Speaker 1hello i'm ted seides and this is capital allocators this show is an open exploration of the people and process behind capital allocation through conversations with leaders in the money game we learn how these holders of the keys to the kingdom allocate their time and their capital you can keep up to date by visiting capital allocators podcast.com with so much of the institutional world focused on value investing including my own training i was pleasantly surprised to learn about a large high-performing growth stock manager located in a nondescript building in laguna beach california my guest on today's show is paul black portfolio manager and co-ceo of wcm investment management a 26 billion dollar manager of global equities that he joined when it was a 200 million dollar boutique in 1989 paul's early career included positions at wells fargo bank and bank of america our conversation starts with paul's trial by fire entry into the business and turns to growth stock investing including defining a great growth company searching for widening moats assessing a culture that's tied to competitive advantage creating a positive culture within wcm learning from mistakes identifying tailwinds and protecting the downside paul embodies the principles he preaches and offers some tasty food for thought please enjoy my conversation with paul black paul it is great to be here with you i know we've been trying to do this for a little while why don't we start with how in the world is there this 25 billion dollar asset manager in laguna beach that i had never heard of before thank you ted it's
Speaker 2it's great to be here and we wanted the same thing frankly you know wcm investment management who's heard of us and how is it that there's a 25 billion dollar firm that most people don't know about and my answer to that is i really don't quite get it because we don't even believe where we are right now so how'd you get here well i'd love to say it was a lot of hard work it was a lot of good fortune it was a lot of learning from past mistakes and making almost every single one of them that you could possibly make but using that as a source of strength to get better and better and better and better and and anyone that doesn't believe that most of life is learning from your failures just doesn't quite get it or they're too young to get it so how'd you
Speaker 1get started in the business
Speaker 2well i started interestingly even how i got involved with stocks i think it's kind of a kind of fun you know when i was uh younger i got a small inheritance from my grandfather when i was about 18 years old and at the time i thought you know i kind of liked the thought of investing i met an ef hutton broker and he told me to start buying south african gold stocks now this is when gold was about three hundred dollars an ounce so i think i bought 500 shares of a company called east street fontaine south african gold miner and i was in college at the time and i'm not kidding i would open up the wall street journal every morning and when gold was going from 300 to 800 an ounce in those periods from 78 to 82 i would literally look at the wall street journal and say you know what i just made the stock would be up a buck a day i'd make 500 a day owning 500 shares of this south african gold miner that was you know highly levered and so that kind of got me hooked i knew nothing about it but obviously when you're making that kind of money in a short period of time it gets your attention and that's when i actually shifted my major from marketing to finance and ultimately went to work for bank of america up in san francisco in 1983 when b of a was the biggest bank and most successful bank in the world it's a short few years later that it almost went bankrupt which is a whole different story but got into the private equity group the private market group the private banking group ran portfolios you know at 25 years of age i was put on a desk and i was like i'm going to do this i'm going to do this i'm going to do this to run 200 million dollars of other people's money i was given the wall street journal bunch of research value line i was said okay go to it which is terrific for me but it wasn't terrific for the clients because i really knew nothing about investing but over the next five or six years you know i learned a lot again again by learning what not to do yeah so what'd you learn
Speaker 1in those early years what mistake what do you think the key mistakes were that you made back
Speaker 2then i remember one of the trades i made i made a lot of money i made a lot of money i made a lot of money i made in portfolios because i've always i've loved growth and growth investing at that time i liked growth for growth's sake so i was taking people out of ibm stock and putting them into digital equipment because digital equipment stock was a much more rapid grower at the time well we all know what happened to that story so i learned very quickly you know that the most rapidly growing companies although they're they're kind of sexy and fun they ultimately they can be massive destroyers of capital and really what i learned is how much i really didn't know over those five years and how much i needed to kind of educate myself to get much better at this business and
Speaker 1was that the process were you educating yourself or were there mentors around you that you learned from you know
Speaker 2it's a good question because i always i've wrestled with that throughout my life really are there guys that i can point to that are mentors and there really wasn't one or two mentors from the investment side it was really self-taught you know i i spent a lot of time reading the classics stuff that buffett talks about common stocks on common stocks i read a lot of books on common stocks and i read a lot of books on common stocks i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and
Speaker 1i read a lot of books on common stocks and i
Speaker 2read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common stocks and i read a lot of books on common in my life at least i think most people's lives it was very much serendipity my fiancee at the time actually taught kurt's five-year-old son in preschool one day i'm going to the zoo if this is interesting i'm going to the zoo in the back of the car his kurt's wife was driving with the kids and i asked her i said what's your husband doing he's a portfolio i said oh i'm a portfolio manager and i'm looking for a job and i said well i'm a portfolio manager and i'm looking for a job at that time she said okay great kurt then gave me his brochure fortunately for me he hired me in 1989 to join a 200 million dollar money management firm down in southern california and that was really kind of the beginning of the journey that kurt and myself and our other partners have been on for a lot of years
