Capital Allocators is one of the leading asset management podcasts in America hosted by Ted Seides.
In this episode Mike Trigg, a partner and portfolio manager at WCM Investment Management discusses WCM’s unique investment approach that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage or ‘moat’.
Ted Seides (TS): Hello, I’m Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You may remember my popular first meeting from a few years ago with Paul Black of WCM Investment Management (WCM), then the $25 billion asset manager in Laguna Beach, California. Since then WCM has gone up in every way. They sold the minority piece of the business to Texas, continue to put big numbers on the board and have grown to north of $66 billion defying the fade of active management outflows.
My guest on today’s show is Mike Trigg, a partner and portfolio manager of WCM’s focused international growth strategy that comprises the majority of the firm’s assets. We discussed Mike’s background arrival at WCM in 2005, the near implosion of the firm shortly thereafter and the rising of the international strategy from those ashes. We then dive in deeper to the core tenants of WCM’s approach discussing how the firm analyses widening moats and cultures tied to competitive advantage. Lastly, we talk about how WCM growth has impacted the firm. Please enjoy my second meeting if you will, with Mike Trigg from WCM. Mike, great to see you.
Mike Trigg (MT): Great to see you, Ted.
TS: Well, this is going to be fun. We did a nice interview with WCM a couple of years ago with Paul and it’s going to be fun to dive in a little bit deeper on what’s become such an interesting story. Why don’t we start with your initial interest in investing?
MT: Before we get into that, I was thinking about Paul’s podcast and how I enjoyed it as well. In the situation I’m in, it reminds me of having to go after the guy at a rehearsal dinner that just gave a great toast. I don’t know if I’ll be able to top it, but I am happy to be here and dig more into the firm and our story.
I have a bit of an unconventional background. I think by investment management standards, I probably fell in love with investing when I was in college. Back then we had a computer lab and so you had to go to the library, you had to study and then you would inevitably go take a break and that was in the late 1990s. It was an exciting time to be in the stock market and you could invest and kind of throw a dart at the wall and make two or three times your money.
My buddies and I would go up there and talk about different stocks and I ended up stumbling across The Motley Fool message boards. The Motley Fool was a website that wanted to empower the individual investor. They had these message boards with all these interesting smart people that you could interact with. You think about all the stuff that’s happened in social media now, and they were kind of way ahead of their time. I started learning more about investing and obviously I was a finance major, so I had some practical schooling as well that was going on at the same time. When it came time to graduate, I did conventional type interviews, tried to interview at a couple big money management firms, some big banks and I thought, I’m just on a whim I’m going to throw a resume at The Motley Fool and see if they respond and lo-and-behold, they did.
They called me and I flew out there and I ended up getting a job writing for the website. just imagine you’re 22 years old, you know really next to nothing about investing and then a website like The Motley Fool comes to you and says, ‘hey, we want you to write like two articles a week’ about anything you want. I hope most of those articles are deleted from the EMC tape storage that they’re probably on somewhere.
I did that for about a year and a half. It was an awesome experience. So much of what The Motley Fool are about really resonates with me. There’s like an irreverence to what they do. David Gardner, one of the founders had this portfolio called the ‘rule breaker’ and a lot of it was about empowerment, right? Like this industry hasn’t served individual investors. Well, you guys can do this on your own. So much of my story too has just been about being a self-taught investor. I became a great writer while I was there and I still to this day think being a good writer is a great tool to being a good investor. It’s important to be able to articulate how you’re thinking about things. It’s important to be able to simplify your ideas down to a few key principles. Writing is a great way to do that. The Motley Fool was on a major growth curve at that point. I joined just kind of at the very peak of the internet euphoria because I graduated school in 2000 and thinking that things were going to continue to grow a lot. The headcount probably doubled, or more, in the time that I was there and 18 months later when I left, there were 30 employees. I remember calling my dad on the phone and being like I can’t believe I joined this company and he’d always be like, “You’re getting a better education than you would ever get at a business school or anything like that”.
As that situation kind of unwound, Morningstar proactively reached out to The Motley Fool knowing that they were laying off a significant percentage of its editorial staff and within a couple of weeks I had interviewed and accepted a job at Morningstar. That was fun because it was more of a traditional equity analyst role. Morningstar at that time is 2001. It’s just really building out its equity research capability and unlike the traditional sort of sell-side research coverage model, it really wanted to have a singular philosophy that drove how the analyst would look at the stocks. It was sort of rooted in more of a classic Warren Buffet methodology – every business has a moat or should have some type of moat. There are six or seven well-understood moat sources, like network effects and switching costs and economies of scale. Understand those, see if they apply to this business, based on some backward-looking analysis and your qualitative assessment of the moat sources, will give it a moat rating.
