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1:16

s-o-l-o-v-i-s. Hello!

1:26

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scuffs on this suggests. I just

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saw today show is so

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Injury is A Portfolio manager

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Laguna based Cds billion dollar

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equity managers Profound. Unpopular. Ceo

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of What. Trust

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and Emerging Market portfolio manager T

2:28

and Sanjay to wind up. You

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see him in two thousand and

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seven and alongside my. First

2:36

process follows the. Position

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Sneezing exploration of the differentiated

2:44

mindsets at the use. Of

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descendants thinking differently, getting better

2:54

compounding. Now it's reflected time

2:56

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2:59

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3:01

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on it. the.com/allocators and download

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they're cheap. The I

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just. I recognize it

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you more goodies along the west. Please

4:26

enjoy my conversation with Sewage A. Magic

4:31

recipe for it. Appear to have one.

4:33

Would you take me back? To

4:35

what first got you interested

4:37

in investing? It's an

4:39

interesting combination of curiosity about business

4:41

and psychology, so for her an

4:44

opportunity Tad racist to tell people

4:46

when I grow up. I.

4:48

Want to be an international businessman? Have

4:50

no idea what that meant. I had

4:52

no idea it's article by the I

4:54

dabbled in various business as a number

4:56

and email first came out. I had

4:59

like a stallion arbitrage model going were

5:01

at by misspelled tickets and resell them

5:03

with the proper spelling for the odds

5:05

and ends like that I hadn't interested

5:07

business but it was ruined college where

5:09

I took a behavioral psychology class and

5:11

was interested about that out as I

5:14

used to have a major insecurity about

5:16

not having strong opinions about as many.

5:18

Things that most people seem to.

5:20

My response to that was just

5:22

a learn more about everything but

5:24

it sounds little inauthentic and force

5:26

been taken out psychology class and

5:28

just learning about devices people have

5:30

and why With the same set

5:32

of facts people have significantly different

5:35

opinions. I started so three frame

5:37

that insecurity and to an asset.

5:39

Pinky, And if I can understand

5:41

why people have different opinions and

5:43

then maybe map out by those

5:45

opinion for converge over time, Why

5:47

how and when? There would be

5:49

an interesting approach and it dovetails

5:51

with how I think about investing

5:54

nowadays which is basically a convergence

5:56

and expectations. Had to get started.

5:58

Professional. Guess. so to cause i job

6:00

was an equity analyst at a company

6:02

called Morningstar in Chicago. When I joined,

6:04

it was kind of an upstart equity

6:07

research service within a bigger shop known

6:09

for mutual fund analysis. It was just

6:11

a tremendous place to start a career.

6:13

I think a lot about how people

6:16

start their careers and the impact of

6:18

luck and paths of dependence. Morningstar

6:20

really grounds you in the right

6:23

framework, long-term thinking, focus on business

6:25

quality. There was a really neat

6:27

culture there. It's collaborative, it's empowering,

6:30

it was a lot of fun. So I worked with

6:32

one of my colleagues now at WCMI Trig. We had

6:34

a great group there and I just learned a lot.

6:36

You were throwing in the deep end and giving a

6:39

lot of responsibility at a young age. How

6:41

did you decide to leave? I always

6:43

had the thought that I wanted to

6:45

transition to the buy side and I, at

6:47

the time, believed the right way to do

6:49

that was to transition to business school as

6:51

the gateway. So about three and

6:54

a half years in, I decided the time was right

6:56

to move on and I joined business school. Not

6:58

a traditional business school path, if I remember right. So

7:00

what happened when you got there? One

7:03

of my claims to fame is I'm a

7:05

business school dropout. One of those life events

7:07

where you just realize pretty quick it's not

7:10

for you. I had an instinct that I

7:12

was doing business school because it was perceived

7:14

as the right thing to do as opposed

7:16

to it actually being what I wanted to

7:19

do and that's never really been

7:21

the compass with which I operate. So it was

7:23

tough. I mean, there's lots of some costs, a

7:25

lot of relationships, one of those decisions if you

7:27

ask a lot of people, you'll quickly be talked

7:29

out of it. So I just found my own,

7:32

went with my gut and I quit school about 10

7:34

to 12 weeks in. And what

7:36

was the plan when you quit? I

7:39

didn't really have too much of a plan.

7:41

So I thought about there was various business

7:43

startup ideas I had. One was the launch

7:45

Shake Shack concept before Danny Meyer pioneered that

7:48

concept. I think I'd maybe do

7:50

a part-time MBA and get a full-time job. I

7:52

didn't have a firm plan. So it was pretty

7:54

much jumping off the deep end and hoping at

7:56

that point things would work out. How

7:58

did that bring you to WCM? One of

8:01

my colleagues, Ed Morinstar, Mike Trigg, who I know

8:03

you've had in the show, he joined WCM a

8:05

year prior to me leaving business school and he

8:07

caught wind of my departure. And him and I

8:09

were pretty close, pretty like-minded. We worked actually side

8:11

by side at Morinstar. So he gave me a

8:14

call and said, why don't you plan to look

8:16

in the beach? You go to WCM, there might

8:18

be a fit. I'd never been out to Southern

8:21

California, made the flight, met the people and

8:23

was sold pretty quick. What

8:25

did you find at WCM that resonated

8:27

for you? First, it's the

8:29

people. I didn't have much context. I'd

8:32

never worked on the by-side. But you

8:34

walk in and it feels like a

8:36

very disarming culture where people are having

8:38

fun, intensely searching for the truth and

8:40

the best possible judgment. But there is

8:43

a strong emphasis on relationships, which I

8:45

didn't expect that the by-side would be

8:47

much more formal. I think by and

8:49

large, I've learned that it is. And

8:52

what really appealed to me was

8:54

an irreverence of industry norms. It seemed

8:56

to be affirmed that we did things by

8:58

our first principles, things as simple as how

9:01

you dress, people wearing

9:03

shorts and sandals, how

9:05

people talk, which is how humans talk as

9:07

opposed to a lot of jargon. Didn't know

9:09

much about the industry but was sold by

9:11

the people. So once you

9:13

showed up, how did you plug into what

9:15

was happening? I just learned on the

9:18

fly. So it was similar to Morinstar in that

9:20

you're given a lot of responsibility and

9:22

it's up to you to define your own

9:24

career path. What I've learned to love about

9:26

investing, Ted, is I view it to be

9:29

a platform for self-discovery.

9:32

It's effectively a mirror. It can

9:34

reveal your biases, your insecurities, your

9:36

temperament, what type of teammate you

9:38

are, what type of communicator you

9:41

are, just so much about you, if you allow it to

9:43

be. I was someone who have always

9:45

been pretty introspective and reflective. I would

9:47

try things, I would get feedback, I'd

9:50

iterate and I'd take

9:52

these fledgling concepts we had

9:54

around our philosophy of investing and I just,

9:56

with the help of Mike, Paul and others,

9:58

it's really trying to build on those

10:01

and turn intuitions into a more formal

10:03

framework. What did you learn about

10:05

yourself in those early years? I

10:07

learned a lot. I learned that one

10:09

thing I had to conquer was this

10:12

notion of cognitive dissonance. Cognitive

10:14

dissonance is when you have a worldview and

10:16

then you're confronted with disconfirming evidence, you

10:19

just get very defensive. It's uncomfortable.

10:21

Your mind races to mental gymnastics

10:23

to reconcile those views, explain it

10:26

away, rationalize it, etc. What

10:28

I learned through a lot of mistakes

10:31

and tough decisions was if you can

10:33

lean into cognitive dissonance, it

10:35

actually makes life a lot easier. It's

10:38

paradoxical in that way. It sounds hard mentally

10:40

to hold two opposing ideas in your head

10:42

but you can get to that point where

10:44

you can. It can be very liberating and

10:46

a lot of the biases you have melt

10:48

away. That was the big early

10:50

stop function change in my career. How

10:53

do you reconcile the idea of

10:55

holding different views in your head

10:57

at the same time with developing

11:00

conviction? That's the art

11:02

of investing. Strong opinions loosely held

11:04

is a common term. I think that's what the

11:06

North Star should be or at least my view

11:08

should be is you have to act on what

11:10

you know while still doubting what you know. It's

11:12

a difficult balance and you want to strike it

11:14

right. You don't want to be stuck in cognitive

11:17

dissonance and be unable to make a decision but

11:19

you also don't want to make decisions that are

11:21

blinders on. It's just a balance I

11:23

think each person has to get through on their own. As

11:26

you started working through learning

11:29

with this team of people around you, how

11:32

did you form what became the core of the

11:34

research effort? It's kind of a build your

11:36

own plan as you fly it type mentality. We

11:38

had intuitions around how a team should

11:40

operate philosophically, a few concepts, mode trajectory

11:43

and culture but it was really how

11:45

do you build processes and a high

11:47

performance team around that. One of my

11:49

other claims to fame is that I

11:51

did have pretty big setbacks early on.