Speaker 1yeah let's turn a little bit to growth investing let's talk about a lot of now we all know growth and value all know the disciplines of value investing hear about it a lot of the time and certainly the conversations i have what is it about growth stock investing that works you know i i think
Speaker 2in part it's a different perspective on the world to be a growth investor you have to be optimistic you have to be optimistic about the future you know value to me is a little bit more pessimistic you're trying to buy these assets at a compelling price based on their value today you know with the hopes that it'll keep kind of plugging along and then you know i'm going to be a growth investor and i'm going to be a growth investor and ultimately there'll be a regression to the you know real value for growth investing i i like it because i tend to see the world more positively i think it's consistent with where i am kind of psychologically and to me optimists rule the world i think optimists are the ones who ultimately get it right because if you look back through history buffett says it all the time never bet against america i'd say never bet against great growth companies with superior culture that are highly competitively advantaged so
Speaker 1let's dive into that a little bit you mentioned great growth companies what constitutes a great growth company a couple
Speaker 2things for us and it's very different i think from what most people do and i'll kind of start like this one of the things that that we wrestle with a lot of people now are wrestling with whether active management can outperform i think there's a lot of evidence to suggest that it can but to me most managers try to buy high quality businesses with strong economic advantages and they're not going to sell them at a discount to intrinsic value i think one of the reasons that active managers underperform consistently is because everybody's doing the same thing they're all approaching the market from the same perspective what we have found is more times than not if you're just looking for high quality wide moat businesses selling cheaply today you're going to find yourself in a lot of value traps the poster child we always use in the firm is nokia in 2007 if you and i would have gone to wall street and met with the 25 different analysts that covered Nokia, and asked them, hey, is that a high-quality, wide-mo business selling at a discount to intrinsic value? They'd be, absolutely. Everybody had a buy recommendation on 2007. What's not to like? 53% market share in phones, one of the great top three brands in the world, no debt, really high quality. Returns on capital of probably 30% for the prior five years selling at 60 cents on the dollar. We fast forward today, and we all know what happened. And our question is, was that really a high-quality business? How do you define high-quality? To us, it would not be a high-quality business, because the truth is, while it was a wide economic moat, that economic moat was clearly deteriorating. It was clearly losing its edge and being disrupted, obviously, by the iOS from Apple, and then also from the operating system from Android that allowed a lot of companies, cheap China manufacturers, to make phones. So we've made the mistakes in the past of buying high-quality, wide-moat businesses cheaply. And what we learned because of our mistakes of significantly underperforming the market is you've got to stay focused on the direction of the competitive advantage. Because everybody's business, I don't care who it is, every organization, you're either getting stronger versus your competitors, or you're getting weaker. And what you want to do is you want to be able to make the case, through pattern recognition and other tools around moat typologies, is how we classify it, that the company that you're looking to invest in has a strong, likely, likelihood of growing its competitive advantage over the next 5, 10, and 15 years. And if you get that right, by the way, I will tell you that any valuation work you do is going to look ludicrously cheap 5 and 10 years out. So that's a huge part of what we do that's different around how we look at competitive advantages. And then the second one I think that's really significant and very different is we put a huge premium on a corporation's culture. And that doesn't mean, hey, we just want shareholder-friendly management teams. Now, which usually means they're good capital allocators. What we want is we want to understand the DNA of the business. We want to know what the core values of the business are and how those core values relate to the competitive advantage. Because if you can buy a company where the core values of the organization are aligned with its competitive advantage, like for instance, in retail, what do the core values of great retailers need to be? It's got to be about taking care of your people. We use the example of Costco versus Sam's Club. Those are two companies in the same industry. The stores look the same. But you look at the financial metrics of Costco, they're twice on every metric, what goes on at Sam's Club. Same store sales are 4% or 5% at Costco. There may be one or two at Sam's Club. Sales per square foot at Costco, $1,000, $500 at Sam's Club. Employee turnover at Costco, 12%, 50% at Sam's Club. ROICs at 12% versus 4% for Sam's Club. What accounts for that? To us, it has to come down to the culture and the culture. It has to come down to the culture and the culture. It has to come down to the values of the business, where in Costco, they truly care about their people. They want happy employees. In retail, you want happy employees because you and I are going to go in there, we're going to get a great experience, and we're going to come back and spend more. It's reflected, and by the way, that whole value side comes directly from the top. Founder of the company, Jim Senegal, owned a lot of shares but never made more than $300,000 a year. How different is that from other companies where the CEO is making $20,000, $30,000, $40,000, or in the CEOs where they get fired and they get a golden parachute of $200 million? That doesn't usually bode well for the long-term cultural success of the firm. So to us, the distinguishing characteristic in any investment has got to be determining what those core values are, what animates that culture, and making sure there's an alignment.
