Paul Black and Mike Trigg are portfolio managers and co-CEOs at WCM Investment Management. They join the podcast to discuss WCM’s unique path to becoming a leading global equity manager, highlighting WCM’s unconventional approach for identifying investment opportunities, including why a company’s culture matters and the important of economic moat trajectory.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:11):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
For today's episode, I'm joinedby Paul Black, co-ceo of WCM
Investment Management, as wellas Mike Trigg, the other co-CEO
at WCM.
I'm looking forward to thisconversation very much.
(00:31):
Wcm actually sub-advises acouple of ETFs and a mutual fund
for First Trust.
First Trust distributes some oftheir mutual funds as well, but
we're going to dig into whatmakes WCM unique.
We're going to talk all aboutculture and how you can utilize
that in screening companies andfinding those diamonds in the
rough in the internationalequity markets.
(00:54):
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
Paul Black, mike Trigg I'm gladyou guys were able to join us
and I'm especially glad we wereable to make this work because I
live in New York.
It's cold and it's beautifulhere in Laguna Beach.
I don't know how you pickedsuch a beautiful place, but
anytime I get a chance to comeout here, it's amazing, so
(01:15):
thanks for having us.
Paul (01:18):
Nice to have you here, Ryan, and it's very intentional.
I'm sure we'll get into itlater in the discussion very
intentional.
Ryan (01:24):
I'm sure we'll get into it later in the discussion.
So I'm intrigued by WCM, partlybecause you guys have had
really outstanding growth, andthat kind of growth is pretty
amazing in itself.
But what's really reallysurprising is that you're an
active manager, and that'sduring a time when active
managers just were hemorrhagingmoney, assets dropping for net
(01:48):
outflows for most managers, andyou're known for investing
internationally and, as you know, international benchmark ETFs,
as well as many internationalinvestments, have really lagged
over that time period.
So I guess my first questionfor you is what are you doing
that's different, that hasallowed you to get to the point
(02:08):
where you are today?
Paul (02:10):
Wow, there's a lot in that question.
There's a lot in that question.
Ryan (02:14):
We can break it down further as we go here.
Paul (02:16):
Yeah from.
You know, hey, internationalsunderperformed the US for
something like 15 years.
Active managers are, you know,going away.
If you believe the passive guys, it's not true.
And you know why have activemanagers underperformed?
And it's all kind of tied up inthis question of most active
managers kind of do the samething, expecting to get
(02:38):
different results and I oftenjoke about it.
You know every manager that willsit across from you when they
tell you, kind ofphilosophically, what they're
about, they will say, hey, webuy high quality businesses with
strong competitive advantagesselling at a discount to
intrinsic value.
I mean, you know, like 100 outof 100 managers will say that to
you.
And the truth of the matter is,if that's all you're doing,
(03:02):
then you're not going to exceedthe returns of the benchmark,
because everybody else is doingthat and there's a lot of smart
people on Wall Street and a lotof smart people around the world
competing using that samemethodology.
So all the inefficiencies areout of that methodology and you
will never underperform ifyou're doing exactly what every
other manager in the world isdoing.
(03:22):
So you know, through ourjourney, you said we're at $100
billion and we were at a billiondollars back in 2011.
There's so much more to unpackin there because I often use
this terminology that we rightnow look like that perfect
family photo for the fireplace,where everyone's beautiful, the
dog's beautiful, the kids areclean and nobody's fighting, and
(03:45):
it looks perfect Moment in time.
Wcm $100 billion probably thebest global growth strategies on
the planet 100 people, 66 whichown shares in the company and
the reality is we look beautifulnow, but we haven't always been
beautiful and we've had ajourney of learning what not to
do by mistakes that we've madeover the years.
(04:07):
So we have iterated veryaggressively over the last 20
years to find inefficiencies inthe market that we can exploit.
That really, I know othermanagers are not exploiting and
we'll dig into that more laterbut you have to do something
different.
We'll dig into that more later,but you have to do something
different.
The reason we've had meteoricgrowth is because we truly are
(04:28):
doing something different fromeverybody else and, in terms of
the benchmarks outside the US,underperforming the US, it's
true, but there are pockets ofgold outside the US.
There are companies that yousimply must own.
In fact, those companies haveperformed outside the US far
(04:49):
better than the broaderbenchmarks inside the US.
So you've got to be veryselective, You've got to be
specific, You've got to dosomething very different from
everybody else, and all thoseattributes from learning from
failure to doing somethingdifferent has really led to our
success.
Ryan (05:05):
So WCM, can you tell me a little bit what that stands for?
Mike (05:10):
It stands for why Culture Matters.
Ryan (05:12):
Okay, I want you to unpack that a little bit more, because
I've had the opportunity tohear you folks at WCM speak on a
couple different occasions andculture is one of the things
that always comes out.
That's something that you talkabout a lot.
First off, what does thatactually mean?
What is culture and why is itimportant as you evaluate
(05:33):
investment opportunities?
Mike (05:35):
Yeah, I mean culture to us is really a set of values or
behaviors.
It's how people act and behave.
It's like, simply said, it'show people act when the boss
isn't looking.
And you know we learned thatmany, many years ago through our
own trials and tribulations ofwriting an investor management
(05:56):
firm, that the single mostimportant thing we can do as
leaders is focus on the cultureof our company.
As leaders is focused on theculture of our company.
And from that there's a longstory that actually predates me
that Paul can go into.
But this firm has been through,as Paul said, a pretty long
(06:17):
journey and there was a periodof time when I don't think it
had the best culture in theworld or a culture that one can
be really proud of.
And through a lot of hard workand iteration I think we've
gotten the culture part rightand as we started to see some
success, there was a bit of alight bulb moment where we
thought, hey, culture's going tomatter for WCM and it's going
(06:38):
to be the most important thingthat's going to drive our
success.
It needs to be something thatwe also focus on in the
investment process.
Paul Bellenhout success itneeds to be something that we
also focus on in the investmentprocess Joe Brown, md, mph.
So when Paul was alluding to, Ithink what we do that's
different.
I think one of the pillars isthe emphasis that we put on
culture and finding companieswith effective culture, because
(06:58):
it's very difficult to quantify,it's an inefficiency that I
think most investors don'texploit and it's something we've
kind of lived and breathedourselves and then, for the past
20 years I think, built apretty robust investment process
around.
Ryan (07:14):
So how would you describe the culture of WCM?
Mike (07:27):
Well, we've got three core values that I would sort of
think about it as this is how wemeasure success.
When we talk to new people,when we go through our annual
reviews with people, obviouslywe think about performance and
accountability, but really, atthe end of the day, it's are
they behaving in accordance withthese three values?
And they're pretty simple.
They're gratitude, service andfun.
Paul (07:50):
I would reframe that to fun gratitude and serve others
yeah.
Mike (07:54):
I have just a slightly different perspective.
To me, it starts with gratitude.
I think everybody that walksinto this place every single day
feels incredibly lucky to be.
I mean, I kind of fondly sortof describe WCM as a lily pad
within the investment managementindustry, and I think everybody
(08:16):
that comes here knows how luckythey are.
And if that's the mindset thatyou kind of operate with on a
day in and day out basis, younaturally think a little bit
less about yourself and moreabout others.
And so I think a grateful heart, a grateful mind just naturally
translate into behavior whereyou really focus on the other
(08:37):
people around you, like on theinvestment team.
I talk about it all the time andI say you know and just think
about investment management.
About it all the time.
And I say you know and justthink about investment
management.
I mean it's a, it tends to be aan industry that that brings a
lot of self-interest and a lotof ambition and and people
wanting to climb the ladder,none of which is probably
conducive to having reallyeffective teams.
And so, if you can, if youcould come to the, come to the
(08:58):
office every day with with thisnotion of gratitude, you're just
naturally going to think aboutyour team and and and everyone
else around you.
And I say like if everybody canjust come in with that mindset
and not worry about themselves,but worry about how they make
every single person around thembetter as a company, as a team,
we're going to go so much, somuch farther faster together.
And when you can experiencethat environment, it is just
(09:24):
ridiculously fun when you workon great teams with people that
really care about each other andcare about each other's success
.
There is literally no one thingyou can do more fun and work
than living in an environmentlike that.
So that's why he starts withfun.
I start with gratitude, but I'msure he's got a different way
(09:44):
to sort of make that all soundsensible.
Paul (09:48):
That's debatable, but it's interesting when you think
about those three core valuesgratitude, serve others and fun.
They're nowhere else in theindustry, right, every other
industry.
If you say what are your corevalues, it's going to be
integrity, discipline, process.
I mean, give me a break.
Those are all permission toplay.
(10:09):
If you don't have those, youshouldn't even be in the game.
So what we did a number of 12years ago is we said what are
the what?
What really are the values thatwe live and that we care about
that animate us and let'senshrine them in in.
And to me, as Mike said, ifyou're grateful, I would put a
(10:30):
little different spin on it.
If you have a sense ofgratitude, then you acknowledge
that we're very fortunate to dowhat we're doing.
We're allocating capital in atime and place where you're
handsomely rewarded for it.
It's an incredibly stimulatingintellectual discovery to try to
understand the investmentequation, but there's a lot of
(10:50):
really good people doing it thatwork really hard.
So gratitude should lead towe're fortunate to be where we
are.
But we should have humility,because we've been given a lot
and I think humility leads us tojust be scrappy.
Just be scrappy.
We need to get better.
We need to do somethingdifferent.
We need to be better thaneverybody else out there.
(11:11):
So we are relentlessly tryingto get better all the time
because we've been given so muchand the fun is the fun.
If you love what you do, asBuffett said, you skip to work
every day.
You love it.
I mean, tell me you're notgoing to give everything you got
.
But my favorite is the idea ofserving others.
We had an analyst come in.
He was about 26 years old whenwe hired him.
(11:33):
I mean literally.
This guy had PTSD for about ayear after experiencing a highly
toxic, brutal culture that wasall about politics and
positioning.
And when he came here he askedme hey, how can I do really well
at WCM?
And I said that is the simplestquestion.
(11:54):
Anyone's asked me If you canmake everybody around you better
, serve your team, serve thepeople you work with, elevate
the team by making them better.
Don't politic, don't positionyourself for more money, don't
position yourself for a title.
If you serve everybody on yourteam and you elevate the whole
organization around you, trustme, we will see you and you will
(12:17):
be recognized.
You know.
So, when you think about myposition and Mike's position as
co-CEOs, our job really is toserve everybody in the
organization.
You know we get to do thesepodcasts and interviews and we
get to be in front of people,but our main priority is making
sure that our people haveeverything they need to be
(12:37):
successful.
I don't just mean all the toolsand all the you know all the
different screens and technologythey can use, but I mean, more
importantly, are they in theposition where they can prosper?
You know that's what we spendour time doing.
Do we have people in the rightplace?
And, frankly, are we aware ofboth the personal and the
(12:59):
professional?
And you know I think inbusiness, a lot of times you
hear these really hardcore,hard-ass people say hey,
professional is professional,personal is a personal.
I've never bought it.
If I have a brutal fight withmy wife in the morning and I
come to work, are you going totell me that's not going to
impact me professionally andvice versa.
You know so we work reallyreally hard on knowing the whole
(13:21):
person and what they might bestruggling with at home or what
they're struggling with here.
But the more Mike and I canserve everybody and the more
people in the organization serveeverybody around them, I'll
tell you that that is anincredibly powerful force that
is almost impossible to competewith.
Ryan (13:38):
You know, you said something interesting when
you're talking about gratitudeand you get to allocate capital,
and it strikes me that theprocess of allocating capital is
something that's virtuous,that's actually a good thing.
You can help foster the growthof other businesses that are
good businesses, and I thinkthat's missing from the
investment management industrythe idea that it's, you know,
(14:00):
not just going to gain for yourinvestors, which is good, but
there's actually some virtue inthe process of allocating
capital as well.
Paul (14:07):
There's massive virtue.
