與傳奇一起價值投資：基金管理的藝術，與 Chase Sheridan 和 Will Pan

Welcome to the fourth season of Value Investing with Legends, a podcast that delves deep into the strategies and principles that top investors use to select stocks and manage risk in an ever-evolving financial landscape.

I’m Thanos Santos, Faculty Director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School and the David and Elsie Dodd Professor of Finance. Since launching our first episode in the spring of 2019—an interview with Mario Gabelli—we’ve built a dedicated global audience and amassed an impressive collection of conversations with extraordinary investors.

However, it’s time for a change in format. While I’ve truly enjoyed hosting these interviews, I’ve always believed that both our audience and guests would benefit from another voice—someone who could challenge perspectives and bring fresh insights. That’s why I’m thrilled to welcome my new co-host, Michael Mauboussin.

Michael is not only a respected colleague and a close friend, but he’s also someone I deeply admire for his ability to bridge academic research with the practical realities of investing. I’m confident he will add a unique perspective to our discussions. Many of our listeners already know Michael, as he’s been a guest on the podcast twice. But for those who are new or may have missed those episodes, let me provide a brief introduction.

Michael is the Head of Consilient Research at Counterpoint Global, a division of Morgan Stanley Investment Management. As I’ve mentioned before, the term “consilient” could have been coined just for him—his knowledge spans multiple disciplines, and he has a remarkable ability to synthesize them into coherent and intelligent insights. Previously, he was Managing Director and Head of Global Financial Strategies at Credit Suisse. Before that, he served as Chief Investment Strategist at Legg Mason Capital Management from 2004 to 2012.

Michael’s career began at Credit Suisse in 1992 as an analyst covering the packaged food industry, and by 1999, he had risen to the role of Chief U.S. Investment Strategist. His extensive experience and deep industry perspective make him an invaluable addition to our team.

Beyond his professional roles, Michael is also a highly regarded author. His books include The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, as well as my personal favorite, Expectations Investing: Reading Stock Prices for Better Returns, co-authored with Alfred Rappaport. The second edition of this book is now being released as part of the Heilbrunn Center for Graham and Dodd Investing series.

Michael has also been an adjunct professor of finance at Columbia Business School since 1993 and plays a key role in the success of the Heilbrunn Center. Michael, welcome to Value Investing with Legends.

Michael Mauboussin: Thank you, Thanos, for the kind words. It’s a pleasure to join you on this journey. I’ve long admired your work, and I’ve always enjoyed our discussions. I’m really excited about this opportunity to collaborate and explore the insights of some of the world’s greatest investors.

Thanos Santos: We’re delighted to have you. And with that, welcome to the first episode of this new season of Value Investing with Legends, now with Mike as my co-host.

To kick things off, we’re featuring one of the most legendary names in value investing—Ruane, Cunniff & Goldfarb (RCG). If you’ve read Warren Buffett’s famous essay, The Superinvestors of Graham-and-Doddsville, published in the Columbia Business School Magazine in 1984, you’ll recognize the name Bill Ruane. He was one of the “superinvestors” Buffett highlighted, as well as the founder of the legendary Sequoia Fund.

The Sequoia Fund holds a prominent place in the history of value investing. Bill Ruane first met Warren Buffett in 1950 at a value investing seminar taught by Benjamin Graham at Columbia University. When Buffett closed his investment partnership in 1969, he advised his investors to move their money into Ruane’s newly established Sequoia Fund. The following year, Bill Ruane and Rick Cunniff officially launched the fund, taking on Buffett’s former clients. Bob Goldfarb joined the firm in 1971, and by the mid-1970s, Ruane, Cunniff & Goldfarb had built an outstanding reputation.

Staying true to the principles of value investing, the fund identified and profited from undervalued public companies, including The Washington Post, Interpublic Group, and Ogilvy & Mather. In the 1980s, it held stakes in Kraft, Sara Lee, and Capital Cities. The 1990s brought investments in Fifth Third Bank, Progressive Insurance, Harley-Davidson, and Johnson & Johnson, all of which were sold at substantial profits.

Bill Ruane managed the Sequoia Fund nearly until his passing in 2005. Few endorsements carry as much weight in the investment community as those from Warren Buffett, who once said, “[Ruane] did a fantastic job. Even today, if you look at its long-term record, I don’t know of a mutual fund in the United States with a better track record.”

The legacy of value investing at Ruane, Cunniff & Goldfarb continues to thrive beyond the Sequoia Fund. Today, we’re honored to welcome Chase Sheridan and Will Pan, who will share insights on the firm’s evolution and the next chapter in its storied history.

Chase and Will joined the firm in 2006 and 2010, respectively, starting as analysts. In 2019, they launched the Hyperion Fund, marking a new era for Ruane, Cunniff & Goldfarb.

Chase is a 2006 graduate of Columbia Business School and joined the firm straight out of school. Will graduated from Harvard College in 2010 and has been with Ruane ever since.

Chase, Will, welcome to Value Investing with Legends, and thank you for being here.

Chase Sheridan & Will Pan: Thank you for having us. It’s always a pleasure to see you both.

Thanos Santos: As always, we like to begin by getting to know our guests and their career journeys. Chase, let’s start with you. Before joining Ruane, what was your path like? You had prior experience before business school, unlike Will. What led you to Ruane?

Chase Sheridan: Absolutely. My journey to Ruane was rather unconventional. My career in investment management actually started on the floor of the Chicago Board Options Exchange (CBOE). I grew up in the Chicago suburbs, and back in the mid-1990s, if you were interested in finance and eager to gain hands-on experience, the trading floor was an incredible place to start. It was an environment where young professionals could take on real responsibility early on.

I started my career as a market maker in S&P 500 options before transitioning into a specialized area called volatility arbitrage or dispersion trading. In the 1990s, this was still a relatively new concept, and while the technical details aren’t particularly relevant here, the key takeaway is that I built a career as an options trader at Cooper Neff, a firm that provided an excellent work environment. I genuinely enjoyed what I was doing.

However, at the end of each year, I would receive my bonus and realize that I had no idea how to invest it. I didn’t truly understand real investing. Fortunately, a close family friend was one of the earliest clients of Ruane, Cunniff & Goldfarb, dating back to 1971. During a ski trip in Montana, this friend spoke passionately about his money manager, Bob Goldfarb, and the remarkable work being done at Ruane, Cunniff. Intrigued, I asked for an introduction.

I initially became a client, entrusting them with my annual bonuses, and before long, they were managing all my assets. Through this relationship, I developed a deep interest in value investing and even started attending the Berkshire Hathaway annual meetings in Omaha with my father. Like many others, I was captivated by the elegance of Warren Buffett’s investment philosophy.

At a certain point, I decided to completely reshape my career in order to pursue value investing. I returned to school—not so much for an MBA, but specifically to enroll in Columbia’s Value Investing Program. That was my sole focus; had I not been accepted into Columbia, I likely wouldn’t have pursued business school at all. Fortunately, I was admitted, and those two years turned out to be among the best of my life.

