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  • Todd Peters

Meet the Manager: Heller House

On Wednesday April 21 we launched our "Meet the Manager" webinar series. Marcelo Lima, the Founder of Heller House was incredibly gracious to join us. We are so excited to offer NS Capital's unique investment research with an ever growing audience. Enjoy the full video below.


Full Transcript:


Eric Hahn:

Okay, hello, everyone. Thank you for joining us. My name is Eric Hahn, I'm a managing director at NS Capital, and I am so excited to have you joining us today for our first Meet the Manager webinar. And boy, do we have an incredible guest for you. Before we get started, just a few quick housekeeping items. Today's webinar is not a solicitation to buy or sell any publicly traded securities. Everything shared today is for discussion purposes only. And now without further ado, I'm going to hand this off to the chairman of NS Capital's Investment Committee, Todd Peters. Todd, take it away.


Todd Peters:

Thanks a lot, Eric. And thanks to everyone joining us today. We hope you will find this both informative and interesting, a chance to learn from and about our experts that we utilize here at NS Capital. And we're so excited to have Marcelo Lima, founder of Heller House for our initial conversation. Marcelo has been a valued partner since April of 2015. For those of you new to the NS Capital approach, we try to find investment talent before they become household names, think undiscovered or emerging. And as such, our search takes a little bit of a different path than the traditional.


Todd Peters:

We extensively leverage our network, and that is exactly how we met Marcelo in 2014. A mutual investment manager acquaintance recommended that we connect and I'm so grateful that they did. From that point, we really focus on trying to learn about the individuals because at the end of the day, we're partnering with the people and depending on their judgment. And through our network, we were very quickly able to identify four other unaffiliated individuals that had worked with Marcelo, and each one of them said the same thing, high integrity, thoughtful judgment, a passion for learning, extensive analytical work and a differentiated perspective.


Todd Peters:

And we were so grateful that we were able to validate each one of those and have benefited from Marcelo's work for the last six years. So Marcelo, again, thank you for joining us today. I think a great starting point would be your path to Heller House as we believe that is really the foundation for your differentiated perspective. Marcelo.


Marcelo P. Lima:

Todd, thank you. How are you? Great to see you. Thank you for inviting me here. And thank you for the partnership for all these years. I began Heller House, I began my career as a software engineer after college, and then through various entrepreneurial activities, I ended up getting into real estate finance, and then ultimately became a huge fan of, as you know, the Warren Buffett style of investing. So that was sort of my path into then launching Heller House in 2010.


Todd Peters:

That's excellent. One of the things that we really look for in our investment managers is that they've developed and created their own investment strategy. We think that that gives them the extra buy and the extra motivation because it's their legacy, it's their work, their approach. Would you please kind of give the audience an understanding of how you did develop and create and how your investment approach has evolved at Heller House?


Marcelo P. Lima:

Yeah. I think it's a very good point because we all start our careers sort of dovetailing with somebody else's, right?


Todd Peters:

Right.


Marcelo P. Lima:

So a Warren Buffett started out his career as a Ben Graham type of investor, and then he evolved his own brand over time. And I've been running Heller House now for just over 10 years. And around 2015 or so, I started hearing a lot about, we all did about disruption. So I decided to do a deep dive into the academic underpinnings of disruption theory. So I studied the work of Professor Clay Christensen. And I started studying things that were, that were in the news, like at the time, it was machine learning with deep mind beating humans in video games. And then I went into the history of technology since the dawn of the Industrial Revolution.


Marcelo P. Lima:

And I concluded that we were undergoing a period of very rapid technological change similar to what we saw at the end of the 19th century. And when that happens, unless you are at the forefront of technology, you risk being left behind both as an individual and also as an investor, and so your portfolio will ultimately suffer because of that. I also realize through the study that great long-term investments are the result of strong businesses and management teams that are writing technology adoption curves.


Marcelo P. Lima:

So as one example to sort of tie it back to Ben Graham, who was Buffett's teacher. In 1948, Ben Graham famously invested in GEICO, the car insurance company, which was recently a publicly traded company back then, this is 1948. He put 20% of his fund in the company. And GEICO was a disruptive innovator in the Clay Christensen sense, it was less expensive than competitors, it was direct to consumer, it had a superior algorithm for targeting risk. They didn't call it [crosstalk 00:06:54] then, but that's what it was.


Marcelo P. Lima:

And it also was writing this technology adoption curve, which was the adoption of the automobile across the United States. And then soon after that, the development of the interstate highway system. So this study of the history of technology, and I'm using this one anecdote to illustrate that really then informed this hypothesis that we are very well served investing in great businesses writing these adoption curves. So what are the adoption curves of today?