We talk about it all the time,one of the things that's really
important to me and I've beendoing this 40 years and people
say, why do you keep doing it?
And I do it because one I loveit, I love the people around me
and I know that we're changinglives to your point.
So if we you know one of our Iguess I can talk about a client
(14:29):
but one of our clients is StJude Hospital.
They hired us about 10 yearsago.
If we do a great job and givethem significant excess return
over the benchmark, what doesthat do?
That helps them spend moremoney to help children that have
cancer, firefighters, policemen, nurses, teachers.
You know we talk all the timeabout hey, this isn't just a
(14:53):
mathematical equation about itand it's not just about us
making money.
It's about changing the livesof the participants that invest
their money with us, and weconstantly talk about that.
We constantly reiterate howmuch, by doing well and doing
things differently, we canchange the lives of people.
Mike (15:15):
And I'd add, I think relationships matter a lot to us
.
One of the things I think we'remost proud of is a lot of the
relationships we've been able tobuild over the years with
clients and in many cases, ifthey hired us in the early days,
(15:37):
when we were a lot smaller thanwe are today, they took a
chance and it's been obviouslyincredibly rewarding to reward
them with that.
And it's also incrediblydevastating when you go through
periods when you don't, becausein many cases these people have
bought in not just to ourinvestment philosophy and our
(16:00):
process and what we say that wedo is different, but they've
kind of bought into who we areas people and what the firm
represents.
And so you know you can't help,but you know kind of carry that
with you to a degree personally, and so you know he said it a
million times I mean this is agreat business.
It's incredible when it goeswell, but when it doesn't,
(16:22):
there's nothing more devastatingthan you know having to deliver
.
You know bad news to clients,and so you know we think about
that and we remember those.
We don't forget about thoseperiods where you know we
haven't necessarily performedgreat.
That's part of the business,that's part of market cycles and
markets, but you know we carrythat with us for sure.
Ryan (16:42):
Okay, so using culture as a way to evaluate companies, to
pick stocks.
Ultimately, is there some sortof algorithm that you have that
says this is the?
You know?
How do you rank stocks based ontheir culture?
How do you quantify culture?
Mike (17:20):
Paul alluded to this a second ago, but there's a real.
I think one of the reasons thatwe've been able to sustain the
level of success that we havefor, you know, the last 20 years
call it has been that you knowthere is an iterative nature to
our investment process, and sowe have incredibly high
standards for what good lookslike and we're constantly trying
to push boundaries, to getbetter at what we do, and I
think our evolution aroundanalyzing culture, I think, is a
perfect example of that.
When we first had that lightbulb moment that I referred to,
you know, I think it was okay.
(17:41):
We recognize culture matters,we have a sense for what that
looks like in an organizationthat's call it people-driven,
like investment management.
Let's go try to find a lot ofcompanies that you know, frankly
, like might be places that Pauland I want to go work at, you
know, and so if you're lookingat you know the retail landscape
(18:03):
and I thought, okay, if Iwasn't lucky enough to land on
the lily pad at WCM and I foundmyself working in retail, um,
you know, like, costco seemslike a pretty cool company.
You know, people there seempretty happy as a yeah, like as
a customer, like I love goingthere.
You know like and um and youknow the obviously they have, uh
(18:25):
, financial and stock priceresults that, um, you know stand
out relative to their peer set.
So, ok, maybe we should go buyCostco.
And so, you know, even early onthere was almost a.
It was easier in some respectsbecause culture was not quite
the buzzword that it's becometoday.
(18:45):
And so if you could even justfind companies and management
teams that explicitly talkedabout culture, you kind of
thought, okay, maybe we might beon to something here.
But you know, through thatjourney we started to realize
that there's a little bit of aself-selection bias that can
come into, you know, come intothat process, right, because you
(19:07):
know, hey, what companies Pauland I might want to go work for
doesn't necessarily there'sprobably a lot of other great
companies with great culturesthat you know maybe he and I
wouldn't last very long at.
And so you know, if you thinkabout, you know, certain
industrial businesses where youknow certain industrial
businesses where you know scaleand like a low cost structure
(19:31):
really matter to, you knowrelative competitive advantage
versus peers, where you knowthose organizations have a lot
of focus on numbers andaccountability and they can be,
you know, stressful, difficultplaces to work.
Maybe that's not where, youknow, paul and I would have
gravitated to, but like hey,there's a lot of companies out
in the world like that that areincredibly successful.
(19:52):
So we had to sort of step backand say you know really what is
the?
We had this moment where wekind of just concluded you know,
there is no such thing as agood culture.
It's really what is thestrategy of the company?
How are it's really what is thestrategy of the company?
How are they going todifferentiate and grow their
competitive advantage versustheir peers?
And then do they have a culturewhich, again, as I said a
(20:13):
second ago, is kind of a set ofvalues and behaviors that
actually makes sense for whatthat company is trying to do.
And so we start with thisnotion of there's these, I call
it sort of three pillars of ourculture process, and the first
one is this notion of culture,strategy, alignment, right.
So understanding what is thestrategy that company to
generate great returns,differentiating themselves from
(20:35):
their peers, and then do theyhave the right culture.
So that's the first piece.
And then the second one is wecare a lot about the cultural
strength, right?
So how successful is theorganization at galvanizing all
of their people around those,that belief system or those
values?
So, like in the case of WCM, Imean I would be completely
(20:57):
floored if you took anyone asidein this organization and said
talk to me about the three corevalues of WCM and and why they,
why they, why they matter andhow they help you do your job.
So we would hope, and that'swhat we do.
When we talk to companies, wedon't just talk to the CEO or
the president.
We're talking to formeremployees, partners, customers,
(21:22):
all the employees that we canget in front of and trying to
understand hey, is the stuff themanagement team's telling us
about their culture does thatline up with you know, what you?
You know with what we'rehearing from other folks?
I mean, amazon is a greatexample, I think, in this regard
.
It's incredibly, you know, youcan you know just Google
(21:42):
articles about Amazon's cultureand see all sorts of you know
kind of stories that don't makeit sound like it's necessarily
the best place to work.
It's very data driven, it's veryit's.
It values data, maybe over someof the softer, some of the
softer sides of people.
(22:03):
But if you ask any employeelike what drives decisions there
.
It's low prices, convenienceand selection, you know, and so
I'm sorry, and convenience is abig one, and so you know that's,
that's a, that's a high degreeof cultural strength.
And then the last one is wewant cultures to be adaptable
and to change, and so we wantthem to have a high degree of
(22:24):
external awareness, to studybest practices, steal good ideas
from other companies, and sowhen we diligence companies,
we're really trying to assessthem across those three pillars,
and then, if they check all theboxes, then we'll conclude that
, okay, this has a culture thatwe think is up to our standards
of considering it as a potentialinvestment.
You need other things to getinto the portfolios here, but
(22:47):
those three things are how wekind of broadly think about the
culture of a company.
Paul (22:51):
And if I had to frame it a little bit, so it's cultural
strategy alignment.
So alignment between values andwhat they're trying to achieve.
Strength throughout theorganization, as Mike said.
Adaptability those are kind ofthe three pillars, but the
interesting part is let's talkabout first trust.
So first trust kind of hasgrown up with a lot of
(23:11):
competitors around it, why haveyou done so much better than
every one of your competitors interms of raising assets?
We firmly believe in a prettycommoditized area, right, pretty
commoditized area.
You know what?
The answer is Culture.
You guys have deeply embeddedcultural values that animate
what you do every day.
So when you find that in anorganization, that organization
(23:35):
has a far greater ability ofgrowing its competitive
advantage because of how theytreat their people and how they
behave as an organization than acompany that doesn't have a
strong values in internally toit.
So you know, the interestingpart is we've, we are so deep
into culture and believe so muchthat it actually allow you know
(23:55):
, it allows a company to growits competitive advantage
because of its people that wehave four full-time culture
analysts.
All they do is work on culture.
You know they have differentbackgrounds from different
experiences.
They may not even know what acompetitive advantage is.
They've probably never done aDCF model, it doesn't matter.
All they do, four of them iswork relentlessly on trying to
(24:18):
understand the DNA of thecompanies we want to invest in.
And here's the, you know, toyour earlier question can you
quantify it 100%?
No, and that's the beautybecause, see, wall Street
doesn't believe anything existsunless they can quantify it.
So they'll talk culture,they'll throw out kind of the
buzzwords, but if Wall Streetcan't measure it and quantify it
(24:38):
and score it, it doesn't existto them.
And that's beautiful, becauseas long as they continue to
believe that, we will continueto have a huge competitive
advantage.
What you're doing with cultureis building a mosaic and you
build that mosaic over time.
We do work on a company.
We have a pretty good idea ofthat alignment, strength and
adaptability.
But I will tell you, likeanything else, you learn as you
(25:00):
go too.
We get better and better as weown that company and see how it
behaves in different periods oftime.
It was Walter Schloss who made avery honest.
He's a long, you know, 80 yearsago was a great value manager
and he said phrases that youcan't money managers won't say.
You really don't know a companywell until you own it.
Right, you're supposed to knoweverything about a company, but
(25:22):
the truth is when you own it andyou see how it behaves.
I'd say the same thing withallocators Allocators that
allocate to us or other firms.
You don't really know thecompany well until you see their
behaviors in difficult markets.
Then you begin to understandand it's either good or it's bad
and you can make judgments onthat.
So culture, work, we have ahuge lead.
(25:42):
There's not anyone that's goingto catch us in that because,
again, people believe if youcan't quantify it, it doesn't
exist, and that's good for us.
Ryan (25:53):
So how often is your analyzing companies?
You find a company that thefundamentals look great, the
growth trajectory looks great,and then you get to the cultural
assessment and their culturedoesn't meet what you're looking
for, so you eliminate that.
Does that happen frequently?
And I guess the other side ofthat is do you find companies
that have great culture but itdoesn't show up in their
(26:15):
fundamentals and you would maybenot choose to invest?
Mike (26:18):
Yeah, I mean it's one part of the process right.
So yeah, it happens with greatfrequency actually that we find
a company that you know we havea view on what it could do to
improve its business right.
So we haven't talked about ityet.
But the other really, I guesssort of core part of what we do,
(26:39):
and I think what's differentabout what we do at the
bottom-up kind of companyanalysis level is our emphasis
on what we call mode trajectory.
So, as Paul kind of said at thevery, very beginning, you know
most managers talk about tryingto buy businesses with a
sustainable competitiveadvantage or a wide economic
mode.
You know, we learned a longtime ago that it's not really
(27:02):
the size of a company's modethat matters, it's actually the
direction and is thatcompetitive advantage.
Actually expanding and gettingbetter Strategy is a huge part
of what enables a company to beable to do that.
And so there's all sorts ofexamples that I can think of
where we were just looking at aGerman healthcare company.
It has three businesses.
(27:25):
It has a pharma business, alife sciences business and then
then kind of a smaller kind ofnon-core operation, and we
really want them to expand andinvest in their life sciences
businesses, and they're justunwilling to kind of just
de-emphasize pharma.
That's kind of what the companyis known for, and so you know
(27:45):
the strategy to us is quiteclear of what the company should
do to create value.
But when you go in and you doall the culture work, you
realize that there's just nochance that the organization's
going to get there.
And so you know that would bean example of one where you know
, hey, we liked the idea of howthis company could improve its
moat, but they just didn't havethe culture to back it up.
And then, but just didn't havethe culture to back it up.
(28:06):
And then I mean, on the flipside, I think if we just went
and bought 35 companies withgreat cultures and didn't pay
attention to competitivepositioning, mo, trajectory
valuation, I mean I don't thinkthat the portfolio would be set
up for success.
And so it's part of the puzzle,but it's not the only piece.
Ryan (28:26):
So another phrase that I've heard, as I've listened to
WCM and read some of yourmaterials, is this notion of
defy the fade.
Talk to me about defy the fade.
What is that and why is itimportant?
Mike (28:38):
Well, we talk about I mean , I think about it frankly with
our own business as well as howwe invest.