Speaker 1Let's dive in on both of those. So on the first, on moats, how do you define and then measure what the company's competitive advantage is?
Speaker 2Lots of different ways. First of all, what indicates historically with money managers, what indicates a moat is obviously some level of return on invested cap. So most managers out there are always screening for some kind of hurdle at 10%, 11% hurdle on ROIC over the prior five years. What we've actually found more valuable than just the level of the ROIC is the direction. There is a one-to-one correlation between the direction ROIC over a five-year period of time and stock performance. So if you break the market down into five quintiles from the top quintile where they have the most rapidly rising ROICs to the bottom where they have the declining ROICs, there is a one-to-one relationship between the best performing stocks on the top and the top quintile and the poorest performing stocks. And is that starting
Speaker 1from a certain baseline, absolute level of ROIC from which you want to see growth after that? And that makes a good company?
Speaker 2No, no. I mean, prefer a company, frankly, that would have maybe five years ago had a 4% ROIC growing to 5, 6, 7, 8. That's a much better investment than a company that's at a 12% ROIC that might be stagnant over that period of time and not growing. So there's a huge advantage to getting that correct.
Speaker 1There's a lot of other ways that people talk about moats. Buffett talked about brands when he went from being sort of a classic Ben Graham investor to a Phil Fisher investor. How are the other ways that you think about what competitive, advantages get incorporated into the kinds of businesses you like?
Speaker 2They're the obvious, right? Disruptors, low-cost providers, obviously an Amazon. But we've actually developed a number of what we call typologies, moat typologies, that we think are a little bit different. One of them, for example, is an outsourced R&D company. We have found when you look at various companies in different industries that we can classify them in certain ways where you don't have to just be specifically in one industry. For instance, there's a company called Core Labs in the portfolio, which is basically ultimately an outsourcer of measuring the core samples in gas wells and oil wells. They were once a part of an integrated oil company, but because they weren't an essential element, they got spun off on their own. And interestingly, so now what they do is they sell their services to all the integrated drill, all the big drillers and integrated oil companies. And over time, because that's an R&D process, we can look at that company versus other outsourced R&D companies and maybe other industries. For instance, Christian Hansen, which is an enzymes company that creates enzymes and biologics for the use in yogurts and cheeses and very simple business that an analyst that's just looking at maybe the material sector might look at Christian Hansen and see it's really very richly priced. But if you think in terms of it being an outsourced R&D company, our argument would be those types of businesses deserve higher multiples because what they ultimately do, they start at the low end. They're a very low cost part of the process, but then they kind of climb the value chain and they start adding larger and larger services to the point now where Christian Hansen, if you look at Danone or Yoplait or any of the other yogurt manufacturers, they're really branding companies now. And Christian Hansen is the company that develops the taste and the texture and the caloric content. If you can't do that, you can't do that. You can't do that. You can't do that. You can kind of look at the world more in a generalist sense. You can kind of see these relationships. Core Labs, just looking at the energy sector, looks expensive. Christian Hansen, just looking at the material sector, looks expensive. But if you look at them really as outsourced R&D companies like we do, you can say that, hey, their margins ought to grow from 25 to 30. So what most people will see as being expensive, we can actually make the argument they're not.
Speaker 1And so you have these businesses with growing moats. And then you also mentioned you started talking about culture. Mm-hmm. Similarly, how do you go out and really assess a company's culture?
Speaker 2I think that's one of the most fun parts of our job. And because nobody does it, you know, it's interesting. If you look at, if you read Phil Fisher's book, Common Stocks and Uncommon Profits, which again is one of the classics, it's interesting. I think he has a 25-point checklist on how to analyze a company. And interestingly, of the 25-point checklist, I think it's really interesting. I think it's really interesting. qualitative elements, which is just the reverse of what most people on Wall Street do. Most people spend 95% of their time crunching numbers, running DCF models, which, by the way, has zero competitive advantage because you have thousands upon thousands of people doing the same work, where we can get a massive competitive advantage is by doing the things that other people are not. And, you know, so when you're trying to assess a culture, really one of the best ways, if I wanted to assess GM's culture and get a, you know, one of the best things to do is not just talk to the CEO or the CFO, but it would be to, hey, let me talk to people that have left on good terms. Of course, you talk to the suppliers and you talk to vendors and you talk to competitors. It's always good to talk to competitors. Who do you respect? Who do you not respect? But if you can talk to people that used to work there that have left on good terms, you usually get a pretty good picture. Now, what you're doing, by the way, is you're building a mosaic when you're going after culture. A lot of you can't put it in a box and score it and come up with a scale and a number ranking. You really have to build a mosaic. One of the things we've done is we actually have worked with a guy named James Heskett, who was a Harvard business professor, wrote a book called The Culture Cycle. It's actually one of the more interesting books we've read on culture, and there are a lot of them out there, but he's really the person that helped us understand that when you're assessing a Companies where the culture, as I said earlier, and the values are aligned with the competitiveness advantage. We've worked with him. We've hired him as a consultant. He helps us with a series of questions to try to ferret out what the culture is about. Because you just can't walk into a business and say, hey, tell me about your culture. Now, you can. And I'd argue if somebody goes on for 30 minutes on culture, it's important to them. Some people you ask them, tell them about culture, oh, you know what? We work hard. OK, you really haven't put a lot of thought into it. But these series of questions.