The Value Investing Program was phenomenal. I took Mike’s class on security analysis, which I found incredibly valuable—many of the lessons I learned in that course still influence my work today. While I wasn’t sure whether I’d ever land a job at Ruane, Cunniff, that firm was the reason I fell in love with value investing in the first place. As luck would have it, they happened to have an opening, and they hired me midway through the program.

Like many young analysts at Ruane, Cunniff, I didn’t ask about salary or benefits—I just wanted the opportunity to work with these extraordinary investors.

I had the privilege of working with incredible investors whom I deeply admired, and from the moment I joined, they put me to work. I’ve been with the firm ever since. That was my rather unconventional path to Ruane, Cunniff & Goldfarb.

And what about you, Will? What did you study in school? Was a career in asset management always your goal?

I was interested in stocks from a young age. My dad was very active in the stock market during the 1990s—perhaps a little too active—but he involved me in investing early on, and that’s when I first learned about Warren Buffett.

In college, I majored in economics and took an accounting class at MIT, since Harvard didn’t offer one at the time. I also studied neuroscience, as behavioral economics was emerging as a major field, and I was fascinated by the idea that people aren’t always rational and often make mistakes. That perspective continues to shape how I think about investing today.

During my time at Harvard, I worked as a research assistant for David Laibson, who has done groundbreaking work in behavioral economics. I also participated in student investment clubs, contributed to student-managed funds, and wrote investment pitches. At the same time, I explored other interests, including startups and tech. What I knew for certain was that I wanted to be in business—companies fascinated me.

Everything came to a head in the summer of 2009 when I was deciding on my junior-year internship. I had a few different paths in front of me: I could go into consulting or take a program management role at a large tech company.

And then I had the option to intern at Ruane, Cunniff & Goldfarb. It’s not often in life that we realize how lucky we are in a given moment, but I think I was fortunate enough to recognize that interning at Ruane would be a once-in-a-lifetime opportunity. I set my heart on it because I knew I would learn a tremendous amount about business—knowledge that would be valuable no matter what path I ultimately chose.

It was actually quite funny because the recruiter from the big tech company kept calling me, increasing their offer, thinking he was competing against a major Wall Street firm. But at the time, Ruane, Cunniff & Goldfarb hadn’t really updated its pay structure—we were paid a $1,000-per-week stipend. So, ironically, he was already offering the highest compensation, but I was never in it for the money. I just wanted to take a shot at this incredible opportunity, even though I knew Ruane didn’t hire interns every year and there was no guarantee of a full-time position.

I did the internship, and I loved every minute of it—the work, the people, the environment. So, I was absolutely thrilled when they invited me to join full-time, and I’ve been here ever since.

There are so many interesting connections here. Michael and I, of course, have immersed ourselves in the literature on behavioral economics. I still vividly remember when David Laibson’s work on hyperbolic discounting first made waves in academia—it was a major shock to the field and had a profound impact. Chase, your career path also resonates with mine in academia. I started my teaching career at the University of Chicago, covering options, futures, and fixed-income derivatives. It was around 2009–2010 that I first started reading Ben Graham, while working with Bruce Greenwald here at Columbia Business School. Like you, once I dove into that world, there was no turning back.

The bulk of our discussion today will focus on your work at Hyperion Fund. We’re very curious about this new name in the investment world. We read the letter you kindly sent us, where you emphasized the deep connection you both share with Ruane, Cunniff & Goldfarb. Can you elaborate on that tradition? How do you build upon Ruane’s legacy, why is it still relevant today, and how are you applying those principles within Hyperion?

I’d say the essence of how we invest—both at Ruane, Cunniff & Goldfarb and now at Hyperion—is that we view stocks as ownership in businesses. That might sound like a cliché, as many people say it, but we truly, deeply believe it. When we hold a stock in our portfolio, we don’t see it as just a fluctuating line on a screen or a piece of paper to be traded. It represents a partnership—a real ownership stake in a business. Our goal is to understand that business as thoroughly as possible, to analyze the people running it with the same depth, and to assess whether we are getting fair value based on where the stock is trading.

Chase, anything you’d like to add?

I’d just emphasize that when you invest with this philosophy, there are no shortcuts. At Ruane, Cunniff & Goldfarb, there’s no rigid research budget or predefined time limit for analyzing a company. You work on it until you truly understand it, no matter how long that takes. I think that approach is increasingly rare, even today, on Wall Street. We refuse to cut corners.

The research process is fundamental to our approach. The purpose and benefit of conducting deep research as we do is to uncover and analyze economic drivers that may not be immediately apparent—or that may be underappreciated by the broader market. That depth of analysis has always been our hallmark, and we believe it is a timeless attribute that will remain a crucial part of investing for as long as Ruane, Cunniff & Goldfarb exists.

I’d like to follow up on that. When people think of value investing, they often associate it with buying stocks that appear statistically cheap—low price-to-earnings, low price-to-book ratios. But there's another definition of value investing: buying something for less than what it's truly worth, meaning acquiring a stake in a business at a discount to its intrinsic value. From what you’re describing, it sounds like you focus far more on the latter than the former. Do people ever challenge you by saying, "You’re not really value investors because you’re not buying cheap stocks?" How do you reconcile those two perspectives?

We are laser-focused on the intrinsic earnings power of a business. That can mean investing in a company that appears statistically cheap—such as Credit Acceptance, which currently trades at a single-digit multiple of earnings in our portfolio. Or it can mean investing in a company that, on the surface, looks expensive—like when we bought Amazon at 150 times GAAP earnings, but at what we believed was a very reasonable multiple of our intrinsic earnings estimate.

At the end of the day, everything comes down to intrinsic earnings power. That focus may or may not align with traditional valuation metrics that make a stock screen cheaply. In fact, some businesses in our portfolio look terrible based on conventional screening metrics. The reason? Many of them are investing heavily in growth initiatives that could drive significant long-term value but temporarily suppress their reported margins.

We’re often attracted to these situations because when a stock screens poorly, it tends to attract fewer sophisticated investors. That, in turn, creates opportunities for us to capitalize on inefficiencies in the market.

Before we dive into the details of your methodology—how you approach valuation, stock selection, and so on—can you first give us a brief overview of the current structure of Ruane, Cunniff & Goldfarb? You have a common research platform that spans multiple investment vehicles. Can you clarify how that works and explain the relationship between Hyperion and Ruane?

Many people think of RCG solely as the manager of the Sequoia Mutual Fund, but we’ve long been home to additional funds as well. Across all our funds, we have a deep research talent pool that produces high-quality analysis every day. All our funds are rooted in the same investment philosophy we’ve been discussing, and they all draw from the same core research. However, each represents a different interpretation or variation of that philosophy. Hyperion is the latest addition to that family.

The name itself gives some insight into its place within our ecosystem—Hyperion is actually the name of the tallest known sequoia tree. So while it might seem like we’re branching into Greek mythology, we’re still sticking with the sequoia theme.

I have to admit, I was a bit puzzled by the name at first, so I appreciate the clarification.