11:54

Internally we joke about one of my

11:56

midlife crises was going to a

11:58

young brains analyst day. back in

12:00

2010, so it's three years into

12:02

the job and this was in New York.

12:04

We owned YUM at the time and

12:07

at that point the firm wasn't doing well. This

12:09

was after market hours. One of the stocks

12:11

I'd recommended and we owned was down I think

12:13

35% after hours. I was not in

12:16

a good mood and so I

12:19

went back into the analyst day and Taco

12:21

Bell, which is one of YUM's properties, was

12:23

presenting and Taco Bell gave

12:25

the presentation, talked about financials and

12:27

whatnot, but then they

12:29

started to preview their product pipeline and

12:31

so they put a commercial about their

12:34

next-gen product. I guess it was a

12:36

Chalupa at that point in time and

12:38

it was just a moment, Ted, where

12:40

time froze. I looked around the room

12:42

and I just saw a lot of

12:44

smart people wearing suits, acting

12:46

the part, taking notes about

12:49

this commercial, which you just reflect on that,

12:51

Taco Bell at the time. I'm going to

12:53

have these numbers wrong. It was 20% of

12:55

YUM's profit. This product was

12:57

going to be infinitesimal percentage of

13:00

YUM's profits yet hundreds of people are

13:02

taking notes about this and that's fine,

13:04

but what made it a lot worse

13:06

was I was taking notes too. There

13:09

I was, someone who could talk in abstract

13:11

terms about the biases of the industry

13:14

and what people get wrong and how people don't

13:16

spend their time wisely, yet I

13:19

was doing the same exact thing. I

13:21

was the person who everyone knows in

13:23

their lives who preaches about meditation but

13:25

actually doesn't meditate themselves. That was me.

13:27

It hit me hard that I was

13:29

for fraud in that respect and it

13:31

sent me on an internal journey about

13:33

what are these gravitational forces at play

13:35

that even though I know in conceptual

13:37

terms what I should be doing, I'm

13:39

doing effectively what everyone else is doing.

13:42

So what did you do when you came to that discovery? I

13:44

went on a journey. I really just

13:46

got very introspective, started to read a

13:48

lot about how people spend their time

13:51

in various professions and what are some

13:53

of the mistakes people make and tried

13:55

to draw analogies with what is it

13:57

about investing where people are not

14:00

spending their time wisely. What are people

14:05

to come to Groupthink? And

14:07

I some

14:28

ways you would think investing should

14:30

be a clean slate. People should operate very differently.

14:33

There's no one to do things but really

14:35

I went on a journey of unpacking the why.

14:37

Why do people behave the same? Why is there

14:39

so much Groupthink? Why is there

14:42

so much fixed mindset? And then can

14:44

we create a team, a culture organization

14:46

that can insulate ourselves from some of

14:48

those forces? What were some

14:50

of the analogs and other industries

14:52

that share those characteristics of there's

14:54

creativity, there's less determinism about what's good

14:56

and bad? Do you think

14:58

about movie studios? I think if you green

15:00

light a movie, it's kind of

15:02

picking a stock. You often get described as having

15:05

the magic touch. If that's how you're judged, it's

15:07

natural that you're going to develop fixed mindset especially

15:09

if there's some lock and cause and effect questions

15:11

at play. You're going to build an ego, you're

15:13

not going to admit mistakes. So

15:15

it's natural you're going to get fixed

15:17

mindset in those professions. You can think

15:20

about sports if you're a general manager.

15:22

People get elevated, cover stories are written

15:24

about that notion of a magic touch.

15:26

So I think that's one major commonality

15:28

is that level of a creative quotient

15:31

and it's an unconstrained environment. The one

15:33

thing I've learned is you would think

15:35

an unconstrained environment leads to more creativity

15:37

but it's the old playground analogy. If

15:39

you put a fence around the playground,

15:42

the kids start to spread out and

15:44

explore. If you take away the fence, everyone

15:46

starts to huddle towards the middle and

15:48

you can think of that as minimizing risk or

15:50

career risk in a professional setting. With a handful

15:53

of those professions where you're not exactly sure what

15:55

you should be doing, it's tough to tease that

15:57

cause and effect and these find written

15:59

rules. seep in and no one bothers to really

16:18

So if you think about groupthink, how

16:20

can you create a core value that

16:23

is opposed to groupthink? And so we came up with

16:25

a core value called think different which we

16:28

didn't coin it. Apple coin did well

16:30

before us but it's very profound in

16:32

investing that if you want different results,

16:34

you should do things differently. Having a

16:36

self-awareness around the base rates of the

16:39

industry asking why should we have

16:41

conviction we can defy the base rate, under

16:43

the constraint we're not going to pivot

16:45

to minimizing career risk. So building that

16:47

core value of think different, making

16:50

sure we message it and build processes

16:52

and guardrails around it and then fixed

16:54

mindset standing on its head and saying

16:56

let's build a core value around getting

16:59

better, let's take the opposite, a growth

17:01

mindset and so how can we build

17:03

behaviors that will really allow us to

17:05

reflect, get better, stay humble and not

17:07

succumb to that. So as you

17:10

break both of those down, when you started framing

17:12

out what you're trying to do is think different.

17:14

What are some of the things you saw that

17:16

were ways that groupthink was

17:18

permeating how people went about research?

17:21

There's a gravitational pull towards expiring

17:23

knowledge. There's so much noise out

17:25

there and if you don't build

17:27

guardrails around how you spend your

17:29

time, you're going to

17:31

fall into this notion of

17:34

just gathering more information, having

17:36

a reactive mindset, benchmark

17:38

hogging, just doing things in a

17:40

way that you're just building out

17:42

a more is better approach. Really

17:45

trying to think about from a portfolio

17:47

standpoint, having high active share from a

17:49

knowledge standpoint, leaning into what we now

17:51

call compounding knowledge as opposed to expiring

17:54

knowledge and codifying this concept of what

17:56

we call return on time. How should

17:58

you spend your time? and the team

18:00

spend their time in a way that

18:18

will maximize outcomes. So

18:22

what are some examples of compounding knowledge as opposed

18:24

to expiring knowledge a little bit easier to understand?

18:30

But are there fields of knowledge out

18:32

there that can structurally elevate the odds

18:35

that you make a series of those

18:37

judgments more than one? So you could

18:39

think about corporate culture. If

18:41

you understand a company's culture, you

18:44

can overlay that culture onto each of

18:46

those judgment calls over a period of

18:48

time. So maybe that boosts your batting

18:50

average by a few percentage

18:52

points, but that can compound significantly over

18:55

time. As we think about

18:57

mode frameworks, how to think about competitive advantage,

18:59

that's another field of compounding knowledge. If you

19:01

could build patterns around it, that's more evergreen,

19:04

that's more scalable, and you can apply it

19:06

to multiple judgment calls. As

19:08

you laid out mode trajectory and culture

19:10

as those two core components of your

19:13

research process, I'm curious if there are

19:15

other big pockets that

19:17

you've discovered or looked at carefully

19:19

and discarded as something that

19:21

is consistently favorable enough

19:23

for companies and stocks that

19:25

contribute to that compounded knowledge.

19:28

Yeah, those are the two we've stumbled upon

19:30

today. There's been so much runway on building

19:32

out each of those as far as processes

19:34

and how to do it. I think each

19:37

of those concepts are sensible in theory, but

19:39

there's a whole arc. The REITs will be

19:41

a small team. In Laguna Beach,

19:43

I do cheese on the corporate culture of a company in Brazil.