Speaker 1And what are those types of questions?
Speaker 2One question that you and I were talking about earlier is, what would you tell a friend about how to be successful in your company? What are the three things you'd tell them to be successful? What's really hard for some new hires to get used to? What are some difficult scenarios? Tell me about your failures. Where have you made mistakes? Most people don't want to talk about their mistakes. They just move on as if their career was just filled with success. I remember years ago, real quick story. We were meeting with John Mackey at Whole Foods, the founder of Whole Foods, who, by the way, I think is brilliant. Went into his office, Austin, Texas. And before we got to meet with him, there was just an incredible energy. And I hate to use the word vibe coming from California, but there's this incredible vibe. And you could tell people were really happy. They were talking. They were smiling. And I asked Mackey about it. I said, I tell you what, it's incredible. The feel as you come in. He said, you know what that is? He said, that's an absence of fear. And I thought, okay, absence of fear. That probably means that you can take risks here at Whole Foods and not be afraid of getting banged on the wrist, but you're going to be encouraged to take risks. Probably pretty good for somebody that's selling a lot of consumer products. You figure out different ways to do it. And over the long term, we'd argue that if you're allowed to take risks in a business in a healthy way, that's probably going to lead to better returns and better outcomes.
Speaker 1And have you ever tried to map out whether sort of companies that you think have good cultures, companies that have less good cultures, and use in any way kind of data to convince you that your instincts are right, that the companies with better cultures will outperform over time?
Speaker 2A bit. This is our argument. Our argument is there aren't that many great cultures with alignment to their competitive advantage. But when you find them, you hold them for a long time, 10 years. So when I look at our portfolio now, I'd say we're not perfect on the culture side, but I would argue there are probably right now five or six names in the portfolio where we really believe there's this perfect alignment between values and culture. And they just so happen to be our largest positions, and they've performed very well.
Speaker 1Right. And what does it mean, maybe give an example of culture aligning with competitive advantage?
Speaker 2I always talk about Walmart 40 or 50 years ago. How in the world did Walmart compete against Mervyn's, JCPenney's, Sears, these big, big successful department stores? How did they grow up in that period of time and actually come to dominate the market? To me and to our firm, that was culture. That was a guy, a gifted guy, Sam Walton, who really embraced the notion that, you know what, you got to bring people along. You got to get people excited. You got to make people happy. In those days, it's different now, but you got to pay those people well. You got to tie them into the bottom line. And he kind of built this culture where people just loved coming to work, and they had a lot of fun doing it. And as a result, they took on these old, stale, kind of bureaucratic, centralized organizations. And that works for a retailer. But does that, do you really need happy employees to run a railroad? Probably not, right? You're probably not all about, hey, I want a bunch of yahoos running around throwing parties. You want people, that are highly accountable, probably think a certain way, more linear, because it's all about delivering an on-time product in an efficient, cost-effective manner. So in like Canadian National or Canadian Pacific Railroads, you're going to pay people more than you would in a retailer. But you know what? High levels of accountability. There's a high cost of failure there. So probably a lot more in different stresses. Very different corporate culture you need for that than you need for a retailer. We found there are different cultures for different businesses that are effective.
Speaker 1So let's turn both of those to that point on WCM. How do you think about your moat and your culture and how that impacts your business?
