Speaker 1: This is Masters in Business with Verry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: You may not know his name, but you probably should
Speaker 1: given the stellar track record he's managed to put together
Speaker 1: over the past twenty or so years. Dennis Lynch is
Speaker 1: head of Counterpoint Global. That is sort of a group,
Speaker 1: a firm within a firm at Morgan Stanley Investment Management. Uh.
Speaker 1: They run a ton of money, about a hundred thirty
Speaker 1: billion dollars and their track record, especially this year, has
Speaker 1: been pretty The Noodles the Growth Fund is up eight
Speaker 1: Discovery is up about a hundred percent. Their worst performers
Speaker 1: advantage it's only up fift. They run very interesting concentrated portfolios.
Speaker 1: Their entire approach is somewhat unique. They're not um like
Speaker 1: very many people. Uh. Maybe Will dan Hof for Bill
Speaker 1: Miller run a similar style of investment management. To give
Speaker 1: you an idea of how outside the box this group thinks. Uh.
Speaker 1: They recently, by recently a year ago, they hired Michael
Speaker 1: Mobison to be the head of their research just for
Speaker 1: the group. Mike has been on the show a couple
Speaker 1: of times, and I just love the way he thinks,
Speaker 1: and any group that brings someone like him in obviously
Speaker 1: is not your traditional Wall Street stock picking um fund managers.
Speaker 1: I found this conversation to be absolutely fascinating if you're
Speaker 1: all interested in how to build a portfolio, how to
Speaker 1: select stocks bottom up, why the buckets we use and
Speaker 1: phrases like small cap or value or growth can be
Speaker 1: so constraining and really harmful to performance. I believe you're
Speaker 1: gonna find this conversation to be absolutely fascinating. So, with
Speaker 1: no further ado, my conversation with Counterpoint Global at Morgan
Speaker 1: Stanley's Dennis Inch. This is Master's in Business with Barry
Speaker 1: Ridholts on Bloomberg Radio. My special guest this week is
Speaker 1: Dennis Lynch. He is the head of Counterpoint Global at
Speaker 1: Morgan Stanley Investing Management. Running about forty four billion dollars,
Speaker 1: he has five separate funds. His group is responsible for advantage, growth, insight, discovery,
Speaker 1: and inception, the largest of which is about fifteen billion
Speaker 1: dollars and year to date is up about Dennis Lynch,
Speaker 1: Welcome to Bloomberg, Barry, thanks for having me. So let's
Speaker 1: talk a little bit about Counterpoint Global. Everybody knows the
Speaker 1: name Morgan Stanley, but not everybody knows the name Counterpoint Global.
Speaker 1: What is the thinking behind a company within a company.
Speaker 1: I mean, I've been at Morgan Stanley, I think over
Speaker 1: twenty years and ever since the habit it would an
Speaker 1: investment manage meant they've followed the philosophy of trying to
Speaker 1: make sure they have a diverse group of thinkers and
Speaker 1: small decision making teams. And I think that's a really
Speaker 1: healthy environment for trying to to do the hardest, one
Speaker 1: of the harder things out there, which is pete the market.
Speaker 1: So it's been a great environment for that. And in
Speaker 1: that context we've been able to build Counterpoint Global our
Speaker 1: group over the course really in a strong manner over
Speaker 1: the last sixteen years, with with the great resources we
Speaker 1: also get from Morgan Stanley generally. So I think it's
Speaker 1: been a good combination of a good, big, big term
Speaker 1: philosophy from Morgan Stanley and and then allowing Counterpoint Global
Speaker 1: and the key members of the team to be very
Speaker 1: entrepreneurial in that context. So not to read too much
Speaker 1: into what you're saying, but you're giving me the impression
Speaker 1: that this is a model within Morgan Stanley, and there
Speaker 1: are a number of small entrepreneurial teams within investment management.
Speaker 1: Is that right? Yes, that's been the model, and I
Speaker 1: think it's really healthy. I think there's been some good
Speaker 1: research that shows that, you know, strong decision making, particularly
Speaker 1: on the investment committee side of things, tends to occur
Speaker 1: when you're dealing with small groups of teams as opposed
Speaker 1: to kind of large bureaucracies. So I count five different
Speaker 1: funds that Counterpoint Global is running, Advantage, Growth, Insight, Discovery,
Speaker 1: and Inception. Are these all run as a group or
Speaker 1: are there different managers for each? How do you guys
Speaker 1: structure this amongst yourselves? So believe it or not. Actually,
Speaker 1: UM Counterpoint Global in its totality is about nineteen products globally,
Speaker 1: which includes the portfolio management team in New York that
Speaker 1: I had, as well as the portfolio management team in
Speaker 1: Asia which my partner and co c i O Christian
Speaker 1: Hugh runs UM. And so in total we have nineteen
Speaker 1: products currently the hundred thirty billion in assets and UM
Speaker 1: we probably own about two companies those globally. So despite
Speaker 1: the fact that sounds like a large number of products,
Speaker 1: we're very concentrated in each product and we're very picky
Speaker 1: about what we invest in. So it is a pretty
Speaker 1: small group of companies when you think globally. We basically, uh,
Speaker 1: you know, we run We have two lead managers in
Speaker 1: two different locations, and the portfolios are kind of informed
Speaker 1: by the insights of the entire team, and we go
Speaker 1: through the process kind of at the end of the
Speaker 1: process to figure out what to go. We're based on
Speaker 1: how big a company is, where it's domiciled, etcetera. In
Speaker 1: other words, you identify a company you want to own
Speaker 1: and then figure out afterwards which funds, which product is
Speaker 1: the right fit for it. Yes, huh. That's very different
Speaker 1: than the typical mutual funds. Yeah, and I think it's
Speaker 1: a big different when I think about Counterpoint Global and
Speaker 1: how we're different. It is one of our big differences.
Speaker 1: You know. The people on our team aren't what we
Speaker 1: call investors. They show up or wake up each day
Speaker 1: looking for the best ideas in their areas of expertise,
Speaker 1: but they're not trying to find the best large cap
Speaker 1: growth healthcare companies. So if you're Jason Young is a
Speaker 1: world class health investor on the team, that's not how
Speaker 1: you're approaching your time spent in your day to day
Speaker 1: you're looking for great ideas within healthcare, and it just
Speaker 1: so happens given that we have US products, international global products,
Speaker 1: and ones that focus on different market caps and different
Speaker 1: parts of the overall products set, we have a we
Speaker 1: have a home for your idea and so I think
Speaker 1: it is is one of the things that differentiates the team.
Speaker 1: So you went from being an analyst to being a
Speaker 1: portfolio manager. How challenging is it to go from analyzing
Speaker 1: a business to building an investment portfolio? What what was
Speaker 1: that transition? Like? Well, I think, you know, there are
Speaker 1: a lot of different personalities out there, and I think
Speaker 1: it really depends on the person. You know. Actually, one
Speaker 1: thing we try to do from time to time every
Speaker 1: few years is the personality assistance for people on the team,
Speaker 1: just to promote a little bit of self awareness. It's
Speaker 1: always good to get get another view of kind of
Speaker 1: how you're hardwired, especially in times like this where we're
Speaker 1: having extreme volatility. It's kind of nice and to remember
Speaker 1: that sometimes you're hardwired to react a certain way under
Speaker 1: durest and maybe that self awareness helps you make you
Speaker 1: more high quality decisions. But I guess in our case
Speaker 1: or in my case, um I've always you know, while
Speaker 1: I love details, and I certainly can be very detail
Speaker 1: oriented at times, I also love learning about a lot
Speaker 1: of things. You know. I went to a liberal arts college,
Speaker 1: and so I have I really do enjoy the extra
Speaker 1: perspective of learning about a lot of different industries and sectors.
Speaker 1: So going from an expert or an analyst in one
Speaker 1: area to being an investor more broadly, I think kind
Speaker 1: of fit my personality specifically. But what we try to
Speaker 1: do on the team is is, you know, attract really
Speaker 1: unique people and then based on their personalities or end
Speaker 1: their passions, sort of let's enable them to do what
Speaker 1: they do well. And so we've got all sorts of
Speaker 1: different types of doing playing different roles. In my case,
Speaker 1: I think given my uh a love for learning about
Speaker 1: a lot of things, the transition probably made more sense
Speaker 1: and was easier than for someone else. So I have
Speaker 1: read a lot about personality testing, and there seems to
Speaker 1: be two groups of thoughts on it. One is there's
Speaker 1: a lot of down and dirty, kind of oversimplified tests
Speaker 1: and they're of no value whatsoever. And there's another group
Speaker 1: of thinking that says, hey, if you ask the right
Speaker 1: questions and you really dive deep enough, you can find
Speaker 1: things out about how people think, how they behave, and
Speaker 1: what type they fall into. So I'm gonna assume you
Speaker 1: guys aren't doing anything um down and dirty. You're really
Speaker 1: doing a serious dive into that sort of profiling of
Speaker 1: various researchers and managers in the group we are. But
Speaker 1: you know, here's the thing about anything like this personality tests, UM,
Speaker 1: this sort of topic UM. You know, and we have
Speaker 1: got a great diversity of thinking on a team here.