19:46

How do you identify growing modes? So

19:48

a lot of my journey has been focused

19:50

on doing those two better.

19:52

At the same time, we are thinking

19:55

about planting research and development seeds to

19:57

coming up with third or

19:59

fourth field of compounding. knowledge, understanding

20:01

base rates, and

20:29

growth investing was associated with career

20:31

risk. Growth investing

20:33

was very disciplined, you

20:35

were exploring these well

20:37

trodden behavioral inefficiencies, mean

20:39

reversion, recency bias, time

20:41

arbitrage. Growth investing

20:43

was just reckless. You were just chasing

20:45

stocks. Growth investing

20:47

can be reckless for sure, but so

20:50

can value. I don't love how people distinguish these

20:52

terms. I'll try not to get too caught up

20:54

in it, but you can overpay for a

20:56

great and improving company, but you'll recover over

20:58

time. It might take a long time, but

21:00

you'll recover. There's a pathway for recovery, whereas

21:02

if you miss value of bad business, there's

21:05

no pathway to recovery. This is just

21:07

how you define reckless. For us, valuation,

21:09

there's a couple ways we think about

21:11

it. One is to say valuation for

21:13

the end of the process. I think

21:15

if you have a valuation-first mindset, it

21:17

steers you towards value traps

21:19

effectively, companies that are becoming less good on

21:21

the margin. And then the other thing we

21:24

think about is, have a first principles approach

21:26

to valuation. I think investors sometimes get caught

21:28

up in the heuristics of the day. Take

21:31

software, there's this rule of

21:33

40 concept that's become very popularized. In

21:36

reality, I think if you just study

21:38

unit economics, you study distribution, you study

21:40

culture, just from first principles bottom up,

21:42

you can develop strong, barren perceptions around

21:44

valuation and not get caught up in

21:46

the flavor of the day. When

21:49

you start thinking about getting better, you mentioned the importance

21:51

of how you manage your time. And

21:53

we'd love to hear more about

21:55

how you go about assessing

21:58

and improving that importance. characteristic

22:00

of what you do. It's a really

22:19

interesting insight whereas we're thinking about

22:21

this notion of what we call

22:23

now return on time like how

22:25

are people actually spending

22:27

their time day to day

22:30

and are you carving out time to

22:32

get better, to think different or are

22:35

you just coming to that gravitational pull

22:37

we talked about. We think a lot

22:39

about being reflective so right

22:41

now actually we're doing a reflection week internally.

22:44

We do it twice a year, we carve

22:46

out a week and you're turning off all

22:48

your screens, you're not looking at stock quotes

22:50

or news and you're just reflecting in the

22:53

spirit of getting better. I'm a

22:55

big believer in artificial constraints. I

22:57

think constraints can unlock creativity as

22:59

we talked about two unconstrained environment

23:01

actually inhibits creativity and you need

23:03

to be jolted out of it.

23:05

So I think again it's just

23:07

this notion of building guardrails and

23:09

not slipping into that reactive information

23:11

gathering mindset and being aware

23:14

of opportunity costs. I think a lot of

23:16

investors get that wrong just thinking about

23:18

the opportunity costs on your time, what else you

23:20

could be doing and how to find that. So

23:23

various ways we have constraints to be

23:25

reflective about it. What have

23:27

you learned from some of that reflection? The

23:30

main thing I've learned is you do these return on the

23:32

time audits and they start

23:34

to look similar. You start to

23:36

see the gravitational pull that despite

23:38

knowing these things about information gathering

23:41

everyone tends to have the same regrets.

23:43

I spent too much time following news

23:45

or I was a little bit inefficient

23:47

with how I traveled, I caught up

23:49

in the day-to-day and didn't spend enough

23:51

time on the R&D work. Another one

23:53

we learned about is mode

23:56

trajectory is about detecting change

23:59

and If you're zoomed in too

24:01

much, you're gonna be slow to see change.

24:04

So I think one of the

24:06

reasons why specialists are struggling with

24:08

the notion of mode trajectory is

24:11

you're in a vacuum, you're in an echo

24:13

chamber. You're just covering a sector, you're doing

24:15

travel with fellow analysts, you're talking to management

24:17

teams. If I'm a newspaper

24:19

analyst and the internet came along, I'm gonna

24:21

be the last person to recognize this

24:23

as a disruption just because I'm caught in

24:26

an echo chamber. We found that we were,

24:28

for instance, doing too much in the

24:30

way of earnings updates. That once a quarter

24:32

we publish updates on every earnings announcement.

24:35

And from a team return on time

24:37

standpoint, it started to become clear that was very

24:40

low. People were spending a lot of time publishing

24:42

those, everyone was consuming those. In

24:44

reality, generally speaking, not much changes in

24:46

the given quarter. The worst

24:48

impact was we were missing slow motion

24:51

change because we were too zoomed in.

24:53

So one of the changes that

24:55

came out of a series of audits was

24:57

let's do a more higher level thesis refresh

24:59

every six to nine months on a name

25:01

as opposed to getting inundated with these quarterly

25:04

updates. What are some of

25:06

these other guardrails that you put in place so

25:09

that you are spending your time on the right things? We

25:11

signal, we message, we have artifacts in

25:13

the office. If you walk over to

25:16

our conference room, you'll see two airplane

25:18

seats. And the reason for that

25:20

is we found our best ideas are not

25:22

standing in front of the screen. They are

25:24

going on travel in a group, flying

25:26

back home, sitting across from each other

25:29

with no wifi and just chatting, downloading

25:31

on the trip, chatting about what we

25:33

can improve on, talking about the team.

25:36

These are conversations that just would not

25:38

happen in the office despite everyone's best

25:40

intentions. Thinking about things creatively as

25:42

far as how should we travel to really

25:46

maximize insights through constraints,

25:48

through modeling, through reflection

25:51

week and audits. And then thinking about

25:53

how do you generate feedback to get

25:56

better. It's great conceptually to say we

25:58

have a get better mindset. set or

26:00

core value, how do you go about doing it?

26:03

I'm curious at these airline seats, have

26:05

you found that you can replicate the

26:07

experience just by having the seats in

26:10

your office? It's funny. No,

26:12

if they don't get used enough in the

26:14

office, we tell people if you want to

26:16

go on a drive and just think, don't

26:18

listen to music or podcast, sorry, but

26:20

just make sure you carve out time to

26:23

think and be intentional about

26:25

it. Go on a walk. We don't clock

26:27

office time. We like being

26:29

in the office, but there's no requisite for

26:31

FaceTime. Really where I get bothered,

26:34

I just see people in their office looking

26:36

at daily pricing quotes all the time. I'll

26:38

say, you know what? Get up, get out,

26:40

go take a walk, think about something creative

26:42

and come back. How do you

26:44

think about the balance of the need,

26:46

whether it's guardrails or just process

26:49

of staying on top of what's happening with

26:51

companies with that more creative

26:53

or even the R&D concept of

26:56

how you want to improve your

26:58

process? I think the course

27:00

correction will always have to be towards R&D

27:03

because I think just definitionally, just given

27:05

how much you're inundated with news flow and

27:07

quotes and just coming into the office

27:09

every day, it's very hard for me to

27:11

envision a case where someone's focused too

27:13

much on R&D and is missing the boat

27:15

on individual stock picks. I think that

27:18

guardrails, at least to date, are always pointed

27:20

towards how do you carve out time to

27:22

think more big picture because the

27:25

blocking and tackling tends to take care of

27:27

itself given you're just confronted with a lot

27:29

of this news flow and information

27:31

on a daily basis. What's

27:33

an example of how some of

27:35

that R&D has impacted your investment

27:38

process? One

27:40

significant process tweak we made

27:42

is replacing our, what was

27:44

it, generic risk section in

27:46

our write-ups with now

27:48

what they call a pre-mortem section. The

27:51

pre-mortem goes something like this, it's three

27:53

years from now, so say 2027, and

27:57

this company's motor trajectory has flipped

27:59

now. negative, what happened? And

28:02

I think the primordum really, getting

28:05

back to cognitive dissonance, really acts as a

28:07

forcing function for coming to grips on the

28:09

front end with cognitive dissonance and

28:11

owning it at the time as opposed

28:13

to suffering from it later on if

28:16

and when the story turns for the

28:18

worst. And I think

28:20

mitigating risk of confirmation bias down

28:22

the road significantly enhances cell discipline.

