Invest Like the Best with Patrick O'Shaughnessy
· 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.
· Alex Behring, Patrick O'Shaughnessy
[00:00:00] S1: Yeah. [00:00:00] S0: As you think about the broader world again today, and the sorts of business models that have become the most exciting to people. How do you think about technology and its role in the businesses that you buy and in the opportunity set in general? It's probably not by accident that all of these have a large, hard physical component to them. Harder to disrupt atoms, that's for sure. But in that most market headlines are about bits, how do you think about using it, ignoring it? How do you relate to it? [00:00:00] S1: Think about the restaurant business, which you would think in principle, it's all about burgers or pizza, or other types of sandwiches and whatnot. And look at what Patrick Doyle accomplished at Domino’s. [00:00:00] S0: Yeah, amazing. [00:00:00] S1: Look at what he drove there. It's one of the most successful stories of all time. And we're lucky to have Patrick with us now as exec chair at RBI. And he basically took so much share from other large players. [00:00:00] S0: Built a tech business. [00:00:00] S1: He built a tech business. That's exactly right. And he took so much share from the other large players and from the small mom and pop players because he built a tech platform. So that's probably the best example you're going to find. And that's true for every other consumer business.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: He built a tech business. That's exactly right. And he took so much share from the other large players and from the small mom and pop players because he built a tech platform. So that's probably the best example you're going to find. And that's true for every other consumer business. [00:00:00] S2: Yeah, I'd say we like businesses, as we mentioned before, well-moated businesses, where technology can help improve the business, not disrupt the business. So if it's the case of Skechers having a better e-commerce experience, or case of Hunter Douglas having AI tie-in to decide when the blinds should go up or down depending on the weather and things like that. Or with the restaurant businesses, several of the restaurant businesses are now experimenting with AI-enabled voice drive-through. So we like types of businesses that could be improved by technology, and we and our teams embrace that. Just not the businesses that a new technology is going to completely change and remove. You're going to wear sneakers tomorrow, regardless of whatever technology is out there. [00:00:00] S1: Hopefully you’re even going to eat a burger every now and then. [00:00:00] S0: Yeah, of course. I'll walk it off in my new Skechers. What are the most misunderstood or surprising things about 3G, do you think, from the outside?