Marcelo P. Lima:

Well, at the base layer, we still have the continued adoption of the internet around the world, as well as mobile, computing and social media. And then cloud computing now has started its diffusion a few years ago, and we're still very, very much in the early innings. So as cloud computing expands that infrastructure layer, on top of that we're seeing now entire businesses being built, consumer and enterprise software companies being built on top of that cloud computing infrastructure.


Marcelo P. Lima:

So these are just a couple of examples of multi-decade trends that I believe will allow us to generate very attractive returns as we find great businesses that are writing those adoption curves.


Todd Peters:

Now, that makes sense. And I know that you really kind of taking it to the next level in your work, and that's kind of one of the things that I remember a quote from Steve Jobs that stuck with me. And he said this on a documentary really kind of relating back to the 1970s, which was, if you're trying to figure out where the industry is heading, or in some cases, even where the world's heading, you don't look at the mainstream, you go to the fringes.


Todd Peters:

And the way that I take that, particularly from our point of view as an investor is, you don't go to just the investor conferences, you don't simply read the sell side research, the real indications about where the world is heading, and where you're trying to determine come at the industry level, and being able to not only go to the industry level, but to understand what they're saying at the industry level, and that to me is one of those critical components of the research effort that you do.


Todd Peters:

And I think our audience would be grateful to hear how and why and the directions that you've taken to go deep into the industry level not simply depending on what the latest sell side research is.


Marcelo P. Lima:

Yeah, I'm a big believer in always going to the source and not outsourcing my thinking. So the problem with outsourcing your thinking is you're adding layers between your cognitive, let's say filter. You're adding layers between your cognitive filter and the source. And so you are observing the world through a keyhole, through a very biased observer in many cases. And that is true if you're an expert in any field and you read the newspaper, you'll quickly identify problems with newspaper stories about the field that you're an expert in. In fact, I very rarely read sell side research.


Marcelo P. Lima:

As a computer programmer, which is what I did for the first several years of my career, I believe very much in getting very close to the technology. So I get to try the software that we're investing in, the software companies that we're investing in, if it's obviously social media, that's easy for anyone to try, but if it's an application programming interface, or API, then you have to spin up an instance and use the API and make API calls and actually use it in a product.


Marcelo P. Lima:

And then also talking to developers, attending developer conferences and talking to customers, and how are they using the product? Does this company have traction? Does it have product market fit? Is it something that I can see growing well into the future and expanding its monetization layers or the surface area of monetization over time? So I think that having that firsthand experiences is absolutely critical.


Todd Peters:

Has it been interesting to kind of go back to your initial roots as a programmer to now looking at it from the perspective of financier investor?


Marcelo P. Lima:

Yeah. I think one problem is a lot of us who have attended Omaha, have gone to Omaha for so many years, we got a little bit turned off from looking at technology. Maybe that's an understatement, because Buffett likes to say that technology is hard and change is very fast. And the irony is that now the world is changing so fast that the traditional industries are getting hurt by the rise of technology. But a lot of times they're not even aware of what's happening, and they're unable, and again, this goes back to Clay Christensen and the innovators dilemma, and the inability of incumbents to respond to these orthogonal competitive threats.


Marcelo P. Lima:

So it becomes a big liability to be in these traditional old school businesses in many cases. So it's been very interesting, because now I can go back and rethink all of this that I learned from Buffett with a very different lens. And the other thing that's interesting is a lot of the things that I was doing 20 years ago in coding, I was doing JavaScript and PHP and MySQL, and running my own Linux server and databases and things like that, a lot of that has changed, but a lot of it hasn't.


Marcelo P. Lima:

In fact, a lot of it has become even more entrenched. So SQL, which is Structured Query Language is now a language that is used even more broadly than before to query data. And JavaScript has now taken over not only in the browser, but also on the server side as an OJS. So the technologies are very much still there. So it's been very interesting to go back to my roots.


Todd Peters:

That's fantastic. One of the things that you hit on there is that the traditional or the known companies today are having trouble keeping up with the changes that are coming in. To me, that's a leadership, that's a company management perspective. And obviously, leadership is important in any company, in any walk of life. But I would suspect when you're trying to disrupt an industry, that the leadership is even more important. And I know that that's a critical component for you. How do you go about trying to figure out essentially as we're trying to looking to partner with you, I know you're essentially then partnering with the leadership to the disruptive companies, how are you kind of getting comfortable with that?


