The Exchanges

Q compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. What action steps did you take in your process to adjust the changes in behavior of the different participants?

A So the first action step that we took was just a recognition. I started talking about this internally, externally. We had the data from the quant team about how much things changed, and I began to think about the implications. So implication number one was price action is much more meaningless than we used to think. Call that the one week to two, three month price action was stocks were Acting weirdly, and it meant nothing. In the old days, when a stock was acting poorly, you're like, somebody knows something, and there was a good amount of time where that company disappointed, and you felt like at a disadvantage. The second thing was to begin to spend more time on the stock versus the business. We began, I think, to impart on our analysts who were attending idea dinners and lunches What is the narrative around the stock? Who is driving it and trading it? When we would speak to the sell side, instead of asking them their opinion about the company or going through the model, who's calling you? What questions are they asking? What's the tension point? And then our quant team could look at a holder's list and tell us, this is long onlys, this is hedge fund, this is quant, and we began to Understand in what sandbox we were playing. So I think it was a combination of first mindset change, and then adapting our research process to recognize that these were other people driving stock …

AI assessment note: “The second thing was to begin to spend more time on the stock versus the business.”

Q What was that path in a relatively short period of time to getting the conviction to go start on your own at a young age?

A I'd been working at Mark Asset Management for probably four and a half years. My then potential partner, Wayne Cooperman, he and I had worked together for two years. It was his idea, but I think he wanted a partner, and he respected me. A lot, I don't think I was ready to do it or even thinking about it until he approached me. The more I thought about it, the more I knew this was a time in my life I could take a risk, and I thought that there was some strength in numbers. The fact that the two of us could work together Feed off each other. We both had backgrounds. We both grew up around investing. We both grew up in the same environment at Morris Marks, and I think we both had a slightly different tact on how Morris invested. Morris was a terrific investor, bought great companies, was a big believer in all the quality factors that we think about today. Cash flow, return on capital, management teams, and I think that Wayne and I Probably felt like we both had a little more value in our blood, and I think wanted to take a little bit of a different tact on what he was doing there, so there was a lot of alignment as well that gave me confidence.

AI assessment note: “The more I thought about it, the more I knew this was a time”

Q So when you went to set up Eminence now at 25, 26 years ago, what was it that you wanted to build?

A As an investor, I wanted to build what I thought was a classic Jones model hedge fund approach. True long short, more moderate long short ratio, spending significant amounts of time on alpha generating single stock shorts. That model of a 120 long by 80 short with the same long strategy that I had pursued with Wayne at Fusion, but with more time and more sophisticated approach to short selling. And then on the business side, I wanted to build what I thought was a high quality organization. I wanted to do something a little bit different than what had been happened in the hedge fund industry. I wanted to treat my people well. I wanted to have a good culture. I didn't want to have a lot of turnover. And I think the industry that I grew up in was one where I would say for lack of a better term, shit flowed downhill. The boss felt a lot of pressure, so he put you under pressure, and screamed, and made you feel like, we're all under a lot of pressure, and you better feel this, and I remember thinking that was not going to get the best out of an investor. Ultimately, the thing we want to try to do is remove emotion from investing, and so if you put somebody under emotional stress for making a bad stock pick, or for the way a stock is behaving, What's the likelihood that that person's going to be able to make an unemotional decision? Very low. And so I think that I wanted to build a c…

AI assessment note: “As an investor, I wanted to build what I thought was a classic Jones model”

Q On the quantitative side, was there anything unexpected that you found in doing that work that really helped your investment process?

A I think it helped us understand how quants think and how rigid and defined their systems are, which helped us also understand how mispricings could happen. So one of the good examples that I like to point to was also back in 2022 when we were in this moment where unprofitable growth stocks were really underperforming. I remember there was a day where unprofitable growth was having a really bad day and My head of quant sent out a note, and he listed seven stocks that were down seven percent. The market was down two, and one of those stocks was Zillow, and I corrected him, and I said, no, no, Zillow's not unprofitable. They sold their home flipping business. That's what was creating losses. The core business is profitable. That's in the wrong bucket. He's like, no, on an LTM basis, this company is still unprofitable, and so it is in the right bucket, but you bring up a good point, which is What quants can't do is look forward, and how things will change over time, and so you learn the power of it, but also the blind spots, and so they can't see what next two, three quarters are gonna be, and so that led me to a conclusion where Zillow and Uber, to a lesser degree, they would be profitable over the next 12 to 18 months, that people were mischaracterizing it, and therefore, in this new market structure environment, that was actually creating an opportunity.