But it does speak to moattrajectory and culture, and so,
if you just think about basicfinance or economic theory, you
know every business you knowshould be mean reverting over
time, right, you know companiescan have a period of success.
(29:19):
Performance, be it financial orstock price, you know becomes
pretty average.
These two attributes that wewere talking about positive moat
trajectories and cultures thatare very well aligned around the
strategy to grow that moat,those are the companies that are
going to defy the fade, and soit requires a slightly longer
time horizon.
(29:39):
I think Wall Street's decent inmost cases at getting the next,
you know 12 months, right, Ithink a lot of the, the
inefficiency or the arbitragethat we're exploiting is
thinking about these things in aslightly longer term timeframe.
Culture is not going to matter.
You know data, you know monthto month in terms of you know
(30:01):
how, how a stock price performs,but over a longer time period
three years, five years, 10years or longer it is the
ultimate, you know differencemaker, and so we use that defy
the fade term to kind of expressultimately what these two
things are helping businesses doand you see that also in just
(30:27):
the forecasting errors that takeplace oftentimes on Wall Street
, because typically they're notincentivized to think about
what's going to happen over thelong term.
They're trying to get theirearnings estimates right over
the next 12 months.
They've got armies of analyststhat are just working
spreadsheets and trying to getthat EPS number right every
single quarter.
There's a lot of hedge funds andpods and people that are
(30:48):
trading around all thatinformation and so if you look
at you know some most of thegreat investments that we've had
, you know Wall Street's likeokay, let's say just say a
business is going to grow, youknow 20% next year.
Oh, okay, wall Street's prettygood about getting that right.
And then, well, then they saywell, it's like you can't do
that two years in a row, soprobably like 18.
And then it's going to go downto, you know, within a few years
(31:09):
it's down to say 10 percentgrowth and and that they're kind
of modeling that fade, so tospeak.
And it's the businesses thathave these moats that are
growing and these culturesaround them that you know just
time and time again can exceedexpectations and sort of did not
defy that inevitable fate.
And it's that delta between themean and what the company is
(31:34):
able to perform that generatesall the alpha in the portfolio.
Paul (31:38):
You know, finance people.
To Mike's point, most financepeople, wherever they are in the
world, worship at the altar ofthe DCF right, the discounted
cash flow model.
They worship it and especiallyif you're young the younger you
are when you come in thebusiness.
Everyone teaches you to do aDCF.
They think there's somethingmagical in there, but it takes
(31:59):
them a while to realize thereare probably a hundred thousand
people building a similar modelto what they're doing and they
tweak a couple of numbers here,they tweak a couple of numbers
there and, as Mike said, whatthey typically do is say, hey,
this company can't grow thatrapidly for that many years.
So after a few years they kindof fade their guesstimates to
(32:19):
GDP growth out 10 years.
And again I like to say this alot, show me a DCF model.
Somebody did five years ago andI'll show you how wrong it is.
Inevitably Because with thesegreat compounders, with these
companies, where we are mostlyright about the economic moat or
the sustainable competitiveadvantage growing with a culture
(32:40):
supporting it to grow, theywill defy that fate.
They will defy that overlyconservative model.
So again, as long as WallStreet thinks it's about the
numbers, we're going to win.
Ryan (32:53):
How much do you pay attention to some of the
macroeconomics, some of theexternal sort of criteria that
others might look at whenthey're allocating, Also like
geopolitical issues?
A lot of what you do is ininternational stocks.
Do you pay much attention tomacro or geopolitics?
Paul (33:12):
Michael will have probably a different take on this, but I
will tell you that every timewe've become concerned with
macro issues whether it'sgeopolitical interest rates and
environment, gdp growth we'vemostly been wrong growth.
We've mostly been wrong.
We've mostly been wrong.
You know, concerned aboutTaiwan or China invading Taiwan,
you know, and therefore whatyou shouldn't own Taiwan
(33:33):
semiconductor because of thatgeopolitical concern.
There's a lot to go into there.
You know, concerned about theMexican peso.
You know, wherever we've actedkind of with a macro bent, we've
pretty much always been wrong.
So we try not to do that.
Mike (33:49):
It's funny.
I, just for an institutionalconsultant, just got asked a
question about processimprovement and we have a
journaling app that we developedinternally where we document
all of our not just it's reallyabout any view we have on a
company, but it's obviously itstarts with all the transactions
that we've made in theportfolio and we talk about.
(34:11):
You know why we bought them.
You know when we sell them, wedocument the reason that we sold
and that there's different tagsin there.
So if it's, there's adescription.
But we also might say well, themacro was one of the reasons
that we sold.
And so if you go back over 10years ago, there was, I think,
maybe four or five decisionsthat we made that had macro as
(34:33):
one of the influencing factorsfor the sale.
In the last 10 years we've hadjust a couple and they've
actually proven to be not theworst decisions, and so we use a
lot of you know, paul paultalks about macro, but we've
actually we use this journalingapp to actually embed these
lessons in our minds so that wedon't fall into the trap again
(34:55):
and and and actually um, youknow repeat the same mistake
twice now, having said that, themacro does matter.
Paul (35:03):
In emerging economies it really, really does matter.
You know what's going on.
That's something we learned,but less so in the developed
countries.
Mike (35:11):
And I think the I think about it.
On the, I think you know, whenmacro is bad, I think we look to
lean into it because it tendsto overshoot to the downside in
terms of how stock pricesperform.
So in that sense, I do thinkabout it.
We don't make macro predictions.
We don't let macro predictionsgood or bad influence decisions
we make with companies.
(35:31):
And the same would be true for,I mean, the geopolitical,
geopolitical stuff is justincredibly unknowable.
And but I could say, like I havejust a house view that like
there's going to be moreinstability around the world in
the next 10 years than there hasbeen historically.
I think that's prettyirrefutable at this point,
especially with two wars goingon.
(35:52):
And so, if you think about thebehavior changes that are taking
place in Europe and Asia arounddefense, are defense companies
thematically a pretty good placeto be right now, knowing that
you know NATO is starting tostep up.
You've got more countriesjoining NATO.
You've got countries in Asialike Japan that are increasing
(36:14):
their defense budgets for thefirst time in decades.
Yeah, so like we don't.
So do I have a geopoliticalview on what's going to happen
in China and Taiwan?
I just witnessed the most acircular conversation about that
a couple of days ago.
Nobody has any clue, but I knowthat people are worried about
it and that means that there'sgoing to be probably more
spending on defense and that'sprobably a place we want to
(36:34):
invest.
Ryan (36:36):
So one of the things that you, paul, said towards the
beginning of our conversationhad to do with the reason why
people should even considerstocks outside the US, because
if you talk to a lot of thefinancial professionals that we
talk to, they've gotten a littlebit discouraged by a decade of
underperformance, especially forthose passive international
(36:57):
benchmarks.
So, as you guys are talking toyour clients, what are some of
the reasons that you maybe referto as you're thinking about why
you should look outside USmarkets?
Paul (37:07):
Well, the first thing I'd say and I'll try to say this
kindly, but it's completefoolishness to index
international markets and it'scomplete foolishness to index EM
in particular, Because most ofthe index in EM is made up of
really junky financial companies, a lot of natural resource
companies.
Yeah, if that's what advisorsare doing, they're saying oh, I
(37:30):
don't really know EM, so I'mgoing to index it.
You've just created a massiveheadwind for yourself.
Mike (37:36):
Yeah, I mean, that's how I was going to answer the
original question about howwe've kind of done what we've
done.
I think you know theseinternational benchmarks are
pretty inefficient.
There's a lot of bad companiesin them, but I think that there
are also some amazing companiesand if you can find them and you
can own them in a meaningfulway, like in our case, like all
of our portfolios are fairlyconcentrated right between, say,
(38:00):
30 and 40 positions, they lookreally, really different than
the benchmarks.
And I think we've just proventhat, despite all the passive
versus active stuff, that if youwant to take a differentiated
view on, a how you look atcompanies, but B also how you
construct your portfolio, activemanagement is alive and well
(38:20):
and not going away, and anybodythat tells you different is just
telling you lies.
Ryan (38:24):
So, mike, one of the reasons why people have often
maybe pitched increasingallocations to international or
even just rebalancing to yourportfolio in internationals
because of the valuationdifferential, the fact that a
lot of the indexes have reallylow PE ratios or price-to-book
(38:44):
ratios, especially in comparisonto US stocks.
In your opinion, is that one ofthe best reasons to invest
internationally, or how does itfall in your list of reasons
that you would considerinternational investments?
Mike (38:58):
You know you're going to laugh like coming from an
international, focused, you knowportfolio manager, but I think
that that's actually a totalnonsense.
It's interesting because it'slike we're kind of approaching
the end of the year and allsorts of people are like
publishing their you know kindof their investment outlooks for
next year and there's there area few like slides I've seen a
(39:19):
couple times that show this kindof once-in-a-decade dispersion
between US market valuations andnon-US.
And that's just not how wethink about it and that's not
why I think it makes sense toinvest internationally Some of
(39:40):
those, just to frame it, I meanmost of those charts or that
data that people see is lookingat the broad-based benchmarks,
right, and I think if you're notfamiliar with international
benchmarks, you probably don'trealize that they're incredibly
inefficient.
They're pretty easy to beat andpart of it is because there's
just a lot of bad companies inthem.
There's a lot of European banks, there's a lot of you know kind
(40:06):
of commodity driven, miningdriven, you know emerging market
companies in there and andthey're not businesses that we
would, we would, ever considerinvesting in, because they don't
, they don't look like they'regoing to be a ripe source of
excess return, and so I thinkthe reason you invest
internationally is to actuallyget access to those few select
(40:27):
winners that are out there, andI think we've proven over time
that we can find them throughour motor trajectory and culture
framework and then own them ina way, in a way um, um that
allows us to to to outperformthose bron those, those
benchmarks, over time.
So there's a diversificationbenefit from what you're going
to find in the us, but also justlike some really, really
(40:50):
incredible companies.
I mean, if you think about, youknow, taiwan semiconductor, just
to use you know an example, Idon't know why anyone wouldn't
want to have exposure to thatcompany.
You think about everythingthat's going on in the world
right now with artificialintelligence, and you know,
right now there's this newdebate about.
Obviously, nvidia has doneincredibly well, it's been a
huge contributor to US benchmarkreturns, but now there's these,
(41:14):
you know, alternative chipsthat you know Amazon may be
developing, or Google's TPU, andit's a very difficult call to
make on what's going to happenover the next five years.
Well, guess what?
Guess, what's the easiest wayto play?
That?
The one company that makes allof those chips, no matter who.
It is right.
And so you know, tsmc, you know, to our mind, is actually
(41:35):
probably one of the mostimportant companies in the world
, if not the most importantcompany in the world and as an
investor, as someone that'strying to allocate money for
clients, you want exposure tocompanies like that.
Paul (41:48):
So I've done this a long time, as I said earlier.
And what is it?
For the last 15 years, peoplehave been playing this oh,
international and EM.
How many times have you heardoh EM?
Many times have you heard oh EM?
It's far cheaper than theWestern world and it's growing
much more rapidly.
And you know what?
(42:08):
There's this whole emergingmiddle class coming up that's
going to spend more money 15years.
And what happens?
Well, kind of like, in general,if you buy the benchmark once
every 15 years, you get a hugespike in returns and the rest of
the time you get nothing.
Now the truth of the matter, asMike said and I'll just be a
little more blunt the EM indexesare trash.
The international indexes aretrash, as Mike said, do you want
(42:31):
to own a European bank?
Okay, the reason the PEs arelow is because it's like what?
30% banks that are selling atsingle-digit PE ratios and a
bunch of industrials, and thenyou know that's why it's cheap.
So forget the index argumentand realize that there are about
100 brilliant companies thatare outside the US.
(42:52):
That's kind of you know, 100,150.
That's the field we play in andthose companies are, you know,
a lot of them are must-haves.
