The Exchanges

Q In that period of time, both formative years at Proctor and then your time at Reebok, what did you learn from being in operations roles that you might say all these years later looking at from a perspective of investor that someone who wasn't in an operating seat might not understand?

A Great question. There's so much, two parts. One is just from running a business and how hard it is In my travels on Wall Street and in finance and sell side and buy side, people's assumptions about, oh, well, you just do this. Take those machines and put them over here. Take the equipment out of wherever, China, and just move it to the Philippines. It's like, it's not that easy. Oh, that's a better product, so just get it listed at retail and off you go. No, you got to go sell it to a bunch of different people. The creation of product and packaging and manufacturing of it and listing it and convincing consumers to buy Gain the product from the factory to the trunk of your car into your house to use the product and then have you come back to the store and buy it again. That's really, really hard. The other aspect that I learned, and this is all Procter & Gamble, it was just how disciplined they were in executing their business. They hated mistakes. By the time they brought a product to market, they knew it was going to be successful because they had done so much research and had been so disciplined and so methodical about executing it. And so one of the things I learned from them that we still use today is we want to be fact-based decision makers. It's not just your opinion. Of my opinion is that stocks can do well. We need judgment in investing, but it's what other research can…

AI assessment note: “There's so much, two parts. One is just from running a business and how hard it is”

Q I'd love to circle back to the investing underneath what's going on in the business. How did you describe the investment strategy of Tremblant?

A I want to compound my own capital. That's been my North star since we started, which is what would I want to do with my money? The process by which we invest falls into following four parts. Number one is an assessment of the business model. So it's basically if you brought McKinsey into a business and said, Hey, is this a good or bad business? What would they do? And this is overly simplified, but basically they'd say, okay, what product or service does that business offer? What competitive advantage do they have relative to their competitive set? And is that competitive advantage sustainable over time? Michael Porter, buyer power, supplier power, these types of things. But basically that's the idea is competitive advantage and why is it sustainable? Part two would be assessment of the financial model. And here to make it a little more colorful, what I say is, hey, Ted, how about we give you the financial statements of a company We'll white out the name of the company so you can't see what company it is or what industry is, but we'll just give you the income statement, balance sheet, and cash flow. You have 15 minutes to tell us whether or not it's a good business or bad business just based off of the financials. Okay, that's a good exercise. So what would you look at? Well, I'd look at cash flow. How much is cash is being spit out of the business? What's being reinvested back…

AI assessment note: “The process by which we invest falls into following four parts.”

Q Now in the business, you started as a hedge fund. That is a long only strategy. I know recently you've launched this Toga, an active ETF, and would love to hear about that product. Why did you go into this new vehicle for you guys?

A My North Star since I started the business has always been, what do I want to do with my money? So the day I started on July first, What I've learned across all these decades is the markets are generally efficient. And every now and then something happens either in the markets or on a stock specific basis, and there's a dislocation. And at that moment, the thing that's guided me is what I want to do with my money. So along the way, I've always had money in our different products, but to some degree there's tax friction. Somebody subscribes, somebody redeems, a PM trims, 50 basis points, another PM adds, 50 basis points. So just like a little friction. And you think about that compared to your personal account. A lot of people have PAs and they buy stocks there. And so we developed Toga because what I realized, and with the help of one of my partners, is that the ETF structure is massively tax efficient. So it's even better than your PA. Why? Let's say you bought Microsoft in your PA and over time it doubled. Well, you may want to sell it. Well, now you sell it, you owe capital gains tax. And I should have known this, I actually didn't fully understand it. The brilliance of the ETF structure led by Vanguard is create a structure that we can own Microsoft. We don't, but we can own Microsoft and Toga. It can double. We could sell Microsoft and the owners of Toga won't pay the capi…

AI assessment note: “we developed Toga because what I realized... is that the ETF structure is massively tax efficient”

Q What brought you from the ice rinks in Canada to the U.S.?

A Historically, one of Canada's great exports was hockey players. One of my siblings was a particularly good hockey player. He ended up down in the U.S. to play for a U.S. college. One thing led to another, and at some point, he was applying to the Harvard Business School, and he said, you should really consider applying to the Harvard Business School. I was working in Toronto at the time, and when you apply to HBS, there's different rounds, one, two, three, four. I think he'd been accepted the first round And it harassed me enough that I eventually applied, I think the third or fourth round. And so I figured, okay, if I get in, then I'll seriously consider going. And so we both got in, we ended up going the same year at HPS, which was a great experience also for a zillion reasons, but one of them personally is because we went the same year and it gave me a chance to reconnect with my brother for a couple of years.

AI assessment note: “he said, you should really consider applying to the Harvard Business School.”

Q How do you go about making decisions for the portfolio?