Marcelo P. Lima:

Yeah, that's exactly right. So we think of ourselves as partnering with amazing management teams that just have this, this missionary zeal to change the world. And one of my favorite stories to illustrate, there's this dichotomy between the mercenary and the missionary. The mercenary is kind of like the hired gun. And all they care about is putting money on their pockets. I'm sort of exaggerating here to create this effect, so that you can understand the contrast.


Marcelo P. Lima:

So a few years ago, I attended the CAGNY conference, this is the Consumer Analyst Group of New York. And this is a conference where all the consumer packaged goods companies attend. And these are companies like Unilever and Kellogg and Hershey, et cetera. And it was very interesting. This was a period where we were hearing a lot of... All these companies were afraid of Amazon and disruption and that you could order things on Alexa and without naming a brand.


Marcelo P. Lima:

And it was very much in sharp relief, this idea of the mercenary because some of these management teams they're compensated based on short-term earnings per share targets, and then they also have this golden parachute at the end of their 10 year. Oh, yeah, I know, I'll retire in seven years, my goal is just to raise earnings per share a little bit every year, and then I can make $20 million, whatever it is, when I retire, why am I going to rock the boat? Why am I going to hurt my earnings today to invest in some experiment in the future that may or may not pan out?


Marcelo P. Lima:

And so they end up doing this sort of fake innovation, like introducing the 37th flavor of cereal, rather than creating something truly new. And so you contrast that with the mission driven founder who has this zeal to completely upend an industry or create something completely new. And they develop this mission, and as a result of that, they're able to attract the best and brightest. So if you're graduating from or even if you're not a graduate, not a lot of these companies even hire you if you're not a graduate, but if you're the best and brightest, would you rather work at Philip Morris or Amazon?


Marcelo P. Lima:

I think the question sort of answers itself. And these missionaries are not focused on maximizing earnings per share in the next quarter, they're focused on maximizing the value of the business and the value to society over the next decade. And ironically, they end up making a lot more money than the mercenaries, they end up building much larger businesses as a result of that. So yeah, for us, I mean, management is absolutely critical. I don't think it's possible to be in a fast moving, fast paced industry, and especially in today's world we're so competitive without having this missionary zeal, which gives manager the ability to think very long-term, and not have to think about the next quarterly earnings or yearly earnings per share, et cetera.


Todd Peters:

That makes absolutely. Now, while I totally agree and see the benefit of the missionary approach, and that that zeal, sometimes they can be too far ahead of implementation of an idea, or a concept. And so they essentially know where the world's going, but they may run out of money before they can actually see it through. So how do you combine that missionary zeal with making sure that there's financial prudence by the leadership so that the company can kind of build its network, build its consumer, build its followers to create the next disruption?


Marcelo P. Lima:

Yeah, the question of financial prudence is interesting. If you read the history of company management, for example, Harold Geneen was a famous manager who ran ITT in the '60s and '70s, and he had to invent a lot of things, he had to do a lot of things with pencil and paper, he didn't have access to real time databases and computers, he didn't have access to collaboration software, and he didn't have access to decades of management, and financial knowledge that we have accumulated since then. All these best practices, and business school studies and all these different things that we have today. And also, frankly, all the mistakes that have been made since then, that people have learned from, right?


Todd Peters:

Right.


Marcelo P. Lima:

So our companies, the company is at the leading edge today, these sort of best of breed technology companies, they not only because they can attract the best talent as I explained, they also attract the best financial talent. So they have incredible folks in financial planning, in mergers and acquisition, business development to have the best CFOs. And these folks now have much better tools to manage the business and they have a lot better intelligence about what works and what doesn't work.

Marcelo P. Lima:

So finally, if you look at the balance sheets also, these companies tend to have some of the strongest balance sheets out there, they tend not to have debt at all, they tend to have a lot of cash, and they tend to have very high margins, and the cash conversion cycle is very short, so they generate a lot of cash in their business, and they're typically reinvesting cash very aggressively in R&D, so they're hiring a lot of software developers. And so it's actually a very interesting combination because you can attract very good talent, you tend to be in an industry with a lot of tailwinds as we discussed, and you also have a lot of cash to reinvest in your business and grow that business. So altogether, I think it's a very interesting combination.


Todd Peters:

And is that one of the... It's not a new paradigm, but we've heard for decades and decades the best companies invest in R&D and keep reinventing themselves. But one of the things that seems to be different amongst the companies that you're investing in is the leadership has just said, "You know what? We're going to forego short-term because we know if we do the right R&D spend long-term, it's going to be an absolute benefit." And it seems that there are investors starting to realize that that is a very prudent way to worry about the longer term by continuously reinventing themselves and create a new product. Are you seeing that throughout the companies that you follow?