Like Mike just said aboutTaiwan Semiconductor, if you're
just US, you've missed one ofthe greatest runs in one of the
greatest companies in the last20 years.
So it's not really aninternational US argument.
(43:12):
It's just buy great companies,no matter where they are, and
that's what we do.
Ryan (43:17):
So if I were to paraphrase what I'm hearing you say anyway
, is that you shouldn'tnecessarily allocate to
international benchmarks,because what you end up with is
stocks that are cheap, that areprobably going to stay cheap
because the business model isantiquated or has some
regulations in the Europeanbanks that might hold them back.
(43:39):
But you should allocateinternationally because of the
opportunities that you look toinvest in.
Paul (43:46):
It's kind of lazy to allocate to the indexes
internationally.
It's kind of lazy and you'rereally doing a disservice to
your client.
Mike (43:54):
And even I mean it's not just the indexes, it's these
closet index funds that claim tobe active and it's ETFs that
have some country dynamic tothat.
Or you think you're gettinginternational exposure through
some 125-stock strategy, whetherit's active or an ETF.
(44:16):
If you want to producedifferentiated results, you've
got to have a portfolio thatlooks different than the
benchmark, and you can do thatby finding great companies and
doing it in a concentratedmanner, and I think that's
especially true now.
You know I mean I'm not goingto make a market prediction by
(44:36):
any means, but obviously youknow the US markets have had an
incredible run and it's, in part, been driven by, been driven by
a small cohort of companies.
I think there's going to beprobably a different set of
winners in the next 10 years,not to say that some of those
companies still won't doextremely well.
A lot of them will be in the US, but they'll definitely be
(45:00):
continuous examples of companiesoutside the US that will show
up.
The next MercadoLibre is thenext C-Limited.
Paul (45:09):
One of the greatest companies in the world is
Ferrari.
Mike (45:12):
It's not in the US of a non-US company with obviously an
incredible brand and one thathas the one that's proven to
defy the fade over time.
Right, there's a waiting list.
They continue to createaspiration around the brand with
(45:33):
new models.
In many cases, if you want thehighly aspirational model to get
up the right part of the list,you have to buy pretty much
everything else on the list.
And you know they've got SUVcoming, they've got an electric
and hybrid vehicles coming aswell, and you know their Formula
(45:55):
One team's, you know, not doingtoo bad either, which I think
helps the brand as well.
Ryan (45:59):
Sure, all right.
So this is a question that I'vestarted asking people that I've
gotten some really interestinganswers, so I'm going to ask you
guys as well.
Paul, I'll start with you.
You mentioned that you've beendoing.
You've been in this industryfor about 40 years.
Okay, so imagine you didn't gointo this industry.
What do you think you'd bedoing right now?
Paul (46:20):
I love that question.
I ask that all the time.
I love to ask people if youdidn't have to make money, what
would you do?
When we hire them, right?
And of course, what I want tohear them say is, oh, I'd do
what I'm doing now, I loveinvesting, right.
But a lot of them will say,well, I'd open, you just go do
that.
So, without question, I wouldbe in real estate development.
You know it's, you know the two.
(46:54):
To me, the two most interestingbusinesses in the world are the
first one's what we do.
But if I wasn't doing this, I'dwant to keep allocating capital
.
I'd want to keep allocatingcapital and I love the idea of
developing real estate becauseyou can unlock and create an
immense amount of value forclients on that.
Ryan (47:09):
That would definitely be what I'd be doing.
Mike, what about you?
What would you do if youweren't in the asset management
industry?
Mike (47:14):
I would either want to be an offensive coordinator for an
NFL team With the Kansas CityChiefs, maybe, well, well, yeah,
that'd be nice to have my homes, uh, and I've with a good on a
team with a good quarterback Iam, yeah, I'm from Kansas City,
um, or, or, or I would want tobe, you know like, the general
manager of a baseball team.
(47:34):
Um, I like, I like competition.
Um, I like findinginefficiencies and how it's sort
of like.
To me, it's another way toexpress the things I like about
investing in a different way.
So I like exploitinginefficient ways of people
(47:57):
thinking about what a player maybe worth or how the market may
be interpreting him.
I like trying to find the ideaof finding a weakness in a
defense and then devising ascheme, you know, to go score a
touchdown or, you know, to havea set of plays that'll take
advantage of that.
To me, that would be, you know,imagining me, you know, up in
(48:19):
the booth at an NFL game.
You know, calling plays for anyNFL team would be, would be
super fun and it.
But I like it because it's the.
The things I would like aboutthat are the things I really
like about, you know, investingand honing an investment process
and trying to make it betterand trying new things.
And you know you try a play andyou would like you know the
quarterback would get sacked.
(48:40):
Oh, that was a stupid play.
We better, we better.
Paul (48:42):
Iterate on that you know that that type of thing sounds
like a lot of fun to me I was ahighly successful flag football
coach for about eight years Idid go to yeah I can attest to
that.
Mike (48:51):
I've been to a couple of those games, yeah, but but you
know what?
Paul (48:54):
but to to illustrate what you know I'm a really good coach
, but you, you know what Talent?
It's all about talent.
Same thing in this company.
You know, it is all abouttalent.
I've had discussions like, okay, let's talk about the Patriot
way.
Oh, it's all about the Patriotway, it's all about Belichick
and the Patriot way.
And you know, do your job, doyour job.
(49:16):
No, you know, we've all foundout.
It wasn't about the Patriot, itwasn't about Bill Belichick or
the Patriot way.
It was about Tom Brady, it wasabout raw talent.
That elevates everybody else Tome.
That ends the argument.
Ryan (49:27):
Okay, so my last question for each of you, so, viewers of
the podcast what should they bereading?
What have you read recently orwhat would you recommend?
Paul (49:38):
Well, I'll tell you what I would definitely recommend you
don't do.
Don't read the news, don't readany short-term, don't listen to
the news, don't watch the news.
Shut off CNBC, just turn it off.
That is probably.
Those items are absolutely themost detrimental to trying to
(49:59):
create wealth long-term, becauseall they're about doing and I
don't if it's Fox or CNBC orMSNBC or CNN or anyone they're
just trying to create chaos.
Right, so and and and so themore you get, and even reading
the, you know, reading the paperevery day, it's just chaos.
So the best thing you can do inmy mind, is what we did 25
(50:19):
years ago when we bought thefirm is read the classics, read
the classics again, read themagain and again, and again.
So, of course, you know,intelligent investor, you read
margin.
You know.
Just read the two chapters onmargin of safety and Mr Market,
that's a for sure I mean.
And then you get.
You got to buy.
You know Buffett's favorite bookafter intelligentigent
(50:40):
Investors, common Stocks andUncommon Profits, read that by
Phil Fisher.
Read that book cover to cover.
Do it a couple of times.
You got to read all.
You should read all the lettersof Warren Buffett.
There's just gold in there.
You know who.
I've dug up some really archaicpieces of chapters from John
Maynard Keynes.
(51:00):
He's mostly known as aneconomist, but the guy was a
brilliant investor.
He's got a couple of chapterson how to invest properly, which
is in a focused fashion fewerrather than more names.
And then I would recommend abook by Lawrence Cunningham that
he wrote called QualityInvesting.
It's very similar.
(51:24):
It's written about a firm overin London, but it's very similar
to what we do every day and Ithink if you just read and
reread those books and they allhave common themes in place and
you take them in, you're goingto learn to be a very good
investor.
Ryan (51:40):
Anything outside of the investment industry that you
would recommend reading Lovebiographies.
Paul (51:46):
I can't remember the last one.
I read Franklin Roosevelt Ijust read recently.
I read one on Reagan.
I've read a lot on WinstonChurchill.
I love to see how leaders ledin difficult times.
Ryan (52:00):
Mike, what are you reading these days?
What would you recommend?
Mike (52:04):
Well, there's a book Paul just reminded me of that I
recommend.
Sometimes it might even be freebelieve it or not, which I
don't know if that's a goodthing or a bad thing, but it's
actually called the EmotionallyIntelligent Investor, and I'm a
big believer in the importanceof self-awareness in all things
(52:28):
in life, but I think it'sparticularly valuable in
investing, and emotionalintelligence is kind of another
way to sort of express that, andso this book talks about that
in some detail and differentways that you can be more,
understand your biases better,and then tools that you can, and
also understanding how themarket's actually interpreting
(52:51):
companies and situations, andthen it gives you actual tools
and ideas, like journaling as anexample, to get better and
become more aware of yourstrengths and weaknesses.
So I like that book quite a bitand it's pretty short, so
that's an easy one.
It was written by an old Soroshedge fund guy who now has a
(53:13):
small hedge fund.
That's a good book.
I'm reading a book right nowthat I'm not done with, but it's
called 10 Cup Dreams and it'sabout this.
It's about the golfer, estebanToledo, who I recently played
golf with, and he's a guy that'sfrom Mexicali, mexico, and and
was able to basically earn hisway onto the PGA Tour despite
(53:34):
having literally nothing.
So that's that's.
That's a pretty cool book.
And then, you know, we'reactually in our library right
now so it would be easy for meto just kind of scan some of the
books on the shelves.
We like the book Creativity Incby Ed Capel that talks a lot
(53:59):
about it's a story of Pixarbasically and I think
particularly in investing, Ithink the power of creativity
whether that's just taking amore optimistic view on a
situation or trying to sort ofunderstand how the market may
misinterpret situations I thinkis pretty powerful.
So how teams can function welland be creative, I think and
(54:23):
think about things differentthan other people.
I think that that's a prettyfun book to read.
And then I think, history-wise,I'm kind of intrigued by
studying World War I right now,because I think there's some
interesting parallels to maybewhat's going on in the world
right now, to kind of conditionson the ground, kind of
pre-World War I.
(54:43):
So I just started a bookactually this week about that.
So those are a few things thatcome to mind.
Ryan (54:49):
All right, final, final question Looking forward the
next decade or so, are youoptimistic or more cautious?
I won't use the wordpessimistic.
Paul (55:00):
Well, it's a bad question for me because I think optimists
rule the world and I think ifyou live your life from a
position of being optimistic,you're going to have a much more
successful, rewarding life.
So, again, I'm extremelyoptimistic.
I'm very, you know, kind oflike, from a broad market side,
(55:21):
very optimistic about the US,from company-specific sides.
There are so many greatcompanies that are developing
around the world that we'regoing to be a part of and again,
it's really, it's almost youknow, it's almost impossible, if
you unleash people's creativityand their ability to take risk,
(55:41):
what they can do.
And so, overall, next decade orso, yeah, it's hard to see that
you're not going to get goodreturns.
Mike (55:53):
There's not a whole lot I can add.
It's funny.
We just went through kind of awebsite, kind of rebranding
process and we're trying to kindof connect some of our values
to different things that we holdtrue, and I made the
observation at one point thatyou know, I think gratitude does
lend itself to a degree ofoptimism.
(56:14):
I don't know many people thatare really grateful, people that
you know think the world'scoming to an end.
I mean most people I know thatare really grateful, are happy.
People that you know think theworld's coming to an end.
I mean most people I know thatare really grateful are happy.
People that you know look atthe situations with positive
intent and glass half fullperspective, and so it would be
insane for me to actually sithere and talk about how grateful
(56:34):
we are and then answer thatquestion by saying that I'm, at
the same time, prettypessimistic about what the world
is going to look like in thenext 10 years.
I believe in the power ofpeople and, whether that's in
the US or people that are livingand creating companies anywhere
in the world, we all kind ofwant the same basic human things
and I think that's going tolend itself to a lot of
(56:56):
incredible companies that aregoing to be born in the future
and there's going to be greatopportunities to invest in them.
Ryan (57:04):
All right, that's a great place to leave the conversation.
Mike and Paul, thank you forjoining us on the podcast, not
only because it gave me anopportunity to come to Laguna
Beach in December, but becauseit's been a really interesting
conversation.
But thank you very much.
Thank you, ryan.