Every business would either have a wide moat, a narrow moat or no moat and then there was a valuation methodology. We had a discounted cash flow model. Every company would be valued and there would be an estimate of intrinsic value and then the star rating or the level of conviction that the recommendation would be based on the discount to your intrinsic value. Where the stock was traded relative to what you thought it was worth and depending on the assessment of the moat, you might demand a smaller discount to intrinsic value for a wide moat business and a bigger one at no moat. I was given a lot of freedom, a lot of autonomy and then also indoctrinated into this way of thinking about competitive advantage.
TS: How did you end up going from Morningstar to WCM?
MT: I was there for about four and a half years and after about three years, my boss at the time had come to me and asked me about writing the newsletter. She and I were kindred spirits, along with Sanjay. There were some inherent flaws in Morningstar’s process and we were missing these growth companies. She said, “Hey, what about writing the newsletter about growth stocks?” I had been toying with this idea of buying moats that weren’t just big moats but small moats that were going to grow. A core feature of that newsletter was this watch list called ‘emerging moats’ and it was kind of, ‘buy the wide moat businesses of the future today’. Paul and Kurt, both subscribed to that newsletter and I found that out later.
One day I was sitting at my desk in Chicago and Paul called me up, left me a voicemail, said, “Hey, I’m Paul Black”, one of his big very enthusiastic voicemails. “I’m Paul Black from WCM Investment Management, a big fan of your work and I’d love to meet in Chicago in a couple of weeks. I would love to have lunch.” I thought it was a portfolio manager looking to fill a slot of a day of consultant meetings or something in Chicago. We had lunch and it was very clear that within a couple of minutes that they had been reading the prior 9 or 10 months of the newsletter. We had a lot of similarities, in terms of the way we thought. He was looking for an analyst and I had no intentions of wanting to leave Chicago. I was just so taken with the conversation that I had with Paul, that I ended up coming out here. When I look back at that lunch, it was an Italian restaurant with one of those paper table covering, and he had taken out a pencil and he was like drawing the org chart and had all these arrows. It was like a coach planning out the next 5 or 10 years of the firm and I just loved his energy and his enthusiasm. I think he asked me at the end of the lunch, “What do you want to do?” and I’m like, “I want to go on the buy-side”. That was an opportunity that just sort of came and found me.
TS: What was WCM like when you got there?
MT: From what I could tell before I joined the firm, it was really successful. They had grown a ton in the last five years. It was about 3.9 billion in assets at the end of 2005. This was when I met Paul, it was December of 05. They had started to build a pretty good institutional business. The overwhelming majority of those assets were in a domestic large-cap growth product. They had a rough year in 2005, which was largely explainable by what was going on in the market at that time with commodities and energies – things that they were nowhere close to investing in.
Paul pitched it as an opportunity to come in and have a big impact. I had two analysts at the time, I wanted a third and it seemed like a no-brainer – great culture, great people. When I got there, you never know what it’s going be like, right? I always ask that now of CEOs, “I know you took this job and you probably had some idea of what the culture was like before you took it, but what are the big surprises?” I mean, I’ve lived that, right? Like you only know until you actually walk in the door and are a part of it.
It turned out to be quite the wild ride. I think what I pitched it to my wife when we moved out there, turned out to be something that was very different. I really thought it was like “Okay, there’s a lot underneath the hood here”. But candidly, when I got here, I remember in the first couple of weeks, just starting to pick up that Paul and Kurt were clearly great business people but they’re not investor-first people. Paul’s passion was really running this business and philosophically everything they talked about, completely resonated with me and was well thought out, and the pitch book and it was flawless. It seemed like that wasn’t their focus. In fact, they were kind of looking to me to really help, not just be part of the team, but what are the next names?
I just got here like two days ago and I remember I was 27 or 28 then, they had an unconventional background with a limited set of experience. There were all these crazy places where you could go have lunch around that Lake Forest office and I finally got up the courage to tell Paul, I don’t think we have the horses basically. He’s like, “What do you want to do?”. Just imagine me moving out here, my guy, Paul being like, “What do you think we should do?” On the one hand, it’s great that someone looks at you like that and they’re like, we really need you. On the other hand, I didn’t know what to do. I was still trying to figure it out for myself and I really just tried to do what I was hired to do, which was trying to find ideas for the portfolio, but we’re underperformed by over 2000 basis points in the first five quarters that I joined the firm. Very quickly, there started to be emotions and cultural issues. It was the first year of having a meeting with the whole company and Paul basically said to everybody, “Everyone in here needs to be prepared that our assets are going to get cut in half.” I was like, wow, okay. Back then, you are kind of naive enough to think it really does just take one great idea and we’ll be back rocking and rolling again. You don’t realize that two bad years, three really bad years of 800 basis points under the bench annually – those aren’t things you really come back from.
