May 7, 2018 · 1h 0m · capital-allocators
Paul Black - Gratitude, Fun, and Growth Stocks (Capital Allocators, EP.51)
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In this episode of Capital Allocators, host Ted Seides interviews Paul Black, co-CEO and portfolio manager of WCM Investment Management, exploring how analyzing expanding competitive moats, evaluating corporate cultures, and learning from past failures helped build a $26 billion growth equity powerhouse.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20.8% of the talking time here. How this is scored →
Ted as informed peer 4.7 Guest teaching 5.2 Guest disagreement 1.9 Ted pushing back 0.5
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 12:25 Dismissing traditional static wide-moat investing as value traps
Paul forcefully rejects the consensus active management playbook of buying static wide-moat stocks at a discount, citing Nokia in 2007 as proof that it leads directly to chronic underperformance.
Hardest push from Ted ▶ 36:05 Pushing back on claims of active management outperformanceTed directly challenges Paul's optimistic assertion about active management by invoking his well-known stance and record as the poster child against it.
Biggest teaching moment ▶ 17:32 Teaching the statistical importance of ROIC trajectoryPaul educates Ted on why absolute ROIC hurdles fail, demonstrating that the five-year trajectory of ROIC shows a direct 1-to-1 correlation with equity performance.
Ted holds their own ▶ 44:00 Naming extinct momentum firms from San DiegoTed demonstrates deep historical industry knowledge by jumping in to list the specific fallen momentum shops in Southern California, such as Nicholas-Applegate.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Paul Black's Early Career and Early Investment Lessons | 3 | 4 | 1 | 0 | Ted opens with warm curiosity about WCM's low profile despite managing $25B. Paul explains his early, naive start trading gold stocks and managing trust assets at Bank of America with zero formal training, emphasizing that career progression came from early mistakes. | |
| Formative Influences, Literature, and Joining WCM | 4 | 4 | 1 | 0 | Ted probes into formative literature and mentors. Paul explains his self-taught background reading Phil Fisher and Benjamin Graham, before detailing the serendipitous meeting on a preschool carpool trip that led to joining Kurt Winrich at WCM. | |
| Growth Philosophy and the Importance of Widening Moats | 5 | 6 | 3 | 1 | Ted sets up the classic debate between value and growth investing. Paul argues strongly that conventional static wide-moat investing leads to value traps (citing Nokia in 2007), asserting that active managers fail because they focus on static valuation rather than the direction of competitive advantage. | |
| Corporate Culture as a Catalyst for Competitive Advantage | 4 | 6 | 2 | 0 | Paul details why corporate culture must align directly with competitive advantage, contrasting Costco's superior metrics and employee-centric model with Sam's Club. Ted listens as Paul frames culture as the ultimate qualitative differentiator. | |
| Tracking ROIC Direction and Moat Typologies | 5 | 6 | 2 | 1 | Ted asks how WCM defines and measures competitive advantage. Paul explains that the trajectory of ROIC is far more predictive than its absolute level, and presents proprietary moat typologies like outsourced R&D companies (Chr. Hansen, Core Labs) that generalist models misprice. | |
| Qualitative Culture Assessment and the Whole Foods Example | 5 | 6 | 2 | 1 | Ted asks practical questions about evaluating qualitative culture. Paul explains how WCM works with James Heskett, conducts mosaic interviews with former employees, and shares an anecdote visiting John Mackey at Whole Foods where 'absence of fear' fostered healthy risk-taking. | |
| Aligning Unique Cultural DNAs with Industry Requirements | 4 | 5 | 1 | 0 | Ted asks for an illustration of culture matching competitive need. Paul highlights that while retail demands happy, engaged frontline staff (early Walmart), capital-intensive freight rail (Canadian National) requires rigid accountability and strict process compliance. | |
| WCM's History, the Taco Bell Epiphany, and Core Values | 4 | 5 | 2 | 0 | Paul narrates WCM's history and its toxic early culture under the original founder, highlighted by the infamous Taco Bell lunch trip. He contrasts that with WCM's modern culture grounded in shared equity, open communication, gratitude, and fun. | |
| Sponsor Message: Ridgeline Cloud Investment Architecture | 6 | 5 | 3 | 2 | Following the sponsor break, Ted brings up his famous bet to challenge Paul's claim that active management works. Paul counters with 10-year rolling database figures and critiques Northeast groupthink and asset-gathering closet indexers. | |
| Past Failures as Catalysts for Investment Discipline | 5 | 5 | 2 | 1 | Ted invites Paul to reflect on critical past investment blunders. Paul openly recounts holding Dell, eBay, and Yahoo over Apple, Amazon, and Google in the mid-2000s due to cheap valuation and static moat metrics, resulting in losing $4B in client mandates. | |
| Evaluating Corporate Culture in International Markets | 5 | 5 | 2 | 0 | Ted explores cultural analysis in global markets. Paul discusses governance challenges in Japan, realistic evaluation of emerging market practices (Walmart de Mexico), and the demise of momentum growth boutiques from the 1990s. | |
| Identifying Global Tailwinds and Demographic Shifts | 5 | 5 | 2 | 0 | Ted queries thematic tailwinds. Paul highlights Chinese consumer optimism (contrasting medical students with American peers), dismissing commodity-based emerging market investing in favor of owning companies selling directly to the ascending global middle class. | |
| Downside Protection within a Concentrated Growth Strategy | 6 | 5 | 2 | 1 | Ted probes downside risk in a 33-stock portfolio and how allocator behavior changes with firm size. Paul asserts that growing moats provide real downside protection and critiques allocators for pro-cyclical performance chasing before transitioning to rapid-fire closing questions. |
Statements from this episode (23)
Black: Rapidly growing companies can be massive destroyers of capital
“The most rapidly growing companies, although they're kind of sexy and fun, they ultimately, they can be massive destroyers of capital.”