Paul (57:18):
Great to be here.
Ryan (57:20):
And thanks to all of you for joining us on this episode
of First Trust ROI Podcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
For today's episode, I'm joinedby Paul Black, co-ceo of WCM
Investment Management, as wellas Mike Trigg, the other co-CEO
at WCM.
I'm looking forward to thisconversation very much.
(00:31):
Wcm actually sub-advises acouple of ETFs and a mutual fund
for First Trust.
First Trust distributes some oftheir mutual funds as well, but
we're going to dig into whatmakes WCM unique.
We're going to talk all aboutculture and how you can utilize
that in screening companies andfinding those diamonds in the
rough in the internationalequity markets.
(00:54):
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
Paul Black, mike Trigg I'm gladyou guys were able to join us
and I'm especially glad we wereable to make this work because I
live in New York.
It's cold and it's beautifulhere in Laguna Beach.
I don't know how you pickedsuch a beautiful place, but
anytime I get a chance to comeout here, it's amazing, so
(01:15):
thanks for having us.
Paul (01:18):
Nice to have you here, Ryan, and it's very intentional.
I'm sure we'll get into itlater in the discussion very
intentional.
Ryan (01:24):
I'm sure we'll get into it later in the discussion.
So I'm intrigued by WCM, partlybecause you guys have had
really outstanding growth, andthat kind of growth is pretty
amazing in itself.
But what's really reallysurprising is that you're an
active manager, and that'sduring a time when active
managers just were hemorrhagingmoney, assets dropping for net
(01:48):
outflows for most managers, andyou're known for investing
internationally and, as you know, international benchmark ETFs,
as well as many internationalinvestments, have really lagged
over that time period.
So I guess my first questionfor you is what are you doing
that's different, that hasallowed you to get to the point
(02:08):
where you are today?
Paul (02:10):
Wow, there's a lot in that question.
There's a lot in that question.
Ryan (02:14):
We can break it down further as we go here.
Paul (02:16):
Yeah from.
You know, hey, internationalsunderperformed the US for
something like 15 years.
Active managers are, you know,going away.
If you believe the passive guys, it's not true.
And you know why have activemanagers underperformed?
And it's all kind of tied up inthis question of most active
managers kind of do the samething, expecting to get
(02:38):
different results and I oftenjoke about it.
You know every manager that willsit across from you when they
tell you, kind ofphilosophically, what they're
about, they will say, hey, webuy high quality businesses with
strong competitive advantagesselling at a discount to
intrinsic value.
I mean, you know, like 100 outof 100 managers will say that to
you.
And the truth of the matter is,if that's all you're doing,
(03:02):
then you're not going to exceedthe returns of the benchmark,
because everybody else is doingthat and there's a lot of smart
people on Wall Street and a lotof smart people around the world
competing using that samemethodology.
So all the inefficiencies areout of that methodology and you
will never underperform ifyou're doing exactly what every
other manager in the world isdoing.
(03:22):
So you know, through ourjourney, you said we're at $100
billion and we were at a billiondollars back in 2011.
There's so much more to unpackin there because I often use
this terminology that we rightnow look like that perfect
family photo for the fireplace,where everyone's beautiful, the
dog's beautiful, the kids areclean and nobody's fighting, and
(03:45):
it looks perfect Moment in time.
Wcm $100 billion probably thebest global growth strategies on
the planet 100 people, 66 whichown shares in the company and
the reality is we look beautifulnow, but we haven't always been
beautiful and we've had ajourney of learning what not to
do by mistakes that we've madeover the years.
(04:07):
So we have iterated veryaggressively over the last 20
years to find inefficiencies inthe market that we can exploit.
That really, I know othermanagers are not exploiting and
we'll dig into that more laterbut you have to do something
different.
We'll dig into that more later,but you have to do something
different.
The reason we've had meteoricgrowth is because we truly are
(04:28):
doing something different fromeverybody else and, in terms of
the benchmarks outside the US,underperforming the US, it's
true, but there are pockets ofgold outside the US.
There are companies that yousimply must own.
In fact, those companies haveperformed outside the US far
(04:49):
better than the broaderbenchmarks inside the US.
So you've got to be veryselective, You've got to be
specific, You've got to dosomething very different from
everybody else, and all thoseattributes from learning from
failure to doing somethingdifferent has really led to our
success.
Ryan (05:05):
So WCM, can you tell me a little bit what that stands for?
Mike (05:10):
It stands for why Culture Matters.
Ryan (05:12):
Okay, I want you to unpack that a little bit more, because
I've had the opportunity tohear you folks at WCM speak on a
couple different occasions andculture is one of the things
that always comes out.
That's something that you talkabout a lot.
First off, what does thatactually mean?
What is culture and why is itimportant as you evaluate
(05:33):
investment opportunities?
Mike (05:35):
Yeah, I mean culture to us is really a set of values or
behaviors.
It's how people act and behave.
It's like, simply said, it'show people act when the boss
isn't looking.
And you know we learned thatmany, many years ago through our
own trials and tribulations ofwriting an investor management
(05:56):
firm, that the single mostimportant thing we can do as
leaders is focus on the cultureof our company.
As leaders is focused on theculture of our company.
And from that there's a longstory that actually predates me
that Paul can go into.
But this firm has been through,as Paul said, a pretty long
(06:17):
journey and there was a periodof time when I don't think it
had the best culture in theworld or a culture that one can
be really proud of.
And through a lot of hard workand iteration I think we've
gotten the culture part rightand as we started to see some
success, there was a bit of alight bulb moment where we
thought, hey, culture's going tomatter for WCM and it's going
(06:38):
to be the most important thingthat's going to drive our
success.
It needs to be something thatwe also focus on in the
investment process.
Paul Bellenhout success itneeds to be something that we
also focus on in the investmentprocess Joe Brown, md, mph.
So when Paul was alluding to, Ithink what we do that's
different.
I think one of the pillars isthe emphasis that we put on
culture and finding companieswith effective culture, because
(06:58):
it's very difficult to quantify,it's an inefficiency that I
think most investors don'texploit and it's something we've
kind of lived and breathedourselves and then, for the past
20 years I think, built apretty robust investment process
around.
Ryan (07:14):
So how would you describe the culture of WCM?
Mike (07:27):
Well, we've got three core values that I would sort of
think about it as this is how wemeasure success.
When we talk to new people,when we go through our annual
reviews with people, obviouslywe think about performance and
accountability, but really, atthe end of the day, it's are
they behaving in accordance withthese three values?
And they're pretty simple.
They're gratitude, service andfun.
Paul (07:50):
I would reframe that to fun gratitude and serve others
yeah.
Mike (07:54):
I have just a slightly different perspective.
To me, it starts with gratitude.
I think everybody that walksinto this place every single day
feels incredibly lucky to be.
I mean, I kind of fondly sortof describe WCM as a lily pad
within the investment managementindustry, and I think everybody
(08:16):
that comes here knows how luckythey are.
And if that's the mindset thatyou kind of operate with on a
day in and day out basis, younaturally think a little bit
less about yourself and moreabout others.
And so I think a grateful heart, a grateful mind just naturally
translate into behavior whereyou really focus on the other
(08:37):
people around you, like on theinvestment team.
I talk about it all the time andI say you know and just think
about investment management.
About it all the time.
And I say you know and justthink about investment
management.
I mean it's a, it tends to be aan industry that that brings a
lot of self-interest and a lotof ambition and and people
wanting to climb the ladder,none of which is probably
conducive to having reallyeffective teams.
And so, if you can, if youcould come to the, come to the
(08:58):
office every day with with thisnotion of gratitude, you're just
naturally going to think aboutyour team and and and everyone
else around you.
And I say like if everybody canjust come in with that mindset
and not worry about themselves,but worry about how they make
every single person around thembetter as a company, as a team,
we're going to go so much, somuch farther faster together.
And when you can experiencethat environment, it is just
(09:24):
ridiculously fun when you workon great teams with people that
really care about each other andcare about each other's success
.
There is literally no one thingyou can do more fun and work
than living in an environmentlike that.
So that's why he starts withfun.
I start with gratitude, but I'msure he's got a different way
(09:44):
to sort of make that all soundsensible.
Paul (09:48):
That's debatable, but it's interesting when you think
about those three core valuesgratitude, serve others and fun.
They're nowhere else in theindustry, right, every other
industry.
If you say what are your corevalues, it's going to be
integrity, discipline, process.
I mean, give me a break.
Those are all permission toplay.
(10:09):
If you don't have those, youshouldn't even be in the game.
So what we did a number of 12years ago is we said what are
the what?
What really are the values thatwe live and that we care about
that animate us and let'senshrine them in in.
And to me, as Mike said, ifyou're grateful, I would put a
(10:30):
little different spin on it.
If you have a sense ofgratitude, then you acknowledge
that we're very fortunate to dowhat we're doing.
We're allocating capital in atime and place where you're
handsomely rewarded for it.
It's an incredibly stimulatingintellectual discovery to try to
understand the investmentequation, but there's a lot of
(10:50):
really good people doing it thatwork really hard.
So gratitude should lead towe're fortunate to be where we
are.
But we should have humility,because we've been given a lot
and I think humility leads us tojust be scrappy.
Just be scrappy.
We need to get better.
We need to do somethingdifferent.
We need to be better thaneverybody else out there.
(11:11):
So we are relentlessly tryingto get better all the time
because we've been given so muchand the fun is the fun.
If you love what you do, asBuffett said, you skip to work
every day.
You love it.
I mean, tell me you're notgoing to give everything you got
.
But my favorite is the idea ofserving others.
We had an analyst come in.
He was about 26 years old whenwe hired him.
(11:33):
I mean literally.
This guy had PTSD for about ayear after experiencing a highly
toxic, brutal culture that wasall about politics and
positioning.
And when he came here he askedme hey, how can I do really well
at WCM?
And I said that is the simplestquestion.
(11:54):
Anyone's asked me If you canmake everybody around you better
, serve your team, serve thepeople you work with, elevate
the team by making them better.
Don't politic, don't positionyourself for more money, don't
position yourself for a title.
If you serve everybody on yourteam and you elevate the whole
organization around you, trustme, we will see you and you will
(12:17):
be recognized.
You know.
So, when you think about myposition and Mike's position as
co-CEOs, our job really is toserve everybody in the
organization.
You know we get to do thesepodcasts and interviews and we
get to be in front of people,but our main priority is making
sure that our people haveeverything they need to be
(12:37):
successful.
I don't just mean all the toolsand all the you know all the
different screens and technologythey can use, but I mean, more
importantly, are they in theposition where they can prosper?
You know that's what we spendour time doing.
Do we have people in the rightplace?
And, frankly, are we aware ofboth the personal and the
(12:59):
professional?
And you know I think inbusiness, a lot of times you
hear these really hardcore,hard-ass people say hey,
professional is professional,personal is a personal.
I've never bought it.
If I have a brutal fight withmy wife in the morning and I
come to work, are you going totell me that's not going to
impact me professionally andvice versa.
You know so we work reallyreally hard on knowing the whole
(13:21):
person and what they might bestruggling with at home or what
they're struggling with here.
But the more Mike and I canserve everybody and the more
people in the organization serveeverybody around them, I'll
tell you that that is anincredibly powerful force that
is almost impossible to competewith.
Ryan (13:38):
You know, you said something interesting when
you're talking about gratitudeand you get to allocate capital,
and it strikes me that theprocess of allocating capital is
something that's virtuous,that's actually a good thing.
You can help foster the growthof other businesses that are
good businesses, and I thinkthat's missing from the
investment management industrythe idea that it's, you know,
(14:00):
not just going to gain for yourinvestors, which is good, but
there's actually some virtue inthe process of allocating
capital as well.
Paul (14:07):
There's massive virtue.
We talk about it all the time,one of the things that's really
important to me and I've beendoing this 40 years and people
say, why do you keep doing it?
And I do it because one I loveit, I love the people around me
and I know that we're changinglives to your point.