Marcelo P. Lima:

Yeah. So there's two things there to unpack, I think, one is the culture of invention, and two is the economics of an internet world, which are very different from the economics of a pre-internet world. So just to very quickly on that, in the internet world, you have zero marginal cost of distributing an additional Netflix subscription to an additional subscriber, right? Zero marginal cost practically. And so your goal then is to blanket the planet and acquire as many subscribers as possible. And I'm using Netflix as an example that people are familiar with. But this is true for collaboration software, B2B software, et cetera.


Marcelo P. Lima:

It's sort of a land grab game, and as a result, companies tend to run at breakeven because they're investing to create more features to acquire more users. And also, they're investing in sales and marketing to acquire those users today, and monetize them over time. And so we focus a lot on unit economics there to make sure that the spend to acquire customer today is much less than what that customer monetizes over time. So that's very, very important.


Marcelo P. Lima:

So this was very different in a pre-internet world where you had, let's say, your Procter and Gamble, and you have to build a new type of detergent, you have limited quantities that you can put on shelves, and you have scarcity at the shelf space level, and then you're fighting with all these different products. And then there's a very long cycle between customers buying the product and you getting any sort of feedback from the customer, that's completely changed today. Today, you have effectively infinite shelf space, it doesn't cost you anything, again, to serve that extra customer, and you have instantaneous feedback. You can tell exactly what the customer is using on your piece of software, what buttons they're clicking, where they're getting stuck, and you can then push software.


Marcelo P. Lima:

Our companies push software two, three times a day, so they're updating software in the background very quickly, so the feedback loop is very tight. And then to your other point about inventing, absolutely, that's true, companies, there's this thing in management where it's like horizon one, horizon two, horizon three, and you always have to keep inventing for the next thing. Unless they do that, they'll get stuck in a plateau, like they'll grow a product, and then they'll get stuck there, and it'll be a fantastic business, but it won't grow and sort of the shareholder returns won't go anywhere. Whereas companies that can constantly think of new products and acquire and essentially build empires are the ones that I think are really exciting to own over the long term.


Todd Peters:

Gotcha. Makes sense. Now, last question on your thought process and the way that you think, and then we'll get into a couple of specifics. You found the missionary leadership, you found the disruptive curve that you think has a long multi-decade run, you see the quality of the talent underneath the leadership, they have the cash to do their job. So you see all of that. What then is that final thread, I'll call it, that you go, "You know what? This is worthy of a precious slot inside of my portfolio." What is that final is that you're just becoming, you going uncomfortable, I see it, or is there something else? What is that thread that says, "You know what? Yes, I want to have this."


Marcelo P. Lima:

Yeah, the limiting factor is usually valuation. I think we're living in a golden age of investing right now. There are a lot of choices for great businesses to invest in. The limiting factor, I think, is really understanding the price that I'm paying today, what returns am I going to get over the next five to 10 years? And then what's my opportunity cost? How does that compare to all the other things that I can invest in? That's, I think, the trickiest part because as you know, no matter how great business is, if the checks all the boxes, et cetera, if you pay too high a price, you're just not going to make any money.


Marcelo P. Lima:

So we do a lot of work to understand how much a business can grow, why they're going to grow, what are the returns on invested capital? What can margins look like five or 10 years from now? And that has to do with the unit economics and whether the customer acquisition costs go down over time, or maybe they go up over time, but they don't go up as much as monetization per customer goes up. So there's a lot of variables in there and it's very business dependent.


Marcelo P. Lima:

So we have these models, we know that the models are wrong because we can't forecast everything, but they're useful in the sense they give us guardrails to think about what's currently priced in at the existing prevailing market price. So these are all inputs. And in addition to that, because these companies are inventing new things all the time, obviously, there are options embedded in this model that we can't really value right now, but we know that we have to give these companies sometimes credit for having this culture of innovation.


Marcelo P. Lima:

One canonical example I like to give is if you look at Amazon in 2005, it was a retailer and just around the corner, they were going to invent Amazon Web Services, and that wouldn't have been in your model at all, but sort of revolutionized the world and created a whole new entire empire within Amazon. So you have to think about these things depending on whether you're invested in a company that likes to invent, and those are the companies that attract us.


Todd Peters:

That and great segue with Amazon is dimension. As you know, we ask you to give us your best ideas, your highest conviction ideas, what kind of term you want in a very concentrated way for us in our portfolio. And with the way we kind of view your portfolio is there's established leaders, those that are really critical in almost infrastructure to the modern world, and those that are the fast emerging leaders in their category.


Todd Peters:

And I think it would be instructive for the audience to hear maybe about one of each. So let's start with the established leader. And you mentioned Amazon, that might be a good one to kind of just a few points of kind of what initially drew you to them, because one of the things you were very early to us with was the AWS component, and how that was really the driver. And just how you see Amazon from an investment standpoint.


