometimes regret, you know, we sometimes regret the name Deep Value for the second fund, because it really is the small-cap version of our flagship strategy. And our Flagship strategy, again, by from a U.S. person's perspective, is still a small-cap strategy, the sweet spot there is probably a one to $5 billion type company. So, you know, many people will consider that small-cap, but that is a product that we could scale that we, you know, we thought could be a billion-dollar type fund. But what we kept running into were things that were really small, you know, it might be a $200 million company, and it's half-owned by the family, and it trades by appointment, but damn, it's cheap, you know, and it's, it's, but they aren't, these aren't cigar butts, these are, you know, these are good businesses, these are compounding businesses, they have good growth prospects, but they're also extremely cheap, you know, it was not uncommon to find things that were 2, 3, 4 times earnings, they were 15-20% growers. And we really couldn't do that in the Flagship strategy, because of risk management, and because of, and we want to scale and just the market cap and liquidity kind of kept us from those types of names. But gosh, you can't stop us, if you see something like that, you just you want to do the work, you got to get the family on the phone and try to understand this business. And so, it was really just an outlet for us to be able to do those kinds of things and kind of take an owner's approach to investing, not be as worried about, you know, catalysts and getting paid near-term. But just saying, look, this is going to be worth a lot more at some point in the future. And so, you know, we may get stuck in this name, we may be, you know, like I say have to act like owners rather than investors. But it was really just an outlet to be able to still have that fun and do those kinds of situations that came, that we’d come across. And so that product does not scale, it's about a $110 million product today. And we think it could be a $200 million product. But we’ll the fund, it just isn't. It isn't. You know, commercially, it's not. It's not a great, great product, but we still have fun. And it does give us a place to kind of scratch that itch when we see something that's really small. But in terms of valuation, in terms of the types of companies that we're looking for, that's really the same, you know, it's just the typically because they're so small and maybe so obscure, that they're even cheaper, but the growth characteristics are, you know, should be there as well. As far as the long-only product that's really just a carve-out of what we're doing on the long side of the hedge funds. You know, we have a really strong track record on the long side and, and a good track record on the short side. But we had people come just from a business, again, kind of business development standpoint, you get to talk to a different audience when you talk about long-only, there's sort of a, you know, there's a portion of the allocators who look for alternatives and maybe 10% of their pie is in alternatives and, and 30% of that is equity long/short, you know, you're down to like 3% of their pie, you know, that you're fighting for. Whereas maybe half the pie is long equities, you know, people tend to look at long equities and then they tend to be you know, institutional type money and so we have a great track record on the long side and it's probably a shame we didn't start it sooner. But as of 2020, we started the long-only, the what we call the "Global Discovery Fund", which focuses on a subset of the long ideas within the two strategies. The overlap is, you know, 95%. It's, you know, all the same names with a few exceptions. And we can get into that later. But, but really with some of the differences, there's a little room for speculation, I'll say, within the hedge fund, there are some names we do that, you know, we're the same throughout the funds, we're looking for great businesses that can come up, that can compound over many years. But there's a small part of the hedge funds where, say, 5-10%, where we’re, I consider speculation anything that doesn't make money, at least today, you know, obviously, we think they're going to make money in the future. We're looking for companies that are really proven compounders; companies that are already generating positive cash flow for shareholders that are a little bit more mature for the long-only product, we don't really, you know if one of those speculations works out, and it starts to be a good long term, sound compounding business then it can graduate. The other thing is we've tried to really not sell a great business in the long-only product. We know there are businesses, I think one of our lessons learned, we call it “don't cut your flowers in the bloom.”. It's time and time again, one of our great weaknesses is selling a great business. And watching it double, triple, you know, whatever.

Daniel Grioli  16:35

You know I’m going to ask you for an example. 

Dan Barker  16:39

Oh, yeah, there's, I mean, there's too many to cite, but, but with the long-only product, we're really trying, and we may cut that position dramatically, but we really want to keep it if the business is still working, if the market is still a good market, and a company is still executing within that market, kind of irrespective of valuation, we want to keep it on the sheet and just let it you know, you and I both know the secret to success is to just find a great business and never sell it. And if you can do that, which is really hard to do, because you're getting bombarded all the time. And it's human nature to keep looking for that next thing, but you know, the people who have that discipline, we want to have that discipline, I want to grow that discipline within myself, and I want that to be a part of, of the long-only fund; just kind of hang on to those great companies almost no matter what, although, like I say, we will certainly reduce the position size. If it's just, you know, on the extreme end of valuation.

Daniel Grioli  17:36

I think we've just uncovered another investment edge. So the first one was taking that global perspective, now we've got patience and a long-term investment horizon. Are there any other edges that you think you have up your sleeve?

Dan Barker  17:1

Well, I think certainly, you know, there aren't many people who've been doing international for 30 years. And so a big part of the edge, if you want to call it that, is just I put it in the large bucket of experience. You know, it’s experience in terms of understanding differences across borders, you know, accounting differences or, or how people, you know, different nuances that may be how people value stocks in different markets. It's, it's experience in terms of having a network of people, you know, we have all kinds of friends all over the world that's been built over decades, that can give us access to companies and help us get in touch with these small businesses and do the translation or, or set up the meetings, or help us with travel if we happen to go to these countries and do things like that so that that network would take a long, long, long time to build. I think it's experience too, just in terms of having a good process, you know, having been through a lot we've seen, you know, all kinds of risk-on, I mean, gosh, 30 years, I mean, especially as an emerging market investor, and you know, I've seen a lot in my life. And hopefully, we've taken some something from that, to make us better, to make us manage risk better to make us understand and kind of keep those, those event risks and perspective, to have a good process for how we diligence companies, how we build portfolios. So I think, you know, it's experience and then I think the other advantage that we have is just the sandbox that we play in. It's, it's small-cap companies and genuinely small. And so, I think we just one, I think there's a lot of dynamism, there's a lot of interesting businesses that are out there. And that's number one. And number two, there's just not a lot of people looking at it; we just don’t run into, you know, institutional investors, there just aren't that many who do what we do. And so, I think when companies get to be kind of, you know, $800 or a billion dollars, and then you start to get more eyes on them, you start to get more maybe sell-side coverage or, or institutional, you know, the really big institutions, it just doesn't move the needle for them to look at a $300 million company that maybe they could buy a few million dollars, you know if they try really hard. So for us, that moves the needle and so we're good with looking at businesses like that. And I think just other institutional investors just don't care. You know, it's, it's not a real scalable business, you know, and I think that's when you get to the, you put all this time and effort into it, and at the end of the day, you know, you can only be so big with the strategy that we have and be effective with the strategy. And so, it, it doesn't, you know, it pays fine. You know, if you do a good job, you certainly can do well, but it's not in terms of institutional scale, I think you can understand why, you know, Fidelity or some large fund management group, just isn't gonna, isn't going to spend a lot of time in the space that we're in. And that's great for us. And I think the other thing, too, is we're our competition if it isn't other institutional investors, a lot of retail investors. And, yeah, I think we have a behavioural advantage, too. I mean, certainly, we have that advantage, where we have this global perspective, and hopefully, we see things that they don't pick up on. But I think, too, you know, when you're up against retail investors, they tend to be kind of, you know, and I respect everyone in the market, and, but you do see, when these risk-off events, for example, you'll see sheer panic, you know, and you'll see volatility that, of course, you're going to see volatility, even in large-cap stocks, from time to time, but in small caps, I, you know, it's usually a higher beta market, and a lot of that is retail-driven. And they're very short-term oriented, they may be, you know, investing on the basis of you know, memes or candlestick charts, or, you know, whatever they do. And that's what you're up against, which is, which is okay for me, because I think, again, with that three to five-year view, or a longer-term view, and having good fundamental work, we can take advantage of that volatility.