28:24

And it also helps you dig

28:27

through the key focus areas for

28:29

maintenance research. And I draw

28:31

a big distinction there with what we

28:33

were seeing in our risk section, which

28:35

often amount to take vague or abstract

28:38

risks that you either really weren't worried

28:40

about or weren't specific enough to

28:42

create any useful focus, things like

28:44

macro or just generic competition and

28:46

so on. The primordum, we find

28:49

it especially helpful when our company's

28:51

firing on all cylinders, the story

28:53

is perceived to be bulletproof, there's

28:55

a lot of consensus excitement around

28:58

it because it really

29:00

forces you to think hard and be

29:02

creative when thinking about how the story

29:04

could flip. One example of primordum on

29:06

an idea or a theme that's doing

29:08

extremely well at the moment is in

29:10

the obesity drug space. So companies

29:12

like Novo Norda, Eli Lilly,

29:14

which have come up with these new seemingly

29:17

blockbuster drugs where the future

29:19

looks very bright. And so

29:21

in the previous world, a risk

29:23

section might look something like, I'm

29:26

worried about competition down the road

29:28

or unexpected side effects from these

29:30

drugs emerging. And you see there, it's

29:32

not really specific, it

29:34

doesn't really guide focus areas for

29:36

ongoing research, presumably we're comfortable

29:38

with those two risks in the course

29:40

of your write-up. Whereas a

29:42

primordum for us would be something like,

29:45

look, a generalist investor could

29:47

get tripped up with these

29:49

names because they are misapplying

29:51

lenses from consumer goods

29:54

or technology where breakout

29:57

products can benefit from positive feedback

29:59

loops. In technology, you have

30:01

network effects, in consumer goods, you

30:03

have brand virality. In

30:05

healthcare, and especially pharmaceuticals, through history, you

30:07

notice there are negative feedback loops. You

30:10

have big major counterparties, namely managed care

30:13

companies and regulators who have very different

30:15

incentives than the drug companies and can

30:17

act as a limiter to grow. And

30:19

so our premortem with the obesity drug

30:22

companies would be at this

30:24

point that they held a deaf

30:26

ear to these counterparty relationships. And

30:28

that ultimately short-circuited the durability of

30:31

the growth curve. And in fact,

30:33

the super high exponential growth early

30:35

on, which investors got excited about,

30:37

actually exceeded the conditions for an

30:40

eventual counterparty backlash and a negative inflection

30:42

in that mode trajectory. And you can

30:44

see there the focus areas for agri-grind

30:46

research would be asking questions

30:49

to the companies and counterparties as far

30:51

as how are you managing these

30:54

relationships? What lessons did you learn

30:56

from other drug classes like statins

30:59

or PCSK9, drugs? What

31:02

lessons have you learned from insulin tracing over

31:05

the last decade where there might have been

31:07

some self-intlected wounds from mistakes of this kind?

31:09

So I think the premortem has been a

31:11

really effective process change for us and in

31:13

fact has surprised us to the upside in

31:15

several ways. I

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32:28

now, back to the show. As

32:31

you've grown both in assets and the organization

32:33

over the last bunch of years, how

32:35

have you taken some of those

32:37

ideas to make the team better? That's

32:40

an interesting thought, Ted. One of the third unstated

32:42

core value of the research team that's, I think,

32:45

different get better is make the team better. And

32:48

all the leaders say we all intrinsically

32:50

prefer a team-based approach. We believe it

32:52

leads to more durable outcomes and it

32:54

just happens to be more fun. And

32:57

I think what I've found is if

32:59

you have a culture where people optimize

33:01

for themselves and their own

33:03

career path, you really just introduce a

33:06

bunch of unspoken friction into the process

33:08

that just bubbles underneath the surface and

33:10

gets in the way of good judgment. So

33:13

insecurities, biases, fear, career

33:15

standing, point scoring, all this friction and

33:17

noise. Whereas if people are waking up

33:19

thinking about how can I make the

33:21

team better? Am I truly rooting for

33:23

my colleague's success? All of a sudden,

33:25

that friction melts away and it shifts

33:27

the mindset from a zero-sum one where

33:29

your views are competitive to almost a

33:31

win-win one. What views can be additive

33:33

because all you're trying to do is

33:35

collectively push the ball forward to get

33:38

the best possible outcome. So that's

33:40

been something in the last few years we've

33:42

really started to highlight more is try to

33:44

wake up every day and take that team mindset,

33:46

perspective take, what's in the team's best interest as

33:48

opposed to just focusing on

33:50

your own silo. I'm really curious

33:52

when you take that concept into practice.

33:55

There's a nice warm feel-good concept of,

33:57

hey, we'll all make mistakes but we

33:59

can get better. better with you also want

34:01

to have the best players on the field. And

34:04

inevitably, you're going to have both of those

34:06

things happen. I'm curious how you've managed messaging

34:09

and the culture through the need at

34:11

times to make change.

34:13

Yeah, I think we're wired to change that

34:15

get better. I think we just have the

34:17

by way of luck, maybe initially, but now

34:19

our hiring process, we hire people who are

34:22

wired to take advantage of this

34:24

platform recreated where we insulate you

34:26

from group thinking fixed mindset and

34:28

self optimization. And we empower

34:30

you to take advantage of a creative

34:33

mindset, a growth mindset, and making

34:35

teammates better. We're very intentional about

34:37

who we bring in. We

34:40

think about trajectory over pedigree. We like people

34:42

who bet on themselves. We just want to

34:44

plug them into this platform and see what

34:46

happens. We don't get too defined with career

34:49

roles. We want people to reinvent their own

34:51

roles and evolve over time. I think for

34:53

us, it's about really leaning

34:55

into this platform we've created, find

34:58

the best talent, but talent that's

35:00

wired to really take advantage of

35:02

the platform as opposed to just

35:04

individuals operating in silos. How

35:06

do you tease that out as you're getting to know someone and think

35:08

about bringing them in? It takes

35:10

time. It's just more interactions is better,

35:13

simulate working with them before you work

35:15

with them. So we like long dialogues

35:17

over, in some cases, years where we

35:20

exchange thoughts with a candidate and say, hey,

35:22

I'm thinking about this. What are you thinking

35:24

about it? So if you could de-risk the

35:26

simulation process and almost act as if you're

35:28

working with them in the moment, I think

35:30

that helps a lot. It's getting better now

35:32

with things like sub-stack and journals

35:35

and social media where you can see how

35:37

people thought historically. So that

35:40

helps your perspective taken and how they would act

35:42

today. There's a lot of thinking

35:44

about building questions that really

35:46

get to the core values of do

35:48

you have first principles thinking? Are you

35:50

willing to admit mistakes? Are

35:52

you self-aware? Are you scrappy? Do you

35:54

have a solution spine set? There's

35:57

no shortcuts and that's why our process is

35:59

pretty painstaking. on the other side of it. I'd

36:01

love to turn to how you take some of these concepts

36:04

and put them into practice. Maybe the best way to do

36:06

it is to start with the concept

36:08

of moat trajectories and as

36:10

you've created these typologies for what

36:12

a growing moat looks like, what

36:15

have you found that's a little

36:17

different from what someone who thinks

36:19

about a moat might? Moat

36:21

trajectory conceptually is a pretty easy idea to

36:23

get your head around. Like you think about

36:25

economic moats, four to five forces, and you

36:27

just take the second derivative of it. Instead

36:30

of looking for bargaining power, is your

36:32

bargaining power growing, et cetera. Conceptually,

36:35

I think even before you get

36:37

to a framework, we find it

36:39

very effective because there's

36:41

your way from value traps. Just fundamentally

36:43

asking the question, is this business getting

36:45

better? Just I think improves

36:48

your cell discipline quite a bit because

36:50

you don't get stuck in that growth

36:52

to value whipsaw that can really hurt

36:54

performance. And then the second

36:56

thing it does is steer you towards where

36:59

change and relevance is happening. That the

37:01

world is changing, moat trajectory, just having that

37:03

second derivative mindset steer you towards where

37:06

there is positive and negative change happening

37:08

from the ground up. But then the

37:10

question is like, how do you tease

37:12

out moat trajectory? And through the notion

37:14

of return on time, we had this

37:16

premise that history might not repeat itself,

37:18

but it tends to rhyme. So

37:20

let's carve out time to do backward

37:22

looking work. So case studies, data

37:25

projects, looking back at large

37:27

collections of companies and trying to tease

37:30

out what separated good companies from

37:32

great companies, from companies that

37:35

haven't stood the test of time. And

37:37

when we did enough of those, we

37:39

started to develop these, what we now

37:42

call moat typologies, which are effectively just

37:44

pattern mapping onto economic moats. One

37:46

example would be we've had a lot

37:48

of success and we've found historically a

37:50

lot of outsourcing

37:52

companies in various industries that

37:55

can climb the value chain over time and

37:57

evolve from low value, outsourced manufacturing.