Marcelo P. Lima:

Yeah, so Amazon is benefiting from at least two large technology adoption curves. One is e-commerce, the adoption of e-commerce. And the other one is cloud computing. So pre-COVID, e-commerce in the United States was about 10% of retail sales. COVID accelerated that by many years. And we don't know exactly where that's going to shake out after COVID. But very few people believe that it's actually going to go back to what it was pre-COVID, just because the convenience factor is there, and you create a new consumer habits.


Marcelo P. Lima:

On the cloud computing side, this is a new paradigm, sort of a new computing platform. As you know, we went from very large computers to smaller computers to even smaller computers, and each one has a new computing platform. This now allows us to offload a lot of computation and offload a lot of infrastructure work. And it saves companies an enormous amount of money and time. The best analogy I have here for that is if you look at the development of the electrical utility industry, so there was this guy called Samuel Insul, he used to work for Thomas Edison, and he left and went to Chicago, and he realized that back then a lot of factories, is in the early 1900s, a lot of factories had their own power plants, because electricity was a new thing, and they were running their own infrastructure. They had their own engineers managing that.


Marcelo P. Lima:

And he said, "Well, why don't I just consolidate these power plants, and run these huge cables from the central power plant to your factory, and I put a meter and you just pay me by the hour or however much you use." That was a critical insight, and it led to the development of the central utility industry. And so the same thing is happening now with computation. But it's much more than that because you're not just selling electrons, it's not a commodity like electricity, you're selling highly differentiated software for different uses.


Marcelo P. Lima:

So AWS has dozens and dozens and dozens of different types of databases and storage and computation, machine learning for all different layers, whether you're a hardcore engineer, and you want to touch the models, or if you are a student, and you just want to have a very pre-built model that you can just populate and start using right away. So they have this amazing segmentation of different use cases that you can just pick and choose. And these are called primitives, and you can mix and match these things to build your applications.


Marcelo P. Lima:

So both of these, both the e-commerce and cloud computing are very still in the early stages of adoption. So I think that there's enormous runway ahead for Amazon, and they're continuing to invent new things. So advertising was a new business until a few years ago. Now, it's an enormous business. I recently read estimates that and again, take this with a grain of salt, that advertising alone could be worth $600 billion if you valued just that piece inside Amazon and they're inventing new things. They've got the whole satellite, low Earth orbit satellite constellation that they're going to launch to compete with Starlink from SpaceX.


Marcelo P. Lima:

There's a bunch of robotics, there's a bunch of different sort of, again, options embedded in this company with an enormous culture of invention and so many talented engineers.


Todd Peters:

And so it's interesting, even though it's become the size that it has, the growth that it has, it's already achieved, you're seeing that there's still the possibility for significant growth still in the future.


Marcelo P. Lima:

Yeah, it's always surprising to us how big numbers can get and how big markets can get. But the truth is markets today are bigger than they've ever been. There are more and more people connected to the internet. If you look at a broadband adoption around the world, it's still around 55, 60%, it's still not fully penetrated. And so it's always shocking to see just how huge these markets are. So I think the numbers will continue to surprise us, because there's just a lot of economic activity out there.


Marcelo P. Lima:

And this is true in e-commerce, you can see it in the e-commerce very clearly, you can see it in cloud computing, and you can also see it, for example, in the payment space, where there are just so many different companies in different parts of the value chain, and it just seems like such a vast, multi trillion dollar space, and that's not a static number, that keeps growing. And that's also true about cloud computing and e-commerce.


Marcelo P. Lima:

So yeah, I believe that we'll continue to see a lot of growth ahead. And the caveat is, nobody knows for sure, that's why we observe these companies and follow them very closely to figure out whether our thesis remains intact as the quarters progress.


Todd Peters:

That's right. Absolutely. Let's shift gears a little bit, and let's talk about one a company that you think is sort of in the emerging leadership category that's fast growing, that's really becoming a dominant player. How about a little bit on Twilio?


Marcelo P. Lima:

Yeah, so Twilio is an interesting one, because the founder of Twilio, Jeff Lawson was an early employee at the AWS. So he very much had this mentality of working backwards from the customer, all these traditional Amazon values, working backwards from the customer, and making sure that you're always inventing and wandering and trying new things, and also this idea from AWS of creating primitives, and serving developers. And so what Twilio does, Twilio is the layer built on top of AWS that allows developers it's a developer facing company that allows developers to program communication.