Daniel Grioli  22:01

I've noticed a few times in our discussion, you've used the word compounder. How would you describe what a compounding business is for you? What are you looking for?

Dan Barker  22:25

You know, I think we try to keep it simple. I just think people overthink this process and stock picking. And I always say that all you really need to know about a business is a dominant position in a growing market. If you have those two things, that's kind of all you need. You know, if you think of yourself, personally, I have no idea what's in your own portfolio. But I, I would imagine, if you have a successful business that you've known for, for many, many years, I would think if you thought about the market they're in, it's probably an attractive market that has good growth characteristics, and two, that company is very strongly positioned within that market. And, of course, you know, it isn't just that simple. You need to, you know, it implies barriers to entry, it implies that mode, it implies, you know, maybe proprietary products or patents or good management, and you need to check all those boxes, it isn't just sort of that simple. But if you think of what we're looking for, in terms of those compounders, it's that sort of dominant position in a growing market. And on the flip side, on the short side, you know, where companies are losing a dominant position, if you think of, you know, Intel, or something like that, it's not a stock we would look at, but there was a day, Intel had a dominant position in CPUs and, and they were selling into PCs, which was a growth market. Well, there was a time where, you know, PCs weren't such a growth market anymore. And Intel was no longer such a dominant company, either. And so, you know, that might have been something that would get you going on the short side on Intel if you sort of saw that developing within their market. So, you know, again, people think well small-cap companies, how do you have a dominant position? These are small companies, well, we find, you know, niche companies that have, you know, real IP, real leading shares, you know, often times 50, 60, 70, 80% market share and what they do, it's just, it's just an incredibly small niche, which, which, you know, in our assessment will be a growth area as well, where we can find companies like that. So those are, those are the types of compounders that we're trying to find. And like I say, you have to be vigilant, you have to make sure that that market is still healthy and growing, and that, you know, that business, they're going to continue to execute within that market and maintain their or even hopefully grow their market share.

Daniel Grioli  24:56

Do you find that the types of franchises or moats that you are looking for have shifted over time, for example, a lot of investors follow Warren Buffett and he obviously popularized the idea of moats and talked about a lot of companies that had these, these great enduring moats, for example, consumer goods companies that were able to get a very strong brand position. And then because once they get that position in a supermarket, it's very hard for another consumer good product to take that position off them. Are those sorts of moats still around, or are moats now shifting more towards technology and other areas that give companies a sustainable competitive advantage? 

Dan Barker  25:49

Yeah, it's a tough question whether, you know, moats are easier or harder than they used to be. I, you know, agree with the premise of your question of looking at something like consumer branded products, I think those moats have eroded a lot. I think consumers are, are willing to try other products, and they might not even go to the grocery store, or look at what's at the end cap of the grocery store shelf anymore. So that doesn't buy you anything. But, you know, we see a lot of companies that, especially it's quite often in Asia, where they maybe they had a legacy business where they did, you know, textiles, or maybe they had a legacy business where they were in, you know, rubber, or some, you know, some commodity product, but because they're in Japan, or because they're in Taiwan, well, they could no longer compete, you know, making commodity rubber. So they found new, you know, new applications for their rubber; maybe it was, it was in the medical field, or maybe it was in, you know, EV batteries or, or things like that, where a lot of what’s seen in a lot of electrical, like you’re talking about technology, or suddenly they’ve kind of grown these businesses and they had this traditional business that sort of melted into the background, and they’ve gone to these sort of higher-end niche components, born out of the chemistry they were doing 50 years ago, where, you know, now they have a very, very high market share for real specialty niche, you know, compounds that might be a component of an EV battery. Or it might be a, you know, copper foil that's sitting inside an iPhone or something like that. And they have literally dominant share, just because of, you know, what they were in. And so the moats are still really strong because they have relationships. And then again, that chemistry that initial chemistry was done 40-50 years ago. And it's just evolved over time. And it's kind of in the woodwork of these businesses, it's kind of in the walls. And you couldn't just sort of snap your fingers and throw a lot of money at it. So you might not be that interested in any way because it might be, you know, a market that has a total size of a few $100 million dollars or something like that it wouldn't justify the investment, at least not yet. So, you know, we find a lot of those, you know, we have a lot of fun with those types of businesses, and they are quite common in Japan, they're quite common in Taiwan and Korea, you know, where you see they've kind of evolved into something that's becoming very high end. Another, another business, I don't want to get into too many examples. But there was a company called Eclat Textile in Taiwan, which we don't own today, but it was a company it was a textile business. And, you know, that textiles got hollowed out by China and Vietnam, and you know, places like that, that. So they came up with a higher value. I mean, there's an I don't know if you have Lululemon in Australia, but there's sort of this athleisure wear trend. It's been around for a long time and oh, my, my wife likes it and spends too much money there. But when you looked at it, Eclat Textile, what they had was this product called Nylon 66, which was a key raw material which was being sold to Lululemon. And we did the work. And there are only three companies in the world that can make this. And here's, you know, we look at a Lululemon at Apis Capital, and we say like, that just goes in the too hard pile. You know, it's a good business for sure. It's quite expensive. A lot of smart people looking at it, you know; smart people who think it’s a long, smart people that think it’s a short. Here's a supplier who, you know, 15% of their sales are to Lululemon. But it's also, you know, 15-20% to Nike and Under Armour, and Athleta and this trend of athleisure wear, you know, that’s what we kind of bought into, that was the growth market. They had a dominant position, they had more than 50% share for this key raw material that everybody who wanted to make athleisure wear, the sportswear, had to go to Eclat Textile, and here it's you know, 10 times earnings that has a 6% yield, it's growing 30%, it's supplying everybody, and that's what we do at Apis, is just sort of okay, see this trend and you know, I believe in Lululemon as a business but is there a better way to play it in Taiwan? And so that, you know, that was a case where we said I can get the same growth. And again, in that particular situation, the people in Taiwan had never heard of Lululemon, you know, so it's a small-cap company, they didn't understand sort of maybe what the potential was there. And so that's kind of what we're doing all the time looking for these, these niche companies that have reinvented, that's one of the things we do, I guess, where they kind of took an old textile business that was, you know, very mundane for many, many years, but they went higher and higher value-add, to create products that people like Lululemon wanted to buy, and, you know, they had great growth came from that. So it's those kinds of things that we see a lot of.