Speaker 1: Some people think it isn't very useful, and some people
Speaker 1: find it extraordinarily extraordinarily useful. I look at it as
Speaker 1: a as a low cost way of getting the team
Speaker 1: together in one place and spending time as a larger
Speaker 1: unit where we can you know, hopefully you know, bond
Speaker 1: and and share share a day where we're sometimes you've
Speaker 1: been making fun of each other for our differences. UM.
Speaker 1: But I think that it's the worst case for my
Speaker 1: vantage point. It helps the team uh culture. But you know,
Speaker 1: we have some people think this is very useful and
Speaker 1: some people think it's useless. And I get both sides
Speaker 1: of that. You know, I actually used to think it
Speaker 1: was useless earlier in my life, and as I started
Speaker 1: to explore it, I found there there there to be
Speaker 1: some utility. So it really depends on the person. It's
Speaker 1: it's it's why we do it every few years. It's
Speaker 1: the worst case, it's a it's a cultural bonding thing,
Speaker 1: and best case, maybe people gain a little extrac off awareness. Huh.
Speaker 1: Quite quite interesting. I find myself about halfway in the
Speaker 1: process that you already went through, going from poo pooing
Speaker 1: it too. All right, maybe it's worth exploring and who
Speaker 1: knows what what will come out of it. I was
Speaker 1: very disappointed when I initially took the Myers Briggs a
Speaker 1: long time ago, to find that I wasn't so unique
Speaker 1: after all. It was a lot more accurate than I
Speaker 1: expected to be. So that's what got me kind of
Speaker 1: moving in that direction. But reminds me of my favorite
Speaker 1: scene in Money Python's Life of Brian. We're all individuals,
Speaker 1: everybody chance together, We're all different. It's pretty hilarious. It's awesome.
Speaker 1: So let's talk a little bit about growth investing in Obviously,
Speaker 1: the stay at home trade has been enormously profitable. Um,
Speaker 1: you're one of your biggest funds has is up almost
Speaker 1: a year to date. Uh, some of these stay at
Speaker 1: home aims like Shopify and Zoom and Tulio. Were these
Speaker 1: in your portfolio pre covid or did you guys recognize, Hey,
Speaker 1: this is gonna be a long working remote scenario and
Speaker 1: we want to load up on the names that would
Speaker 1: benefit from that. Uh. These for the for the very
Speaker 1: most part, these are all holdings going into and they
Speaker 1: were usually our performance at any given period time. It's
Speaker 1: more function of decisions we made a year or several
Speaker 1: years prior than it is kind of the moment sort
Speaker 1: of in the moment reaction to what's happening and obviously
Speaker 1: being an exceptional time. UM. So we did all these
Speaker 1: stocks that you're mentioning prior to UM. That was actually
Speaker 1: a transition we made maybe a few years back. If
Speaker 1: you look maybe eight or ten years ago, you might
Speaker 1: have seen in our portfolio is a large, large stakes
Speaker 1: and companies like Amazon and Apple and Google and Facebook,
Speaker 1: and a few years back we were looking at the
Speaker 1: opportunity set and I think, you know, all good invest
Speaker 1: things opportunities have driven. We thought there were some really
Speaker 1: interesting young companies in some of the areas that have
Speaker 1: benefited more recently, not just from COVID, but from secular growth.
Speaker 1: And so what I would say is we added things
Speaker 1: like some softwares of service and e commerce companies you know,
Speaker 1: two or three years ago, all of which fortunately benefited
Speaker 1: this year. And what I'd say there is, I think
Speaker 1: many of these companies offer you know, time and cost
Speaker 1: efficiencies to their customers or their clients. And you know,
Speaker 1: at the time of general generally, in the time of crisis,
Speaker 1: you're going to see a more likelihood of faster adoption
Speaker 1: or people sort of looking more at the world from
Speaker 1: a blank sheet of paper standpoint, and more likely to
Speaker 1: do things that are different and change their behavior. In addition,
Speaker 1: so I think that's generally true, but you know, from
Speaker 1: a luck standpoint. In addition, I think we were for
Speaker 1: relatively fortunate a tough time for everybody that some the
Speaker 1: specific needs that a pandemic required, like delivery and staying
Speaker 1: at home and UH and working and streaming from home,
Speaker 1: you know, certainly did were extra benefits that you know,
Speaker 1: much more luc driven than it was I think us
Speaker 1: reacting quickly to the environment or anything like that. So
Speaker 1: that raises an interesting question how much of these spectacular
Speaker 1: gains for this group of companies. Is future growth being
Speaker 1: pulled forward to and how much is a permanent shift
Speaker 1: in the dynamic? Well, I think there's definitely some evidence
Speaker 1: of a few things. There's some evidence you've seen some
Speaker 1: of the fundamentals pulled forward for some of those companies,
Speaker 1: i e. Growth, faster growth than expected coming into this period.
Speaker 1: But as you're alluding to, you've also seen pretty dramatic
Speaker 1: outperformance of the companies in relation to the rest of
Speaker 1: the market. So I think it's a combination of both
Speaker 1: forward UH fundamentals being pulled forward as well as potentially
Speaker 1: UH to a degree, future returns also being pulled forward UM.
Speaker 1: And so yeah, it's it's not we we still really
Speaker 1: like the portfolios today from a fundamental standpoint, but when
Speaker 1: you think about perspective returns from here, uh, you know,
Speaker 1: we're not as we're not expecting the high returns we've
Speaker 1: seen over the last ten to twenty years. That counterpoint global.
Speaker 1: But I think that's really true of all asset classes
Speaker 1: with interest rates where they are, and especially real interest
Speaker 1: rates were possibly negative. It doesn't there aren't That doesn't
Speaker 1: seem to be a whole lot of great places to
Speaker 1: find new incremental investments so we're mostly happy staying the course,
Speaker 1: but we recognize by pulling some of those fundamentals end
Speaker 1: valuation expanding in the near term, you're not likely to see,
Speaker 1: you know, the return profiles we've been able to achieve historically.
Speaker 1: We're recording this the day after the big fiser vaccine
Speaker 1: news came out effectiveness in a large study, and the
Speaker 1: market action was value stocks I think had their best
Speaker 1: day in uh at least five years. Tech didn't do
Speaker 1: nearly as well. Do we think this trade is going
Speaker 1: to be changing on a permanent basis or is this
Speaker 1: just a little bit of digestion as to what everybody
Speaker 1: thought was eventually going to come, namely some sort of vaccine,
Speaker 1: some sort of return to normalcy. Yeah. I think you know,
Speaker 1: if you're a trader and you're really focused on, you know,
Speaker 1: the next few months or the next few weeks, or
Speaker 1: of shorter time arisings, then I think you're very, very
Speaker 1: interested in this kind of question, and you might be
Speaker 1: looking at market activity as a barometer for whether or
Speaker 1: not there's been a really dramatic there's certainly been a
Speaker 1: very dramatic short term impact to that news, whether or
Speaker 1: not that sustained itself. You know, it's very hard to predict,
Speaker 1: and certainly we don't We don't have a strong view
Speaker 1: as to whether that will continue or not in the
Speaker 1: very short term. I think it's great news in general.
Speaker 1: I think the economy is going to be a lot
Speaker 1: bigger five to seven years from now, the sooner we
Speaker 1: get out of this uh. And you know, it's hard
Speaker 1: to sustain an economy through his fiscal stimulus and other
Speaker 1: means UM. And that's not good for anybody, including the
Speaker 1: companies that have done you know, the small group of
Speaker 1: companies that have done really well this year. So I
Speaker 1: look at as a positive development. Having said that, it's
Speaker 1: also there's also a lot of unknowns and uncertainty. I think, um,
Speaker 1: you know, how fast we can get any any sort
Speaker 1: of functional vaccine um distributed and implemented. Uh, there are
Speaker 1: you know, other things that can also still still go
Speaker 1: wrong in terms of mutations of the virus, etcetera. So
Speaker 1: this is still a time of uncertainty. Usually when you
Speaker 1: see the sort of dramatic change and things, it's just
Speaker 1: what it does tell you is that how people might
Speaker 1: have been positioned in the short term are trying to
Speaker 1: make short term profits and so obviously this suggests that
Speaker 1: some people were you know, there's there's these stocks have
Speaker 1: become popular in the short term, and that um, you know,
Speaker 1: the people that need to protect their short term gains
Speaker 1: were think in terms of those smaller increments of time
Speaker 1: are going to you know, have have a problem. You know,
Speaker 1: I think even at the end of last year, for example,
Speaker 1: you know, our stocks weren't doing to some of the
Speaker 1: stocks have done so well this year, We're doing terribly
Speaker 1: in relation to the market in the fourth quarter, and
Speaker 1: when we didn't do as badly in the initial draw
Speaker 1: down um posts the COVID occurring, let's say in March April.