Hyperion is essentially another expression of the same core philosophy—it’s a different flavor of the same dessert. The key distinction is that it serves a slightly different client base than our flagship Sequoia Fund. Sequoia is somewhat unique in that many of its clients are individual investors, with some having their entire net worth tied up in the fund or in separately managed accounts that closely mirror it.

We’re very aware of the fact that many of our Sequoia clients are individual investors, and that shapes the way we invest on their behalf. Hyperion, on the other hand, has a more institutional client base, which leads to a slightly different approach to portfolio management.

Given that analysts and students are a key part of our audience, one question we frequently get in the classroom is about the career progression from analyst to portfolio manager. Could you share a bit about your career paths within the firm? How does that transition from analyst to portfolio manager work, and perhaps more importantly, what skills do analysts and PMs share?

Michael, I’m probably the only person you’ll interview who started his career as an analyst with eight years of portfolio management under his belt. So if you have any listeners who are looking to move from portfolio management to an analyst role, I’m your guy. But going the other way, Will may be the best person to speak about it. I had a bit of an unusual background. Will, do you want to talk about the process within Ruane?

RCG is an interesting place. It starts with Bill Ruane. He used to say that his business card would say "Bill Ruane, research analyst," not portfolio manager, not founder, not CIO. And we maintain that ethos all the way through today. We all consider ourselves analysts first and foremost. Even if you do end up being responsible for a portfolio and making decisions for a portfolio, you still do analysis work. You do your own research projects, partner with others on research, and that really is the utility player at our firm. We think portfolio management is relatively simple if you do a good job on the research and the analysis. You do have to think about concentration and common risk factors and that sort of thing, but that doesn’t consume a lot of our time or brainpower relative to just the analysis of businesses and ensuring that we understand each individual business in detail.

Let's start talking a little bit about Hyperion, if you don’t mind. I want to ask a bit of a delicate question. I want you to go back to what you were saying just a moment ago, Chase, which is, beyond the personal ambition of a career path where you want to end up managing funds, what is it about client selection that differentiates Hyperion from Sequoia? What do you do differently?

What do you think is it that, with this particular client base, allows you to do X, Y, and Z, which might be more difficult at Sequoia? Is it communication with institutional clients? A long-term outlook? Or perhaps your efforts are burdened by the reputation of the Sequoia fund? What is it about launching on your own that lets you do things you wouldn’t be able to do otherwise?

Hyperion was really launched at the request of certain institutional clients who asked us to create a vehicle that was A) even more concentrated than Sequoia, and B) fully invested at all times. The first client in Hyperion was someone for whom we had been managing a more concentrated portfolio for a number of years. We made an exception for that client, and it gave us an inkling that this might be a product that would be well-received by our existing institutional client base. So, it was really in response to their needs, and it wasn’t so much a vehicle for Will and me. In fact, we conceived of Hyperion before we knew or decided who would be managing it.

Now, of course, it reflects the natural inclinations that Will and I have—our preferences. We tend to have very similar preferences for the kinds of businesses we like, and I think that’s why we ended up paired as portfolio managers for Hyperion.

Interviewer: And it’s only you two, Chase, co-managing the portfolio—just you and Will?

Chase: Yes, it's just Will and I as co-managers. It’s entirely at our discretion.

Interviewer: One question I want to ask is a fascinating observation in the investment management industry. Funds, maybe a generation or two ago, and certainly when Sequoia was launched 50 years ago, were almost always single-person managed—one portfolio manager. And increasingly now, I think more than three-quarters of them are team-managed. I’d love to hear your thoughts on that. Obviously, we have a team managing this fund. Have you evolved that, and what are the pros and cons of working in a team?

The pros would be you get different points of view and different sets of experiences. The con might be accountability—who makes the ultimate decision? So, how do you handle that balance between the benefits of working together and the challenges that might arise?

Will: It's interesting. We’re always trying to strike that balance. We do think diversity of opinion is important for good decision-making. You’ll find that throughout the firm now, we're taking much more of a team-based approach. For Chase and me specifically, like Chase was saying, we found ourselves aligned in a lot of ways. We like the same kinds of stocks, we work on the same types of projects, so it was very natural for us.

And it’s kind of a funny story. When we started the fund, we said, “Well, we don’t want to succumb to groupthink.” We know that we think very similarly, so let’s go away into our respective offices, and each of us will construct the portfolios that we individually would want this to look like.

Then we came back, and the portfolios were remarkably similar. We were both surprised not only by the fact that we selected mostly the same things, but that they were also weighted in roughly the same rank order. So, we are constantly trying to make sure we don’t fall into groupthink, that we do our work independently to bring diverse perspectives to the table.

But it’s a very smooth working relationship because we are so often on the same page. We’ve never run into a situation where it’s one vote for and one vote against, causing a stalemate. We’ve always been able to convince each other when we do disagree. We just debate it out and come to a decision.

Chase: Now you guys are learning about each other's behavioral biases at the same time and figuring out how to control them!

Chase: I know Chase likes this, or I know Will likes this.

Will: Oh, of course. And we’ve known about these preferences for a long time as well, but it certainly is an ongoing process. We do things like investigate our trade ledger. We go through the decisions and talk them through with each other, analyzing whether this was a good decision with a good outcome, a bad decision with a good outcome, a good decision with a bad outcome, or a bad decision with a bad outcome.

Chase: We’re constantly learning about ourselves individually and how we function as a team, and we try to incorporate that into the feedback loop.

Will: I just want to make a note here, which is that while Sequoia is, of course, associated with Bill Ruane, the management of Sequoia was very much a team effort from the very beginning. Bill, Bob, and Rick really operated as a triumvirate. It wasn’t just a one-man show. Bill was obviously the spiritual leader, but it was a team effort even back then.

Chase: And, as you know, Sequoia is now committee-managed. It's managed by a team of four people. We liked that dynamic and wanted to bring it to Hyperion. We didn’t want a sole manager at Hyperion. We wanted at least two people, and two seems to be working well at the moment.

Will: Mike, I think you would probably say that the data suggests three is usually the optimal number, but so far, we haven’t run into any issues. It seems to be working for us.

Will: Can I go back to something you said just a minute ago that I found quite interesting? I actually lecture on this to my students. You mentioned a trade ledger and how important it is to track your decision-making process. What was the thesis behind a particular investment? Can you elaborate a bit on that? I’ve always thought a trade ledger and a diary of sorts is a great idea. Can you tell us a little more about how you guys utilize it to improve your decision-making?

Chase: Sure. We do this on a regular basis. We download our trade ledger and go through it, checking to see, based on the subsequent performance of the stocks we bought and sold, whether it was a good decision or not. Honestly, we could do a better job of documenting our decision-making at the time of the trade, but we can always look back and see what we were thinking.

Will: We also have a practice at the firm of writing a lot. One thing we write, which Chase introduced, is thesis memos. We regularly update the thesis on a stock, and maybe this was inspired by you, Mike, because it’s similar to a thesis but also a sort of pre-mortem. We ask ourselves, "What could go wrong? What could go right?" We try to keep these updated so that we have a record of what we were thinking at any given time, because it’s so easy to later just manufacture what we thought.

