π§π She Beat the Market 15 Years in a Row | Lisa Rapuano
Lessons from owning 24% of Amazon, how Dell reinvented PC manufacturing, why public company transformations are so hard, lessons from raising too much capital, and how to hire outlier candidates
Lisa Rapuano outperformed the market 15 years in a row in the 90βs and 2000βs. We go deep on how she did it, going inside early investments in AOL, Dell, and how she bought 24% of Amazon in 2002.
She shares what she learned from Jeff Bezos and Michael Dell, what makes a good investor, plus her experience as a startup CFO and how it influenced how she thinks about investing.
π Stream on Apple and Spotify
Timestamps to jump in:
3:18 Growing up middle class while dad worked at NASA
12:31 Moving to Baltimore to work for Bill Miller
18:12 What Lisa learned from Bill
19:41 How value investing changed over the last 30 years
26:40 Investing in internet stocks in the 90βs and 00βs
29:50 Thinking a 13x win on AOL in 1996 would be the biggest of her career
37:45 Teaching Barry Diller about the internet
41:42 How Dell reinvented PC manufacturing and created a negative cash conversion cycle
46:58 How Amazon survived the Dot Com Crash
52:05 Buying 24% of Amazon in 2002
53:27 Why companies get the investors they deserve
57:34 What Lisa learned from Jeff Bezos
1:04:43 Lessons from raising too much money
1:08:09 Running her own fund from 2006-2016
1:13:44 Why fees in asset management are too high
1:15:32 Joining Facet out of retirement 2017
1:20:32 What she learned about investing from operating
1:23:59 Why women are better investors than men
1:26:55 How to hire outlier candidates
1:35:18 Why no one can be the next Warren Buffett
1:40:06 When to sell your winners
Find Lisa on LinkedIn
π Find on Apple, Spotify, and YouTube
Transcript - (read on Rev)
Find transcripts of all prior episodes here.
Turner Novak:
Lisa, welcome to the show.
Lisa Rapuano:
Thanks for having me.
Turner Novak:
So you worked with a man named Bill Miller. You working together with him, you beat the market for something like 15 years that's incredible. Can you just talk about that?
Lisa Rapuano:
Sure. Yeah. So I worked for Bill Miller at Legg Mason Capital in the '90s and early 2000s, and he beat the market from '90 to '94 without me. I joined in '94 and from '94 to 2004, I was pretty much his right hand person and I think I can take a little credit for the beating of the market that he did in the value trust. I also started managing another fund at Legg Mason in '97, and for the six years that I managed that I actually beat Bill also.
Turner Novak:
The jungle whammy.
Lisa Rapuano:
And he did continue to beat the market for a few years after I left. But it was a pretty great time, pretty fun time, and we were just really had a lot of success and had a lot of fun too.
Turner Novak:
I was going to say, hopefully it was fun.
Lisa Rapuano:
Yes, it was.
Turner Novak:
I think that's going to be kind of the common sort of thread of the conversation is how do you beat the market? How do you be a good investor? And I know there's a lot of case studies examples from that time throughout the course of managing the funds. I'm interested, I think maybe to start, you didn't grow up thinking you were going to be an investor.
Lisa Rapuano:
No, I thought I was going to be a rocket scientist.
Turner Novak:
And your dad was also right?
Lisa Rapuano:
Yes. My dad was a rocket scientist in Apollo. He was in launch control, excuse me, in Cocoa Beach, Florida during the heady times when rockets were blowing up all the time and-
Turner Novak:
This is the '60s?
Lisa Rapuano:
He moved there in '58 and yeah, I grew up there. I went to college in 1984. So during that whole time we lived there and it was, space was cool. Space is cool again. Thank you, I guess Elon and Jeff, right? And NASA, they get some credit too. But yeah, it was cool and it was interesting and I really thought that's what I wanted to do with my life. And I was good at physics and math, I thought, but it turns out not so much.
Turner Novak:
And you went to a school that didn't have the greatest physics program?
Lisa Rapuano:
So I went to Yale and they had decent engineering, but I could have gone to Auburn on a full swimming scholarship and that probably has a more prestigious engineering school than Yale. But when I got there, thank God I didn't go to Auburn because when I got to Yale, I figured out I wasn't actually that good at it. And I was like, "Oh wait, I took two years of physics in high school at Cocoa Beach High School, and that's nothing like this intro to physics class that I'm taking here with all these other smart people who are way better than I am." So I ended up not taking that route.
Turner Novak:
And then what did you do instead?
Lisa Rapuano:
I majored in American Studies. I fell in love with, I had this professor, Bill Cronin changed my life. He had a great class called The History of the American West, and it was about bringing together lots of different information from primary sources, cultural information, music, newspapers. It was a different way of studying history than what we did at Cocoa Beach High School.
Turner Novak:
So it was instead of here's the story that we're top down presenting to the kids, it was taking different pieces, music at the time to learn about the history that wasn't actually the narrative?
Lisa Rapuano:
Yes. And it was really good training for being an investor, which I did not know at the time, but really good training because you were given all the info, you could find information, weight it differently, come up with new strings of a narrative, new strings of a story, a different way of approaching something. And that general approach was something that I used a lot in my investing career.
Turner Novak:
Interesting. Do they call that the Mosaic theory now or is that a different-
Lisa Rapuano:
That's one of the ways, they also call it lattice work sometimes or all kinds of different ways of putting it together. The mosaic theory was actually, if you want to know, it was brought up to try to counter inside information. So before Reg FD you would say that you could have, "Inside information," if you put it together from a lot of different sources through mosaic.
Turner Novak:
So it wasn't someone just said Amazon is going to be there and you should buy the stock. It was three different suppliers that were indicating maybe that they had higher shipments than normal and something else that's not as insider.
Lisa Rapuano:
Putting together the business model, the forecast, the way that you think that it's going to grow, what you think the demand cycle is, how you think the stock cost structure is going to, go when the free cash flow is going to come. All of those things, it's like from getting it from lots and lots of different sources of information rather than a few.
Turner Novak:
That makes sense. And then before you actually graduated school, or maybe it was kind of right as you were graduating, you thought you were going to be an Olympian, I think, and you didn't, how did that go?
Lisa Rapuano:
Yeah, so I was a sprint freestyler at Yale.
Turner Novak:
This is swimming?
Lisa Rapuano:
This is swimming, yeah, sorry in swimming.
Turner Novak:
So you just swim as fast as possible, whatever mode.
Lisa Rapuano:
Correct. If you saw it in the Olympics, it's the 50 free is the one that lasts 20 seconds.
Turner Novak:
It's just down the pool.
Lisa Rapuano:
It's like just like, vroom. It's the most fun.
Turner Novak:
What was your style? What was your form?
Lisa Rapuano:
My form was kick like hell and turn your leg and turn your arms over really fast and don't breathe.
Turner Novak:
Okay.
Lisa Rapuano:
Just what they do now, but I think I kind of hit a curve of getting really good late in college. And let's be really honest, I didn't take it that seriously my freshman year because I was a little bit burned out and I didn't have a scholarship to worry about. So I just kind of had a little fun. Plus also, Yale was really hard for me when I first got there and I went to Olympic trials in '88 and I was seeded third going in.
Turner Novak:
Is that good?
Lisa Rapuano:
That's good. That means that I had the third fastest time at going into the 50 freestyle.
Turner Novak:
What do you need to qualify?
Lisa Rapuano:
The top two.
Turner Novak:
Okay.
Lisa Rapuano:
Back then, now it's top four or six because they have relays. It turns out my time, well, not turns out my time was actually converted from a yards time, which is not something you're allowed to do anymore, which is I swim a lot of 25 yards and 25 meters was the Olympics, which is one long length instead of two short lengths. And turns out my turn is really good and I'm not quite as good at the 50 meter as I am at the 50 yards. So I ended up tying for 19th and it was great experience and I enjoyed it, but I was nowhere close to the Olympic team.
Turner Novak:
So what was the backup plan?
Lisa Rapuano:
There wasn't one.
Turner Novak:
Okay. What'd you do?
Lisa Rapuano:
Let's see. Oh my gosh, this is hilarious. My parents, this kind of goes into investing. My parents who are not investors at all and really we'd grown up during inflation and I remember being broke because my dad's rocket scientist salary didn't go up while inflation was going up and gas prices and all those things-
Turner Novak:
They don't make a lot of money, I always assumed.
Lisa Rapuano:
They do not make a lot of money. No, they're government employees basically.
Turner Novak:
Yeah, that's fair. So it was like you weren't poor, but it wasn't a lot of money.
Lisa Rapuano:
We weren't poor, but during the inflation of the '70s, we were a little broke.
Turner Novak:
Interesting.
Lisa Rapuano:
And my parents bought Kruger Rands.
Turner Novak:
What is it?
Lisa Rapuano:
Which are South African gold coins. Probably at the very peak of the market, the people going to Costco and buying gold bars right now. Same idea, right? "Oh no, it's inflation. Let's go buy gold bars."
Turner Novak:
Oh, they bought it to defend against inflation.
Lisa Rapuano:
Exactly. Probably at exactly the wrong time. And that was the only savings they had left after mortgaging the house to pay for me to go to school, because I was supposed to have a full swimming scholarship. So they cashed in their Kruger Rands and I had $2,500 to get myself started in New York City and I moved in with a friend, her parents lent us a studio for a couple months. I got the first job I could get.
Turner Novak:
So what was that? It was kind of related to investing.
Lisa Rapuano:
No, I was a secretary.
Turner Novak:
But wasn't it an investment firm?
Lisa Rapuano:
It was.
Turner Novak:
Okay.
Lisa Rapuano:
I was a secretary on Wall Street.
Turner Novak:
Okay, so what'd you do?
Lisa Rapuano:
Luckily I was on Wall Street and I did road checks and fetch coffee and took calls and typed letters and all the stuff that you did in the '80s. But it was a guy that hired women. He hired people, but generally they were women and then would give them a promotion after six months. And so after six months I ended up in research marketing, which is basically I supported the salespeople by reading all the research and knowing what everybody was saying and being able to say, "Hey, this client might be interested in that and this client might be interested in that." It was sort of a support role for the sales team, but I got to read a lot of research and so I started teaching myself finance.
Turner Novak:
Interesting. So that was your training. You didn't really get any academic training, but it was all practical. Okay.
Lisa Rapuano:
Nope. I taught myself accounting first and then-
Turner Novak:
That sounds like a nightmare. I failed accounting. I got a D plus the first time I took accounting, took it again and I got an A.
Lisa Rapuano:
Okay, well see, because there's an aha moment with it, right? Do you remember when you had the aha moment of debits and credits?
Turner Novak:
It was after I started working a job and it all kind of came together. The was the first time I took it, it was just like, "This makes no sense. I don't understand what any of this means." And just memorizing things. I think there's acronyms that I think kind of clicked for me, like dead debits equals assets and dividends or something. I think that was one of the acronyms.
Lisa Rapuano:
Okay. I don't remember that one.
Turner Novak:
Yeah, there was one Red Revenue Expenses Debits or something like that was one of them.
Lisa Rapuano:
Okay.
Turner Novak:
Yeah, anyways.
Lisa Rapuano:
I never learned those.
Turner Novak:
Yeah, that's how they taught you in college in the early 2010s. I forget the year I took it for the first time, but the second time I took it was literally just like, "Oh, I have done this for a job, it makes sense now."
Lisa Rapuano:
It does make sense, but it's a different language and you have to have the aha moment. And so I did that and then I just started reading everything that I could read, learning what finance was, listening, kind of informing myself. So that was how it all got started.
Turner Novak:
And then Legg Mason was where Bill Miller worked. It was in Baltimore. How did you end up working for Bill? What's the story there?
Lisa Rapuano:
Yeah, so I left Wall Street with the man that became my husband. He did not like Wall Street. He wanted to work on something tangible, he thought, but they did not want, he tried to get a job and all the places were kind of like, "Yeah, right. You're not going to go from making 200 grand to making 45. We don't believe you." And so he went to business school and I ended up in Chapel Hill, North Carolina where he went to business school. And I ended up getting a job with a money manager who was so kind to me, and he kind of let me do, I did the marketing, I wrote the brochure, I did the computers, blah, blah, blah, blah, blah. And I started the CFA program. So that was also the training that I had. The CFA program is I think a great program for learning how to be an investor or maybe not so much that, but how to be financially literate.
Turner Novak:
Yeah, it's definitely, I feel like level one, so I did the first two levels. I passed the first two, I took the third as I was trying to transition into VC. I took the test, but I didn't study. So if you know how that works, zero chance you're going to pass. I think I actually got below 33%.
Lisa Rapuano:
Oh goodness.
Turner Novak:
So guessing I still did worse. But the first test is finance undergrad degree.
Lisa Rapuano:
It really is.
Turner Novak:
The second one is maybe a master's, but you tweak and go deeper on certain topics. And then the third one, which I thought was just ridiculous, I didn't enjoy it at all and it was portfolio construction of, it's stuff I wasn't really that interested in.
Lisa Rapuano:
Yeah. And it's gotten more and more technical since I took it.