At the same time, from a process and portfolio management point of view, things were unravelling because of all the pressures and disappointment around performance. You can read about the dysfunction of investment committees, but until you’re on one and you actually hear people say the stuff, you don’t realize that it’s real, it happens and that’s exactly what was taking place.
I went to my first investment committee meeting, which were these three-hour track-on-marathon meetings and the book Wisdom of Crowds had just came out, so everyone in the firm would go to these meetings and at the end when it came time to make a decision on the portfolio, every single person in the room (it could be operations, it could have been in sales), wrote down on a piece of paper what they thought we should do with the next trade in the portfolio. All those votes were tallied up and looked at what the consensus was in the room. If you read the book Wisdom of Crowds, you would realize that that’s not the most appropriate application of it. What seemed like a rocket ship and a growth engine suddenly had some significant headwinds.
You join a firm, you think it’s going to keep growing, you’re excited to just to be part of the team and then suddenly you’re one and a half year in and the product that you were hired to be an analyst on is looking like it doesn’t have a future. I needed to find other sources of growth and something fortunate and dramatic happened. One of my partners, Peter Hunkel had been incubating an international strategy that was loosely based on the domestic strategy in that it was concentrated, had a quality orientation and focused on growth companies. The idea was sort of hatched and this is an opportunity to go build something and Peter said “Mike, why don’t you team up with Pete and go try to build something?”
TS: Where’d the assets go to at the time?
MT: The assets ultimately bottomed out at less than a billion dollars. That created a couple of interesting challenges. One was the firm’s reputation at that point in the institutional market. I don’t think it was all that great and we were known for this domestic strategy that had significantly underperformed. I think it was by the time 2010 came, we had gone from 4 billion when I started to a little under a billion dollars in assets. There are lots of things I could talk about during that period, but the most important ones are first, nobody left, which was remarkable.
If you think about the challenges that a business can face when it goes through performance and business struggles like that, I don’t know of other stories of firms where that happened. Everybody stuck together and was committed to seeing it through and hopefully getting to the other side. That was fantastic and I think we all agreed to forget about what we’re doing now and what we’ve done. It’s like in end of itself is one of the proudest moments I think we all had. The other piece is we learned a lot from some of the mistakes that were made with that domestic product. None of us would be the investors and the people we are now, if not having gone through those experiences. A big one being coming back to this idea of moats and moat trajectory. The big mistake I think is that we made was focusing on big, wide moat businesses and trying to buy them as cheap as possible. Our valuation discipline, which was largely sort of rooted in doing a lot of DCF work, continued to overtake the investment process and philosophy.
If you look back in time, we were buying Dell instead of Apple, eBay instead of Amazon, and Yahoo instead of Google. Those three trades alone if we had done differently, would have had dramatically different results for that domestic product. It was that experience combined with some of the stuff I had brought to the table from my Morningstar experience, combined with some of the successes we’d had with the international product and other folks that were here that said, “This is really what we think, we’ve unlocked the key element here when it comes to growth investing”. It’s really rooted in this idea of buying wide-moat businesses and not only finding great investment ideas but also steering you away from companies that are essentially pig value traps.
I don’t think those insights would have been hard or been as acute if not for going through the struggles that we had. What was interesting about that as well is, I knew we had learnt so much and had gotten so much better because of that, it took a while for other people to believe us. We outperformed by 900 basis points annually in the first six years of the product, and it still took us that long to get to $100 million. So much of investing is getting out of your own way and letting the importance of staying humble and recognising that you’re not perfect. People today look at us and see what we’ve done and how big we’ve gotten and think, “These guys must have huge egos and think they know everything”. Well, not really. Let’s dig into the history here and tell you where we came from. I still think that how we run the company, how we treat people, how we think about our investment process is – it all traces back to that experience in knowing how fragile the business can be if you don’t continue to get better. If you don’t continue to innovate, you don’t continue to treat people right. This is a fun business when it’s working, but it’s a really difficult one when it’s not.
TS: There’s a big difference between those starts in the international product after six years being $100 million and where you are today. We talked to Paul about this, two key features in the investment process, but let’s start on this question of moats and widening moats. How do you think about assessing companies through that lens?
MT: It’s been a huge evolution, right? I think if you asked anybody intuitively they’d say, “I get it. Why wouldn’t I want to own a business with a set of advantages or a moat that’s strengthening?” But how do you detect that? How do you do that with any sort of consistency? We’ve done it a bunch of different ways.
The first thing we really started doing was case studies on companies. A lot of it is rooted in backward-looking analysis, which is funny because I think a lot of people are attracted to this industry for the immediate gains – the cause-and-effect relationship of investing – maybe that explains why people don’t do more backward-looking work. We started doing case studies on companies and tracing the full lifecycle of the business and trying to figure out what is this company’s moat? What were the early signs that this moat was developing and being built? What did the market think about the company at the time? Then going all the way through to say, “What were some of the early warning signs when this moat started, then ultimately will it start shrinking?”