Speaker 2It's a great question. And it's something we've thought a lot about. Can I go back in time a little bit? Sure. Let me tell you, our firm was actually founded in 1976. And I kind of see the founder's still alive. He controlled everything in the firm. 1976, that was two years after ERISA. That was when it was a brilliant time to start a money management firm. You know, you should be able to build a multi-billion dollar money management firm just by showing up every day. But he was tough. He controlled 100% of the equity. He made most of the money. Most importantly, he made all the decisions in the business and on the portfolio. And I think as you'd guess, what happens, you know, a lot of talented people in this business, and they, you know, you can attract them to a money management firm because it's stimulating and usually it's fiscally rewarding. But there was this constant revolving door of talent that would come in, realize very quickly there was no place for it to go and leave. So for 20 years, actually 22 years from 76 to 1998, the firm never grew over $200 million. Never. In the perfect time to launch a money management firm. We'd argue right now that that's because it was an extremely unhealthy culture. I've got some great stories. Let me tell you one that sticks out in my mind. And I think illustrates kind of the unhealthiness of the culture. So I was hired to kind of help raise assets, sales, marketing. And I was fortunate because I didn't really know what I was doing because I had come from portfolio management. About six months into it to the job, the founder came to me and he said, Hey, Paul, why don't we go to one of the local beaneries, break bread, and let's talk about the firm and where we're going. I said, Hey, that's great. I said, Yeah, I'd love that. I'm getting attention from the founder. I'd love it. So the next day, we walk out of the building. He's got a brand new Nissan NSX, the fastest production sports car in the world at the time. $90,000 car. We get in that car. We drive around the block and down the block and pull into a Taco Bell. No kidding. I'm not kidding. Founder goes first, buys his tacos, pays for them. I go next. I buy my own tacos and I pay for them. We then walk out and in Taco Bell, the seats are small and you're literally about a foot away from the person that you're sitting across from. And the founder asked me, he said, So Paul, what is it that you need to really grow this firm, to really make it go? And I said, It would be great if we had some investment performance. Because we were in the bottom decile for every time period. So it'd be great if we had some investment performance. Well, you know, you probably don't want to say that to the lead portfolio manager and founder of a company. That meeting was over. And as we walked out the door, he said, as he's getting into his $90,000 sports car, Hey, Paul, you don't mind walking back to the office, do you? I said, Probably not. To the office in 95 degree weather, wearing a suit. He took off in his sports car. And that was completely emblematic of some of the issues in the organization. I'm not saying he was a bad guy. I'm just saying he was a little bit out of touch. Were you surprised that the door wasn't locked on you when you walked, when you made it back to the office? Yeah, I really was. So it was just a classic example. Every day, the founder would come in, say hello, go back to their office, close the door and never to be seen again. And the only way you could communicate with the founder, he had a mail slot in his door. He literally had to take a piece of paper and write a note on it and put in the mail slot. So, you know, not conducive to, that's why we're so, our offices are wide open. There's no hierarchy. Fun is a huge value because that wasn't fun. And you know what? You didn't get the best out of people because they were not having fun. There were four of us that were not having fun. And so, you know, I'm not kidding. Not even tongue in cheek. What we decided was, hey, what did the founder do? Let's go 180 degrees the other way and we'll probably build a doggone good culture, right? So what does that mean? That means, you know what? First of all, we're going to share the wealth. And secondly, we're going to be transparent about pay. It's not going to be opaque, but we're going to be transparent. And third, we're going to hire this young talent. And when we figure out that that talent's really adding excess returns to the portfolio, they're going to own equity and they're going to own a decent amount of it. As a result, they've grown from $200 million to $26 billion in assets under management. Great products. I think we do something very different in terms of how we approach competitive advantages and the work we do on culture. But to me, it's the core set of values in our firm that were born out of a tough experience that come down to two things. What are most people's core values? Oh, integrity, dependability. We're not going to steal from our clients. And that's kind of like, that's permission to play, you know, you've got to have those, right? That's obvious. We have two core values. One is gratitude and the other is fun. And those two core values really do reflect who we are. And I'm convinced that those core values and living those core values has led to our ability to make mistakes and be free to analyze those mistakes, not so that somebody can be punished, but so that we can learn and get better. Gratitude, again, stealing from Buffett, you're born in America, you won the lottery. I mean, come on, you've got to be grateful for that. And I've had clients ask me, well, how's gratitude help us as your clients? And I think what it does is hopefully with gratitude, there's a level of humility to know how fortunate you've been. You're again, allocating capital in this day and age and you get paid handsomely to do it. Not so maybe a hundred years ago. If there's a level of humility, hopefully, you're going to be able to do it. And I think that's what we're going to do. There's also a recognition that, hey, we may not be the smartest guys out there. We may not work the hardest because everybody on Wall Street works hard and smart, but you know what we can do? We can care more about our people. And to me, that's an enormous competitive advantage because the evidence is overwhelming again, that small teams perform better. And I think if those small teams are healthy and they're grateful and they're having fun, you're going to have a better chance of getting great results out of that.
Speaker 1When you look at this landscape, for active management, touched on it a little bit earlier. You said there's evidence that active management works. I've been the poster child that that's not the case. So why don't you talk a little bit about what you've done and what you see?
Speaker 2One basic premise I have is that when you start in this business has everything to do with what you ultimately believe about markets. If you started, let's say in 1972 and you ran Port portfolios from 72 to 74, it's highly likely that you come out of there writing a book about how you can't beat the market. If you started in 1983, like I did, you know, even though we had a little blip in 1987, you probably, since you've had a pretty robust market in the US and even globally for a lot of years, you probably have a sense that active management can outperform. I went out recently and went through a database and said, you know, what's the reality here about how many people, how many? Active managers beat the market. So we looked at all active managers in the database. There were 2000 that had at least a 10 year track record. And of those 2000, 50% of them beat their respective markets, whether it's EM, small cap bonds. What was that time period? That was 10 years.