Speaker 1: I think part of that had to do with, you know,
Speaker 1: some of the people that are short term orions that
Speaker 1: didn't own our stocks at that point because their relative
Speaker 1: momentum was pretty terrible at the end of last year.
Speaker 1: So this is not the fun part of being a
Speaker 1: long term investor, because you know, we're we're all human
Speaker 1: and you're gonna experience these kinds of times. But how
Speaker 1: we think about the decision making, how we're you know,
Speaker 1: kind of making our choices, it's more of a three
Speaker 1: to five year thing, and it requires being being able
Speaker 1: to zoom out from time to time and recognize that
Speaker 1: the rest of the market's going to focus on short
Speaker 1: term reactions, sometimes more than you'd like. So so let's
Speaker 1: briefly discuss that short term reaction. Back in February and March,
Speaker 1: in a very short period of time, I want to say,
Speaker 1: five or six weeks, the SMP five hundred was down thirty.
Speaker 1: You're running some pretty high, high beta names and a
Speaker 1: lot of volatility. How do you manage around a draw
Speaker 1: down like that? Is it merely you know, the cost
Speaker 1: of admission if you're going to own some of these
Speaker 1: um high flying names. That's pretty interesting, right because you
Speaker 1: as you as you use the word beta, which is
Speaker 1: obviously the modern portfolio you know, proxy for risk. And
Speaker 1: one would have guessed that if, if, if you're you
Speaker 1: had a higher than average beta profile in your portfolio,
Speaker 1: that if the market was going to have the drawdown
Speaker 1: it did earlier in the year, that these stocks or
Speaker 1: those stocks would do worse, and it actually wanted up
Speaker 1: being the opposite, which is pretty amazing. But I think
Speaker 1: what shows you is the limitations of quantifying risk in
Speaker 1: that way or really, you know something we love quantifying
Speaker 1: things right, but sometimes it really only tells us so
Speaker 1: much and we can kind of overly that oversimplification can
Speaker 1: lead to overconfidence. So uh, meanwhile, now you have the
Speaker 1: opposite happening, where um, you know, you have good news
Speaker 1: and these companies going going near the direction at least temporarily.
Speaker 1: So um, you know, I guess how we think about
Speaker 1: drawhounds are? You know? They are part of investing in general.
Speaker 1: No matter what you do, you're going to have. Any
Speaker 1: successful investment over time that's publicly traded usually has some
Speaker 1: draw down period, and we've lived through so many of
Speaker 1: them over the last few decades. I mean, I can
Speaker 1: remember vividly having a large position in Facebook after they
Speaker 1: had come public and having this dot go down at
Speaker 1: a time when I believe the market was up pretty significantly,
Speaker 1: and that was a very challenging time. And the way
Speaker 1: we think about risk generally is not really beta. It's
Speaker 1: more about company specific fundamentals and exposures, and we're trying
Speaker 1: to make sure we build a portfolio that has you know, um,
Speaker 1: exposure to all parts of the economy. So it's not
Speaker 1: one big bet, but from time to time on a
Speaker 1: company specific basis and even sometimes on a short term
Speaker 1: correlated basis. With a group of companies, you can have
Speaker 1: these drawn outs and there, and they're painful. And I
Speaker 1: think it's why Warren Buffetto says, you know, it's not
Speaker 1: really about how smart you are investing, it's more about
Speaker 1: your temperament. This is these are the time frames where
Speaker 1: you kind of learn a lot about a team and um,
Speaker 1: you know, whether they can handle that, and also your
Speaker 1: clients and there has to be a nice, uh you know,
Speaker 1: hopefully symbiotic relationship where your clients understand that that's a
Speaker 1: part of the equation that you're going to experience them
Speaker 1: from time to time. So while we would love to
Speaker 1: have with them, um, at the same time, I think
Speaker 1: it is a part of any any successful investment in
Speaker 1: the public market that you're going to have these kind
Speaker 1: of really dramatic swings. And the way we think about
Speaker 1: is not really trying to figure out things like beta
Speaker 1: or whether some companies are currently correlating that because that
Speaker 1: maybe don't have real fundamental correlation long term. We think
Speaker 1: about it more on a company specific level and making
Speaker 1: sure we believe in those companies, the people running them,
Speaker 1: the skin in the game of the people running them
Speaker 1: hopefully there's a lot often mostly in our case, a
Speaker 1: lot of equity ownership of the management teams. And then
Speaker 1: just thinking first principles are we are we betting on
Speaker 1: one big thing or not? And sometimes everyone else thinks
Speaker 1: you're betting on one thing. But my guess is when
Speaker 1: we look back in five years, many of the companies
Speaker 1: that are being grouped and some of these artificial classifications
Speaker 1: like work from home or or you know, fang or
Speaker 1: you know the four horsemen, these types of things that
Speaker 1: you know are used from time a time to discuss markets.
Speaker 1: If you look later on, you know, five, three or
Speaker 1: five ten years later, often the outcomes are very different
Speaker 1: on the company's specific level. And part of our job
Speaker 1: is to be able to communicate that with our clients
Speaker 1: when we live through periods like this. So last question
Speaker 1: in this area you mentioned not everything can be quantified.
Speaker 1: How much of the success of these portfolios of the
Speaker 1: past few years is driven by quantitative analytics and how
Speaker 1: much of it is more qualitative insights into the potential
Speaker 1: of the underlying business. You know, definitely I put most
Speaker 1: of it in that second category, which is, you know, certainly,
Speaker 1: so much of our time is spent on numbers in
Speaker 1: the industry when we do our research, um. But at
Speaker 1: the end of the day, I think that this is
Speaker 1: more of an insight business and creative business and and
Speaker 1: looking at the world differently or looking at an idea
Speaker 1: differently than the rest of the world and try and
Speaker 1: understand what that is as part of the process. So
Speaker 1: I think we're much more qualitatively driven. That doesn't mean
Speaker 1: we're anti quant you know. I think a good cult
Speaker 1: investment culture is constantly thinking about you know, um alternatives
Speaker 1: and not being closed minded, but being open. Uh. I
Speaker 1: do think generally the problem with quantitative or algorithmic or
Speaker 1: you know, kind of very specific rule fund based investing
Speaker 1: is that the markets are complex, adaptive systems that change
Speaker 1: over time. So the idea that while it's appealing at
Speaker 1: a human and emotional level, that there might be some
Speaker 1: secret formula that always works or works for extended period
Speaker 1: of time. I I generally think that's a bad thought,
Speaker 1: given that, like the markets today are so different even
Speaker 1: than they were three to five years ago in terms
Speaker 1: of the level of passive investing or the number of
Speaker 1: hedge funds, where the types of companies in the markets
Speaker 1: that comprise the markets, you know, so it's very hard
Speaker 1: to think in those terms. It doesn't mean quantitatives can't
Speaker 1: be a useful tool in some ways, maybe in helping
Speaker 1: us can doct our research, but generally we're set up
Speaker 1: more in the judgment business and the qualitative assessment business.
Speaker 1: And I think that that, given the nature of markets,
Speaker 1: that you have to have that as part of your DNA. So, Dennis,
Speaker 1: let's talk a little bit about being an active manager
Speaker 1: and being a manager that's running a concentrated portfolio. It's
Speaker 1: been pretty tough for active managers the past decade. How
Speaker 1: have you been able to stand out um from from
Speaker 1: the move to towards passive. Well, I think, you know,
Speaker 1: if you think about the investment industry, it's it's it's become,
Speaker 1: over time, maybe as a mature industry, very compartmentalized, and
Speaker 1: so most people have a very specific area that they're
Speaker 1: focused on, maybe it's small cap growth or international large
Speaker 1: cap value. So I think to some degree that's a
Speaker 1: bit of a trap, and people get Lewis perspective in
Speaker 1: being so compartmentalized in their knowledge. So I think one
Speaker 1: thing we've done, and we talked about this upfront, is
Speaker 1: as a team. We're structured in a way that the
Speaker 1: investors you know, spend their time looking for great ideas,
Speaker 1: regardless of those that at the end objective of those
Speaker 1: kinds of compartments. And I think that that additional perspective
Speaker 1: is valuable and useful when we look at the opportunity set.
Speaker 1: It gives us a different perspectives. The fact that you know,
Speaker 1: Sam Shinani, who's a world class and internet investor, can
Speaker 1: look at small cap companies that could disrupt large cap companies,
Speaker 1: are large cap or non US companies that can hurt
Speaker 1: the small cap companies. I think it's something that not
Speaker 1: all teams share and I think is a huge competitive
Speaker 1: advantage from a structural standpoint. I think also, you know,
Speaker 1: we look at great I think really good investing over
Speaker 1: a long period of time is opportunities set driven. And
Speaker 1: that's how we kind of define ourselves. UM. We don't
Speaker 1: think in terms of that sort of the value growth
Speaker 1: and some of the sort of the standard snowmenclature. UM
Speaker 1: because because as we said before, the markets continue to evolve.