Daniel Grioli  30:57

So the moats are still there, but they require a little bit of extra digging, maybe to find.

Dan Barker  31:03

Yeah, yeah, sure. I mean, again, it’s very common for us to kind of look at, you know, I think Apple's an interesting company, or I think Tesla's an interesting company, but we don't, we're looking at the supply chain for those companies, you know, it's all those sorts of small companies that are, maybe you have a good, I don't know, you know, lens material for the camera that's on the phone, or some kind of, you know, particular multilayer ceramic capacitor, which is being used in the next generation of iPhone, and maybe that that little Japanese company has won the entire share of that. So it's that kind of thing that, again, these little niches that, that you can find, you know, usually cheap companies, you know, that might not be appreciated for what it is. And, you know, they have really good growth prospects, because of, you know, what we sense is the supply chain and the product, I guess, life cycle, of some of the new products, maybe that Apple is coming out with or Tesla  or what have you.

Daniel Grioli  32:09

Do you find that these sorts of companies, do you find them more frequently in certain industry sectors?

Dan Barker  32:19

Yeah, for sure. I mean, you know, when you look at what we do and don't do within global investing, we're really not interested in things that are local. So if you need, you know, if you think of industries like property stocks in Tokyo, or Hong Kong, or a construction business, or a business that's like a utility, or where you've got to know the politicians, you got to know the regulators, we avoid that we don't know anything about Japanese property. And you should, you know if you want to invest in Japan, and have somebody who's a Japan expert, you know, they should be on the ground in Japan, you know, that that's their edge, you know, they would have that advantage. But sectors like Technology is clearly you know, a sector where a global perspective is required. Healthcare is another area where we see a lot of situations where a global perspective is really helpful. You know, Consumer names, like Eclat Textile, for example, you know, another area where, you know, global companies, companies competing on a global basis, and in Industrial and Materials, you know, commodity type businesses or industrial type businesses, I, to me, any business that sells to another business is sort of an industrial business. So, again, those are definitely fair games. So there are those sectors that lend themselves to a global approach. And then I would also say, there are those geographies that lend themselves to a global approach. You don't really find us in frontier markets, you know, we're not, again, I think if you're going to buy stock in Africa, and you probably get that the country, you know, the country factor is the dominant factor, right? If you pick can't pick stocks in Egypt, I think you're either going to get Egypt right or wrong. But there are countries that are very global; Korea is export-oriented, you know, it's perfect for what we do. Taiwan is perfect for what we do, Japan is perfect for what we do. Now, companies and I should say countries which have deeper markets, a lot of export-orientated companies, if you look at it in India might be you know, IT services or again, it could be healthcare, there's also a lot of good industrials exporting companies within India as well. But generally, it's North America, it's Europe, it's, you know, it's Japan, you know, those are the big areas, but where, where you find us in emerging markets, it's not, you know, not going to be the Africas it's not though never say never, we're free to go wherever we want. That's all part of the strategy, but Latin America again, you know, Russia, Eastern Europe, doesn't feature terribly high on our list. So, so there are countries that lend themselves to that global approach, I would say, and also sectors that we gravitate towards. 

Daniel Grioli  35:08

Spoken a little bit about stock picking on the long side. How does your approach differ on the short side? What are you looking for there?

Dan Barker  35:18

You know, to some degree, I'd start with and say that it is, you can first think of it as sort of the opposite of long, you know, I mentioned dominating positions and growing markets, well, if a company is losing its dominating position or its market is going ex-growth. You know, those are good places to start, in terms of, you know, looking at the short side. I think we're, you know, I would say, there are so many lessons learned from short-selling over 20 years. And I think when we first came to this business and running a hedge fund, it was like, oh, sure, you know, you can't short sell, you're not going to know how to short sell. And certainly, I think, well, we're always learning in this business. And so, you know, but certainly, we learned some fast lessons, you know, within shorting, and then there's been sort of ongoing lessons within shorting. But I would say, you know, whereas valuation is important to us, on the long side, it's pretty far down the list on the short side, it's not something that we start with. Matter of fact, ironically, some of the best places to look for shorts are the cheapest, highest yielding stocks, you'll find, and if so, why would you start there? I mean, it's usually there's a signal that there's a problem, you know, that sometimes it's cheap for a reason. And, you know, whereas I think some people might, it's understandable why you'd look at expensive stocks to, to potentially short, I say, been there done that, you know, at least for us, it didn't work that well. It's not a bad thing, if you have all the other things, stars aligned, and it's expensive, then, you know, that's, that's a good thing. But we definitely don't start with that, like I say, almost the opposite, we look for cheap stocks to short, which sounds silly, but, but it could be a sign of stress. You know risk management is also very different. You risk manage naturally, as a long investor, you know, I say, a good stock that works, gets bigger, a stock that fails you, gets smaller, by its nature, on the short side, when you're wrong, they get bigger. And so you have to risk manage, you know, differently on the short side. And also, you know, when you get one right, on the short side, for example, there's, there's a whole host of behavioural aspects to investing generally, obviously, but I think even, you know, more mind, torture goes on, on the short side. And, you know, oftentimes you're in this battle with a short, you maybe have spent a very long period of time and done a lot of work. And finally, your ship comes in, and you've got to a 1% position that goes down 20%, because hey, they missed earnings, or something bad happens, and your thesis is finally getting recognized. You know, it's human nature to just almost say, like, thank God, you know, like, I'm out of here, you know, or  to not add to that position, you know, I mean, really, when you get it right, and again this is sort of lessons learned after years, now it's going the right direction, you know, people are beginning to recognize and maybe see what you've seen all along, you've got to power in, you've got to take, you know, what was hopefully a small short position, that was a battleground for a period of time. And, and now make it real, you know, which for us is still a relatively small position, but maybe a 1-2% type position where we have high conviction. Whereas we, you know, we do position size, significantly larger on the long side. So, you know, but we look for the same things, it's competitive threats, it's frauds and fads,  it's you know its secular trends, we call melting ice cubes. You know, but we've done a lot over the years to kind of, like, improve our process and take those lessons learned and try to get better at short selling. I think the other thing, you talked about advantages we have early, and, you know, I think, where do you find the frauds in the world? You know, where do you find the bad actors in the world? It’s not typically at, you know, 3M or, you know, name your large gap, high quality, you know, good, generally good business. It's usually in these small businesses. You know, there's a lot of flaky characters. There's a lot of bad actors, but they're $200 million companies or $300 million dollar companies, this pump and dumps you know, these, you've seen all the fraud in China and places like that. You know, again, those things don't move the needle for a lot of other funds. They don't even really bother to look. But for us, again, we can look at some really small companies and so, you know, that I think that plays to our advantage as well.