Turner Novak:
And the questions are absolutely ridiculous. I just was like, "I'm never going to actually-
Lisa Rapuano:
I had to calculate duration by hand for bonds. I had to calculate bond duration with a calculator and a pen and pencil, right?
Turner Novak:
Which I don't even remember how to do that. I did know it a couple, five, 10 years ago.
Lisa Rapuano:
Now you just press the button on Bloomberg and...
Turner Novak:
Yeah. Well, that's the thing that I thought was really ridiculous with a lot of this stuff was, but again, it's good to understand how it all is calculated and what the computer's doing-
Lisa Rapuano:
Absolutely.
Turner Novak:
To get you the answer.
Lisa Rapuano:
Absolutely. But it goes back to, and I tell people this all the time and they don't really listen to me, but I think finance is just arithmetic and it's not, it's just understanding all the terminology is hard. Understanding some of the... Once get NPV, it's just not that hard.
Turner Novak:
Yeah, that's fair. It's all just an NPV calculation.
Lisa Rapuano:
It's not like hardcore math. And you can get an advantage with learning Python and learning things that do make your Excel better and stuff like that. But at the end of the day, it's not high math. So it's conceptual, which I loved and-
Turner Novak:
Because anyone could do it. If you understand eighth grade math, you can do it.
Lisa Rapuano:
Right, which is why I tell people, you don't need to major in business. You don't need to major in finance, you don't need to major in econ. You can teach yourself that. You can major in econ to be an economist, but if a lot of people are majoring in econ because they think it gives them a finance edge, which I don't think it does. But anyway, back to the story. I stayed in Chapel Hill for a few years and then my husband got a job at Black & Decker, which is in Baltimore. That's how they ended up there-
Turner Novak:
This is a construction company?
Lisa Rapuano:
They're the tool company. They've been bought by Stanley since then, but they have DeWalt and all those kinds of things. So he got that job and I started looking for a job in Baltimore. At the time, Legg Mason was tiny, the big firms were T Rowe and Alex Brown was by far the biggest-
Turner Novak:
In Baltimore or just generally?
Lisa Rapuano:
In Baltimore, and there was no remote work back then. There was no internet. It turns out the only place I interviewed was like Mason and the only job and Bill and I hit it off and that was that, right. I mean, everybody, I knew him. It was just kind of a strange match.
Turner Novak:
And then didn't you, you helped him research company that he already owned?
Lisa Rapuano:
Yeah, I actually forgot all about that until recently. Yeah. So as part of my kind of interview process, he was like, "I own this company, Royal Appliance Manufacturing," and they made the Dirt Devil. I don't know if you remember, it was... Is Devil Still around?
Turner Novak:
A vacuum? Yeah, I've seen it within the last couple of years.
Lisa Rapuano:
Okay.I think it probably got bought, and it's probably a branded thing now, but at the time it was a big deal. But it was a one product company, and it was a classic thing where the stock went up a lot when it was growing and then crashed and burned when they lost a little bit of their edge and their sexiness. And he bought it when it looked really cheap on trailing numbers. He asked me to look at it, and I figured that unless they had more products coming, there wasn't much there. And so I cold-called the director of marketing in the evening and just talk to him like, "What's our product market? What's your product line like?"
Turner Novak:
Were you calling as an investor or were you calling as a-
Lisa Rapuano:
I don't remember. I really don't remember how I did this. I'm 25 years old or 26 years old, and I just had no fear, I guess. I don't know.
Turner Novak:
You were trying to make money. You're trying to just get the information that you needed.
Lisa Rapuano:
Yeah, I wanted this job. And so yeah, I called him and I figured out that the product pipeline was terrible and non-existent really And the director of marketing was a clown. And so I told Bill what I thought of it, and I ran the numbers-
Turner Novak:
Hopefully he's not listening to this.
Lisa Rapuano:
And he sold the stock and it never went up from there. And I think it went down and ended up getting bought out lower than where it was when he had it and he hired me.
Turner Novak:
What all did you learn from Bill?
Lisa Rapuano:
I'm not the same as Bill. Just like I think all investors are different. We were a pretty good team. What he did really well, he was just inherently contrarian. Anything that everyone else hated, he was just drawn to it.
Turner Novak:
Yeah, that can be really good, but it can also be a curse, I feel like.
Lisa Rapuano:
Yes, it can be. It can both. And he was also, he's just brilliant. He is just a really smart guy. He reads widely. He doesn't only read investment things. He's a philosophy guy. So I learned a couple things. I learned one that you're not going to get an edge by doing the same thing that everybody else does. You have to figure out a way to think about it differently, whether that's you just have to fill your brain with lots of different mental models that are not the same as everybody else has. Two is that you have to look longer term than everyone else does. And again, I'm going to tell you these things in 1995 when we were doing it, it was revolutionary at the time. When I talk about it now, sometimes let's remember it's just 30 years later, right?
Turner Novak:
These are talking points that-
Lisa Rapuano:
Yeah, this is like what everyone says now. But at the time it seemed extremely, it was very differentiated and it was extremely cutting edge. And I feel good that it's mainstream now.
Turner Novak:
And you guys were sort of "Value investors" if we had to give it a name, what was value investing at that time?
Lisa Rapuano:
Yeah, Bill took over from this guy, Ernie Keeney. Ernie passed away not maybe 15 years ago. He was the greatest man ever. He was just such a sweet, good-hearted values based man. And he had founded the Value Trust, which was the fund that Bill took over. And Ernie was the classic old-fashioned value investor. His big thing was called sales leverage. He wanted to buy something with a low price-to-sales ratio that had the opportunity for margin expansion. And literally that's all he did. And so he always owned a lot of cyclicals. He would own the car companies, the banks. He was very, very old-school value investing, low multiples.
Turner Novak:
So it's basically the company produces this for someone who's never heard of value investing before, you look at the financials as they put out and you say, the produces this much revenue, these are the margins, this is how much cash it generates. And then typically, when you buy a company, the very quick summary is people look at how much it generates and they pay a rough multiple compared to the market of something of like, okay, this company generates a hundred dollars in cash every year, so we'll pay about 10 times that. It's worth a thousand dollars.
Lisa Rapuano:
Exactly.
Turner Novak:
And then so value investors, you try to find, "Oh, it's at a 10, let's try eight or we'll only pay five times, we'll pay 500 for this and try to get a deal," because it should be worth 10.
Lisa Rapuano:
Right.
Turner Novak:
That's the basic dynamic.
Lisa Rapuano:
Classic multiples arbitrage, we would call it. If it's earning a dollar and trading for five, it's five times earnings. And you think that the earnings can go to $2, and even if it only stays at five times earnings, then you got a double, but often when the earnings go to $2, the five times goes, the market decides it's worth more and sends it up to 8, 9, 10, 11, 12, 13 times. But I would say that Ernie was very multiples based. Ernie, he wanted low multiples. And so if you go all the way back to Ben Graham, he wanted multiples of book value. Book value has become less relevant in our intellectual property based world. And so we generally now are looking at price to earnings, price to EBITDA, price to sales, price to cash flow, whatever. But still very much earnings, very much multiples based. So that was still what value investing was in the '90s. Do you want to ask me how it changed or is changing or has changed?
Turner Novak:
That's what I was about to ask you. Yeah. So what did you start doing differently at the time? And then I'm curious, what do people think? What was the pushback? Now we talked about, it's like, "No, duh, of course you should be thinking about these things." But what was the feedback like at the time as you started to change, and then what did you start to think differently about?
Lisa Rapuano:
Right. So this took place over multiple years. This wasn't like an aha moment where we suddenly figured something out. But when I first got there, I was doing some more standard stuff. I think we owned Reebok and Nike. We owned the gambling companies, we owned, or the casino companies. I always called them gambling companies.
Turner Novak:
And I think I remember you told me that you couldn't access the 10Ks or investor relations pages of the gambling companies?
Lisa Rapuano:
Yes, because when we first got the internet, if you went in and searched, it was, I think we owned Hollywood Casino or whatever it was that we owned Mirage, all these things that we owned. And Mandalay Bay back when it was independent and you went in search of them, they were flagged as gambling sites.
Turner Novak:
Yeah. So blocked.
Lisa Rapuano:
Blocked. Yeah. So we couldn't download their 10K's and 10Q's for the first year we had the internet at Legg Mason.
Turner Novak:
That's awesome. What year was that?
Lisa Rapuano:
That was '95.
Turner Novak:
Okay.
Lisa Rapuano:
Yeah.
Turner Novak:
And then you didn't even have email for a while, right?
Lisa Rapuano:
No, I got us to get email at Legg Mason Capital Management, because I was following the internet and I was following AOL. I was like, "We need email. Email is a good idea."
Turner Novak:
Yeah. So what did you do instead of having email? Did you write letters?
Lisa Rapuano:
Yeah.
Turner Novak:
Okay.
Lisa Rapuano:
I made phone calls mean. When I first started, you had to write to the SEC to request 10K's and 10Q's to be mailed to you.
Turner Novak:
Did you at least get them every quarter or did you have to ask each time?
Lisa Rapuano:
No, you had to ask every time.
Turner Novak:
Oh, wow. Okay.
Lisa Rapuano:
And then you waited two weeks until you got them in the mail and it was crazy.
Turner Novak:
So if you went to the SEC's office, got the 10K, Reddit, you had like a two-week advantage?
Lisa Rapuano:
Yeah, I guess you could have done that. I never thought of that.
Turner Novak:
Interesting.
Lisa Rapuano:
No, we never did that.
Turner Novak:
See, that's how you make money.
Lisa Rapuano:
Yeah. That's how you make money, right? The time arbitrage, look at you.
Turner Novak:
That used to be a thing. Now there's no time arbitrage. It's instant.
Lisa Rapuano:
No, it's all instant, right? Yeah. But how it changed, so I would say that we started getting a sense that growth had value in the mid '90s when the whole-
Turner Novak:
Because there was these two ways of thinking, value versus growth.
Lisa Rapuano:
Yes.
Turner Novak:
Value, you're getting a cheap price growth. It's growing really fast to momentum based.
Lisa Rapuano:
And Allegedly, you don't pay any attention to the value.
Turner Novak:
Yeah, because it's just going to keep going up. Just going to keep growing.
Lisa Rapuano:
Right. So we thought that that was a dumb differentiation, that things that are growing fast are worth more. And there is an intrinsic value for every company based on a lot of characteristics that may or may not be the multiple. And it makes so much sense now, but if the multiple was the value, everything would trade for the same multiple. So why do things trade at different multiples? Because they have different businesses, different growth prospects, different returns on capital, different economic characteristics that make them worth more or less.
Turner Novak:
Everything should be priced efficiently based on how much risk you're taking to return. Everything should trade at this blended spectrum of the price, the multiple, the growth, the returns on capital invested.
Lisa Rapuano:
Right. So we went from going to you buy something at five times and you sell it at 10 or 12 times, earnings, cash flow, EBITDA, whatever, to let's figure out what the appropriate multiple for this business is. And maybe we're going to pay 12 times for it, which is going to look bad.
Turner Novak:
That's low today.
Lisa Rapuano:
That's going to look really bad on your blended multiples in Morningstar, and they're going to put you in the wrong box. But we were finding value in people not understanding the durability of a franchise and people not understanding the growth prospects of something happening in the world, specifically the internet. I mean, that was the big thing at the time.
Turner Novak:
Was the internet a fad?
Lisa Rapuano:
So, we-
Turner Novak:
Because I'm just curious, because today, you literally, you can't be a human without accessing the internet constantly.
Lisa Rapuano:
Yeah. There were people that thought it was a fad.
Turner Novak:
Okay.
Lisa Rapuano:
There were people that thought e-commerce was a fad very much so. And it was in certain ways, right, because there were lots of businesses that were unsustainable. Just like when I know you do a lot of coverage of AI and more emerging technologies now, which I am no longer as familiar with, but it was kind like when people get excited about something, they overdo it. But that doesn't mean there's no there there, right? So from '95 to '98, there were lots of skeptics, but nothing was too crazy. There were lots of people thinking, "Oh, that's not sustainable. The Internet's going to go away." I mean, I remember Bill Gates said, "I had the internet on my list. It was down here at number 10. And then I realized I had to move it up to number one." That was '98 when he said that, right? So that was after Netscape had launched and after all this stuff had happened. So I think that it could be easily dismissed in the early years. And then in the sort of Greenspan said, " The exuberance-"
Turner Novak:
Irrational exuberance?
Lisa Rapuano:
Irrational exuberance. And I think he said that in '98.
Turner Novak:
That's how he described the internet?
Lisa Rapuano:
Yes.
Turner Novak:
Okay.
Lisa Rapuano:
And that was way before the real rational exuberance happened.
Turner Novak:
The actual bubble. It was kind of like somewhat sloping upward line to a vertical line for two years.
Lisa Rapuano:
Yep. And there were a lot of fads. There were lots of things that were unsustainable. There were lots of people just cashing in, lots of people playing the game. But if you found the people that were trying to build sustainable businesses, that's what we would focus on. And I mean, there was lots of money to be made, but yeah, there were people that thought it was a fad, and then when it turned into a mania, it was much easier for them to dismiss it altogether like, "See, I told you, look at Pets.com." It doesn't mean that the Internet's not real guys.
