The Exchanges

Q From that initial exposure, how did you get from there to the path of a career?

A When I was in high school, I knew that I wanted to go to college, but I didn't know how. First in my family to go to college. And so my strategy was to go into the military. So I went to test Took the entrance exam, the ASFAB, and I'll never forget, the officer came back and he said, you scored really high. You should think about going to college. And that sounds good, but how does that work? And he said, well, they have these ROTC ships, and you should really think about it. I said, okay. So interesting thing, and I don't know why, is I wanted to be a Marine for whatever reason. And in Illinois, there are only two schools that have Marine ROTC ships. Northwestern and University of Chicago. Turns out I was lucky that they happened to be pretty good schools, and I applied to one school. I applied to Northwestern because they had just placed in the top 10 NCAAs in wrestling, and they were D-one, and that was the reason. And the way that the ROTC works is you have to be accepted by the school first, and I got accepted, and I got a full ride, full scholarship. And so it was really by accident that I ended up At Northwestern. And then, this is comical in hindsight, but I saw the movie Wall Street when I was in college with Michael Douglas. I was like, I want to go to Wall Street. And I was recollecting Lewis and earliest days. And I found this program called SEO, Sponsors for Educat…

AI assessment note: “I found this program called SEO... and was placed at DLJ”

Q What is the typical portfolio structure look like?

A We're not didactic around particular hard risk rules or parameters. We think about sizing across four dimensions. So the first is discount to intrinsic. Second is what are the range of outcomes here? Does it have right tail, left tail skew? Third is size and liquidity. And then fourth is correlation. And a target for us would be two and a half percent of capital in the global strategy. So when we're at ideal, we'd have a 40 stock portfolio. You're never at ideal because you're always moving in and out of positions. And so if you step back, we've got 35 analysts across the globe. Each of them is running, call it a 10 stock paper portfolio. So that's 350 names. And In the strategy, we're seeking to narrow that down to call it 60, 70 high conviction positions in the global strategy.

AI assessment note: “a target for us would be two and a half percent of capital”

Q How does the decision making work on the portfolio?

A So, in our global strategy, there are three portfolio managers. I'm one of the three, and I have overall accountability for the strategy and risk. Each of us manages a sleeve, roughly of equal size. And it's an independent decision for each of those of the most compelling ideas that they're seeing around the globe. Now we're in the same investment committee meetings. Every week we're meeting with each of our five teams and interrogating what they're seeing, sharing what we're seeing, driving research direction. We're in the same risk meetings, but We all show up with somewhat different perspectives of the world. And on top of that, I have overall accountability for the strategy. So if there's something that I view as off from a risk perspective or a sizing correlation, then I have responsibility to change that.

AI assessment note: “Each of us manages a sleeve, roughly of equal size. And it's an independent decision”

Q What are some of the ways over time that your portfolios maybe looked, as you say, different because you went about things differently?

A I wasn't at Orbis at the time. You go all the way back to inception, 1990. Japan was 45% of the world index, and we had zero. That was right from the start. You go back to 2008. We had quite a big position in the managed care companies. And so the Aetna's and UnitedHealthcare and Humanas of the world. And the reason was that Obama was going to get elected, and the fear was we were going to go to universal healthcare. When you get the calls from clients like, don't you follow the news? You see that they're going to go to universal healthcare. And we had, I think, more than 10% of the global strategy In that sector at the time on a view fundamentally that they played a really critical role and that wasn't going to change dramatically. And in fact, there was a chance that that could flip and it would become a better business because of some of the legislation that was in play. You can go back years when we were buying some of the memory companies, when the memory industry was consolidating and literally companies were going bankrupt. And our view was that That consolidation actually was going to lead to a healthier DRAM business, but it was tough in the moment, which I think ties back to the core of you have to have the ability to take those independent views. You have to have an aligned client base that allows you to do it because your time horizon is only going to be as long as …

AI assessment note: “Japan was 45% of the world index, and we had zero.”

Q Coming out of HBS, what did you think about doing?

A So when I went to HBS, I knew that I wanted to invest, but that's a wide purview. Didn't know how. And I was thinking about the public side as well as the private side. And what I did for the summer, I actually split my summer. Half of it was at Orbis doing public market investing with a global purview. And then the other half was at a distressed turnaround firm. And so it was a really good exposure to see both sides and what are you most acclimated to. And at the end of the summer, my view was, I like the public side, just the behavioral aspects of it. And so that was my intention. But three of the folks that I worked with at that private equity firm had left to start their own new private equity firm and invited me to join them in founding that. And I felt like that's a once in a lifetime opportunity. I didn't dislike it. So let me go for that. We launched, we were backed by Cerberus originally doing distress turnaround investing, invested two funds. We were raising our third fund. I'm now five years in. And I was just having a Honest conversation with myself. I like this, but I don't love it. And spending a lot of time on the weekends and getting upset when some of the CEOs of my companies call because I'm thinking about some public idea that I like, I got to give this a go. And so I stepped back as a partner and started over. On the public side, and that's when I joined Orb…

AI assessment note: “I knew that I wanted to invest... thinking about the public side as well as the private side”

Q What investment mistake have you made that you'd never make again?