Black: Buying cheap wide-moat businesses often leads to value traps
“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 qual…”
Black: Investing in expanding moats makes initial valuations look cheap
“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 …”
Black: Costco doubles Sam's Club on sales density and ROIC
“But you look at the financial metrics of Costco, they're twice on every metric what goes on at Sam's Club. You know, same store sales are four or five percent at Costco. There may be one or two at Sam's Club. Sales per square foot at Costco, a thousand bucks, …”
Black: Costco founder Jim Sinegal never made over $300,000 annually
“Founder of the company, Jim Senegal, owned a lot of shares, but never made more than 300,000 dollars a year.”
Black: 5-year ROIC trajectory correlates directly with stock performance quintiles
“There is a one-to-one correlation between the direction of the ROIC over a five-year period of time and stock performance. You know, so if you break the market down into five quintiles from the top quintile where they have the most rapidly rising ROICs to the …”
Black: Expanding low-ROIC firms outperform stagnant high-ROIC companies
“We prefer a company, frankly, that would have maybe five years ago had a four percent ROIC growing to five, six, seven, eight. 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.”
Black: Outsourced R&D businesses deserve premium valuation multiples
“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 o…”
Black: DCF models provide zero competitive advantage for investors
“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.”
Black: Optimal Corporate Culture Varies Radically by Industry and Business Model
“You want people that are highly accountable, probably think a certain way, more linear, because it's all about delivering an, you know, an on-time product in an efficient, cost-effective manner. So in, like, Canadian National or Canadian Pacific Railroads, you…”
Black: WCM stayed under $200M AUM for its first 22 years
“So for 20 years, from, actually 22 years, from 76 to 19 98, the firm never grew over two hundred million dollars. Never.”
Black: WCM grew from $200M to $26B in AUM
“As a result, we've grown from two hundred million dollars to twenty six billion dollars in assets under management.”
Black: 50% of 2,000 active managers beat their benchmark over 10 years
“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.”
Black: Most active managers run 100-stock portfolios to protect assets
“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 mode business selli…”
Black: Evaluating competitive advantages is fundamentally qualitative, not quantitative
“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 advan…”
Black: Cross-Shareholdings and Opaque Cultures Make Japan Hard for Growth Investing
“You know, there's a lot of, you know, you 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 very difficult for us to find names for that reason in …”
Black: Balanced Executive Pay Outside the U.S. Benefits Shareholders
“I think it's great that outside the U.S., you don't see guys making 30 or forty million dollars 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 like a lot, b…”
Black: Practices Seen as Under the Table Are Normal in Emerging Markets
“Emerging economies, They operate a little differently than a lot of European and North American countries. And things that we would see as being kind of under the table are just normal.”
Black: Multi-billion dollar momentum shops from past decades no longer exist
“How many years ago, 1520 years ago, there were a bunch of multi-billion dollar momentum shops and I can't I can't really think of one right now that is still in existence.”
Black: Emerging middle class spending tailwind will last 15 to 20 years
“We'd argue that It's a way better idea to buy companies that sell products as these people get richer. That's a beautiful tale, and that's not going away for 15 or 20 years.”
Black: Unconstrained companies outperform in downturns by out-investing weaker rivals
“Because in difficult periods of time, if you can own the company that isn't constrained by the financial markets, And can allocate their capital into the spaces where their weaker competitors cannot. What you find is that, that really, those companies hold up …”
Black: Allocators Chase Past Returns Instead of Rebalancing Into Lagging Strategies
“Most individuals still chase money. They still chase performance. We tell them all the time, look, if we've done particularly well, we completely understand you taking money away from us and why don't you put it into a, you know, a strategy, like maybe a value…”