Mike: I actually think that’s quite important. There’s a great tradition in value investing of being good writers. I think writing forces you to slow down and think carefully about your thesis and how tight it is. I don’t know if you agree with that.

Chase: I absolutely agree.

Mike: And the other question I’d love to follow up on is: Have you noticed any interesting patterns? Like, do you buy too soon, buy too late, sell too soon, sell too late? Or are there any sizing issues? Are there behaviors you've observed that help you get better going forward?

Will: I’ll speak to this a bit, just to emphasize Chase’s point about Ruane, Kniff being a writing culture. We document our research from the first call to the last, so we have an internal research system where memos are constantly coming in from our analysts. I remember a third party recently called us, trying to sell us their services, saying, “We have over 10,000 transcripts from different calls, and you should subscribe to our service because look at the body of work you’ll have access to.” And I said, “You're not even close to what we have internally. Call me when you're bigger than we are in terms of your internal database.”

We have documented research on thousands of companies here, and all of that research has a date and a stock price associated with it. We can go back and see—not just on trading decisions, but at every single step of the research process—where we were, what we were thinking. It’s all in writing. It’s an invaluable resource.

And I think that through the introspection and retrospection we regularly do, it’s what has guided Will and me towards the kind of companies we like today. So, if you ask me personally how I’ve fared with, say, turnarounds over the course of my 15-year career, I’d tell you that I’m about a coin flip. Half the time I beat the market, and half the time the market beats me. And it’s not a very good pond for me to be fishing in.

Will: So, you need to recognize that and be self-aware. One of the things that's led Hyperion into the kind of companies it invests in is that we've done really well with these kinds of companies, and we can get into that. But all of this comes from focusing on what's worked for you and being a bit of an empiricist about your results, trying not to fool yourself.

Mike: Great segue to the next question. I know you guys already described yourselves as business analysts and that you like to think about the long-term earnings power of businesses, but what is an ideal Hyperion investment? What are you looking for in a firm, and what are you looking for in a stock? What would be the dream investment for you?

David: I’ll start with the ideal Hyperion investment. I can use some of our current holdings to illustrate. The ideal investment would be something with super fast organic growth and runway ahead of it—something like Facebook—with the M&A prowess and discipline of a company like Constellation Software, recession resilience like UnitedHealth, and run by a founder who is a major owner and operator, like Gilles Martin of Eurofins. We want it to trade for a low valuation, like Credit Acceptance, which has been taking advantage of its consistently low valuation by repurchasing 40% of its shares outstanding over the last 10 years. So it’s sort of a chimera of all those things, and all those attributes are represented in our portfolio, but balanced with other things. If we ever found something with all those attributes, we would be running, not walking.

Will: You can see why I love having Will as a partner—he just managed to plug half of our portfolio into that ideal.

David: You can see why I love having Will as a partner—he just managed to plug half of our portfolio into that ideal.

Mike: That's skillful, Will!

Will: But they do have certain characteristics. We like companies with readily identifiable advantages, firms that are the best at what they do or unique in what they do. We like firms that have demonstrated differentiated products for their customers, which is usually indicated by market share gains. We like to say we like market share gainers, but we also prefer that they be gaining faster than anyone else in their industry. We like smart and aligned managers, and that usually means significant ownership in the businesses. So, we do have a bias in favor of founder-owners, typically. And like many others, we like conservative balance sheets. We like businesses that are resilient and are financed to withstand a storm.

Mike: Do you have any type of structure or quantitative filter that helps you narrow down companies that at least meet certain criteria—what could be considered an ideal Hyperion investment?

David: We all keep different lists. Chase is sort of the keeper of the list of companies that are run by founder-owner managers, and he tracks that very closely. Everybody knows that if they’re looking for a new project like that, they can go to him and see what’s next on the list if we haven’t covered something already. I keep a spreadsheet of fast-growing SaaS companies, and I have it organized by the growth rate, then the valuation (usually price to sales), and then some other different metrics. We all keep different lists, and each of the analysts is usually looking in specific areas. We’ve got 25 full-time analysts who are deep in this kind of work. And we talk about this as sort of what we look for in Hyperion, but it’s common across the entire firm.

David: Everybody at Roincunif loves these attributes about companies, and we’re always looking for the right combination of all of them to research next. It’s probably not a very satisfying answer when someone asks us, “Where do you get your ideas?” and we answer, “We get them from everywhere,” but we’re really blessed. We have 25 fanatics combing the markets every day for opportunities for us to invest in. With that level of resources, you can really cover the waterfront. So we really do get them from everywhere. And while we have our personal biases and inclinations for what we like, we think it’s important to play more than one note. The firm philosophy is to play more than one note and invest in more than one type of company. Opportunity can come from a variety of different places, so we are willing to look at a lot of very different sorts of companies. We don’t want to just focus on one specific niche.

Mike: When you guys are thinking about how you sort businesses, there are a couple of empirical observations that we can make. One is that investors, by and large, overestimate growth for businesses. So, while we are all looking for growth businesses, the challenge is that often they don’t grow as much as people think or what’s priced in. Second, as we also know, M&A is really a hard way to create value. At least empirically, most deals don’t add value. Those are your number one or two criteria. So how do you sort those companies you believe will achieve the growth or do better than what the market anticipates? And how do you find those executives—those founder-executives—who really are the great capital allocators who know how to do deals that add value versus ones that are neutral or even value-destroying?

Chase: Like I was saying earlier, there are no shortcuts. It’s just turning over every rock. We place a lot of emphasis on scuttlebutt, getting a 360-degree view of a company by talking to competitors, suppliers, customers, ex-employees to really understand the nature of the beast, its market position, and what its likely future trajectory is. And of course, we don’t always get it right, especially in the cases where there’s fast growth, but we’ve been at it for a long time, and we are constantly trying to hone our ability to predict that. The same goes for capital allocation. We investigate what the track record has been. We go through that same diligence, talking to people who have been involved in the deals—whether as sellers, brokers, customers, or employees who have been through the integration process. And we try to understand if the rationale for the deal makes sense, whether the executives are really thinking about it the right way, because you can have a good track record sort of incidentally, without actually thinking about returns and risks the way that we would want them to think about it.

David: So we just spend a lot of time crossing our Ts and dotting our Is to make sure that we have a feel for it. I think there are some persistent patterns among the subset of mergers and acquisitions that do create value. You can look at Berkshire Hathaway 20 years after Warren Buffett became famous, and you’d probably be able to predict that his next acquisition was more likely to be value-creating than value-destroying, given that you're talking about Warren Buffett.

Chase: And you can look at the market, and these exceptional managers exist everywhere, and they're readily identifiable—they raise their hands. We don’t own all of them, but whether you're talking about Mark Leonard at Constellation Software or Gilles Martin at Eurofins Scientific, those are businesses where you don’t have to catch the first double or the second double or the third double. You don’t have to catch the business in its first 10 acquisitions or its first dozen. You can wait and see a demonstrated track record over sometimes decades before committing capital.