We did that on a bunch of different companies and the interesting thing was we started to see patterns amongst companies. Sometimes those patterns were not just several companies in the same industry that did really well. They’ve shared certain characteristics, but oftentimes there were companies that shared business model attributes that were in totally different industries. From that, we created a set of typologies or frameworks really rooted in this idea of pattern recognition.
We have a bunch of these things where if we’re looking at an outsourcing business model, as an example, we think we’ve isolated the four things that are consistent with long-term moat expansion for an outsourcing business model. When we look at a new company, there’s a lot of different outsourcers in a lot of different industries. If they sort of pass these four criteria, then it gives us confidence that it’s a business that’s going to be able to sustain its growth and grow its returns for a long period of time. More importantly, I think it also helps you tune out all the noise that you’re sort of inundated with companies.
TS: In that example of the outsourcers, what are those 4 criteria, and what’s an example of where you saw that across different industries?
MT: The first thing we would look for is we want a runway of outsourcing. You don’t want to invest in outsourcers when the majority of the market has already been outsourced. That can take a long time to be honest with you. These things are slow moving even in some of the other industries that we’re involved in today, things like outsource clinical trials or outsource pharma-manufacturing, you’re looking still at well under 50% of those markets being outsourced. The second piece is you want the outsourced service to be a relatively small part of the customer’s PNL, but the cost of failure to be high. So, if it’s a high piece of the expense line, oftentimes you don’t get the pricing, it becomes a little bit more contentious and so you want more of a cosy relationship. It’s easier to achieve that when the actual service costs are relatively small.
The other one is a fragmented customer base and that is pretty apparent. You don’t want an outsourcer that’s largely relying on two or three customers that can become something that’s not going to lead to the same amount of durability. You want some level of customer fragmentation and high barriers to entry.
The last one, and this is probably the most important one, is you want evidence that the outsourcers continue to move up the value chain. That’s ultimately what’s going to extend the growth curve of the business. That’s a fairly qualitative assessment, but if you go back and you study what the great outsourcers have done over time, they started doing pretty routine basic things, then over time just became a lot more essential. Their role in the ecosystem became a lot bigger. A lot of that is just by becoming more of an outsourced RND arm for those companies.
If I want semiconductors, the one that we’ve owned, the outsourcer that we’ve owned the longest, but this is kind of a playbook that’s been successful in a lot of companies. For many years, we owned a company called Christian Hanson, it makes cultures and enzymes for yogurt, milk and cheese. They serve the dairy industry predominantly. Nestle, Danone, companies like that used to largely produce all those cultures and enzymes in-house. Over time they just became big branding and distribution businesses. They’ve realised that they could outsource a capital-intensive business to companies like Hanson and when the company first came public, the narrative was not that different than what you saw with Taiwan Semiconductor 20 years ago, which is why would you want to own an outsourced culture and bacteria company.
Why do you want to own brands and why do you want to own distribution and these are the kinds of companies are going to play to the emerging middle-class consumer? There’s nothing that unique, but if you dug into it, you realise in the same way they were moving up the value chain. Companies like Danone wanted to make certain feature claims about their products either being sugar-free or being able to be stored at certain temperatures. A lot of it ended up being about health and wellness. All that stuff was like getting enabled at the supplier level, so they were becoming an increasingly important partner to those customers. Over time, it just manifests itself not just as a great growth opportunity, but also an opportunity for more margin. When we looked at the company initially, its margins were around 20%, I think when it first came public and we didn’t look at it as an ingredient supplier, like most people did. We looked at it as more of an outsource business. If you look at the other outsourcers that we’d studied, it was clear that this could be a 30-35% operating margin business that turned out to be the case. That’s a form of pattern recognition that we do, and I think it’s enabled in part by the fact that we’re not just a bunch of specialists, we’re global generalists. We cover the world and can see some of these patterns that we wouldn’t be able to. If we were all stuck in certain lanes, just covering certain countries or certain industries.
TS: With the outsourcers, there’s this typography you’ve figured out there are these four key criteria that help you figure out what’s happening with the moat. What are the other ways that you’ve tried to measure these widening moats across either different typologies or industries?
MT: One thing that we realized with the case study approach was there is some selection bias that comes with that. If I know intuitively that most outsourcers turn out to be great businesses, I can give you a list of 10 that we should go study. But I never knew about the ones that tried and failed, right? You can certainly study the lifecycle of the moat and figure out what potential sources of deterioration there are, but it’s hard to know what the failed examples were. We’ve also done this in a more quantitative way by taking an industry and all the participants in the industry, then study what’s happened to them over the course of a few decades.