Turner Novak:
Meanwhile, Chewy, which is basically Pets.com is like a 50 billion company. It's a lot. That's like the total market cap of the internet company.
Lisa Rapuano:
How are they ever going to be able to ship all these things? How are they ever going to be able to do the-
Lisa Rapuano:
How are they ever going to be able to ship all these things? How are they ever going to be able to do the distribution? It's never going to work. It's like, "Well, you just have to think forward a little bit."
Turner Novak:
Yeah. Meanwhile, I think one of my favorite thing from that era is Bezos was doing a interview with a reporter and they were like, "You're an internet company. Why are you investing? Why are you opening warehouses? You should be focusing on the internet." I don't even know what that means. "You should be getting a better web presence versus you're opening these warehouses that spends a lot of money. That doesn't make any sense." They didn't compute how maybe you use the technology, but then there's actually... You need to deliver the technology that you're leveraging in some way.
Lisa Rapuano:
Yeah. Because reporters know better than Jeff Bezos, I think. Right?
Turner Novak:
I don't know. You said it, not me. So I'm interested. You guys made a lot of money on AOL, right?
Lisa Rapuano:
Yes.
Turner Novak:
It was tricky. Can you tell me that story?
Lisa Rapuano:
Absolutely. That was fun. So that was kind of my first big... I thought when I got nailed AOL, that that would be the biggest investment pit I ever had in my life because it was amazing. Everyone hated it. Okay. So it went public, went up a lot. We did not buy it on the OPO.
Turner Novak:
What year? Can you just timeframe?
Lisa Rapuano:
I think it was '95?
Turner Novak:
I was four at that point.
Lisa Rapuano:
Yeah. Oh, you were four. Okay.
Turner Novak:
So I need a little bit-
Lisa Rapuano:
My children weren't born yet.
Turner Novak:
Yeah. I think the average listener of this podcast is between the ages of 31 and 35. There's a little younger, there's a little older, so we need a little context.
Lisa Rapuano:
AOL was the first ISP, which stands for Internet Service Provider. And the way that you access the internet back then is you got these disks in the mail from AOL and you downloaded the software onto your PC or Mac.
Turner Novak:
Yep, I remember that. They would mail you these physical disks of 750 free hours or something like that.
Lisa Rapuano:
Exactly.
Turner Novak:
Every month.
Lisa Rapuano:
And you would use them for coasters because you had a lot of them sitting around.
Turner Novak:
I think there's a stat, there's more of those DVDs than people in the US or something.
Lisa Rapuano:
There's actually an artist in Park City that uses them to make paintings. It's really cool.
Turner Novak:
Oh, amazing.
Lisa Rapuano:
So the reason the stock crashed is so it went public on lots of enthusiasm about the internet. And then Netscape went public and launched the World Wide Web basically. So an actual browser versus-
Turner Novak:
AOL was like give you the internet. Netscape was access the internet.
Lisa Rapuano:
Correct. On anybody's wires. AOL had their own wires plus their own software and what we called the walled garden.
Turner Novak:
Oh, yep. I do remember that.
Lisa Rapuano:
Right. And so they have their own little AOL Instant Messenger. Mine was LisaRap.
Turner Novak:
That's a good name.
Lisa Rapuano:
And the reason the crash and burn is the emergence of a more open internet was evident. That was obviously going to be the future and it was unclear how AOL was going to survive. And AOL had this very... They had infrastructure, they had hardware, they had-
Turner Novak:
Oh, which was unsexy because capital-intensive and-
Lisa Rapuano:
Correct.
Turner Novak:
Oh, God. Okay, yeah.
Lisa Rapuano:
And they were growing really fast. And they were capitalizing their customer acquisition costs, which means they would mail out all these disks and it would cost, let's say, $175 to get a new customer-
Turner Novak:
Per customer.
Lisa Rapuano:
... and instead of expensing $175 on their income statement, which would show that they were burning money-
Turner Novak:
Losing a ton of money.
Lisa Rapuano:
Yeah. They would only expense, I don't know, $25 or whatever the lifetime value of that customer was estimated to be, they would depreciate it or they would amortize the cost over time. So it'd be 25 bucks a year or 50 bucks a year, whatever that was.
Turner Novak:
Isn't that bad? You probably shouldn't be expensing it, right?
Lisa Rapuano:
Well, at the time, the accounting rules actually were very clear that they had to do it this way. However, it wasn't good. It made them look like they were very profitable and they were burning cash like crazy. So all the shorts started coming on it and were like, "This is really bad. Look at all the cash they're burning. It's a fraud." And it wasn't a fraud. They literally would-
Turner Novak:
It was a real product.
Lisa Rapuano:
You could figure out exactly what was happening. All the data was there.
Turner Novak:
The data in the financials or the data...?
Lisa Rapuano:
Yeah, exactly.
Turner Novak:
Okay.
Lisa Rapuano:
"Okay, well, they're capitalizing it and here's how much they spent, and if they expense it, here's what it'd be. And oh, here's their free cashflow."
Turner Novak:
So the narrative at the time was they're trying to hide the losses on the balance sheet?
Lisa Rapuano:
Correct. And there's a competitive problem and the walled garden, blah, blah, blah, blah, blah. And the infrastructure. So infrastructure, walled garden and bad accounting.
Turner Novak:
That's legit. That's a good excuse.
Lisa Rapuano:
However, the internet penetration at that time was like 4% of the US. So there was lots of room and people have to get on somehow. So you can still use Netscape on your AOL connection. You have to get on there somehow through some ISP. And AOL was relatively affordable relative to, I don't know if you remember, but PSI was one of them. And for about one hot minute, they were the sponsors of the Ravens Stadium in Baltimore where I live. And it was called the PSINet Stadium, which we called the Piss In It Stadium until PSI went out of business.
Turner Novak:
There was Net Zero. That was one we used because it was free. That's all my mom could afford. And then SBC, I think?
Lisa Rapuano:
SBC. All the cable companies did it.
Turner Novak:
Okay. They all had their own internet?
Lisa Rapuano:
Yeah. But this was dial-up modems. This was like unplug your phone, put it in the back of your computer, have your mom yell at you because you're using too much time on the phone and her sister might be trying to call.
Turner Novak:
So this was before the cable companies got into it?
Lisa Rapuano:
Yes. In the meantime, they were still growing really fast and they were about to go cash flow positive. So if you ran out the numbers and you uncapitalized the marketing expenses and you looked at how the cash flow was going to go versus what the earnings were going to show, you could see they're about to go cash flow positive. So we bought it that, on the thesis there's still a lot of growth. They're about to become self-funding and that the walled garden would take care of itself over time.
Turner Novak:
What year was this?
Lisa Rapuano:
This was '96.
Turner Novak:
Okay. It still went down for a little bit, right?
Lisa Rapuano:
Yeah, it did.
Turner Novak:
You kept doubling down?
Lisa Rapuano:
Yes, we did. All the way down.
Turner Novak:
Okay. What was the lowest that it got to?
Lisa Rapuano:
I don't remember the stock prices. It was a thirteen-bagger for us, I know that, by the Time Warner bought them. I remember sitting at their analyst meeting. I think I just had my first child. I was running to the bathroom to pump. And in between I was coming out and David Rocker, who was a famous short seller, was sitting next to me in the front row with the financials in his hands, like the physical financial [inaudible 00:36:13].
Turner Novak:
That's intimidating. Like, "I read this shit."
Lisa Rapuano:
And he's an old guy, super famous, and I'm like this mom.
Turner Novak:
A mom pumping. Yeah.
Lisa Rapuano:
Pumping. Yeah. He's like, "You're going out of business. I've got the evidence right here. You're going out of business." And I was like, "They're about to go cash flow positive." And he's like, "No, they're not." I was like, "It's going to happen three quarters from now." And so once they went cash flow positive, all this accounting, then they changed their accounting. But they had to get permission to change their accounting. They changed their accounting. It was all of these things went away.
And not that there weren't still competitive issues, but they had a real business. And so from '96 to '99, we really just rode that one as far as it would go. At the same time, all of this internet speculation and crap was happening. Like I said before, we still knew there was a there there. So it was always a matter of just like, "Has it gone too far yet? Has it gone too far yet? Has it gone too far yet?" When Time Warner bought AOL, that was like, "Ding, ding, ding, ding, ding, ding, ding. Game over."
Turner Novak:
That was close to the top of the market, right?
Lisa Rapuano:
Beginning of '00, yeah.
Turner Novak:
Yeah. What was the valuation of the whole company or the deal? Was it like a hundred billion or something?
Lisa Rapuano:
You got to go look that up. I don't know. That was a long time ago for me. I'm not even looking at numbers anymore. But it wasn't-
Turner Novak:
It was the biggest corporate deal of all time or something.
Lisa Rapuano:
Yeah, it was huge. And you knew that Time Warner was going to screw it up, because there was like-
Turner Novak:
What? Okay, how so?
Lisa Rapuano:
Well, because there was such... Okay, I have another funny story. Barry Diller, who runs IAC.
Turner Novak:
IAC.
Lisa Rapuano:
Who's very savvy in the internet. At the beginning of my career, I owned Silver King Television, which he owned and controlled. And I owned Home Shopping Network, which he also controlled. And at one point he tried to merge Home Shopping and Silver King. So I remember being a pivotal vote on this. And people that hated were Silver King owners. It was a television network, hated the deal. And people that are Home Shopping Network hated the deal. And I was like, "You can't both hate the deal. It's got to be good for someone. If you both hate it, it's probably a good deal." Negotiation, if everybody's a little bit disappointed, it's probably a good deal. So anyway, I got to know Barry during that. And then he was running QVC's HSN at the time. Both of them were together. And I remember Bill and I sitting him down and being like, "So there's this thing called the internet and it's going to be a big deal for you, and you've got to get it."
Turner Novak:
Like he's going to benefit from it?
Lisa Rapuano:
"All these other media companies don't get it. They really don't understand." The whole transition from old media to new media was very, very clear. So you knew that Time Warner was just... They were doing it defensively. They were going to run it into the ground. All the talent was going to leave. It was going to be a disaster.
Turner Novak:
What was Time Warner at that time? It was Time Magazine and Warner Brothers?
Lisa Rapuano:
Warner Brothers. And the cable companies. All the cable companies.
Turner Novak:
They owned all of the cable companies?
Lisa Rapuano:
Well, all the... I guess what's now Comcast. Yeah.
Turner Novak:
Oh, really?
Lisa Rapuano:
Yeah. I think it was Comcast. Was it Comcast? No, it was Time Warner Cable. TWC. Time Warner Cable.
Turner Novak:
Is that what AT&T is now?
Lisa Rapuano:
I'm not sure where it went. But yeah, they had been consolidating cable companies throughout the whole country for a long time. So [inaudible 00:39:36] Media and Time Warner were both the big consolidators in that.
Turner Novak:
Interesting.
Lisa Rapuano:
But yeah, so that's why they were interested in AOL because they had pipes too and they had content too. And so it was like, "Oh, we can move it to broadband and all this kind of stuff." But yeah, we knew it would be a disaster.
Turner Novak:
And then you also benefited quite a bit from Dell. You were, I don't know, an early investor. I don't know at what point in the post IPO how big the company was, but I know you made a lot of money on that one too. What was the story with Dell? That's another one of those... "It's a computer company. It's hardware. Why would you buy that?"
Lisa Rapuano:
Yeah. In '95, when you all were...
Turner Novak:
When I was four.
Lisa Rapuano:
When you were four-
Turner Novak:
I was in preschool.
Lisa Rapuano:
Or maybe some of you were not even fetuses yet. In '95, there was a actual soft landing in the economy. So they raised rates.
Turner Novak:
Yeah. This was the only time they ever did it, basically, right?
Lisa Rapuano:
I think it was Paulson, maybe? I don't remember the Fed Chair's name. Maybe it was Greenspan. I can't remember. So got a little overheated in '94. And they raised rates. And this is after a really long recession. It had been brutal-
Turner Novak:
The early '90s.
Lisa Rapuano:
... for a long time. And then it started to really go up. And in '94 it got a little overheated and they raised rates. And so as is normal, all the cyclical stocks went down.
Turner Novak:
It's basically whenever rates go up, stock prices come down.
Lisa Rapuano:
Yeah.
Turner Novak:
Whenever rates go down, they go up. That's like the rough TL;DR for people.
Lisa Rapuano:
Yeah, especially things that are cyclically sensitive, like manufacturing companies, steel companies, paper companies, anything that's very cyclically sensitive. Technology was considered cyclically sensitive. It had historically been cyclically sensitive. And at that time, technology was IBM, mainframe computers, computer associates, big giant installed software bases, disk drives. That was kind of the whole industry.
Turner Novak:
Yeah. The internet wasn't a thing.
Lisa Rapuano:
The internet wasn't a thing.
Turner Novak:
It barely even existed. [inaudible 00:41:41] at that point.
Lisa Rapuano:
Exactly. And so we didn't realize how great Dell was until after we bought it. Okay.
