Chris Bloomstran – What Makes a Quality Company

**Patrick O'Shaughnessy** (0:04)
Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest this week is Chris Bloomstran, the President and Chief Investment Officer of Semper Augustus Investments Group. He became famous in investing circles a few years ago for his incredibly detailed investigations of Berkshire Hathaway. While we do cover Berkshire towards the end of the conversation, we spend most of our time talking about what makes for a quality business.
I love some of his angles on the current landscape, including our discussion of companies like Richemont and Disney, which are actively taking distribution back in house. Please enjoy our conversation.
I thought an interesting place to start, which I've really not done before, would be with your biggest mistake, biggest investing mistake. We'll talk a lot about successes and interesting companies over the course of the conversation, but oftentimes we learn most from our biggest screw ups. You were talking a little bit about one of those before we hit record. Let's begin there. What in your now pretty long career investing in equities has been the largest error?

**Chris Bloomstran** (1:40)
Well, 30 years in and 20 years running Semper, you do make a fair share of blunders and mistakes. This year's letter, I wrote about a handful and probably the one that comes to mind that I would categorize as the worst, which was clearly an error of commission, was having sold Ross Stores, having owned it for the prior two and a half years.
We owned at the outset of the firm, we had transitioned a very wealthy family's portfolio away from kind of large blue chip businesses with very low cost basis, a lot of businesses no longer earning their cost of capital, prices ranging from 30 to 50 times earnings.
Very tax-efficiently with a foundation and some cruts had liquidated a portfolio and at the time, all of the value that we were finding was in small mid-cap names. So we buy Ross Stores as an example.
Maybe 10 times earnings, we'd followed Ross for seven or eight years, had never owned it. Terrific retailer, they probably had 350, 375 stores at the time.
We love the ramp at which they could continue to open stores. Standard economics were terrific, kind of high teens, low 20s, returns on capital. Balance sheet was great. They used operating leases, but judiciously. So we paid 10 times earnings for Ross. During that first 50% bear market when the market fell, during 2001 and 2002, we made on the order of two and a half times our money on Ross. So the stock at that point was trading kind of high teens, call it 20 times earnings. We figured, as we did at the time, that you could always sell things and buy them back. Well, the lessons of history and the great investors all say it's really hard to buy something. You hear Mr. Monger talk about it all the time. Well, we sell the thing. I had this notion, and I still do at some level, that a retail concept or a fast food restaurant type concept, once they get to a certain unit size, and I've always thought that number was about 400, that a lot of things tend to change. Distribution changes. A lot of times you need new management.
And so we thought we could step away from Ross at what we thought was a very full price. It was trading north of our appraisal of fair value. We didn't value anything at 20 times earnings at the time. And so Ross looked expensive, so we trimmed it. In the years having sold it since, the stock's more than a 20-bagger, just insane. So you look at the unit count, profitability grew, gross margins expanded. If we had done a model and laid out a 20-year projection, we probably could have gotten to the way Ross played out, but we sold it for price. We sold it for price and made the mistake of never circling back and buying it because I think we were anchored at some level in the fact that we paid 10 times earnings for it and you make two and a half times, do you circle back and pay 15 or 16 times? Well, it was clearly worth way more than 10 It was worth way more than 20 times.