As an example, if you’re a global investor, odds are, you’ve spent a lot of time looking at luxury goods stocks over the years. We studied about 50 luxury companies over the course of 30 years and tried to find what were the markings of the ones that really compounded returns at high rates for a long period. Not the ones that had its day in the sun, but the ones that were enduring were the real coffee can investments in that group. When we did that, it was clear that there were two criteria. One, the higher the price points the better. The more aspirational the brand, the more enduring it tends to be. The other is controlling your own distribution – direct sales not heavily relying on wholesale channels. That in and of itself explains to you probably why the companies we’ve been involved in in the past are Louis Vuitton, Hermes, Ferrari – they all fit that criteria. At the same time, we’ve been reluctant to invest in stocks like the caring group which owns Gucci. Not that they haven’t done extremely well in recent years, but because they have, it doesn’t really fit that framework that I’m talking about. Oftentimes we think that if anything, the frameworks or the typologies, one of the things they really do is help you make distinctions between what’s just momentum and what’s the structural differences in companies that are going to lead to long-lasting above-average growth.
It doesn’t mean they’re always right, but more often than not; they’re going to be very helpful in that regard. So that along with the filtering piece that I mentioned a second ago kind of tune out all the noise. I think it’s probably two of the more important things that they do, the other important part about moat trajectory.
To be honest, we talk about this internally all the time, it’s a mindset, right? It’s sort of steers a lot of the questions that we ask companies – it’s just as good for finding great ideas. I think it’s probably more valuable in steering you away from bad ideas. I think so much of successful investing is you’re going to make mistakes, and so you want to minimize the frequency and then the damage when they take place. I think that’s an unappreciated part about it, I think that’s historically why growth investing got a bad name. Another way to kind of think about moat trajectory is there’s the moat and then there’s the growth formula. Those two things combined give you a positive moat trajectory. Depending on the type of business that you’re looking at, you have to be more sensitive to the moat. For others, you have to be more sensitive to the growth piece.
If you’re looking at a consumer staple company, take Pernod Ricard, their moat is well understood. It’s not going to change its brands, its distribution, its scale – but what’s going to dictate whether that’s a good investment or not is their ability to execute on growth. If you contrast that with something like Shopify, which is another name that we own, the growth piece of the Shopify thesis is well known. Everyone can look and quickly realise Shopify is going fast and they’ve got a huge team. They’ve got probably 7% of their total addressable market in terms of merchants and they’ve got a massively growing ecosystem. What’s going to derail that investment is really going to be disruption – it’s going to be their moat, it’s going to be competition, right? We have different sensitivities that we have to focus on. Those are all designed to, once we own the name – obviously just make sure that we don’t end up owning in the case of a bunch of dead money high quality stocks – in the case of Shopify, businesses that we’re going to wake up one day and there’s going to be a significant change to the competitive landscape. We’re going to find that there’s been a significant impairment in the valuation of the business.
TS: How do you think about the valuation of some of these companies? Because when one or the other aspect of what’s creating growth or where the moat is well-known, often the market price is that in and some of the names you mentioned are traded in a traditional looking valuation – pretty expensively and have been for some time.
MT: I’ve gone through a full life of learnings when it comes to valuation. My first lesson really in investing coming out of 2000 was the importance of valuation. I gravitated towards discounted cashflow models because there’s something so seductive about that, especially when you’re young and impressionable. I remember the first time I did a discounted cashflow model and I put in what I thought were some reasonable estimates for growth, margins and capital expenditures. Then I looked at what the price was, and I thought, “oh my goodness, I’m actually pretty close to the current stock price. I might be decent at this.” There’s this like false precision that I think can become seductive, but over the years, for one, I’ve learned that it’s just ridiculous to think that you can precisely determine what a company’s worth.
Things are changing constantly and particularly if you’re investing in companies that are in growing, industries with moats that are growing and with cultures that are super adaptable in finding other ways to grow. Your valuation work is going to look so long in a very short period that it’s not worth all the effort and problems that come from relying on discounted cashflow models. Not to mention the fact that focusing a lot on DCS – there’s false precision, it gets you very focused on the short-term winning the reality.
Most of the value in the discounted cashflow model resides in that terminal period, which they spend zero time thinking about and if you’re a long-term investor, that makes no sense. We’ve had to come up with this term called ‘defy the fade’. One of the big mistakes that you see people make when you do modelling is you look at a company and you’re very focused on the short term and the company’s growing 5 or 6% today. You think, “Okay, I like the business and things are going well – 6% seems pretty good. That’s close to the company’s guidance and maybe they’ll do that again the next year.” But after that, it’s probably going to be 5% and then it’s going to have to go down to 4%, and then before you know it, it’s down to GDP and the same is true for your return on invested capital assumptions and at this kind of cashflow model.