Turner Novak:
Really? Okay.
Lisa Rapuano:
Yeah. We bought just all the tech companies. We just were doing a cyclical trade. We bought Dell, Gateway Computer, which was another one.
Turner Novak:
I remember those.
Lisa Rapuano:
HP, Western Digital. We bought a whole bunch of them. Just because we didn't know technology from our toenails.
Turner Novak:
But they just looked like good, multiple...
Lisa Rapuano:
And so then I was like, "Here's technology, Lisa. Go figure it out." That was my assignment. So I was like, "All right, these are semiconductors and these are semiconductor capital equipment. And this is what a PC is. And these are what..." I literally had to figure it out from nothing.
Turner Novak:
Yep. And you were young-ish. You were in your 20s, right?
Lisa Rapuano:
Yeah. Mary Meeker was the PC analyst at Morgan Stanley. I don't know if you know who she is.
Turner Novak:
Yep.
Lisa Rapuano:
All right. She's like the mother of the internet now, right?
Turner Novak:
Yeah.
Lisa Rapuano:
She was the PC analyst.
Turner Novak:
I should try to get her on the podcast actually. She'd be interesting.
Lisa Rapuano:
She'd be great. And so we bought them all. And then there were a couple of things happening. With Dell and Gateway... HP was not doing as well. Dell and Gateway were doing really, really well. We were trying to really understand the differentiation here. And so we bought them all at five times cash flow or five times earnings. And there wasn't a ton of risk while we spent some time figuring it out. Over time, we culled it down to, I think Western Digital, Seagate, Dell, and Gateway were the main hardware.
Turner Novak:
Were Western and Seagate, were those hard drive companies?
Lisa Rapuano:
Hard drive companies. Yeah. I have one in my office. It's like a 20 meg hard drive that I just keep there to remind myself that 20 megs used to be a lot.
Turner Novak:
Wow. And those were the biggest tech companies at the time.
Lisa Rapuano:
Oh, yeah.
Turner Novak:
A hard drive company. That's awesome.
Lisa Rapuano:
Yeah. So as the internet started to emerge, we realized that that was going to drive a lot more demand for PCs. So everybody wants email. Everybody needs a computer on their desk. Everyone now, not just the senior people or just the secretaries. And then we also started to... Dell was the first to start the made-to-order trend. And so they weren't making computers until you ordered it, which was going to vastly decrease the cyclicality. So when you have to carry inventory and demand goes down, the value of your inventory decreases.
Turner Novak:
And it just sits there.
Lisa Rapuano:
And your earnings blow up. You suck. It's so bad. This is why cyclicals suck.
Turner Novak:
But doesn't doing one-off production lower... You get less pricing power. Your margins are worse, technically, because it's [inaudible 00:44:27] scale.
Lisa Rapuano:
Not at that time. They reinvented the way that you did the manufacturing.
Turner Novak:
How did they do it?
Lisa Rapuano:
They were just an early pioneer of... Just in time. They worked with the suppliers to get a lot of things standardized so they could do a lot more plug and play. Just like now when... People still build desktops for themselves. One of my nephews just did it. And it's like, you just go buy the pieces and put them all together. They helped that along by getting things standardized. Whereas before IBM would design in this big behemoth desktop and it could be made by no one else and it had to be made in a big factory. Dell got it so it was a lot more like putting together Legos.
Turner Novak:
So I would order it. So there'd be like 1000 people would order in a day. They'd put the order into the factory and they'd make [inaudible 00:45:16]-
Lisa Rapuano:
Make them all custom. Make them all custom.
Turner Novak:
Maybe a bunch of custom models. Okay. Then they'd ship them all out.
Lisa Rapuano:
So the other benefit would be they got paid before they had to buy the parts, they got paid first, then they would deliver the product later so they started this negative cash conversion cycle. So their working capital was funding their business. They didn't have to raise as much capital. So the combination of the demand curve, the differentiated business model, the negative cash conversion cycle, and it was still only, I think, 12 times earnings when all the other value investors were starting to sell it. We were like, "This is a no-brainer. We're going to keep this one." So we kept that for... Also, we probably sold it in late '98, early '99. And then I remember when it went private.
Turner Novak:
When was that? Mid 2000s or late 2000s?
Lisa Rapuano:
Mid 2000s, yeah. So they really were such a great changer of the industry. But then people copy it. People catch up. Things don't stay differentiated forever. And I remember I said to Michael Dell, "You could do this in the public market. You're stealing money from the public market." And he's like, "No, I can't do it in the public market." I said, "Yes, you can. You just need the right shareholders." And he's like, "Nope." But look how much money he made taking it private and then taking it public again.
Turner Novak:
Well, he could possibly be true because people would've not given him a long enough timeframe. Looking at the financials, "This is dog shit. We're going to remove you as CEO and not let you do that."
Lisa Rapuano:
It's very hard to do a transition. It's very hard to do a massive transformation of a business in the public eye.
Turner Novak:
So has anyone done that in the public markets that you remember coming across?
Lisa Rapuano:
That's a good question.
Turner Novak:
I'm just trying to think who's pulled off... Is Amazon an example?
Lisa Rapuano:
Well, Amazon. Yeah, Amazon did for sure. They made a massive transformation of their business in the public eye and they just said, "Look, I don't care where our stock price goes. I just don't care. I'm not going to manage to that."
Turner Novak:
When was the first time you bought Amazon?
Lisa Rapuano:
The first time I personally bought it in my fund was early 2002. Bill started buying it in 2001. We met them on the IPO, they went public in 1997 or 8.
Turner Novak:
And you didn't buy it before that?
Lisa Rapuano:
We did not buy it.
Turner Novak:
Why not?
Lisa Rapuano:
It was unclear what the real business model was at that point. We thought they were brilliant. We started following it aggressively. I remember one of my analysts, Randy Befumo, who is now my brother-in-law, he was like, "I'm going to build a model. I'm like, "You don't need to build a model. We'll never own this thing." But he built a model, which I still have a copy of. And it verified that it was not a good risk reward at that point. It was in the peak of the frenzy.
Turner Novak:
So it was maybe good business, but it just didn't matter because the valuation was just too high.
Lisa Rapuano:
Yeah. And the frenzy was so high in the market around internet stuff. We just didn't need any more of that.
Turner Novak:
Was Amazon one of the most drastically overvalued ones at the time?
Lisa Rapuano:
Yeah. I don't know if you remember. It was not even that it was overvalued, it's that nobody was even doing the work anymore. So this was the whole controversy around it when people were like, "Oh, I'm just going to raise my target to $400." "$400. Sure, why not? We know this thing's a piece of shit but we're just going to do because it's going up." And despite the fact we owned a lot of tech companies and a lot of things that were frothy, we weren't crazy. So we were trying to be selective, and we knew we needed to be selective. So we didn't buy it at the IPO. But we did start following it and I became very good friends with the CFO who was-
Turner Novak:
Joy.
Lisa Rapuano:
Joy Covey, yeah. So then when it started crashing and burning in 2001-
Turner Novak:
It was down like 97% peak to trough, I think?
Lisa Rapuano:
Yeah, something like that. So it started going down in 2000... Well, it went down with the internet bubble as everything did.
Turner Novak:
And it was basically just the valuation multiples went from 50 times sales or whatever the number was to 10 times EBITDA or cash flow.
Lisa Rapuano:
And if you weren't cash flow positive, which they were not, your access to capital is drying up. And so that's scary.
Turner Novak:
So you were probably just trading it like cash in the balance sheet plus acquisition and option value.
Lisa Rapuano:
It's scary when your access to capital dries up, your business goes away.
Turner Novak:
And they raised debt, right?
Lisa Rapuano:
Well, yes. So first thing they did is they raised margins by raising price. And that was probably helpful, but probably was a mistake in retrospect.
Turner Novak:
Really?
Lisa Rapuano:
Yeah. And I think Jeff would say that. I think he would look back and be like, "Yeah, we should have never done that. We should have never tried for higher margins."
Turner Novak:
Because consumers?
Lisa Rapuano:
Because the mission is to give the best experience to the customer all the time. But that did buy them a little bit of time. Then they raised some debt in the European markets and I remember when they did that, I was like, "Okay."
Turner Novak:
What does that mean?
Lisa Rapuano:
Well, that's going to help them get through. They're no longer at risk of-
Turner Novak:
Insolvency.
Lisa Rapuano:
Of insolvency. Yeah.
Turner Novak:
And they had good timing on it, if I'm remembering right.
Lisa Rapuano:
Yeah.
Turner Novak:
They got it pulled off at the perfect time.
Lisa Rapuano:
Perfect time. They got it pulled off right before 9/11, I think.
Turner Novak:
Okay.
Lisa Rapuano:
Yeah. And then 9/11 happened.
Turner Novak:
And wasn't the market closed for a week during 9/11 or something like that? Okay.
Lisa Rapuano:
Yeah.
Turner Novak:
I think I was in fifth grade. I remember I had a different experience maybe than somebody was in the market at the time, but I remember it was like the world was going to end. It was kind of like a COVID type scenario where the stock market might not exist.
Lisa Rapuano:
I've been through three world endings. 9/11, the world was going to end. Well, the internet wasn't... Maybe four. 1999 the world was going to end because-
Turner Novak:
Oh, Y2K?
Lisa Rapuano:
Y2K. And then 2001, the world was going to end again because of-
Turner Novak:
Dot com?
Lisa Rapuano:
Dot com. No, because of 9/11. And then the world was going to end in 2007, '08, I actually thought the world might end in 2008. The financial world might end at that time. And then COVID. I'm not that old.
Turner Novak:
You've been through it.
Lisa Rapuano:
I'm only 58. That's a lot of world ending.
Turner Novak:
Yeah. Like a full lifetime.
Lisa Rapuano:
So yeah, after 9/11 then also consumer demand. We went into recession. It was very scary about... Are people ever going to buy anything again? Are we going to go to World War Three? What's going to happen? So that was when the stock really started taking another hit. And in 2002 sometime is when Bill and I both started loading up on it.
Turner Novak:
So why did you load up?
Lisa Rapuano:
Oh, okay. I figured out they weren't going to run out of cash. I had a very good sense of what they were doing, which is now very well known. But at the time was like, "What are you talking about?" So they started with books, music and video. And books, music and video was a sustainable business. We'd never know for sure. But I became convinced that that business itself was a sustainable business and that the reinvestment in the other parts of the business were what was making the free cash flow look so bad and that they had some discretion over whether they were going to do those investments or not.
Turner Novak:
Because they could choose to make investments or not. Yeah.
Lisa Rapuano:
And any company that can invest its capital above the cost of capital should do it all day long. Because investing above the cost of capital is a really rare thing. Most companies can't do it. And most companies could do it and choose not to. So it's like if you can reinvest your money in further expanding your competitive advantage, you should be doing that even if it makes your financials look like crap.
Turner Novak:
How do you control for investor perception at that point?
Lisa Rapuano:
There's two elements to that. I think companies worry way too much about that.
Turner Novak:
Really? Okay.
Lisa Rapuano:
Mm-hmm. I think you get the investors you deserve. If you run your company for value creation, people who value value creation, who are generally long-term investors, who will give you the benefit of the doubt and understand what you're doing will sit by patiently. If you are constantly managing to the street and-
Turner Novak:
Short-term expectations.
Lisa Rapuano:
Exactly, you'll get people that care about that. That doesn't mean you won't have some volatility. Prices are always set at the margin. But if you know that you can sustain this downturn because your primary investors understand what you're doing, go for it. So we bought it because it was less than one times... I think it was 0.8 times sales. It was less than a billion-dollar market cap. It was, I believed, free cash flow positive in the businesses that mattered. So it had flexibility to free cash flow positive when they wanted to, had huge growing potential. I understood that Jeff was trying to build something way bigger than what people thought he was. Also, we had the benefit that in 2001, no one else wanted to talk to Amazon except us and we own 24% of it. So we got to sit down with Jeff and Joy whenever we wanted to and have lots of fun conversations about all kinds of stuff.
Turner Novak:
Wait, so you owned 24% of Amazon?
Lisa Rapuano:
We did, yes.
Turner Novak:
So getting to that position in the [inaudible 00:55:04], did you buy it all at once?
Lisa Rapuano:
Oh, no, no.
Turner Novak:
Was it every week you'd buy another 10 million into it? How do you build into that kind of position?
Lisa Rapuano:
Ernie Kiehne used to call it munching. You would just buy it on the way down. Because you can't generally buy something after. If you have a lot of capital, it's harder to buy something on the way up.
Turner Novak:
Because you move the price up as you buy?
Lisa Rapuano:
Exactly.
Turner Novak:
But if you're buying into weakness when other people are selling to you, you don't...
Lisa Rapuano:
Exactly. So I think Bill, it's split many, many, many times since then. But Bill started buying it at 31, bought it all the way down to four. I started buying it at 18, bought it all the way down to four and had a $6 average cost, which I think is 6 cents now.
Turner Novak:
Yeah, because it's been split a bunch of times.
Lisa Rapuano:
Yeah
Turner Novak:
So your average cost basis was 6 cents on Amazon.