Speaker 1Which 10 years?
Speaker 210 years ending December of 2017.
Speaker 1Oh, okay. Yeah.
Speaker 2Tough 10 years. Yeah. Tough 10 years and fully 50%. Now, okay. People are going to argue out there. There's a survivorship bias. Absolutely. But let's, let's tone it down, make it call it 25%. Do you think that most people that are allocating capital should be able to find one out of four managers that has a good shot at beating the market? I think so. And here's the reality. The reality is on one hand, I get people going passive because for the most part, managers don't do anything different to justify an active management fee. Most managers are all about protecting their assets. So they're going to run a hundred stock portfolio. They're going to buy the high quality, wide moat business, selling it at discount. And you know what? And then they're going to wonder why they don't outperform. And frankly, there is a big, I know it's hard for the Northeast to see, but there's a lot of group think in the Northeast and there is beauty to being removed from that. So if you kind of, if you set the premise right from the beginning, which is, hey, let's run a more focused portfolio of 30 names that gives us the best chance of outperforming.
Speaker 1You know, you'd mentioned that, that firm over time has gone through some tough periods and a lot of introspection and learned from them. Why don't you tell a few stories about those periods?
Speaker 2Yeah. One of them, you know, firm founded in 76 in 1994 firm was still a couple hundred million dollars. And there was a transition between the founder and the son, who's my partner now, where the founder of the firm just decided one day that he's done managing money and kind of told the son, Kurt, that he had to take over the portfolio the next day. Well, having never run money before and all of a sudden having to run $200 million of it, didn't really quite have a solid repeatable process in place. Firm performed very badly for a year and lost a lot of money. You know, probably went down to about $150 million. If you ask Kurt now, he'd tell you that he was getting his resume out. Here's a business owner, right? And you know what's hard about that? He's the son of the founder and he feels like he's driving it into the ground. It was a huge learning experience in terms of, you know, one, Kurt came from an engineering background. So he was trying to quantify a subjective process and he saw everything through numbers. And if you ask Kurt now, he'd say, even though I'm an engineer and I get numbers, and it's not about that, the competitive advantages is all in our cases on the qualitative side. That was a big lesson. And then we were running in 2000 to 2007, a large cap growth strategy, U.S. and good solid companies. We did a couple of things. We did a couple of things couple things wrong. One, we really believed in this wide moat stuff. So we were buying these wide moat businesses and we really believed in valuation. You got to get them cheap. So we were buying Yahoo instead of Google. And this is a 20 stock portfolio, right? Yahoo instead of Google, eBay instead of Amazon, and Dell instead of Apple. Why? Because they were wider moats and they were cheap. And we thought, how can we not lose? Well, we got murdered. Those three stocks murdered the performance of the portfolio. A very hard time. We ultimately got fired from $4 billion of money that we had raised because people trusted we could do well for them. And it's interesting. What I find is that people don't want to believe that money managers make mistakes. And they certainly don't want you to learn. They don't want to believe that you didn't know before, but now you know. We're supposed to be omniscient, right? And what we have found is that over time, there are a few people that actually look, they don't look at those periods of time where we almost bury the firm as failures. They look at them as sources of strength. And that's how we see the world too. Some people might feel shame in them. We feel like, man, how about that for an education? How about that for learning a very different way of approaching the markets? So again, good humility, which makes you grateful that you survived and showed up to live another day. And those periods of time have been huge for what we're doing now on the global equity side. Yeah.
Speaker 1So you spend a lot of time now in international markets. What are the differences in how you think about culture in other countries?
Speaker 2That's a good question because it is different. What we do think in part, we have a hard time being a growth manager, finding a lot of great companies in Japan, in part because of the cultural issues. You know, there's, I think it's changing a lot, but historically it's been hard for us to find names there where we think the cultures are healthy. You know, there's a lot of, you know, they still have the cross ownership of shares. You know, you still have a very paternalistic society and paternalistic companies. They're not very transparent. So it's, it's very difficult for us to find names for that reason in Japan. We do have a number of them, but in general, it's difficult in other parts of the world. Interesting what I, what I have found is when you look at compensation structures, which is another way of looking at culture, how do they pay people? I think it's, it's great that outside the U S you don't see guys making 30 or $40 million while their CFO makes 500,000. You just don't see that. You see a lot more reasonable equity payouts and or salary payouts in those companies, which I, which I like, I like a lot. Cause I think ultimately that, that benefits everybody. It benefits shareholders, but you're right in emerging market. You know, people were, you know, we own a Walmart in Mexico about five or six years ago. I think it was, there was a big New York, York times piece on kind of the, the bribery or the so-called bribery that Walmart was engaging in to get space right now. Interestingly, what we, most people haven't heard is the end of that story, which is, it was just big, you know, it just blew up and Walmex was on in flames. Nothing came out of it. There were, there were nothing was proved emerging economies. They operate a little differently than a lot of European and North American countries and things that we see as being kind of under the table are just normal. So you, there, there is this part where you've got to understand that and just make sure that it's reasonable.