A Man, there's many. Probably the one that stings the most goes back to the GFC. I'll never forget It was right in the middle of the GFC. I was in the office on a Sunday night and I got a call from our broker at Goldman. And she said, we've got the whole trading desk set up. We're trading contracts contingent on whether or not Lehman files by midnight tonight or not. And we're here to serve. And I remember hanging up the phone thinking, wow. And the next morning we had an investment committee meeting to make a decision as to whether or not we were going to add or sell our position in AIG. And we decided to add to it. The mistake, which I'll never forget, is the difference between liquidity and solvency. We spent so much time, Ted, on the fundamental bottoms up of the credit. They had insured these AAA portfolios, and we were convinced they were money good. Problem is they have to post collateral based on marks, and that got them in a lot of trouble, and we know the rest of that story. But just the difference between liquidity and solvency, and I think just We pride ourselves on being contrarian, but it's not just about being contrarian, it's also being right. You don't get paid just to be different.

AI assessment note: “The mistake, which I'll never forget, is the difference between liquidity and solvency.”

Q What are some of the other ways that you've thought about alignment in the business?

A The other one that I'll touch on is our ownership structure. So we're quite unique in this dimension as well. We are privately owned by a charitable foundation in perpetuity. And so That's really powerful in aligning incentives because the whole premise from an investment standpoint is we want to take independent contrarian decisions. If I go back to 1995, when I first met Alan, when I was in business school, the very first meeting, he said to me, if you want to generate a meaningful alpha, you have to come at the problem completely differently. You've got to turn it on its head. If you look like everyone else, you're going to have average results like everyone else. So simple in concept, difficult to execute in practice, and it means that you are going to be under pressure at times, and you're going to be out of sync. And so when we took on the decision to launch the refundable fee reserve, that would be very difficult for a lot of firms. There's no way you could do it if you're a public firm, but many private partnerships even, I think, would struggle with that decision. There's a lot of talk around having permanent capital. Well, what about permanent long-term ownership? And so it's really meant to reinforce us being in a position to take those kind of decisions.

AI assessment note: “The other one that I'll touch on is our ownership structure.”

Q Why don't you take me back to your first interest in investing?

A Ted, it's been a journey. I'm a non-traditional for sure. I'm a big believer in serendipity and return on luck, and I've had lots. And so when I go back, I first became captivated with investing when I was in middle school. This is in the late seventies, early eighties. I grew up in Illinois, south suburbs, about an hour south of Chicago, and I spent a lot of time with my grandfather growing up. He's my hero, hardest working person I've ever seen. During the day, he used to work in a factory, and at night, he was a janitor in the savings and loan, and I used to go with him every night to clean the bank, to mop floors, and dump out waste paper baskets, and I like to say, I joke that In other people's garbage, I found treasure, and there was this really odd-looking newspaper that was different than any of the other newspapers, and it had these funny dot matrix photos, if you remember going back. So, of course, it's the Wall Street Journal, and I was just fascinated by it. I can't say that I understood what it was, but was asking questions, and that was really my first taste, and on Friday nights, we didn't have to go to the bank, because you could go on Saturday, and my grandfather used to love to watch Louis Rukeyser's Wall Street Week. So that was every Friday night. In the beginning, that was just a way to spend time with my grandfather, but over time, it just really fostered …

AI assessment note: “I first became captivated with investing when I was in middle school.”

Q You mentioned a couple times having a lot of data. So you have data of each of these individual shadow portfolios. You have data on the main portfolio. How have you thought about using all this data to integrate into your process and prove what you're doing?

A I'll take that in two dimensions. I think the core is the paper portfolio system, and we've been using that for 30 years, and that's really the flight simulator. We use that to identify the talent within the team to really zero in on the superpowers of the individual, and so we have a dedicated performance attribution team. All of our analysts get scorecards every six months. These are 25, thirty-page documents. It's going to look at Success ratio. It's going to look at win or loser skew. It's going to look at slugging percentage. It's going to look at that voting track record from the investment committee meetings. It's going to show you a visual graph of every recommendation and how you've managed that position sizing wise based on how the stock is traded. And everything in those paper portfolios trades based on actual volume and VWAP from when you execute the orders. It's subject to the same compliance provisions that we have. So it's real. And we use that. And it's interesting because you, you see some people are very good at things that they work themselves. Some people demonstrate a lot more skill at ideas and they're more objective on the ideas of others. Some people can be very good at idea generation, but not necessarily pulling the trigger. And so there's so many nuances to that, but it gives you really clear objective data to work with as you're making those decision…

AI assessment note: “All of our analysts get scorecards every six months. These are 25, thirty-page documents.”

