Invest Like the Best with Patrick O'Shaughnessy
· Daniel Schwartz, Patrick O'Shaughnessy, Alex Behring
[00:00:00] S2: Each transaction is different. I think they're all – BK, talking about Hunter Douglas, they're all great businesses, and I think there are different ways we were able to kind of help in each. And this business is certainly growing faster than any of the other businesses that we've been involved in. [00:00:00] S0: How much do you care that an acquisition has what I'll call platform potential? BK became RBI, you've got Tim Hortons and Popeyes and Firehouse and these other great franchises that are inside of the original purchase. Is that something that you think about a lot ahead of time, whether or not within Hunter or Skechers, you can go do a bunch of other stuff by virtue of the platform? [00:00:00] S1: As Dan said, these are all different deals. In the case of Hunter, the company in fact has always been doing consolidation-like acquisitions in this space. And I think that continues under our ownership. But here, it's a little bit different. I think that if you look at the footwear sneaker leading companies, for the most part, they're not multi-brand. [00:00:00] S2: They're largely monobrand footwear. [00:00:00] S1: They're monobrand, which by the way, is great in this case. [00:00:00] S2: Well, I'd like to sit here and say the investment memo for Burger King said that it was going to be a platform company and we were great visionaries. [00:00:00] S0: So there was no such memo? [00:00:00] S2: Oh, there was a memo. It just didn't say that. [00:00:00] S1: And there isn't a case where we would make, I don’t know, 20 million times our money.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: And there isn't a case where we would make, I don’t know, 20 million times our money. [00:00:00] S2: After five years, this will be worth three times. So, getting into Burger King, we didn't know that was going to be the case. [00:00:00] S1: But having said that, it's a different nature here. [00:00:00] S2: With all these businesses you have to, from the outside in, do enough work that you get comfortable that you believe they're going to be a good business. And you have to hope to own it forever. But this came up in your interview with Matt and Alex – that you only really know and understand a business once you own it and you're inside of it. You only know if it's a forever business once you're really part of it. And we do as much work as we can to maximize the chance that the business we get involved with is going to be the next forever business for us. [00:00:00] S0: The first time I ever heard of your business was probably 16, 17 years ago. I was in my early 20s doing a reading tour through investing, and I came across that "Double Your Profits in Six Months or Less" book about zero-based budgeting. And obviously, 3G is well-known for this method. But I want to ask the good, the bad, and the ugly question about zero-based budgeting. Give us your impression of, first of all, how important the concept is to your success or not. But also, where it works well, where it doesn't, considerations that people listening should have if they want to apply a method like this to a business that they own.
· Alex Behring
[00:00:00] S1: So, I think that it's a great way for you to understand a business and to learn a business, and to make it more efficient. Because you basically, as the name indicates, you have to think about the business from the grounds up. So you learn a lot. And if you undergo that intellectual exercise, it frees up some expenses and frees up some margin for you to invest and grow in the business, and for you to take it to the next level. Having said all of what I just said, I think the importance people assign to this process, in terms of what our investment success has been, is a bit exaggerated. If you look at the amount of money we made at RBI, and then you try to decompose that, okay, how much of it was because we did zero-based budget successfully in a couple of instances, and how much of it is because we grew the businesses? Originally, we had 12,000 restaurants, now we have north of 30,000 restaurants. So how much of it has to do with that second growth piece of it? The bulk of it. So, again, I find it to be a great process. I think it's a helpful process. Doesn't probably deserve as much credit on our case as it gets. Would you agree?
· Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S2: For us, it's like we try to bring this ownership mentality where the folks running the business are large shareholders, and they're acting like owners and not management. And then that ownership mentality then needs to be applied both to cost and to revenue, to growth. And when you apply it to cost, as Alex said, you do this bottoms-up analysis. And in many cases, it enables you to extract a meaningful amount of value in companies. But I wouldn't recommend one of your listeners buy a lousy business with a big zero-based budgeting overhead opportunity, because you're just going to have a slightly more profitable lousy business. The ownership mentality and linking goals to compensation, to results, that applies equally to cost and to revenue. And so in the case of the cost, it's let's have a zero-based budget and have a budget of cost that you have to adhere to. If you spend more than your cost budget, there's consequences. And let's also have goals linked to revenue and the goal with restaurant brands or Burger King. The number of restaurants we need to open this year, the target profitability for our franchisees this year. And so I think it just comes back to ownership mindset and ownership management. [00:00:00] S0: Yeah, it’s so interesting that your reputation for doing this so well can – because it's such a nice sounding idea. "Double your profits in six months or less." A good book title, maybe less useful. [00:00:00] S2: Who doesn't want to read an article about zero-based budgeting or cost cutting, whatever?
· Daniel Schwartz, Patrick O'Shaughnessy, Alex Behring
[00:00:00] S2: Who doesn't want to read an article about zero-based budgeting or cost cutting, whatever? [00:00:00] S0: I'm really curious for both of your very broad perspective on capital markets today. How does the world feel to you? Its conditions, its opportunity set, its asset prices. How does it feel to you thinking back on today versus your whole careers operating in the business and capital markets world? [00:00:00] S1: I should preface this by saying that I don't know that we made a lot of money by virtue of being great macro analysts or predictors. [00:00:00] S2: And I know that we didn't. [00:00:00] S1: Yeah. I'm being polite. I didn't make any money by being that. And having said that, I find that we probably are in a moment where valuations are more stretched, where there is a lot of capital out there trying to do things. Where debt is still abundant and less cheap now, but still pretty attractively priced. So, not necessarily the easiest investment environment that I have seen over a long period of time. [00:00:00] S2: I agree with Alex. It does feel like businesses, the world, markets are more expensive today than they were in the past. And therefore, it's harder to buy a good business or a great business at a reasonable price. With that said, this thing's never been easy. It's easy to look back in hindsight and say, "Oh, in 2010, you bought Burger King and it was so inexpensive." Like I said, no one else showed up.
· Daniel Schwartz, Alex Behring, Patrick O'Shaughnessy
[00:00:00] S2: I agree with Alex. It does feel like businesses, the world, markets are more expensive today than they were in the past. And therefore, it's harder to buy a good business or a great business at a reasonable price. With that said, this thing's never been easy. It's easy to look back in hindsight and say, "Oh, in 2010, you bought Burger King and it was so inexpensive." Like I said, no one else showed up. [00:00:00] S1: Aren't you happy that we have this business model that we only have to buy one versus we have to buy one versus we have to buy ten. [00:00:00] S2: Yeah, of course. It's so hard to buy one, let alone buy... [00:00:00] S0: Yeah, it only takes one every five years. [00:00:00] S2: Let alone buy like five or 10 of them. And if you're going to be disciplined on business quality and price, it's always difficult. It really is. It's easy to look back in hindsight and say, "Oh, it was so easy." [00:00:00] S1: It wasn't. [00:00:00] S2: It wasn't. It was always, always, very difficult to buy a great business at a fair price, regardless of what was going on in the world or whatever time period it was. [00:00:00] S1: It's interesting you say that. Sometimes we have conversations with our younger partners in these discussions. And they're like, look, "When you guys did this and this deal in the past, it was much easier." And we kind of look at each other. "What are they talking about?" [00:00:00] S2: It's like, "I was there. I don't remember being that easy." [00:00:00] S1: Yeah.