Sydnee Gatewood: Hello, everyone! Thank you for joining us on GuruFocus Value Insights! Be sure to subscribe on YouTube and Spotify so you never miss an episode.
We are pleased to have Patrick Brennan, the founder and portfolio manager of Brennan Asset Management, join us today!
Based in Napa, California, Brennan Asset Management uses a concentrated value investing strategy to manage separate accounts. It is also the sub-adviser for the Oceancross Capital Partners Fund.
Patrick has appeared at multiple value investing conferences, including presentations to The New York Society of Security Analysts, The Nebraska Society of Securities Analysts and the VALUEx Vail Conferences. He also co-authored an article on tracking stocks with Lawrence Cunningham for The Financial History Magazine and was featured in a write-up of Liberty Latin America in The Private Investment Brief.
Prior to founding Brennan Asset Management, he managed portfolios and led research efforts at two value investing firms in California: Hutchinson Capital Management and RBO & Co.
Previously, Patrick worked at Mark Boyar & Company, where he led the firm's research team and helped manage $800 million of assets across individual portfolios, institutional accounts and a mutual fund. He also worked for six years in investment banking and equity research with Deutsche Bank, CIBC World Markets and William Blair & Company.
Thank you for joining us today, Patrick!
Patrick Brennan: Great. Thanks Sydnee, and thank you to GuruFocus for giving me the opportunity to present.
Some basic disclosure, you know, do your own research, advice, investments can move up and down, et cetera.
You did a great job covering, you know, sort of my background. This is just one quick overview slide. I manage money on a separate account basis. I'll also do some company-specific special purpose vehicles. I own personally all the names that I own for clients. I focused in on just a couple of areas, you know, generally, financial services, the media telecom and then some consumer discretionary. I don't do everything, well, I try to focus in on, you know, just a couple of niche areas and I don't own that many names. The top 10 or 15 names are 90% of the portfolio and we're sort of looking for attractive IRRs over a three to five-year period.
So on the next slide, I'll give an overview of what I'm gonna actually talk about. I thought maybe it'd be helpful to just sort of, you know, quickly highlight the global things. Most of you who are listening to this are very familiar with it's sort of a narrow stock market, the so-called Magnificent Seven have been driving a large portion of the returns. I sort of, you know, characterized the… there seems to be a lot of excitement on artificial intelligence and all the productivity gains that can bring. But, you know, at a current, cyclically-adjusted P/E ratio, the market probably looks pretty elevated, among the highest in history.
There's also a big debate on interest rates, the rate cuts at the beginning of the year down to maybe one to two, maybe it's zero, maybe it's an increase, you know, what happens if, you know, rates go higher. I think for, you know, a couple of names we will touch on the very end, maybe a concern on refinancing or certainly a wave of refinancing to come. You know, where are investors avoiding? We're gonna be talking about a couple areas, you know, spec debt in the middle here. You know, people are uncomfortable with leverage. Generally, foreign names areless popular. Some of the names in Europe, the U.K. maybe in particular, are fairly bombed out. If you're smaller, there's a lot of, you know, research been cut across several names, those pockets of maybe smaller names. They are just not well covered. I, you know, would think would be misvalued and certainly, you know, big debate has just been sort of would…most people have sort of concluded, and rightfully so in many cases, you'd rather own a great business than an average price versus an average, you know, business of extraordinary price. I think maybe the nuance is slightly more complicated. I sort of frame it as what about a great business at above-average price versus maybe an average-plus business at a bombed out price. And there, I think, maybe the answer is less clear and, hopefully, I'll try to show a couple names we own that we think the latter category is more attractive.
So try to cover a couple topics we're gonna have to, you know, go through reasonably quickly. You can always reach out to me afterwards if you have questions.
We touch on European financials. It's one of the hardest hit sectors I've ever come across in my career. I think certainly financials in the U.S. have had their challenges with Silicon Valley Bank, et cetera that, you know, most are probably familiar with. I don't think many U.S. investors appreciate how cheap European financials are. So maybe just some high level there. I talked about Irish banks the last time in a previous presentation. I still like them. I think PTSB (LSE:PTSB, Financial) is the most attractive one of them, the smallest one. You know, this is a rather illiquid situation. We're one of the larger shareholders here, but we continue to see a substantial amount of upside.
Talking about another unpopular stock. It's technically a U.K. bank, but it's really a payment processor. Cab Payments (LSE:CABP, Financial) might have been the most notorious IPO in Europe last year. It had a huge stock decline. I think it's still a secular grower, arguably, with incredibly attractive growth rates over time trading very much like the European financials.
And we'll just sort of touch on, I know I've spoken on the Latin cable in the past and I think we'll just, you know, have a chance for a quick summary of those. At the very end, I can answer any follow up questions.
So in Europe, I thought a couple of these charts from Autonomous Research might be helpful. This is just, you know, broad-based European financials on a two-year P/E basis. We rallied a little bit to sort of, you know, really were between six and seven times, but we're not that far off valuation levels during Covid or kind of near the bottom of the GFC. And that surprises a lot of people, I think. This has just been the long-term average P/E of European financial has been 10 times that will sort of show again, period of, you know, Europe has actual negative interest rates. And so zero and negative interest rates are clearly bad for banks. And I think there's just this muscle memory that people somehow think value situations are headed back to this level.
I would argue you don't think rates are headed back negative in Europe. It probably makes less sense to wait the period of, you know, roughly a decade when, you know, zero negative interest rates were the law of the land. The chart on the bottom is just trying to show expected profits as a percentage of GDP in the market cap of financials as a percentage of GDP and going back into the mid 1990s. As a percentage of GDP, even though absolute profits are, you know, the highest levels ever as a percentage of GDP at very modest levels and sort of something comparable with what existed in sort of the end of 200 3, not something where they were earning or over-earning, you know, right at the heel of… right at the beginning of the financial crisis and as a percentage of GDP, you know, even though as a percentage of GDP, the profits are the same as they were in 2023, the market cap is a percent of GDP is half those levels. So again, I think it speaks to a sort of bombed out sector; this is just the visual representation of interest rates.
Again, you see a period where, you know, rates were negative, rates are expected to fall in Europe, maybe three rate cuts in the back half of this year. But I don't think, you know, it was debatable whether negative interest rates actually worked; it probably did as much harm as any good. And most U.S. investors you speak with would sort of have a broad forecast. So saying, “No, we don't think rates will go negative again.” But yet again, you're applying valuations during a period of negative interest rates. And so here, maybe the final macro slide, this is just sort of showing capital levels and this is particularly relevant when we get into talking about PTSB. But it's just the one of the regulatory metrics that's most important for financial institutions. How much common equity does it have relative to its risk-weighted assets? And, you know, we'll cover this, you know, I suppose right here, risk-weighted asset.
