Paul Black (2:55)

Well, I started, interestingly, even how I got involved with stocks, I Think it's kind of fun. You know, when I was younger, I got a small inheritance from my grandfather when I was about 18 years old. And at the time I thought, you know, I kind of like the thought of investing. I met an E.F. hutton broker, and he told me to start buying South African gold stocks. Now, this is when gold was about $300 an ounce. So I think I bought 500 shares of a company called Eastrifontein South African Gold miner. And I was in college at the time, and I'm not kidding, I would open up the Wall Street Journal every morning. And when gold was going from 300 to $800 an ounce in those periods from 78 to 82, I would literally look at the Wall Street Journal and say, you know what I just made? Stock would be up a buck a day. I'd make $500 a day owning 500 shares of this South African gold miner. That was highly levered. And so that kind of got me hooked. I knew nothing about it, but obviously when you're making that kind of money in a short period of time, it gets your attention. And that's when I actually shifted my major from marketing to finance and ultimately went to work for bank of America up in San Francisco in 1983, when BofA was the biggest bank and most successful bank in the world. It's a short few years later that it almost went bankrupt, which is a whole different story. But got into the private equity group, the private market group, the private banking group, ran portfolios. You know, at 25 years of age, I was put on a desk to run $200 million of other people's money. I was given the Wall Street Journal, bunch of research value line. I said, okay, go to it. Which is terrific for me. But it wasn't terrific for the clients because I really knew nothing about investing. But over the next five or six years, you know, I learned a lot again, again, by learning what not to do.

Ted Seides (4:53)

Yeah. So what'd you learn in those early years? And what mistake? What do you think the key mistakes were that you.

Paul Black (4:57)

I remember one of the trades I made in portfolios because I've always. I've loved growth and growth investing. At that time, I liked growth for growth's sake. So I was taking people out of IBM stock and putting them into Digital Equipment, because Digital Equipment stock was a much more rapid grower at the time. Well, we all know what happened to that story. So I learned very quickly, you know, that the most rapidly growing companies, although they're. They're kind of sexy and fun. Ultimately they can be massive destroyers of capital. And really what I learned is how much I really didn't know over those five years and how much I needed to kind of educate myself to get much better at this business.

Ted Seides (5:36)

And was that the process? Were you educating yourself or were there mentors around you that you learned from?

Paul Black (5:40)

You know, it's a good question because I always, I've wrestled with that throughout my life. Really. Are there guys that I can point to that are mentors? And there really wasn't one or two mentors from the investment side. It was really self taught. You know, I, I spent a lot of time reading the classics stuff that Buffett talks about, Common stocks on Common Profits by Phil Fisher, one of my favorites. You know, obviously you read the chapters on Margin of Safety and Mr. Market Intelligent Investor, but a lot of other books along the way and that's really how I've kind of wrestled through the investment problem. Some mentors certainly on the business side that have been really influential, just kind of keeping me in the game and keeping me accountable. It's been a big part of what's happened over my life.

Ted Seides (6:23)

So what happened after those five years?

Paul Black (6:24)

After those five years, bank of America was sold or the private bank was sold to Wells Fargo Bank, Spent a couple of years there, really just didn't enjoy the bank trust department, Private Bank World. You know, when you're one of 90,000 employees, it's really, it was very hard for me to figure out how I'm going to move the needle. And I wanted to move the needle. You know, it didn't matter if I did a brilliant job or I didn't do a brilliant job. I still got a 3.2% raise. So I wanted to have more ability to control how I was compensated and you know, how I grew professionally. So I was fortunate enough to run into a gentleman named Kurt Winrich. And interestingly, like most things in my life, at least I think most people's lives, it was very much serendipity. My fiance at the time actually taught Kurt's five year old son in preschool one day. I'm going to the zoo. If this is interesting, I'm going to the zoo. In the back of the car, Kurt's wife was driving with the kids and I asked her, I said, what's your husband doing? He's a portfolio. I said, oh, I'm a portfolio manager and I'm looking for a job. At that time she said, okay, great. Kurt then gave me his brochure. Fortunately for me, he hired me in 1989 to join a $200 million money management firm down in Southern California. And that was really kind of the beginning of the journey that Kurt and myself and our other partners have been on for a lot of years.

Ted Seides (7:48)

Yeah, let's turn a little bit to growth investing. Let's talk about a lot of. Now, we all know growth and value, all know the disciplines of value investing, hear about it a lot of the time and certainly the conversations I have. What is it about growth stock investing that works?

Paul Black (8:07)

You know, I think in part it's a different perspective on the world. To be a growth investor, you have to be optimistic. You have to be optimistic about the future. You know, value to me is a little bit more pessimistic. You're trying to buy these assets at a compelling price based on their value today, you know, with the hopes that it'll keep kind of plugging along and then, you know, ultimately there'll be a regression to the, you know, real value for growth investing. I like it because I tend to see the world more positively. I think it's consistent with where I am kind of psychologically. And to me, optimists rule the world. I think optimists are the ones who ultimately get it right. Because if you look back through history, Buffett says it all the time, never bet against America. I'd say never bet against great growth companies with superior cultures that are highly competitively advantaged.

Ted Seides (9:01)

So let's dive into that a little bit. You mentioned great growth companies. What constitutes a great growth company?

