Martin Shkreli: "This Is Why Investing Is Hard"

Summary

In this engaging discussion, Martin Shkreli shares insights on the challenges of investing, especially when you're not familiar with the industry of interest, like Charles River Laboratories. The conversation delves into evaluating companies, the importance of industry knowledge, and how instinct plays a vital role. He examines the steadiness of Charles River's business in animal-based testing and its growth potential through acquisitions. Shkreli emphasizes that understanding the fundamentals of a company and its industry can provide a significant advantage in investing, even if growth isn't apparent. Specialization, common sense, and thorough research can aid investors in making better decisions.

Highlights

• Charles River Laboratories was once overvalued but now appears attractive due to its stable business model. 🐀
• Instinct, rather than excessive knowledge, often guides investors in complex industries. 👁️
• Industry specialists frequently err, underlining the difficulty in understanding industries deeply. 😅
• Animal testing remains a crucial sector with potential growth due to its foundational role in medicine. 🐶
• Commonsense and familiarity with general business principles are essential for investing success. 💡

Key Takeaways

• Industry knowledge is crucial in making sound investment decisions. 🧠
• Instinct, developed through experience, guides understanding in complex fields like quantum computing. 🔮
• Stable businesses, like Charles River, offer consistent returns despite a lack of growth. 📈
• Understanding the fundamentals of companies and their industries enhances investment strategies. 🔍
• Private equity can realize potential in seemingly stagnant companies through restructuring. 🤔

Overview

In this fascinating discussion led by Martin Shkreli, the hurdles of investing without industry knowledge take the front seat. The topic kickstarts with an exploration of Charles River Laboratories, touching upon their financial standing and forecasting revenue and earnings. Shkreli dives deep into the significance of understanding an industry thoroughly, emphasizing that specialization can often yield more precise insights compared to generalist views. His experience with short selling Charles River adds a layer of practical knowledge on unpredictable market dynamics.

The conversation portrays Charles River as a robust company with a stable business model centered around animal testing. Shkreli notes that while industries evolve, certain sectors like animal testing remain foundational, likened to a constant need ingrained in the medical field. Despite not showcasing rapid growth, Charles River is depicted as a long-term investment opportunity due to its stable cash flow, potential acquisitions, and the unique niche it occupies in the life sciences arena.

Shkreli also touches upon broader investment strategies, underlining the importance of basic business acumen and instinct cultivation. Drawing parallels with private equity's approach, he suggests that hidden value in stable companies can be realized through strategic adjustments. Through anecdotes and analysis, the value of commonsense combined with rigorous industry understanding emerges as a recurring theme, offering guidance for investors navigating complex and variable financial landscapes.

Chapters

• 00:00 - 01:00: Introduction and Inquiry about Charles River The chapter opens with a greeting and an expression of gratitude for patience, as Martin is addressed regarding a call. Martin acknowledges the greeting, starting a conversation where the speaker has a couple of questions and intends to keep the interaction brief. The speaker mentions researching industries they are unfamiliar with, specifically noting Charles River Laboratories as a company they have looked into but know little about.
• 01:00 - 03:00: Understanding the Industry and Investment Strategies This chapter delves into the intricacies of the industry and investment strategies with a focus on understanding a company's business model, its financial forecasts, and revenue predictions. It highlights the importance of comprehending the details of a company's operations, even when one is not inherently familiar with the industry's nuances. Emphasis is placed on the necessity of learning about the various components of a business to make well-informed investment decisions, particularly when analyzing financial models and revenue forecasts of unfamiliar sectors, such as those based on biology or involving the use of medicine and rats in research.
• 03:00 - 05:00: Evaluating Charles River's Business Model This chapter discusses the complexities and challenges of investing, specifically the debate between specialization and being a generalist. The speaker shares their experience with Charles River's business model, mentioning a short position they took, which proved to be successful. The chapter ends on a note that Charles River currently seems attractive at its present price.
• 05:00 - 07:00: Discussion on Revenue and Growth The chapter titled 'Discussion on Revenue and Growth' explores the complexity of learning within industry contexts. It begins with a reflection on the necessity of understanding industry-specific knowledge, highlighting that one cannot skimp on this when aiming for success. The discussion touches upon the paradoxical nature of knowledge acquisition—the "chicken and egg" scenario wherein one ponders how much is enough before it becomes excessive. The focus is on striving for a 'PTO optimal'—a balanced level of insight that contributes to growth without overloading oneself with more information than necessary. This balance is crucial for effectively navigating and leveraging industry dynamics to achieve revenue and growth.
• 07:00 - 10:00: Private Equity and Company Prospects The chapter discusses the necessity of understanding the right amount of information needed for decision-making, specifically in the context of investing. It emphasizes the role of experience and instinct in determining what is sufficient knowledge. The speaker uses the example of quantum computing to illustrate that one doesn't need to know every detail, such as how to program a quantum computer, but should instead focus on understanding the fundamental concepts that drive the technology.
• 10:00 - 13:00: Potential for Growth through Acquisition and Industry Insights The chapter discusses the challenges of identifying the future trends in industries, particularly in computing. It highlights the difficulty for individuals to become experts in every domain they invest in, emphasizing the importance of industry specialists. However, even specialists can make mistakes, making it crucial to apply common sense in investment decisions.
• 13:00 - 16:00: Outsourcing in Pharma and Animal Testing The chapter discusses the importance of animal testing in the pharmaceutical industry, emphasizing that businesses like Charles River, involved in lab-based animal research, are fundamentally crucial and likely to grow due to the persistent and increasing need for animal research in medicine. It also touches on the specific case of monoclonal antibodies, suggesting their unique position in the context of pharmaceutical outsourcing and testing.
• 16:00 - 18:00: Conclusion and Reflection on Industry Knowledge The chapter discusses the minimal testing of monoclonal antibodies (MABs), highlighting that they were never meant to undergo extensive testing. It mentions that the FDA has acknowledged this by stopping unnecessary tests. The text suggests that MABs do not play a significant role in what is described as a 'big business', which focuses on 'talks'. It emphasizes that 'talks' remain important for industry perspectives, and that MABs rarely go through these processes. The conclusion reflects on the unchanged relevance of 'talks' even when some MABs are involved.