38:00

which is to be how outsourcing companies are

38:03

born to high value outsourced

38:05

R&D partners. They can grow their

38:07

modes for incredibly long periods of

38:09

time. And because

38:12

the industry is organized around specialists,

38:14

that creates an opportunity for significant

38:16

baron perceptions. There was a Danish

38:18

company we owned called Christian Hansen,

38:20

which made the dairy cultures used

38:22

in the production of yogurt and

38:24

cheese. The company came public, I think, in

38:26

2010. It

38:28

had maybe mid 20%

38:30

profit margins out of multiple in the 20s. What

38:34

cell side analysts should cover it? It's a weird

38:37

company, right? Bacteria culture. So maybe

38:39

you cover Dow and DuPont, other chemicals

38:41

companies. Maybe you cover consumer

38:43

brands. But whoever you are, this is

38:45

a one-off company. And you look at it and you're

38:47

saying that the margins look high relative

38:49

to history. The valuation looks high relative to

38:52

the rest of my coverage list. Through

38:54

that pattern mapping and developing

38:57

this outsourced service R&D typology,

38:59

we're just redefining the reference class and saying,

39:01

forget about what sector it is or industry. It's

39:04

an outsourced R&D business model. What

39:07

do similar business models who

39:09

are more mature, what type of margins

39:11

do they generate? The Taiwan Semiconductor, CRO, and

39:13

healthcare. And you find they can generate

39:15

30% and 40% profit margins. So

39:18

you just take that same set of information and

39:21

you believe in mean reversion. You're just redefining

39:23

the mean in a way. So you're fading

39:25

those margins up. You're fading the valuation up

39:27

as opposed to the typical specialist who would take

39:29

all that information and fade it downward. So that's

39:32

how you can, through these most

39:34

typologies, we have about 12 or

39:36

13 of them today. I

39:38

just see patterns that others might not

39:40

see through an outside view type framework.

39:43

What's another example of one that

39:45

cuts through different industries but works

39:47

if you look at it as

39:49

its own typology? One that

39:51

we find ourselves owning more and more is

39:53

what we call niche industrials. And so these

39:55

are companies that operate in a niche, have

39:58

a significant market share. an

40:00

industry with limited scale, so it doesn't

40:02

invite multiple competitors, there tends to be

40:04

a complicated route to market, it could

40:06

be an engineer-to-engineer sale, and oftentimes there

40:08

is that climbing the value chain element

40:10

to them. And niche industrial would

40:12

make you think they should be industrial

40:14

companies, but in fact, many healthcare

40:16

companies. We own a company called West

40:19

Pharmaceutical, which is a pharmaceutical packaging

40:22

company, and for us,

40:24

what it is effectively, it's niche industrial. It's

40:27

a low cost of goods, extremely high

40:29

cost of failure product, 75 cents

40:32

for a rubber stopper or plunger that goes

40:34

into syringe for a drug that costs $1,000

40:36

plus a dose. What

40:40

makes our business model unique is the packaging

40:42

is part of the product from a regulatory

40:44

standpoint, so if you want to switch suppliers

40:46

and switch from West to a competitor, you

40:48

have to repile for approval. So it's going

40:50

to take years of testing and trials, and

40:52

you're not going to take a chance on

40:54

a fly-by-night operator in China to save a

40:56

few cents. So that's one where

40:58

a similar concept, we looked at it,

41:01

I think at 15-ish percent margins when we

41:03

bought it, and we said, look, other similar

41:06

niche industrial companies, like Greco and

41:08

Ampedal, etc., they have margins in

41:10

the 20s, sometimes 30s, so

41:13

similar concept is the S or

41:15

CERN-D one. How have you

41:17

gotten better at research on the culture of

41:19

businesses? This is Johnita. I

41:21

was a skeptic on culture when I first joined.

41:23

I had read the book, The Halo Effect, before

41:26

I read Good to Great, and

41:28

almost everyone who loved culture started with Good

41:30

to Great is what drew them in

41:32

as far as the secret sauce of

41:34

durable outstanding companies, whereas Halo Effect will

41:37

say people get the cause

41:39

and effect, they reverse the causality there. If

41:41

a company is performing well, people will describe

41:43

it as having a good culture, but it's

41:45

the performance dictating the explanation as opposed to

41:47

the culture driving the performance. So I had

41:49

a skeptical view, and it was only

41:52

through a lot of learning, mistakes, auditing,

41:55

some of my winners and losers over the years that

41:57

I got to a point where I was drinking the

41:59

Kool-Aid on call. culture. And

42:01

really over the last 15 years, we've just steadily

42:03

developed a playbook around it. For

42:06

instance, I think a lot of

42:08

people think about culture as touchy failure, right? Are

42:10

employees happy? And for us, that's not the question.

42:13

It's more about alignment. Are employees

42:15

behaving in a way that will

42:17

help that company grow its moat?

42:19

Very different for an industrial company

42:21

or a railroad versus a tech

42:24

company like a Google. You could just

42:26

conceptualize the different behaviors and cultures. That

42:28

notion of alignment, that notion of adaptability.

42:30

Yeah, we found a lot of our

42:33

best investments have been companies, especially in

42:35

fluid industries like technology, companies that have

42:37

been able to adapt and

42:40

turn potential roadblocks into

42:42

opportunities and capitalize on new opportunities that come

42:44

their way. And so we have lots of

42:46

examples of that. And then cultural

42:48

strength. We did make a few mistakes. We

42:50

were just betting on the people at the

42:53

top and not asking ourselves like, how deep

42:55

is that culture? How widely held are those

42:57

beliefs? So intensely felt are they figuring out

42:59

the right questions to ask? Who to talk

43:01

to? We feel like this

43:03

is something we're building on our own. There's

43:06

no real textbook on how to analyze culture

43:08

as an outsider. It's been a fun journey

43:10

and we've built out a whole team now that

43:12

really focuses the majority of their time on just

43:14

culture. What are some of those

43:16

key questions that you've learned to ask that

43:19

just helped put you in the right direction? They

43:22

sound simple. It's tell me about a

43:24

mistake you made and what you learned from it. That

43:26

sounds like a basic interview question but maybe you

43:28

wouldn't be shocked. The company CEO struggled to answer

43:31

that question or talk about some irrelevant

43:33

small acquisition they made. Whereas

43:36

we own a company called Mercado Libre which

43:38

probably knows like the Amazon, Slash, PayPal

43:41

and Latin America. And what

43:43

we always loved about them was the level

43:45

of candor they had about mistakes they made.

43:47

And the level of external awareness. Tell me

43:49

about something you admire that a competitor does.

43:52

That'll jar most companies. They don't

43:54

want to talk favorably about competitors.