Marcelo P. Lima:

So they started out with a few lines of code, you can make any phone ring, which back in 2008 was magical. And that was their first wedge, let's call it, into then building additional products, they then created SMS. So whenever you do two factor authentication, and you get that code from your bank, type in the code on the website that's powered by Twilio. And then they acquired SendGrid, which did something very similar before email, programmable email, which allows for a very, very quick and and with a high rate of deliverability for companies to send receipts and other types of transactional emails.


Marcelo P. Lima:

And ever since then, they continue to expand into essentially creating what they call an unbreakable bond between you and your customer. So really allowing for that interaction with the customer, that feedback with the customer. So they're continuing to make very interesting acquisitions, and introduce additional products and services around building that for that vision. So this is a company that, they model themselves partly on Salesforce, which is the granddaddy of software as a service companies and has become its own empire and has this very visionary founder.


Marcelo P. Lima:

And Twilio has hired folks from Salesforce and has been building the business, I think very much along those lines of expanding into its core functionality and serving customers more and more where they want to find solutions. So yeah, Twilio is I think, a powerhouse and Jeff Lawson I think right now is very underrated. I think in a few years, people will look back and say, "Wow, this was really one of the true greatest leaders of our time." So that's how much I believe in the company, and so we'll see but right now, it's really working out well for us.


Todd Peters:

I like how it essentially is built on top of the AWS, so it's neat to see the extension. One of the things that you've talked about is the ability for all of these partners to kind of work together themselves in creating new industries and new approaches that can be used. I think that's a fascinating concept.


Marcelo P. Lima:

Yeah. And you see this in traditional technologies, obviously. So electrification allowed for the creation of radio and television. And so once you had the television technology built on top of electricity, then you had TV stations built on top of the TV technology. So now you have entire businesses that are benefiting from building on top of Twilio. And so Salesforce, by the way, has, there's at least two public companies now that are very successful, have very attractive margins, and growing very quickly, that are built on top of Salesforce. Who would have known that a company that started out as a CRM system, a customer relationship management system, like a phonebook, would eventually build a platform that allows entire businesses to be built on top of, but that's what they've done. And I'm sure we'll see that in the case of Twilio as well, in the future.


Todd Peters:

That's fascinating. Well, thank you very much for that. That is a great coverage as to what you do for us, what you do for our clients and the way that you think. We very much appreciate it. I think we'll shift now to the question and answer session. As Eric mentioned earlier, there is a button on the bottom of your screen that should say Q&A, feel free to click that and enter in questions. And we will try to answer as many of them as we can in the time allotted. I'll give a second for them to start to populate, Marcelo, one moment. All right, so here's one that's come through. As you would expect in the age that we live in, what have you learned from the past 12 months?


Marcelo P. Lima:

So much. I think the most important lesson is this idea that the world is a complex adaptive system. We forget that often. And what I mean by that is, you frequently hear pundits talking about this one factor that will make all the difference, and making very bold macroeconomic forecasts based on that one factor. So oh, the Fed is printing money, and therefore, or interest rates are going up and therefore. And be very skeptical, I would say, because in a complex system, there's not one variable that makes a difference. There's a thousand variables, or sometimes a million variables.


Marcelo P. Lima:

And these variables are sometimes invisible to us, they have these complicated feedback loops. And the pandemic was very hard to forecast. I would say, the way that it played out was impossible to forecast. Some people did a very good job, I think, forecasting many, many aspects of it. But those are very rare people. And again, path dependence. We're saying that they were right, because it happened the way they said it would happen.


Marcelo P. Lima:

We didn't know how that was going to unfold. We also didn't know that our businesses were going to accelerate so much because of the pandemic that was a complete surprise. Now it looks obvious in hindsight. So the takeaway is the world is very weird, and if you have a very rigid view of how the world works in a very mechanistic view of things, then I think you're bound to be disappointed with your forecasts. So that was my main relearned lesson that... And I try to stay very flexible.


Marcelo P. Lima:

There's this book called Superforecasting, which I think everybody should read by Philip Tetlock, talks a lot about the pitfalls of forecasting. It's a very well-informed book, it's based on a study that this professor made for a division of DARPA, very interesting stuff. And it just shows how very, very hard it is to forecast in a very complex system.


Todd Peters:

Gotcha, that makes sense. Well, let's stay on that theme but change the perspective, instead of going back for the last 12 months. Now, that we're getting the vaccines out and the world may be opening up a little bit, how are you position the portfolio in a post-pandemic world?