You know, the basic idea is $1 of Treasury exposure is very different than $1 of commercial construction loan. And so that $1 may be weighted at sort of 50 cents for one exposure might be weighted at 100 cents, 100 cents on the dollar for another. And the higher the risk weighting, the higher perceived riskiness of the aspect. And so this is a metric that sort of talks about capital as a percentage of this. But you sort of see the line goes up into the right, I mean, capital levels on a onee-to-one basis are the highest level. And you know, what is this close to in 40 years? And also if you just wanna sort of a leverage ratio, sort of say common equity relative to total assets again, also at some of the highest levels in the last 40 years. And the, you know, the bottom chart is just sort of saying, look at total capital returns, dividends, buybacks versus capital raise. You see again large numbers the last couple of years and forecasted to go even higher. So huge, like bombed out sector, a lot of capital and stocksand many of the companies are actively buying their stock. I think that's a recipe for a lot of potential value creation.
So on to Ireland. I'm gonna quickly go through some of the just macro overviews and sort of thinking and doing this is that if you're long a bank, you're kind of long whatever market you're in. You're kind of long that macro market. And I would argue Ireland is, one of, I think it's biased obviously, but I think it's the most attractive market in Europe from a three-to-five-year economic forecast from a demographic point of view. I think it's one of the most attractive in all the developed world and a lot of multinational companies here are based in Ireland.
Just a quick review of Ireland.They lost their collective mind during the global financial crisis. Bank assets were multiple of GDP. This was an incredibly painful experience. So the, you know, the government took in…came in, had to guarantee all the banks' liability, the IMF had to come into Ireland, the homebuilders all went belly up. And so you went as a result of this, you went about 10 years with building very few homes throughout all of Ireland and sort of three or four years post-financial crisis, the entire economic outlook for Ireland drastically changed. Tech companies came to Ireland, a lot of them probably initially attracted to a low corporate tax rate. But they're also attracted to a very educated workforce; venture capital communities sprung up in Ireland, there's a lot of engineers that come out of Ireland colleges, you can, you know, the government will finance education through graduate school. And so there became a, you know, drastic need for homes. And so, um to put, you know, some rough numbers on this, you know, you hear a lot of stats in the US about shortage of homes. The shortage is, is, is very modest compared to what happened in Ireland. So there's no homes built for roughly 10 years. They got the home building up to roughly 30,000 units on the, you know, this is a housing stock of roughly 22.1 million units. It's forecast now with the job growth, with people, with the demographic trends, people moving back to Ireland, we're gonna need 40 to 60,000 homes for maybe the next two to three decades. It's really an incredible number and a lot of mortgages are gonna have to exist.
So you got this real favorable macro backdrop and then on top of that, you had a regulator in many ways that was fighting the last war. And so, you know, you have this, this GFC was a real traumatic experience for Ireland and sort of a vow of never again. And so Ireland imposed some of the most stringent capital requirements on the Irish bank. And after several years of negative interest rates, stringent capital requirements, two of the banks decided to voluntarily turn in their banking license and that was Ulster and KBC. An important thing to remember is that these two banks were swallowed by the three banks that remain in Ireland. And for PTSB, in particular, the acquisition of Ulster increased their performing loan book by roughly 40%. And so this is really, it was transformational for all of the Irish banks, but for PTSB in particular, this one, you know, was a game changer.
So PTSB, you've got this favorable macro backdrop it got along with the sale with the Ulster Bank. We're gonna talk about it has a risk-weighted issue that it just has not been updated but should be by the end of next year and it's among the cheapest banks in the bombed out sector.
So I'm gonna go through these next couple slides pretty quickly. This is just showing demographic trends. Europe is notorious for slower growth, there's not as many kids and, you know, is demographically less attractive, certainly, than the U.S. You can sort of see annual population growth is far less than 1%. For the EU, close to zero, it's 1.3%. It may not sound like a big number, but, you know, when you over a multiyear period, this is actually fairly robust growth. Ireland is very young, a lot of jobs and again, big, you know, translates to a big need for, attractive place for foreign direct investment. An attractive place for a lot of houses that have to be built and for a lot of mortgages. This is some broad economic stats, not gonna go through all this, but the thing that's worth mentioning again is I don't think there's a single European country that would trade their own outlook for that of Ireland over the next three to five years, from just sort of a macro perspective.
GDP numbers in Ireland are skewed because of the multinationals; they have a pharmaceutical presence, the big presence as I've mentioned already, on the tech companies. And so the GDP from just that net trade component can go haywire from quarter to quarter. Aircraft leasing is a big sector in Ireland as well. So you modify domestic demand is kind of like their version of GDP and that's expected to grow, you know, 2% to 3% could be upside for that. So, very stable economic growth over the next several years. It's worth highlighting too in that period of budget and the huge deficits that we're facing in the United States. I mean, record surplus is expected over the next four years in Ireland. And this is a big political issue in Ireland. Exactly how you spend that money but, you know, something in the order of $40 billion of surplus forecast over the next four years.
I won't spend a lot of time on this. It was just sort of, you know, think about Ireland as during the GFC of the United States on steroids. I mean, the drop was even greater, the rebound was higher or above 2007 levels. And maybe one thing that's worth highlighting is Ireland put in macro prudential rules in 2015. So by the rules of the central bank, you could not borrow more than 3.5 times your income for a home. So what that meant was that for, even if a bank wanted to give the crappiest loans they possibly could, riskiest loans, et cetera, they were limited by macro prudential rules. When we talk about this capital relief for PTSB, keep in mind 70% of PTSB's loan book now is from 2015 onward and it's eventually gonna go to 100%. And so that means that that you're talking from 2015 onward, this is probably the most favorable credit environment in history to write mortgages in. And so it's really a completely pristine period. Now the 3.5 target, as I mentioned on the slide, was lifted four times in October 2022. And part of this is just due to the enormous demand for housing and, you know, this sort of speaks to it. I mentioned the 40 to 60,000 possibly needed for the next 30 years. There's very few homes across all of Ireland, not a lot in the secondary market. So this is sort of the political issues in Ireland.
And maybe one other broad difference between Ireland and the United States is just it's substantially cheaper to buy a home than rent. And that you hear of a housing shortage in a lot of markets, but that dynamic is not true in many cases in the United States. Significantly, it can be, depending on the market, can be a lot cheaper rent than it is to buy. But this sort of speaks to, you know, full-blow housing crisis and why this capital relief for PTSB is sort of a political issue for Ireland as a whole, you know. They only have 5.1 million people. There's three banks left and one of them, PTSB, has one arm tied behind its back because of an antiquated regulatory issue that's in the process of being fixed, but they need the bank's lending as freely as possible. And for as many mortgages as possible, you know, to fix, to remedy some of this housing crisis.