Daniel Grioli  39:19

It sounds like the niche that you occupy just helps you to avoid a bit of that competition from larger institutional investors, you sort of occupying a space just beneath where they're forced to invest by sheer dint of the assets that they manage. And so you've, you've almost got the first pick of what happens beneath that.

Dan Barker  40:24

Yeah, I mean, that's the idea, right? Especially, I mean the magic happens in small-cap when you get a good compounding business. And then eventually the re-rating comes. And that when it's compounding and it's cheap, and then you get discovery, that's where you get the, quote, unquote, the multi-baggers. And so, yeah, that's the other question, you have to, you know, small caps is not easy, and you have to be pragmatic, and you're, they're not all going to be the next Apple. A matter of fact, almost none of them are going to be the next Apple. And so, you know, it's hard work, but when they do come in, you know, you can, you can definitely get one or two ideas which can make up a lot of mistakes.

Daniel Grioli  41:09

Are your shorts usually paired with a long or are they standalone positions? 

Dan Barker  41:15

They are really standalone positions. I mean, they've been a few cases where we've had genuine winners and losers. And so we, you know, we're going to buy the winner and sell the loser, but we're looking to make money, not just hedge. And we want, you know, idiosyncratic ideas that stand on their own. You know, we will, if we have a lot of, you know, that’s really also a lesson learned. I mean, when we think when we were young, we would, you know, maybe force a short if we had a lot of great ideas in Korea, but we didn't want a lot of Korea exposure, we'd look for things on the short side, you know, again, we were looking for fundamental shorts, but I suppose we compromised on our principles somewhat to kind of force something that was not necessarily optimal. Today, we just learned to manage that through the long side, if we can't find, if we're not comfortable with Korea risk, or what have you, we just won't, you know, we may have a great idea and we may be in a normal circumstance we’d have a much bigger long position. But because of that Korea risk, you know, we’ll just dial that down and not have it, if we can't find, you know, good high-quality shorts and Korea that stand on their own, we'll just manage that Korea risk to the long side. 

Daniel Grioli  42:32

Perhaps you can take us through an investment idea from start, the initial idea generation, through to implementation in the portfolio to give our listeners an idea of how that whole process works from start to finish.

Dan Barker  42:53

Sure, you know, maybe one that's a bit of a sort of growth cyclical. We had a position in Siltronic. And of course, everybody wants to talk about their winners. So I'll give you a winner. But you know, I caution you there have been many, many losers over the years, but one is a German company called Siltronic was very good to us, I think, about three years ago. And it was a perfect kind of setup for Apis. It was spun out of a German chemical company, called Wacker Chemie. And it was a company that makes silicon wafers. So you know, they compete with Global Wafers, they compete with MEMC which is now part of Global Wafers, SUMCO, Shin-Etsu, LG Siltron, so we know, the semiconductor wafer space well, and we've invested in that space. You know, it's cyclical, but it has its moments, its having one of its moments now, it's a very attractive sector. And these are making the raw wafers, the six-inch, the eight-inch, the 12-inch wafers that are used to fabricate circuits, semiconductors. And Siltronic is a 15% type player, I would say, you know, maybe in that 15 to 20% of the global market. The Japanese are very strong, and there's like a couple of Taiwanese that are strong, but it's a nice oligopoly. Like I say, five, six main players and, and when Siltronic was spun out of Wacker, you know, it's the only semiconductor wafer company in Europe. And it was covered initially by German chemicals analysts, because, you know, they covered Wacker. And so this thing came public and, you know, we were watching the semiconductor cycle get much healthier and we had a kind of feel for how strong the earnings power can be in an up-cycle for this sector. And so we did our work on Siltronic and you know, we came up with our numbers, and I think it was a 40 Euro stock and, you know, we had them earning about nine euros of earnings. And when we looked at the Street, you know, which is like I say a couple of German analysts who cover chemicals, they had four as the earnings, you know, so they had an on 10 times earnings and we had it on, you know, less than four times earnings. Now, in the end, we were wrong, it was actually they made about 12 that year, so we were too low, you know, it was really on less than three or about three times earnings, I guess. But the whole point of that discussion was that we could understand, I mean, again, to make money, you got to be different, and you got to be right. It's not that hard. But you know, a contrarian view, or we call it we want to be “violently contrarian,” and it was just way different, you know, when we're way different from the Street, if there's a Street consensus, and we're arrogant enough to believe that we're right. You know, that's where you're really going to make your money. And so when we're nine, and they’re at four, and we know why they’re at four, we understand why they’re at four, and we're really confident they're wrong, and we're right, those can be what we call “core” ideas, you know, those can be ideas that for us as a 5 to 10% position, the core, what we call these core ideas. So when we're arrogant enough to believe that we're right, and have that high conviction, and we don't get, you know, our whole model is if you get three or four of these a year, you're going to do great. You know, if you have a 7% position that doubles, you just made 7%. And if you get two or three of those, you've had a great year. And so that's kind of the model of Apis. And so for Siltronic, you know, we bought, and we made it a core position, I think, yeah, went from 40 to about 160 Euros. You know, of course, as we talked about earlier, you know, we sold on the way up and didn't necessarily top tick it and certainly didn't bottom tick it, but all that's part of a process to of you know doing your work, getting building a position, getting more conviction, adding to the position, seeing the stars come into alignment, continuing to add to the position as it does that and then, you know, having the pragmatism to say like, okay, you know, is this now in the price now? Several analysts are covering it, you know, and  their earnings are gone from four to 12. And, you know, of course, now they’re going to project, you know, 16 for the year after, and we’re kind of nervous, you know, we no longer have an edge, you know, or maybe 16, we think is a bit too high. Because these are cyclical, and while their sort of growth cyclicals, kind of stocks that I guess you rent rather than own to some degree or you have to at least keep them on, on a more short, keep an eye I guess on the cycle itself because that's going to drive stock performance. So yeah, I mean, you know, I don't like I said, I'll remember exactly where we got in and where exactly we got out. And I know we didn't execute perfectly, but I know we were out sort of back in the low hundreds. And I think it then fell again to about 60 Euros as a share price. And of course, it's done well again, in this most recent semiconductor cycle. So again, that's sort of placed our advantages, we know the Asians, we understood why the Europeans are kind of, you know, we call it “the locals don't get it,” you know, it's sort of one of these areas where we get value. And sometimes they have this great situation, it's right in front of their nose. But they don't appreciate it because they can't see the bigger picture, they've never looked at semiconductor, you know, wafer stocks in the past,  and then we have you know, so we could bring that Asian perspective over to this European company, and get an edge.