43:57

Whereas Mercado Libre would talk about, hey

43:59

here's what I buy. doing against JD

44:01

in China, here's what PayPal, maybe the

44:03

mistakes they made in the US. So

44:06

having that external awareness which I think is critical

44:08

for adaptability. So each of those pillars we break

44:10

down and have various questions that

44:12

we use to tease out how a company will

44:14

score on those but we also are constantly iterating

44:17

on those questions as well. What have

44:19

you found been the most effective practices

44:21

to learning from mistakes through feedback on

44:24

the team? I think feedback

44:26

quality is the biggest challenge in investing

44:28

and I think concepts like deliberate practice

44:30

have become popularized like how do you

44:32

get better golf, get out there, you

44:34

take a lot of swings, your course

44:36

correct, you embed the feedback. The

44:39

problem in investing is the feedback

44:41

quality is poor, at least for our flavor

44:43

for investing. You're long term, you're not making

44:45

that many decisions, takes a long time to

44:48

get the feedback, multiple years if you're right

44:50

or wrong and then there's just

44:52

a ton of noise and randomness in that

44:54

time period. If you have any

44:56

kind of formula around feedback quality, I

44:58

think investing would score among the poorest of

45:01

any profession. You have to be mindful about

45:03

challenge and make sure you are generating feedback

45:05

that has high signal which means

45:07

generate lots of feedback and then carving out

45:09

time to reflect on that feedback and looking

45:11

for patterns. You don't want to just act

45:14

on an individual mistake because

45:16

you can actually compound that mistake but

45:18

if you see patterns which

45:20

seem to be getting this type of

45:22

investment wrong, let's explore why and maybe

45:24

it's an individual mistake, maybe it's a

45:27

team mistake, that can bubble up into

45:29

our conversation. One major

45:31

initiative we actually completed recently to

45:33

address the feedback quality problem

45:36

in investing is building out

45:38

a fully-fledged proprietary journaling app

45:41

custom made for investing. We

45:44

belong here at WCM, had a

45:46

journaling culture to help create that

45:48

raw material for learning but it

45:50

was highly scattered. I think Evernote

45:52

journals, Excel spreadsheets, sticky notes. We

45:55

decided if we really wanted to be serious about

45:57

high quality, high signal feedback, we needed to... really

46:01

step up and centralize

46:03

this raw material for learning. So we

46:05

spent a lot of time, a lot

46:07

of money building an application. We called

46:09

Project Everest that centralizes all this learning,

46:12

raw material and provides a really easy

46:14

user interface for analysts to enter in

46:16

your entries and eventually do

46:19

analytics on this data over time.

46:21

And so really everything we do

46:23

and all decisions we make, not

46:25

just buys themselves but passes, random

46:27

predictions we make in the office,

46:29

it's logged in there and tagged

46:31

with a whole host of custom tags

46:33

that we've created. It's been a fun

46:35

initiative and you can already see some

46:37

of the signs as far as accelerated

46:40

high signal learning. One example of that would

46:42

be the setup we often see with founder

46:44

or CEOs come out with a

46:46

major new product or initiative. In the

46:48

near term, it looks murky. Maybe

46:51

the uptake from customers has been slower than

46:53

expected or there's some near term financial pain

46:56

because of the new initiative. I think there's

46:58

often a notion that that's a setup where

47:00

you want founder or CEOs because they have

47:02

that long-term vision, long-term

47:05

thinking, willing to look through

47:07

short-term paying for long-term gain,

47:10

read Hastings with Netflix and moving

47:12

into streaming, Jeff Bezos with Prime.

47:14

Those are often examples

47:16

that people would point to. What we

47:18

found for every basis are Hastings. There's

47:20

dozens of examples we've encountered of these

47:23

setups where a founder can actually run

47:25

a company off the rails because the

47:27

idea proved to be flawed. You

47:29

can imagine these scenarios where the founder has

47:31

a track record of being a visionary. As

47:34

an investor, it's very difficult

47:36

to distinguish that grid and

47:38

long-term thinking with stubbornness on a flawed

47:40

idea. With this project, we've been able

47:43

to surface a bunch of these setups

47:45

and launch a project to see if

47:47

we can better tease out ex ante

47:49

if there are common patterns. Maybe

47:53

bench strength is something to dig into. You're

47:55

not having a bunch of yes men or

47:57

people can push back if the idea is

47:59

intact flawed. And maybe it's

48:01

self-awareness or introspection from the founder

48:03

to pivot or course correct when

48:05

the feedback is negative. Maybe

48:08

it's teaching up whether there's a defensive component

48:10

to the new initiative and it's not purely

48:12

offensive. Ideally, Everest, you have a lot of

48:14

data points and you can run sophisticated

48:17

analytics on. But even when you just have a handful

48:19

of data points, I think you can explore

48:21

hypotheses around certain patterns and launch some,

48:24

I guess, R&D projects that for us

48:26

could prove to be very high return

48:28

on time. Over the last

48:30

10, 15 years, you've been at the firm

48:32

for the most part. You've been on this

48:35

exponential one-way trajectory. And

48:37

then fall of 21 hits. And

48:40

for the first time in a while,

48:42

growth stocks sell off a little bit.

48:44

And I'm curious what you experienced over

48:46

those last two years. Yeah,

48:48

it really dovetails with your last question, Ted, about

48:50

how do you incorporate feedback. It was a tough

48:52

backdrop for us as growth investors, if

48:55

given the pond we fish in, not

48:57

having investments in areas like energy was

48:59

difficult from a relative standpoint. But it

49:01

was a unique environment for us because

49:03

typically we tend to do well during

49:05

down markets and this was an outlier.

49:08

And yes, there were some

49:10

macro considerations to explain

49:12

that. But I also think there were some mistakes

49:15

we made. And there weren't mistakes in 2022. There

49:18

are mistakes in 19, 2021,

49:20

as far as maybe,

49:22

for instance, how we didn't

49:24

maybe diversify our research pipeline

49:26

sufficiently. But again,

49:29

it gets back to that feedback question because you

49:32

can take two extremes. You

49:34

can say like a football cornerback, just next

49:36

play, forget about what happened. It's always the

49:38

next play, not the best way to operate.

49:40

And there's put some takes to that. On

49:43

the opposite side, there's this notion of taking

49:45

the intensity and grit to learning, which is

49:47

about every day trying to get better. And

49:50

the challenge with that is twofold. As we talked

49:52

about, you could learn the wrong lesson because of

49:54

poor feedback quality. But actually

49:56

the worst possible outcome, in my view, is

49:58

learning the right lesson. at

50:00

the wrong time. At least in the same

50:04

time, you're going to be able to get

50:06

a little bit of a change in your

50:08

time. So, I think you have to take

50:10

the feedback, understand, reflect on the mistakes, but

50:12

sometimes there are immediate changes to be made

50:15

and sometimes you want to park those mistakes

50:18

and make more structural changes

50:20

that won't yield payoffs for a few years. It takes a

50:22

lot of intentionality to strike that

50:24

balance. Just an example, you

50:27

mentioned tweaking what was coming through

50:29

your research pipeline as one of those lessons.

50:32

I would love to hear more about

50:34

that. When you think about building

50:36

a watch list and what you cover versus what

50:38

you don't cover, in the last

50:40

four or five years there was a lot of new

50:42

names coming across our radar in areas like software

50:45

with a lot of IPOs, areas like

50:48

semiconductors, areas like FinTech. In the spirit

50:50

of not having blind spots, I think

50:52

we leaned into that from a research

50:55

pipeline perspective and wanted to build sufficient

50:57

coverage around these up and coming

50:59

sectors. I think just as

51:01

we build a portfolio, or at least aspire

51:03

to a portfolio of all weather that can

51:05

do well in different cycles, I think

51:08

you can take that same mindset into

51:10

your research pipeline and make sure your

51:12

pipeline is adequately diversified by the type

51:14

of business, the industry. Obviously

51:16

in hindsight you can think about long

51:19

duration, short duration type considerations. I think

51:21

those guardrails were in place but not to the extent

51:24

with which they could have been. I think we got

51:26

a little bit lopsided in the types of names we

51:28

were writing out for a few years. That was a

51:30

change we've made since. One

51:33

of the other things that has changed

51:35

in the organization over the years is

51:37

expanding different strategies beyond

51:39

international growth. I would

51:41

love to hear your experience in building

51:43

out the firm to be a more

51:46

diversified offering. It's a really

51:48

interesting question because I think growth in

51:50

this industry has a bad name. You're

51:52

trying to product proliferation is a common

51:55

concern if you're an allocator. So

51:57

we think about it a few ways. I wonder if we're going to build

51:59

a new product. the first question is can we

52:01

do something different? We have no interest in

52:03

building MeToo products. Can we

52:05

leverage the WCM platform, those core values I

52:07

talked about before? The third question

52:09

and the most challenging one is how

52:12

do you balance the added resources it'll

52:14

take to sufficiently do that product well

52:17

versus the notion that could

52:19

this product make our existing products better?