So these are three banks, Allied Irish Banks, Bank of Ireland and PTSB. The other two are three or four times larger than PTSB. They have some clear scale advantages, they have advantages over…I think they're both very reasonable banks. They're attractively priced and selectively owned. You know, both of these, I think the more attractive investment at current times is PTSB. PTSB is a pure play. It's all Ireland and it's also predominantly a residential book, although the SME, small and medium enterprise, business book could grow to sort of 7, 8% of the book over the coming years thanks to the Ulster acquisition. But the other important thing to note is PTSB, unlike the other two, has zero commercial real estate exposure of any kind. And so again, if you like Ireland, you buy into that, you need a lot of homes in Ireland. You buy into, you know, this is an attractive valuation. They're gonna get some capital. I think this sets up well.
This slide might be a little more difficult to read, but again, this is a function of only three banks in Ireland and the so-called deposit data that a lot of investors, financial investors in the United States talk about. It's the amount that deposits increase as a percentage of in the U.S. fed funds increases in Europe for each ECB deposit rate increases. Ireland, with only three banks, the deposits have been much, much lower. And so PTSB, from what we can gather for guidance, assuming data is ultimately moved to sort of 40% to 50% on paying deposits, I think this is an exceptionally conservative assumption given that, you know, underlying deposit data really haven't cracked 10%. And again, in Europe, bombed out sectors we sort of talked about, but it's a consolidated sector here. We only have three banks with 5.1 million people. You don't have a Treasury Directive like you do in the United States, it's more cumbersome to move your deposits. You don't have 4,000-plus banks like you have in the United States and in Ireland you got a pretty substantial tax on any of your interest income. So PTSB has a really attractive deposit franchise. Their deposit guarantee scheme is capped at 100,000 euros. Around 70% are covered. It's even higher on a retail deposit format. So we would argue just the nature of Ireland and the attractiveness of Ireland, plus this deposit franchise, makes PTSB a pretty interesting acquisition candidate. If the risk potential that we foresee doesn't ultimately materialize, we think they've got a pretty good story on that front as well.
So I'm gonna go through this kind of quickly. It's a little technical, but I can get into any questions in the Q&A, but we covered risk density. The one on the left, that like crazy high black line, that is PTSB. It shows Ireland is a lot higher than the rest of Europe and PTSB is ridiculously higher than the other two banks. And this is one of the key parts of understanding the PTSB investment pieces and they are far more ove capitalized than first meets the eye. The target CET1 to risk weighted ratio is 14%, which is high. But there's a lot of other banks that have CET1s in that ballpark. What's different is the density of new mortgages is 55% for PTSB versus something like 32% for AIB, 22% for Bank of Ireland. The AIB and BOI ratios would be up to, you know, 2 to 3 times the density of other countries in Europe. And as we just went through, from 2015 onward, Ireland is about…it's just an incredible market to have been writing mortgages from.
So why did this happen? Well, there is a process called the targeted review of internal models , or RIM, process that the European banks have been going through for whatever reason. PTSB was the first of the three Irish banks to go through it in 2015. A lot of the models that were given to the central bank of Ireland were only updated through 2013 before the macro prudential rules came into effect. Some have been that the central bank has the models from 15 to 17. But the important point is the other banks are up to through the end of 2023. So you can't have two banks that are updated through the end of 2023 incorporating a much larger period of very positive underwriting data and one that is sort of stranded at free macro prudential rules. So currently, the central bank has agreed that this needs to be remedied. This is a massive project. You know, you've got to submit all the models or thousands of pages of code associated with each input assumption. The expectation is by the end of 2025, there's gonna be a fairly material reduction in the density.
Now they're not gonna go as low as, you know, certainly Bank of Ireland or Allied Irish Bank. But interestingly, over a longer stretch of time, all three should converge. So the actual effect could be much larger than what I'm going to talk about. But the punch line is between organic capital generation and the density reduction. We think that of the amount of excess capital above the 14% CET1 ratio, it could be 50% to 75% of PTSB's market capitalization. It's a huge number.
This one is just gonna sort of say if you wanna assume incremental funding term costs at, you know, two and a quarter percent, which is, you know, way higher than their existing funding ratio. Now, if you sort of said I write a mortgage of 42.25, I've got a mortgage, I've got to put aside 55. It's weighted at 55%. So it's 55 cents of actual exposure. I've gotta put capital, get 14% against this. If I make a series of assumptions right now, the incremental return on that mortgage might be 18ish percent while an SME loan could be something closer to 19%. So until PTSB gets relief on this front, it does affect their ability to aggressively court market share in Ireland versus the other two and it causes them to lean a little bit more to the SME loans even though SME loand might be weighted at 90%. So this is the distortion it causes. If I change for the next slide and sort of say, OK, let's take a guess from where the density of mortgages might move to something closer to 33%, down from 55%. The incremental return on your mortgage jumps to like 30%. And so this is a massive change and obviously, it's ramification for how aggressive PTSB can be going after market share. We sort of say that like, you know, there are shares hovered between 16 and 18% and around 16ish percent. Now, if you're kind of pursuing more SME loans until this relief goes through, we think it can move into the low 20% driven in part by this change. So, I'm not gonna go through every detailed model assumption here. I'm just gonna cover the highest level. Look, three banks for 5.1 million is a lot easier than 4,000-plus banks in the United States, you know, 330 million people in the United States. But just the ratios are much more favorable. I thinkit's a lot easier. And again, the original point on average plus average plus businesses, the bank might be an average business. But if there's only three of them for 5.1 million, I think you got a good chance that the average plus year, I think ultimately they can earn a 40 cents plus of earnings potential, you know. So at, you know, 150 to 160 euros, the the updated PTSB, you know, from the last time, so has weakened, they sort of updated their guidance, sort of forecast the 2026 earnings of roughly 30 cents a share. If I'm completely wrong, that guidance is accurate. It trades at five times that number 40% of tangible book, I think the number is closer to 40 cents, especially since subsequent to their Q4 earnings release.
There's two worthwhile points. First of all in Europe, you have to issue a series of senior debt. It's called Emerald Debt. I mentioned the CET1 capital ratio. You have total capital ratios that incorporate essentially the senior bonds in the bank. PTSB just issued senior debt in early April at 4.25%. Now, if you trade at 40% tangible book value, that implies the cost of equity ratio probably something more than 20%. And almost the valuation suggests that maybe you need to raise capital or that there's some sort of capital deficiency we just went through. Why? That we think it's actually the polar opposite of this, it's about to be a catalyst. It's gonna unleash a lot of excess capital. But even trying to square the 4.25% versus 20% cost of equity is really, really challenging. You know, either the debt investors collectively lost their mind early in April or the equity is massively underpriced and we're kind of in the latter camp and went through the excess capital.