So if we you know one of our Iguess I can talk about a client
(14:29):
but one of our clients is StJude Hospital.
They hired us about 10 yearsago.
If we do a great job and givethem significant excess return
over the benchmark, what doesthat do?
That helps them spend moremoney to help children that have
cancer, firefighters, policemen, nurses, teachers.
You know we talk all the timeabout hey, this isn't just a
(14:53):
mathematical equation about itand it's not just about us
making money.
It's about changing the livesof the participants that invest
their money with us, and weconstantly talk about that.
We constantly reiterate howmuch, by doing well and doing
things differently, we canchange the lives of people.
Mike (15:15):
And I'd add, I think relationships matter a lot to us
.
One of the things I think we'remost proud of is a lot of the
relationships we've been able tobuild over the years with
clients and in many cases, ifthey hired us in the early days,
(15:37):
when we were a lot smaller thanwe are today, they took a
chance and it's been obviouslyincredibly rewarding to reward
them with that.
And it's also incrediblydevastating when you go through
periods when you don't, becausein many cases these people have
bought in not just to ourinvestment philosophy and our
(16:00):
process and what we say that wedo is different, but they've
kind of bought into who we areas people and what the firm
represents.
And so you know you can't help,but you know kind of carry that
with you to a degree personally, and so you know he said it a
million times I mean this is agreat business.
It's incredible when it goeswell, but when it doesn't,
(16:22):
there's nothing more devastatingthan you know having to deliver
.
You know bad news to clients,and so you know we think about
that and we remember those.
We don't forget about thoseperiods where you know we
haven't necessarily performedgreat.
That's part of the business,that's part of market cycles and
markets, but you know we carrythat with us for sure.
Ryan (16:42):
Okay, so using culture as a way to evaluate companies, to
pick stocks.
Ultimately, is there some sortof algorithm that you have that
says this is the?
You know?
How do you rank stocks based ontheir culture?
How do you quantify culture?
Mike (17:20):
Paul alluded to this a second ago, but there's a real.
I think one of the reasons thatwe've been able to sustain the
level of success that we havefor, you know, the last 20 years
call it has been that you knowthere is an iterative nature to
our investment process, and sowe have incredibly high
standards for what good lookslike and we're constantly trying
to push boundaries, to getbetter at what we do, and I
think our evolution aroundanalyzing culture, I think, is a
perfect example of that.
When we first had that lightbulb moment that I referred to,
you know, I think it was okay.
(17:41):
We recognize culture matters,we have a sense for what that
looks like in an organizationthat's call it people-driven,
like investment management.
Let's go try to find a lot ofcompanies that you know, frankly
, like might be places that Pauland I want to go work at, you
know, and so if you're lookingat you know the retail landscape
(18:03):
and I thought, okay, if Iwasn't lucky enough to land on
the lily pad at WCM and I foundmyself working in retail, um,
you know, like, costco seemslike a pretty cool company.
You know, people there seempretty happy as a yeah, like as
a customer, like I love goingthere.
You know like and um and youknow the obviously they have, uh
(18:25):
, financial and stock priceresults that, um, you know stand
out relative to their peer set.
So, ok, maybe we should go buyCostco.
And so, you know, even early onthere was almost a.
It was easier in some respectsbecause culture was not quite
the buzzword that it's becometoday.
(18:45):
And so if you could even justfind companies and management
teams that explicitly talkedabout culture, you kind of
thought, okay, maybe we might beon to something here.
But you know, through thatjourney we started to realize
that there's a little bit of aself-selection bias that can
come into, you know, come intothat process, right, because you
(19:07):
know, hey, what companies Pauland I might want to go work for
doesn't necessarily there'sprobably a lot of other great
companies with great culturesthat you know maybe he and I
wouldn't last very long at.
And so you know, if you thinkabout, you know, certain
industrial businesses where youknow certain industrial
businesses where you know scaleand like a low cost structure
(19:31):
really matter to, you knowrelative competitive advantage
versus peers, where you knowthose organizations have a lot
of focus on numbers andaccountability and they can be,
you know, stressful, difficultplaces to work.
Maybe that's not where, youknow, paul and I would have
gravitated to, but like hey,there's a lot of companies out
in the world like that that areincredibly successful.
(19:52):
So we had to sort of step backand say you know really what is
the?
We had this moment where wekind of just concluded you know,
there is no such thing as agood culture.
It's really what is thestrategy of the company?
How are it's really what is thestrategy of the company?
How are they going todifferentiate and grow their
competitive advantage versustheir peers?
And then do they have a culturewhich, again, as I said a
(20:13):
second ago, is kind of a set ofvalues and behaviors that
actually makes sense for whatthat company is trying to do.
And so we start with thisnotion of there's these, I call
it sort of three pillars of ourculture process, and the first
one is this notion of culture,strategy, alignment, right.
So understanding what is thestrategy that company to
generate great returns,differentiating themselves from
(20:35):
their peers, and then do theyhave the right culture.
So that's the first piece.
And then the second one is wecare a lot about the cultural
strength, right?
So how successful is theorganization at galvanizing all
of their people around those,that belief system or those
values?
So, like in the case of WCM, Imean I would be completely
(20:57):
floored if you took anyone asidein this organization and said
talk to me about the three corevalues of WCM and and why they,
why they, why they matter andhow they help you do your job.
So we would hope, and that'swhat we do.
When we talk to companies, wedon't just talk to the CEO or
the president.
We're talking to formeremployees, partners, customers,
(21:22):
all the employees that we canget in front of and trying to
understand hey, is the stuff themanagement team's telling us
about their culture does thatline up with you know, what you?
You know with what we'rehearing from other folks?
I mean, amazon is a greatexample, I think, in this regard
.
It's incredibly, you know, youcan you know just Google
(21:42):
articles about Amazon's cultureand see all sorts of you know
kind of stories that don't makeit sound like it's necessarily
the best place to work.
It's very data driven, it's veryit's.
It values data, maybe over someof the softer, some of the
softer sides of people.
(22:03):
But if you ask any employeelike what drives decisions there
.
It's low prices, convenienceand selection, you know, and so
I'm sorry, and convenience is abig one, and so you know that's,
that's a, that's a high degreeof cultural strength.
And then the last one is wewant cultures to be adaptable
and to change, and so we wantthem to have a high degree of
(22:24):
external awareness, to studybest practices, steal good ideas
from other companies, and sowhen we diligence companies,
we're really trying to assessthem across those three pillars,
and then, if they check all theboxes, then we'll conclude that
, okay, this has a culture thatwe think is up to our standards
of considering it as a potentialinvestment.
You need other things to getinto the portfolios here, but
(22:47):
those three things are how wekind of broadly think about the
culture of a company.
Paul (22:51):
And if I had to frame it a little bit, so it's cultural
strategy alignment.
So alignment between values andwhat they're trying to achieve.
Strength throughout theorganization, as Mike said.
Adaptability those are kind ofthe three pillars, but the
interesting part is let's talkabout first trust.
So first trust kind of hasgrown up with a lot of
(23:11):
competitors around it, why haveyou done so much better than
every one of your competitors interms of raising assets?
We firmly believe in a prettycommoditized area, right, pretty
commoditized area.
You know what?
The answer is Culture.
You guys have deeply embeddedcultural values that animate
what you do every day.
So when you find that in anorganization, that organization
(23:35):
has a far greater ability ofgrowing its competitive
advantage because of how theytreat their people and how they
behave as an organization than acompany that doesn't have a
strong values in internally toit.
So you know, the interestingpart is we've, we are so deep
into culture and believe so muchthat it actually allow you know
(23:55):
, it allows a company to growits competitive advantage
because of its people that wehave four full-time culture
analysts.
All they do is work on culture.
You know they have differentbackgrounds from different
experiences.
They may not even know what acompetitive advantage is.
They've probably never done aDCF model, it doesn't matter.
All they do, four of them iswork relentlessly on trying to
(24:18):
understand the DNA of thecompanies we want to invest in.
And here's the, you know, toyour earlier question can you
quantify it 100%?
No, and that's the beautybecause, see, wall Street
doesn't believe anything existsunless they can quantify it.
So they'll talk culture,they'll throw out kind of the
buzzwords, but if Wall Streetcan't measure it and quantify it
(24:38):
and score it, it doesn't existto them.
And that's beautiful, becauseas long as they continue to
believe that, we will continueto have a huge competitive
advantage.
What you're doing with cultureis building a mosaic and you
build that mosaic over time.
We do work on a company.
We have a pretty good idea ofthat alignment, strength and
adaptability.
But I will tell you, likeanything else, you learn as you
(25:00):
go too.
We get better and better as weown that company and see how it
behaves in different periods oftime.
It was Walter Schloss who made avery honest.
He's a long, you know, 80 yearsago was a great value manager
and he said phrases that youcan't money managers won't say.
You really don't know a companywell until you own it.
Right, you're supposed to knoweverything about a company, but
(25:22):
the truth is when you own it andyou see how it behaves.
I'd say the same thing withallocators Allocators that
allocate to us or other firms.
You don't really know thecompany well until you see their
behaviors in difficult markets.
Then you begin to understandand it's either good or it's bad
and you can make judgments onthat.
So culture, work, we have ahuge lead.
(25:42):
There's not anyone that's goingto catch us in that because,
again, people believe if youcan't quantify it, it doesn't
exist, and that's good for us.
Ryan (25:53):
So how often is your analyzing companies?
You find a company that thefundamentals look great, the
growth trajectory looks great,and then you get to the cultural
assessment and their culturedoesn't meet what you're looking
for, so you eliminate that.
Does that happen frequently?
And I guess the other side ofthat is do you find companies
that have great culture but itdoesn't show up in their
(26:15):
fundamentals and you would maybenot choose to invest?
Mike (26:18):
Yeah, I mean it's one part of the process right.
So yeah, it happens with greatfrequency actually that we find
a company that you know we havea view on what it could do to
improve its business right.
So we haven't talked about ityet.
But the other really, I guesssort of core part of what we do,
(26:39):
and I think what's differentabout what we do at the
bottom-up kind of companyanalysis level is our emphasis
on what we call mode trajectory.
So, as Paul kind of said at thevery, very beginning, you know
most managers talk about tryingto buy businesses with a
sustainable competitiveadvantage or a wide economic
mode.
You know, we learned a longtime ago that it's not really
(27:02):
the size of a company's modethat matters, it's actually the
direction and is thatcompetitive advantage.
Actually expanding and gettingbetter Strategy is a huge part
of what enables a company to beable to do that.
And so there's all sorts ofexamples that I can think of
where we were just looking at aGerman healthcare company.
It has three businesses.
(27:25):
It has a pharma business, alife sciences business and then
then kind of a smaller kind ofnon-core operation, and we
really want them to expand andinvest in their life sciences
businesses, and they're justunwilling to kind of just
de-emphasize pharma.
That's kind of what the companyis known for, and so you know
(27:45):
the strategy to us is quiteclear of what the company should
do to create value.
But when you go in and you doall the culture work, you
realize that there's just nochance that the organization's
going to get there.
And so you know that would bean example of one where you know
, hey, we liked the idea of howthis company could improve its
moat, but they just didn't havethe culture to back it up.
And then, but just didn't havethe culture to back it up.
(28:06):
And then I mean, on the flipside, I think if we just went
and bought 35 companies withgreat cultures and didn't pay
attention to competitivepositioning, mo, trajectory
valuation, I mean I don't thinkthat the portfolio would be set
up for success.
And so it's part of the puzzle,but it's not the only piece.
Ryan (28:26):
So another phrase that I've heard, as I've listened to
WCM and read some of yourmaterials, is this notion of
defy the fade.
Talk to me about defy the fade.
What is that and why is itimportant?
Mike (28:38):
Well, we talk about I mean , I think about it frankly with
our own business as well as howwe invest.
But it does speak to moattrajectory and culture, and so,
if you just think about basicfinance or economic theory, you
know every business you knowshould be mean reverting over
time, right, you know companiescan have a period of success.