Paul Black (9:07)

A couple things for us. And it's very different, I think, from what most people do. And I'll kind of start like this. One of the things that, that we wrestle with, a lot of people now are wrestling with whether active management can outperform. I think there's a lot of evidence to suggest that it can. But to me, most managers try to buy high quality businesses with strong economic advantages or competitive advantages, selling at a discount to intrinsic value. I think one of the reasons that active managers underperform consistently is because everybody's doing the same thing. They're all approaching the market from the same perspective. What we have found is more times than not, if you're just looking for high quality, wide moat businesses selling cheaply today, you're going to find yourself in a lot of value traps. The poster child we always use in the firm is Nokia. In 2007, if you and I would have gone to Wall street and met with the 25 different analysts that covered Nokia and Asked them, hey, is that a high quality wide mo business selling at a discount to intrinsic value? They'd be absolutely. Everybody had a buy recommendation on 2007, what's not to like? 53% market share in phones, one of the great top three brands in the world. No debt, really high quality returns on capital of probably 30% for the prior five years, selling at 60 cents on the dollar. We fast forward today and we ultimately know what happened was, you know, and our question is, was that really a high quality business? How do you define high quality? To us, it would not be a high quality business. Because the truth is, while it was a wide economic moat, that economic moat was clearly deteriorating. It was clearly losing its edge and being disrupted obviously by the iOS from Apple and then also from the operating system from Android that allowed a lot of companies cheap china manufacturers to make phones. So we've made the mistakes in the past of buying high quality wide moat businesses cheaply. And what we learned because of our mistakes of significantly underperformed the market is you've got to stay focused on the direction of the competitive advantage. Because everybody's business, I don't care who it is, every organization, you're either getting stronger versus your competitors or you're getting weaker. And what you want to do is you want to be able to make the case through pattern recognition and other tools around moat typologies is how we classify it, that the company that you're looking to invest in has a strong likelihood of growing its competitive advantage over the next five, 10 and 15 years. And if you get that right, by the way, I will tell you that any valuation work you do is going to look ludicrously cheap 5 and 10 years out. So that's a huge part of what we do that's different around how we look at competitive advantages. And then the second one, I think that's really significant and very different is we put a huge premium on a corporation's culture. And that doesn't mean, hey, we just want shareholder friendly management teams, which usually means they're good capital allocators. What we want is we want to understand the DNA of the business. We want to know what the core values of the business are and how those core values relate to the competitive advantage. Because if you can buy a company where the core values of the organization are aligned with its competitive advantage, like for instance in retail, what do the core values of great retailers need to be? It's got to be about taking care of your people. We use the example of, of Costco versus Sam's Club. Those are two companies in the same industry. The stores look the same, but you look at the financial metrics of Costco, they're twice on every metric. What goes on at Sam's Club? You know, same store sales are 4 or 5% at Costco. There may be one or two at Sam's Club. Sales per square foot at Costco, a thousand bucks, 500 at Sam's Club. Employee turnover at Costco, 12%, 50% at Sam's Club. ROIC is a 12 versus 4 for Sam's Club. What accounts for that? To us it has to come down to the culture and the values of the business where in Costco they truly care about their people. They want happy employees. In retail you want happy employees because you and I are going to go in there and we're going to get a great experience and we're going to come back and spend more. It's reflected. And by the way, that whole value side comes directly from the top founder of the company, Jim Sinegal, owned a lot of shares but never made more than $300,000 a year. How different is that from companies, other companies where the CEO is making 20, 30, 40 million or in the case of some CEOs where they get fired and they get a pair a golden parachute of $200 million. That doesn't usually bode well for the long term cultural success of the firm. So to us, the distinguishing characteristic in any investment has got to be determining what those core values are, what animates that culture and making sure there's an alignment.

Ted Seides (13:47)

Let's dive in on both of those. So on the first on moats, how do you define and then measure what the company's competitive advantage is?

Paul Black (13:59)

Lots of different ways. First of all, what indicates historically with money managers, what indicates a moat is obviously some level of return on invested cap. So most managers out there are always screening for some kind of hurdle, a 10%, 11% hurdle on ROIC over the prior five years. What we've actually found more valuable than just the level of the ROIC is the direction. There is a one to one correlation between the direction of the ROIC over a five year period of time and stock performance. You know, so if you, if you break the market down into five quintiles, from the top quintile where they have the most rapidly rising roic to the the bottom where they have the declining roic, there is a one to one relationship between the best performing stocks on the top and the top quintile and the poorest Performing stocks.

Ted Seides (14:46)

And is that starting from a certain baseline, absolute level of ROIC from which you want to see growth after that and that that makes a good company?

Paul Black (14:54)

No, no. I mean, we'd prefer a company, frankly that would have, you know, maybe five years ago had a 4% ROIC growing to 5, 6, 7, 8. That's a much better investment than a company that's at a 12% ROIC that might be stagnant over that period of time and not growing. So there's a huge advantage to getting that correct.

Ted Seides (15:14)

There's a lot of other ways that people talk about moats. Buffett talked about brands when he went from being sort of a classic Ben Graham investor to a Phil Fisher investor. How are the other ways that you think about what competitive advantages get incorporated into the kinds of businesses you like?