Daniel Grioli  48:35

Very good. So you, you talked a little bit about selling on the way up. So obviously taking profits is part of your sell discipline. Are there any other elements to your sell discipline? Particularly on the risk management side when things go wrong? How do you make that decision that it's time to cut bait and move on to another idea?

Dan Barker  49:05

What I love about this game is its you're always getting feedback every day. And, it's like, you take a test, you don't look at the ones you get right you look at the ones you got wrong.And that's what you're going to learn from and that's, you know, every day you're, you see things you're getting wrong and you're looking at that and trying to understand those reasons why you're wrong. You know, I think this is where you get into the art of investing. It's, you know, there's an element of yeah, if I don't  understand why it's not working, certainly you see things and it sticks out like a sore thumb if it's not working. It's not easy to get that subset of stocks that are giving you problems, but then you go through them name by name and try to understand you know, what, am I missing? What have we got wrong? And if you can understand that, and you can get comfortable with that, then you know there’s those ‘maybe’ situations where you can be contrarian and buy, and maybe it is just you know, a risk-off episode or a sector rotation or, you know, one of these episodic, you know, retail investors have lost their minds kind of thing where you can really take advantage of those types of situations. But, but also you have to be pragmatic, I mean, this is a small-cap, you're going to get things wrong. And, you know, there's why I'm still here after 30 years, is that ability to keep my humility, to understand you know, that when you're wrong, or when you can't explain, you probably, you know, and we're very incremental in what we do, it is not, you don't see us whipping it around in terms of  our exposures and stocks. And when it's not working, or starving it or reducing it, when it is working, you know, we're probably incrementally adding to it or, or feeding it. So sort of feed your winners, starve your losers is sort of, you know, the approach we have. So when you're wrong, you know, that's a good reason to sell. And there are times where you're just flat wrong, you know, if you're honest with yourself, it's pretty easy to see that's a good reason to sell. You know, I think when you have better ideas, there's a lot of kind of internal competition for capital. We have a what we call a monthly “re-buy the portfolio” meeting and it just starts with the A's. On the long side, remind me again, why do we own this? Okay, let's look at this portfolio, I've got a large position and our price target only has5% upside. Whereas I've got this much smaller position with 50% upside. Let's have that discussion as a team, you know, maybe we, you know, should, again, a lot of things just happen out of inertia in a portfolio, and you just let things work. And then you know, you need to stop at a point in time and say, okay, if I just had cash today, is this the portfolio I would want? Is this the optimal portfolio? And so there's a lot of, you know, when we come out of our monthly meeting, there are several, you know, trim positions, you know, candidates or maybe even outright  sells if we can't push the numbers anymore, and it's already at our price target. You know, we can't dream in the most optimistic scenario that this could get any better. Yeah, it can just be, you know, we have better ideas, we have ideas, which have, you know, more upside, that are more compelling. And there is this competition for capital, and so that can be another reason that, that you sell a position. Yeah, I mean, I’m trying to think of others, it's just yeah, you just can't push the valuation anymore. No, you're wrong. Those are the main reasons, but I think that there's so much behaviour in all of that, there's so much of, again, I think just doing it, I always think being from the Midwest, we have a reputation for just having a lot of common sense and not being too full of ourselves. And so, you know, I think that plays into our hopefully our, our strengths, that we can admit when we're wrong and move on. Not take it too personally.

Daniel Grioli  53:21

Yeah, it's not a “Masters of the Universe” vibe like you sometimes get in New York or?

Dan Barker  53:19

Yeah, I mean, I always say, like allocators spend way too much time on sort of intellectual IQ and what school you went to, or what have you. And of course, it's all-important, I suppose. But the real investment grades are yeah, they're smart but they also possess a lot of common sense. You know, I think the behavioural IQ is not talked about nearly enough in this business. And so if I was an allocator, I would really want to get inside the head of that portfolio manager and understand them as a person and understand them behaviorally. I think that's more important, honestly, in the long run than you know, we don't out model anybody else, you know, let's be honest, our models are fine. But I'm not going to say that, you know, we're better at that than other people. But we've been around the block a few times and we learned a lot of lessons and hopefully some of those have stuck, and that's really important in the investment business.

Daniel Grioli  54:21

It's funny you mentioned that because when I was a capital allocator, working in superannuation or pension funds, I used to say something quite similar to the fund managers that I would speak to. And I'd make the point that in many ways, our job is the same. We're both portfolio managers. And when they look at a stock, they're looking at the fundamentals of the business and the macro exposures that that stock is giving them. For example, if it's a bank, they're looking at its net interest margins, they're looking at what's happening in the housing market in that country, and then they're looking at their portfolio and they're deciding whether they have that already in their portfolio, whether they want some more of that kind of exposure or risk, how much, etc. So I'm doing all those things except what I'm exposed to is your thinking, how you see the world, and how you make decisions. And so, what I'm trying to understand is your investment philosophy, your process, your thinking, your decision-making quality. And whether or not that's similar or the same or different to other managers in my portfolio, whether I need that, whether I want more of that, the risks that that brings, it's the same process, it's just the emphasis shifts from factors affecting the company to factors affecting a manager’s thinking.