(29:19):
Performance, be it financial orstock price, you know becomes
pretty average.
These two attributes that wewere talking about positive moat
trajectories and cultures thatare very well aligned around the
strategy to grow that moat,those are the companies that are
going to defy the fade, and soit requires a slightly longer
time horizon.
(29:39):
I think Wall Street's decent inmost cases at getting the next,
you know 12 months, right, Ithink a lot of the, the
inefficiency or the arbitragethat we're exploiting is
thinking about these things in aslightly longer term timeframe.
Culture is not going to matter.
You know data, you know monthto month in terms of you know
(30:01):
how, how a stock price performs,but over a longer time period
three years, five years, 10years or longer it is the
ultimate, you know differencemaker, and so we use that defy
the fade term to kind of expressultimately what these two
things are helping businesses doand you see that also in just
(30:27):
the forecasting errors that takeplace oftentimes on Wall Street
, because typically they're notincentivized to think about
what's going to happen over thelong term.
They're trying to get theirearnings estimates right over
the next 12 months.
They've got armies of analyststhat are just working
spreadsheets and trying to getthat EPS number right every
single quarter.
There's a lot of hedge funds andpods and people that are
(30:48):
trading around all thatinformation and so if you look
at you know some most of thegreat investments that we've had
, you know Wall Street's likeokay, let's say just say a
business is going to grow, youknow 20% next year.
Oh, okay, wall Street's prettygood about getting that right.
And then, well, then they saywell, it's like you can't do
that two years in a row, soprobably like 18.
And then it's going to go downto, you know, within a few years
(31:09):
it's down to say 10 percentgrowth and and that they're kind
of modeling that fade, so tospeak.
And it's the businesses thathave these moats that are
growing and these culturesaround them that you know just
time and time again can exceedexpectations and sort of did not
defy that inevitable fate.
And it's that delta between themean and what the company is
(31:34):
able to perform that generatesall the alpha in the portfolio.
Paul (31:38):
You know, finance people.
To Mike's point, most financepeople, wherever they are in the
world, worship at the altar ofthe DCF right, the discounted
cash flow model.
They worship it and especiallyif you're young the younger you
are when you come in thebusiness.
Everyone teaches you to do aDCF.
They think there's somethingmagical in there, but it takes
(31:59):
them a while to realize thereare probably a hundred thousand
people building a similar modelto what they're doing and they
tweak a couple of numbers here,they tweak a couple of numbers
there and, as Mike said, whatthey typically do is say, hey,
this company can't grow thatrapidly for that many years.
So after a few years they kindof fade their guesstimates to
(32:19):
GDP growth out 10 years.
And again I like to say this alot, show me a DCF model.
Somebody did five years ago andI'll show you how wrong it is.
Inevitably Because with thesegreat compounders, with these
companies, where we are mostlyright about the economic moat or
the sustainable competitiveadvantage growing with a culture
(32:40):
supporting it to grow, theywill defy that fate.
They will defy that overlyconservative model.
So again, as long as WallStreet thinks it's about the
numbers, we're going to win.
Ryan (32:53):
How much do you pay attention to some of the
macroeconomics, some of theexternal sort of criteria that
others might look at whenthey're allocating, Also like
geopolitical issues?
A lot of what you do is ininternational stocks.
Do you pay much attention tomacro or geopolitics?
Paul (33:12):
Michael will have probably a different take on this, but I
will tell you that every timewe've become concerned with
macro issues whether it'sgeopolitical interest rates and
environment, gdp growth we'vemostly been wrong growth.
We've mostly been wrong.
We've mostly been wrong.
You know, concerned aboutTaiwan or China invading Taiwan,
you know, and therefore whatyou shouldn't own Taiwan
(33:33):
semiconductor because of thatgeopolitical concern.
There's a lot to go into there.
You know, concerned about theMexican peso.
You know, wherever we've actedkind of with a macro bent, we've
pretty much always been wrong.
So we try not to do that.
Mike (33:49):
It's funny.
I, just for an institutionalconsultant, just got asked a
question about processimprovement and we have a
journaling app that we developedinternally where we document
all of our not just it's reallyabout any view we have on a
company, but it's obviously itstarts with all the transactions
that we've made in theportfolio and we talk about.
(34:11):
You know why we bought them.
You know when we sell them, wedocument the reason that we sold
and that there's different tagsin there.
So if it's, there's adescription.
But we also might say well, themacro was one of the reasons
that we sold.
And so if you go back over 10years ago, there was, I think,
maybe four or five decisionsthat we made that had macro as
(34:33):
one of the influencing factorsfor the sale.
In the last 10 years we've hadjust a couple and they've
actually proven to be not theworst decisions, and so we use a
lot of you know, paul paultalks about macro, but we've
actually we use this journalingapp to actually embed these
lessons in our minds so that wedon't fall into the trap again
(34:55):
and and and actually um, youknow repeat the same mistake
twice now, having said that, themacro does matter.
Paul (35:03):
In emerging economies it really, really does matter.
You know what's going on.
That's something we learned,but less so in the developed
countries.
Mike (35:11):
And I think the I think about it.
On the, I think you know, whenmacro is bad, I think we look to
lean into it because it tendsto overshoot to the downside in
terms of how stock pricesperform.
So in that sense, I do thinkabout it.
We don't make macro predictions.
We don't let macro predictionsgood or bad influence decisions
we make with companies.
(35:31):
And the same would be true for,I mean, the geopolitical,
geopolitical stuff is justincredibly unknowable.
And but I could say, like I havejust a house view that like
there's going to be moreinstability around the world in
the next 10 years than there hasbeen historically.
I think that's prettyirrefutable at this point,
especially with two wars goingon.
(35:52):
And so, if you think about thebehavior changes that are taking
place in Europe and Asia arounddefense, are defense companies
thematically a pretty good placeto be right now, knowing that
you know NATO is starting tostep up.
You've got more countriesjoining NATO.
You've got countries in Asialike Japan that are increasing
(36:14):
their defense budgets for thefirst time in decades.
Yeah, so like we don't.
So do I have a geopoliticalview on what's going to happen
in China and Taiwan?
I just witnessed the most acircular conversation about that
a couple of days ago.
Nobody has any clue, but I knowthat people are worried about
it and that means that there'sgoing to be probably more
spending on defense and that'sprobably a place we want to
(36:34):
invest.
Ryan (36:36):
So one of the things that you, paul, said towards the
beginning of our conversationhad to do with the reason why
people should even considerstocks outside the US, because
if you talk to a lot of thefinancial professionals that we
talk to, they've gotten a littlebit discouraged by a decade of
underperformance, especially forthose passive international
(36:57):
benchmarks.
So, as you guys are talking toyour clients, what are some of
the reasons that you maybe referto as you're thinking about why
you should look outside USmarkets?
Paul (37:07):
Well, the first thing I'd say and I'll try to say this
kindly, but it's completefoolishness to index
international markets and it'scomplete foolishness to index EM
in particular, Because most ofthe index in EM is made up of
really junky financial companies, a lot of natural resource
companies.
Yeah, if that's what advisorsare doing, they're saying oh, I
(37:30):
don't really know EM, so I'mgoing to index it.
You've just created a massiveheadwind for yourself.
Mike (37:36):
Yeah, I mean, that's how I was going to answer the
original question about howwe've kind of done what we've
done.
I think you know theseinternational benchmarks are
pretty inefficient.
There's a lot of bad companiesin them, but I think that there
are also some amazing companiesand if you can find them and you
can own them in a meaningfulway, like in our case, like all
of our portfolios are fairlyconcentrated right between, say,
(38:00):
30 and 40 positions, they lookreally, really different than
the benchmarks.
And I think we've just proventhat, despite all the passive
versus active stuff, that if youwant to take a differentiated
view on, a how you look atcompanies, but B also how you
construct your portfolio, activemanagement is alive and well
(38:20):
and not going away, and anybodythat tells you different is just
telling you lies.
Ryan (38:24):
So, mike, one of the reasons why people have often
maybe pitched increasingallocations to international or
even just rebalancing to yourportfolio in internationals
because of the valuationdifferential, the fact that a
lot of the indexes have reallylow PE ratios or price-to-book
(38:44):
ratios, especially in comparisonto US stocks.
In your opinion, is that one ofthe best reasons to invest
internationally, or how does itfall in your list of reasons
that you would considerinternational investments?
Mike (38:58):
You know you're going to laugh like coming from an
international, focused, you knowportfolio manager, but I think
that that's actually a totalnonsense.
It's interesting because it'slike we're kind of approaching
the end of the year and allsorts of people are like
publishing their you know kindof their investment outlooks for
next year and there's there area few like slides I've seen a
(39:19):
couple times that show this kindof once-in-a-decade dispersion
between US market valuations andnon-US.
And that's just not how wethink about it and that's not
why I think it makes sense toinvest internationally Some of
(39:40):
those, just to frame it, I meanmost of those charts or that
data that people see is lookingat the broad-based benchmarks,
right, and I think if you're notfamiliar with international
benchmarks, you probably don'trealize that they're incredibly
inefficient.
They're pretty easy to beat andpart of it is because there's
just a lot of bad companies inthem.
There's a lot of European banks, there's a lot of you know kind
(40:06):
of commodity driven, miningdriven, you know emerging market
companies in there and andthey're not businesses that we
would, we would, ever considerinvesting in, because they don't
, they don't look like they'regoing to be a ripe source of
excess return, and so I thinkthe reason you invest
internationally is to actuallyget access to those few select
(40:27):
winners that are out there, andI think we've proven over time
that we can find them throughour motor trajectory and culture
framework and then own them ina way, in a way um, um that
allows us to to to outperformthose bron those, those
benchmarks, over time.
So there's a diversificationbenefit from what you're going
to find in the us, but also justlike some really, really
(40:50):
incredible companies.
I mean, if you think about, youknow, taiwan semiconductor, just
to use you know an example, Idon't know why anyone wouldn't
want to have exposure to thatcompany.
You think about everythingthat's going on in the world
right now with artificialintelligence, and you know,
right now there's this newdebate about.
Obviously, nvidia has doneincredibly well, it's been a
huge contributor to US benchmarkreturns, but now there's these,
(41:14):
you know, alternative chipsthat you know Amazon may be
developing, or Google's TPU, andit's a very difficult call to
make on what's going to happenover the next five years.
Well, guess what?
Guess, what's the easiest wayto play?
That?
The one company that makes allof those chips, no matter who.
It is right.
And so you know, tsmc, you know, to our mind, is actually
(41:35):
probably one of the mostimportant companies in the world
, if not the most importantcompany in the world and as an
investor, as someone that'strying to allocate money for
clients, you want exposure tocompanies like that.
Paul (41:48):
So I've done this a long time, as I said earlier.
And what is it?
For the last 15 years, peoplehave been playing this oh,
international and EM.
How many times have you heardoh EM?
Many times have you heard oh EM?
It's far cheaper than theWestern world and it's growing
much more rapidly.
And you know what?
(42:08):
There's this whole emergingmiddle class coming up that's
going to spend more money 15years.
And what happens?
Well, kind of like, in general,if you buy the benchmark once
every 15 years, you get a hugespike in returns and the rest of
the time you get nothing.
Now the truth of the matter, asMike said and I'll just be a
little more blunt the EM indexesare trash.
The international indexes aretrash, as Mike said, do you want
(42:31):
to own a European bank?
Okay, the reason the PEs arelow is because it's like what?
30% banks that are selling atsingle-digit PE ratios and a
bunch of industrials, and thenyou know that's why it's cheap.
So forget the index argumentand realize that there are about
100 brilliant companies thatare outside the US.
(42:52):
That's kind of you know, 100,150.
That's the field we play in andthose companies are, you know,
a lot of them are must-haves.
Like Mike just said aboutTaiwan Semiconductor, if you're
just US, you've missed one ofthe greatest runs in one of the
greatest companies in the last20 years.
So it's not really aninternational US argument.