AI assessment note: “it helped us understand how quants think and how rigid and defined their systems are”

Q Did you know all the way through college that you wanted to get into investing?

A No. I did not know I wanted to go to investing. Despite being around it, I thought maybe I would go to law school. I thought I'd get a broader education. Maybe I would operate a business. So I took the LSATs, applied to law school, was going down that path, and I began my research process on being a lawyer and talking to young lawyers and other folks, and I don't like what I heard. Nobody was enjoying what they did. The things, the document reading and writing, Began to make me question the direction I was going, and not that I thought I wanted to be a lawyer, but then there was a point at which I thought maybe it was a great education, and people would tell me, look, you're going to spend three years of your life, and you're going to be competing with the same people. It's not as if you're going to get a leg up in another avenue, and so I put law school acceptances on hold, and I did a bunch of interviews around finance. I was fortunate that my dad was in the business, so at least he can get me some shots on goal, and interviewed at a Ended up getting an opportunity to work for Morris Mark at Mark Asset Management, which really changed my life, and I wouldn't call it a last-minute decision, but it was somewhat like an attack in the road that I didn't necessarily expect, and then once I got into the business, it was love at first sight.

AI assessment note: “No. I did not know I wanted to go to investing.”

Q How long were you able to run that pure fundamental playbook before you felt like the markets were either catching up or changing?

A Throughout my 25 or 26 year business at Eminence, there have been points in time where we ran a playbook that ultimately needed to be tweaked or changed. So I would say, in a narrow sense, that the short side eventually got more crowded. As more hedge funds launched Posta.com, there was more competition. 10 queues would have nuggets in them that would get flagged much quicker. Accounting services came out, and we had to morph and adapt and evolve that part of our process. But I would say, broadly, through the GFC, most of what we did was relatively consistent, which was, on the long side, finding quality businesses that were trading at attractive valuations, and the rest took care of itself. On the short side, Looking for what we thought were companies that were gonna miss earnings. We mostly did a lot of accounting-driven shorts. The big changes that we started to see, 2010, 2011, caused us to pivot a bit on our strategy. What I noticed after the GFC was that stocks would trade at bigger disconnects to fundamental value for much longer than they used to, and we couldn't just count on the market to Correct things. Understanding why investors were perceiving things a certain way and what might change that became something that was a much more important element. Having what we thought was true differentiation relative to not just sell-side consensus, but buy-side consensus versus…

AI assessment note: “The big changes that we started to see, 2010, 2011, caused us to pivot”

Q And then on the data science, some of those historical data sets, as you described, are what, say, a pod shop is going to look at. How do you think about using data science for your own process that's a little bit different from what the market knows?

A That's where owning the data and then being able to slice it, dice it, and look at it in different ways gives you maybe an analytical conclusion that isn't how is the current quarter progressing, I'll give you a good example. Dave & Buster's is a company that we own, and we have a thesis around new management, putting in place menu changes for the food and beverage, remodeling all the stores, and so they have 10 stores out of 200 that are remodeled. And the company is telling you the remodels are going well, but what does that mean? How well? We know they're going to remodel all 200 stores over the next two or three years, but there's only 10 done now, and we can now take the data and Look at the stores and or states where the remodels exist, slice and dice the data and say, how are those compared to the cohort? And then more precisely answer our own question about these remodels and what the consumer is doing. So it is in this way where we're taking big data sets and then breaking them down in ways that are a little bit less exact to this quarter and more relevant to a thesis that might be playing out over multi-years.

AI assessment note: “analytical conclusion that isn't how is the current quarter progressing”

Q What led you to create a dedicated short team?