Lisa Rapuano:
Yeah.
Turner Novak:
That's crazy.
Lisa Rapuano:
Yeah.
Turner Novak:
And it's like $1000 now or something. I don't know. I don't really look at stock prices that often.
Lisa Rapuano:
It's not $1000. It's like $179 or... I don't know.
Turner Novak:
Okay, so there's probably a split.
Lisa Rapuano:
I only look at stock prices once a month now.
Turner Novak:
That was probably a split in there that I'm not remembering but okay. But it's like a trillion dollar, 2 trillion company or something, right?
Lisa Rapuano:
Exactly.
Turner Novak:
Wow.
Lisa Rapuano:
But the thing that people thought, so because it had been cash flow negative and because it was so controversial, and I don't know why but for some reason it just pissed people off that anybody thought it was going to be okay. It was very, very contrarian. I remember my husband coming home from the golf course one time, and he's like, "This guy in the golf course. He was just going on and on and on about it." I'm like, "What does he know?"
Turner Novak:
So just like a random golfing buddy?
Lisa Rapuano:
Yeah.
Turner Novak:
Like you specifically or the fund or just Amazon the stock?
Lisa Rapuano:
No, just Amazon. Didn't even know that. Rich had... My late husband had any knowledge of it. But it was on the cover of Barron's, AMAZON.BOMB. It was very, very controversial and it turns out we were super right. And I'm very grateful that Jeff Bezos gave us so much of his time but also he listened to what we had to say about building a business and we listened to what he had to say about his challenges. And at one point he told me, and I hope he doesn't mind if I say this, but at one time he told me, he said, "I think you knew more about Amazon than I did at one point." And I said, "Yeah, well, you put a stop to that really soon by stopping telling anybody anything."
Turner Novak:
So wait, so what happened there? Everything you just said, there's a lot more we could talk about with that. So he stopped telling investors what was going on with the business or...?
Lisa Rapuano:
No. As they became more successful, they really got more closed mouth, which is actually appropriate because you don't want to give away your secrets, right?
Turner Novak:
Yeah. And because it took a long time for offline competitors to realize the internet worked, right?
Lisa Rapuano:
Yes.
Turner Novak:
They just thought Amazon losing money. No threat.
Lisa Rapuano:
When you look at a business now... If you look at any kind of business as a venture investor, the-
Lisa Rapuano:
If you look at any kind of business as a venture investor, the first question you ask is like, "How is this going to survive against Amazon?" That's the first question you asked if it has anything to do with-
Turner Novak:
With eCommerce.
Lisa Rapuano:
... AWS or eCommerce, right?
Turner Novak:
Yeah.
Lisa Rapuano:
I mean, they're dominant now, so, yeah.
Turner Novak:
What did you learn from him? And then maybe, what did he learn from you? I don't know which one's better to start with, but.
Lisa Rapuano:
Well, I mean, what I learned from him is that, and I, and this has been reinforced, is that it's really hard to... he's a very smart guy who's also kind of theoretical. One time we sat at a dinner and we talked about this book called A New Kind of Science by Steve Wolfram, which is this book is about this fat and I read maybe 100 pages of it. He read the whole thing.
Turner Novak:
How big? It's like a thousand-page book?
Lisa Rapuano:
Yeah, and it's really complicated. He's like a very much in his head, very good at thinking theoretically. And I learned that the practical and the theoretical are very far apart. And watching him struggle through some of the early challenges, was very insightful to me. Okay, even the smartest, most committed person might fail and might not be able to get it right even though they have all the right ideas.
Turner Novak:
Was there things he was not quite there on at the time when you think about the practical versus theoretical?
Lisa Rapuano:
Well, I think that he ran into the same thing that a lot of venture-backed companies have run into more recently, which is in the early years, capital was unlimited, and everybody just said, grow, grow, grow, grow, grow, grow. And so he didn't necessarily have his finger on the pulse of where money was being wasted, where cash was being burned when it shouldn't be burned. Even though Amazon was relatively frugal. You've heard about the desks.
Turner Novak:
Yeah, we've seen all those desks, yeah.
Lisa Rapuano:
You know, the door desks and all that crap. But it's still, when capital is unlimited, you make dumb decisions. So that was a really big lesson for me to understand.
Turner Novak:
Because you probably thought sitting in the outside, there's no way that they would be making bad capital allocation decisions. They probably have-
Lisa Rapuano:
Right, because they're so smart
Turner Novak:
... each line item on the budget. They're on top of it.
Lisa Rapuano:
Yeah, they're so smart. Yeah.
Turner Novak:
What was like a common thing, not just Amazon, but just in general, like, it seemed like people were wasting money on. Were they hiring too many people or?
Lisa Rapuano:
It's almost always. There's the standard P&L stuff, right, which is hiring too many people. Taking the Acela when you can take the Northeast Regional.
Turner Novak:
Like expensive travel?
Lisa Rapuano:
Expensive travel. Or just like stupid expensive travel. Why spend twice as much the product is only 5% better, so there's those line items. But the biggest thing is spending capital on projects that either have the wrong probability of success or the wrong return profile, or just growth at any cost. Growth at any cost is a big bad one.
Turner Novak:
It's probably just because you have so much money that... well, on the bad projects is you have so much money, you've got to spend it. So instead of only doing the two projects that are most likely going to work, you do 10. And 8 of them probably make don't make sense.
Lisa Rapuano:
You do 10, and you don't do any of them well. And you waste money, and you don't think about their potential return profiles as well as you should.
Turner Novak:
And then the growth at all costs is to keep the multiple that you have, you probably need to continue to grow 30% a month so you will back into that [inaudible 01:01:27].
Lisa Rapuano:
And your venture-backers sometimes tell you to do that.
Turner Novak:
Yeah, 100%. I mean, that's basically how it works. For the companies I investing, it's usually like let's just figure out how to make the product and sell it to people. That's the buy average. But it's definitely that we do run into that where you have to figure out how to get the next round of funding raised, typically, if that's what you're doing.
Lisa Rapuano:
Absolutely. Absolutely. One of the things that I think we were very helpful to Jeff and Joy and Amazon in general, is understanding free cash flow. And understanding that you are not necessarily needing to manage the current free cash flow, but when you're making investments, you're looking at what the cash flow return on investment is long term.
Turner Novak:
Did they convey that poorly or well or?
Lisa Rapuano:
They just didn't understand it.
Turner Novak:
Didn't understand it internally or externally they should?
Lisa Rapuano:
Internally, they didn't really understand it. They didn't understand that cash flow was what created value. They didn't understand that basic part. They thought growth was what created value. Because that's what, you know, it feels like a lot of times. I think it was the... one of his letters, the first line. After we taught him this one, the first line of his letter for many years, I don't know if it still is, is, you know, our free cash flow per share is... our free cash flow is X, and our number of shares outstanding is Y. And these are the two things you need to know to understand the value of our business.
And that was something that we like, spent a lot of time kind of working on with them. And they got it quickly.
Turner Novak:
Yeah. They're known as being like they really focused on free cash flow now.
Lisa Rapuano:
Yeah. It's good, isn't it?
Turner Novak:
Yeah. That's good that you made that happen. Is there anything else we should maybe hit on with Amazon before we start with other things?
Lisa Rapuano:
No. That's good.
Turner Novak:
Okay.
Lisa Rapuano:
That's enough. I mean yeah. Well, I could tell you that it's the only individual stock I still own.
Turner Novak:
Yeah. So you owned 24% of Amazon.
Lisa Rapuano:
In our funds, yeah.
Turner Novak:
In the funds. Did you like how did you think about starting to trim that over time?
Lisa Rapuano:
I left in 2004 and we hadn't sold any. And so I don't know how they decided to do that. I know there were diversification rules that we had to go about. Like we ran into that with AOL. I think at one point it was 23% of my fund, because it gone up so much. And you run into the roles, you can't have more than 20% in the top three, I can't remember the rules are anymore, but yeah, you had four selling. I'm sure they ran into some of that.
Turner Novak:
Didn't you say you had to do stuff with the state of Washington?
Lisa Rapuano:
Yeah, we accidentally bought more than 20% and we didn't know there was a law in Washington that was-
Turner Novak:
But you can't own more than 20%.
Lisa Rapuano:
That you can't own more than 20% of a company.
Turner Novak:
Of a company in Washington?
Lisa Rapuano:
Based in Washington. Yeah, so I don't know. Our lawyers had to, like, go to Washington and file special things and get a special dispensation to allow us to own our 24%.
Turner Novak:
Okay. That's the only stock you own still?
Lisa Rapuano:
Yeah. When I left Legg, I sold all my individual stocks. I decided that I would just put all my money into the fund that I ended up starting a couple years later called Lane Five Capital. So I sold all my individual stocks except Amazon.
Turner Novak:
Okay. And why did you leave Legg Mason?
Lisa Rapuano:
Why did I leave Legg Mason?
Turner Novak:
I know you started a new fund, or joined a new fund.
Lisa Rapuano:
I joined a new fund, and then I left there and started a new fund. I should have just started one right away. I didn't realize it's not that hard, but I was a little scared.
Turner Novak:
Really, why were you scared?
Lisa Rapuano:
I don't know, it seemed like a big job. I had only worked at Legg Mason, and it seemed like a lot of work to go find clients and start a hedge fund but it actually wasn't that hard. I just didn't understand how the business worked yet.
I was at like for 10 years. It was great time. We were 3 billion when I joined. We were 30 billion when I left in assets, under management. Our numbers were amazing. Assets were flowing in like crazy.
Turner Novak:
Because you were just, like, consistently outperforming the market every year, so people, it's pretty easy to sell that as a person that's helping you raise money.
Lisa Rapuano:
Everybody wants you after you've been outperforming for a while, right?
Turner Novak:
Yeah.
Lisa Rapuano:
Not when you're you know, anyway. So as the way you make money in asset management is grow assets, because you charge a percentage of assets under management.
Turner Novak:
Yeah. It's way easier to just raise more money and clip the fees.
Lisa Rapuano:
Exactly. We had a research team of six people that I ran. I had implemented a very robust and consistent process of evaluation and the way that we communicated. I was really good at translating it in ways that Bill would hear it.
Turner Novak:
Oh, really? Okay.
Lisa Rapuano:
Yeah. Because he's got his own view of things. And if it sounds conventional, he sort of immediately would reject it.
Turner Novak:
It's always like the give me, like the concur and take.
Lisa Rapuano:
Yeah. Give me something different, right? And, so I was pretty good at that with him. And I thought that was our secret sauce, right? Keeping it small. Being able to be contrarian. Not look like everyone else. And in order to grow the assets the way that they really wanted to, they were getting a lot of pressure from the ... They had to go to the institutional market, and a lot of pressure from the institutional market to have a bigger research department, to have more redundancy, to look like everyone else.
Turner Novak:
Because you have to be able to say like, oh, we have this proprietary process. We have like, 30 people on the team that are on top of the calls and the spreadsheets that we're making.
Lisa Rapuano:
Yeah. So I didn't want to do that. I certainly didn't want to run a team of 30 people. I mean I was okay running a team of 6 but 30 was too many. I like picking stocks and running funds, right? And so I just didn't want to do that. I thought... not that I only didn't want to do it. I thought it was wrong thing to do. And unfortunately, I was right about that. I'm sad that this happened to them, but they did grow to 60 billion. They had hundreds of people. And then when 2007 hit their numbers went down, and their assets flew out, and I think they bottomed out at 10 billion. 10 billion is still a lot of money, but going from 60 to 10 is really hard.
Turner Novak:
Yeah. When you say over a time you went from 3 to 10 but there's the 60 in the middle there. The 60 to 10 is tough.
Lisa Rapuano:
Yeah, exactly.
Turner Novak:
Yeah.
Lisa Rapuano:
They did recover from 2007 to some way, but unfortunately, the whole firm has, you know, been sold off in pieces now. It's too bad.
Turner Novak:
You didn't know how easy it was to start your own fund. It was like ultimately what you did. How did you go about starting your own fund? And this was in probably 20... Was it 2006?
Lisa Rapuano:
'06, yeah. I went to another company called Matador Capital, and it was a good fit at the time, but the problem I had was that the people weren't my people. Even though my co-investor, he gave me the process and he gave me the funds, he wouldn't let me manage the people I wanted the way I wanted to manage them. So that ended up not working. I left there and I spent 2006 like getting everything arranged and got back in the swimming pool. That was another thing that I did in 2006.
Turner Novak:
Like literally swimming?
Lisa Rapuano:
I've stopped swimming after college, and I started swimming again in 2006. I swam masters for a long time. I named my firm Lane Five Capital Management, because lane five is my lucky lane.
Turner Novak:
In the pool?
Lisa Rapuano:
Because it's the second sea lane and I always like being the underdog a little bit.
Turner Novak:
Is there six lanes in the pool?
Lisa Rapuano:
This was in college, yeah, there are six lanes in the little, tiny pool that Yale still has, which is built in 1932 which is a whole another thing. Most pools are eight now, but in the pool I grew up in, and I grew up-
Turner Novak:
Like the underdog?
