Invest Like the Best with Patrick O'Shaughnessy
· Daniel Schwartz, Patrick O'Shaughnessy, Alex Behring
[00:00:00] S2: We have this luxury of only having to find one great business at a time. And I think if you're investing your own capital, and if that's the lens through which you're looking at the investment, you want to be really patient and wait until you find that great business. The other way to look at it is, it's so hard for us to find a great business to invest in. How are we going to find 10? It's so hard to find great people to be great CEOs. So how are we going to find 10? So I think it's great to be able to buy one business every once in a while and send in your A++ players to get involved. [00:00:00] S0: Is there any psychological fear or pressure associated with knowing that it's just one, all eggs in one basket, and watch the basket very closely? Like, what psychology does that feel like? [00:00:00] S1: As much as the psychology, I think it drives the investment process – a very rigorous analysis of what the downside can be. And in our case, the downside has to be capital preservation, with some small return of sorts. And that drives the business side of decisions. And it also drives capital structure decisions. I think that's where it manifests itself the most. If you were to look at businesses that we didn't buy, or deals that we didn't do over a long period of time, I think more often than not, that would be a function of us not being comfortable with a potential downside scenario or a downside case, as opposed to us not finding a path to a great case.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: As much as the psychology, I think it drives the investment process – a very rigorous analysis of what the downside can be. And in our case, the downside has to be capital preservation, with some small return of sorts. And that drives the business side of decisions. And it also drives capital structure decisions. I think that's where it manifests itself the most. If you were to look at businesses that we didn't buy, or deals that we didn't do over a long period of time, I think more often than not, that would be a function of us not being comfortable with a potential downside scenario or a downside case, as opposed to us not finding a path to a great case. [00:00:00] S2: I think it's a healthy pressure that we put on ourselves to make sure that we're not compromising on business quality. And we're only – we’d rather do nothing than... [00:00:00] S1: Our capital structure being too stretched... [00:00:00] S2: Yeah, like, we're going to buy a great business. We're going to lever it appropriately, not too much. It definitely makes it harder to price risk. If you think about the traditional portfolio approach, where... [00:00:00] S0: Yeah, it's the portfolio construction part of it.
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: Yeah, it's the portfolio construction part of it. [00:00:00] S2: Yeah, you have 10 businesses, and if one has some idiosyncratic risk or whatever. It's harder to price risk, so we take that into consideration. But then on the other hand, you have this team here who are really excited to do a great deal. And oftentimes, they're going to bet their own careers, as is the case with Alex and a railroad that he bought in Brazil, as is the case with Burger King that we bought here for me. And so when you're betting your reputation on something, you want to hold it to the highest possible standard. [00:00:00] S0: If you think back to that, the very first days, 2004 or thereabouts, through to today, 20 years. How has your idea of what constitutes a great business changed the most through all of these investigations and running the five, six businesses? What's most changed about your views? [00:00:00] S1: We over the years had to refine our investment process in terms of making that determination of whether a business is great or not, as a function of how the world changed because of technology. The possibilities of a business being disrupted in this day and age, as compared to maybe 20 years ago, are significantly higher. And therefore, the investment process and the investment discussion around disruption needs to be significantly more detailed and thorough.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: We over the years had to refine our investment process in terms of making that determination of whether a business is great or not, as a function of how the world changed because of technology. The possibilities of a business being disrupted in this day and age, as compared to maybe 20 years ago, are significantly higher. And therefore, the investment process and the investment discussion around disruption needs to be significantly more detailed and thorough. [00:00:00] S2: Yeah, I agree with that. Disruption and disintermediation. I think we have a greater appreciation today for businesses that own the relationship with their end customers. If you have that, you're less likely, I mean it seems obvious, but less likely to be disintermediated through some new disruptive force. [00:00:00] S0: How did you most learn that specific lesson, the disintermediation lesson? [00:00:00] S2: Since 2004, we’ve followed restaurant businesses. We’ve followed packaged food and consumer packaged goods businesses. And there is this ongoing shift you see in society of the share gain of private label. If you're a large retailer, be it a Walmart or Amazon or Costco, if you own the relationship with your customers, you have this ability to disintermediate the company selling to you. [00:00:00] S0: Kirkland happens, yeah.
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: Kirkland happens, yeah. [00:00:00] S2: Kirkland's a fantastic brand. It's one of the largest in the country. You and I probably both have plenty of Kirkland products in our household. Compare and contrast that with the restaurant business. So Burger King or Tim Hortons, Popeyes or Firehouse Subs – I mean, those are just a few great brands. I mean, we happen to be involved in them. Each of those brands owns the relationship with our end customers. And so if you want a Whopper, you're coming to a Burger King. Or, in the case of our Hunter Douglas business, if you want blinds, you're coming to a Hunter Douglas dealer or one of our shop-at-home dealers. And so I think we have a much better appreciation for that. [00:00:00] S0: If I think about just the businesses themselves, we were joking before about the simplicity of the business, and maybe when you're talking to Buffett about one of these businesses – don't make the business description complicated. And it's interesting how burgers, shoes, shades – you can actually do it in a word in many cases, with your businesses. You don't even need a whole paragraph. Maybe say a little bit more about that. [00:00:00] S1: We're not well-suited to manage businesses that require high IQ, to be honest with you. [00:00:00] S2: We have some mutual friends who are much better suited to invest in the next technological... [00:00:00] S0: The AI automated workflow.
· Patrick O'Shaughnessy, Daniel Schwartz
[00:00:00] S0: The AI automated workflow. [00:00:00] S2: Exactly. We're just not that. We've managed to stay pretty disciplined, to stick to good, relatively easy-to-understand, well-moated businesses that we and our partners here could kind of wrap our heads around. Businesses that have ideally been around for a long time, with strong brand franchises that we could own and grow and maybe improve a little bit. [00:00:00] S0: As Munger used to say, "Show me the incentives, I'll show you the outcome." In addition to the one investment per fund, I'd love to understand the other distinguishing features of how the capital is set up, who the LPs are, what the incentives are, how the fees work. Because almost everything you do is a little bit different than the traditional model. Maybe you could walk us through what those are, because those then determine the outcomes.