Speaker 1: It's a complex adaptive system, so that the behaviors and
Speaker 1: ideas you had twenty years ago might no longer be
Speaker 1: kind of leading to success today. And when I think
Speaker 1: about my own career, I went to Columbia Business School,
Speaker 1: and I was got the chance to learn a lot
Speaker 1: about things like return to invest the capital and free
Speaker 1: cash flow yield. This is back, you know, back in
Speaker 1: nineteen to late ninety nineties, and when I got into
Speaker 1: the investment industry, I was surprised how little people who
Speaker 1: were focused on those metrics. This is probably around the
Speaker 1: time when Joel Greenblatt wrote wrote a book like things
Speaker 1: called a Little Book that Beats the Market about those
Speaker 1: kind of variables are O, I C and free cash flow.
Speaker 1: And I think for quite some time, being more focused
Speaker 1: on that than sort of say earnings and P multiples
Speaker 1: was sort of an interesting way of of looking at
Speaker 1: the opportunities in the market differently than other people. When
Speaker 1: I then, you know, when I think about of our
Speaker 1: experience halfway through the twenty years, having some success with
Speaker 1: companies like Amazon and Facebook before they had reported earnings, um,
Speaker 1: you know, I led us to tontinue to be opening
Speaker 1: the idea that you know, investings through the income statement
Speaker 1: can be a good idea. And more recently, I think
Speaker 1: there's a little more recognition that investing today on the
Speaker 1: corporate level is happening more from a into things like
Speaker 1: an intangil assets relative to tangible assets, and so that
Speaker 1: can lead to things like lack of earnings, but not
Speaker 1: necessarily bad decision making at the corporate level or something
Speaker 1: bad about the business. So that openness and and and
Speaker 1: a willingness to look at the different opportunities out there
Speaker 1: also has let us more recently some of the companies
Speaker 1: that have succeeded more recently UM. So I think overall
Speaker 1: the team as an open mindset UM, but also we're
Speaker 1: constantly trying to understand where the best ideas are today
Speaker 1: in the market's given the fact we have a global mandate.
Speaker 1: And I think it's the perspective plus that openness that
Speaker 1: hopefully leads to an environment where we can succeed. So
Speaker 1: you you're echoing some of the thoughts I've heard from
Speaker 1: people like Will dan Off at Fidelity, or Bill Miller
Speaker 1: formerly of Like Mason now with his own shop, as
Speaker 1: well as Joel Greenblatt who have said, if you're just
Speaker 1: looking at PE ratios, you're missing a lot of the pictures.
Speaker 1: Is that something UM that has evolved over the past
Speaker 1: twenty years have there been a group of people who
Speaker 1: recognize that and basically profited from it while a lot
Speaker 1: of people were stuck in the old dynamic or or
Speaker 1: my overstating that, well, I definitely think to an extent
Speaker 1: that is true that, um, you know, if you define
Speaker 1: yourself so narrowly in any business, but in particular in
Speaker 1: this business, as you know, a low pe investor or
Speaker 1: high pe investor, or a low price and sales, or
Speaker 1: if you if you sort of identified too much as
Speaker 1: one variable and you're not open to thinking about how
Speaker 1: the actual economic circumstances in reality might affect those variables.
Speaker 1: And and I intangible capital being more valuable and those
Speaker 1: investments than they have been historically and more important and
Speaker 1: more necessary than I think it's just important enough to
Speaker 1: anchor on. I can't you know, buy something because of
Speaker 1: one variable. I mean the reality is uh, real life
Speaker 1: is more complex than that. And looking at a lot
Speaker 1: of different vantage points I think can help you understand
Speaker 1: the situation more fully. And in this case, um, I
Speaker 1: think what you're saying has some validity because sometimes people
Speaker 1: just to keep k it's it's easy. We all got
Speaker 1: to get through our days, and it's a lot easier
Speaker 1: to live with rules of thumb or that either you
Speaker 1: identify with the tribe or you identify with an approach
Speaker 1: and and just stick to that, and it is to
Speaker 1: kind of I think, try to think beyond some of
Speaker 1: those things and explore the ideas that might be the
Speaker 1: drivers behind them. So we've mostly been discussing the factors
Speaker 1: and decision making behind selecting a stock, but a number
Speaker 1: of studies have discovered that the bigger challenges identifying when
Speaker 1: to sell a stock. That seems to be where all
Speaker 1: the profits are made, and it also seems to be
Speaker 1: where all the mistakes are made. How do you determine
Speaker 1: when to sell something that's been in your portfolio either
Speaker 1: for a short time and it looks like you're wrong,
Speaker 1: or for a longer time and it's gone as far
Speaker 1: as you might think it might go. Well, yeah, there's
Speaker 1: several reasons will sell. I mean the first that comes
Speaker 1: to mind is diversification. Sometimes part of the portfolio just
Speaker 1: gets too big, and that we need to think about
Speaker 1: that to some degree on an now I'm talking primarily
Speaker 1: on an individual company specific name basis that we don't
Speaker 1: want to have too much exposure to one idea at
Speaker 1: some point, no matter how strong it's been. UM. That
Speaker 1: then we also might sell because we think the risk
Speaker 1: reward is no longer as compelling as other ideas that
Speaker 1: we're looking at. So that would be under the evaluation
Speaker 1: UM bucket of selling. UM. There, I think it's important
Speaker 1: to an important distinction. Like you you mentioned earlier around
Speaker 1: you know, ease and such. You know what we're really
Speaker 1: looking at when I say evaluation is what's the market
Speaker 1: cap today and based on our analysis over the next
Speaker 1: five and ten years, where can the market cap be?
Speaker 1: Not necessarily un multiple UM, because I think people sort
Speaker 1: of conflate that day. When you hear the word valuation,
Speaker 1: it usually means what someone really means is a short
Speaker 1: term multiple. And again that's a simplification. It's not really
Speaker 1: giving you a full picture of the potential of a company.
Speaker 1: In my mind, UM, And finally we'll sell because the
Speaker 1: thesis changes, right so that we're we're constantly focused on
Speaker 1: competitive the competitive landscape that our companies are operating in
Speaker 1: and monitoring that you know, every second of the day,
Speaker 1: and from time to time, you know, threats will emerge
Speaker 1: for our companies that are competitive and it might be
Speaker 1: from a company that's disruptive and young, and then most
Speaker 1: people aren't following it, or it could be from an
Speaker 1: existing company trying to follow some sort of bumbling type
Speaker 1: of approach. UM, but we will closely watch how that's changing.
Speaker 1: And that might be a variable that hasn't shown up
Speaker 1: at in the company's u results, but that we're starting
Speaker 1: to anticipate that the uniqueness of the company and their
Speaker 1: competitive bantages. And what we thought was let's talk a
Speaker 1: little bit about how you construct portfolios and what they
Speaker 1: look like. And and one of the first questions I
Speaker 1: have to ask is you have fairly concentrated portfolios. How
Speaker 1: do you know what's too concentrated? How do you figure
Speaker 1: out how to size various positions? Sure, well, look, I
Speaker 1: think there are only so many great ideas globally, right,
Speaker 1: and so I think UM and as I've mentioned, you know,
Speaker 1: we're opportunities at driven. So you're right, today we're fairly
Speaker 1: concentrated in relation to what you might expect generally within
Speaker 1: the mutual fund industry. UM. But right now, or at
Speaker 1: least in the last few years, we thought there were
Speaker 1: just a unique group of companies that warranted taking a
Speaker 1: larger position and maybe slightly more concentration given our conviction
Speaker 1: in their competitive advantage and the opportunity that they have
Speaker 1: in front of them. UM. I also think though, that
Speaker 1: it's it's bad to be dogmatic, and you can have
Speaker 1: another environment or an opportunity set where you want to
Speaker 1: own some more names. The word more names make the cut,
Speaker 1: and that might affect the waitings that you are gonna
Speaker 1: allocate to all the names that you currently already own
Speaker 1: or want to continue to own. So we generally, though,
Speaker 1: are going to be more active and different than the
Speaker 1: market by our DNA. And I think a big part
Speaker 1: of our culture is a willingness to be different. It's,
Speaker 1: you know, you don't want to just be a contrarian
Speaker 1: in life, As I think Jeff Bezos has said, it's
Speaker 1: you know, being a contrarian is usually wrong, but when
Speaker 1: you know, but but the big ideas and the big
Speaker 1: kind of gains in life occur when you are willing
Speaker 1: to be a little bit outside or away from the
Speaker 1: crowd or against the crowd, and you have to have
Speaker 1: that in your DNA. But in terms of our general
Speaker 1: thought around sizing, generally, when we have a core position
Speaker 1: that we think really fits all of our criteria, Uh,
Speaker 1: you know, it's usually going to be a tune a
Speaker 1: half or three and a half percent of the portfolio
Speaker 1: type of allocation of costs initially. Um occasionally we'll have
Speaker 1: ideas that are a little more speculative but have maybe
Speaker 1: some binary components done. Things like biotech might fit there,
Speaker 1: or there's some limitation, but the upsides significant enough for
Speaker 1: us to want it to make a small allocation. In
Speaker 1: that case, we'll own things that even in the in
Speaker 1: the small small as like a fifty basis point increment,
Speaker 1: because you know, what I would call that is, you know,
Speaker 1: betting small to win big, where you're you're not risking much,
Speaker 1: but it is still it's kind of worth it in
Speaker 1: the context of the overall portfolio because the upside is
Speaker 1: so great and you know, I think more broadly away
Speaker 1: from even the funds we managed, like you know, somebody
Speaker 1: might put bitcoin into that category. You know, as a
Speaker 1: personal investment, you know amount that you're willing to sort
Speaker 1: of take a risk that this is going to zero,
Speaker 1: but you're opening up your overall portfoiliy of some big
Speaker 1: upside potential and maybe even potential that can help you know,
Speaker 1: at a time of crisis. You know, it's something that's
Speaker 1: anti fragile or that can benefit from disorder while the
Speaker 1: rest of your portfolio is going down is always appealing.