A 2013. If you remember the year, I think the S&P was up 30% with no pullbacks. And it was the greatest sharp ratio ever. We have a process here where everybody creates a weekly working list. Call it three to five names. In the next six weeks, these are the things that I'm spending my time on. And in early 2014, I looked at the working list and it was like five longs and one short. Four longs, two shorts. Four longs, no shorts. And I'm like, nobody's looking at shorts. I'm like, market was up a lot, so that makes sense, and everyone's working, doing what's working. And then I also realized that we are compensating people equally for long and short alpha, except short positions have to be half the size or less. So I Where are people gonna spend their time? That's the old, you show me the incentives and I'll show you people's behavior. We've been in business for 14 years and had a good track record, and I knew that When things were this good and this easy, you want to be a little bit more skeptical, and so I did a number of things around that time. One was, began to create a dedicated short team, and at that time, I took maybe my most skeptical contrarian analyst and made him a dedicated short person. I changed our compensation structure to add double weight for short alpha, and preached to the team. I know that It's been tough in the past, but if we just look at the past, we're al…

AI assessment note: “I looked at the working list and it was like five longs and one short.”

Q What'd you learn about partnerships in those early years from your partnership with Wayne?

A Co-equal partnerships in this business are really hard. I think that this business attracts very strong personalities, people that have strong opinions, willing to debate them, but probably not willing to compromise on them a lot, and so we battled a bunch on names and different strategies, the market, and you realize in this business that you have very strong-headed people who have conviction. I think the co-equal partnerships That I saw tended to take one or two forms. Either two stock pickers like us, who maybe didn't always see eye to eye on investments, or the kind that maybe lasted a little bit longer, but ultimately broke up also, which was the business guy and the stock guy, or gal in this case. And those also didn't end up working out because eventually the stock guy felt like he was driving more of the value. And so there's a lot of pitfalls in partnerships in this business because returns are not always generated. Equally, or people are not always contributing or seeing eye to eye, and so I don't think I would be here today if I didn't actually start that business with Wayne, but I also realized after four years that I had my own view about what I wanted to build, and I didn't want to have to fight every day to get there.

AI assessment note: “Co-equal partnerships in this business are really hard.”

Q So this ties back to something you were saying earlier. There's a whole line of research about tennis being the greatest sport for longevity. So in your study of longevity, I'm curious, what are the two or three things you've most taken away and adopted?

A So more recently, so I think sleep is an obvious one, that I think we grew up in a world where it was a sign of manlihood, the less you could, it was like, I can name that tune in four hours. I only need three and a half hours of sleep. Guarding that and realizing that I used to have seven-thirty breakfast meetings. I don't make breakfast meetings anymore. I wanna wake up when I wake up, and I don't sleep a day away, of course, but I think that's important. I think sunlight is incredible. Walking. Things that are so basic that I don't think until I began to read all the research realized How important these things were, and so my whole morning routine is different now. I get up, I have water instead of coffee first. I try to get sunlight and walk a little bit. Then I have my coffee. The energy and clarity it gets you is great.

AI assessment note: “I think sleep is an obvious one... I think sunlight is incredible. Walking.”

Q How have you led this team in such a way that you have such duration of senior talent who have stayed with you in an industry where notoriously people spin out? You know, you've had some of that along the way as well.

A There's a handful of things that I would point to. One we talked about before, which is kind of a good culture. People want to come to work every day. You get the right people, create a good culture is one. I think you have to compensate people. You have to err on the generous side. I don't think you have to dramatically overpay them, but you can't be cheap, and you can't be greedy. You gotta be long-term greedy. Then, for us, I think two of the things have been really helpful. One is the collaborative nature of what we do. I think that each of these senior people are very credible and strong, and the people around them make them better, and challenge them in productive ways that we get to a better answer, and then The person at the top has to be an integral player, has to make people better. They have to realize that they're good investors, but they could be great inside of this system, and therefore, a solid piece of this pie is better than signing up to live and die by every other own decision, let's say if you went to a platform, or having to build something on their own and dealing with everything. You have to be pulling your own weight, because you're certainly pulling your share of the Incentive pie. And I think that in certain environments, that can become a disconnect for people below.