And then the final aspect of the story is this is a very limited float and again, like do your own diligence and keep this in mind if you're trying to buy shares, even if a retail investor would have some trouble, you know, buying a meaningful position in this, given the illiquidity, the government still owns 57%, Natwest owns 12%. Natwest is Ulster. As part of this deal, they received shares in PTSB Natwest was, you know, amazingly there, it's a U.K. bank that they were bailed out by the U.K. government in the process of selling their own stock to the public, getting the UK government out the PTSB position of roughly 100 million euros. It's just insignificant relative to the total asset size of Natwest. There was a sale last year the government went down to 57%. They were higher before, as was Natwest, they sold share for share. We think there's gonna be another share sale sometime this year, other large shareholders, ourselves included, as part of that 15% market. You know, your actual free trade float, like 150 million euros. So this is, it's a smaller name, but I think like, you know, it doesn't take a lot of imagination to think of a time when the free flow is increased. The government is completely out of Bank of Ireland. They've reduced their stake in AIB from it was. It was over 70% a couple of years ago, they're down into the…they're getting into the mid-30s right now. They could completely exit AIB within two years.
The process is gonna repeat, we think, with PTSB. And it would repeat, at the same time, you have the capital that is reset via the relief effort I talked about and the manifestation of this earnings that we see and the dividend blocker that existed on PTSB was lifted at the end of last year. So you know, if we're directionally correct on, you know, 30 or 40 cents of earnings, you're talking about even at a 50% payout ratio on a dividend, that could be 15 to 20 cents of dividends. And obviously you'd buy back stock versus doing a dividend at current levels, but it's not gonna trade at sort of a 10 to 15% yield over time. So I think it's just the progression over time that rerates this and ultimately, if we're wrong on the degree of upside, we again would sort of back up and say Ireland is a real attractive place to be, it's cheaper to buy PTSB than it would be to try to build a franchise from scratch. So for those who want some more details on this, please give us a call.
So, we're gonna cover two other topic areas which I hope Sydnee is not too terrified by in this presentation, but I want to introduce another. This one I firmly put in the average plus two, I would argue an out and out good business and this is sort of a situation that's notorious in Europe that I think is really attractively priced.
So what exactly is Cab? It is a U.K. bank. It's been around for nearly 200 years. They used to be an arm of the government processing payments, you know “the sun never sets on the British Empire.” It was ultimately privatized, but it has its sort of tentacles in all parts where Britain had historically existed since 1833. And this includes a large presence in Africa. This sleepy bank was taken over by a private equity firm named Helios Partners in 2016. They pivoted the bank towards foreign exchange and payment processing. And this pivot has been wildly successful as we'll show.
The core thing they do is provide hard currency to emerging markets. So this is key points of hard currencies, dollars, euros, pounds, predominantly those three. And they are acting as a middleman if the United Nations wants to send aid relief to Nigeria, maybe they go through Cab Payments to send dollars to Nigeria. And Cab Payments, because of their extensive relationships within Africa, might have the best position to get the most favorable rate on the Nigerian naira local currency. That's what they do. I just sort of point that out because all the sort of scary headlines with emerging market devaluations, et cetera, Cab is not exposed directly to those risks. They are acting as a middleman for this. And you can actually see it in the lower risk weighting that is actually assigned to this particular business. So we think they have a very small share of an enormous market that's growing rapidly. There was a lot of hope around Cab Payments. It was, as I mentioned I think at the beginning, the U.K. markets, even by European standards, are trading at some of the cheapest valuation levels. Cab Payments was considered the big hope of the fast-growing fintech company coming to the U.K. market forecasting huge growth rates; 45% in 2023 and 35 to 40% thereafter. These are top-line growth. They flagged sort of Nigeria as the area of potential weakness. And then in October of 2023 they blew up, they had to revise their guidance downward. They had problems in two of their currency corridors that after the fact probably were not as bad as was maintained at the time. The problem was Cab thought there was gonna be big growth in those markets. The stock declined 70% in one day. It's kind of a staggering move that happened. And, you know, for those who read the Financial Times, the Financial Times thought that, you know, Cab did not disclose some of the volatility in their businesses as well as they should have in the IPO perspective. But just with this movement, you know, it's high-profile IPO blows up. You had investors who…they just can't own it. After that percentage decline, a lot of people sell out.
The sell-side analysts are no longer confident in their numbers. So this is a very small market cap, but the fundamental growth outlook may not have to change that much. And you still could have, you know, it's very possible that growth could be something closer to 20 to 25ish percent, maybe, maybe it's 30%. It's really hard to be precise on these levels. But it's still probably a very attractive grower and has no debt. It is a bank; it has an incredibly high 25% CET1 capital ratio. It's gonna generate excess capital and it's priced like a European financial. And so I would just sort of argue that if growth returns even close to the current pace, to prior forecast pace, you could have this dynamic that growth is strong and you have a re-rating on top of this as capital is generated as well. So you could get…there is the potential for multiple turns of upside from here. And I would argue downside is limited by the current valuation.
So we're gonna flip through a lot of these fairly quickly and I'll just come back with questions. I sort of describe what they do. Their competitive edge is for those, for anybody who's tried to wire money from the United States, maybe your local bank, and, you know, take a city Atlanta, Georgia and you're gonna go from Atlanta, Georgia and you want to send something to Africa. Yeah, your local bank is gonna have a correspondent banking relationship with another, you know, probably large, it might be one bank who has the relationship then with one of the larger multinational banks, like Citigroup (C, Financial), JPMorgan (JPM, Financial), would have a correspondent banking relationship with a large bank in Africa.
The bank in Africa could have a banking relationship with multiple other local banks within Africa. So that's multiple point to point Cab offers because of just history, 200-plus years operating, you know, for the British Crown, they have bank accounts throughout all of Africa and they're a regulated bank. And so what this means is they can open something called the nostro account, which is a foreign currency bank, a foreign bank account at another bank in a different foreign currency. And they have these throughout all of Africa and they have one of the largest payment networks throughout Africa where they can get some of the most favorable FX transactions and where the rubber meets the road is that ultimately, the correspondent banking relationship is much more expensive. They might take 5% of the total transaction, while Cab is taking one-tenth of that. And that's an enormous opportunity for market share gains over time.