Speaker 1: So the bottom line is, you know, we have our
Speaker 1: core position size. As I mentioned, we think a little
Speaker 1: bit about speculative value and speculation um and binary outcomes
Speaker 1: and manage that risk by with sizing the port of
Speaker 1: those ideas properly. I think there really aren't any bad
Speaker 1: ideas in life. I mean, obviously you could probably you
Speaker 1: could probably come up with a really bad idea, but
Speaker 1: just it's really about sizing. You know, if you bet,
Speaker 1: you bet one penny out of a dollar, you know
Speaker 1: you really can only lose. You really haven't lost much
Speaker 1: if you lose. So it's really about sizing, not you know,
Speaker 1: And sizing is a function of our conviction and the
Speaker 1: quality idea, right And and obviously anytime you have an
Speaker 1: opportunity for really asymmetrical risk reward bed you can do
Speaker 1: that with one yes, And it really depends on you
Speaker 1: and personality. Right. Some people might think once a sense
Speaker 1: too much or not enough. And for us, at least
Speaker 1: for our farms, that's that's usually more of a fifty
Speaker 1: cents out of a dollar fifty basis points. Gotcha. So,
Speaker 1: so you mentioned Jeff Bezos and Amazon dot Com, But
Speaker 1: I'm curious about your process. How what brings you to
Speaker 1: names like Amazon and Shopify and Slack and Zoom and moderner.
Speaker 1: Not specifically the work from home theme, but what was
Speaker 1: the pre approach that led you to these companies? Is
Speaker 1: it growth? Is it is a growth at a reasonable price?
Speaker 1: Is it um the unique winner? Take all companies with
Speaker 1: a moat around their business? What what's the thinking that
Speaker 1: leads you here? I mean, those are some actually good, good,
Speaker 1: good stabs at it. I think our ideas tend to
Speaker 1: emerge from all the all the activities of the people
Speaker 1: on the team. We've been lucky to have people on
Speaker 1: the team for you know, I think I think we've
Speaker 1: had very little turnover over the last sixteen years. So
Speaker 1: we're proud of that. And part of the benefit of
Speaker 1: them being in one place for a long period of
Speaker 1: time as they get developed really stable and contact networks
Speaker 1: with an industry, companies, corporate world, the investment world, etcetera.
Speaker 1: So we always have ideas. They tend to emerge from
Speaker 1: our research and our daily activities. But You're right where
Speaker 1: there are certain things we're looking for. It's not from
Speaker 1: screening for high growth rates or something of that nature.
Speaker 1: It's more certain characteristics jump out at us, like inside ownership.
Speaker 1: Like a lot of these cases that you just mentioned,
Speaker 1: or at least many of them, you have. You know,
Speaker 1: the founder or the person in charge has a large
Speaker 1: equity stake, a lot of skin in the game. So
Speaker 1: that's always really interesting to us when you have somebody
Speaker 1: who's not just you know, um in the CEO and
Speaker 1: and managing a business, but really someone who acts like
Speaker 1: an owner. Similarly, for us, you know, our team has
Speaker 1: a lot of ownership of our products. I mentioned you know,
Speaker 1: we have a large, large number of products across the platform.
Speaker 1: I have to personally have money and every one of them.
Speaker 1: I don't think you should start a product unless you
Speaker 1: think it can succeed in or you're willing to put
Speaker 1: direct investment in. In addition, I think what's great is
Speaker 1: Morgan Stanley, through it's deferred compensation program, UH forces you,
Speaker 1: whether you like it or not, or to put at
Speaker 1: least you're deferred pay into the products you manage. Our
Speaker 1: team tends to put over so for me, you know,
Speaker 1: we're putting our skin in the game every day in
Speaker 1: the products we're managing for our clients at Counterpoint Global,
Speaker 1: and we're looking for companies that do the same thing
Speaker 1: that our owner operators, not just people that are caretakers
Speaker 1: of something that's already been built, and not not to
Speaker 1: disparage some of those situations, but I think the more
Speaker 1: interesting component is trying to find that identify cultures that
Speaker 1: act like owners like we do. And I think that
Speaker 1: that's really appealing. And when you can combine that with
Speaker 1: high growth potential and big you know, addressable market's, obviously
Speaker 1: that's even more appealing. So much of your process sounds
Speaker 1: very much bottoms up stock picking, fundamental analysis of different companies, businesses.
Speaker 1: How much do you pay attention to what's going on
Speaker 1: in the world top down? I don't get the sense
Speaker 1: that you're hanging on every FED release or every uh,
Speaker 1: you know, macro economic release like I s M or
Speaker 1: um international deficit or do you guys factor top down
Speaker 1: into your process very much? So? UM, Yeah, we're mostly
Speaker 1: focused at what people would call bottom ups and making
Speaker 1: company specific investments. UM. Because few things that come to
Speaker 1: mind when you ask that question. I mean one is
Speaker 1: I think I'd be remiss and anybody would be interested
Speaker 1: for all asset classes in general. But the fact that
Speaker 1: we've had a tail in behind the you know, a
Speaker 1: lot of pretty much every asset class over the last
Speaker 1: thirty years with interest rates kind of going from where
Speaker 1: they hadn't been to they are today. And that's partly
Speaker 1: something that sort of lifts all acts classes to some
Speaker 1: degree and probably does help companies on the margin. More intellectually,
Speaker 1: you can understand that if you did that have high
Speaker 1: growth in the future and where the values on the
Speaker 1: come as opposed to something that's like right today current currently,
Speaker 1: there is some something that might be more of a
Speaker 1: hard asset. So I think interest rates obviously matter. The
Speaker 1: problem is we don't know what they're gonna do, you know,
Speaker 1: and so um, you know, are they going to go up?
Speaker 1: Are they going to go down? And if they do,
Speaker 1: you know why. We don't know what circumstances might lead
Speaker 1: to that those things happening, or why the stas might
Speaker 1: do what it does. So I think given that we
Speaker 1: know our mindset is that's some of that's so unknowable,
Speaker 1: that's better to focus on specifics that you can control.
Speaker 1: UM and in the process. When we look at our
Speaker 1: companies and play around with the sensitivities of what they
Speaker 1: could be worth, we obviously need to cost the capital.
Speaker 1: We need an alternative to look at, and that includes
Speaker 1: other companies and asset classes, including the rest free rate um.
Speaker 1: We've try it over time to not give a whole
Speaker 1: lot of benefit to the fact that interest rates are
Speaker 1: as low as they are today, and generally we don't.
Speaker 1: But you know, when I play around the sensitivity is
Speaker 1: of values the companies, it is a consideration because it's
Speaker 1: also possible to stay where they are. So it's a
Speaker 1: probably a long winded way of saying, you know, we're
Speaker 1: not that focused on the macro. It does matter in
Speaker 1: the sense that things like interest rates represent fundamental alternatives
Speaker 1: and cost of capital, and they the consideration and how
Speaker 1: you think about company valuation, whether you like it or not,
Speaker 1: having a strong view about what's going to happen in
Speaker 1: those uh to those variables. Though I think it's some
Speaker 1: people might do that, well, it's not a part of
Speaker 1: our DNA, and I think that the only problem with
Speaker 1: that thought process is that you know, if if you
Speaker 1: think interest rates are going up and you're gonna build
Speaker 1: a portfolio around that thought. If you're wrong, you've got
Speaker 1: to change your whole portfolio. And what we try to
Speaker 1: do is collect unique companies that have exposure to many
Speaker 1: different end markets. Ultimately that can be hopefully a lot bigger,
Speaker 1: and the market caps are today in excess of hopefully
Speaker 1: the alternatives and let some of the rest of that
Speaker 1: all play outs. And really, you know, it's control what
Speaker 1: you can control. And it just fits the way we
Speaker 1: think about the world, which is more individual judgments as
Speaker 1: opposed to kind of larger It takes on asset classes
Speaker 1: and things of that nature, which I think aren't that
Speaker 1: use to us or not that useful. If you tell
Speaker 1: me the markets over valued and aggregate, it doesn't help
Speaker 1: me make a decision about the one company I'm looking at.