Paul Black (15:28)

They're the obvious, right, disruptors, low cost providers, obviously in Amazon. But we've actually developed a number of what we call typologies, moat typologies that we think are a little bit different. One of them, for example, is an outsourced R and D company. We have found when you look at various companies in different industries that we can classify them in certain ways where you don't have to just be specifically in one industry. For instance, there's a company called Core Labs in the portfolio, which is basically ultimately an outsourcer of measuring the core samples in gas wells and oil wells. They were once a part of an integrated oil company, but because they weren't an essential element, they got spun off on their own. And interestingly so now what they do is they sell their services to all the integrated drill, all the big drillers and integrated oil companies. And over time, because that's an outsourced R and D process, we can look at that company versus other outsourced R and D companies and maybe other industries. For instance, Christian Hansen, which is a enzymes company that creates enzymes and biologics for the use in yogurts and cheeses. And very simple business that an analyst that's just looking at maybe the material sector might look at Christian Hansen and see it's really very richly priced. But if you think in terms of it being an outsourced R and D company, our argument would be those types of businesses deserve higher multiples because what they ultimately do, they start at the low end, they're a very low cost part of the process, but then they kind of climb the value chain and they start adding larger and larger services. To the point now where Christian Hansen, if you look at Denone or Yoplait or any of the other yogurt manufacturers. They're really branding companies now. And Christian Hansen is the company that develops the taste and the texture and the caloric content. If you can kind of look at the world more in a generalist sense, you can kind of see these relationships. You know, Core Labs, just looking at the energy sector looks expensive. Christian Hansen, just looking at the material sector looks expensive. But if you look at them really as outsourced R and D companies like we do, you can say that, hey, their margins ought to grow from 25 to 30. So what most people will see as being expensive, we can actually make the argument they're not.

Ted Seides (17:50)

And so you have these businesses with growing moats. And then you also mentioned you started talking about culture. Similarly, how do you go out and really assess a company's culture?

Paul Black (18:01)

I think that's one of the most fun parts of our job. And because nobody does it, you know, it's interesting. If you look at, you read Phil Fisher's book Common Stocks and Uncommon Profits, which again is one of the classic. It's interesting, I think he has a 25 point checklist on how to analyze a company. And Interestingly, of the 25 point checklist, probably 15 points are all qualitative elements, which is just the reverse of what most people on Wall street do. Most people spend 95% of their time crunching numbers, running DCF models, which by the way, has zero competitive advantage because you have thousands upon thousands of people doing the same work. Where we can get a massive competitive advantage is by doing the things that other people are not. And, you know, so when you're trying to assess a culture, really one of the best ways, if I wanted to, you know, assess GM's culture and get a, you know, one of the best things to do is not just talk to the CEO or the cfo, but it would be to, hey, let me talk to people that have left on good terms. Of course, you talk to the suppliers and you talk to vendors and you talk to competitors. It's always good to talk to competitors. Who do you respect? Who do you not respect? But if you can talk to people that used to work there that have left on good terms, you usually get a pretty good picture. Now what you're doing, by the way, is you're building a mosaic. When you're going after culture, a lot of people don't do it because you can't quantify it, right? You can't put it in a box and score it and come up With a scale and a number ranking, you really have to build a mosaic. One of the things we've done is we actually have worked with a guy named James Hesket, who was a Harvard business professor, wrote a book called the Culture Cycle. It's actually one of the more interesting books we've read on culture, and there are a lot of them out there. But he's really the person that helped us understand that when you're assessing a culture, you've got to look for the strongest companies are going to be companies where the culture, as I said earlier, and the values are aligned with the competitive advantage. We've worked with him, we've hired him a consultant. He helps us with a series of questions to try to ferret out what the culture's about. Because, you know, you just can't walk into a business, hey, tell me about your culture now.

Podcast Host (Ted Seides Intro/Outro) (20:11)

You can.

Paul Black (20:12)

And I'd argue if somebody goes on for 30 minutes on culture, it's important to them. Some people, you ask them, talking about culture, oh, you know what? We work hard. Yeah, okay. You really haven't put a lot of thought into it. But these series of questions, you know, what are the.

Ted Seides (20:26)

And what are those types of questions?

Paul Black (20:28)

One question that you and I were talking about earlier is, what would you tell a friend about how to be successful in your company? You know, what are the three things you'd tell them to be successful? What's really hard for some new hires to get used to? You know, what are some difficult scenarios? Tell me about your failures. Where have you made mistakes? Most people don't want to talk about their mistakes. They just move on as if their career was just filled with success. I remember years ago, real quick story, we were meeting with John Mackey at Whole Foods, the founder of Whole Foods, who, by the way, I think is brilliant, went into his office, Austin, Texas, and before we got to meet with him, there was just an incredible. There was this incredible energy, and I hate to use the word vibe coming from California, but there's this incredible vibe, right? And people, you could tell people were really happy. They were talking, they were smiling. And I asked Mackey about it. I said, you know, I tell you what, it's incredible. You know, the feel as you come in here. He said, you know what that is? He said, that's an absence of fear. Fear. And I thought, okay, absence of fear. That probably means that you can take risks here at Whole Foods and not be afraid of getting banged on the wrist, but you're going to be encouraged to take risk probably pretty good for somebody that's selling a lot of consumer products. You figure out different ways to do it. And you know, over the long term, we'd argue that, you know, if you're, if you're allowed to take risks in a business in a healthy way, that's probably going to lead to better returns and better outcomes.