(43:12):
It's just buy great companies,no matter where they are, and
that's what we do.
Ryan (43:17):
So if I were to paraphrase what I'm hearing you say anyway
, is that you shouldn'tnecessarily allocate to
international benchmarks,because what you end up with is
stocks that are cheap, that areprobably going to stay cheap
because the business model isantiquated or has some
regulations in the Europeanbanks that might hold them back.
(43:39):
But you should allocateinternationally because of the
opportunities that you look toinvest in.
Paul (43:46):
It's kind of lazy to allocate to the indexes
internationally.
It's kind of lazy and you'rereally doing a disservice to
your client.
Mike (43:54):
And even I mean it's not just the indexes, it's these
closet index funds that claim tobe active and it's ETFs that
have some country dynamic tothat.
Or you think you're gettinginternational exposure through
some 125-stock strategy, whetherit's active or an ETF.
(44:16):
If you want to producedifferentiated results, you've
got to have a portfolio thatlooks different than the
benchmark, and you can do thatby finding great companies and
doing it in a concentratedmanner, and I think that's
especially true now.
You know I mean I'm not goingto make a market prediction by
(44:36):
any means, but obviously youknow the US markets have had an
incredible run and it's, in part, been driven by, been driven by
a small cohort of companies.
I think there's going to beprobably a different set of
winners in the next 10 years,not to say that some of those
companies still won't doextremely well.
A lot of them will be in the US, but they'll definitely be
(45:00):
continuous examples of companiesoutside the US that will show
up.
The next MercadoLibre is thenext C-Limited.
Paul (45:09):
One of the greatest companies in the world is
Ferrari.
Mike (45:12):
It's not in the US of a non-US company with obviously an
incredible brand and one thathas the one that's proven to
defy the fade over time.
Right, there's a waiting list.
They continue to createaspiration around the brand with
(45:33):
new models.
In many cases, if you want thehighly aspirational model to get
up the right part of the list,you have to buy pretty much
everything else on the list.
And you know they've got SUVcoming, they've got an electric
and hybrid vehicles coming aswell, and you know their Formula
(45:55):
One team's, you know, not doingtoo bad either, which I think
helps the brand as well.
Ryan (45:59):
Sure, all right.
So this is a question that I'vestarted asking people that I've
gotten some really interestinganswers, so I'm going to ask you
guys as well.
Paul, I'll start with you.
You mentioned that you've beendoing.
You've been in this industryfor about 40 years.
Okay, so imagine you didn't gointo this industry.
What do you think you'd bedoing right now?
Paul (46:20):
I love that question.
I ask that all the time.
I love to ask people if youdidn't have to make money, what
would you do?
When we hire them, right?
And of course, what I want tohear them say is, oh, I'd do
what I'm doing now, I loveinvesting, right.
But a lot of them will say,well, I'd open, you just go do
that.
So, without question, I wouldbe in real estate development.
You know it's, you know the two.
(46:54):
To me, the two most interestingbusinesses in the world are the
first one's what we do.
But if I wasn't doing this, I'dwant to keep allocating capital
.
I'd want to keep allocatingcapital and I love the idea of
developing real estate becauseyou can unlock and create an
immense amount of value forclients on that.
Ryan (47:09):
That would definitely be what I'd be doing.
Mike, what about you?
What would you do if youweren't in the asset management
industry?
Mike (47:14):
I would either want to be an offensive coordinator for an
NFL team With the Kansas CityChiefs, maybe, well, well, yeah,
that'd be nice to have my homes, uh, and I've with a good on a
team with a good quarterback Iam, yeah, I'm from Kansas City,
um, or, or, or I would want tobe, you know like, the general
manager of a baseball team.
(47:34):
Um, I like, I like competition.
Um, I like findinginefficiencies and how it's sort
of like.
To me, it's another way toexpress the things I like about
investing in a different way.
So I like exploitinginefficient ways of people
(47:57):
thinking about what a player maybe worth or how the market may
be interpreting him.
I like trying to find the ideaof finding a weakness in a
defense and then devising ascheme, you know, to go score a
touchdown or, you know, to havea set of plays that'll take
advantage of that.
To me, that would be, you know,imagining me, you know, up in
(48:19):
the booth at an NFL game.
You know, calling plays for anyNFL team would be, would be
super fun and it.
But I like it because it's the.
The things I would like aboutthat are the things I really
like about, you know, investingand honing an investment process
and trying to make it betterand trying new things.
And you know you try a play andyou would like you know the
quarterback would get sacked.
(48:40):
Oh, that was a stupid play.
We better, we better.
Paul (48:42):
Iterate on that you know that that type of thing sounds
like a lot of fun to me I was ahighly successful flag football
coach for about eight years Idid go to yeah I can attest to
that.
Mike (48:51):
I've been to a couple of those games, yeah, but but you
know what?
Paul (48:54):
but to to illustrate what you know I'm a really good coach
, but you, you know what Talent?
It's all about talent.
Same thing in this company.
You know, it is all abouttalent.
I've had discussions like, okay, let's talk about the Patriot
way.
Oh, it's all about the Patriotway, it's all about Belichick
and the Patriot way.
And you know, do your job, doyour job.
(49:16):
No, you know, we've all foundout.
It wasn't about the Patriot, itwasn't about Bill Belichick or
the Patriot way.
It was about Tom Brady, it wasabout raw talent.
That elevates everybody else Tome.
That ends the argument.
Ryan (49:27):
Okay, so my last question for each of you, so, viewers of
the podcast what should they bereading?
What have you read recently orwhat would you recommend?
Paul (49:38):
Well, I'll tell you what I would definitely recommend you
don't do.
Don't read the news, don't readany short-term, don't listen to
the news, don't watch the news.
Shut off CNBC, just turn it off.
That is probably.
Those items are absolutely themost detrimental to trying to
(49:59):
create wealth long-term, becauseall they're about doing and I
don't if it's Fox or CNBC orMSNBC or CNN or anyone they're
just trying to create chaos.
Right, so and and and so themore you get, and even reading
the, you know, reading the paperevery day, it's just chaos.
So the best thing you can do inmy mind, is what we did 25
(50:19):
years ago when we bought thefirm is read the classics, read
the classics again, read themagain and again, and again.
So, of course, you know,intelligent investor, you read
margin.
You know.
Just read the two chapters onmargin of safety and Mr Market,
that's a for sure I mean.
And then you get.
You got to buy.
You know Buffett's favorite bookafter intelligentigent
(50:40):
Investors, common Stocks andUncommon Profits, read that by
Phil Fisher.
Read that book cover to cover.
Do it a couple of times.
You got to read all.
You should read all the lettersof Warren Buffett.
There's just gold in there.
You know who.
I've dug up some really archaicpieces of chapters from John
Maynard Keynes.
(51:00):
He's mostly known as aneconomist, but the guy was a
brilliant investor.
He's got a couple of chapterson how to invest properly, which
is in a focused fashion fewerrather than more names.
And then I would recommend abook by Lawrence Cunningham that
he wrote called QualityInvesting.
It's very similar.
(51:24):
It's written about a firm overin London, but it's very similar
to what we do every day and Ithink if you just read and
reread those books and they allhave common themes in place and
you take them in, you're goingto learn to be a very good
investor.
Ryan (51:40):
Anything outside of the investment industry that you
would recommend reading Lovebiographies.
Paul (51:46):
I can't remember the last one.
I read Franklin Roosevelt Ijust read recently.
I read one on Reagan.
I've read a lot on WinstonChurchill.
I love to see how leaders ledin difficult times.
Ryan (52:00):
Mike, what are you reading these days?
What would you recommend?
Mike (52:04):
Well, there's a book Paul just reminded me of that I
recommend.
Sometimes it might even be freebelieve it or not, which I
don't know if that's a goodthing or a bad thing, but it's
actually called the EmotionallyIntelligent Investor, and I'm a
big believer in the importanceof self-awareness in all things
(52:28):
in life, but I think it'sparticularly valuable in
investing, and emotionalintelligence is kind of another
way to sort of express that, andso this book talks about that
in some detail and differentways that you can be more,
understand your biases better,and then tools that you can, and
also understanding how themarket's actually interpreting
(52:51):
companies and situations, andthen it gives you actual tools
and ideas, like journaling as anexample, to get better and
become more aware of yourstrengths and weaknesses.
So I like that book quite a bitand it's pretty short, so
that's an easy one.
It was written by an old Soroshedge fund guy who now has a
(53:13):
small hedge fund.
That's a good book.
I'm reading a book right nowthat I'm not done with, but it's
called 10 Cup Dreams and it'sabout this.
It's about the golfer, estebanToledo, who I recently played
golf with, and he's a guy that'sfrom Mexicali, mexico, and and
was able to basically earn hisway onto the PGA Tour despite
(53:34):
having literally nothing.
So that's that's.
That's a pretty cool book.
And then, you know, we'reactually in our library right
now so it would be easy for meto just kind of scan some of the
books on the shelves.
We like the book Creativity Incby Ed Capel that talks a lot
(53:59):
about it's a story of Pixarbasically and I think
particularly in investing, Ithink the power of creativity
whether that's just taking amore optimistic view on a
situation or trying to sort ofunderstand how the market may
misinterpret situations I thinkis pretty powerful.
So how teams can function welland be creative, I think and
(54:23):
think about things differentthan other people.
I think that that's a prettyfun book to read.
And then I think, history-wise,I'm kind of intrigued by
studying World War I right now,because I think there's some
interesting parallels to maybewhat's going on in the world
right now, to kind of conditionson the ground, kind of
pre-World War I.
(54:43):
So I just started a bookactually this week about that.
So those are a few things thatcome to mind.
Ryan (54:49):
All right, final, final question Looking forward the
next decade or so, are youoptimistic or more cautious?
I won't use the wordpessimistic.
Paul (55:00):
Well, it's a bad question for me because I think optimists
rule the world and I think ifyou live your life from a
position of being optimistic,you're going to have a much more
successful, rewarding life.
So, again, I'm extremelyoptimistic.
I'm very, you know, kind oflike, from a broad market side,
(55:21):
very optimistic about the US,from company-specific sides.
There are so many greatcompanies that are developing
around the world that we'regoing to be a part of and again,
it's really, it's almost youknow, it's almost impossible, if
you unleash people's creativityand their ability to take risk,
(55:41):
what they can do.
And so, overall, next decade orso, yeah, it's hard to see that
you're not going to get goodreturns.
Mike (55:53):
There's not a whole lot I can add.
It's funny.
We just went through kind of awebsite, kind of rebranding
process and we're trying to kindof connect some of our values
to different things that we holdtrue, and I made the
observation at one point thatyou know, I think gratitude does
lend itself to a degree ofoptimism.
(56:14):
I don't know many people thatare really grateful, people that
you know think the world'scoming to an end.
I mean most people I know thatare really grateful, are happy.
People that you know think theworld's coming to an end.
I mean most people I know thatare really grateful are happy.
People that you know look atthe situations with positive
intent and glass half fullperspective, and so it would be
insane for me to actually sithere and talk about how grateful
(56:34):
we are and then answer thatquestion by saying that I'm, at
the same time, prettypessimistic about what the world
is going to look like in thenext 10 years.
I believe in the power ofpeople and, whether that's in
the US or people that are livingand creating companies anywhere
in the world, we all kind ofwant the same basic human things
and I think that's going tolend itself to a lot of
(56:56):
incredible companies that aregoing to be born in the future
and there's going to be greatopportunities to invest in them.
Ryan (57:04):
All right, that's a great place to leave the conversation.
Mike and Paul, thank you forjoining us on the podcast, not
only because it gave me anopportunity to come to Laguna
Beach in December, but becauseit's been a really interesting
conversation.
But thank you very much.
Thank you, ryan.
Paul (57:18):
Great to be here.
Ryan (57:20):
And thanks to all of you for joining us on this episode
of First Trust ROI Podcast.
We'll see you next time.
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy And Charlamagne Tha God!
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.