David: And there are players out there doing this on a regular basis—Bill Stone at SS&C, Alain Bouchard at Alimentation Couchetard, Serge Godin at CGI, among others. So we keep an eye on these people and these businesses. They don’t always trade for valuations that are attractive enough for us to invest, but they are interesting places to look because value is being created by these managers on a consistent basis. In a lot of cases, the acquisitions are small enough that one bad acquisition won’t kill the investment.

Chase: I mean, to put a finer point on it, we’re trying to evaluate the process. We’re really trying to get at exactly how management is thinking about it, how they source it, how they go about integrating it. It’s the same way that we think of them as outsourced managers of our capital. We want to understand their investment philosophy and approach. We'll talk about a couple of names in more detail in just a moment, but before we get to that, I’d love to just talk briefly about how you guys think about valuations or what the core principles are there, and in particular, an emphasis on how you value intangibles. This is obviously a very hot topic now in both the academic and practitioner community, clearly very relevant for the types of businesses that you’re looking at. So how do you guys value businesses in general, and then how do you take into consideration intangible investments, which, by the way, are often expensed, which are deleterious to earnings, but may actually create a lot of value in the long run?

David: We’re focused on intrinsic earnings power. We’re trying to understand what is the normalized earnings power in order to understand what we’re paying at any given moment. Then we do a lot of work to try to understand what the trajectory of those earnings will be over time. Because at the end of the day, that’s the old saw, right? The value of the firm is the discounted cash flows, and that’s what you can eat at the end of the day. It may not be the tangible or the intangible assets—it’s what they throw off. And so we spend a lot of time trying to understand the nature of the franchise, whether it's tangible or intangible. We think of investments in the same way people would think about capitalized investments in the past. We do seek to recognize investments that are expensed through the P&L as well.

David: There’ve been a lot of opportunities, I think, over the last decade, investing in businesses that were investing significantly in growing their flywheel without reporting significant GAAP earnings. The most prominent among these was Amazon, as you know, and we were investors in Amazon. It took us a long time to get comfortable with our estimate of that company’s intrinsic earnings power because it’s a complicated beast. The analyst who covered Amazon for us did calls in the triple digits, and by the time that project was finished, I think he knew more about the margins of Amazon than most of the employees who worked there because it was very siloed in terms of the availability of information internally to the employees of Amazon themselves.

Chase: And we sort of set on that one, just to take a case study. We worked backwards, we identified losses from growth investments, and we put them aside and said, “Alright, here’s what we’ve been able to identify. Here’s how many billions of dollars they’re spending on it.” And that was one approach to triangulating their true earnings power. So when we purchased Amazon, we thought we were paying 30 times their true earnings power at the time. And of course, it was growing like a weed. So it was a very, very compelling investment for us. It took a lot of work. So as Will said, there’s just no shortcuts.

David: Before we move to those couple of names, there’s another question that I want to ask about these founding tools of any good asset management practice. It’s one of the most mysterious in asset management and one that we get asked often in the classroom, for which we have little intense answers, which is this issue: How do you size your positions and incorporate diversification motives into your portfolio construction? Issues of industry concentration, trading off the issues of specialization and diversification, of course, is an important issue as well.

Chase: So why don’t you tell us a little bit about your process inside Hyperion for portfolio construction?

David: It’s very much an art rather than a science for us, and intentionally so. Within Hyperion, we maintain awareness, obviously, of common factors across our investments. We want to make sure that any risks we’re taking on in that respect aren’t unintentional. We have a dozen different investments in 11 different industries. The two investments that really have a common driving factor are Google and Facebook, which are both driven by online advertising and subject to some of the same risks, including the scrutiny they’re getting by federal authorities for monopoly power. So, while we are aware of the common drivers among the portfolio investments, we’re not pseudoscientific about it. It’s about using common sense and intuition. When it comes to sizing, we do size those positions where we have higher conviction, bigger than investments where we might think the returns are just as good or higher, but the variability and potential outcome are higher as well. We look at risk-adjusted return and our conviction and ability to understand the business when considering sizing.

Will: What would you add to that?

David: Yeah, when it comes to sizing, Chase and I, we maintain our view on prospective IRRs for the various stocks that we’re considering for the portfolio. You could just rank those and size the portfolio accordingly. But obviously, that would be a naive way to do it because there are risks embedded in all these, and there are certain managers we trust to surprise us on the upside more than others or steward our capital better more than others. That’s not always built into the prospective IRR as much as we would like to incorporate it. As such, we have overlays—or personally, I do—just different rankings for how much I trust the management team to allocate capital well, and then how resilient the business is and various other qualitative factors that we think are just as important as the quantitative ones, like what’s the prospective growth and how does that translate into return, just not as easily quantifiable.

Chase: And just relating to understanding the path of the earnings power of the business and also for portfolio construction, do you guys run scenarios? Do you say, this business is here today, if it goes well, it could be X. If it goes poorly, it could go to Y? What’s your thinking about scenarios and where you might be in that set of scenarios?

David: The analysts will usually run a few different scenarios. I don’t know if it’s as formal as the way you phrased it implies, but it’s not a formalized process for us. Very commonly, analysts will say, “Here’s my expected return on the investment. Here’s what could happen in the best case, the blue sky scenario. Here’s what could happen if I’m wrong. And here’s where I’m likely to be wrong.” We do it heuristically, Mike, I would say, rather than formally.

Will: I’ve been in some of these pre-mortem exercises, and they’re quite interesting in a way. You learn a lot thinking through some wild scenarios, and there’s someone always in the room who says, “Oh, that happened here and there in that industry, in that country,” and all of a sudden, you reweight your probabilities of particular scenarios, unlikely as they may be. It’s amazing how often tail risks will come back to bite you. Scenarios that you consider unlikely turn out to be less unlikely than you think.

Chase: Yeah, absolutely. The topic of portfolio construction is worth highlighting. I think there's something to be said for students or people who are new to the business. It's an issue I’ve observed with young portfolio managers in the past. A lot of folks getting into this business want to emulate their idols. They want to emulate Warren Buffett or they want to emulate Joel Greenblatt. The problem with concentration is that the right answer for one person is not the right answer for another person. It really depends on what your edge is, and the appropriate level of diversification is different for different people. It’s even different for different firms across time.

Chase (cont’d): If you look at Sequoia Fund in the '80s, we often ran with a single-digit number of stocks in the portfolio. It was a different level of competition back then, number one. And number two, we didn’t have the research resources we have today. So, today, Sequoia runs with about 25 stocks in the portfolio, and that feels appropriate for the time.

Chase (cont’d): What I don’t like to see is young, first-year portfolio managers emulating Warren Buffett by being hyper-concentrated in their portfolios or emulating Joel Greenblatt by owning five stocks when they don’t have the same level of advantage that Buffett did when he was investing in American Express after the salad oil scandal, or when Greenblatt was investing in spinoffs in the '80s. It really is an individual answer for each different manager. It depends on what advantage you bring to the table.