The other thing worth noting is correspondent banking. It's not really a focus area for the largest banks. In fact, one of the fastest-growing customer areas for Cab Payments is actually multinational banks, including Santander, Citigroup, et cetera. And so Citigroup might be able to quote, you know, with a markup to the Cab service, a rate for exchanging currency or making payments and it's beneficial for them because they don't have to worry about the regulatory risk. And again, a nostro account in advance as a bank that the banks can open these, tech companies cannot. And so it's much, much easier. You don't need the central bank approval of Tanzania in order to open up a nostro account, you would potentially if you're going to do foreign currency and payments in that country without one of these accounts. So global payments equal $271 trillion; Cab is targeting just a fraction of this, 1% of this market and still 2 trillion and they have roughly a 1% to 2%. So the basic model is there's a certain amount of flows, they have a take rate of those flows. If you look at it in terms of the flows or the actual revenue, it's roughly 1% to 2%. Again, in that targeted pool, it's $6 to $7 billion and our revenue stream within this 1% to 2%. It's a huge market still, you know, growing and Cab's taking share the major market customers for Cap Payments are some non-bank financial institutions; this will be…a lot of people are more familiar with, you know, some in Europe, some a company likewise which is like a consumer-facing payments company is a customer of Cab Payments and a lot of these B2C companies who, you know, one of the confusions that Cab has is, well, how do you compete with live? Actually, they're a customer because it's cheaper for a lot of these tech companies for some of these four doors to go to Cab Payments for that last mile. It's far cheaper for Cab to process international development organizations.
The UN is a client of Cab Payments. There's some sensitivity; Cab can only selectively disclose what its clients are, but sometimes the client itself discloses and that's why some of these clients you're able to talk about. And so, you know, it's not an easy thing to get on the United Nations, you know, client roster, but, you know, they're a massive sender of aid packages to Africa and not really a cyclical send in some ways. And then one interesting aspect is if when, if you think of like some sort of crises, a coup, a devaluation, some negative macro event, a lot of times there's a countercyclical aid flow into these markets. And so maybe counterintuitively some of those events open up potential or FX transactions which can maintain the other two that emerging market financial institutions cannot. You know, a lot of the large central banks of Africa are clients, as are the African banks themselves, the major market banks; Citigroup is believed to be a client as it has publicly addressed. If this is a client, this is the smallest client base for Cab. It's also the fastest growing.
So up there, I mentioned 509 clients. Tjeu have a big roster and the retention rate is over 100%. What does that mean? It just means not only have you kept customers, that means the customers that you have are actually doing more businesses. And typically what this means is they'll start using Cab for one corridor and then they'll switch to use them for other corridors. Maybe we'll start in Africa and they can go somewhere else. And one of the other questions, I'll just sort of address it, you know, right now is well, can they only do Africa? Well, they also have a, you know, Brazil has been a market they've been expanding in. They will expand into North America as we talked about. And if you have the customers, they have flows and so, you know, you might, maybe the UN is gonna use Cab initially to get money into Nigeria, but they have aid flows all around the world and they operated with them in 11 markets. And typically, you start in one market and you grow in other markets over time.
From 2020 to 2023, it's not quite a five fold increase in income, but something close to that, it's huge margins, a lot of, very, very high cash conversion in these markets. So it's really an attractive little business. And so here at the macro, you know, at the highest level, the $2.3 trillion, you know, there is volatility in, you know, in these numbers. And I sort of say these were originally macro numbers at the time of the IPO. Theis swift data that is not fully complete that was sort of cited in some of their earnings presentations. But the highest level is, the market is probably, for the specialist, is gonna grow at something like 20%. That 5% underlying growth in just payments in general. And then the specialist firms like Cab taking share from correspondent banking and correspondent banking is down by I want to say something close to 20% over the last five or six years in Africa itself. And so the specialists, it's just irrespective of Cab taking additional market share. The headline opportunity is somewhere around 20% underlying growth, which is really an attractive overall market.
This slide is just sort of the take rates for the market. Again,you do volume, you take a take rate here. The thing that's probably to note is emerging market take rates can be up to like nine times that of developed markets. And so Cab probably has a focus in the developed market area, but they also do some developing market currencies as well.
So this all sounds wonderful. But I mentioned the stock declining 70%. So what exactly happened again? They flagged the problem with Nigeria at the time of the IPO. What happened in Nigeria, like a couple of markets, they have a couple of…there's a set FX regime that sort of exists for most goods. And then because there's a shortage of hard currencies, in particular dollars, there's sort of a black market rate. And what happened from 2020 to 2022 is there were still strong flows of remittance aid, other foreign transactions that occurred. But you had a big divergence between the official rate and the black market rate. Cab was able to source local currency at the black market rate while volumes were still strong. So they have this period of super profit that existed in Nigeria they flagged at the time of the IPO and said, you know, like this is not expected to continue. It probably ended up a little worse than what they thought, but it wasn't a primary driver.
But this is something that sort of flagged. Nigeria is the fastest, the largest economy in Africa; gonna be probably, you know, the largest for many years, will be a major market but probably be something closer to 7%. It's worth noting that there was a change in administration in June of last year. There's been two devaluations in Nigeria again. So, you know, scary headlines. This doesn't affect…it's not an existential risk for Cab, but there hasn't…volumes haven't been as strong. The currency has been more stable since March during, actually, I believe it's the strong currency in the world since March. Volumes have returned. Cab is forecasting essentially no growth, or I'm sorry, not no growth; they're forecasting for 2024 volume or revenue in Nigeria may be 70% below what it was in 2023. What the key point is if you X out Nigeria in 2023, the headline payment and FX growth was close to 30%. So this market once Nigeria stabilizes and likely grows, I think that you're gonna see the stronger underlying growth per cap as a whole, just mathematically, from that dynamic.
The problem is two corridors: Central African Frank and West African Frank. I know a lot of you are probably totally unfamiliar with the two corridors. What essentially happened is there was a dollar shortage and the central banks decided that they're gonna make it more difficult for outside firms to earn a profit, bringing dollars into the country and measures were taken. The mistake Cab made was, again, I sort of mentioned that they start new clients with a couple of corridors where they are particularly active. This is where the restrictions came in right at the start of the fourth quarter. It's a heavy remittance quarter and they had to give an update and they were assuming growth in these corridors and they were restricted from, you know, operating here. And that decline is what caused them to revise down their forecast from the levels they had just reaffirmed a couple of months earlier. Since that time, the second one of these, the XOF has stabilized a lot more; a lot of the restrictions have been lifted and are no longer present. There are still some in XAF-land, but this is probably a much lesser issue than existed in October of last year.
Now I am just gonna sort of talk about Nigeria again. I mentioned that for 2024 it's expected to be at roughly one-third of the level it was in 2023. XAF and XOF are expected to, you know, rebound to be something like…they are going to be top five corridors, but the overall growth for Cab for next year might be something closer to 10% versus I think levels that you know, of the higher levels I mentioned before. But if again, you strip out Nigeria, it's very possible the growth in their core business is closer to 40%.
One last thing that's worth mentioning and I'll just do it here via, you know, just these are my projections and sort of what the business would look like. Cab actually has a very attractive deposit franchise, as I mentioned, a lot of the nostra accounts they have in Africa, their clients are just looking for exposure to dollars. They're not trying to get the strongest possible interest rate. The deposit franchise for Cab's probably going at 3% to 5% per year. They benefit from higher interest rates that they earn on those deposits. And so the net interest income benefits from higher interest rates. And so this is another attractive aspect of the story.