Lisa Rapuano:
It's the underdog. Yeah, second sea come from behind. Anyway. Why was it easy? I had a lot of contacts, a lot better contacts than I thought I did. I had a lot of really wealthy people who knew me and who had I had invested alongside, and so I lined them up to be my investors including Bill, including Jeff Bezos, and some other very high profile people. And so I had a good core of billionaires that were funding me. That wasn't as hard as I thought. This is a problem, and I understand the world is changing a little bit, but you literally like call up the lawyer. He's cut and pasting your offering documents from someone else, somewhere else. Charges you 35 grand, or whatever they charge these days.
Turner Novak:
I paid less than that, but more than you would think.
Lisa Rapuano:
Yeah, and then you're like, in business as an as an LP or an LLC, you know? There's not a lot of barriers to entry. The hard part. And I had a very differentiated investment process. I knew exactly how I wanted to invest. I didn't want to do it like everyone else wanted. Like I wanted to do it like the way we had done it at Legg, and the way that I had learned to do it, and the way that I had outperformed and so that part was super easy. I hired some people that I had a lot of trust in. I had a good team. However, what was hard was, even though I had these lovely seed investors. And I thought I had a differentiated product, money raising is the hard part.
I had enough to do well for the 10 years that I ran it and that was great, but it was harder long term to grow it and to be a big sustainable business than it was to start it.
Turner Novak:
Interesting. And you had a different approach to management fees.
Lisa Rapuano:
And no one cared.
Turner Novak:
Okay, so what was your approach that was different?
Lisa Rapuano:
Instead of charging 2 and 20, which was what the-
Turner Novak:
That was the market.
Lisa Rapuano:
That was the market at the time.
Turner Novak:
You charge 2% of the assets every year and then 20% of any profits?
Lisa Rapuano:
Correct. I decided to charge 1% of AUM so 1% is my base fee, and then I was going to take my fee only after I beat the market, because it was in a long-biased fund, right? I started it at 40% of outperformance I was going to take. Still, as I ran the numbers out on all of my previous investments, it would have come out better for the investors this way, and also protect them more in the downside.
But just being different isn't, at least back then, being different wasn't okay. I had a concentrated fund. There was lots of volatility. It was mostly long. It was, you know, value based for sure, but didn't fit in the boxes. The allocators just didn't know what to do with me. And to be honest, I didn't want to spend a lot of time playing that game. Probably could have done it if I really put my mind to it, and didn't want to. I mean I had fun, and did a great job for the time that I was doing it. But it wasn't. I got bored, and I sent the money back after a while, and that was my first retirement.
Turner Novak:
So then, what do you think is the right way to do that? Is that essentially how you think most people should do it with the paying for specific benchmark outperformance?
Lisa Rapuano:
I think that's a good way to do it if you're long biased, for sure. Okay? I understand that there's been a shift in the way the market is to people wanting stock pickers like me to just run a super concentrated portfolio, and that's what they hire you for. Like that didn't exist back then. They wanted me to fit into the box so they could have their Morningstar type for six-box allocation. And I didn't fit in the box, and they didn't know what to do with me.
I like the low fee, higher percentage.
Turner Novak:
Higher hurdle rate, basically.
Lisa Rapuano:
Higher hurdle rate. I like that fee, and I know there are people doing that and have been very successful. I also think that just fees in general and asset management are stupid. Stupidly high, stupidly high.
Turner Novak:
So why are they stupidly high? Just like paint a ... I've never even heard this before.
Lisa Rapuano:
I don't know.
Turner Novak:
Paint me a picture why it's high.
Lisa Rapuano:
Okay, why are they stupidly high? Okay. Think about any asset gatherer of big, giant financial management company like Edelman...
Turner Novak:
T. Rowe Price.
Lisa Rapuano:
T. Rowe Price.
Turner Novak:
Andreessen Horowitz, Tiger Global hedge fund.
Lisa Rapuano:
Just for showing up to work every day, they are taking 1 or 2% of their assets. Just for showing up for work. And then when the market goes up, which it has been for a long time, they get that growth in their fees for doing nothing. And so look at the margins at these places. They're stupidly high.
Turner Novak:
So you're saying like the income statement for the asset management company.
Lisa Rapuano:
It doesn't make any sense that there wouldn't have been more fee competition by now. And you know, and then you look at my hedge fund, where I tried to cut fees, and no one ... It didn't have the standard economic impact of lower pricing attracts demand, right? That doesn't happen. You ask people, what do you pay for your financial advisor? They don't know. And usually, they're paying like two and a quarter percent. Something dumb like that.
Turner Novak:
Yeah. And sometimes there's hidden fees.
Lisa Rapuano:
Yes, plus all the hidden fees, exactly. And so no wonder most people don't pay the market, right? The fees are ... It's so hard to outperform the market anyway, and then when you've got like a 2% yoke around your neck, before you can even get there, it makes it even harder. So anyway, I'm not sure how we got on that subject.
Turner Novak:
An interesting way to go is you actually, you ended up investing in and then joining a company that was in this realm, right, called Facet. Can you just talk about that and why you're so excited about it, and how that ended up going?
Lisa Rapuano:
Yeah. So I retired from Lane Five. I was I was trying to figure out what I was going to do next. I'm spending a lot of time in my garden. And my friend Christy Wyskiel, who runs a Hopkins Technology Ventures, like all of their startup land, all their royalties and everything, she told me I was posting way too many pictures of flowers on Facebook. And she got me to come in and start advising startups on some stuff. And I met Anders Jones who's the CEO of Facet. They hadn't started it yet.
The idea for Facet, which I'm highly supportive of is that most people don't get the kind of financial advice they should get. And even when they get financial advice, they pay way too much, or it's conflicted, or it's just like it's sold stuff. And the way the market is structured is not very pro customer.
And so what Facet does is they charge a flat fee. It's not based on AUM. It's loosely correlated with what they're doing for you. So AUM is one of those things, right? But they do all their investing passively right now. I'm sure that over time, they'll add a greater level of access. But for most people who have less than $1 million and are just not making hundreds of thousands of dollars, that's exactly what they should be doing.
Turner Novak:
You should be in no real estate fund. Actually, you probably have your house, but you should be in no alternative assets, no venture capital.
Lisa Rapuano:
Exactly.
Turner Novak:
You probably shouldn't even have bonds if you're below a certain age. Usually, it'd just be like the stock market, broad stock market, maybe like a little bit of a global tilt. Maybe you get ...
Lisa Rapuano:
You're selling it for them.
Turner Novak:
You should literally be like the most basic, no fee ...
Lisa Rapuano:
Diversified.
Turner Novak:
Should be literally be in like a Vanguard fund.
Lisa Rapuano:
Lowest fund. Yeah, so we use a lot of Vanguard funds, a lot of iShares, things like that. And what attracted me to that is number one, it needs to exist. This needs to exist because so many people are getting taken advantage of.
Turner Novak:
So this is like someone who, we'll say like, 50,000 in their account and they're paying a couple thousand dollars worth of fees. And that's like massive fee, right?
Lisa Rapuano:
If they can even get somebody to take their account.
Turner Novak:
Okay, fair.
Lisa Rapuano:
So, they can go open an account at T. Rowe or they can open an account at Fidelity, that's fine, but they're not going to get any financial planning advice. They're not going to get somebody to tell them what they ought to do next.
Turner Novak:
So they're probably using like TikTok for their financial advice, which is like I'll buy you a Joe Buttcoin or whatever, like Trump Coin or whatever.
Lisa Rapuano:
Right. Exactly. I mean, there's so much misinformation, it's scary. Financial literacy is really low and it's scary for a lot of people. I just gave my daughter some access to some money to take care of for themselves, and they're terrified. They're just like, "Mom, what do I do with this? I just asked you what to do." And I was like, "No, that's why I'm giving you access to this money. It's not yours, but you're in charge of it."
Turner Novak:
Oh, so you gave them a pool of your own, opened an account for them to log into.
Lisa Rapuano:
Yes. I just did it today.
Turner Novak:
Interesting.
Lisa Rapuano:
One daughter was like, "This is really good. I have such anxiety about money. I should definitely do this. This is so smart. What should I start reading?" And my other one said, "Girl, I am in college. I am not doing anything with that."
Turner Novak:
Well, I mean, hopefully it's just like buy some index funds and don't touch it.
Lisa Rapuano:
Well, exactly. I was like, "Okay, put it in an index fund. When you're ready, we'll talk about it."
Turner Novak:
I mean, I think an interesting thing to do with people learning about investing is like products that they're familiar with is like, go buy stock in Abercrombie, if you like their clothes. If you if you think they have a really good product, turns out Abercrombie outperformed Nvidia. I think it was last year or this year or something. It makes it more fun.
Lisa Rapuano:
It does make it more fun.
Turner Novak:
Just like it's this ticker and ...
Lisa Rapuano:
If that's what gets you started, great, but educate yourself. And so, what I liked about Facet is that it gave people a lot of advice. What are your goals? They sit down and talk to you like a rich person would get. And that's invaluable.
Turner Novak:
Just like an app or video calls?
Lisa Rapuano:
Yeah, video calls. Yeah, I'll Zoom.
Turner Novak:
They have advisors?
Lisa Rapuano:
Yeah, all CFPs.
Turner Novak:
Okay.
Lisa Rapuano:
So I love the model, I love the mission, I love the people.
Turner Novak:
And you joined.
Lisa Rapuano:
Yeah, I was the third employee, the third non-founder employee. I invested a bunch of money in it. I stayed for five years. I unfortunately had some disasters in my life. My husband passed away, and I couldn't deal with the world anymore, so I retired.
Gosh, three years ago, three or four years ago, but they're still going strong. They're still working on growing and getting customers. And I think it's a great thing. It's going to be a struggle because they are against a lot of inertia in the industry where people just don't care about their fees or the quality of their product, which is bizarre.
Turner Novak:
So what did you learn that on the other side of the table, like you were talking to Bezos and Joy and Michael Dow, like, I'm an investor. I own 10, 20% of your company.
Lisa Rapuano:
Let me tell you how it's done. Let me tell you.
Turner Novak:
So what did you learn on the other side? You're like, "Oh, shit. I have to actually do this now."
Lisa Rapuano:
I would use a stronger swear word than that, because you literally, when you get on the inside, there is that moment where you're just like, "Oh my god, this is so much harder." My Facet experience was a little unusual. Look, we had a huge series A, way too much, in fact, way too much money. We shouldn't have had as much money.
Turner Novak:
Really, why is that? Why should you not have raised that much money?
Lisa Rapuano:
Because remember what I was talking about before, how when you think capital is unlimited, you start making stupid decisions.
Turner Novak:
You do think, okay.
Lisa Rapuano:
I don't think that any of our decisions were stupid, but I think that, in prospect, I think we tried to be thoughtful about them. And I certainly was kind of the bad guy in a lot of these things like, "This is too much. We're doing too much. We're gonna run out of money." But there's a lot of pressure to grow. And we didn't fully have the product market fit yet. Well, we had the product market fit. We didn't have the go-to market yet.
We didn't know how. The customer acquisition model wasn't fully fleshed out. Customer acquisition's really expensive. It's what crushed a lot of people trying to do this. So we wasted a lot of money on things that if we had been more capital-constrained, we probably wouldn't have wasted.
Turner Novak:
So, at the time, though, did you feel like you were being somewhat reasonable compared to the market? Did you feel like they're doing this crazy stuff.
Lisa Rapuano:
Depends on who you ask.
Turner Novak:
Like you.
Lisa Rapuano:
Me?
Turner Novak:
Well, inside of Facet.
Lisa Rapuano:
I felt like we were throwing money at stuff.
Turner Novak:
Really, okay.
Lisa Rapuano:
At some things. There were a lot. I mean, there are a lot of constituents, right? A lot of really, really smart people making these decisions. I was just the CFO. CFO has only so much. I mean, my job is to report and give my opinion. It's not to make the final decision, right?
Turner Novak:
Yeah, that's fair.
Lisa Rapuano:
So my personal view was we spent too much money on everything. That's a typical CFO thought process, right?
Turner Novak:
Yeah.
Lisa Rapuano:
However, I think there was ... This was when capital was relatively free and growth ... Things were getting valued on price of sales of 30, 40, 50 times. So, yeah, in retrospect, we wasted a lot of money and I knew it at the time, but at the same time, I'm not sure that a different decision could have been made. So going back to your original question of what's so hard? What's so hard is instilling a value creation framework in a company is really hard because it's counterintuitive, right? It's counterintuitive to know that not all sales are created equally. That ...
Turner Novak:
So what does that mean?
Lisa Rapuano:
If you spend $2 to get a dollar of sales, it's not worth it.
Turner Novak:
You may be just so deep in it, you don't even realize you're spending $2.
Lisa Rapuano:
Right. If you spend 50 cents to get a dollar of sales, maybe that's worth it if that dollar of sales is recurring for a certain amount of time. If you spend 10 cents to get a dollar sales, probably that's worth it. But it's a matter of understanding what those dynamics are. And it's very, very hard to educate people on that broadly. It's very hard to understand those economic concepts for people. I think the senior people has certainly understood that. But then you have to manage around it. You have to instill the right incentives. You have to instill the right mentality. You have to be frugal. Those are really hard things to do. And at the same time, I'm not sure, I also think that at different levels of development in a company, there are times to worry about this and times not to worry about this.