Ted Seides (21:57)

And have you ever tried to map out companies that you think have good cultures, companies that have less good cultures, and use in any way kind of data to convince you that your instincts are right, that the companies with better cultures will outperform over time A bit?

Paul Black (22:16)

This is our argument. Our argument is there aren't that many great cultures with alignment to their competitive advantage, but when you find them, you hold them for a long time, 10 years, you know. So when I look at our portfolio now, I'd say we're not perfect on the culture side, but I would argue there are probably right now five or six names in the portfolio where we really believe there's this perfect alignment between values and culture. And they just so happen to be our largest positions and they've performed very well.

Ted Seides (22:46)

Right, and what does it mean? Maybe give an example of culture aligning with competitive advantage.

Paul Black (22:53)

I always talk about Walmart 40 or 50 years ago. How in the world did Walmart compete against Mervyn's, JCPenney, Sears, these big, big successful department stores? How did they grow up in that period of time and actually come to dominate the market? To me and to our firm, that was culture. That was a guy, gifted guy, Sam Walton, who really embraced the notion that, you know what, you got to bring people along, you got to get people excited, you got to make people happy. You got to in those days, it's different now, but you got to pay those people well. You got to tie them into the bottom line. And he kind of built this culture where people just loved coming to work and they had a lot of fun doing it. And as a result, they took on these old stale, kind of bureaucratic, centralized organizations. And that works for a retailer. But does that, do you really need happy employees to run a railroad? Probably not, right? You're probably not all about, hey, I want a bunch of yahoos running around throwing parties. You want people that are highly accountable, probably think a certain way more linear because it's all about delivering, you know, an on time product in an efficient, cost effective manner. So in like Canadian national or Canadian Pacific railroads, you're going to pay people more than you would in a retailer. But, but, you know, high levels of accountability. There's a high cost of failure there. So probably a lot more in different stresses, very different corporate culture. You need for that than you need for a retailer. We found there are different cultures for different businesses that are effective.

Ted Seides (24:30)

So let's turn both of those to that point on wcm. How do you think about your moat and your culture and how that impacts your business?

Paul Black (24:40)

It's a great question and it's something we've thought a lot about. Can I go back in time a little bit?

Ted Seides (24:45)

Sure.

Paul Black (24:45)

Let me tell you, our firm was actually founded in 1976 and I kind of see the founder's still alive. He controlled everything in the firm. 1976, that was two years after ERISA. That was when it was a brilliant time to start a money management firm. You know, you should have be able to build a multi billion dollar money management firm just by showing up every day. But he was tough. He controlled 100% of the equity, he made most of the money. Most importantly, he made all the decisions in the business and on the portfolio. And I think as you'd guess what happens, you know, a lot of talented people in this business and they, you know, you can attract them to a money management firm because it's stimulating and usually it's fiscally rewarding. But there was this constant revolving door talent that would come in, realize very quickly there was no place for it to go and leave. So for 20 years from actually 22 years, from 76 to 1998, the firm never grew over $200 million ever. In the perfect time to launch a money management firm. We'd argue right now that that's because it was an extremely unhealthy culture. I've got some great stories. Let me tell you one that sticks out in my mind and I think it's just completely illustrates kind of the unhealthiness of the culture. So I was hired to kind of help raise assets, sales, marketing. And I was fortunate because I didn't really know what I was doing because I had come from portfolio management. About six months into the job, the founder came to me and he said, hey Paul, why don't we go to one of the local beaneries, break bread and let's talk about the firm and where we're going. I said, hey, that's great. I said, yeah, I'd love that. I'm getting attention from the founder. I'd love it. So the next day we walk out of the building, he's got a brand new Nissan nsx, the fastest production sports car in the world at the time. $90,000 car. We get in that car, we drive around the block and down the block, pull into a Taco Bell. No kidding. I'm not kidding. We get out of this $90,000 production sports car and we go in, we get in line. Founder goes first, buys his tacos, pays for him. I go next, I buy my own tacos and I pay for them. We then walk out. You know, in Taco Bell, the seats are small and you're, you know, you're literally about a foot away from the person that you're sitting across from and in. Founder asked me, said, so, Paul, what is it that you need to, to really grow this firm to really make it go? And I said, you know what would be great? It would be great if we had some investment performance, because we were in the bottom decile for every time period. So it'd be great if we had some investment performance. Well, you know, you probably don't want to say that to the lead portfolio manager and founder of a company. That meeting was over and as we walked out the door, he said as he's getting into his $90,000 sports car, hey, Paul, you don't mind walking back to the office, do you? I said, probably not. Walk back to the office in 95 degree weather wearing a suit. He took off in his sports car. And that was completely emblematic of some of the issues in the organization. I'm not saying he was a bad guy. I'm just saying he was a little bit out of touch.

Ted Seides (28:10)

Were you surprised that you, that the door wasn't locked on you when you walked when you made it back to the office?

