The Exchanges

Q And why do you think it is that you've chosen that path, that Kurt's chosen that path, when that's just so different from other people in the industry, and you look at if that's what it takes, just walking away from an enterprise value that you've built over the years in order to sustain a business?

A Kurt will tell you it is not all about him. It is not all about him. This firm was not built by Kurt Winrich. This firm was not built by Paul Black. This firm was not entirely built by Mike Trigg or Sanjay or Pete Hunkle. This firm is the collective efforts of a lot of people. Now you can argue, okay, we were founders. We were there in the early days. We were there when we were trying to keep the lights on, when we were suffering performance from the domestic strategy, and there's some value to that. But ultimately we know that we've all done extraordinarily well. We won the lottery and we don't need to get every last dollar off the table. I'd much rather leave something in Kurtz this way. He'd rather leave something to me and Mike and Sanjay and Pete and Sloan that endures and goes on than he would trying to get his last hundred million dollars. It's a mindset and it's a life philosophy and That really is about caring for others more than you care for yourself. I mean, it sounds corny these days, but it's a living example of caring about other people more than yourself. And Kurt will tell you, he has been wildly overcompensated for the last 20 years, and he's happy to do it. So it starts by the core values of the person themselves.

AI assessment note: “It's a mindset and it's a life philosophy and That really is about caring”

Q So how did you get started in the business?

A Well, I started, interestingly, even how I got involved with stocks, I think it's kind of fun. You know, when I was, uh, younger, I got a small inheritance from my grandfather when I was about 18 years old. And at the time, I thought, you know, I kind of liked the thought of investing. I met an EF Hutton broker, and he told me to start buying South African gold stocks. Now, this is when gold was about 300 dollars an ounce. So, I think I bought 500 shares of a company called Eastry Fontaine, South African gold miner. And I was in college at the time, and I'm not kidding, I would open up the Wall Street Journal every morning, And when gold was going from 300 to 800 dollars an ounce in those periods from 78 to 82, I would literally look at the Wall Street Journal and say, you know what, I just made, the stock would be up a buck a day. I'd make 500 dollars a day owning 500 shares of this South African gold miner that was, you know, highly levered. And so that kind of got me hooked. I knew nothing about it, but obviously when you're making that kind of money in a short period of time, it gets your attention. And that's when I actually shifted my major from marketing to finance, and ultimately went to work for Bank of America up in San Francisco in 1983 when B of A was the biggest bank and most successful bank in the world. It's a short few years later that it almost went bankrupt, w…

AI assessment note: “shifted my major from marketing to finance, and ultimately went to work for Bank of America”

Q There's a lot of other ways that people talk about moats. Buffett talked about brands when he went from being sort of a classic Ben Graham investor to a Phil Fisher investor. How are the other ways that you think about what competitive advantages get incorporated into the kinds of businesses you like?

A They're the obvious, right? Disruptors, low cost providers. Obviously in Amazon. But we've actually developed a number of what we call typologies, moat typologies, that we think are a little bit different. One of them, for example, is a, is a, an outsourced R&D company. We have found, when you look at various companies in different industries, that we can classify them in certain ways where you don't have to just be specifically in one industry. For instance, there's a company called Core Labs in the portfolio, which is basically, ultimately, an outsourcer of measuring the, the, the core samples in gas wells and oil wells They were once a part of an integrated oil company, but they, because they weren't an essential element, they got spun off on their own. And interestingly, so now what they do is they sell their services to all the integrated drill, all the big drillers and integrated oil companies. And, ah, over time, because that's an outsourced R&D process, we can look at that company versus other outsourced R&D companies and maybe other industries. For instance, Christian Hansen, which is a, um, enzymes company that creates enzymes and biologics for the use in yogurts and cheeses and very simple business that an analyst that's just looking at maybe the materials sector might look at Christian Hansen and see it's really very richly priced. But if you think in terms of it be…

AI assessment note: “we've actually developed a number of what we call typologies, moat typologies”

Q You know, you'd mentioned that, that firm over time has gone through some tough periods and a lot of introspection and learned from them. Why don't you tell a few stories about those periods?