Speaker 1You know, if you could turn back to growth stock investing as a concept in the ETF world and all the factor, the blowing out of sort of factor products, you hear about value products, you don't hear about growth products. So the notion is supposed to be that value stocks work because they're boring and nobody pays attention to them and growth stocks, you do get the Google or the Amazon every now and then, but on average that the growth stocks underperformed because people are optimistic and they price them too high. Where does that break down or is it more that there's a subset of that growth stock universe that you've been able to identify? Cause it's, it's clearly worked for you guys.
Speaker 2Yeah. I think there's a subset, you know, we're not buying fad names or high, real high price names. We're not buying momentum. It's funny. Cause you know, 20 years ago, 15, 20 years ago, there were, there were a bunch of, bunch of multi-billion dollar momentum shops. And I can't really think of one. right now that is still in existence so when you think of growth in terms of momentum i completely agree they were all
Speaker 1down here i was all san diego nicholas applegate that's right nicholas applegate turner turner investment
Speaker 2partners uh there was a there was a firm great firm called uh duncan hearst that came out of nicholas lap or no i actually came out of security pacific bank yeah they're gone they're gone and i'll never forget actually one year when um i met with a gentleman at duncan hearst and he was telling he was a marketer and he said hey you know i'm so good at closing business now he said i win all these deals and i said does it have anything to do with the fact that in 1991 you're up 90 percent maybe maybe but he thought it was about him that gets to my point about humility he thought it was about him like let's make no let's not confuse you know the issues so a lot of
Speaker 1times in the growth stock universe and the way you approach investing you're looking for certain tailwinds in trends and sectors what are the that you're excited about it's
Speaker 2hard to bet against china it really is you know now we're not loaded up in china we've got a couple of names in the portfolio one of them's ten cent it's really really hard to bet against china you know i know people don't always believe the numbers that come out of china i was there in 1981 as a student and in 1981 there wasn't a car on the street there wasn't one building there weren't any hotels there weren't any restaurants people were driving black bikes everywhere you come back today they buy more cars per year than the u.s does there are beautiful buildings across shanghai and beijing and other major cities so i don't know what the growth rate is but it's extremely high it's extremely high and quick little story about one of our ideas around investing kind of globally is we really like to own businesses in countries that are optimistic and it's not just about the growth rate it's about the growth of the economy and it goes back to my earlier comment the optimist win i was in china four years ago and we met with a group of doctor students medical students and i asked the question what motivates you what gets you up in the morning and they said you know what motivates me these 20 year old students what motivates us is to be like america to be as successful financially as america is and i thought what a contrast to you know i thought about 20 year old kids in the states and what do they want to do they want to figure out the next video game that they can beat or win and i thought four or five years ago i said that's that's a very powerful optimistic doesn't mean the gunu but but i sure do like that energy and you go over there's a lot of energy a lot of positive energy in china on the other hand you go down to latin america you go to brazil you go to argentina not as optimistic because they've had years of corruption they've had years of volatility and you know interest rates and currencies and they've had years of volatility and you know interest rates and currencies and interestingly a couple years ago we were down there we met with 12 companies 10 of those companies complained about the macro it's really hard for us to operate you got this corruption you've got the real getting clobbered you know interest rates are rising inflation's out of control we can't really we just can't make it happen a lot of excuses there are two companies that never mentioned the macro what we do we came back we bought those two companies you know they knew that they had a significant edge in spite of what was going on around them and those are the kinds of companies that you want to own so so in general we are looking for those those businesses where there's a obviously a growing competitive advantage but also a belief within the organization that it doesn't matter what the external situation is like we're going to run
Speaker 1right through this yeah and then when you get down to either the sector level or the subsector level are there particular tailwinds that you have as kind of themes through what you're looking for yeah i think
Speaker 2you're always looking for that you certainly want to have tailwinds it's just an acknowledgement that that's how life works i think anyone that doesn't acknowledge that it's just not being honest right it's like you know jay paul getty you know someone asked me how do you make a billion dollars in oil so it's really easy you know you get up really early you work really hard and you strike oil and there's this this notion that he was fortunate you know he drilled the well in the right places and he was fortunate so i think having tailwinds is essential to success obviously there are demographic i think i think a big advantage we have is that we tend to own businesses in the growthier sectors like technology health care and consumer and if you think about the emerging middle class throughout the globe this is just one aspect of it but as people get wealthier in brazil and indonesia and india and china of course what are they going to do with their money they're going to buy products from the companies we own so if you think about a beautiful big picture tailwind you can do what jimmy rogers did which he said hey you know he drove around china and asia on his motorcycle and he came back and said oh yeah you got to buy emerging economies and you do that by buying commodities we'd argue it's a way better idea to buy companies that sell products as these people get richer that's a beautiful tailwind that's not going away for 15 or 20 years you know that that's just something you can really take advantage of how do you think