Chase (cont’d): That’s actually a wonderful comment. The relation between your research capability and your research power, and what you can afford in terms of diversification, is absolutely key and a point that is typically missed. Can I suggest we move to a couple of the names you guys have mentioned and whether we can project some of the ideas onto those names? So, one that Will brought up is Constellation Software. Can you describe first for our listeners what a roll-up is and the challenges that come with investing in such a company?

Chase: So, a roll-up is a common term for a company that makes a lot of acquisitions in a particular field, consolidating businesses in that industry. In the case of Constellation Software, it was founded in 1995 by Mark Leonard in Canada to invest in vertical market software companies and roll up that industry, if you want to call it that. He preferred to call it a conglomerate. He has built a tremendous track record doing this, but not all roll-ups end happily. There are many conglomerates or roll-ups from the '60s and '70s that ended in tears.

Chase (cont’d): It’s always the case that there are roll-ups happening all around us, and some of them will do well—they’ll be disciplined, and they won’t overextend themselves. They’ll integrate things well, and they won’t overpay. But there are others that are overpaying, growing, but destroying value. The key is to try to understand the distinction between these, and we think it comes down to investigating the process. Does the company have a sound process?

Chase (cont’d): Do they think about these investments as not purely just growth and accretion, but also investing capital at a high rate of return with a high probability of success? Another thing you have to keep in mind is incentives. A good process, plus ensuring that whoever’s managing the roll-up isn’t just trying to run a get-rich-quick scheme or make bad acquisitions with shareholder money, but feels that this is really their own money. That’s why we prefer situations where there’s a founder-owner-operator in charge, someone who has been involved with the business from the start, has a significant stake in it, and will invest your money alongside theirs—really considering it their own.

Chase (cont’d): Will, can you discuss why the vertical software industry is appropriate for consolidation?

Will: It's extremely fragmented. Think of any business or organization out there, really. To keep things in order administratively, they need software, often customized. They don’t just want to run it on paper or Excel. So, there are many small software businesses providing specialized solutions to manage various industries like fitness gyms, golf clubs, municipalities, nonprofit organizations, libraries—really any organization or business endeavor. They probably rely on specialized software. This also differs by geography. For example, there might be a Dutch company that provides pharmacy software to process prescriptions between GPs and pharmacies. So, Constellation is out there acquiring these businesses.

Will (cont’d): One of the wonderful things about this industry is not only the fragmentation but how sticky these software solutions are. These systems are often mission-critical for the organizations using them, and there's nothing they’d like less than switching to a new system and retraining their entire staff. So, when you purchase the right software in this industry, it has staying power. The decline curves are typically predictable, and if you make the right investments, you can maintain that franchise quite well. The fragmentation means there are a lot of smaller companies out there. Constellation has built the best machine to acquire these little software companies, usually buying them from the founders or their families for a fair price.

Preston Pyshko: Just to get into the weeds a bit, these sellers are obviously trying to maximize the value of their business when they sell to Constellation Software. What exactly is the formula that Constellation uses to create or build value from the price they pay for these acquisitions? We know that the best roll-ups tend to have a specific formula. Are there particular elements of what they do to add value once the business is in their fold?

Chase: They absolutely have a playbook for improving businesses after they acquire them. But before we get into that, what Constellation would tell you is that the key to their return on investment—the IRR from any acquisition—is the price they pay. It all starts with the price. They are constantly in touch with tens of thousands of small companies through their Salesforce database, consistently reaching out to gauge if these companies are ready to sell—and more importantly, if they’re ready to sell at the right price for Constellation to make their return.

You’d be surprised, these small businesses don’t often have a lot of suitors. Many have issues—they’re often run by sole proprietors who haven’t maximized the business’s value or may have an undiversified customer base, which makes other buyers nervous about the risk of losing a large customer. But Constellation has hundreds of these businesses and acquires over 100 per year. They can afford to play the averages, which means they often can sole-source deals.

Chase: What's interesting about Constellation Software is that, in addition to being an acquisition machine, they also think about the possible synergies between the businesses they acquire. They might bundle services and offer packages to clients, creating value they might not have been aware of before. But I also wonder to what extent some acquisitions are driven by defensive motives. For instance, a business might see a potential threat from a competitor they don’t own yet, so acquiring it preemptively might be a strategic move. There’s a lot of talk about “killer acquisitions” lately, where you acquire a company to eliminate a potential threat. The price for such an acquisition can be inflated because the seller knows they’re holding leverage—they can disrupt profits and distract your market if you don’t acquire them.

There’s a lot of variation in the types of acquisitions Constellation makes. The real question is how they integrate these acquisitions into their existing portfolio without suffering from the “curse of dimensionality,” where having too many businesses makes it difficult to track the conglomerate’s operations.

Preston Pyshko: So, Constellation does indeed make some acquisitions with a defensive strategy in mind, and they’re upfront about it. But how do they value those kinds of acquisitions? And how do they manage their portfolio to avoid being overwhelmed by the sheer number of businesses they own?

Chase: They have their own framework for valuing acquisitions, including defensive ones. What’s interesting is that Constellation has found that their acquisitions are often driven by the stickiness of the software solutions they’re acquiring. These software solutions are often critical to their customers’ operations, and customers are very reluctant to switch, even when the software is outdated.

Sometimes, these software solutions have components that are nearing the end of their life cycle, but customers are still hesitant to upgrade because of the effort involved. The situation can sometimes be a bit of a “legacy trap,” where customers stick with a solution far past its prime. Constellation has learned to identify these situations and use them to their advantage. If a customer is about to be forced into switching away from an old solution, Constellation can swoop in and acquire a more modern, cloud-based version of the software. They can then offer this new solution as an upgrade path for the old customers, essentially ensuring that the transition is seamless and that the legacy customers stay within the Constellation ecosystem.

Chase: So, with the acquisition strategy that Constellation Software uses, they manage to keep their customers happy by offering them an upgrade path without pushing them to switch immediately. The legacy customers might not want to switch, but knowing there’s a modern, up-to-date solution available for them when the time comes is often enough to keep them loyal. A lot of their more recent acquisitions have been SaaS companies, which is interesting. There's so much venture capital floating around these days, and for every successful unicorn, there are countless other companies that didn’t quite make it—despite having a great product. Constellation can scoop these up at a relatively cheap price and use them to enhance their offerings.

Trey Lockerbie: For our listeners, can you give us a brief rundown of Constellation Software’s financials—what kind of revenue, earnings, and growth you expect, and what the stock market cap looks like?

David Collum: Sure. Constellation Software is expecting to generate about $4 billion in revenue this year. The market cap is around $36 billion. We project that it will grow in the mid-teens. One of the things we like about the company is that they haven’t issued any new shares, nor have they bought any back, so it’s easy to track. There are 21,191,530 shares outstanding, so you can always keep that number in mind. Based on their future earnings power, we estimate the stock price to be about $1,700, with earnings in the low 40s per share. That puts the stock at just over 30 times earnings, with mid-to-high teens growth expected.