Paul Black (28:16)

Yeah, I really was. So it was, it was just a, you know, classic example. You know, every day founder would come in, say hello, go back to their office, close the door, and never to be seen again. And the only way you could communicate with the founder, he had a mail slot in his door. He literally had to take a piece of paper and write a note on it and put it in the mail slot. So, you know, not conducive to. That's why we're so. Our offices are wide open. There's no hierarchy. Fun is a huge value because that wasn't fun. And you know what? You didn't get the best out of people because they were not having fun. There were four of us that bought out the original founder in 1998. And I'm not kidding, not even tongue in cheek. What we decided was, hey, what did the founder do? Let's go 180 degrees. The other way. And we'll probably build a doggone good culture. Right. So what does that mean? That means, you know what? First of all, we're gonna share the wealth. And secondly, we're transparent about pay. It's not gonna be opaque. But we're. And third, we're gonna hire this young talent, and when we figure out that that talent's really adding excess returns to the portfolio, it's gonna. They're gonna own equity, and they're gonna own a decent amount of it. As a result, we've grown from $200 million to $26 billion in assets under management. Great products. I think we do something very different in terms of how we approach competitive advantages and the work we do on culture. But to me, it's the core set of values in our firm that were born out of a tough experience that come down to two things. What are most people's core values? Integrity. Dependability. And we're not going to steal from our clients. And that's kind of like. That's permission to play. You know, you've got to have those. Right? That's obvious. Our. We have two core values. One is gratitude, and the other is fun. And those two core values really do reflect who we are. And I'm convinced that those core values and living those core values has led to our ability to make mistakes and be free to analyze those mistakes, not so that somebody can be punished, but so that we can learn and get better. Gratitude, again, stealing from Buffett. You're born in America. You won the lottery. I mean, come on, you've got to be grateful for that. And I've had clients ask me, well, how's gratitude help us as your clients? And I think what it does is, hopefully, with gratitude, there's a level of humility to know how fortunate you've been. You're, again, allocating capital in this day and age, and you get paid handsomely to do it. Not so maybe 100 years ago. If there's a level of humility, hopefully there's also a recognition that, hey, we may not be the smartest guys out there. We may not work the hardest, because everybody on Wall street works hard and smart. But you know what we can do? We can care more about our people. And to me, that's an enormous competitive advantage, because the evidence is overwhelming, again, that small teams perform better. And I think if those small teams are healthy and they're grateful and they're having fun, you're gonna have a better chance of getting great results out of that.

Ted Seides (31:22)

When you look at this landscape for active management. Touched on it a little bit earlier. You said there's evidence that active management works. I've been the poster child that that's not the case. So why don't you talk a little bit about what you've done and what you see.

Paul Black (31:40)

One basic premise I have is that you know, when you start in this business has everything to do with what you ultimately believe about markets. If you started, let's say in 1972 and you ran portfolios from 72 to 74, it's highly likely that you come out of there writing a book about how you can't beat the market. If you started in 1983 like I did, you know, even though we had a little blip in 1987, you probably, since you've had a pretty robust market in the US and even globally for a lot of years, you probably have a sense that active management can outperform. I went out recently and went through a database and said, you know, what's the reality here about how many people, how many active managers beat the market? So we looked at all active managers in the database. There were 2,000 that had at least a 10 year track record. And of those 2,000, 50% of them beat their respective markets. Whether it's EM, small cap bonds.

Ted Seides (32:39)

What was that time period?

Paul Black (32:40)

That was 10 years.

Ted Seides (32:41)

Which 10 years?

Paul Black (32:42)

10 years ending December of 2017.

Ted Seides (32:44)

Oh, okay.

Paul Black (32:45)

Yeah.

Ted Seides (32:45)

Tough 10 years.

Paul Black (32:46)

Yeah, tough 10 years. And fully 50% now. Now, okay, people gonna argue out there there's a survivorship bias. Absolutely. But let's, let's tone it down, make it, call it 25%. Do you think that most people that are allocating capital should be able to find one out of four managers that has a good shot at beating the market? I think so. And here's the reality. The reality is on one hand I get people going passive because for the most part managers don't do anything different to justify an active management fee. Most managers are all about protecting their assets. So they're going to run 100 stock portfolio, they're going to buy the high quality wide moat business selling at a discount, and you know what. And then they're going to wonder why they don't outperform. And frankly there is a big, I know it's hard for the northeast to see, but there's a lot of groupthink in the Northeast and there is beauty to being removed from that, you know, so if you kind of, if you set the premise right from the beginning, which is, hey, let's Run a more focused portfolio of 30 names that gives us the best chance of outperforming.

Ted Seides (33:53)

You know, you'd mentioned that firm, over time, has gone through some tough periods and a lot of introspection and learned from them. Why don't you tell a few stories about those periods?

Paul Black (34:03)