Marcelo P. Lima:

If you look at these technology adoption curves over time, and whether we're talking about electrification, radio, color TV, internet, they are very, very resilient and very macro-insensitive. And so these curves are very strong regardless of whether there's a pandemic, or a recession, or a war. And so I think we'll continue to see the adoption of these technologies. We'll continue to see the adoption of cloud computing, the adoption of businesses built on top of cloud computing. There might be short-term effects, obviously. So tactically, if we were not long-term investors, if we were short-term traders, sure there might be periods of time where what would otherwise be a very lousy business might do very well in the next few months, because it's like a reopening trade or something like that. And I don't want to pick on any specific lousy business, but there's many of them out there.


Marcelo P. Lima:

But maybe those are short-term rewards, but they're not long-term rewards for us. And so we'd rather stay much focused on the great businesses that we have, which I think one very underestimated piece is because COVID accelerated our businesses so much last year, they acquired a lot of new customers. And if you look at how they monetize these customers over time, it's not like they make a ton of money on day one, they make a little bit of money after the first year, and then they make more money in the second year, and they make more money over time.


Marcelo P. Lima:

If you look at these cohorts, they grow over time. So with a record number of customers acquired in the last 12 months, that augers very well for very strong growth into the future in terms of revenue growth not only because of that cohort dynamic that I described, but also because these companies have innovated in the past year and created new things to sell to their customers over the next several years. So we haven't seen that yet, obviously, because it's going to play out over time. So I'm very optimistic for the future of our companies and if you look at the models that we have for all of them, the valuations are very attractive in terms of future growth and internal rates of return from here.


Todd Peters:

Okay, excellent. Next question that's come up is, how do you know when it's time to sell an investment?


Marcelo P. Lima:

I think the best time to sell is when the thesis is wrong. So you've done all this work and you thought you understood exactly what was going to happen, but nobody has a crystal ball. We just described how complicated the world is, and so sometimes things come out of left field and of course, that happens to businesses as well. So, that's I think one reason to sell. The other reason to sell is opportunity cost. So the opportunity cost of not investing in something else. I believe that over the next decade entire new empires will be built, and so I want to be very cognizant of that, and I want to make sure that we have adequate exposure to the companies that I believe strongly will become those new empires over the next 10 years. That's another reason to make changes in the portfolio.


Todd Peters:

Gotcha, all right it makes sense. Next question, do you have any thoughts as to the next wave of innovation? That maybe the question is kind of where it's starting or where the words are starting to become more and more louder, any thoughts of where the next wave might be?


Marcelo P. Lima:

Yeah, so, we're living in this very amazing time right now that has a conjunction of all these different general purpose technologies. So we've talked about cloud computing, and there's also machine learning or artificial intelligence, which is a general purpose technology that permeates everything. Every company is going to have to use machine learning in one way or another to sift through data and make better decisions for product development, to serve customers, et cetera, because if they don't do that their competitors will.


Marcelo P. Lima:

Another example of general purpose technology is cryptocurrencies and blockchains, which for the first time in the history of computer science, and if you read the Bitcoin white paper, there's the section at the end it has all these academic papers from the past two to three decades. Essentially the academic background behind Bitcoin, what led to Bitcoin? These are a lot of ideas that have existed for a long time and had been worked out by computer science, professors, and academics, and researchers, but that were not possible to combine and put into practice until we had the internet, and until we had computers on everybody's desks. And so that's what enabled the creation of that.


Marcelo P. Lima:

And cryptocurrencies and blockchains allow us for the first time to create digital scarcity and the exchange of value among two untrusted parties without a trusted central counterparty. In the past, you've always needed a clearing house, or a bank, or some sort of central counterparty. And that's going to have enormous repercussions for how exchange of value is done, how banking is done, how finance works.


Marcelo P. Lima:

And then in addition to that, we also have these new computing platforms. Bill Gates, like I said, his vision was one computer on every desk, and then we have one computer in every pocket now with a smartphone, and soon we're going to have high resolution glasses with augmented reality and virtual reality on every face. And in addition to that, we're also going to be able to control these computers, whether it's on our face or in front of us using our minds, so this is not science fiction. There's a company called CTRL-labs, which was acquired by Facebook a couple years ago. And I saw you can look on YouTube to see their demo, I saw the demo in person, it's fascinating technology just reads the neuro inputs on your wrist.


Marcelo P. Lima:

So you wear a bracelet and you don't even have to move your hand you just think, and you can move a cursor on your computer, or you can type, you can interact with your computer that way. So innovation happens when entrepreneurs have access to building blocks and they can mix and match those building blocks and create new things. And so the conjunction of all these general purpose technologies will create things that we can't even imagine.