Dan Barker  55:45

Yeah, yeah, I think that's great, you can buy a manager who has, you know, just a very, very, very high-risk tolerance who wants to invest in a very concentrated way in a particular sector, and you know  or you can imagine what you're going to get that type of person. And you can invest, you know, I'm sure other people who are going to hug a benchmark and, you know, play a fiddle at the margin, and you know what you're going to get in that case too. And so, I hope, I hope we're somewhere in between I guess, in terms of some of that. I think we run actually relatively low risk from a portfolio management standpoint, in terms of, you know, in terms of our hedge funds, we never run leverage, we always have cash. And we're certainly not pushing any envelope in terms of gross exposure or net exposure, or we want to give people a globally diversified fund and have exposure to all geographies and all sectors and be pretty balanced and have, you know, relatively, you know, maybe 60, 70 names, you know, where I have my comfort level. I don't know if that's, you know, more or less concentrated, there are certain people that are more concentrated, and certainly people that would have more names. But yeah, you have to find the investment style that fits your personality, you know, what makes you sleep at night, I think that was also a very early lesson in our business, is that we sometimes did things that you know, to give you a quick example, we had a stop-loss rule at Apis Capital when we first launched Apis Capital. That was not something we'd ever done in our careers. It was a stupid idea, to be honest with you, but we did it because we thought, you know, allocators would like that. And, of course, for you know, after a few months, it just wasn't working and you know, it created all kinds of problems, and we just threw it out, you know, and we thought what the hell were we doing? You know, why would we do that? And again, it was sort of one of these, I think, kind of immature things that we did as managers to think that you should do something because the market wants you to do it. And you got to do what works for you. And then you've got to hopefully be able to explain that to other people that, hey, this, this fits my personality, this is how I'm built. This investment process works for me, might not work for you but it works for me. And it's my job to explain to you why, why it'll work, you know, over the long run and give you a good return.

Daniel Grioli  58:16

Your comments remind me of a great book called "What I Learned Losing A Million Dollars". It's written by a former trader on the Chicago commodity markets. And he, he was very successful for 25 years and he lost everything in a three-month period on one trade. When I say everything, I mean everything, life savings, money borrowed from friends. And he wrote it all the way down until the margin clerk put him out of his misery. And what happened after that is after going through an understandable period of depression, he sat down to try and figure out where he went wrong and what he could learn from it and write the book. And the first half of the book talks about his story. And then he gets to a point where he, he went and did a lot of serious study of all these different ways to make money, you know, different investment styles. And what he found was that he was getting all of this contradictory advice in it, he was always reading about value investors, growth investors, momentum investors, long term investors, short term investors and they were all contradicting each other, except on one thing. And that was, what you just said really, is you've got to do what works for you and not lose money. You have to manage your risk in a way that matches your style. That was the one consistent theme across everything that he looked at was, there are lots of ways to make money, but you've got to keep it. And the only way to do that is to manage money in a way that suits you and your personality and your objectives.

Dan Barker  60:01

Right. Right. I think that book sounds sort of like, I'm sure you've probably read the “Market Wizards” books, but those are sort of vignette that’s right, a similar kind of, I always kind of live vicariously through these people that like, you know, they make tens of millions and they lose it all, and then they make it back. Oh my God, I could never ever do that. I couldn't possibly put myself in that kind of situation, but it is interesting to kind of, again, you know, understand the mind of some of those people, because those are, there are other players in the market, and they think differently from you. And you have to have, you know, you have to understand what's motivating them sometimes. And that's all part of the game, I guess. And understanding, you know, we look at that, too, when we look at businesses, and we look at who are the owners of this business, and if it's, you know, if it's a value crowd, then you will generally see the behaviour of that stock will sort of, you know, it tends to be low volatility, it's, you know, whereas if you have the growth momentum crowd, and you look at those types of players are in your name, oh, okay, I can understand why this stock is behaving this way today, these are sort of some, you know, flaky characters that I've gotten in bed with, and so I can appreciate maybe why this particular security is behaving the way that it is. So, yeah, it's all part of the game.

Daniel Grioli  1:01:28

And as you're looking at the stocks in your portfolio, how are you thinking about position sizing? Obviously, it will be different across the three funds, but in broad terms. 

Dan Barker  1:01:41

In broad terms, we do have the same approach across the funds, we have this concept of what we call ’Farm’, ‘Research’ and ‘Core’. And this idea of ‘Farm’, ‘Research’ and ‘Core’ is that, well, we created this what we call ‘Farm Team’ because we used to work with these enormous watch lists. And we sort of, you know, we're big believers in terms of whoever turns over the most rocks wins, you know, that sort of Peter Lynch principle, and so just meet businesses, meet companies, learn about their industries, learn about their particular businesses, and you're just going to start to naturally kind of connect dots and then start to put things together and over time. So but what we would, again, this is behavioural, I guess challenge is that what do you do with a watch list? You'll watch it. Yeah. And you know, like you being an allocator, looking at, at fund managers. If you have an investment with a fund manager, I guarantee you, you're going to look more closely at that fund manager than some guy that you met once and you were curious, you probably weren’t going to invest with him, but you keep tabs on him or whatever. But when you own it, suddenly, okay, I’m feeling it. Again for our ‘Farm Team’, it’s a sub 1% position, no note, no model. I'm the PM, you know, I'm the decision-maker. But our analyst could come to me and say, “Hey Dan, I think this is interesting, I still have some work to do. These are some questions I have, but it's timely. Let's get something started” And just based on my experience, sure, let's do 50 basis points, let's do up to a percent. Now to grow it to the research portfolio, which is a one to 5% position. Full note, full model, you know, more, at least two people on the team agree so we’ve got a larger consensus on the team. And we’re developing, you know, it’s, it’s less, and it’s okay, on the farm team, you do the work like, yeah, you know, I found some hair on this, you know, this, it wasn’t, there was something I can’t get comfortable with, or it’s not as you know, I’m not building the really strong contrarian view that I had hoped I’d buy, but it’s okay, kick it out. So there is this kind of churn and maybe 10% of the portfolio is typically in what we call the ‘Farm Team’, the bulk of the portfolio is in that 1-4% range, maybe you know, or 50% of the portfolio 60% of the portfolio are with these 1-5% positions. Again, full note full model, we have a contrarian view, it may not be perfect, it may have liquidity or other risk constraints that sort of keep it in that 1-5 bucket, it may not be necessarily as timely or the timing isn't necessarily perfect, but we really like it. It’s a solid idea, we have edge, we have an argument with the market, we have conviction, it's gone through our diligence process, that can be a research position. And then to go ‘Core’, which again is sort of these, like the Siltronic example I gave you, sort of these 5%+ positions, full note, full model, actually consensus of the team. You know, Eric, my partner at Apis is, you know, I require his agreement on anything that's going to be a ‘Core’ position because these are going to be the big movers, you know, these are these can hurt or help, hopefully help, you know, the portfolio. But we really have this, you know, as I said, we're at nine, the Street’s at four, we know either four, we know why we're at four, we're right, they're wrong. You know, we're going to, we're going to make that a big position. And so those are what we call our core ideas. And those, you know, those might be our top 10 positions are probably 40, 50% of the fund. So at the top is our 7, 8% positions, at the bottom they may be our 3% positions. But, you know, those three or four or five core names, hopefully, that we have are 5-10% type positions. And in total, they, you know, they might those four or five names might be 30, 40% of the portfolio. I should say, yeah, I mean, if they average sort of 6, 7% positions, you know, if we have five of those, you know, that's 30% or whatever of the portfolio. So it's kind of a blend, there is this tail of names, but there's also, you know, these core high conviction ideas that kind of give you a little bit of that concentrated portfolio while having a kind of well-diversified, you know, tail of names as well.