AI assessment note: “There's a handful of things that I would point to.”

Q So in the last 10 years or so, there's been at least this thinking of a big shift in market structure. What's happened with index funds, that movement factors, How have you thought about that and addressed it in your investing?

A Yeah. It was late 2019 that we began to notice something even more peculiar about how stocks were behaving. I mentioned the post GFC, things got dislocated wider for longer, but eventually came back. What we began to notice in 2019 was stocks were behaving unpredictably, even if you really knew the fundamentals. It was as if the things that we were doing in the short run Didn't matter at all. And I had our Quan team start working on some of these factors, like who's trading in these stocks? What's happened to different elements? I want to get some data and some conviction that my anecdotal perspectives have some rigor to them. And so we began to put together the pieces of how The people trading in the market had changed and altered, and it was very eye-opening to me. Things changed slowly, but then you look back over 10 years, and you're like, wow, we just went from 25% passive, I think at that time it was probably 50. Now it's 60. And then when we looked at the active component and how much in the alternative asset space had moved from fundamental investors to Quants to platform or pod shops. It was another big eye-opener. We looked at the thematic share. So all these ETFs are beginning to be created, and I didn't appreciate it till I began to look at the amount of AUM that was being driven in thematic buckets through ETFs. And so then we began to put all these things together…

AI assessment note: “we began to put together the pieces of how The people trading in the market had changed”

Q Ricky, I want to ask you a couple of closing questions. I have one question to come full circle before we get to that, which is, We started with your growing up in an investment family, and I'm really curious, as you've raised kids in an investment family, what have you done similarly or differently than what you saw from your father?

A I have kids who are 21, 23, and 25 now. One in college, two out of college working. I think one of the most important things that I've realized, and this is probably more in watching other parents and people and how they've dealt with their kids, is it's their journey. It's not your journey. So while I provided guardrails, a good environment, I've let my kids figure out where they want to go. One of my Kids has come into the investing business. He's an investment banker at Molus, and on his own, through his peers at school, he was driven, and that's what he wanted to do. Now, I said, hey, I could help you maybe. Maybe I could help you get interviews or whatever, but this is what you want to do. You're going to have to get it. I have another son who went into a healthcare, a growth equity. That was what he wanted to do, and my daughter, I think, is Somewhere between legal and not-for-profit, I don't quite know, but I've let them be their own people. I see so much of this in New York City, where it feels like the parents are living their own dream over again, what school the kid gets into, what sports he plays, and that's been an important part of it for me, and I think that's a little bit what I do in Eminence, which is, I don't oversteer. I think there's a lot that I could impart on them, but you want them to make their own mistakes, you want them to learn from their mistakes, …

AI assessment note: “the other thing which probably copied my dad, which was really having them know”

Q As you've looked at your peers in other organizations who do things a little bit differently, what are some of the things that you've either tried or thought about in working with your team and trying to improve that either haven't worked for you or you wish you could get to, but you know, just wouldn't work here?

A There's a lot of things that I've gotten from peers that we've implemented at work. So I would call them in the execution oriented, process oriented types of things. One of the things that I didn't do early on, but something that I know Viking does is they make folks PMs at relatively inexperienced levels and a little bit of trial by fire. And I think for a long time, I was of the mindset, we have these investors entrusting us with their capital, and I'm gonna have to believe that you're great and experienced and to have capital, and over time I've realized that that tool is a great tool to retain people, so they want to become PMs. It's a great accountability tool, and it's a great communication tool. Their behavior speaks to what they want to do versus their words. And so that's something that I think through a lunch with one of the senior people there, I heard about, I reflected on it, tried on for size, and then ultimately was something that we instituted and has been great for us. I think seeing peers invest in data science and quant were things that got me thinking about it. So I think where I come down is we're our own end of one, we're a unique organization, and there's lots of great ideas out there, and you got to figure out what works for you. But it's a little bit of Almost like picking from the supermarket. I tell young investors, find your own investing compass. Sa…

AI assessment note: “There's a lot of things that I've gotten from peers that we've implemented at work.”