Yeah, one of them, you know, Firm Founded in 76 in 1994, firm was still a couple hundred million dollars. And there was a transition between the founder and the son, who's my partner now, where the founder of the firm just decided one day that he's done managing money and kind of told the son Kurt that he had to take over the portfolio the next day. Well, having never run money before and all of a sudden having to run $200 million of it, didn't really quite have a solid repeatable process in place. Firm performed very badly for a year, lost a lot of money. You know, probably went down to about $150 million. If you ask Kurt now, he'd tell you that he was getting his resume out. Here's a. Here's a business owner, right? And you know what's hard about that? He's the son of the founder and he feels like he's driving it into the ground. It's a huge learning experience in terms of, you know, one, Kurt came from an engineering background, so he was trying to quantify a subjective process and he saw everything through numbers. And if you ask Kurt now, he'd say, even though I'm an engineer and I get numbers, and it's not about that, the competitive advantages is all over in our cases. On the qualitative side, that was a big lesson. And then we were running in 2000-2007 a large cap growth strategy, US and good, solid companies. We did a couple things wrong. One, we really believed in this wide moat stuff. So we were buying these wide moat businesses and we really believed in valuation. You got to get them cheap. So we were buying Yahoo instead of Google, and this is a 20 stock portfolio, right? Yahoo instead of Google, Ebay instead of Amazon, and Dell instead of Apple. Why? Because they were wider moats and they were cheap. And we thought, how can we not lose? Well, we got murdered. Those three stocks murdered. The performance of the portfolio, a very hard time. We ultimately got fired from $4 billion of money that we had raised because people trusted we could do well for them. And you know, it's interesting, what I find is that people don't want to believe that money managers make mistakes, and they certainly don't want you to learn In a sense, they don't want to believe that you didn't know before, but now you know that, you know, we're supposed to be omniscient. Right. And what we have found and is that over, over time there are, there are few people that actually look. They don't look at those periods of time where we almost buried the firm as failures. They look at them as sources of strength. And that's how we see the world too. Some people might feel shame in them. We feel like, man, how about that for an education? How about that for learning A very different way of approaching the markets. So again, good humility, you know, which makes you grateful that you survived and showed up to live another day. And those periods of time have been huge for what we're doing now on the global equity side. Yeah.

Ted Seides (37:02)

So you spend a lot of time now in international markets. What are the differences in how you think about culture in other countries?

Paul Black (37:10)

That's a good question because it is different. Well, we do think in part we have a hard time being a growth manager, finding a lot of great companies in Japan, in part because of the cultural issues. I think it's changing a lot. But historically it's been hard for us to find names there where we think the cultures are healthy. You know, there's a lot of, you still have the cross ownership of shares. You know, you still have a very paternalistic society. And paternalistic companies, they're not very transparent. So it's very difficult for us to find names. For that reason in Japan we do have a number of them. But in general it's difficult in other parts of the world. Interestingly, what I have found is when you look at compensation structures, which is another way of looking at culture, how do they pay people? I think it's great that outside the US you don't see guys making 30 or 40 million dollars while their CFO makes 500,000. You just don't see that. You see a lot more reasonable equity payouts and, or salary payouts in those companies, which I like a lot because I think ultimately that benefits everybody, it benefits shareholders. But you're right in emerging market, you know, people were, you know, we own Walmart in Mexico about five or six years ago, I think it was, there was a big New York Times piece on kind of the, the bribery or the so called bribery that Walmart was engaging in to get space right now, interestingly, what we, most people haven't heard is the end of that story, which is it was just big, you know, it just blew up and walmax was on, in flames. Nothing came out of it, Nothing was proved. Emerging economies, they operate a little differently than a lot of European and North American countries. And things that we would see as being kind of under the table are just normal. So there is this part where you've got to understand that and just make sure that it's reasonable.

Ted Seides (39:01)

If you could turn back to growth stock investing as a concept in the ETF world and all the factor, the blowing out of sort of factor products, you hear about value products, you don't hear about growth products. So the notion is supposed to be that value stocks work because they're boring and nobody pays attention to them. And growth stocks, you do get the Google or the Amazon every now and then, but on average that the growth stocks underperform because people are optimistic and they price them too high. Where does that break down? Or is it more that there's a subset of that growth stock universe that you've been able to identify because it's, it's clearly worked for you guys?

Paul Black (39:41)

Yeah, I think there's a subset. You know, we're not buying fad names or real high price names. We're not buying momentum. It's funny because, you know, how many years ago, 15, 20 years ago, there were, there were a bunch, a bunch of multibillion dollar momentum shops. And I can't really think of one right now that is still in existence. So when you think of growth in terms of momentum, I completely agree.

Ted Seides (40:06)

They were all down here as well. San Diego. They were there. Nicholas Applegate.

Paul Black (40:08)

That's right, Nicholas Applegate. Turner Turner Investment Partners. There was a, there was a firm, great firm called Duncan Hurst that came out of Nick's lap or no, I actually came out of Security Pacific Bank. Yeah, they're gone. They're gone. And I'll never forget actually one year when I met with a gentleman at Duncan Hurst and he was telling, he was a marketer and he said, hey, you know, I'm so good at closing business now. He said, I win all these deals. And I said, does it have anything to do with the fact that in 1991 you're up 90%? Maybe, maybe. But he thought it was about him. That gets to my point about humility. I thought it was about him. Like, let's make no, let's not confuse the issues.

Ted Seides (40:47)

So a lot of times in the growth stock universe and the way you approach investing, you're looking for certain tailwinds in trends and sectors. What are the things today that you're.

Paul Black (40:59)