52:22

And I think we have

52:24

a hypothesis at least that the

52:26

products we've launched like emerging markets,

52:28

China, international small cap, they

52:31

are making our core selection products

52:33

for lack of a better term, better. And

52:36

I'll give you an example. Nowadays a lot of investors are

52:38

thinking about industries like

52:40

semiconductor equipment, life sciences, because

52:43

there's really good businesses in these industries and

52:45

there's maybe a notion that the cycles are

52:47

bottoming. That could be an area to deploy

52:49

capital. I think where

52:51

investors would be liable to get

52:53

tripped up in these industries here

52:56

is the snapback tends to be

52:58

less sharp than expected because there's

53:00

emerging competition from Chinese competitors. And

53:02

so having a portfolio that

53:05

invest in emerging markets, having a

53:07

portfolio that invest in China, I

53:09

think takes an offensive mindset

53:11

towards those emerging competitors to the

53:14

companies you own. And I

53:16

think you'll be quicker to uncover

53:18

blind spots and manage risk. If there

53:20

is a potential mode situation at play

53:22

that if you didn't have those products,

53:24

you just wouldn't be on top of.

53:27

For instance, if I'm looking at Danaher, am I better

53:29

off from a team return on time standpoint, reading

53:32

another case study on Danaher business system or

53:35

researching a local Chinese competitor that's up and coming?

53:37

And our view is the latter is at this

53:39

point in time, the higher return on time. So

53:41

I think when you think about growth, it doesn't

53:44

necessarily have to be bad. You have to be

53:46

mindful of the outside view and what scale there

53:48

is to managers. But I think if

53:50

you're intentional about it and you do it deliberately and

53:52

you're self-aware about some of the trade-offs, you could do

53:54

it in a way that improves the whole. What

53:57

are some of the other areas of group think

53:59

that you see in the industry that you've

54:01

decided they tried to do things differently? I

54:04

think one of the things I think a

54:06

lot about that is this notion that I

54:08

like to use this term internally, creative laziness

54:10

and people hate it because analysts build their

54:13

identity on grit and self-sufficiency and hard work

54:15

and if you're using some laziness, it's instantly

54:17

rejected but I like it

54:19

because I think again it's this notion of

54:22

everyone works hard in this industry. Everyone puts

54:24

in the hours and I think people zoom

54:26

in too quickly and they try to tackle

54:28

things through brute force and that's

54:31

what we talked about earlier with that information gathering

54:33

mindset and not asking like before

54:35

rushing to answer questions, ask is this the

54:37

right question as opposed to intend expert network

54:39

calls, maybe the best insight is coming from

54:41

a small partner in Scandinavia, that's the person

54:43

we should fly on the plane and just

54:46

meet that company because that's going to be

54:48

the unique insight. I just see in the

54:50

industry this notion of just

54:52

tackling things through brute force,

54:55

not bringing a creative elegance. I use

54:57

this example which people laugh at is

55:00

Nathan's hot dog eating contest. This

55:02

guy Kobayashi wins all these contests

55:04

and what he did is

55:06

he legitimately reframed the question like how do

55:08

you eat more hot dogs? How do you

55:10

make hot dogs easier to eat? He

55:13

snaps it in half, he dips the bun in water, maybe

55:15

elegance is not the right word in that sense

55:18

but there is a creativity, a creative laziness that

55:20

he brought to bear which I think there's something

55:22

to learn from there. Yes, you've grown

55:24

the assets and had

55:26

more conversations and more clients come in.

55:28

I'm curious what you've seen from the

55:30

other side of the table as

55:33

some of the things that resonate both positively

55:35

and negatively. Negatively is

55:37

easy. This notion of drift, it drives

55:40

me crazy because I think getting better,

55:42

it's almost punished. If you have

55:44

a notion of getting better, learning from mistakes,

55:46

showing vulnerability, having a growth mindset, the

55:49

industry writ large will be

55:52

very quick to describe the term drift,

55:54

style drift, process drift, thesis drift. It's

55:56

like we're going to make mistakes. We

55:59

have made mistakes. Here is what

56:01

they are. Wouldn't you rather us learn

56:03

and get better rather than have our heads in the

56:05

sand? Just to have the blinders on. I

56:07

totally get why you're plugging a hole in a

56:09

portfolio. You want to make sure that the fund

56:12

plays the role you attended it to. But

56:14

I think not just being too quick to

56:16

jump to the notion of drift and understanding

56:18

that everyone is trying to get

56:20

better and evolve and that shouldn't just be

56:23

reflexively punished. You should try to perspective take

56:25

on where you're coming from. I think we

56:27

do a pretty good job to end up

56:29

being candid with prospects and allocators about here's

56:32

when we're going to do well, here's when we're not going to do

56:34

well. We're pretty transparent

56:37

about who we are, what

56:39

our values are, types of markets

56:41

that will be more difficult. So I think we try not

56:43

to make false promises. And so

56:45

I think that is the same way if

56:48

companies get the shareholders they deserve. We try

56:50

our best to get the right aligned allocators

56:52

involved. What are some of the

56:54

lessons you've learned from the CEOs of

56:56

your portfolio companies? There's a

56:58

few that come to mind. A recent

57:00

one is a portfolio holding called Arch

57:02

Capital which CEO's name is Mark Grandison

57:05

and Arch Capital, by the way, backgrounds.

57:07

It's an insurance company that just has

57:09

a phenomenal track record of growing

57:11

book value and attractive returns on capital

57:14

with limited volatility. And their secret sauce

57:16

is this notion of cycle management. How

57:18

do you operate with a counter-cyclical mindset

57:21

in a predictably cyclical industry taking

57:23

advantage of human psychology and market psychology.

57:26

But to the point where I learned,

57:28

the CEO Mark Grandison, he uses this

57:30

quote, luck is the residue of design.

57:32

I think Branch Rickey, it's attributed to

57:34

him and it probably predates him, I'm

57:37

sure. But this notion of designing an

57:39

organization and a culture, whether it's temperament,

57:41

messaging, incentives, hiring, which we talked

57:43

about, is what investing

57:45

is. How do you bring a counter-cyclical

57:48

mindset to a cyclical industry and marry

57:50

that as Arch does with an entrepreneurial

57:52

band. I've learned a lot and I've

57:54

tried to inspire the model of WCM

57:56

after what they do. There's

57:58

another executive at a company called company called

58:00

Bajaj Finance in India,

58:03

his name is Rajiv Jain. Bajaj is

58:05

probably the most understudied consumer

58:07

finance company in the world. It's probably what

58:09

every emerging fintech company should aspire to be

58:12

and he uses this quote like

58:14

long-term planning is often overrated and

58:17

counterproductive. We think about that a

58:19

lot because we're not big strategic

58:21

planners, five-year vision type manager

58:23

because we think it can create blinders, right? You miss

58:25

opportunities right in front of you but I used to

58:28

hide from that a little bit because it was that

58:30

build your plane as you're flaring it and

58:32

I think seeing company like Bajaj evolve and

58:34

just emerge into a Goliath through that mindset

58:36

kind of gives me your conviction around the

58:38

right path and then the last one is

58:41

one of my favorite executives. His name is

58:43

Pedro Arens. He is a CEO

58:45

of D Local. He came from a Kaddalibre and

58:47

what I learned from him is just how to

58:49

interact with the person on the

58:51

other side of the table. He

58:54

does it with candor, an active

58:56

listening, our learning mindset, talking about

58:58

mistakes. It opened my eyes to

59:00

whether it's the fund manager with the

59:02

corporate, whether it's a manager with an allocator,

59:04

it doesn't have to be adversarial. It doesn't

59:06

have to be nitpicking. You don't have to

59:08

be trying to get points scoring or gotcha

59:11

moments. You can build a really fun win-win

59:13

journey with the person on the other side

59:15

of the table and I learned a lot

59:17

about from Pedro. Even though you're

59:19

not big five-year planners, curious to ask

59:21

how you think about where WCM goes

59:24

from here? Yeah, we're not

59:26

big planners, Teddy. I think if you ask me

59:28

what the five-year plan, it's ten-year plan, it's all

59:30

I care about. What are the vibes when I walk into

59:32

the office in 2035? Are the

59:35

core values more vivid or are

59:37

they less vivid? Are we finding people who are

59:39

flourishing in the platform we've created and

59:41

pushing the organization in brand new ways? I

59:43

can't envision them. That's a good thing. Are

59:45

we looking back at what we're doing today

59:47

and cringing a little bit at the way

59:49

we do things? That's a good thing. That

59:51

would be my measures of success. I always

59:53

hate to walk into the room and get

59:55

any semblance of bureaucracy or group bank or

59:58

everything we tried so hard to insulate ourselves.