A This is so critical to How we've had success, but also how we've had success retaining talent is if you have somebody who you developed over time, ultimately they want to make the decision. What I found is people who are talented don't want to keep going to the quote head person and saying, Hey, I think we should buy da da da. And the person who spent three hours on it is saying, Hey, this is really compelling. And the head guy's like, nah, I don't feel like buying that day. The person is eventually going to get frustrated and leave. I mentioned earlier, Mark Bader, he was a Navy SEAL. He's a close friend and he's one of my heroes. He had this thing, always go with local Intel. Like, yes, always go with the person who's done all the work. Now you can disagree because you feel they missed something in the research or you want them to spend more time. So I have the ability to say, nah, can we hold off on that? Can we have another conversation about it? But I see everything we do. I'm a large investor in the fund. And so I want to know what we're doing with my money. But The people who are in the portfolio manager seats, they're managing positions for the entire portfolio. These are not carve-outs. It's, hey, you're going to take a two to four percent position for the firm, and you're going to decide when to do that, and you're going to put the order in, and then you're going to m…

AI assessment note: “always go with the person who's done all the work”

Q How do you and the team think about that competition for capital to get at those 25, 30 names?

A Because of how we compensate people, they're incented so that if you have a better idea than I do, you can have more capital. As I said earlier, our best ideas should be obvious and compelling to all. So if someone else at the table is like, yeah, you know, my stuff's good, but it's not great, but man, your stuff is really good. Everybody at the firm gets paid first on how we perform for our clients. And secondly, on the relative contribution to that performance. But the first part is so important because everybody's aligned to have the best outcome for the firm or for the clients first. Without that, you end up a mercenary type organization where people are trying to Box out. Oh no, I'm covering that stock, or that's my name, or they don't want to share information. We don't want that. And that's not a culture I would want to work in anyway.

AI assessment note: “they're incented so that if you have a better idea than I do”

Q So in that last piece, that incremental research, I'd love to hear the evolution of what did that look like? 20 years ago. And what does it look like today?

A So different. It's incredible. The power of technology and how it's changed that aspect of what we do. So you go way back, even before I started Tremblant, when I was working at another hedge fund, it wasn't like I had some like big idea to me. It was just like, well, I got to do this. So there was a company called Abercrombie and Fitch, the retailer. And I thought Mike Jeffries was a brilliant CEO. I thought his product was great. I thought he'd found a real niche for what he was doing. And so I did the model and I said, oh, these guys are going to bang out stores. So what we call the self-funded in retail investing, meaning that they're generating enough cash from the existing store base to open new stores. So the self-funded organic grower. So let's say that they're going to grow the store base, 10 or 15% a year, and then they could put another 10 or 15% same store sale on top of that. So then you get to a 25, 30% top line, and then they're going to get leveraged. So that's really attractive because if you get a good retailer that can do that, that can grow for a long period of time. So I thought Abercrombie was going to be that, but part of my analysis was, okay, I got to go to stores. So I spent part of my day going out to Abercrombie's and asking certain questions. And then I realized maybe if I hire two or three high school college kids in different geographies of the co…

AI assessment note: “The power of technology and how it's changed that aspect of what we do.”

Q Are there any things that you saw from your operating experience back in the Proctor and Reebok days that give you some lens into deciding if the management team are better or worse than somebody else might think?

A I have to admit, I love CEOs or senior executives who know the granularity of their business because they love it. Jim Sinigal, who used to be the CEO of Costco, You meet with that guy and you walk around a Costco with him. He is just locked in. He is taking notes. He's asking you questions. I can't remember what store it was. I shopped. I think it was in Long Island. I shopped at a Costco and I mentioned to him that the carts, shopping carts, the wheels were busted on a bunch of them and that they didn't roll that well. I think a month later I was back at that Costco, all brand new shopping carts. Jim Senegal is so maniacal. Galanti, the CFO at Costco, who just retired. I mean, that guy knew his business backwards and forwards. It's always concerning to me when you talk to someone senior at a company, and they don't know some degree of granularity.

AI assessment note: “I love CEOs or senior executives who know the granularity of their business”

Q you started at business school, a lot of the people that you mentioned that were in the business, Chris Shumway, your brother, are no longer still actively managing money for other people. I'd love to ask why through all these trials and tribulations over the last 23 years, you are still so deep in the game when some of your peers aren't or are doing it in a different way?

A Everybody gets to live their life. This is what I enjoy doing. Not a Maslow's hierarchy of needs, but like what makes me happy? Well, number one, spending time with my wife, Megan makes me really happy. Spending time with my children makes me really happy. Whether it's coaching their hockey teams or something like that, or taking my, my son to the park goes down the slide. That brings me joy. So spending time with my family is the thing I enjoy most. And then the next level would be looking at puzzles like investments. I just enjoy that. For somebody else, they'd be like, God, what a boring guy. Well, that's your choice. Some people like going to new restaurants, and they like traveling the world to try new things, and they like going to rock concerts, they like going to black tie events. Hey, we all get to live our life as we want, and that's what you choose to do. That's your choice. So live your best life as you choose. This is how I choose.