The two other recent updates they've had, I mentioned the strong customer growth that they've had, they just recently received the Netherlands license again. But as a U.K. company, there were Brexit restrictions. They actually couldn't call many financial institutions; they could receive calls about their services, but they couldn't make inbound calls. That license was supposed to happen at the end of 2023. There was probably some investor concern about this. It was officially granted in April of this year. They're going to have a similar license that's called the representative license in the second half of 2024. This would allow them to directly call on regional and national banks in the U.S. and went through a pretty big deal.
The last thing I'll mention here is there's something called the CHIPS system and this is the biggest potential upside for Cab, even in spite of what I just mentioned. This is the clearing house interbank payment system. This is dollar payments. You have to be a member in order to process dollar payments. So if Rwanda wants to send dollars for a particular payment, they're gonna have to go through a CHIPs member. Cab has a custodial banking relationship with the likes of JPMorgan, Croup. But JPMorgan, Citigroup have restrictions on how much dollar payments from Rwanda they will process in a given day, month period. And so Cab probably leaves a lot of money on the table.
This license would require them to get their ownership level down that you couldn't have an owner above 25%. Helios owns 45%. When Cab decided to IPO, this was one of the primary reasons why they decided to IPO versus sell the bank is because the opportunity to potentially get CHIIPS would be such an enormous, you know, revenue upside over time. I think this was behind the thinking. There's several ways it could evolve; they could end up buying in stock, Helios sells into a buyback. Helios could sell their stake to a couple of other players who are below the 45%. This is probably a two-year opportunity over time, but I think it's just worth mentioning. So again, I would sort of characterize it, probably say conservatively, outlook growth maybe 20% to 25ish percent tops. I think post-2024 is very realistic. I think it could be faster than that. And it's trading at something in the order of 5 to 7 times its projection. So I think that's a real attractive setup for those who can deal with illiquid unpopular stocks and take advantage of the complete turnover of the shareholder base.
So I'll talk about the risk in a second. I just, this is this one, we'll spend just two minutes on.
I did mention switching gears. LATAM cable remains as unpopular as ever. I sort of mentioned three names, I believe, in the last update. I think two of the three have gone incredibly well. There's a lot of potential in the third.
But Millicom, starting in the middle and the bottom, Millicom… an activist investor named Xavier Neil owns nearly 30% of shares, just under 30%. At 30%, you have to make a tender offer for the entire company. They did an attractive acquisition of Guatemala, the 45% they didn't own. This time, poor execution on the rights offering ultimately priced at $10. Xavier Neil has, you know, helped drive a lot of progress; they doubled the cost savings, they're expecting $550 million of free cash flow this year, traded six times this number, leverage is expected to fall at 2.5 times. So I'd say this one's going really well. I think it's materially mispriced at current levels.
Megacable is a Mexican cable name. They've vowed to double their footprint from 9 million to 18 million homes and are most of the way through this at this time; penetrations seem to be progressing. Well, they're 13% now in the older cohorts of 20- 25%; they could do this because they were one of the only unlevered names in all of Latin America. So rollouts are going well, their competitors are hamstrung because of balance sheets. It trades at four times 2024 Ebitda off or something that could very well grow to 10% to maybe 15%-plus depending on the timing of these rollouts.
LILAK has probably been the one on an operational basis that the execution has been lacking. It's been a little disappointing. It always, you know, they did this massive deal for AT&T's Puerto Rico wireless business. The wireless business probably has been hit a little harder than they thought from T-Mobile competition. It's taken longer to get out of transitional service agreements with AT&T. That's all expected at the end of this year. You know, they need to execute here and they have given kind of bold claims on more of the synergies, the cash flow numbers are gonna be. Investors sort of have to see it. And I sort of, you know, honestly proclaim that this is the one that the operational has to improve. That said, this is a $1.5 billion market cap company. They said they're gonna generate a billion dollars of free cash flow over the next three years, even assuming they have to refinance some of their data at higher prices. John Malone just recently bought $10 million worth right around, you now, it's not that far from current levels.
So again, not gonna have time to go through all these, but I just wanted to flag them quickly as we talked about them in the past. So with that, I'll pause and am happy to answer any questions.
SG: All right, thank you so much. During your presentation, you discussed some of the disadvantages of the European banking sector, like compared to the U.S. and vice versa, and how Permanent TSB appears to be at an advantage currently, especially in the Irish market. Are there any areas in which it is at a disadvantage compared to other European operators and U.S. operators? You mentioned the risk weight density, but is there anything else?
PB: Yeah, I'd certainly say the number one of the issues…I'll give like a zoom out for a second and I'll go back into the PTSB. One of the issues I think the U.S. investors have has just been the regulatory apparatus in Europe that's been considered more hands on. Like I sort of say, you know, over a couple of cocktails, it'd be more described as something a bunch of socialists and a restrictive campaign out to get their European banks and part of that, you know, understandably I think during Covidthat universally European banks stopped dividend payments to their name just a full stop and, you know, we're gonna build capital now. So more hands on capital. Restraint would be one of the common areas that you would sort of hear and so harder to release capital now that has changed and we sort of showed those projected buybacks over time. But that is probably something to sort of flag is like when you hear something, you know, that's more negative about the U.S., about Europe than the U.S. But that actually could be flipping around a little bit and the US banks are about to get something that is more relative for PTSB, in particular, their disadvantage is just scale. I mean, I sort of mentioned the two other banks are three to four times larger than PTSB. They have an advantage in their funding cost is even cheaper. They have more dominant market share, they have, on the SME side, they have sort of an 80%-plus market share. And so again, these are huge scales advantages.
And so some of the fixed cost that PTSB has to absorb, they can't spread it across as large a revenue base as the other two, and certainly that is worth highlighting. The counter to that though is just from the starting point, you just don't need much progress on these in a couple of areas and to really materially move the needle for PTSB. In fact, the SME share is something that there's a lot of businesses who would like nothing better than to have a competitor, a third competitor rather than be, you know, have a choice just between AIB and Bank of Ireland. And, you know, if you can just offer any type of credible offering, you've got a chance. And so they have a chance for SME for just a little bit of broader market share within that market can be really meaningful for moving the needle.There is a pretty good step up in interest rates from these SME loans.