Q Within this structure, you have to put in an investment product underneath it. So let's turn to that. How do you think about investing?

A You go back to, I mentioned that very first conversation that I had with Alan. And if you want to drive a really meaningful alpha, you have to come at the problem completely different, which means you need people who are very independent minded. So the core, core DNA, if you think about it as a flywheel, right at the top is people and culture, and it's people that are intrinsically independent minded and driven. And so then you need to create an environment and a culture And you need to reward in a way that attracts and retains those kind of really independent-minded people. So the big way that we do that is all of our analysts run paper shadow portfolios. So we've got 35 analysts around the globe, and after generally a year or two, they will launch a paper portfolio. And that tends to be a concentrated expression of, call it their 10 highest conviction Recommendations in a particular either sector or geography. And that's meant to be very objective about what one is expressing. So not picking on any particular firm, but a lot of firms, you have analysts and they will go around, they will quote unquote pitch their ideas. You're trying to sell. I think we come at it the opposite direction whereby when an idea is recommended to be purchased on behalf of Clients, we call it a thesis defense. Much more like in academia, when you're presenting your PhD, and you have peers around, an…

AI assessment note: “all of our analysts run paper shadow portfolios. So we've got 35 analysts”

Q Within any one of those analyst sectors or geographies, is there a shared style for what an Orbis company is?

A There's space within that, but at the core, we're fundamental investors. We're not trying to impose a macro view. We're going deep, bottoms up. We want to understand the business well. And we're thinking, what would a sophisticated owner pay for this business? And that can be different if you're in an asset-heavy business or software business, but what would a sophisticated owner pay for this business? And we're looking to buy that at a meaningful discount to that. Generally speaking, we know markets are efficient, but they go through periods when they get wide, and we're looking to go after them in those periods when they get wide. And more often not, the reason that they get wide is there's some kind of behavioral element. They've underperformed. They're out of favor. There's a fear associated. We are drawn to those types of situations. To really come to a first principles, intrinsic value view of what we think this is worth, and then take those positions.

AI assessment note: “at the core, we're fundamental investors. We're not trying to impose a macro view.”

Q How have you found the ownership dynamics impact the employees relative to other, say, more typically structured ownership organizations? Let's just say private partnership, leave aside the public companies.

A Couple different dimensions to that, but I think the biggest is just knowing that you've got that long-term aligned owner. We went through a leadership transition a couple of years ago in this industry that can be difficult, but having this in place created a lot of clarity around the control owner and how that transition would take place. And I would argue that's quite valuable in fostering continuity. Now there's another dimension on the other side, which is that entity is a charitable foundation. And so The more value that we create in our investing efforts has an impact on the other side, and so there's a bit of a self-selection. It's not exactly the same, but it's similar to what you see the people that are drawn to university endowments in terms of there's a deeper mission behind it that has a larger impact, and I think that's something certainly felt by myself, but many other individuals in the firm as well.

AI assessment note: “knowing that you've got that long-term aligned owner”

Q When you go through your process of looking at ideas that could work their way into your portfolio, does that start at that analyst level in the shadow portfolios? Are there other mechanisms that you guys use to generate ideas?

A One of the things that's pretty distinctive about us at Orbis is we have A very rigorous phased research process called phase one, phase two, phase three. And in front of that is idea generation. And it's two parts. One, it's quantitatively driven. The typical stuff that you'd see, we have internal proprietary models. It's largely reversion to mean driven, those models. And the other side is qualitative. Some of my best ideas are existing ideas where you have an insight, but that's what drives it. And one of the interesting things I just say as a side point is we have this incredible data set across all of these paper portfolios going back since inception. And we're now using AI to replicate what we would have been buying based on the historical algorithms of what we were doing. Now that doesn't drive it to be in the portfolio, but we're using as an idea generation mechanism to say, Looking at what we've done historically and identifying ideas, what would the models be saying we would be doing right now?

AI assessment note: “in front of that is idea generation. And it's two parts. One, it's quantitatively driven.”

Q How far along did you go with a more industry standard management fee structure so that you had these reserves that you could create this ability to refund the performance fee?

A We launched the refundable fee strategy in 2004, and it was a multi-year period that we went through that we were Reserving on our balance sheet. Now also consider that each client has an individual trust or reserve account that they're also building a reserve in. And so the fee will not flow out to us until it reaches certain thresholds. So it's two layers. So it was really a multi-year period. But I think looking back, it's been fantastic because it's a very powerful mechanism to align. You go through those periods when you're underperforming, but if you're sitting on a reserve and And you're earning back that fee. One, it dampens the underperformance. That's really good. Two, you're very reticent to want to redeem when you've got a credit in your account. That's also fantastic, right? Because it's promoting Exactly the kind of behavior that you'd want to see when you are against the market and you're underperforming. And that puts us in a better position to make the best decisions in those periods.

AI assessment note: “We launched the refundable fee strategy in 2004, and it was a multi-year period”