When you're going for product market fit, it doesn't matter.
Turner Novak:
Yeah. When you're an early-stage startup, you are going to do a lot of dumb things because you ... That's the point. You're supposed to do things that are probably not a consensus thing.
Lisa Rapuano:
Exactly. But there is a point at which you need to start thinking about conserving capital. And there is a point at which you have to have a business model and you need to experiment around the edges of the model instead of just absolutely 100% experimentation from the beginning.
Turner Novak:
So it's like going back to when you talked about Amazon's core business made money and they were reinvesting in new products that were going to make the whole more valuable. So it's the same thing with a startup. It's like a core thing that works.
Lisa Rapuano:
Yes.
Turner Novak:
What are we investing in and burning cash on to make the whole thing a better business overall?
Lisa Rapuano:
Correct.
Turner Novak:
A better product?
Lisa Rapuano:
And you have to have a probability matrix of what's going to work and what's not going to work. And you have to think about risk weighting these things and you have to put the right amount of money. I mean, it's just managing a portfolio of stocks, right?
Turner Novak:
It's internal capital.
Lisa Rapuano:
Yeah, exactly. You have to say, "Okay, well, my risk-reward on this is X. And, so it deserves this size position." "No, my risk reward on this is Y and it serves that size."
Turner Novak:
So this might be like how many employees we put on a project or...
Lisa Rapuano:
Right. What is the budget for the project? What is the expected return and when do we pull the plug or when do we throw more money on it? Those are the four pieces.
Turner Novak:
Okay. So you're super passionate about investing, just broadly. I've seen studies that women are better investors than men. I know we were talking about it a little bit. How do you react when I say that?
Lisa Rapuano:
So it's a vast generalization with a kernel of truth in it. We also have a smaller sample set in women, which is interesting.
Turner Novak:
That's true. Yeah.
Lisa Rapuano:
So maybe women who have made it through this industry of whatever, Game of Thrones.
Turner Novak:
They just have to be really good.
Lisa Rapuano:
They have to be really good. But I think the kernel of truth though is the studies that you're mentioning basically say that women are more patient. One of the things I like to do when I'm really stressed about investing is take my hands and put them under my butt and sit for as long as I can. I don't do anything because sometimes the hardest thing to do is nothing until you know the right thing to do. Men tend to be a little more impulsive around those sorts of things. These, again, vast generalizations. But I do-
Turner Novak:
Yeah.
Lisa Rapuano:
These again, vast generalizations. But I do think that the evidence is that women trade less, women are longer-term holders. The other piece that I found to be an advantage for me was, I like talking to people. You get the classic example of the Michael Burry guy from The Big Shorts sitting behind there acting all weird and playing the drums, and nobody wants to talk to that guy, right?
Turner Novak:
Yeah, fair.
Lisa Rapuano:
But people like to talk to a personable young woman. You do get-
Turner Novak:
That's fair. Maybe that's how you got the guy on the phone, the marketing guy.
Lisa Rapuano:
Maybe. Maybe. Look, this is a dumb thing, but they remember you. You're the only blonde there. You're the only blonde woman there.
Turner Novak:
Yeah, fair.
Lisa Rapuano:
And you ask good questions, then you further differentiate yourselves. So maybe they're better investors. But I think that the other piece that we address there is that, if they're better investors, why aren't they doing it?
Turner Novak:
Yeah. Should there be more?
Lisa Rapuano:
Of course there should be.
Turner Novak:
So why aren't there?
Lisa Rapuano:
Well, my favorite answer to that is because the men who run the industry don't hire them.
Turner Novak:
Yeah. That is basically the answer, right?
Lisa Rapuano:
They don't hire them, they don't train them, they don't mentor them. I think there's also an element of some women developing a fear of it. One of my daughter's friends thinks she wants to go into finance, and she's at UCLA and she's having a hard time. She's surrounded by all the finance bros and she's one of the only women there. And it's kind of hard to be her. Even though she's probably very good and probably will be a very talented investor if this is what she wants. There's just cultural pieces that make it difficult.
Turner Novak:
So what should I do if I'm listening to this? I'm a 22-year-old, I'm in college, I'm 25, I'm doing investment banking. I'm like, "Man, I want get into this." What do you recommend? Then maybe also, what do you recommend to someone like me or somebody who is in a seat to hire those roles?
Lisa Rapuano:
Okay.
Turner Novak:
How should we approach that whole-
Lisa Rapuano:
Let me start with a hiring one. I like that one.
Turner Novak:
Okay.
Lisa Rapuano:
That one's easier for me.
Turner Novak:
Okay.
Lisa Rapuano:
So I truly believe that the greatest investors, if you look around, very few of them went a conventional path. And I think you talk about your unconventional path sometimes, right? But when I hire, I will not hire somebody who went to an Ivy League school, I went to an Ivy League school, but who went to an Ivy League school and then went to an investment bank and went to private school when they were children or something. And MBAs, I'll never hire another MBA again, ever.
Turner Novak:
Oh no.
Lisa Rapuano:
Ever.
Turner Novak:
The MBAs get just destroyed on this podcast. We're going to multiply. [inaudible 01:29:59].
Lisa Rapuano:
Well, first of all, they've made a really bad financial decision to spend hundreds of thousands of dollars to get a degree that means nothing. But anyway. They come out thinking they know more than they do. And granted, they do get well-trained, but they're trained in a certain way that isn't necessarily the way you're going to do it. So to hire someone, you have to be willing to invest your time in them.
Turner Novak:
Yeah, that's true. No one talks about that. I don't have anyone that works for me right now, I don't even have an intern, which I could probably get for free, but there's a time component.
Lisa Rapuano:
Exactly.
Turner Novak:
Which you got to invest.
Lisa Rapuano:
You do. And in fact, like I talked about my experience at Matador, I joined this firm that had been in existence for years, and the CIO had seven analysts working for him, and none of them were going to take over the firm. And I was the same age as most of them. So why? Because he hadn't invested any time teaching them how to do the next level. He just would send them out for information and have it reported back. So he didn't invest in them, so he didn't have a successor.
You have to be willing to invest time in them. And so that eliminates, you don't need to have somebody who already knows how to do a DCF. You don't need to have somebody who already knows everything about finance. You don't have to have somebody who's been picking stocks since they were five years old because then they have a view of what it's like. Right? You need to hire somebody who's curious, who has shown determination and hard work. I actually like people that are from a little bit more... I like to hire liberal arts graduates. That maybe is a little bit self-reinforcing because that's what I have that I thought was helpful to me.
Turner Novak:
Yeah.
Lisa Rapuano:
But I like to hire liberal arts graduates or engineers who have just a different way of thinking than I do.
Turner Novak:
Yeah.
Lisa Rapuano:
But you have to be able to train them. And so when you then get the next inevitable argument from somebody like, "Well, we would hire more women, but there are no candidates." It's like, okay, where are you looking? You're looking at people with two years of investment banking experience. You're looking at people from the business school at Wharton, you're looking at people from the business school at UCLA. Why are you looking there? Right? There has to be a different way. I liked looking for somebody who had taken a risk in their lives and that showed determination and passion. I know that's really broad, but I think if you start from there and then you're going to look for personality traits that are going to fit with you. Right? You need somebody who's different from you, but who you can get along with.
Turner Novak:
So how was that you and Bill? You maybe explained that a little bit earlier, but can you expand on that? How did you work well together and then the differences? You probably made each other better, I'm assuming.
Lisa Rapuano:
We did. Yes. I think we did.
Turner Novak:
Okay.
Lisa Rapuano:
I think the evidence is that we did.
Turner Novak:
Yeah.
Lisa Rapuano:
We did better together than we ever did apart.
Turner Novak:
That's not true. You beat him five years in a row.
Lisa Rapuano:
You're right. I did beat him. But okay, so what we had in common, I still remember one of the things that on my resume, I had this skills section at the bottom, or just this random personal thing, which I don't know if people still do that.
Turner Novak:
Yeah, people have that bottom line where it's like chess, boxing, YouTube videos or whatever. Yeah.
Lisa Rapuano:
I was in a Victorian novel stage at that point. So I wrote... And I literally read every Victorian novel. And it was like, reading Victorian novels. And so he was like, "Have you read The Moonstone?" And I had not read The Moonstone. So my interview was on a Friday. So I read The Moonstone over the weekend. And so when I came back on Monday, I had read The Moonstone so we could talk about The Moonstone. So we had lots of broad interest in intellectual things. That was something that we had in common.
Turner Novak:
Yeah.
Lisa Rapuano:
We're exploratory, curious.
Turner Novak:
You also did something over the weekend that was related to this job, which was probably like, oh, she puts in more work than just nine to five.
Lisa Rapuano:
Yeah, there you go. Yeah, maybe. So there was that basis. And then I was very green when I joined, so I learned his worldview, his valuation view. I learned from him. So I adopted a lot of his stuff. And what I was really good at is formalizing it. So he was really good at here's all the stuff, and I was really good at like, okay, let's put that in a framework and let's apply it in a judicious and repeatable fashion. We are very different personalities. He was an INTP and I was an ENTJ, which is a Myers-Briggs thing, right?
Turner Novak:
Yeah.
Lisa Rapuano:
But the N and the T part in the middle were similar. But okay, so P is perceiving, right? And J is judging, the last one. And I don't know if you're going to want to keep this in there, but Ps tend to turn over ideas over and over again and look at things from all different angles and view, always looking for optionality and always thinking about the next possibility. So he was super good at that.
Turner Novak:
And that was Bill. Okay.
Lisa Rapuano:
But it could also be very paralyzing. And I'm a J like, okay, I want to do that. We're doing that, right? And so together we were a good balance.
Turner Novak:
So he was constantly looking at different angles and you're constantly doing the decisions.
Lisa Rapuano:
Yeah.
Turner Novak:
And saying, this is what we're going to do.
Lisa Rapuano:
Or helping saying, okay, so that means that we're going to... Okay, we got to make a decision on this.
Turner Novak:
Yeah.
Lisa Rapuano:
And whenever it would get a little out of hand and he would just be turning over the decision over and over again or looking at new angles or coming up with a different thing, I would just say, "Bill, your P-ness is showing."
Turner Novak:
Okay, that's the good play on words.
Lisa Rapuano:
So anyway. And the other piece that was really good, is that Bill's understanding of the reward that you can get from risk was very well ingrained in him. He likes risk and he can price it, right? But sometimes he wouldn't do as much as he needed to do to get the true sense of how much risk there was. And I was really good at mitigating... He probably made me take risks I wouldn't have taken, but I made him do work to understand the risk that he wouldn't have done.
Turner Novak:
Okay.
Lisa Rapuano:
So I think a good example is we were looking at credit card companies, I don't know what year, but they were all going out of business. And we were looking at these two credit card companies, one of which was Providian, and I don't remember the name of the other one.
Turner Novak:
Capital One?
Lisa Rapuano:
No, it was one that went out of business.
Turner Novak:
Okay.
Lisa Rapuano:
And so they were both trading for 0.1 times sales or some ridiculously low valuation. They're both trading like they're going to go out of business. And he was just loading up on both of them. I'm like, well, I think I'm going to do a little work here and figure out which one is more likely to not go out of business. So I bought Providian and he bought both, and the other one went out of business and Providian didn't. Providian ended up getting bought out, made 10 times my money on it. And it's just an example of just they appeared to have the same risk, but if you dig down, you can really price the risk a little bit better. So I was a little bit better at that part.
Turner Novak:
Interesting. Right. So another thing I think I've heard you mention before, stepping back to the value investing, Buffett is kind of just this classic value investor. Everyone tries to emulate what he's done and and his philosophies and his strategies. Can somebody be like Buffett? Is that a good idea to just say, I'm going to be just like Warren Buffett?
Lisa Rapuano:
You should never be just like anyone.
Turner Novak:
Okay.
Lisa Rapuano:
So no. And Warren Buffett will tell you that.
Turner Novak:
Yeah.
Lisa Rapuano:
He will say, literally, don't do what I do. Do what you're good at.
Turner Novak:
So this is a unique competitive advantage as an investor?
Lisa Rapuano:
Exactly. This came out, I was giving a presentation at the Value Investing Congress in New York. It was a big thing back in the 2000s. And I think I titled it, I am not Warren Buffett and neither are you, because everyone would get up there and talk about how they're like Warren Buffett, how they do competitive... The moat, long-term, blah, blah. And even Buffett doesn't do exactly what Buffett says Buffett does.
Turner Novak:
Yeah.
Lisa Rapuano:
Right?
Turner Novak:
He's basically the 10th largest economy in the world. His balance sheet that he works with is massive.
Lisa Rapuano:
But he also is... He evolves, he learns. He's very good at what he does, obviously.
Turner Novak:
Yeah.
Lisa Rapuano:
He also has been doing it so long that his competitive advantage from time is way more pronounced. Most people don't make it that long, right?