AI assessment note: “This is what I enjoy doing... looking at puzzles like investments. I just enjoy that.”

Q Once you've eliminated certain management teams because of say yellow flags, maybe red flags, how do you assess the quality of a management team and the companies that you're interested in?

A You want to see talent. The same thing you would look for in an investment manager. You want to see grit. You want to see that they're driven. There's a track record of success. There's a lot of smart people. The prettiest guy in tryouts for the hockey team, that's one thing. But when the puck drops, you see who can actually put the puck in the net, and those are the guys you want. Some guys decompose when the game starts. And then obviously alignment of interests. How much stock do you own? I love sitting with management teams, and we get in this conversation about how much stock do you own? You know, what do you think your stock is worth? Why? Well, here's what I think. Sometimes I think I'm crazy and then it's like, okay, let's debate it over time, but now we're aligned. That's how I do it.

AI assessment note: “You want to see talent. The same thing you would look for in an investment”

Q How do you weigh the quality of management when you're looking at the business model, the financial model, the dislocation or change in the types of companies you like to buy?

A That's a very good question. It's a threshold. It has to be above something, and then everything else is just benefit. And then we focus on the other things. Because at the end of the day, whether it's the industry sector, the product, new product launches, there's some dynamic that we think is going to drive this forward. That's most important to us. Without naming names, you can look back over the last 1020 years, 30 years, companies that had a step on the competition and gave it up because they just didn't execute. We've made a few mistakes. Blackberry. By the way, have you seen the movie? Movie's hysterical. A little too close to home because we made a bunch of money in BlackBerry, and then we lost a bunch of money in BlackBerry. We were early, one of my partners was like, this mobility thing is going to scale much faster than people think, and the winners are going to be Apple and Google and BlackBerry, and the losers are going to be Nokia and Sony, and so we had the longs and the shorts, and at first we did well on all the pieces except BlackBerry, and you look back and it's like, yeah, they were skating a little too fast, so yeah, that comes down to management.

AI assessment note: “It's a threshold. It has to be above something, and then everything else is”

Q So within all of those lenses, a business model, financial model, consequential change, and the research you can bring to bear, what's the sweet spot of what you like to find in a long position?

A All of them. In a perfect world, you'd find a company where something changed. You would say, well, the moat around their competitive edge has just increased. I love when people say like, oh, back in the day, Amazon trades at 150 times earnings, and they don't generate any cash. And like, what are you talking about? They're generating an insane amount of cash. They're just reinvesting it all back in the business. So we love finding things like that. There's some controversy. So we try to isolate. We try to figure out that one factor. Chris Shumway gave me great advice years ago. He's like, you're not going to outmodel the other guy. We're going to build models. Figure out the one driver that will dictate success or failure to your thesis, and then spend all your time on that one thing. And that's what we try to do.

AI assessment note: “All of them. In a perfect world, you'd find a company where something changed.”

Q So that was turned out to be almost like a golden period for long, short investing. What was the business over the next couple of years up until the financial crisis?

A Yeah, you're right. It was a good time period to be long and short. There was opportunities on both sides. There were things to do. For me as a manager, I was young. I don't want to say I was insecure, but I was worried about what I didn't know. All knowledge falls in three buckets. I know what I know. I know what I don't know. Third bucket is what I stress about. I don't know what I don't know. That's the part that I was always stressed about. And people would tell you, oh, you should be doing this. And you're like, should I be? We learned a lot particularly about risk management. I'd buy things and I'd be like, well, that stock's going up. That stock's a great investment. And our hit rate has been quite good actually, but every now and then we're wrong. And so I learned about, hey, what to do when you might be wrong and how to think about that. And then, so, oh one through oh seven into oh eight was fine. It was really summer of oh seven, we started to get nervous about certain things. Way naive. Definitely underappreciated the size of the tidal wave that was about to hit us. For example, one of the risks that we as an organization stress about is counterparty risk. And so we start to stress about counterparty risk, particularly as it relates to Lehman Brothers. Didn't know anything about Lehman, but we had some of our investors' money there. And in the final decision, it was…

AI assessment note: “so, oh one through oh seven into oh eight was fine. It was really summer”

Q What did you learn in being on the sell side that helped inform you later on how people operate on the street?

A There's a lot of talking. There's only so much research. So I found that the really well run by side shops did light years, more deep research in my observation. And this is almost 30 years ago, but back then people did research, but they also spent a lot of time talking to clients. So there's only so much research they could do. And so that was the biggest observation and actually flash forward from the sell side. And then from ultimately my buy side experience, And the reason I started my own fund is I just want to do it the way I want to do it. There's many paths to the waterfall. There's many different ways you can invest, but I just realized that I just want to do it my way, the way that I invest. I have a very specific process by investing, and that's the only way I believe it, and that was it.

AI assessment note: “There's a lot of talking. There's only so much research.”