Daniel Grioli  1:06:08

And so when a stock makes that core allocation, how long would you typically own it for? What would be your usual investment horizon for a well-researched core position that you've got a strong team consensus on?

Dan Barker  1:06:25

Yeah, there's a nuance to that, I mean, I can give you the math, the mathematical answer, I think is the average holding period has been about three and a half years for a position like that. But there is some, you know, that Siltronic was probably a year and a half type of position. And that was because it was a little bit more of a cyclical story, there was a moment in time where we had a lot of edges and that got closed pretty quickly. So, and that's okay, it can then go from ‘Core’ back to ‘Research’ or, you know, even in some cases, it goes back to ‘Farm’. You know, because the timing isn't right, or, you know the thesis has largely played out, or it goes out entirely. But so the ideal is to have, you know, we've had a few of these, where they've been almost for the entire existence of Apis. You know, where we've owned a company for 15 years and it’s been a multi, multi-bagger over that period. And the goal is to find those that can do that. So, I will say too I think just as a small-cap investor, you can't bet on the quarter, and you can't be short term, you actually, it's a requirement that you look out three to five years, and you think, okay, this business will still be good in three to five years because you don't know when you're going to get paid in that spectrum. And a lot of times, in small-cap, you can kind of be the proverbial, you know, tree in the forest or whatever – it's doing great, it's executing fundamentally just the way you'd hoped and nobody cares, and nobody's paying any attention to it. But then, for some mysterious reason, the spotlight maybe comes to that segment of the market and you're like, duh, you know, where have you been all my life, it's about time and you get a very significant re-rating and in a short period of time. And so I think if you're playing, you know, just because you think, hey this is gonna have a good situation short term. And they may have a great quarter, and the stock does nothing, we're talking about the timeframe for small-cap investing and sort of the three to five-year view. Yeah, and I, like I say, I think you just hope that somewhere along with that, you know, if you have that perspective, you hope in that timeframe that someone will notice what you've noticed, you know, as long as you have that longer-term view. Nut hoping that they'll see what you see imminently, it's probably, you know, potentially asking for too much.

Daniel Grioli  1:09:58
Now we can't avoid asking the question because we're still, we're still in the middle of this pandemic, we're trying to work our way out of it, but from the perspective of a fund manager in your portfolio, what were some of the lessons that you learned investing through this period of lockdowns and uncertainty?

Dan Barker  1:09:24
You know, I think we managed the crisis if you want to call it that reasonably well. You know, I took the, you know, while I felt like we were pretty prepared as much as you could be for what was about to come. Certainly, you were getting signs in January, February that this was, you know, we'd seen SARS and some of these other things. And, again, you know, having experience, you lived through some of those and, you know, pretty quickly, if you'd talk to me in February of 2020, you know, it's not inconsistent with what I actually, I would have said. The only thing we have to fear is fear itself, you know, and I was worried about society's reaction to it rather than really, you know, it's obviously a horrible disease, and it's become very political to talk about it, unfortunately, but it certainly affects a certain segment of the population. And it's certainly a significant risk for a certain segment of the population. But I think I understood pretty quickly that this was not a significant risk for young healthy people. And the world was going to carry on and certainly, because, again, of the volatility, I mean that fell off in March, April was as vicious as you know, my first experience was the ‘87 crash. I mean, I got investing in ‘87. So that hurt to you know, that was a horrible day, was traumatic for me but this is sort of an elongated few week periods of trauma and a crash that took place over several days. But, you know, there's always these opportunities to, well I call it to upgrade your portfolio, and in a portfolio of stocks, you'll see two things you like equally. One, for some reason, is down 5% and another business you feel similarly about is down 50%. Those are great opportunities, you know, those are again, I don't really want to change the composition of the portfolio, I don't want to change my gross and net positioning or whip around the portfolio risk too much. But from a stock-picking standpoint, as much as it pains you, you know, sell the one down five, and use that capital to buy the one that's down 50. And those opportunities, you know, they do come to you on an on a semi-regular basis, you have this risk-on, risk-off kind of episodes, and so we treated COVID similar to that, you know, we saw businesses that were, again, just margin selling and very much panic. And in small-cap, you get a lot of variabilities there, and small-cap can at times be a place to hide out, sometimes there are stocks that just they don't really trade much. So they kind of avoid some volatility, even in a volatile time. But, you know, if you can get those out of the book, and then use that, you know, some of them and buy some of the underperformers, you know, we took advantage of that. But certainly, we learned to think like everyone when it started, we thought, oh, everyone's going to pull on their horns and, you know, consumer spending will drop. We were quite surprised, it was pretty early in April, May when you could start to see that, actually, online sales were quite strong. And, you know, I had everything at home, you know, and doing things at home or feathering your nest and buying furniture and IT products or online gaming or gambling or, you know, things like that we're actually benefiting from this, you know, and so, just yeah, I think it was just natural to think people will cower and be afraid, but actually, their behaviour was just the opposite. They went out and spent money like drunken sailors. And so we didn't, you know, and again, kind of with our style, we saw this behaviour in the U.S. and thought, well, gosh, are there online businesses in other parts of the world that are, you know, will people in France start to buy furniture? We found online businesses in Scandinavia, for example, that, that was still very much down and out, but that same behaviour, and we're all human beings at the end of the day, so some of that behaviour that we saw in the U.S. was quickly translating, we were seeing it in other parts of the world. Again, you know, we have this luxury of the dollar and we could print money and flood the markets and flood people with free money, and they didn't have to work. And so there are some just some crazy, crazy things that we tried. But to a lesser extent, those programs were happening all over the world. And so we found a lot of businesses that we were kind of taking those lessons real quickly and applying them to other parts of the world and found some good online e-commerce businesses and things like that, that did very well in the second half of the year.

