Connor Leonard - Capital Light Compounders & Reinvestment Moats

**Patrick O'Shaughnessy** (0:00)
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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_2** (0:59)
Patrick O'Shaughnessy is a Principal and Portfolio Manager at 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** (1:21)
This week's conversation is an ode to old-school fundamental public market investing. My conversation is with IMC's Connor Leonard, who spends most waking hours thinking and reading about markets. His mandate is to invest purely as if it was his own money, with no pressure to hug a benchmark and no pressure to do much of anything other than earn strong long-term returns.
The portfolio that results from this approach is highly concentrated and unique. Connor's strategy is to sort companies into four categories based on their type of sustainable competitive advantage. As you'll hear, the vast majority fall into the first category, which means they have no such advantage and therefore should be largely set aside.
We spend the majority of our conversation talking about the other three categories. One, companies with a legacy moat. Two, companies with a reinvestment moat. And three, an interesting category Connor calls capital-like compounders, which we explore in detail. When you step back and think about public markets, you realize how amazing it is that we can, from afar, buy an interest in so many companies around the world. A select few go on to deliver outstanding returns. This conversation highlights how hard that can be, but also how fun and ultimately rewarding. Please enjoy my talk with Connor Leonard.
We're talking about one of the trends that you're noticing in value investing, so maybe we'll just start there in the middle of our conversation.

**Connor Leonard** (2:36)
Sure, so I think that there's been a change over time in value investing from quantitative to qualitative.
So what I mean by that is if you're to go back to securities analysis, Ben Graham's work, or even looking more at like Seth Klarman's stuff from margin of safety, a lot of it is you're looking for statistically cheap securities.
So the classic example would be there's a host of banks that are all more or less the same. They trade for one times book value. Then there's this one bank that happens to trade for 0.5 times book value. And that would be your opportunity to essentially arbitrage. You're buying a $0.50, when it gets to 90 or 95 cents, you would sell. What I've seen lately, and I think you have a role in some of this, is that those statistically cheap, kind of no-brainer opportunities are in a sense being picked off by quantitative models or just different players in the market than have historically been there.
So maybe you see some of this still, but I don't see as much of nine banks being at one times book value. And then the 10th one for no reason is at 0.5 times book value. So I think the game is shifting towards more of a qualitative game. So what I mean by that is some of the businesses that I'm looking at, people ask me, well, yes, you're looking for a long-term growing business, but how do you value that? Well, I think part of it is you're not valuing it based off of a static multiple today. You need to have a little bit of a qualitative aspect. You need to say, I'll just do an example. This is not a security we own, but Zillow Group is one I just looked at recently.
That earns essentially 0% margin. It's a similar business model to Rightmove, which is in the UK that earns a 70% EBITDA margin. I'm not saying Zillow can earn a 70%, but if you study that other business model of a company that's a little bit more mature, and then you apply it to a company today that hasn't quite gotten there, you can see where the earnings power will be. That's something that a model or a chart and value line isn't going to pick up on. So I think that that's where the game is moving, because it's harder to replicate. You need to study a lot of different business models and kind of put it all together and apply to the situation that's right in front of you.