What moat directory and culture are designed to do are identify those companies that can defy the fade, defy that inevitably. We’re not saying that fade will never take place, but by focusing on the companies with these attributes, they’re going to maintain that competitive advantage period far longer than anybody thinks. It’s that delta between what the market’s expectations for the fade are and when that takes place is when all that alpha generation opportunity exists.
I think we’ve come to a place where we focus on the qualitative assessments of a business around moats and culture and how that translates into the durability of a company’s growth rate. I think that is far more predictive of a successful investment than trying to find things like waiting for price breaks on businesses of reasonable quality. There’s some sort of short-term impact that’s like disrupted the stock price and you jump in at a 20% discount, close that gap, earn a little bit of the cost of capital on top of that and then you’re out of the business in a few years. I think a much more successful way to invest is the way we do it now.
TS: You touched a little bit on culture and this notion of culture being aligned with that competitive advantage that creates that growing moat trajectory. Paul’s also talked about that. You’ve mentioned it a bunch of times. What does it mean to do the analysis on a company’s culture that’s aligned with their competitive advantage?
MT: It’s been a huge evolution here. When I came to WCM, Paul Kurt were already talking about culture. They had experienced a huge transformation in their own lives, which Paul talked about in your conversation and became convinced that culture if it mattered for our company, should matter for the companies we invest in.
The truth of the matter is that at the time, I think there was a narrow view of what a great culture really meant. In fact, I think Paul would tell you that basically what we were trying to do is just go find companies that sort of smelt and tasted like WCM. If they talk about the same things that I’m talking about and I’d really want to go work at that company if I was in that industry, then that must be a company with a great culture.
Over time we realised that that’s a really flawed way to kind of look at things as there’s no perfect culture. Particularly what culture works in one industry might not be right for another, right? The joke that we’ve used for years is Google’s infamous unstructured time. It gave developers to go work on pet projects and create things. That’s a huge part of its culture and Canadian Pacific, which is a railroad that we’ve owned for a long time. That has been an operationally driven company that’s all about sweating its assets and operational excellence and efficiency, and suddenly they decided to give everybody in the company unstructured time. There’s going to be a serious problem in terms of the company’s competitive advantage. At the same time, if you applied some of the things that Canadian Pacific does from a cultural perspective for the developers at Google, there’s going to be a revolt.
There is not one perfect culture that you have to start from there. You have to make sure that your own personal biases of what is and isn’t a good culture actually get in the way. That’s another key piece. The ultimate question is, let’s try to understand what the company’s strategy is to grow their moat. Every company has a strategy to differentiate itself from its competition, to grow its business, to take market share to whatever its strategy for shareholder value is. Let’s try to understand what that is, a lot of that comes through in the moat directory analysis. Once we think we understand that, we want to talk to the company about what the behaviours are that they think are necessary to achieve that strategy.
TS: What are the parts of your research that you’ll go into the company and ask about to tease that information out?
MT: What we’ve done over time is developed a bunch of questions that we think are to tease those things out. There was a period of time, 5 or 6 years ago, when unfortunately we’d sit down with companies and just say, “Hey, will you do me a favour and just describe your culture for a little while?” Most companies can’t do that interestingly enough, particularly if you’re reserving the last 20 minutes of an hour and a half meeting to ask them that question. That really hit home with me.
A number of years ago, we were actually going up to visit Tencent, and it has a fantastic culture. We’ve done extensive amounts of research into it, but we had never really had just a dedicated culture meeting with them. We were talking to one of the senior executives there and I asked that stupid question, “hey, just describe your corporate culture”. He immediately just gave a horrific answer, to be honest with you. He started talking about having to pay programmers more money because of competition from Alibaba. That’s why I sort of pivoted the conversation and ended up asking them about a decision they’d made to close their search business, which they had spent a bunch of money on, and this is when he was trying to build a competing product with Baidu. He said, “That was a really easy decision. Our product managers came to us and told us we should shut the business down”. I said, “Wow, that’s impressive that they felt like comfortable enough to do that. After all, they are probably responsible for a lot of the product”. He said, “Well, actually it was pretty easy for them because we compensate people based on user satisfaction, not based on revenue growth.” That really is the core of what Tencent’s culture is all about. It’s been an obsessive focus on the user. That was a light bulb moment for me – that we weren’t asking great questions. It was like the straw that broke the camel’s back.
I knew it intuitively and so we’d set on a journey to figure out how to have good conversations with companies about their culture. We talked to lots of folks and build some relationships with people that had spent a lot of time talking about this in the academic community, tested a lot of questions asking CEOs and ultimately have come up with a series of questions around alignment because that’s a huge piece of it and then around adaptability. That’s the other big hallmark of a great culture is that its adaptable.