Daniel Grioli  1:14:04

You're right, there was a big difference between the COVID sell-off and the financial crisis was that the liquidity that central banks created during the financial crisis went largely to the banks to repair their balance sheet. But this time, it went right into the pocket of consumers. And they saved a big chunk of it, but they also spent a lot of it too.

Dan Barker  1:14:44

Yeah, yeah, Americans have a reputation for pretty much living for the day. My son, this is sort of a funny aside, he goes to Yale, so he's a smart kid, but he took a semester off, the second semester because he became a ski lift operator at Deer Valley in Utah. He just was tired of online learning. And that wasn't the college experience that he wanted. So he got to live in a dorm with, you know, a bunch of people, other ski lift operators who are a little bit different. His roommate got a stimulus check for I don't know, you know, $700 or something like that. And immediately he bought a pair of like $700, fur-lined leather gloves. And so there. Yeah, there was a tendency for you know, that certain types of the population that just spend it very quickly on frivolous things. And so, yeah, when you give, give Americans money, they don't let it stay in their pocket too long, generally speaking.

Daniel Grioli  1:15:38

I think some of it ended up in GameStop as well.

Dan Barker  1:15:42
Oh, yeah, absolutely. Crypto, you know, we're still seeing it, although maybe that's waning somewhat. But yeah, that's been a feature as well over the last year and a half. 

Daniel Grioli  1:15:52

So looking forward now we're hearing a lot about supply chain disruptions. We're hearing about the great resignation, you know high quit rates with people leaving their jobs. We're hearing about inflation no longer being transitory - Jay Powell told us possibly not transitory anymore. How are you seeing that play out across the companies in your portfolio and where you're seeing opportunities?

Dan Barker  1:16:12

I think one of the real interesting changes that's going to take a number of years, and there's going to be a lot of investment implications is just the onshoring of manufacturing, the re-onshoring of manufacturing. I think a lot of businesses, you know, it's been very, it's been a lot of fun to kind of outsource everything and earn this incredible return on capital because you could just design a semiconductor wafer, and you could have it fabricated in Taiwan and packaged in Malaysia and built-in a product in China and shipped to anywhere. So that, but you know, we learned that just-in-time, having these supply chains, which are disparate and very global, leaves your business vulnerable. And I think right now, I mean, certainly, when you look at, I think it’s strategic. I mean, we’re way over-reliant on Taiwan Semiconductor example. If China were to ruffle the feathers of Taiwan, we've got big, big problems. And these aren't problems that you can fix overnight. I mean, TSMC is building, I think nine semiconductor fabs, as of now they're going to spend $90 billion, and most of them I think, are in Phoenix. Intel is making a huge push into semiconductor fabrication. Samsung, of course, is also but you can't, you know, again, you talk about moats,  who can do a three-nanometer design chip, there's one company on earth that can do that, it's Taiwan Semiconductor. And there's one company that can do the UV lithography called ASML Lithography. And as far as I know, that's never, that's not going to change, you know, not in not in my investment horizon. And so, we have become, you know, hugely dependent on a few businesses and a few companies. And that's, that's a huge vulnerability for our, for our existence and our world as the world as we know it. And so, you know, what you're seeing now is, you know, an onshoring. Why are we building these nine fabs in the United States? Because having nine fabs and Taiwan was not a very good idea. Or, you know, there's some in China as well, but so that, that's a strategic need, I think, and then we're seeing that, you know, that's going to probably cause companies to keep inventories of things. You see it in the automotive sector, you know, they're going to have to build more themselves, they're going to have, you know, have some safety stock of various components. They don't want to get caught out the way they were caught out this time. And they don't want to be vulnerable to you know, because if you look at the automotive IC chain, a lot of that problem was in packaging companies in Malaysia and when COVID shut them down for a month or two, everything got stopped up you know, and it didn't matter if you could make the semiconductors you still couldn’t package them, you still couldn't test them, you still couldn't get them to the factory in China where maybe it went onto a printed circuit board and then got put into a product and so you know, shipping and all those things, all that congestion that you see today, I think that'll get worked out but I am a believer. On the inflation front, we don't do a lot of macro at Apis, I do believe that stock pickers sometimes they get consumed by macro and I think that's a dangerous thing when they do. So, I try not you know, we do a little bit of macro at Apis, but not a lot. But one thing I kind of kept as a truism in economics and inflation was that you couldn't have inflation without wage inflation. And, you know, all through my career, you'd have these bouts of, you know, little bits of inflation, and companies would have pricing power. And I would always wonder, what is this going to be? Is inflation coming back? And I never really saw it because I said, you know, there just isn't wage inflation. So how can you have inflation if you don't have wage inflation? And so, when you say, is it different this time? What is different this time is we have wage inflation and we have significant wage inflation. And when you talk about the great resignation and people dropping out of the workforce, you can't automate everything, you know, we're seeing tremendous pricing power of wages in the U.S., you know, some especially, you know, it's just probably not altogether unhealthy more on the lower end of the wage brackets where people who made $10 an hour are now making 15. Restaurants in Minneapolis, you know, start at $18 an hour which is, which is not bad. If you work 40 hours a week and 52 weeks a year, it's an OK living. So, that's for a fast-food company, you know, you can do higher value-added things for that as well. So, that job used to be an $8-9 an hour job and it's literally doubled in the last year so you know we are seeing wage inflation. I think that's sticky. I think you see it in rents, you see it in other things that are sticky, that don't typically come down once they've gone up. And so I'm I think that means the cost of capital is higher, I think discount rates eventually should go higher, probably argues that valuations should go lower at some stage. You know, some of the speculation and more speculative areas of the market probably will need to come back but timing is everything.

Daniel Grioli  1:22:16

Well, Dan, it's been a pleasure to talk to you about your career, your portfolio and how you're seeing the markets. Thank you very much for joining us on the Foresight Active Investment Podcast.

Dan Barker  1:22:29

Absolutely. It was fun. Nice to talk to you.









Dan, Apis and Investment Philosophy
Compounders and Moats
Short Selling
Investment Process in Action - Stock Selection and Sell Discipline
Position Sizing