Martin Shkreli: "This Is Why Investing Is Hard" Transcription

• 00:00 - 00:30 What's up? Thank you for waiting. Hey, Martin, can you hear me? Yeah. Yeah. Thanks for taking the call. Uh, have a couple questions. Try to keep it short. Um, yeah. Thanks for waiting. First off, yeah, when looking So, I' I've been doing some research into some some companies that I don't actually have too much familiar familiarity with their industry. Yeah. So, first one I was looking at was Charles River. Yeah. laboratories and I don't know anything
• 00:30 - 01:00 really about biology. They use rats medicine and I'm trying to understand the company. I've done a model. I've forecasted their own their finances and what I think, you know, is going to happen to their revenue and earnings. But how if I don't know much about the industry, how indepth do I need to go about learning all the little components of their of their business in order to really like get a good understanding of the company? You know, this is the
• 01:00 - 01:30 problem of investing and this is why specialization is is very helpful and being a generalist can be a little bit difficult. Um, you know, here's my Charles River model. I was short this actually briefly and I guess that that seemed to to work really well. I don't know if you guys remember when I was short this thing, but um it does look attractive uh at this price.
• 01:30 - 02:00 Let me just I'm just going to refresh some numbers here. Hold on one second. So, the short answer is you really can't skimp on learning in industry. And if you're asking how to go about it, I can give you a lot of insight. If you're asking how much should you know, it's kind of one of these chicken and egg questions where it's like you got to reach a PTO optimal like there is a level of like okay, you know too much and then there's a level of like you
• 02:00 - 02:30 obviously don't know enough and you don't always know which is which. I think experience will tell you, you know, like I've been looking into quantum computing pretty heavily and I sort of felt like after a while I knew what I needed to know and it it's instinct more than anything that that guides me on that because like do I know need to know how to program a quantum computer? That's that's probably too much. Um should I have a pretty good idea of like what makes them work? Why
• 02:30 - 03:00 are they special? It's probably pretty important because if you don't like how do you know it's not going to be the future of computing? Maybe it is going to be the future of computing. So, it's a little tricky because now what am I going to become a PhD in physics? Of course not. You know, um no, nobody has the time to to do that for every stock they look at. So, it's super tricky. I mean, this is why there are industry specialists. But man, even those industry specialists get it wrong all the time. So, what's the answer? I think it's a healthy dose of common sense.
• 03:00 - 03:30 It's a healthy dose of understanding businesses in general. Like so Charles River is a great business. It just was overvalued for a while. There there will never not be lab-based animal research, right? Like this is like such a fundamental concept in medicine uh that the animal testing business will never disappear. In fact, if if anything, it's probably going to increase in my opinion. Now monoconal antibodies are a very unique situation where
• 03:30 - 04:00 MABs have always been something where they don't get tested a bunch. They never really should have been tested in the first place anyway and finally the FDA has realized that they should stop doing it. There's not many this is not a big business for these guys anyway. The big business is talks and in talks, you know, again, MABs don't really go through talks normally. So like and talks is not going to really disappear even for some MABs. So like to me, I
• 04:00 - 04:30 think the the business is really safe. I think what's weird about Charles River is like how do they grow, right? And yeah, and you know, as a value investor, like can you get are you satisfied owning a stock? It's kind of like IBM where it's like, look, this company is never going to grow again. Are you okay just sitting there collecting a dividend, watching, you know, your EPS go up through buybacks, but you're not getting any revenue growth because the pharma business is
• 04:30 - 05:00 not growing, you know, and if you look at their I just have their 10K open here. They haven't grown in in, you know, three years. Same amount of revenue, right? So, but is it a great business? They were forecasting a decline as well. Yeah. Yeah. And that's this year. And you know, it doesn't mean that a declining, you know, declining revenue is a bad thing. Like let's look at the cap X and stuff like that. Like this is a company that has a billion6 in PP&E order cancel um and they're cash flowing
• 05:00 - 05:30 600 to 700 a year. It's insane return. Imagine if you own this business. Well, net of the capex, you know, it's a little bit less. It's more like 3 to 500. But regardless, you'd be very happy as an owner of this business. And um you know, but you're not the founder of this business or the current owner. But if you if you inherited this business, for example, and you said, should I sell