Stig Brodersen: It’s fascinating how Constellation operates. When we look at these acquisition-driven companies—like Teledyne, Berkshire Hathaway, and Danaher—it’s important to understand the discipline behind their success. The key to these businesses often lies in their ability to execute acquisitions with a structured, strategic approach. Studying how they succeed can provide great insights into building a successful acquisition strategy.

Stig Brodersen: What's fascinating about these high-performance conglomerates is their ability to deploy capital over long periods. Some companies manage to scale acquisitions over decades, and when you find one that has the infrastructure to keep doing it effectively, you’ve found a compounding machine that’s worth your time. It's essential to dig deep into these companies and understand how they work, especially when there’s a founder-owner at the helm who’s been there from the beginning. This could be a business you want to stick with for the long haul.

Chase Clymer: Absolutely. Moving on to another interesting company—Eurofins. Will, would you like to dive into that? I’m also curious to circle back to Constellation, especially regarding how Mark Leonard has successfully diversified decision-making for their acquisitions.

Will Pfeiffer: Sure, I’ll take that question first and then we’ll get back to Eurofins. So, regarding Mark Leonard, one of the challenges in running a large acquisition machine is how to maintain oversight across hundreds of acquisitions. Constellation is now operating close to a thousand entities across the globe, making hundreds of acquisitions every year. Mark Leonard’s approach is particularly unique. He’s deeply studied other high-performance conglomerates like Berkshire Hathaway, Danaher, and Amatek, and has learned from their experiences.

What many of these conglomerates end up doing is making larger and larger acquisitions over time. However, as companies grow, it becomes more difficult to make big deals because of increased competition from other strategic players and private equity. What Mark Leonard has consciously done differently is to continue making smaller acquisitions, something that’s quite rare among successful conglomerates. He’s chosen to stick with smaller deals, which allows him to avoid the intense competition for bigger deals while maintaining the ability to scale effectively.

Chase Clymer: That’s a great insight into Leonard's strategy and how he’s kept Constellation’s edge in making successful acquisitions. Let's move on to Eurofins, though, as it sounds like a fascinating company to explore.

I mean, there are parts of Berkshire that are still making small deals. Maybe Marmon is still making deals that are smaller than the sort of big commitments that Buffett is making up at the top. But the amount of capital that Constellation is deploying, $500 million a year on acquisitions, is mostly still being done in sort of $5, $10 million deals by this whole team that he's trained to run this process that he pioneered. And so it's not just the six operating group managers who are one level below him that have been with him for decades, but it's then the six people or six or seven folks or whoever, or whatever number report to those six folks. And then a level below that, those are the people that are making the deals and they've been sort of trained and inoculated and invested with this responsibility to go out and make disciplined acquisitions and care for these companies. Actually fascinating. So Eurofins, Chase, tell us a little bit about it.

I'm happy to, Tano. So I think a lot of listeners won't be familiar with Eurofins, so let me give you just a basic overview. Eurofins is a testing company that provides testing services to customers in the food, pharma, environmental, and clinical diagnostics markets. They offer every kind of test imaginable to ensure the quality, authenticity, purity, chemical makeup of their customer's product. And lately, that last vertical, clinical diagnostics, has taken on special importance because Eurofins has processed more than 25 million COVID tests since the start of that pandemic. It was certainly not a big business for them, obviously, prior to the pandemic. And it's one that we, like many others, are hopeful that the need for COVID testing declines sooner rather than later.

So Eurofins is a diversified testing company. And to give you a sense of its scale, they operate 900 labs in 50 countries, and they perform more than 450 million tests each year from a menu of more than 200,000 different tests. Incredibly, this company is only 34 years young and is still run by its founder, Gilles Martin, who is not yet two years old. So I guess the first question would be, how do you get a company of this scale in 34 short years when it was founded with four employees in a single lab in 1987? And the answer is he's done a lot of acquisitions.

And so I don't want to give listeners the impression that all Hyperion does is invest in roll-ups. It's only a minority of our portfolio. But Eurofins does rhyme with Constellation Software in this respect in that it has a brilliant capital allocator at the helm. And Gilles Martin has conducted more than 300 acquisitions over the life of the firm. And so what I think is important is if I describe to you the structure of the industry, you will probably come to your own conclusion that this is an industry that makes a lot of sense for consolidation.

So the thing about testing is that it's an extremely sticky service. Customers often stay with the same provider for decades, and service levels matter a lot. They matter more than price. Testing is typically a really low-cost service in the context of product value, but it's mission critical. And to give you a sense of the scale, in food testing, food test spending runs at about 0.1% to 0.2% of global food turnover. So it's a mission-critical service, not very important in terms of pricing. The other thing about testing that is really important is that it's really scalable and there are advantages to being large in a given market.

So Dr. Martin likes to make a comparison. He says the cost of running one assay twice a day is about 20% of the cost of running that same assay a thousand times a day. So you're talking about a 50-fold improvement in unit costs as you scale up at the extreme. So scale really matters.

And so what happened was Dr. Martin looked at this business in food testing in France in the early days and made the conclusion that this is really a business that should be served by a hub-and-spoke network, where you have a few large hub labs that have very high volume throughput for the most common assays, and then labs that are very close to the customer and have very quick turnaround times for those tests where speed is important.

And that network didn't exist. And so he decided to build it. And he built it by acquisition. And that was the playbook that he started with. And he has then applied that playbook over and over and over again in entering new markets. And what he does is he targets niche markets that are limited in size, where there aren't that many assets to buy. So once he buys them, there's really not much left for a competitor to roll up.

And the goal of Eurofins is typically to be the number one scale competitor in any market it enters within five years. Preferably, it will be two to five times the size of the second-largest competitor. And so this playbook has been what he's been running ever since he started the business in 1987. And it makes a lot of sense.

And it's interesting that other large testing companies like SGS, like Intertech, like Bureau Veritas, they do acquire, but they've never done it with the same level of intent and focus that Gilles Martin has brought to the task. And as a result, they're very different businesses and they have very different growth rates.

What is wonderful about it is that, if I can summarize, they have powerful economies of scale on testing, that I can offer you a better price if you give me a thousand tests instead of 10. In addition, there's a lot of customer captivity associated with that because customers are going to be reluctant to start sampling other labs. So they're going to be reluctant to move away. So you combine these economies of scale with this sort of customer captivity, and all of a sudden you have enormous pricing power and you're the tier in entry. Because even if you match the scale, the entrant won't be able to attract the customers of Eurofins away, and it seems to me if I understand you correctly, Chase, that in addition, Mr. Martin has been incredibly disciplined in terms of acquisitions, very focused, building kind of like an onion—you start with food purity, a very French thing I would say, and then you start building around it to increase the scope of the testing that you can do for several businesses. Do you understand that correctly?

Yes. And he started even more specifically with wine, which you couldn't think of anything more... I mean, this is just very incorrigible, this French thing. It's an amazing business. Can you give us a little of these magnitudes of the company? What are the numbers that we're talking about?