Speaker 1about downside protection in the portfolio that's a really interesting question because
Speaker 2i've said a couple of things today we're growth investors we run 33 stock portfolio first thing everyone's thinking is volatility right wow you guys must you probably capture 140 percent of the market when it's going up and but you get 110 when it's going down and interestingly that's not the case everything we do in this portfolio is to manage on the downside for all the reasons we know about how do we do that i think one way we do that that's real important is being right more times than not and i think that's a really important thing to do and i think that's a really important thing to do and i think that's a really important thing to do and i think that's a really
Speaker 1favorite sportsman. moment I'm a
Speaker 2Pat fan so there's been a lot of them but my favorite was with my son who's now 13 so he was probably 11 being with my son who kept asking me you know during the the Atlanta game recently two years ago hey dad can they win I'm like no I don't think so actually what I said to him I said you know what yeah I kept telling him yeah Jake they can win they can win hey dad third quarter it's 28 to 3 dad can they win like yeah Jake they can still win and then they came back and they won I mean one of the most extraordinary and my son takes it so seriously I mean he was literally you know weeping you know at that last part of the game and then you know you know they won embraced really one of the great moments of course being a Boston fan I mean you know 2004 when they win the world series for this time phenomenal but I but sharing it with my son yeah highlight yeah what
Speaker 1teaching from your parents has most stayed with you showing up never ever give up
Speaker 2you know I've thought about that a lot there's a lot of times when I would have wanted to quit you know when we especially when we tried to bury the firm but you know what if we would have quit we would never be here for this period for this ride right now so many what if we would have quit we would never be here for this ride right now so many what of life is showing up I absolutely I think it's 99 just keep showing up keep doing what you're doing and you know what you'll be there when good things happen it's huge it's a huge huge lesson
Speaker 1what information do you read that you get a lot out of that other people might not know about
Speaker 2I'll tell you a great one I just just opened it this morning there's a gentleman named Nick Murray and he's actually kind of an advisor to financial advisors he writes a monthly newsletter but what I love about it is he's always his basic thesis is how negative the press is how pessimistic the press is and how really you know again he's a big fan of the optimist wins over time but we don't see that out in the world we see only the problems so he keeps you focused on what's actually working and then he always has great resources great books that he's read a couple of blogs I just went to a there's a there's an it's funny as I'm talking about optimism again but there's a there's an optimist blog I just went to today that was kind of talking about the the short term negative perspectives versus long-term kind of wealth creation those are two that are real real valuable to me and of course I read the wall street journal but those are two and then we have a lot of guys that have various podcasts that I listen to of course I listen to capital allocators of course I do my work and uh you know get a lot of good information yeah
Speaker 1what life lesson have you learned that you wish you knew a lot earlier in your life
Speaker 2I think that notion of keep showing up I wish I would have got that earlier because I think it would have been easier to endure through some very difficult periods of time I wish I would have learned that early in my business career because you know again I didn't pull the trigger on moving or leaving the bank but I really wanted to and I'm glad I didn't because I wouldn't be where I am now if I had pulled the trigger on any of those things so so I would have I would have liked to had somebody tell me Paul keep showing up that's why I kind of preach that all the time in this
Speaker 1firm how do you advise that your kids when you know when we were growing up it feels like there was a lot more stability in people's career paths and now there's seems like there's a lot more mobility so does showing up mean the same thing that it might have you know 20 years ago that's a
Speaker 2really good question that's a great question I think it does because when I say keep showing up I could have left the business you know I was thinking oh I love camping I'll be a camp counselor or something you know I actually was talking you know I could have left the business but you know what I always loved the business I just didn't love the vehicle in the form of a bank that I was doing it in so keep showing up keep pursuing what you're passionate about and you know there that's how I found WCM investment management
Speaker 1yeah all right last one you know it's your your waning days you are at this point probably a camp counselor who knows maybe the camp counselor WCM what advice would you give yourself today I'd probably argue
Speaker 2that as much as you love the business remember there are other parts to life and make sure you know whether that's being healthier or whether that's spending more time with my family my wife my kids the problem for me is I just love this business so much you know I'm not trying to run away from anything I love it and I love the people in this business so I'd probably argue probably would say get a little bit more balance there Paul a little bit more balance because I think you know in 20 years I'm going to say okay I don't have to do all that I can get other people to do that and just kind of you know slow it down a little bit because we're running pretty hard right now great stuff all right
Speaker 1thank you Ted thanks for listening to the show to learn more hop on our website at capitalallocators.com where you can join our mailing list access past shows learn about our gatherings and sign up for premium content including podcast transcripts my investment portfolio and a lot more have a good one and see you next time this testimonial will
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