• 05:30 - 06:00 this or should I, you know, and go invest in something better or should I keep it? The way you could look at it is again, you have $1.6 billion of property. That property costs some money to maintain, but the net cash flow that's coming out of it is is 400 million, which is around a 25% return. So, you're basically making a 25% return on your capital every year. There's not too many hedge funds that can do that. So, to me, it's this like just constant, you know, compounder of cash flow that
• 06:00 - 06:30 25% coming out every year. The question is what what can you what can you pay for it? And it's on at like a kind of legendary discount at the moment. You know, pharma services is, you know, the pharma industry is is going through its own trials and tribulations right now, but it's not going away for the next at least 30 years. So, and probably never going away. We'll always need medicine. What medicine looks like and what it really is is probably going to change a little bit, but I kind of like this. Thank you for bringing it up. Um, I
• 06:30 - 07:00 don't need growth in my stocks. Like I think that's like sometimes a poisonous attitude and most growth investors will roll their eyes right now and think I'm crazy. But like what is private equity? Why is private equity make better returns than almost any industry? Because like it's this kind of thing. Like if a new management team came into Charles River and cut costs and like really tried to I don't know pass through price increases, find a way to grow, grow through acquisition, whatever it is. Like I bet you they could find a
• 07:00 - 07:30 way to make this even better company that does a billion in earnings a year and you know it's six times it would be six times earnings in that case. So to me I I love companies like this because like these guys have been around for I don't know do you've done more work on the company than me but like I want to say these guys have been around at least 50 years and like like they are the lab animal king. Um, it's interesting you mentioned inheritance because the the current CEO is the son of the the founder. Oh, yeah. That's why I think
• 07:30 - 08:00 that's probably what my neural network was configuring as I was thinking about this, right? And maybe it's time for him to go. Private equity would pay like 30 50 to 30 to 50% premium for these guys now. And again, it's the most like stable legendary business in in kind of pharma services life sciences because these guys have just been, you know, they've been around for so long and if you need lab animals, whether you're academic or pharma, there's no second
• 08:00 - 08:30 player like and then, you know, to do to talk services to do all this other stuff, I think they do all that stuff, too. Um, like toxicology is a bit of a meme, but remember these guys could really benefit from tariff stuff because this is, you know, it's a services company, but guess where I used to do all my talks? I'm not doing it in America. I'm doing it overseas. So to me, it makes a lot of sense that, you know, this is a company that's a
• 08:30 - 09:00 homegrown American company. Could they, you know, literally Charles River of Boston, right? And you know, could they potentially, you know, be a beneficiary of tariffs where Trump administration says, "Yes, we want to reward you guys for being an American company doing America high-end American work." You know, those toxicology tests are not simple. Uh they're a little gruesome, but they're not simple. and to have this American science company dominate and
• 09:00 - 09:30 let's not use Wuji as great as I like as much as I like Wuji, you know, it's a Chinese company and if we're going to do this American patriotism thing, let's all move our business to Charles Labs, Charles River Labs. And you know, it's interesting because they I don't know if have they been growing by acquisition? Yeah, they they have been making a lot of acquisitions like they're buying firms that sell like monkeys from like Maitius I saw that deal. Yeah. But like is it a huge cash outlay that they're paying because like they are growing
• 09:30 - 10:00 technically. I don't probably not organic. I don't I don't have the numbers off the top of my head. Um they do they normally complete like two or three acquisitions a year. I mean they they're growing them. You know it's probably all inorganic but they are growing. um you know I so I I think that there's I mean they've doubled the size of the business so if they can do like
• 10:00 - 10:30 prudent acquisitions technically they have been growing so you know it just last time I looked at it was like super expensive and but as I look at it now I mean it's it's actually kind of attractive so I appreciate like like I said many times like I got cassava uh which I made a million dollars on through um this community and then uh quantum as well. You know, we're actually super
