TIP770: Mastering the Markets w/ Andrew Brenton
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Clay Finck sits down with Andrew Brenton, CEO and co-founder of Turtle Creek Asset Management, to discuss market inefficiencies and investment opportunities in today's environment. (01:28) The conversation explores Cliff Asness's paper on declining market efficiency, drawing parallels between today's market and the 1999 tech bubble. (13:08) Andrew provides detailed analysis of two portfolio holdings: Floor & Decor, a hard surface flooring retailer disrupting the industry through direct sourcing, and Kinsale Capital, a specialty insurer leveraging technology to capture market share in the excess and surplus lines market. The discussion emphasizes the importance of patience in value investing and weathering periods of underperformance while maintaining focus on long-term intrinsic value. (57:05)
- Core Theme: Market inefficiencies are creating opportunities for patient, fundamental investors willing to look beyond short-term price movements and focus on companies with sustainable competitive advantages and strong management teams.
Speakers
Andrew Brenton
Andrew Brenton is the CEO and co-founder of Turtle Creek Asset Management, which he established in 1998. Since inception, Turtle Creek has achieved an average annual return of 18.8% versus just 8.7% for the S&P 500, turning a hypothetical $10,000 investment into over $1 million compared to around $95,000 for the broader market. Prior to founding Turtle Creek, Andrew worked in investment banking and mergers and acquisitions, and helped set up and run the private equity arm of one of Canada's major banks in the 1990s.
Clay Finck
Clay Finck is the host of The Investor's Podcast and has been studying financial markets and billionaire investors since 2014. He focuses on educating listeners about value investing principles and interviewing successful money managers and entrepreneurs to share their insights with over 180 million downloads of the show.
Key Takeaways
Markets Are Becoming Less Efficient, Creating More Opportunities
Andrew agrees with Cliff Asness's observation that markets have become less efficient over his 27-year career at Turtle Creek. (03:35) This is driven by the shift from fundamental analysis to passive investing, algorithmic trading focused on short-term movements, and the decline of traditional active managers like Fidelity and T. Rowe Price. While markets react more frantically to news than ever, this activity doesn't equate to price efficiency - getting reasonably close to fair value. The key insight is that fewer people are doing the fundamental work to understand what companies are actually worth, creating larger mispricings for patient investors willing to do that work.
Value Investing Requires Longer Time Horizons Than Before
The time required for markets to recognize value has extended compared to previous decades. (11:21) Andrew notes that Turtle Creek uses a five-year timeframe, giving the market credit that share prices will eventually be "dragged kicking and screaming" toward intrinsic value if their analysis is correct. While some mispricings correct in one to two years, others take more than five years. This extended timeline, while requiring more patience, creates greater opportunity sets for investors who can maintain their discipline and wait for value recognition.
Buy and Optimize Strategy Enhances Returns Beyond Buy and Hold
Turtle Creek employs a "buy and optimize" approach rather than pure buy and hold, treating the public market's price volatility as an additional lever for returns. (25:13) When they find a great company at an attractive price, they size the position appropriately. As the stock price moves relative to their intrinsic value estimate, they adjust position sizes - buying more when prices fall below fair value and trimming when prices exceed reasonable valuations. This approach allows them to be fundamentally buy-and-hold investors while taking advantage of market noise to enhance long-term returns.
Focus on Self-Funding Companies That Don't Need Capital Markets
The best investment opportunities are companies that never need to issue equity and can fund all growth internally. (53:36) These businesses, like Floor & Decor and Kinsale Capital, generate substantial cash flows that they can either reinvest in profitable growth or return to shareholders through buybacks and dividends. Andrew describes these as "slow motion management buyouts" where either the stock price appreciates significantly or management and long-term shareholders end up owning increasingly larger portions of outstanding shares. This dynamic creates asymmetric risk-reward profiles favoring patient investors.
Quality Management Teams Think Like Owners, Not Operators
The best companies are led by management teams that think about capital allocation like private equity owners rather than public company operators focused on quarterly metrics. (49:34) Kinsale Capital exemplifies this approach - when insurance markets become irrational with competitors writing unprofitable business, they step back and reduce their policy writing rather than chase growth for its own sake. When their shares trade below intrinsic value, they implement share buybacks. This owner-operator mentality ensures capital is allocated to its highest and best use rather than being deployed to hit arbitrary growth targets.
Statistics & Facts
- Turtle Creek Asset Management has achieved an average annual return of 18.8% since inception in 1998 versus just 8.7% for the S&P 500. (00:15) A $10,000 investment in their fund would have grown to over $1 million compared to around $95,000 for the broader market.
- Turtle Creek maintains an active share of 97.5%, meaning they look almost nothing like the indices they're compared against. (58:42) Andrew notes this would be 99.9% if compared to the S&P 500.
- Floor & Decor has 250 vendors across 25 different countries and has doubled both their revenue and store count over recent years despite the challenging industry environment. (21:51) Their operating income dropped from just under $400 million in 2022 to $256 million in 2024 due to the cyclical downturn.