Excited about it's hard to bet against China. It really is. Now we're not loaded up in China. We've got a couple of names in the portfolio. One of them is 10 cent. It's really, really hard to bet against China. You know, I know people don't always believe the numbers that come out of China. I was there in 1981 as a student and in 1981 there wasn't a car in the street, there wasn't one building, there weren't any hotels, there weren't any restaurants. People were driving black bikes everywhere. You come back today, they buy more cars per year than the US does. There are beautiful buildings across Shanghai and Beijing and other major cities. So I don't know what the growth rate is, but it's extremely high. It's extremely high. And quick little story about one of our ideas around investing kind of globally is we really like to own businesses in countries that are optimistic. And it goes back to my earlier comment, the optimist win. I was in China four years ago and we met with a group of doctor students, medical students, and I asked the question, what motivates you? What gets you up in the morning? And they said, you know what motivates me? These are 20 year old students. What motivates us is to be like America, to be as successful financially as America is. And I thought, what a contrast to, you know, I thought about 20 year old kids in the States and what do they want to do? They want to figure out the next video game that they can beat or win. And I thought four or five years ago I said that's, that's a very powerful optimistic. Doesn't mean they're going to, but, but I sure do like that energy. And you go over, there's a lot of energy, a lot of positive energy in China. On the other hand, you go down to Latin America, you go to Brazil, you go to Argentina. Not as optimistic because they've had years of corruption, they've had years of volatility and you know, interest rates and currencies and interestingly a couple years ago we were down there, we met with 12 companies. Ten of those companies complained about the macro. It's really hard for us to operate. You got this corruption, you've got the real getting clobbered. You know, interest rates are rising, inflation's out of control. We can't really, we just can't make it happen. A lot of excuses. There are two companies that never mentioned the macro. What did we do? We came back, we bought those two companies. You know, they knew that they had a significant edge in spite of what was going on around them. And those are the kinds of companies that you want to own. So in general, we are looking for those businesses where there's obviously a growing competitive advantage, but also a belief within the organization that it doesn't matter what the external situation is like, we're going to run right through this.

Ted Seides (43:45)

Yeah. And then when you get down to either the sector level or the subsector level, are there particular tailwinds that you have as kind of themes through what you're looking for?

Paul Black (43:54)

Yeah, I think you're always looking for that. You certainly want to have tailwinds. It's just an acknowledgment that that's how life works. I think anyone that doesn't acknowledge that's just not being honest. Right. It's like, you know, J. Paul Getty, you know, someone asked him, how do you make a billion dollars in oil? So it's really easy. You know, you get up really early, you work really hard, and you strike oil. And there's this. This notion that he was fortunate. You know, he drilled the well in the right places and he was fortunate. So I think having tailwinds is essential to success. Obviously, there are demographic talents. I think a big advantage we have is that we tend to own businesses in the growthier sectors like technology, healthcare and consumer. And if you think about the emerging middle class throughout the globe, this is just one aspect of it. But as people get wealthier in Brazil and Indonesia and India and China, of course, what are they going to do with their money? They're going to buy products from the companies we own. So if you think about a beautiful big picture tailwind, you can do what Jimmy Rogers did, which he said, hey, you know, he drove around China and Asia on his motorcycle and he came back and said, oh, yeah, you got to buy emerging economies and you do that by buying commodities. We'd argue it's a way better idea to buy companies that sell products as these people get richer. That's a beautiful tale. And that's not going away for 15 or 20 years. You know, that's just something you can really take advantage of.

Ted Seides (45:12)

How do you think about downside protection in the portfolio?

Paul Black (45:18)

That's a really interesting question because I've said a couple of things. Today we're growth investors. We run 33 stock portfolio. First thing everyone's thinking is volatility, right? Wow, you guys must. You probably capture 140% of the market when it's going up, but you get 110 when it's going down. And interestingly, that's not the case. Everything we do in this portfolio is to manage on the downside for all the reasons we know about. How do we do that? I think one way we do that that's real important is being right more times than not on the direction of the competitive advantage. Because in difficult periods of time, if you can own the company that isn't constrained by the financial markets and can allocate their capital into the spaces where their weaker competitors cannot, what you find is that really those companies hold up really well. Of course we do the basic portfolio construction of diversifying among sectors and industries and making sure we never have more than 4 or 5% in any one name. Those are obvious. But at the end of the day, everything we manage is to do well in tough markets. I'm surprised frankly, how well we've done in the rising markets. Where we really expect to do well is in tough markets, markets very, very counterintuitive. But to me it goes right to the heart of what we're doing differently around the issues we've raised.

Ted Seides (46:38)

So in the evolution of the business, you mentioned going through a tough period of time and having $4 billion of money come out. And as, as an allocator looking at something like that from the outside, you say, well yeah, but at that point in time, as you said, you guys were doing some things wrong. Yes. What's been the patterns that you've seen of what you would consider more positive allocator behavior and less positive allocator behavior?

Paul Black (47:06)

Unfortunately, even the so called sophisticated capital allocators tend to do what everybody else does, which is when they do a search for a manager, they tend to find the guys that have done the best. Most recently with the argument being because they've done well for 10 years, they're going to keep doing well. Well, you know, lots of things can change. To me, a better way to look at it, and I know you've done this yourself, is to really figure out the people in the organization and whether they're the right people to continue to generate the kinds of returns. And then of course you need a process, but the allocation behavior still. You know what, most individuals still chase money. They still chase performance. We tell them all the time, look, if we've done particularly well, we completely understand you take the money away from us and why don't you put it into a, you know, a strategy, like maybe a value strategy that hasn't done well, but you believe in the people in the process. That, that, that's brilliant. It's so simple. But nobody does it. And even today, nobody does it. So what's going to happen now? What are the public funds? A lot of public funds now are moving to passive right at the bottom of the cycle. And you know, it's just like seven years ago, everybody had to be in hedge funds and long shorts with a little leverage. And now what's happening today, you know, they're getting fired time and time again. It's probably a great time to build a long, short hedge fund. And so after 10 year period of time, a great performance in long only. People load up on long only. So their behaviors really, I don't think in general have changed and I don't think they will.

