Invest Like the Best with Patrick O'Shaughnessy
· Alex Behring, Daniel Schwartz
[00:00:00] S1: I don't presume that our model is superior to others. There are incredibly successful firms that have a very different model, a very different way of going about their business than us. And I think what's important for every successful firm, I mean, we're no exception to that, is find out what works well for you. And for us, for a very long – for decades now, that's the model that works really well for us. To invest our capital, to compound the capital of the people that are close and invest with us. And I think we should stick to that and not try to emulate other people's models. And that's probably true, vice versa. And most successful firms have their own model that they develop that works for them, for their culture, for their people, for their capital. [00:00:00] S2: I think also staying "small" allows us to attract some of the best, best, best people on the investment side here. Because we can still offer people founder-like economics, a path to partnership, a path to taking on responsibility much, much faster than those people might have if they take a kind of traditional investment path. [00:00:00] S1: Yes, and this is a place where we think that over time, the firm should always be owned by the people driving it. And historically, that has been the case, my co-founders and me, and then I'm still here – my co-founders over time have become more on the capital side. Daniel was an analyst and is sitting here today, I was an analyst early on in the predecessor firm of this. So we do have a demonstrated culture that attracts people that way.
· Alex Behring, Patrick O'Shaughnessy
[00:00:00] S1: Yes, and this is a place where we think that over time, the firm should always be owned by the people driving it. And historically, that has been the case, my co-founders and me, and then I'm still here – my co-founders over time have become more on the capital side. Daniel was an analyst and is sitting here today, I was an analyst early on in the predecessor firm of this. So we do have a demonstrated culture that attracts people that way. [00:00:00] S0: I love the notion that both of you ran businesses as the CEO. And I'm especially curious about the forged-in-fire moments from running the Brazilian Railway. What were the aspects of operating as the CEO that you most remember, that most shaped how you think about running a business well or investing well?
· Alex Behring
[00:00:00] S1: Within a few weeks in the business, it was apparent that it was an operations challenge. Meaning the customers around the railroad all wanted to be serviced by the railroad, and they couldn't because the service wasn't good enough. And the focus on basically churning the assets faster and more safely was really the driver of the company's success. Which drove me, in turn, to spend a week, a month, in overalls, driving trains and going around the country. That allowed me first to get close to the engineers in the business. Who were crucial, the people that run the trains. And understand how important they were in that business in every respect. And do things to improve their lives that you could only do if you were out there with them. For instance, I was young and athletic, and sitting in a locomotive for eight hours in those really old chairs. It was really tough. And the cabins were cold because they were not sealed properly. So all of that was not expensive to address. We didn't have the money to buy brand new General Electric locomotives, but we could fix that. And we could also fix all the engineering quarters where people sleep between changeovers, which were also in dire straits conditions. And we were able to get them all fixed, get new beds, get satellite TV for sports and get them all that done. That really drove a lot of support from the engineers. We were able to then capitalize on that by having onboard computers rank people on their fuel and safety performance nationwide. I mean, railroaders are very proud people. And that drove like a 30% reduction in fuel, for example, which was the number one cost in the company. That drove much higher asset returns. Because we then did the same thing in the yards and there were all these ideas and participation. And these people all had the solutions for things. They just needed to be engaged to address this operating challenge, which was the biggest value creation driver. So that taught me a little bit about managing by walking around and not sitting in an office and getting fed information through PowerPoint.
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: It seems like that's one critical lesson in the general category of finding hygiene and inefficiencies within the businesses that you buy to make them a lot better. This is like an obvious thing to say, like, yeah, of course, we want the business to be more efficient. How else have you learned to do that effectively across several different kinds of businesses? What are the playbooks that you've most enjoyed rolling out business-to-business, not just to fix, but to find the inefficiencies in the first place? [00:00:00] S2: One of the things that's interesting – you hear Alex's story in the railroad, and a lot of these initiatives he outlined were his, but he benefited from some great advice from co-founders, our co-founders. [00:00:00] S1: I did. Absolutely did.
· Daniel Schwartz
[00:00:00] S2: Two of whom were CEOs of operating businesses themselves at relatively young ages, and who gave Alex a shot when he was 30. And they gave you some real practical advice, which you then passed on to me when I, I guess, became CFO or CEO of Burger King. Which, if you hear some of this advice, you'll be able to connect it to some of Alex's actions, which were at the time for me, deeply insightful comments that were very contra to how I behaved and acted as an investment analyst. Things like, "Manage the people, not the business." "Centralize the what, not the how." "Go around asking lots and lots of questions. Don't ever be afraid to ask people questions, even if something that seems obvious to the organization might not be as obvious to you." When we were buying Burger King, I'll never forget – to just show how naive maybe I was at the time – Alex says to me, we announced the deal, and Alex says, "Well, now it's time. We’ve got to assemble our team." I'm like, "Alex, come on. We just bought this business. It's like $4 billion. It comes with people, right?" And Alex is like, "Well, it does, but I think it's really important. We got to assemble like an A-plus, world-class leadership team." And just kind of dawned on me, which he had experienced this for years. A business is nothing more than a bunch of people kind of running around doing things. And the quality of the people is paramount to the quality of the business. In these businesses, you want to create a culture centered around ownership. And that starts with the leaders of the business who need to act like they are, and behave like they are, and be the shareholders of the business. So the leaders need to be the shareholders. The leaders can't just be, "The Management." Management and shareholders need to be one and the same. And so once you've established that, now you can go to the next step. It's like, how are you going to manage a business if you are its owner? You're going to look after all the money you spend as if it's your own. You are going to make decisions based on what is in the best interest of the business. You always have to put your business before yourself. And so typically when we come into these businesses, we love doing benchmarking exercises where we will look at expenses, costs by area within the business.
· Daniel Schwartz, Patrick O'Shaughnessy
So let's say by the North American group, the European group, the Asia Pacific group, and then we look at by category, all the ways we're spending money, we call this zero-based budgeting. And we basically give visibility on cost to everyone. And we say, look, if this one group is spending this much on this area, well, why can't we apply policies throughout the organization to benchmark, both with ourselves internally and other companies externally. And you find enormous amounts of savings in just doing kind of simple internal and external benchmarking. But you only are able to capitalize and achieve those savings if you have buy-in at the top – people who view this as owners of the business, who want to run it optimally for the business and not necessarily for themselves. [00:00:00] S0: What does "centralize the what" mean?