Yeah. So revenue, surprise, it's a little over 5 billion euro revenue, one and a half billion euro EBITDA, and you can think of it as about a billion in EBIT or EBITA. And the market cap is about 22 billion, enterprise value 24 billion euro. So not a cheap company by any measure. And that's something that we should get into a little bit. Some of those earnings are COVID-related, but the company is growing at a relatively quick pace, and the COVID testing is persisting longer than I think we originally anticipated. So I don't expect the earnings to go significantly backwards.

One of the things that I think is interesting about the business is that when Gilles Martin would acquire, it's a very fragmented business. So there are tens of thousands of labs out there. A lot of them are mom-and-pop shops, scientists who run very specific niches. A lot of them he would acquire at breakeven. They’d be breakeven operations, and Eurofins could take them to 20% EBITDA margins in the span of a year. However, generally speaking, the acquisitions are depressive to margins.

In addition, Eurofins does a lot of greenfield lab startups and they take three years to break even. So they are also depressive to margins. And in addition, in order to differentiate themselves from their competitors, they've invested an enormous amount into digitization and into proprietary laboratory information management systems. Again, depressive to current earnings. And so Eurofins has undertaken a lot of painful steps that public competitors generally were unwilling to undertake because the impact it would have on their near-term margins was significant and deleterious.

And so I think that's really important. Gilles Martin still owns a third of the company. And as a result, he runs it very much like a family business. I mean, it's very professionally run, but in terms of his incentives, he runs it like his baby. He's very proud of his track record of long-term EPS growth.

And so I just don't think that we could have gotten a public company managed by a hired gun to behave in the same way. And I think that's been a big advantage for Eurofins as it has executed this land grab over these niche testing areas over the last 30 years, because it really was there for anyone else to see and to interrupt. If SGS had, for instance, one of their large public competitors had more capital, it could have easily interrupted that process of dominating these small niches, but it just didn't have the motivation to watch its margins decline as it invested heavily for future earnings power. Just an important aspect of why Eurofins has succeeded. And I think that was also part of the opportunity for us, because typically, if you punched Eurofins up on the screen, you would see returns on invested capital that looked like they were in the high single digits.

And that was the case, even when Jean Martin was telling us that he was earning 20% returns on his incremental capital investments. So that reinvestment, it really masked the true earnings power of the business for a very long time. I think the other thing that's important is that it required leverage to grow as quickly as Eurofins grew. And so the end market that they were operating in is really important. The important aspect of it is that these end markets are non-cyclical and they grow faster than GDP, all of them. You're looking at end markets that historically have grown organically at about 7%. There's a fantastic organic tailwind there. And the business grew organically in 2009 during the financial crisis. It grew organically in 2020 during the pandemic. So you can put some debt on the balance sheet without undue risk. And he's generally run the company with a significant amount of leverage. It's not very leveraged today because their earnings have really skyrocketed thanks to the pandemic. But you can safely put two times, three times, even four times debt to EBITDA on this balance sheet, given the diversification and the non-cyclicality of the end markets.

And that has supercharged their growth as well. This is an important point in a way, which is many of these roll-up stories, in a way, as you were saying just a moment ago Chase, you require the leverage, and that makes it even more important to understand the incentives of management, to really monitor those acquisitions, select them properly. Really, for the analyst to zero in on the quality of the process by which acquisitions are being made is absolutely key. In a way, leverage increases the risk and it puts more pressure on process and on the analysis that you need to do in order to assess that it's not going to blow up in your face, effectively.

Very important. And I think in these two cases, the size of the acquisitions is also important. It's scary if managers are scaling up their acquisitions to keep their growth going, and that's something we're always vigilant about. You have to be on the lookout for it. Even if it's a manager that has been extremely successful in the past, you have to make sure that there's no mission creep there or growth imperative that's causing them to change their criteria. So we're introducing a new segment to our conversation, which is one I love. And that is, what are you guys reading these days? And what book or books would you recommend to our listeners? So maybe Will, we can start with you.

So lately, I have a lot of books open. Some of them I finished recently. So I've got, let's see, Noise by Kahneman and Savoni and Sunstein. I've got some science books, The Rise and Fall of the Dinosaurs by Brizate, which was fascinating. I don't know if you know, but the market share of triceratops in the Hell's Creek formation was 40% and T-Rex was 40%.

The market share of triceratops? There you have it. I'll listen to it. Exactly. I'm incredibly well-informed about market shares. Yes. And then Breakthrough by Walter Isaacson about CRISPR. And then A Thousand Brains, which is Jeff Hawkins' new theory about the neocortex. The one that I would recommend, which I think flies a little bit under the radar in terms of investing books, not one of the classics, is Common Stocks and Common Sense by Ed Wachenheim, who's a great investor and just writes so cogently through his thought process on a number of investment case studies that he's compiled over his career. One that I thought was extremely well-written and very informative.

Well, can I follow up on Noise? We talked about just a few moments ago about bias, and bias is obviously a sort of a systematic departure from proper process. And noise is sort of this unsystematic set of mistakes. So when you went through that book or even understood the basic thesis, did you find some of those concepts apply to how you did your own process and how you guys think about managing money? What does noise mean for investors versus bias, which is much clearer?

Well, noise is just, essentially, I think it's just mistakes or variability in process. And so one of the things that the book recommends or documents is noise audits. That's the thing that I want to bring to the firm very shortly, is to do a noise audit and to just present a case study to our analysts and say, "There's this company, and we can identify or de-identify it and say it has these certain financial attributes. It's this earnings multiple and this earnings trajectory, it has this much debt. How would you value it?" And I wonder what the disparity is going to be. We'll have to report back on that and see.

So in the book, they mentioned a noise audit at an investment firm, and that was one that I did. So I've done that and I have to do it with my students every year. So I always think the numbers will be smaller than they are. So we'll see if you guys are as surprised as I was when I ran it. So the numbers you see in the book, and it's toward the beginning of the book, that was actually a noise audit that I did.

That's so funny. It's great.

So Chase, books for you, past, present, what you like, what you'd recommend to our listeners?

Not all of them would be investment books, but I've been reading recently. One that I loved is How Not to be Wrong by Jordan Ellenberg. It's a treatise on the power of mathematical thinking. And that sounds dry, but it's not. It's really entertaining, and he's a fantastic writer. And he himself was a math prodigy, so well-qualified to write about it. My wife has me reading a book called Switch right now. She's in the nonprofit world and she's trying to make some changes to the way doctors practice medicine, and Switch is about how to change things when change is hard. It's all about the psychology of change, and I find that fascinating.

One thing I would recommend people do is read the annual letters of the very best and smartest capital allocators out there. And I'm talking about businessmen. So in that vein, I am launching into Invent and Wander right now on the recommendation of a friend who's also an investor. That's just the collective writings of Jeff Bezos. The collective writings of Warren Buffett, published by Lawrence Cunningham, had a huge effect on me. And I think even if something hasn't been analogized or put into a compendium, there are many people out there worth reading. And Mark Leonard is among them. Will, I don't know if Mark's letters have been collected yet.