Turner Novak:
Yeah, true.
Lisa Rapuano:
So no, you can't be like Warren Buffett because you have your own strengths and weaknesses. And so the key thing to do, and just like I was talking about Bill, Bill's really good at identifying something that has a high reward and not so good at pricing the risk part of it, right? But that's how he's made a lot of money. He finds these things that are going to go up 15X. and I'm really good at actually nailing down and lowering the circle of probable outcome so that I have a much better sense of these things aren't going to zero, or I know what their probability of going to zero is and it's worth it to me. So it's just a very different... It's worth understanding exactly what you are good at and what you're bad at.
Turner Novak:
Do you have a way to think through or a framework to think through of, if I'm trying to figure out, if I'm listening to this, I'm like, I wonder what I am good at, do you have a good lens of thinking through what could be a competitive advantage as an investor? This can maybe be also relevant to a startup operator or a founder. That's the majority of people who listen to this podcast are startup founders.
Lisa Rapuano:
Yeah.
Turner Novak:
And then we had a little sprinkle of just everything else adjacent to that. A lot of investors too.
Lisa Rapuano:
That's such an interesting question. I don't have a pat answer. I don't have an answer in my head right now. So let me riff a little bit and see what comes out.
Turner Novak:
Yeah.
Lisa Rapuano:
Okay. So I think if you've already been investing, obviously the first thing you can do is look at what are your successes and your failures. Right? And if you're looking at your successes and your failures, then you can be like, okay, so one of my weaknesses is I'm a sucker for an extrovert.
Turner Novak:
Oh yeah, you told me that.
Lisa Rapuano:
Absolute sucker.
Turner Novak:
Okay.
Lisa Rapuano:
If you're a good salesperson, and I mean a good salesperson, the kind of person that makes you feel like you're not being sold to, and you're charming and you're engaging, I like over index to that. Right? So I know this about myself, so I actually over time would lower the amount of time I spent with managements because I would give them too much credit if I liked them.
Turner Novak:
Interesting. Okay. That's super relevant in venture where you're making [inaudible 01:41:08] on the team and it's just a great founder and you just love them so much.
Lisa Rapuano:
Exactly. Why do you love them? Do you love them because they make you feel good about yourself? A lot of times that's what it is.
Turner Novak:
Interesting.
Lisa Rapuano:
They make you feel seen. They make you feel smart. They make you feel like you're so special and you lose your ability, I lose my ability to see them intrinsically.
Turner Novak:
Yeah.
Lisa Rapuano:
So looking back at your failures, I've made many mistakes in my investing career, and it's part of your investing career, but sometimes I'll get too entrenched in a theory, in a thesis, and I'll be immune to new evidence, right? And I'll be kind of publicly identified with it a little bit, and maybe I will put it in my investor letters. And so cutting bait doesn't feel like an option and I'll just go down with the ship.
Turner Novak:
Interesting. I've definitely had that before. I don't know, do you follow Stitch Fix?
Lisa Rapuano:
Yeah. I don't follow it, but I know the product. And my friend, our mutual friend Manas had an investment in it for a long time.
Turner Novak:
Yeah. So that's one of our common bonds is we both rode that all the way up and all the way down. And I think for me, I just think they didn't execute on this obviously, but very interesting value prop is people intentionally, they'll say, hey, deliver me products every month, it's closed, but this can be products that you get online and just show up and they buy them.
Lisa Rapuano:
Yes.
Turner Novak:
And it's pretty incredible how well that core thing works. And yeah, so rode it all the way up, and I probably should have just been like, wow, I got a 6X on this in a quarter. That's pretty good. But I think you get too tied in to like, oh, I was known for talking about this publicly, and the stock price goes up. So you think, oh, it's still working. You definitely get sucked into that.
Lisa Rapuano:
Yeah. Well, especially on momentum. I have a little framework for that if you want me to tell you.
Turner Novak:
Yeah, yeah, I'm interested.
Lisa Rapuano:
So I actually made this up for a friend of mine that had an NFT that she just bought on a whim.
Turner Novak:
Okay.
Lisa Rapuano:
Or she bought it because she was like, "I got to figure out these NFT things." So she minted one.
Turner Novak:
Fair, yeah.
Lisa Rapuano:
And it ended up being one of the board apes. And so it went up a gazillion bazillion times.
Turner Novak:
Oh, wow.
Lisa Rapuano:
And she was freaking out, so-
Turner Novak:
Because she probably made hundreds of thousands of dollars.
Lisa Rapuano:
She did. Yeah. So I was like, all right, make framework, right? So right where, if it goes to zero, how will you feel? If you keep it and it goes to zero, how will you feel? If you keep it and it goes to a million dollars, how will you feel? And if you keep it and it just stays where it is, how will you feel? And then I said, all right, now pretend you've sold it. And say if you sold it goes to... How do you feel? And she came up with this little matrix. I was like, okay, now probability weight those things.
Turner Novak:
Like, most likely that it will go to zero, go up, stay flat?
Lisa Rapuano:
Exactly.
Turner Novak:
Okay.
Lisa Rapuano:
And so it ended up, she let it ride for a few more weeks, and then she sold it, and it probably went up another 30% after she sold it before it crashed and burned. Right? But she made a lot of money. She bought a house.
Turner Novak:
Nice. I had a little bit less skill. I had that with GameStop. So you probably saw Michael Burry owned a bunch of it. I think that's when I first heard about it. I was like, oh, you're like, okay, crazy idea. This video game retailer that's going out of business, this guy's tried, he owns 10% of the company. I think it was Ryan Cohen, the founder of Chewy, beat Amazon, selling pet things online. I think he was starting to buy shares or something. And I was like, "Wow, this is super interesting." If they figure out this e-comm thing. I think my thinking was just it [inaudible 01:44:54] how it was trading. It would basically go from EBITDA to revenue.
Lisa Rapuano:
Yeah.
Turner Novak:
And that was basically the thesis. It was a little more detailed than that.
Lisa Rapuano:
A little more work. Yeah.
Turner Novak:
But yeah. And so I bought some shares and it was the beginning of December of 2020, whenever the thing happened, and I think I got a 10X in a month and I sold, and it went up another 100% the next day. I basically sold a day too early. But the reason I sold was because I was like, this is absolutely ridiculous. My thinking was it might start trading at 10 times revenue or something like that. I forgot. And it hit that, and I was like, okay-
Lisa Rapuano:
It's the hardest thing.
Turner Novak:
Yeah. And I was talking to my wife about it also, and she's like, "Why did you do that? That's a lot of money. You should get out of it." So I think I kind of accidentally did that where I went through that framework of like, wow, this is probably going to go back down. That feels like 99% chance this is going to go back down much lower. I would feel really bad and I would feel great. Wow, I think I made 10 grand from it or whatever.
Lisa Rapuano:
That framework only works on these really speculative things.
Turner Novak:
Yeah, yeah.
Lisa Rapuano:
That's not a real-
Turner Novak:
Yeah, the board [inaudible 01:46:10].
Lisa Rapuano:
Yeah. That's not a real framework for selling.
Turner Novak:
Those are the definition of zerp day trading.
Lisa Rapuano:
Yeah. Yeah. But yes, you had to... The GameStop thing was, there were other people that bought it on real fundamentals and then now what do I do?
Turner Novak:
Yeah.
Lisa Rapuano:
And you kind of ride it and trade it and-
Turner Novak:
Yeah, I think there was a console cycle coming up. I think that was another part of the thesis too.
Lisa Rapuano:
Yeah.
Turner Novak:
Well, you go into those stores and they smell bad. The carpets are gross.
Lisa Rapuano:
They're in malls.
Turner Novak:
Yeah. Exactly.
Lisa Rapuano:
Strip malls.
Turner Novak:
Yeah, it was just a challenge business. I don't pay attention to it other than it comes in the news now because it's a meme.
Lisa Rapuano:
Right. Right.
Turner Novak:
Do you follow much of those meme stock things?
Lisa Rapuano:
You know what? I don't really follow any stocks now. I really don't.
Turner Novak:
Are you a ski instructor?
Lisa Rapuano:
I'm a ski instructor.
Turner Novak:
Okay.
Lisa Rapuano:
Yes. That is my job. I have to keep reminding... I went to this heavy metal concert in Phoenix a couple weeks ago and we met the band. It's this band called Lords of the Lost. And my friend, my best friend from elementary school is a super fan.
Turner Novak:
Okay.
Lisa Rapuano:
And so we went to this thing, and so we're meeting the band and he's like, "What do you do?" And I was like, "I'm retired." And I'm like, "That's a really boring answer." She goes, "You're a ski instructor." I'm like, "Oh, right. I'm a ski instructor." Anyway, so I have to remember. So yeah, I retired from Facet and I also had been tired of the market before. It can really burn you out. And outperforming is really, really, really hard. And I had enough money and I'm not that greedy in terms of needing more.
And so I mostly indexed, and I still own Amazon. And I look at my portfolio once a month. At the end of the month I look at my little spreadsheet and I log how everything is done. And then I think a little bit, and I think if I want to do something else, and then sometimes I do. I did recently raise some money for cash and it's sitting in account that I could trade and invest if I want to.
Turner Novak:
Interesting.
Lisa Rapuano:
I have yet to do so, but I have it because I feel I can... It's almost like I've been gone from it long enough that maybe there are some things I want to do, but I'm not following any. I read the Wall Street Journal every day and I look at the markets at the end of the month, but that's about it.
Turner Novak:
Interesting. Do you have a single biggest mistake that you made? Recent or long time ago? I'm just curious. Maybe it's something you already talked about.
Lisa Rapuano:
Oh, my single biggest mistake was definitely investing in for-profit education in probably, maybe '10. I don't remember when. Probably '10 or '11 in 2010 or '11.
Turner Novak:
Okay. How is it a mistake? Those are good businesses. The margins can be pretty good, right? Because they're basically scamming people.
Lisa Rapuano:
Yeah, they can be. Well, and they're not all... So I'd been through a bunch of cycles with them. Right?
Turner Novak:
Okay.
Lisa Rapuano:
I had owned a [inaudible 01:49:07] four times. [inaudible 01:49:08] was one of the higher quality ones, less scammy, if you will. I knew kind of what the seedy edges were. I'd also been short-
Turner Novak:
The CD edges?
Lisa Rapuano:
The seedy. The edges of-
Turner Novak:
Oh, seedy.
Lisa Rapuano:
Seedy.
Turner Novak:
Yeah, the bad parts.
Lisa Rapuano:
The bad parts, the fraud.
Turner Novak:
Okay.
Lisa Rapuano:
And then I've been short them. I've been short a lot of them. I've been short them all. I think I was long to Ryan, short everything else in '05.
Turner Novak:
Okay.
Lisa Rapuano:
And so then they were going through... And they tend to go through these cycles, right? When college admissions go down because of the cyclical thing, whatever, and admissions fall and it's a fixed cost business and blah, blah, blah, blah, blah. So I invested in them. And then there started to be a regulatory cycle on top of it that I did not recognize was worse than ever before. So Dick Durbin had always been out there saying they needed to be regulated and blah, blah, blah. And it generally had resulted in an improvement in quality. I am not anti-regulation. I think regulation must exist to preserve capitalism, otherwise we're all going to eat each other.
Turner Novak:
Yeah. There would be like crypto that was the edges of, we should have probably regulated some stuff, would be like everything.
Lisa Rapuano:
Yes.
Turner Novak:
Like, financial system.
Lisa Rapuano:
Well regulated capitalism is the best thing.
Turner Novak:
Yes.
Lisa Rapuano:
The problem is well regulating things is difficult. I got too entrenched in the old business models. I got too close to the companies. I didn't recognize the regulatory changes. And I did what we talked about before. I was kind of publicly identified with them. I'd written a lot of letters with them, and I was just going down with the ship. That's probably my worst mistake.
Turner Novak:
How do you get off the ship?
Lisa Rapuano:
You have an analyst who beats you over the head.
Turner Novak:
Okay.
Lisa Rapuano:
And you listen.
Turner Novak:
Okay.
Lisa Rapuano:
No, you just have to constantly try to not be immune to evidence. You really have to try to have an open mind and think. I think what happened with that is that I also had a couple analysts who were similarly in the group think with me. We were all on the board and nobody raised the flag early enough. Yeah. Sometimes you just have to cut your losses. Sometimes you have to say, look, I can't see this clearly anymore, and so I'm just going to sell everything and then look at it clearly and decide if I'm going to re-buy it.
Turner Novak:
Okay.
Lisa Rapuano:
But most of the time it's a gradual process of the information eventually seeping into your thick head.
Turner Novak:
Yeah, that's fair. And sometimes it's like the price is like, hey, it's down 95%. You invest in this private company, it was a unicorn and now it's worth less than the cash that was raised. And your equity is zero.
Lisa Rapuano:
Take the tax loss. Right?
Turner Novak:
Yeah, exactly. Well, this has been awesome. This has a lot of fun.
Lisa Rapuano:
Yeah, thank you.
Turner Novak:
Thank you so much for sitting down.
Lisa Rapuano:
Yeah, thank you so much.
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