So I think that's one area and the second one is just, as they sort of said it, PTSB is a very, very different competitor if they just can compete something closer to the other two banks from a mortgage density standpoint. I mean, that difference in density is really pronounced and if you just narrow that a bit, they're going to have an opportunity to offer slightly more competitive mortgage rates. And again, similar dynamic that for a smaller bank it is easier for them to win on servicing with the typical customer. They just…it's like they have a chance to marginally increase their share, but the total pie should grow meaningfully over the next several years. I mean, if you're talking about a mortgage market that maybe generates $13 billion of new loan growth this year to get up to 40 to 60,000 new homes, you could have a mortgage market that has to grow 50% on an aggregate level.
So the other two banks can still do very well, still have, you know, more scale than PTSB. Just marginal improvements for PTSB can be much more meaningful. And at this starting point, from a valuation, from future capital return perspectives, I mean, when you start like figuring in, buy back into those numbers, over time it could add a meaningful amount to overall EPS. I think just on the margin from a starting valuation point of view and from a change in the business, that's what really can move the needle for PTSB.
SG: All right. Well, thank you so much. Also when you were discussing Cab Payments, you mentioned some of the challenges it's had to face like with Brexit and not being able to call up banks in other places. They had to wait to be contacted. How would you characterize management's performance on handling or navigating the challenges it has faced?
PB: I think it's very fair to say that they really…you give them very low marks for forecasting the consistency of their revenue. I think what they probably failed on is just to mention that growth is not linear. And you know, the dream of all investors is that the secular growth story is like the same quarter reporter, you never have to worry about it. It's at a fast rate and it goes and it's just not life. And I think maybe the dynamic that happened was, you know, you can make a debate, the Financial Times would argue that they should have had more robust disclosure on currency corridors, there could be changes and restrictions, et cetera. And, you know, Cab sort of said that was disposed and there's probably not enough there one way or another. I would just sort of say that they've proven growth is nonlinear.
But where you sort of give them higher marks is that this is really impressive customer growth they've had and that they brought on. And you have to give them credit from the very beginning to see this opportunity to like, you know…the bank's been around for 200 years and like this, I doubt it's had this type of period of revenue growth at any point in its history. And it was just this pivot toward foreign exchange and payments to market where it has a lot of what you want in younger growth companies with a huge market. You've got a tiny market share, you've got a competitive edge in this little kind of sector of the market and it grows a bit over time and, you know, the revenue numbers that I threw up, it's tough to go through all those I know in detail, but they're what they're shooting for 5% of their, you know, targeted market by 2027. And that would imply actually FX and payment numbers well above what I showed there.
So you'd say that the pivot has been good to this business. I think identifying the opportunity, the actual guidance that they give, should they have given guidance, you know, at all, et cetera, you sort of say four marks there.
Now, the movement into other markets and into North America, into Latin America, you'd probably honestly say to be determined. I mean, there's a huge amount of potential. It's easy to see that. But, you know, the proof will be in the pudding. So this will sort of play out over a couple of years to give a more complete answer.
SG: All right. Well, thank you so much for that insight. In your fourth-quarter letter, you discussed how some of these Latin American cable companies, like Liberty Latin America (LILAK, Financial), Megacable (MEX:MEGACPO, Financial) and Millicom (TIGO, Financial), their operational performance has not met expectations. Could you expand a bit more on where they have fallen short and what they need to do to improve?
PB: Yeah. I sort of mentioned, I think we've seen where the operational performance probably would apply more toward Millicom and LILAK. We've sort of seen a more pronounced turnaround at Millicom, the trigger being an activist came in.
I'd say at LILAK, it's been a mixed bag. That they sort of, you know, to quickly…the entire history of this that came out of Liberty Global, they did a big deal out of the gate with cable and wireless and they overpaid. The current management team at LILAK had nothing to do with the acquisition. They were brought in, you know, after the fact and you give them really high marks for turning around cable and wireless and in fact, the margin progression in that business has been well above what I thought it would be where I sort of say you'd question a bit more is just the execution within Puerto Rico.
On the fixed side of the business, the cable side of the business, it's been a strong business. They've taken share. They've done better versus…their largest fixed-line competitor in Puerto Rico. It's been on the wireless side where I think that they struggle now. They would tell you it's been because they've been in the shackles of the AT&T agreement. So that means AT&T is essentially they have to rely on AT&T for the core part of the network of their business. And so they don't have the flexibility to change around the pricing of their offering.They have to go back through AT&T to do this. This is, you know, a very bureaucratic process. I think it'd be fair to sort of say they thought they acquired this business at a really, really attractive multiple post-synergies and maybe they underestimated the…you know, AT&T doesn't have the best history of selling assets. So I'll put it kindly like that, but they may have pulled one over a little bit on this, the nature of the deal requiring a three-year TSA that had to be extended. I think was a disappointment. And because like what the investors are waiting for is to just sort of $70, $80 million of synergies that are promised for Puetro Rico have to come through and you have to get out of the TSA in order to have this happen; they claim it's gonna happen. I would blame them some for the slippage of this time table and just sort of say, you have to see, they absolutely have to execute on this from a credibility point of view.
So I'd say that's one aspect and then the second one is with the shares just bombed out $1.5 billion market cap, a billion of free cash flow. They have to just be decisive on repurchasing stock and they probably…their target leverage is probably closer to 3.5 times or a little over four. Now, they'd like it to go down a little below this level. They had to convert what they were paying off for this year and then they don't have another major maturity until 2027. So they just have this window that the cable business can support a lot of debt. And, you know, the interest rate environment has changed a bit. But they sold themselves to investors as the levered equity model and like the equity is at a bombed out price and they have to be decisive in, you know, stepping up to the plate and repurchasing shares. And I think they fundamentally seem to, there's been this little bit of a tendency to talk a little bit about how cheap their stock is versus stepping in and purchasing it. And I would argue that investors, I think, have to see progress on both those fronts. And so maybe that's a little more helpful insight on sort of what I see, at least in Latin America.
SG: All right. Thank you so much. Kind of shifting focus a little bit, how, if at all, has your approach been impacted by the market environment so far this year?
PB: I don't think it's changed much. I think investors need to be pretty humble about their ability to predict macroeconomic events and interest rates. I think in some of the past letters I've noted that there was an IMF study that they had two economists who were looking at the blue chip, a series of economists and having them predict what percentage of the, going back over, you know, umpteen years, had predicted a recession one year in advance. And, I mean, it was just depressing how poor it was and it was just like, you know, that it was close to zero and, you know, this includes the a period where the GFC happened.
And so, the number of calls at the beginning of 2007 for massive problems, it didn't happen. And so if can't do that, then the idea that anyone else is gonna randomly be able to predict exactly what's gonna happen seems pretty low on my part. I mean, obviously the story has been, there's six interest rate cuts that were forecast at the beginning of the year and now we're sort of saying maybe it's one or two, maybe it's gonna be zero, maybe it's gonna be a 20% chance of a hike apparently. So I just would sort of throw that all in the bucket of like stuff is gonna change. I suppose what, you know, for a couple of names that a period of lower interest rates would probably be good for, Liberty, Latin America probably wouldn't matter as much for some of the other names. I think that maybe a period of, if the dollar were to weaken a little bit, just mechanically, there might be more money flows into emerging markets and maybe some people would sort of kick the tires on something like Millicom a little bit more closely because it looks bombed out, but you just can't predict the timing of this thing.