Speaker 1: It might be really undervalued, right It actually might hurt
Speaker 1: you to think the markets over value ten years ago.
Speaker 1: And so you know, I think the markets over value
Speaker 1: right now. So I'm not going to buy Amazon, even
Speaker 1: though I'm interested. So if anything, sometimes I think the
Speaker 1: discourse and the industry around these aggregate notions of you know,
Speaker 1: high cost mutual funds are bad, or you know, the
Speaker 1: markets over valued, or like in hindsight, those things are
Speaker 1: always obvious, but it almost hurts your ability to make
Speaker 1: individual decisions. So again, we're really focused on the individual
Speaker 1: company decisions. Quite quite interesting. So as long as we're
Speaker 1: discussing decision making and the thought process behind the selection,
Speaker 1: let's talk about someone you brought in recently to be
Speaker 1: the head of concilient Research at Counterpoint Global, Michael Mobison.
Speaker 1: How significant is that role and how closely do you
Speaker 1: work with him? Look, we've known Michael for a long time.
Speaker 1: He's in fact, when I was at business school, I
Speaker 1: was exposed to some of his great content and great
Speaker 1: you know thinking um uh at Columbia, and uh, you know,
Speaker 1: we've always respected a lot of what he has to offer.
Speaker 1: And uh, you know, in fact, when he was on
Speaker 1: the South Side, he would he would kind of guest
Speaker 1: star in our in our team meetings at least a
Speaker 1: few times a year because he wanted to know what
Speaker 1: was kind of going on in his mind. And and
Speaker 1: and I think reading Michael's research and being a part
Speaker 1: of it now it's kind of like eating your Reati's
Speaker 1: it really how you know, you prepare for making good decisions,
Speaker 1: you know, and and thinking and thinking about thinking and
Speaker 1: and I think that that there's a lot of utility there.
Speaker 1: Um when I think back over time. For as an example, actually,
Speaker 1: you know, I think when Michael was at like Mason
Speaker 1: with Bill Miller, they had Bill had particularly was had
Speaker 1: a pieces about Amazon which wound up being you know,
Speaker 1: one of the only things that matters over the last
Speaker 1: twenty years and equity markets, and they had this whole
Speaker 1: concept around how Amazon was being looked at as or
Speaker 1: kind of misclassified. People were looking as a retailer and
Speaker 1: it was really a logistics company. And Michael, I think
Speaker 1: you should talk about that is you know, um, you know,
Speaker 1: misclassification or looking at um, you know, circumstances versus attributes.
Speaker 1: You know, there's sort of the mistakes we make as
Speaker 1: as decision makers. We got to put something into a
Speaker 1: bucket in order to compare it to things. But sometimes
Speaker 1: that initial decisions wrong and when it is, that can
Speaker 1: lead to this a pretty big misperception. So this is
Speaker 1: the kind of stuff that you know, Michael's about. It
Speaker 1: really fits the intellectual curiosity, which is a big part
Speaker 1: of that. You know, the team and a lot of
Speaker 1: people talk about intellectual curiosity and talent development. I think
Speaker 1: bringing Michael in just is a real natural thing for
Speaker 1: us to do given what we're about. And already you know,
Speaker 1: it's you know, a year into it, we're seeing great benefits.
Speaker 1: You know, Mike's Michael is also a great coach for
Speaker 1: people or earlier in their careers um to to just
Speaker 1: become not just good analysts, but good thinkers and decision makers.
Speaker 1: And he's rebooted our our book club. We've had some
Speaker 1: great authors in so it's knowing the team DNA and
Speaker 1: what Michael does. It's a very it was a very
Speaker 1: natural thing. We were happy to have the opportunity to
Speaker 1: do it. And concerning research is basically the idea that
Speaker 1: you know, exploring ideas not just in the day to
Speaker 1: day financial world, but in other domains can lead you
Speaker 1: to you know, maybe coming up with good decision models
Speaker 1: or rules of some or help you think differently about
Speaker 1: some of the things that are occurring in the financial world.
Speaker 1: And you know, Michael had a long history doing that.
Speaker 1: First first Boston and so and he called his piece Concilient,
Speaker 1: the Concilian Observer. So we just said, well, why don't
Speaker 1: we just reboot that because it was so great, and
Speaker 1: so we hope to continue to benefit from his insights
Speaker 1: and share them with people in the community as well. Yeah,
Speaker 1: that that was definitely a good hire and I see
Speaker 1: him as a very good fit into what you guys do.
Speaker 1: You you mentioned Bill Miller. Bill Miller has brought up
Speaker 1: what he sees as a problem in part of the
Speaker 1: active world of investing, and it's what he describes as
Speaker 1: closet index ers and low active share. I think his
Speaker 1: active share is pretty much in the nineties. I'm gonna
Speaker 1: guess your active share across the big funds are gonna
Speaker 1: be pretty close, right. You don't really seem to look
Speaker 1: very much like any of the indexes out there. Yeah,
Speaker 1: we have a wide range of products, but you're we're
Speaker 1: in the eighties and some of the nineties, So it
Speaker 1: just depends on each one. And then part of that
Speaker 1: really is about the ben smarks. Some of them are
Speaker 1: super concentrated, so that can affect those metrics. But yeah,
Speaker 1: we're we're we're at the extreme similarly to what you
Speaker 1: just characterized. Yeah, and we really haven't spent much time
Speaker 1: delving into valuations, and I want to ask you a
Speaker 1: very big picture question. We've seen valuations creep up not
Speaker 1: just over the past thirty years of falling interest rate,
Speaker 1: but over the past go back to World War Two.
Speaker 1: Valuations have continued to rise since then. How much of
Speaker 1: this has been a significant undervaluation of the economies of
Speaker 1: scale of technology and how digital can grow with far
Speaker 1: less needed capital and labor. Yeah, I think it's a
Speaker 1: good point. You know, we talked earlier about how markets
Speaker 1: can change over time, and that's why rules of some
Speaker 1: are you know, sometimes useful for a periods of time,
Speaker 1: but how they know often and can become actually, they
Speaker 1: can become a problem, right, they can becomes just like expertise,
Speaker 1: it's useful and when the world is not changing too quickly,
Speaker 1: but if there is a change over time, expertise can
Speaker 1: become a real problem. You know, you suddenly a you know,
Speaker 1: I have to jettis in your way of thinking and
Speaker 1: learn new things, and most people are often hesitant to
Speaker 1: do that. I think the constituencies in the market today
Speaker 1: and you know, meaning the earnings or the cash flow
Speaker 1: that sort of backs up ultimately the valuation of what's
Speaker 1: called the market. Even though I don't love talking in
Speaker 1: aggregate frankly, but there's no question that it's driven more
Speaker 1: from a more of a capital light UM vantage point
Speaker 1: than maybe when you look back over time and the
Speaker 1: history of markets and there are times when railroads and
Speaker 1: you know, so certainly today's market is very different and
Speaker 1: the earnings of it, maybe the quality of those earnings
Speaker 1: might be different, and they're puts in takes. To be fair,
Speaker 1: I don't want it could be a very long discussion,
Speaker 1: but I think that, you know, I think that is
Speaker 1: a very I think this full concept that of tangible
Speaker 1: versus intangible UM and Michael has actually written about that
Speaker 1: a bit and was fairly focused on as we speak,
Speaker 1: Michael Mogson is something that um, most people haven't appreciated
Speaker 1: enough probably um uh that you know, earnings UM and
Speaker 1: in the way companies make investments have had changed and
Speaker 1: that has that definitely affects some of these rules of
Speaker 1: thumb that maybe people have thought about for many years. So,
Speaker 1: you know, again, the last thing I'll stay here though,
Speaker 1: I'm reacting to the question which is really kind of
Speaker 1: about the market, and I think you always have to
Speaker 1: be a little careful about market aggregate discussion because again,
Speaker 1: our DNA and what we're focused on is company investing
Speaker 1: and finding those unique situations. And if you get too
Speaker 1: if you spend too much of your time on on
Speaker 1: the aggregation of trends, where the aggregate trends and predicting
Speaker 1: them and discussing them, I think it's a little bit
Speaker 1: gets you off track, at least from what it does
Speaker 1: for us, from what our what our core mission is
Speaker 1: quite quite interesting. So you mentioned the aggregate. Let's let's
Speaker 1: get a little more granular and drilled down into at
Speaker 1: least those five funds. I love the names of these Advantage, Growth, Insight, discovering,
Speaker 1: and inception. I mean kudos to whoever was putting putting
Speaker 1: those titles together. Um, they ranged. The smallest one is
Speaker 1: about half a billion, the biggest one is almost fifteen billion,
Speaker 1: and they've all done super well this year. Advantage up
Speaker 1: more than fifty percent, growth up over eight Inside is
Speaker 1: almost eighty eight percent, Discovery is Inception is what are
Speaker 1: the differences of these five UM funds? Is that US
Speaker 1: versus overseas? Is its small versus large? Or are those
Speaker 1: buckets just not relevant? Oh no, so you know, um, ultimately,
Speaker 1: so it's a great question because I talked about how
Speaker 1: the team, you know, I think a differentiated for us
Speaker 1: is that we're investors first, and this sort of category
Speaker 1: stuff happens at the end of the process. And I
Speaker 1: think most of the industry is start off with a
Speaker 1: product or a category and build a team around it,
Speaker 1: and obviously their strength and a week could be strength
Speaker 1: and weaknesses to both those strategies. I think in a
Speaker 1: world where most people are compartmentalized, it's better to have
Speaker 1: some perspective because you're you're kind of going against the
Speaker 1: grain and maybe picking up things that that they that
Speaker 1: they can't um. In terms of these individual products, inception
Speaker 1: is our small cap product. And so ultimately, when we
Speaker 1: find companies that have market caps in the range of
Speaker 1: the general of the Russell one thousand growth small cap arena,
Speaker 1: that's the home for which we can take with which
Speaker 1: we can take advantage of. Hopefully those those insights are
Speaker 1: ideas discoveries really more of a mid cap growth strategy
Speaker 1: UM in the sense of the market cap range. And
Speaker 1: by the way, both are us and the ones we're
Speaker 1: discussing here all us as well et centric. And then
Speaker 1: where large cap is where growth sorry excuse me, growth
Speaker 1: is a large cap growth strategy by market cap, and
Speaker 1: and so is advantage. But the only difference there is
Speaker 1: that we do too we have two different constraints. Growth
Speaker 1: can own whatever it wants in terms of opportunities set
Speaker 1: whereas advantage from a competitive advantage standpoint, when we look
Speaker 1: at why a company is unique, like is it network
Speaker 1: effect or scale or switching costs or brand or you
Speaker 1: know these the designations we look at there we stay
Speaker 1: away from intellectual property driven UM, technology driven competitive advantages
Speaker 1: in advantage and we we tend to own companies a
Speaker 1: little bit later in their life, not in the early
Speaker 1: part of their life cycle. So it's a different variation
Speaker 1: for that product of of our large cap growth thinking UM.