A Yeah. One of them, you know, firm founded in 76 in 1994. The firm was still a couple hundred million dollars, and there was a transition between the founder and the son, who's my partner now, where the founder of the firm just decided one day that he's done managing money and kind of told The son, Kurt, that he had to take over the portfolio the next day. Well, having never run money before, and all of a sudden having to run two hundred million dollars of it, didn't really quite have a solid repeatable process in place. Firm performed very badly for a year. It lost a lot of money. You know, probably went down to about one hundred and fifty million dollars. If you ask Kurt now, He'd tell you that he was getting his resume out. Here's a, here's a business owner, right? And, and you know what's hard about that? He, he's the son of the founder, and he, and he, and he feels like he's driving it into the ground. It was a huge learning experience in terms of, you know, one, Kurt came from an engineering background, so he was trying to quantify a subjective process, and he saw everything through numbers, and if you ask Kurt now, he'd say, even though I'm an engineer and I get numbers, and it's not about that, the competitive advantages is all over, in our case, is on the qualitative side. That was a big lesson. And then in, we were running in 2000 to 2007, a large cap growth strategy, …

AI assessment note: “One of them, you know, firm founded in 76 in 1994.”

Q And was that the process? Were you educating yourself or were there mentors around you that you learned from?

A You know, it's a good question because I always, I've wrestled with that throughout my life really. Are there guys that I can point to that are mentors? And there really wasn't one or two mentors from the investment side. It was really self-taught. You know, I, I spent a lot of time reading the classics, stuff that Buffett talks about. Common Stocks on Common Profits by Phil Fisher, one of my favorites. You know, obviously you read the chapters on margin of safety and Mr. Market, Intelligent Investor, but a lot of other books along the way, and that's really how I've kind of wrestled through the investment problem. Some mentors, certainly on the business side, that have been really influential, just kind of keeping me in the game and keeping me accountable. That's been a big part of What's happened over my life.

AI assessment note: “there really wasn't one or two mentors from the investment side. It was really self-taught.”

Q So if these couple of managers that went through what you did weren't responding to you, and then when you did reach out to one, he said next to nothing that helped. How did you go about learning what these other firms did?

A We had to do a lot more sleuthing by talking really to former employees of a lot of organizations. And the preponderance of the evidence to us was that when those tough times came, The true culture revealed itself, and the true culture in most firms where you have a bunch of high performance, highly educated, highly compensated people tends to be a little toxic, and so when that bad performance came, inevitably, portfolio management teams turned on each other. Portfolio managers started pointing out who made the mistakes in the portfolio, And there started to be divisions among the team to the point where even one firm that's fairly well known divided its portfolio management team between institutional and mutual fund money because they actually couldn't get along. And as you might imagine, that was a death blow to the institutional business because as soon as you show the truth of what's going on relationally within the firm, People are going to flee very quickly, as they should, as they should. That was the main one. The other one that was really important, a lot of firms fail when the founders want to move on. When you have a firm that's worth, let's say, a billion or two billion dollars, the difficulty of transitioning ownership from the founding generation to the second generation or third generation is overwhelming because The founders usually want to get a market multipl…

AI assessment note: “We had to do a lot more sleuthing by talking really to former employees”

Q And then lastly, how do you think about the fit of Clifford Capital into WCM's ethos and investment strategies?

A It's very different. We're growth stock managers run international and global portfolios. They're focused on the small cap value area. It's not an area that I love, but I will tell you that it's an area that in March of 2020, when the market sold off really hard, I decided, you know what, it's probably a good time to allocate some of my capital of value, so I made a pretty significant investment, luckily, at the trough. I, of course, had no idea it was the trough, and it could have troughed for the next few months. But I took a couple of cuts at them in March and then another one in April, and they've performed brilliantly from those bottom. So it's a very different strategy, but it's a strategy that, that you need. Smaller company value companies obviously do different than large cap growth companies, which is the world we live in. So from my perspective, it was a great way for me to diversify, but also get a true stock picker that's actually working on a lot of active share and trying to add alpha.

AI assessment note: “It's very different. We're growth stock managers... They're focused on the small cap value area.”

Q Well, it's safe to say that while that is true, it's kind of an unconventional approach. So Mike, when he came on the show last year, talked about thinking differently. What is it about how you've gone about this relative to the industry that's really made it work?