• 10:30 - 11:00 early to quantum and I was kind of constructive on it if you guys remember and then it went through this crazy bubble. So like this kind of stuff is really helpful to me because just like you I I don't know what stock to look at which is why I made Goodell. It's a great terminal for stocks once you know what to look for, but it's also a community where you can look um and find new companies uh by chatting with people and this so is this stream. So, Charles River, you know, um I still want to like you said, I I want to dig in more and like really understand like has their revenue makeup shifted a bit since these
• 11:00 - 11:30 acquisitions, but if it's all mostly animal and pharma testing, you you can sort of like one of these types of companies, they're just industrial companies that are like boring like this. There's not a they're not a lot different from like an HVAC company or like you know some of these really like old slow companies because at the end of the day like yes you should understand what what it is they do who their customers are what the outlook for changes are but like at the end of the day if they're like super diverse you know I'm sure animal testing is still a
• 11:30 - 12:00 big chunk of their business but like it this is a stable company like if you look at their revenue and and their products like it doesn't feel like, you know, this is something that's that dynamic and that's kind of a good thing. Uh, obviously you still have to be very vigilant and understand it all, but I I kind of think this is a a steady grower and just doing the diligence on the animal stuff is would be where I would focus. Um, and you
• 12:00 - 12:30 know, to me as a farmer guy, you know, there's not much that's changed in the animal world and unlikely to change anytime soon. I don't know if you agree with that or not. I I don't think there's too much. Uh I think the big thing for in terms of the animal segment is how much companies are willing to outsource and like how managed the service uh would be of where the animals are stored. Do you hire your own workers? Um I think everyone out
• 12:30 - 13:00 everyone outsources. You know, there's a couple of big pharmas that insource, but nobody wants to do the animal work because it's so ro it's like very like there's no reason to do it in house if like unless you're like fizer and even then like people use CRO for trials you know they used to do trials in house and now everyone uses contract research so you just take like the difficult part of the work and you send
• 13:00 - 13:30 it out and I think that every B I'll tell you this every single biotech in the world and any pharma below a certain size will not do toxicology in house. So now there's a lot of different kinds of tests. It's not just TOX, but yeah, TOX is something where like you can actually, if you want a little bit of a hint here, there's the FDA does these reviews of uh drugs before they approve them. And oftentimes you can see where the tox study was done. It's kind of I
• 13:30 - 14:00 would say leaked, but it's kind of like in in the filings. And um it's a really interesting thing sometimes to see who who's doing it internally or externally. everyone's external like I've seen so many drugs they're always doing these talk studies you know at some other company but yeah these guys have grown from 1.8 8 in revs to 4 billion. They've never had a year where they dropped a lot of revenue. You know, last year was a little slow. The year before that was a little slow, but like as long as they keep turnurning out earnings, you
• 14:00 - 14:30 know, these guys will still be here in 10 years, 20 years, 30 years, you know. Like, yeah, could they be could they atrophy? Sure, it's possible, but seems to me like a really good long. I don't know if you did. You think it was a short? Uh, no. Actually, I I was pretty my valuation of it was pretty similar to what it was trading at uh two months ago. Oh. Um and it has dropped um a decent amount over the past um past year
• 14:30 - 15:00 or so, but I I was I was undecided on it. Um I was more so doing it as an exercise in terms of learning the industry and um yeah. Yeah. I mean you learn this industry super well and then the problem becomes like all that knowledge you just gained does not apply to any other company because it's like you know how many companies are in this space not many like here's a list of life sciences diagnostics companies
• 15:00 - 15:30 basically the knowledge you get from Charles River basically none of it applies to these other companies they might be a customer of some of these guys so there's a little bit of that food chain effect going on so you will learn something like it's not totally you know useless but like you know that's the difficulty of of looking into some of these fragmented spaces like in pharma every company's the [ __ ] same you know so it's really easy to look at but in in life sciences all these guys are a little bit different from each other you know uh one no two companies
• 15:30 - 16:00 are exactly alike anyway thank you so much for for jumping in um that was really Cool.