There are certain trappings or things that we look for in adaptable cultures. We have questions that we ask around that. As an example, we’re trying to get it aligned, which is like behaviours. First question would be, let’s hypothetically say the son or daughter of a good friend of yours is going to work at the company, they start next week. You’re going to have coffee with them this afternoon, what are the three pieces of advice you’re going to give them to be successful? That’s a much easier question for a CEO to answer than saying, “Hey, just describe your culture, tell me what it’s all about”. You have to prime them and put them in a place to answer the kinds of questions and give you the information that you want.
Then there are things like adaptability. For adaptability, you’re looking for a learning orientation and what does that require? Lots of candor, learning from mistakes, external awareness. We’ll ask companies about mistakes. What’s a mistake that you made that you look back on now, and you think “I’m so glad we made that mistake because we’re so much smarter because of it” and when you ask that you’d be surprised. Sometimes you get good answers but oftentimes you don’t. When we ask that question and somebody starts talking about some $10 million acquisition they made three years ago where they misjudged the people and they had to write it off. I’m like, seriously, you’re a $50 billion company – give me like a real mistake. That would be kind of a yellow flag that maybe there’s not as much adaptability here as I thought.
It’s that, we do that with management. We do that with former employees and then really the next big foray for us and things we’re spending a lot of time on now is more data-oriented culture work. I think that’s going to become a source of meaningful differentiation and some of that is being enabled by a lot of the work that’s going on in the SG landscape. There’s just going to be more data to look at and to glean cultural insights from. I think that’ll be the next big push for us in the next five years.
TS: As you’ve gone through this incredible trajectory in the firm, even in the last three years that we’ve known each other, how do you turn that lens onto WCM? How do you think about what’s happening with WCM’s moat and what’s happening with WCM’s culture?
MT: We’re all of the view that nurturing, protecting, and keeping the culture as healthy as possible is the single most important thing we can do. Obviously, things are going to change, they change with size but we spend a lot of time trying to articulate where we’ve come from, the difficult periods, the behaviours we think were essential to get us to where we are.
I worry, honestly, when you have people that have come in and all they’ve done is experience a tremendous amount of success and prosperity and they don’t have a big reference class of experience to look at. They might miss certain attributes that I think also have been core to making this place successful. I worry that they stopped trying to make the firm better because they think it’s already so great.
We talk about the core values of the firm, which are fun and gratitude, and I think Paul went into those conversations but on the research team, we have our own core values as well and they think different and get better. In some ways, the firm embodies those as well. But the research team went through its own process of establishing core values and it was a very similar process to what the leadership team did when we came up with fun and gratitude. A lot of it is looking back and saying, “How did we end up here? What really makes us different than everybody else?” That’s not talking about smart people or hard work, that sort of permission-to-play in the investment community, but what are the behaviours that I think have really made us successful? As we went through it, ‘think different and get better’, just bubbled up to the surface. If you step back, it makes perfect sense because when you think about the industry and one of my other partners, Sanjay Ayer, does a really good job articulating this and we’ve now dubbed it the WCM platform.
If you think about the industry where you’ve come from in your career, it’s difficult to detect and know whether somebody is talented or not. Some of that is because there’s long feedback loops in the industry. It can take 10 years or longer to know if somebody is actually a great investor. There’s a lot of noise, there’s a lot of luck involved. Because of that, these rules emerge in the industry. Unwritten rules, like everybody acts the same way and they dress the same way. If you go to an investment conference put on by one of the big banks, it’s a little sad how much uniformity there is in those rooms. People tend to look at the same school for hiring, everybody watches and reads the same things. From that, you get these counterproductive behaviours that largely explain why active management struggles. It’s a lot of groupthink, people are worried about standing out from the crowd, they’re worried about careers so they play it safe. They hug the benchmark and focus on a lot of short-term information. They become information gatherers not trying to stick their neck out on unique insights and then they have a fixed mindset. They perpetuate that myth that there’s some people that have the ‘it factor’ in this industry and some that don’t. They want you to think that they’re smarter than everybody else, even though everybody in the industry is already pretty damn smart.
So ‘think different and get better’ is kind of the antidote to that. If there’s a lot of groupthink that’s part of the problem. Let’s totally flip that on its head and make the whole culture about being different. Let’s run really concentrated portfolios, let’s focus on things where there’s compounding knowledge like moat directory and culture, where we can get better at assessing those things over time. Let’s not focus on developing insights that are going to be worthless in six months once they come to fruition, and let’s pound this idea of being reverend, scrappy and just a little different than everybody else. Let’s really make the firm about this journey of getting better. What does that take? Well, it takes a lot of candor and it takes a lot of trust. You got to be willing to talk about your mistakes and you got to lean into them. You got to make them not as an opportunity for you to learn, but from the whole firm to learn we’re not perfect, we’ve made mistakes, but what I think we’ve always done is really learn from that. I think that that’s been core to the success of the firm. When new people come in and I think about, how the culture is going to change, I’m confident if people can just continue to think different and get better. I think the firm’s going to be in really good hands.