A Well, I'll start with that. You know, when we started the domestic growth strategy back in 1999, we were very conventional in our thinking. We did what everybody else in the business does. Buy those big, large cap companies that are high quality, They have huge competitive advantages, and we were trying to buy them at a discount to intrinsic value, and that worked for a little bit until it didn't, and when it didn't work, what we realized is that we had camped too hard on trying to find really cheap companies, so it's interesting. The mistakes that we made with the domestic strategy really helped us When we launched the international strategy, because that whole notion, and we've talked about this before of buying wide moat businesses cheaply, I think is flawed today because everybody's trying to do the same thing. So the reality is we found that if we just keep doing what the conventional wisdom says you should do, we're probably going to get pretty conventional and pretty average returns. So it was at that point, and actually adding Mike to the equation where he came over from Morningstar, that we began to wrestle with that whole idea of what is important with a competitive advantage, and part of that was it wasn't about the absolute size, it was about the direction of that competitive advantage. As we started working that out more and more, We started having greater and grea…

AI assessment note: “it wasn't about the absolute size, it was about the direction of that competitive advantage.”

Q All right. Which two people have had the biggest impact on your professional life?

A That's a hard one for me, Ted, because one, I would say, 25 years ago, I tried to quit the industry because I was at Bank of America, and it was a very miserable time for me. I had a really good mentor and friend who walked me around a lake in Oakland and convinced me not to quit. If I had quit and went and become a camp counselor, I wouldn't be here at WCM doing something I absolutely love to do. I'm sorry to give you more people, but I'd throw Kurt Winrich in there for sure. Mike Trigg and Sloan Payne. These are all my partners. We have a leadership team That is second to none. There's just something magical about what we each bring to the equation, and they've all had massive impacts on my life.

AI assessment note: “I'm sorry to give you more people, but I'd throw Kurt Winrich in there”

Q What information do you read that you get a lot out of that other people might not know about?

A I'll tell you a great one. I just, just opened it this morning. There's a gentleman named Nick Murray, and he's actually kind of, um, an advisor to financial advisors. He writes a monthly newsletter, but what I love about it is he's, he always, his basic thesis is how negative the press is, how pessimistic the press is, and how really, you know, again, he's a big fan of the optimist wins over time, but we don't see that out in the world. We see only the problems. So he keeps you focused on what's actually working. And then he always has great resources, uh, great books that he's read, a couple of blogs. I just went to a, there's a, there's an, it's funny as I'm talking about optimism again, but there's a, There's an optimist blog I just went to today that was kind of talking about the, the short-term negative perspectives versus long-term kind of wealth creation. Those are two that are real, real valuable to me. And of course I read the wall street journal, but those are two. And then we have a lot of guys that have various podcasts that I listened to. Of course I listened to capital allocators. I do my work and, uh, you know, get a lot of good information.

AI assessment note: “There's a gentleman named Nick Murray, and he's actually kind of, um, an advisor”

Q And so you have these businesses with growing moats, and then you also mentioned, you started talking about culture. Similarly, how do you go out and really assess a company's culture?

A I think that's one of the most fun parts of our job, because nobody does it. You know, it's interesting, if you look at, you read Phil Fisher's book, Common Stocks and Uncommon Profits, which again is one of the classics. It's interesting, I think he has a 25 point checklist on how to analyze a company. And interestingly, of the 25 point checklist, probably 15 points are all qualitative elements, which is just the reverse of what most people on Wall Street do. Most people spend 95% of their time crunching numbers, running DCF models, which by the way, has zero competitive advantage, because you have thousands upon thousands of people doing the same work. Where we can get a massive competitive advantage is by doing the things that other people are not. And, you know, so when you're trying to assess a culture, really one of the best ways, if I wanted to, you know, assess GM's culture and get a, you know, one of the best things to do is not just talk to the CEO or the CFO, but it would be to, hey, let me talk to people that have left on good terms. Of course, you talk to the suppliers, and you talk to vendors, and you talk to competitors. It's always good to talk to competitors. Who do you respect? Who do you not respect? But if you can talk to people that used to work there that have left on good terms, you usually get a pretty good picture. Now, what you're doing, by the way, is…

AI assessment note: “not just talk to the CEO or the CFO, but... talk to people that have left on good terms”

Q Were you surprised that you, ah, that the door wasn't locked on you when you walked, when you made it back to the office?