Speaker 1: But at the end of the day, and as you
Speaker 1: say with the names, I mean the names were really
Speaker 1: what we want to do is not be the large
Speaker 1: cap growth fund or small cap growth fund. I think
Speaker 1: great investing is. You know, you have to define yourself
Speaker 1: to a degree, but if you limit yourself through these designations,
Speaker 1: you're doing a disservice the people that have allocaded your money.
Speaker 1: Because you know, if I take a real big step
Speaker 1: back and about the industry, you know, the real goal
Speaker 1: is to beat the an alternative, and the alternative is
Speaker 1: really probably the SMP five hundred. And you know, if
Speaker 1: you're really good at doing is part of that world
Speaker 1: that still doesn't beat the SMP five hundred. And you
Speaker 1: haven't given yourself enough flexibility to do that, then at
Speaker 1: some point your asset class is not that useful or
Speaker 1: might be considered you know, uh, null and void or
Speaker 1: not not worth pursuing. So what we try to do
Speaker 1: is name the funds um in ways that are indicative
Speaker 1: of the team culture but also aren't in the half tendencies.
Speaker 1: Like I said, these buckets at the end of the process,
Speaker 1: the conventional consultant thinking, but where there's still more flexibility
Speaker 1: in running inception than there is if I call this
Speaker 1: we called small cap grows because there are more constraints
Speaker 1: with that naming from a forty Act legal standpoint. And
Speaker 1: so leave yourself flexible, be who you I didn't know
Speaker 1: who you are in this business, but you've got to
Speaker 1: leave enough flexibility to evolve. And I think that's hopefully
Speaker 1: something culture we've been able to achieve. But part of
Speaker 1: that is even what you know the name of your
Speaker 1: funds or even the name of your team. So counterpoint
Speaker 1: global the idea behind counterpoints simply there's two actually two meanings.
Speaker 1: One is counterpoint is often used thought of as the
Speaker 1: other side of the argument, you know, and so it
Speaker 1: connotes that willingness to be different, not always contrarian, because
Speaker 1: that I think that you're very wrong, but you have
Speaker 1: to be willing to stick your neck out in order
Speaker 1: to succeed. That's from time to time. So that's that's
Speaker 1: the symbols in there. But the other meaning in music
Speaker 1: is counterpoint. Well, counterpoint in music is when you take
Speaker 1: unique melodies or voices and when you get that are
Speaker 1: sound great on their own, but when you layer them together,
Speaker 1: you get, you know, a situation where the the outcome,
Speaker 1: the output of better than the some of the parts.
Speaker 1: So like in a musical, and usually each character has
Speaker 1: its own theme, and at some point at the end
Speaker 1: of the first act or or the final act, those
Speaker 1: themes kind of intermit mingle musically at some point and
Speaker 1: you're kind of like wow, the audience feel like wow,
Speaker 1: that's amazing um or like you know, she's leaving home
Speaker 1: by the Beatles, or I've got a feeling by the Beatles.
Speaker 1: These are cases where they're multiple melodies happening that stand alone,
Speaker 1: but so hopefully from a team standpoint that whether it's
Speaker 1: our ideas that we can put into different products where
Speaker 1: they fit, or whether it's the people or the way
Speaker 1: we can combine our products, hopefully there's a benefit of counterpoint,
Speaker 1: which is creating something that exceeds to some of the parts. Huh,
Speaker 1: quite quite fascinating. I know I only have you for
Speaker 1: a certain limited amount of time, so I want to
Speaker 1: jump to my favorite questions that I asked all of
Speaker 1: our guests and see what see what's going on in
Speaker 1: your life these days. Let's start out with streaming. Tell
Speaker 1: us what you're watching either on Netflix or Amazon or
Speaker 1: anything you happen to be listening to on podcast. What's
Speaker 1: keeping you entertained during this period of work from home? Um,
Speaker 1: the series I just finished and I blew right through it.