1:00:01

What are some of the things today that if you

1:00:03

look back five years ago, you

1:00:05

would say are cringe-worthy from how you

1:00:07

were doing things five years ago? Oh,

1:00:10

there's so much. We have a big believer

1:00:12

in leading with vulnerability. We did an off-site

1:00:14

several years ago where I'm tricking myself and

1:00:16

got up and we just talked about every

1:00:18

mistake we made over the last 10 years

1:00:20

and that was something like a 50-point PowerPoint

1:00:22

deck and showing about these mental models

1:00:25

that you just look at and like, what were

1:00:27

we thinking? Individual stock picks.

1:00:30

And I think just doing that and

1:00:32

having that vulnerability, it just gives people

1:00:34

that right mindset. I'll give

1:00:36

you a very live example, Ted. We're doing

1:00:38

a reflection week now, which I talked about.

1:00:40

One of our newer analysts, Dave Heng, he

1:00:42

just wrote a beautiful piece about how he

1:00:45

struggled with vulnerability because he viewed vulnerabilities imposing

1:00:47

on others, taking rather than giving.

1:00:49

And a lot of his identity growing up

1:00:51

was being scrappy, self-sufficient, having grit, figuring stuff

1:00:53

out on their own, don't impose. But now,

1:00:56

he's seen other people show vulnerability and he's

1:00:58

doing that as courageous. It makes

1:01:00

him want to help them more. So he wrote a really

1:01:02

interesting piece, kind of reconciled that. When I'm doing it, I

1:01:04

feel like I'm a taker. When I see other people doing

1:01:06

it, I do them as a giver. I

1:01:09

think really leading into that vulnerability

1:01:11

is critical and something we as

1:01:13

leaders always try to do and

1:01:15

pry over to sometimes. But I

1:01:17

think if you want to build a high-trust team,

1:01:19

you've got to get all the noise out of

1:01:22

the way, the friction, the insecurities. And

1:01:25

I think starting with vulnerabilities, at

1:01:27

least I found to be the best starting point. Sanjay,

1:01:30

I want to make sure I get a chance to ask you a couple

1:01:32

of closing questions before we wrap. What is your

1:01:34

favorite hobby or activity outside of work and family? Yeah,

1:01:37

I've gotten into this sport called paddle,

1:01:39

which is like a tennis-clash hybrid. And

1:01:42

Mike Tridge likes to talk a lot of trash. So I

1:01:44

got a great doubles partner, so I'm looking forward to taking

1:01:46

him down soon. What's one fact

1:01:48

that most people don't know about you? I

1:01:51

like to move a lot, like move houses a

1:01:53

lot. And it drives my wife

1:01:55

crazy. But I try to explain to

1:01:57

her, there's a thought process behind it. I do feel

1:01:59

like more... moving slow sound time or at least

1:02:01

stretches out your perception of time. If you find

1:02:04

a new neighborhood, you build out into a new home,

1:02:06

get incarcerated in a new community,

1:02:08

I think it slices life into individual chapters and

1:02:10

there's a novelty and memories around that. But if

1:02:12

anyone out there is nodding, my wife is not

1:02:15

nodding, I can tell you that. What's

1:02:17

your biggest pit piece? Problem

1:02:19

admirers. I think if you can't think of

1:02:22

a solution to a problem or

1:02:24

at least a pathway to a solution, don't

1:02:26

make your identity just constantly griping about

1:02:29

the problem, amplifying drama around it. I

1:02:31

feel like a lot of young people especially get trapped in that identity.

1:02:34

Which two people have had the biggest impact on

1:02:36

your professional life? Two people you've

1:02:38

had on the show before Ted, Mike, Tread

1:02:40

Paul Black. Mike, I said this if I

1:02:42

had a firm recently, if you

1:02:45

really want to grow as a person, find someone

1:02:47

in your life who when you're down will

1:02:49

pick you up and when

1:02:51

you're up will push you often

1:02:53

beyond your comfort zone. I think there's a lot of

1:02:56

people out there who'll do one or the other. Exceptionally,

1:02:58

few people will do both and Mike's been

1:03:01

that for me for 20 plus years. Paul,

1:03:03

the leadership style. He is throw you

1:03:06

in the deep end but with a lot of

1:03:08

grace and a lot of patience. I'll

1:03:10

give you a quick anecdote. I was like 28 at

1:03:12

the time, pretty new to WCM and I went to

1:03:14

Paul and this is problem admirer mindset right here. I

1:03:17

said, Paul, I don't think we have a research culture

1:03:19

here. If I was him, I would have been like, oh,

1:03:22

they're just shooting me out and what do you

1:03:24

know about research culture? And instead, he just said

1:03:26

three words. He said, go build it. That

1:03:29

jolted me into a solutions mindset. It was

1:03:31

so important for my career and it's something

1:03:33

I've carried forward to this day is always

1:03:35

look for solutions and if you hadn't said

1:03:37

those words, maybe I would be a problem

1:03:39

admirer today. What's the best advice

1:03:41

you've ever received? I've had a

1:03:44

few people tell me this and it

1:03:46

sounds so simple but just do exceptional

1:03:48

work because someone will eventually notice. I

1:03:50

think people short circuit their potential but

1:03:52

you just get too caught up in your

1:03:54

circumstance. Maybe you don't get along with your boss,

1:03:56

your college, you're not getting the promotion you think

1:03:58

you deserve. There's also demotivation,

1:04:00

your work suffers. But I think if you just

1:04:03

pour your energy into doing great work,

1:04:05

someone will notice and it'll usually be

1:04:07

someone you can't anticipate, a customer, a

1:04:09

partner, someone outside their organization. That's

1:04:11

tough, last one. What life lesson have you learned that you

1:04:13

wish you knew a lot earlier in life? Let

1:04:16

me pick my sports teams more wisely. I

1:04:18

was a long-suffering Knicks, Mets, Dolphins fan. On

1:04:20

the East Coast now I'm a long-suffering Angels,

1:04:23

Clippers, Chargers fan. But more seriously,

1:04:25

it's finding your own voice, Chad. I think

1:04:27

when I first joined WCM, I

1:04:29

think a lot of young people get in

1:04:31

this trap is you hear Paul Black, Mike

1:04:33

Trigg, Kurt Greenwich, our founders, tell a story

1:04:35

and tell it so persuasively about what WCM

1:04:38

is, what makes us tick. And you try

1:04:40

to memorize those words and spit it back

1:04:42

in the marketing setting, for instance, and

1:04:44

you just get blank faces on the

1:04:46

other side because it's not authentic. And

1:04:48

so I think you can

1:04:51

borrow ideas, but once you develop your

1:04:53

own voice on the topic and lean

1:04:55

into your journey around it, it changes

1:04:57

everything, your disposition changes, your body language

1:04:59

becomes much more engaging, meetings

1:05:01

transform from a test or a conversation, and

1:05:03

you just have more fun doing it. So

1:05:05

that's a big lesson. Well, Sanjay,

1:05:07

I wanna thank you. This goes all the way

1:05:09

back. I remember an email you sent me almost

1:05:11

seven years ago as one of the first true

1:05:13

fans of the show. So it's really fun to

1:05:15

come full circle. And thanks so much for sharing

1:05:18

this insight in the research process and

1:05:20

the continued evolution of WCM. No,

1:05:22

it's a pleasure, Tan. It's been fun watching your journey as

1:05:24

well and seeing the podcast have so much success. Thanks

1:05:28

for listening to the show. To

1:05:30

learn more, hop on our website

1:05:32

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1:05:34

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1:05:46

a good one and see you next time.