TS: Mike, I’m curious as you’ve grown and you think about the business so much, that incredible growth has really come in one product. Have you thought about just trying to get better and better at doing that one thing, and mostly international growth compared to taking the skill set and broadening out in different investment strategies?
MT: I think that’s going to become a huge part of our story in the next 10 years. It’s interesting because I think growth is kind of a dirty word in investing. I look at it slightly different – growth is such a huge part of our story and what makes this a fun place to work and why people are so engaged. We need to continue to find other avenues of growth. We’ve done that out of the global equities team by moving into global emerging markets, international small-cap, and global long-short short. We have a China fund now and then there’s a lot of interesting things that we’re doing. I think asset classes that we’re exploiting some major inefficiencies and we’re going to develop some great businesses out of those products.
What’s exciting is trying to make this a platform for other people. I look at it and think we are the luckiest guys in the world to be sitting where we are and what better thing to do than give other people an opportunity to do what we’ve done. We started doing this a number of years ago. We brought a team in that’s now done small-cap value-based in Cincinnati. We’ve got a team in St. Louis that does small-cap growth and then we’ve got an ESG team in Denver and I hope we continue to do those. Our intention is to continue to find people that are passionate about what they do and got a good idea. Maybe they’ve been stuck in a bank or an insurance company or they’ve been at a firm or something went sideways, and they just haven’t had that true moment needed to really make it work. We have the resources and the platform that they can come in and plug into and then have the freedom to go chase whatever it is they’re most passionate about. I think that that’s something at the firm level that we’ll continue to pursue because I think there’s just a lot of opportunity that we can give to people.
TS: Mike, can’t let you go without asking a couple of closing questions. what is your favourite hobby or activity outside of work and family?
MT: I love cooking. I think that’s one of my favourite things to do. It’s one of the few things I can do that actually distracts me from what else is going on in the world. There’s something meditative about chopping an onion. In California, we’re blessed with an unbelievable amount of great produce. Right now, we’re transitioning from the Summer of corn and heirloom tomatoes into blood oranges and stone fruit. It’s fun to watch that happen and take advantage of that in the kitchen.
TS: What’s your most important daily habit?
MS: You know, I try to start every day doing some type of spiritual-related reading. The thing I find that’s so helpful with that is starting your day that way grounds you a little bit. What really matters gets me a little bit more focused on what’s to come in the day, how to handle it and it makes me worry a little bit less actually. Everyone has their own version of what spiritual is to them, but I think that’s just a fantastic way before you pick up your phone and start plowing through emails or checking your Twitter account – doing something like that, I think has been really helpful for me.
TS: What’s your biggest pet peeve?
MT: Probably the biggest one is people that just lack self-awareness. I find that to be a hugely important thing here in the firm. People that aren’t self-aware, they tend to be difficult to deal with. They get defensive without recognising it and it sort of chokes off the ability to get better, right? If you’re not self-aware about what you’re good at and what you’re bad at, then it can become difficult to attack those bad things. I think lack of self-awareness is the biggest one for me.
TS: What teaching from your parents has most stayed with you?
MT: I think my dad was always about, when I made mistakes, looking at them as learning opportunities. So that’s part of the reason I feel so strongly about some of the stuff that I mentioned earlier. I came from what seemed like a dysfunctional family at times and I remember as a kid complaining to my mom about that. She’d say “Yeah, you just don’t realize every family has got their issues.” As I got older, I started to realise that’s true. The more you can have open trusting relationships with friends and deal with those types of things and not bury it. I think that that leads to good relationships. That’s probably what my mom taught me most.
TS: Here’s the last one for everyone who’s listening, what life lesson have you learned that you wish you knew a lot earlier in life?
MT: The biggest one is where to look for wisdom. I think at least in today’s world, I think we’re led to believe that wisdom is going to come from people with big balance sheets, celebrities and athletes. The more I’ve interacted with people like that, the more I realised that it can often be disappointing more so than not. Wisdom comes from talking to people that have had struggles, that have made mistakes. Oftentimes it could come from a teacher or could come from a cab driver. Creating those moments of just random interaction and talking to people and hearing about people’s stories and journeys and looking for it in unusual places – I’ve really leaned into that idea in recent years and I wish I would’ve known that at a much earlier age.
TS: Mike, that’s great, thanks so much.
MT: Thank you, really appreciate it.
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