And one of the humbling things about investing is you can be wrong about something; you can be right about the underlying investment and it just takes a lot longer than you'd like to for investors or other people to come and corroborate your story and that is the potential risk for buying some of these smaller names, but with a little bit of patience, I think these are real interesting situations.
But to the underlying question, I suppose all that everyone has to keep in mind it's just like interest rates may not fall exactly as we anticipate and that could have some negative impacts for markets going forward.
SG: All right. Kind of on a related note, what advice do you have for individual investors in the current market environment?
PB: Yeah, I probably echo all the comments I sort of said about just being really suspicious about anyone's ability to, you know, predict any individual market trends. Interest rate forecasts are very, very difficult. I guess maybe one other thing, you know, it's probably a self-serving comment to a certain degree, but I think it's very possible that the next 10 years don't look exactly like the past 10 and maybe the idea of it only makes sense. It only makes sense to be in the United States. The dollar is always going to be strong, you throw interest rates or, you know, for sure we're gonna moderate, not be as volatile. Deficits don't matter as much. Just because something applied for a 10-year period doesn't mean it's gonna apply going forward. Hopefully, I think that's the case just because, you know, banks in Europe trade at very low prices, that means it doesn't necessarily mean they always will. I would think so. I think it's just human nature, you extrapolate recent events like all of us do when you predict, forecast the company and the earnings in many ways, you just kind of extrapolate recent trends in some way, shape or form and, you know, reality can end up hearing a lot from that. So I think that's probably, you know, one aspect I'd sort of like for individual investors.
SG: All right. Thank you. I think that's some great advice. As you know, Charlie Munger passed away in December. What do you think his most significant contribution to the investment community was?
PB: Well, I'm from Omaha, Nebraska originally. And so, I joke a little bit that I've owned Berkshire (BRK.A, Financial) (BRK.B, Financial) for roughly 24 years and by Omaha standards that means I totally missed the boat on what a fantastic story it is. I sort of say for having attended many of the BRK meetings, it's just his incredible uncommon common sense is. Then, you know, really incredible, I mean, just sort of complicated concepts that he can summarize in a couple of sentences, sometimes one sentence, is truly remarkable. I think he's about as close to unflappable emotionally as any investor you'd ever meet. AndI certainly didn't know Charlie Munger, you know, personally, but I saw him speak several times, sometimes down at the Daily Journal (DJCO, Financial) down in LA, but I sort of think maybe one of the underappreciated aspects is just the incredible sense of humor. I mean, he would say it obviously in a very direct way, but I don't think he took himself too seriously. And he was obviously a brilliant investor, brilliant individual, but he really did just a fantastic job of making his points with humor on a regular basis. And that was, you know, that was probably one of the aspects I enjoyed most of listening to him. But he's clearly in the hall of fame of investors of all time. And a lot of what he says…you could read something he wrote 20 or 30 years ago and it would age incredibly well, it would be entirely relevant for, you know, something else.
SG: Yes, thank you. I definitely agree that he has a lot of timeless advice for pretty much any situation. Just to wrap up our time together, whether they are investing related or not, please recommend three books and three movies for our listeners to check out. And could you also share why you like them?
PB: Yeah, OK. Well, let me see. I think I'll stick to the books. I'm not as big a movie person in general and my wife would be much better for giving out recommendations. We have enough trouble finding something in common to watch.
So I would say, you know, sort of a mix of both. I think from an investing point of view, William Thorndike's “The Outsiders” was fabulous. And there you can read about John Malone, Warren Buffett (Trades, Portfolio), you know, among others, in different industries, different balance sheets and whatever businesses that they started. And I just like, you know, again, super rational thinking and just extraordinary capital allocation returns that was able to generate, I think from an investing side, that's really valuable.
In today's world, I think “The Chip War,” I think it was Chris Miller who wrote that. So it's a very recent book, but I think that's really fabulous for sort of thinking about…and a lot of the…I am not super strong in the technology area, but a lot of sort of the history of semiconductors and what the applications, how that industry grew over time, how it was threatened, you know, near extinction in the U.S. And then, you know, how it expanded again and all the offshoots of Texas Instruments (TXN, Financial) and a lot of the applications and how it affects geopolitical events. And the military's use of technology over time and there's a lot of topics that are sort of covered just about, you know, something on I guess, like a theme of semiconductor, something closer to like what maybe oil used to be, et cetera, I think is really worthwhile.
Sort of an older one I thought of is “The Smartest Guys in the Room.” The Enron story is sort of a timeless book and, in some ways, it's easier to read about someone else's failures rather than try to experience some of the same. But obviously, it's specific to Enron. I know it's complicated accounting, but I think some of the lessons are applicable for sort of what happened in 2000, really most recently, 2021,2022 with just excessive evaluations. How a story can, you know, be pulled over a lot of very smart, rational people are just so captivated by a story. They suspend reality in some way, shape or form. And I think Enron it might be…that might have been a slightly different in the sense of off balance sheet accounting entities and how they were able to manipulate earnings in many ways, but it was more just the story of…people wanted to believe this is a radically different energy company that was going to be able to take on these enormous markets and just how many people believe them. I think it is pretty applicable across maybe some areas where investors should be a little skeptical today.
And maybe along with a modern version of it, as far as guy in the room with, you know, going infinite, Michael Lewis is obviously one of more entertaining writers of all time. And again, it's like I'm not the person to speak with on bitcoin. I can barely even describe what it is. But I have a negative bias towards it, but following the Sam Baker freeze around for a bit and Michael Lewis, the way he can bring his story to life, it's just incredible. I highly recommend that and I mean, it's just like you, you see some of the headlines abd sort of wanted to follow this from just having a good laugh as well. I think that's outstanding.
For those who want more, something closer to straight investing, Larry Cunningham's Warren Buffett (Trades, Portfolio) letters and his insights with the underlying writings that have existed over time is certainly a fantastic read and I think a lot of those are timeless and, you know, I think you could really get something, I don't know if it's an MBA or like some sort of honorary finance certificate just going through all those letters that have been written. But I think those are highly valuable, so I'd recommend those as well.
SG: All right. Those are all great recommendations and I'll be sure to check a few of those out that I'm not familiar with, but thank you again so much for joining us, Patrick. It was a pleasure to have you.
PB: Great. Thanks a lot for the opportunity to present. I appreciate it. And please, if anyone has questions here, they can follow up with me after going through this presentation. Thanks again for your time.