A Yeah, I really was. So, it was a, it was just a, you know, classic example. You know, every day, The founder would come in, say hello, go back to their office, close the door, and never to be seen again. And the only way you could communicate with the founder, he had a mail slot in his door. He literally had to take a piece of paper and write a note on it and put it in the mail slot. So, you know, not conducive to, that's why we're so, our offices are wide open, there's no hierarchy, fun is a huge value because that wasn't fun. And you know what? You didn't get the best out of people because they were not having fun. There were four of us that bought out the original founder in 1998. And I'm not kidding. Not even tongue in cheek. What we decided was, hey, what did the founder do? Let's go a 180 degrees the other way. And we'll probably build a dog on good culture, right? So what does that mean? That means, you know what, first of all, we're gonna share the wealth. And secondly, we're gonna be transparent about pay. It's not gonna be opaque, but we're gonna be, and third, we're gonna hire this young talent. And when we figure out that that talent's really adding excess returns to the portfolio, it's gonna, they're gonna own equity. And they're going to own a decent amount of it. As a result, we've grown from two hundred million dollars to twenty six billion dollars in assets und…

AI assessment note: “Yeah, I really was. So, it was a, it was just a, you”

Q So let's dive into that a little bit. You mentioned great growth companies. What constitutes a great growth company?

A Couple things for us, and it's very different, I think, from what most people do, and I'll kind of start like this. One of the things that, that we wrestle with, a lot of people now are wrestling with whether active management can outperform. I think there's a lot of evidence to suggest that it can, but to me, most managers try to buy high quality businesses, With strong economic advantages or competitive advantages selling at a discount to intrinsic value. I think one of the reasons that active managers underperform consistently is because everybody's doing the same thing. They're all approaching the market from the same perspective. What we have found is more times than not, if you're just looking for high quality, wide moat businesses selling cheaply, today you're going to find yourself in a lot of value traps. The poster child we always use in the firm is Nokia in 2007. If you and I would have gone to Wall Street and met with the 25 different analysts that covered Nokia, And ask them, hey, is that a high quality, wide moat business selling at a discount to intrinsic value? They'd be, absolutely. Everybody had a buy recommendation on in 2007. What's not to like? 53% market share in phones. One of the great top three brands in the world. No debt. Really high quality. Returns on capital of probably 30% for the prior five years selling at 60 cents on the dollar. We fast forward…

AI assessment note: “To us, it would not be a high quality business, because... economic moat was clearly deteriorating”

Q Let's turn a little bit to growth investing. Let's talk about a lot of, you know, we all know growth and value. We all know the disciplines of value investing, hear about it a lot of the time, and certainly the conversations I have. What is it about growth stock investing that works?

A You know, I, I think in part, it's a different perspective on the world. To be a growth investor, you have to be optimistic. You have to be optimistic about the future. You know, value to me is a little bit more pessimistic. You're trying to buy these assets at a compelling price based on their value today. You know, with the hopes that it'll keep kind of plugging along, and then, you know, ultimately, there'll be a regression to the, you know, real value. For growth investing, I, I like it because I tend to see the world more positively. I think it's consistent with where I am kind of psychologically, and to me, optimists rule the world. I think optimists are the ones who ultimately get it right, because if you look back through history, Buffett says it all the time, never bet against America. I'd say never bet against great growth companies with superior cultures that are highly competitively advantaged.

AI assessment note: “never bet against great growth companies with superior cultures that are highly competitively advantaged.”

Q Yeah. And then when you get down to either the sector level or the subsector level, are there particular tailwinds that you have as kind of themes through what you're looking for?

A Yeah, I think you're always looking for that. You certainly want to have tailwinds. It's just an acknowledgement that that's how life works. I think anyone that doesn't acknowledge that is just not being honest, right? It's like, you know, J. Paul Getty, you know, someone asked him, how do you make a billion dollars in oil? So it's really easy. You know, you get up really early. You work really hard and you strike oil. And there's this, this, this notion that he was fortunate. You know, he, he drilled the well in the right places and he was fortunate. So I think having tailwinds is essential to success. Obviously there are demographic talents. I think, I think a big advantage we have is that we tend to own businesses in the growthier sectors like technology, healthcare, and consumer. And if you think about the emerging middle class throughout the globe, this is just one aspect of it, but as people get wealthier in Brazil and Indonesia and India, And China, of course, what are they going to do with their money? They're going to buy products from the companies we own. So if you think about a beautiful big picture tailwind, you can do what Jimmy Rogers did, which is said, hey, you know, he drove around China and Asia on his motorcycle, and he came back and said, oh yeah, you got to buy emerging economies, and you do that by buying commodities. We'd argue that It's a way better ide…

AI assessment note: “we tend to own businesses in the growthier sectors like technology, healthcare, and consumer”