Speaker 1: I thought it was not super well known, I think,
Speaker 1: but might have flown under the radars. It's called Halt
Speaker 1: and Catch Fire and it's available on Netflix, and it's
Speaker 1: kind of like a Madman version of the gaming world,
Speaker 1: the video gaming world in the eighties, and how that
Speaker 1: that environment went from the eighties and what was happening
Speaker 1: with you know, the ataris of the world and and
Speaker 1: and all the early Pecs and uh and then and
Speaker 1: then the evolution of that up until sort of the
Speaker 1: the advent of the Internet, and you follow these characters
Speaker 1: um through that journey. So it's really interesting to watch
Speaker 1: the progression, you know. It's I think it's really well
Speaker 1: done from an entertainment standpoint, but it also happens to fit,
Speaker 1: you know, things were interested in in terms of how
Speaker 1: technologies evolved over time. My wife and I are also
Speaker 1: enjoying Ted Lasso on Apple Plus so good. I just
Speaker 1: I just read it was renewed for a second season,
Speaker 1: which I'm thrilled to be good. It's awesome. It's funny
Speaker 1: you mentioned mad Men. I missed that when the first
Speaker 1: time it went around, and my wife and I had
Speaker 1: just started streaming it a few weeks ago, and I
Speaker 1: had to find someone who lived through that year to say, hey,
Speaker 1: how hyperbolic and exaggerated is this? And the consensus seems
Speaker 1: to be, no, that's pretty much how it was like,
Speaker 1: which is kind of shocking. It's literally a different universe,
Speaker 1: you know, than than where we are today. But now
Speaker 1: we enjoyed mad Men too. It's it's a there's some
Speaker 1: really great stuff in there. Tell us about some of
Speaker 1: your early mentors who helped to shape your career, well,
Speaker 1: you know, I was, I mean very lucky. Um. You know,
Speaker 1: my dad has always been a great influence. Um, he
Speaker 1: was an investor as well. He has had his own
Speaker 1: firm for many years. But just and what we do
Speaker 1: is very different than what he did back then, and
Speaker 1: partly that his opportunities that driven. But really my dad
Speaker 1: was has always been a really great role model in
Speaker 1: terms of how he handled himself and how he you know,
Speaker 1: it's very thoughtful and he finds you know, he's really
Speaker 1: able to find the positives and other people, which has
Speaker 1: really been valuable for me. Um, you know in my
Speaker 1: life in terms of specifically in investing as well. Certainly
Speaker 1: helped me there as well. But that when I think
Speaker 1: more specifically to my career, Um, you know, I took
Speaker 1: a class at Columbia Business School with a guy named
Speaker 1: John Griffin who used to be the president Tiger the
Speaker 1: hedge fund and had his own head fund, Blue Ridge Capital,
Speaker 1: for a long time. And you know, if you take
Speaker 1: and happened to me in his first class, which is
Speaker 1: very lucky that he taught. First class he taught and
Speaker 1: he you know, if you leave his class, and you
Speaker 1: haven't gotten passionate about investing afterward, then you probably shouldn't
Speaker 1: be in the field. So John has just had a
Speaker 1: great way of communicating passion and and and sort of
Speaker 1: establishing what it takes to to to make it in
Speaker 1: the business. I think. So that was a really he's
Speaker 1: been a real valuable person for me. Um. And then
Speaker 1: you know, there are a lot of people in the
Speaker 1: industry I admire. We talked about Bill melt Miller and
Speaker 1: his willingness to be different, um and uh, you talked
Speaker 1: about well dan Off and who I'm friendly with, and
Speaker 1: I really you know, I think he's been been unbelievable
Speaker 1: over the course of his career. It's on the to
Speaker 1: touch base with him on things. Other people like Ron
Speaker 1: Baron I admire mostly from far. I think he's been
Speaker 1: really good at what he does. And Um, Henry ellen
Speaker 1: Bogg used to be a tro now he runs Durable
Speaker 1: is another person. Bailey Gifford as a organization. James Anderson
Speaker 1: has also been great. So sometimes the mentorship happened just
Speaker 1: by you know, sometimes being friendly with but also in
Speaker 1: addition just you know, kind of learn think from people
Speaker 1: from far and some of those people have been influential
Speaker 1: for me. Quite interesting. Tell us what you're reading, What
Speaker 1: are some of your all time favorite books, and what
Speaker 1: are you reading currently? Sure, so my favorite all time
Speaker 1: book probably might be It's probably The Art of Learning,
Speaker 1: which is by a guy named Josh Waitskin, who um was, uh,
Speaker 1: you know, the subject of the movie Searching for Bobby Fisher,
Speaker 1: which is about the young chess prodigy who might be
Speaker 1: the next great chess player from the United States, and
Speaker 1: the books about what it was like to be him
Speaker 1: during that time frame and his journey as a chess
Speaker 1: player and eventually went on to be I think the
Speaker 1: tai Chi push has Champion of the World, which was
Speaker 1: a whole different domain where he excelled in addition to chess,
Speaker 1: and um, yeah, but really, I'd say the heart of
Speaker 1: the book is about this idea of having a growth
Speaker 1: mindset versus a fixed mindset, the idea that you be
Speaker 1: willing to fail and try new things and learn from
Speaker 1: it as opposed to getting to arapped up in your
Speaker 1: current identity and having that limit your ability to learn
Speaker 1: as a person. Um. And you know, I certainly know
Speaker 1: what that's like. I think probably most people if they
Speaker 1: think about themselves will can find themselves doing a lot
Speaker 1: of fixed mindset things. So just the concept of trying
Speaker 1: to trying to be somewhere open to new things and
Speaker 1: and aerate and at the learning stoff I was really
Speaker 1: for me. It was actually a really big help to
Speaker 1: me in my life. And I probably read that about
Speaker 1: fifteen years back, but I highly recommended UM. We we're
Speaker 1: currently reading. Frankly, I don't read a lot of books
Speaker 1: as much as I used to do because there's so
Speaker 1: much material investment related that I like to read. But
Speaker 1: you know, we do have a put the book club
Speaker 1: that Michael rebooted at for our team, Michael Mosison. Uh.
Speaker 1: This year we just had two people and the first
Speaker 1: one was guy named Michael Kern's who is the um
Speaker 1: uh you know, actually is a consultant or sorry adviser
Speaker 1: for Morgan Stanley. But he wrote a book called The
Speaker 1: Ethical Algorithm, and it's it's really about the pluses and
Speaker 1: minuses of algorithm and you know where they can be
Speaker 1: strong and benefit us, you know, uh in society, and
Speaker 1: how they can be harmful. And I thought that that's
Speaker 1: a really that was great framing and good good uh,
Speaker 1: A good topic for the team. But then you know,
Speaker 1: we also had David Epstein come in and wrote Range
Speaker 1: and Range is kind of the other side of the
Speaker 1: Malcolm Gladwell argument about ten thousand hours equals expertise or mastery.
Speaker 1: It's more about cases where people don't declare what they're
Speaker 1: going to do till a little bit later in life,
Speaker 1: like Roger Federer and tennis as an example, and instead
Speaker 1: of like the Tiger Woods models, you know, and playing
Speaker 1: literally playing golf right right out of the crib and
Speaker 1: really interesting thinking they're around, um, you know the benefits
Speaker 1: of you know, having broader perspective before you get too narrow,
Speaker 1: and that resonates us with our team to based on
Speaker 1: some of the things we've talked about today, just having
Speaker 1: that being able to cultivate perspective in a world where
Speaker 1: there's a lot of expertise. Our whole industry is based
Speaker 1: around that for teeth, so I think often what's missing
Speaker 1: is you know, being able to connect things between areas
Speaker 1: of expertise, and hopefully that's one place where set up
Speaker 1: to do that as a team. Really interesting. What sort
Speaker 1: of advice would you give to a recent college grad
Speaker 1: who was interested in a career in asset management. UM.
Speaker 1: Most actually very similar to what we just talked about
Speaker 1: previous and the previous question. But you know, most jobs
Speaker 1: start off, you know, in that sort of expert you know,
Speaker 1: you're given a very specific task and I think that, um,
Speaker 1: you know, that's just the nature of how the system
Speaker 1: is set up. And you follow a sector or an industry.
Speaker 1: I mean when I was at JP Morgan on the
Speaker 1: South Side, just got to follow e MP companies, companies
Speaker 1: that explore produced for energy, energy and oil and gas
Speaker 1: excuse me. And so you know, it's great to dive
Speaker 1: in and become an expert, and there's a lot of
Speaker 1: values like in that learning process. But to degree you
Speaker 1: can compliment that with broadening your your learning and not
Speaker 1: just be so narrow when I think there can be
Speaker 1: benefits to kind of pursuing that. And today in today's world,
Speaker 1: there's so many sources for for doing that. You know,
Speaker 1: you can use stuff like Twitter to your advantage, or
Speaker 1: there's these ways if you want to be a learning machine,
Speaker 1: you can you can find internet resources that will really
Speaker 1: throw a lot of interesting stuff at you and hopefully
Speaker 1: round out your perspective. If you've really been put into
Speaker 1: a narrow position, So that would be my first instinct. Huh.
Speaker 1: Quite quite interesting. And our final question, what do you
Speaker 1: know about the world of investing today that you wish
Speaker 1: you knew thirty years ago when you were first starting out?
Speaker 1: Probably every everybody learns in math class or at some
Speaker 1: point in their life, you know, compound annual growth, you know,
Speaker 1: and you can see when you're doing it that it's
Speaker 1: a powerful thing. But I think, you know, as I've got,
Speaker 1: you know, further on in my life. Uh, you know,
Speaker 1: and I think we tried to it's certainly professionally, but
Speaker 1: in many ways in my life try you try to
Speaker 1: take advantage of those, you know, the developing habits that
Speaker 1: will lead to good things down the road, and making
Speaker 1: investments today it I'll benefit you later, like But I
Speaker 1: would say I wish I had had an even greater
Speaker 1: appreciation of that earlier in my life. I mean, somebody
Speaker 1: like Warren Buffetted, the real great investors, I would say,
Speaker 1: you know, probably really get that very early in life.
Speaker 1: And he's somebody who's just started young, and that time
Speaker 1: is such an advantage. So just that just a really great,
Speaker 1: you know, even better awareness of those that concept in hindsight, Uh,
Speaker 1: is something that I always try to highlight the younger
Speaker 1: people because while I knew that a little bit mathematically,
Speaker 1: I probably didn't didn't focus on how that can really
Speaker 1: benefit you, whether it's financially or whether it's even habit
Speaker 1: formation and what it leads to down the road. It
Speaker 1: might be your health or some skill you want to develop.
Speaker 1: So so i'd say companding your growth and really taking
Speaker 1: that to heart and making it part of your your DNA.
Speaker 1: Thank you, Dennis for being so generous with your time.
Speaker 1: We have been speaking with Dennis Lynch, head of Morgan
Speaker 1: Stanley's Counterpoint Global. If you enjoy this conversation, be sure
Speaker 1: and check out all of our previous such discussions. We
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Speaker 1: not thank the team who helps put these conversations together
Speaker 1: each week. Michael Boyle is my producer slash booker. Maroufle
Speaker 1: is my audio engineer. Atica Albron is our project manager.
Speaker 1: Michael Batnick is my head of research. I'm Barry Results.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio