Idea Brunch with Evan Tindell of Bireme Capital

Evan Tindell on Value Investing, China, and his Top Ideas

Welcome to Sunday’s Idea Brunch, a weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Evan Tindell!

Evan is currently the chief investment officer of Bireme Capital, a long/short value manager he co-founded in 2016. Before launching Bireme, Evan worked for seven years at Ballentine Capital, where he was the lead equity analyst at the value-oriented long/short equity fund. Prior to that, Evan spent three years as a professional poker player. Bireme’s flagship Fundamental Value (“FV”) strategy (where Evan is the Portfolio Manager) returned 48.5% net of fees in 2021 compared to 29% for the S&P 500, and FV has compounded at 26% net of fees since its 2016 launch.

Evan, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Bireme Capital?

I have a little bit of a strange background for this industry in that I didn’t go straight to Wall Street or consulting after college. As you mentioned in the introduction, I played poker for a few years.

In some ways, poker is a lot like investing – you are using money to generate a financial return, attempting to weigh the risks and rewards of various bets, managing risk, etc. But in one important way its not like investing – it doesn’t scale. So once you have a certain amount of success playing poker you must start investing on the side with the excess capital. This is like a lot of professions, I guess.

After a few years I did end up with some excess capital, and I started to think about how I would invest it. I was broadly aware of the finance world, having taken several finance and economics classes in college, but I was still a novice at investing.

This is when my current business partner and college friend, Ryan Ballentine, suggested I read Warren Buffett’s annual letters, The Intelligent Investor, and other pieces from the value investing canon. I was immediately hooked. These books preached patience and rationality, providing a framework for analysis in an industry where those two traits seemed to be rare.

I felt like I had seen the story before. I saw major overlaps between these books and the poker literature that had influenced me, specifically books from TwoPlusTwo publishing like The Theory of Poker. TwoPlusTwo’s books also espoused a form of rational analysis that stood in start contrast to the random, superstitious, and impulsive actions taken by most players.

I ended up going on a journey through these value investing texts. I eventually got so hooked that Ryan convinced me in 2009 to join him full-time at his father’s hedge fund, Ballentine Capital.

In 2016 we were pushed out like baby birds being forced to fly. Luckily this came with an offer for seed capital, which we happily accepted.

Bireme Capital’s flagship strategy owns only ~15 roughly equal-weighted stocks and has “a Benjamin Graham-style, value-investing philosophy.” With technology and hypergrowth businesses abundant, why is your strategy outperforming?

First off, I would say that the last few quarters show that hypergrowth businesses don’t necessarily outperform forever. In 2022 we are +6% vs the market at -6% simply because we don’t own – and are actually short – the really overvalued stuff.

But prior to January, the answer is more complicated. Admittedly it has been a minefield for investing in “cheap” stocks, with value investing indices underperforming the S&P 500 by >5% annually since we started Bireme.

Part of our success probably involves luck. I think most investors dramatically underplay the role of luck in their success or failure, but we prefer to stay humble about our performance to date. We’ve outperformed the S&P Value ETF by more than 13% annually over the past five years and this will be difficult, if not impossible, to sustain.

That said, we do have a particular way we pick stocks that has helped us avoid value traps.

We try to be very clear with why we think an opportunity exists. Some call this the “variant perception”, a phrase introduced a few decades ago by the legendary investor Michael Steinhardt. We take this a step further and try to dissect not just how our view is different, but why the conventional view is wrong. We ask – why are most investors avoiding this stock? Is there some kind of cognitive bias causing investors to sell at irrational levels?

We start to get a lot more confident in our contrarian view if we see one of these biases at work, such as the “narrative bias” we think is impacting investors in Chinese ADRs today.

Of course, sometimes we are wrong. Sometimes investors’ fears turn out to be rational after all, but we feel like this framework gives us an edge.

Bireme Capital recently invested in Tencent Music (NYSE: TME) and pushed back against the notion that “China is uninvestable” in its Q4 letter. Many investors are concerned about U.S.-listed Chinese companies because of the government’s interference in business, poor rule of law, uneven disclosures, and VIE structures. What makes you comfortable investing in U.S.-listed Chinese companies?

We don’t really see the incentives for the Chinese government to upend the economics of most of these businesses. It seems to us that consumers of US news organizations are being fed a simple story that CCP regulation is some sort of smash and grab, where the party’s goal is to crush these businesses. In this narrative, the only thing that matters is decreasing the power of the corporations to increase the relative power of the party.

Even if we are being completely cynical about the goals of the Party, would crushing these companies grow the power of the CCP? These firms are extremely important to the long-term health of the Chinese economy. And one thing we all know about China is that the CCP regards economic development as crucial to its own status and legitimacy. Therefore, it strikes us as extremely unlikely that the CCP will reduce these companies to rubble and risk the economic fallout that would result.

In addition, most of the new regulations make sense. For example, Tencent Music was forced to give up their exclusive license to the music owned by the major music labels UMG, Sony, and Warner Music. While they did sub-license most of this content to competitors, they essentially had veto power of other music apps in China.

What would the regulatory agencies in Europe do if Apple announced that it was signing an exclusive license with those same labels? If such a deal were possible (and I’m sure current contracts forbid it), it would kill Spotify’s business overnight. Regulators would of course never let this happen. It would be hailed as exactly the type of monopolistic behavior that regulators have pledged to stop.

In terms of disclosures and the risk of the VIE structure, we are quite comfortable partnering with Tencent. While Tencent has about $5b at risk in TME, they have over $100b at risk in other minority investments. They have every incentive to be good stewards of capital at TME.

Tencent’s recent distribution of JD shares also shows that they are rational about capital allocation.

Most management teams, when dealing with a large equity stake in a separate company, will dispose of it on the open market. Then they will reinvest that money elsewhere in the firm. Distributing this money to shareholders reduces the overall size and scope of the business they are managing and may result in lower pay and less power for their executives down the line. Tencent management decided to distribute those shares anyhow, showing they care more about shareholder value than the size of assets they control.

What are two interesting ideas on your radar now?

Cogeco Inc (CGO CN), a Canada-based cable company, is our largest position. We think it’s preposterously cheap at about 8x free cash flow.