Marcelo P. Lima:

I'll tell you why it's so hard to imagine. The smartphone adoption curve when it started, when everybody had let's say the iPhone one, it was like, okay, cool, I can surf the web, I can look at the weather, I can check stock prices, and I can check my email, but nobody thought I can get an Uber, nobody thought about that because that was at the end of the S-curve when we had GPS sensors and mapping data, which are things that were built eventually and built into the phone eventually. So that's why it's very hard to forecast these things, but staying on top of the development of these technologies allows us to be early in identifying where these things are going and then investing accordingly.


Todd Peters:

Right, absolutely. Okay next question. Curious how you consider the open-source-software movement as you evaluate companies, either as a risk factor to the existing or an opportunity building and selling on top of open-source?


Marcelo P. Lima:

Yeah, open-source runs the world. So every computer in the cloud runs some variant of Unix or Linux which is open-source. And entire huge businesses have been built on top of open-source like AWS is an empire built on top of open-source. And then you have more specific to your question I think is for example, companies like MongoDB, which developed a document-based database. It's not for structured data in rows and columns, it's for unstructured data so you give it a Jason... I don't want to get too technical, but it's like a Jason file, which has a bunch of curly braces and data separated by commas. And you can feed any type of data in as long as it's formatted properly and then you can query that data very, very quickly.


Marcelo P. Lima:

Amazon went and copied MongoDB and offered a DocumentDB because it was open-source, but then MongoDB changed the license and now restricts others from taking the code and making commercial applications, and MongoDB's business continues very strong, and there's other examples like that. So I think that it's a fact, and I think that you have to understand the licensing models, the threats, and how these companies differentiate. And so it's a very tested, tried and true now strategy to build an open-source product that then has sort of proprietary product and services on top of it that you monetize that way and very large businesses are built that way. So it's a very interesting part of the industry that is there and we look at all the time.


Todd Peters:

Fantastic. One last time, anyone that has a question, please click your Q&A on the bottom of your screen. We'll give it another second Marcelo. We've answered all questions at this point, and I'm seeing no further questions. Marcelo, thank you so much for your time today. Most importantly, thank you for all the efforts you've done on behalf of NS Capital's clients for six years. We're excited for at least the next six, hopefully and many, many more after that. One more, this just popped up, Marcelo. What about regulations impact on the securities you follow? Where do you see the regulatory side?


Marcelo P. Lima:

Yeah, so my guess is the question has to do with antitrust more related to Amazon. That's a tricky one because I've been following the discussions very closely. In fact, a few years ago, I attended an antitrust conference at the University of Chicago of all places with a bunch of academics who are very vocal and very well-informed in antitrust. And the interesting thing is if you've watched any congressional hearing, you'll see that the legislators, the senators are not very well-informed when it comes to technology. And when you read the complaints, when you read the lawsuits, and when you read all these different complaints that have come out, you'll see that they're full of holes. So the technological understanding is not really great there.


Marcelo P. Lima:

Secondly, I would say that we have primarily a standard of consumer harm in the U.S. Not really of encouraging competition for the sake of encouraging competition, which is the focus of the European Union. So in the U.S. it's very hard to say that there has been consumer harm when these companies have driven prices lower, they've created abundance in so many different areas, right? So Amazon is, you can buy anything, there's even something called the Amazon Effect which you can Google and it's been deflationary over time because they just offer more products, more cheaply. And Facebook allows anyone to communicate in high definition and in an encrypted way with anybody in the world, and allows small businesses to reach consumers with ads that are much better and more relevant than ads before you had sort of targeting where it was basically weight loss and hair loss. It's like, okay, I'm either going to serve you weight loss or hair loss because one of these two might work because I don't really know much about you.


Marcelo P. Lima:

So, we'll see how it works. I mean, having said all that, none of that prevents the government from making dumb decisions and passing dumb legislation. We see that all the time. We saw it in the European Union, we saw it in Germany, we saw it in Australia, now recently with the proposal to tax hyperlinks, which everybody has told them that was a bad idea. They went ahead with it anyway. And then they discovered it was a really bad idea and they backtracked. So I'm hopeful that we can inform our government before they decide to make bad legislation that will frankly hurt our best businesses. So the companies that we have that are, I think Juul's. So we'll see, I'm monitoring it, I'm not super worried about it right now, but anything can change very, very fast.


Todd Peters:

Sure, understood. Okay one last ask. Any other questions? If so, please click the Q&A button on the bottom of your screen. Okay, well, Marcelo, thank you. This has been great. To all of you that attended today, we are most grateful for your time and your attention. We ask if you have any question for us feel free to reach out to anyone at NS Capital, we will do our best to get back to you. Until then, we wish you much continued health and wellness, and have a great rest of the day everybody. Thank you so much.


Marcelo P. Lima:

Thank you, Todd.