Ted Seides (48:35)

So I imagine one of the questions you must get a lot now is you're at 26 billion not too long ago and years ago, but you were a lot smaller. How have you managed the change within the portfolio at 26 billion compared to when you were a few billion?

Paul Black (48:54)

Interestingly, and we keep track of this, you know, our average market capitalization today versus 13 years ago is about the same. It's $76 billion. Our median market cap is about 35 billion. 13 years ago is about 35 billion. So we never generated returns by kind.

Ted Seides (49:13)

Of creating, it was large cap stocks even when you were a lot smaller.

Paul Black (49:16)

Yeah. And you know, the beauty of kind of owning your own firm and being a part of it and having a group of people, there's 40 of us here, is you don't have to run all the money in the world. I mean, if we found out all of a sudden that we were sacrificing returns, we'd close the product immediately. You know, this is our goal. We love taking on the big guys. Like you said, who is this firm in California that's adding 500 basis points per year over any time period versus all the big guys we know about? It is fun to do that. So that's more fun than raising more assets. And we want to make sure we keep ourselves in a position to continue to do that.

Ted Seides (49:53)

Paul, it's great. I think we need to turn to some closing questions.

Paul Black (49:57)

Oh, boy.

Ted Seides (49:58)

What was your favorite sports moment?

Paul Black (50:00)

I'm a PAT fan, so there's been a lot of them. But my favorite was with my son, who's now 13, so he was probably 11. Being with my son who kept asking me, you know, during the, the Atlanta game recently, two years ago, hey, dad, can they win? I'm like, no, I don't think so actually, what I said to him, I said, you know what? Yeah. I kept telling him, yeah, Jake, they can win. They can win. Hey, dad, third quarter, it's 28 to three. Dad, can they win? Yeah, Jake, they can still win. And then they came back and they won. I mean, one of the most extraordinary. And my son takes it so seriously. I mean, he was literally, you know, weeping, you know, at that last part of the game. And then, you know, you know, they won. Embraced, really. One of the great moments, of course, being a Boston fan, I mean, 2004, when they win the World Series first time. Phenomenal. But. But sharing it with my son. Highlight.

Ted Seides (51:02)

Yeah. What teaching from your parents has most stayed with you showing up.

Paul Black (51:08)

Never, ever give up. You know, I've thought about that a lot. There's a lot of times when I would have wanted to quit. You know, when we. Especially when we tried to bury the firm. But you know what? If. If we would have quit, we would never be here for this period, for this ride right now. So what is it Woody Allen said 95% of life is showing up? I. Absolutely. I think it's 99. Just keep showing up, keep doing what you're doing, and you know what? You'll be there when good things happen. It's huge. It's a huge, huge lesson.

Ted Seides (51:39)

What information do you read that you get a lot out of that other people might not know about?

Paul Black (51:43)

I'll tell you a great one. I just opened it this morning. There's a gentleman named Nick Murray, and he's actually kind of an advisor to financial advisors. He writes a monthly newsletter. But what I love about it is he always. His basic thesis is how negative the press is, how pessimistic the press is, and how really, you know, again, he's a big fan of the optimist wins over time, but we don't see that out in the world. We see only the problems. So he keeps you focused on what's actually working. And then he always has great resources, great books that he's reading, couple of blogs. I just went to a. There's a. There's an. It's funny as I'm talking about optimism again, but there's a. There's an optimist blog I just went to today that was kind of talking about the. The short term negative perspectives versus long term kind of wealth creation. Those are two that are real, real valuable to me. And of course, I read the Wall Street Journal, but those are two. And then we have a lot of guys that have various podcasts. That I listen to. Of course I listen to capital allocators. Of course I do my work and, you know, get a lot of good information.

Ted Seides (52:46)

Yeah. What life lesson have you learned that you wish you knew a lot earlier in your life?

Paul Black (52:52)

I think that notion of keep showing up, I wish I would have got that earlier because I think it would have been easier to endure through some very difficult periods of time. I wish I would have learned that early in my business career because, you know, again, I didn't pull the trigger on moving or leaving the bank, but I really wanted to. And I'm glad I didn't, because I wouldn't be where I am now if I had pulled the trigger on any of those things. So. So I would have. I would have liked to had somebody tell me, paul, keep showing up. That's why I kind of preach that all the time in this firm.

Ted Seides (53:28)

How do you advise that to your kids? When, you know, when we were growing up, it feels like there was a lot more stability in people's career paths, and now there seems like there's a lot more mobility. So does showing up mean the same thing that it might have, you know, 20 years ago?

Paul Black (53:49)

That's a really good question. That's a great question. I think it does, because when I say, keep showing up, I could have left the business. You know, I was thinking, oh, I love camping. I'll be a camp counselor or something. You know, I actually was talking, I could have left the business. But you know what? I always loved the business. I just didn't love the vehicle in the form of a bank that I was doing it in. So keep showing up. Keep pursuing what you're passionate about. And, you know, there. That's how I found WCM Investment Management.

Ted Seides (54:17)

Yeah. All right, last one. You know, it's your. Your waning days. You are, at this point probably a camp counselor who knows exactly the camp counselor at wcm. What advice would you give yourself today?

Paul Black (54:32)

I'd probably argue that as much as you love the business, remember there are other parts to life and make sure, you know, whether that's being healthier or whether that's spending more time with my family, my wife, my kids. The problem for me is I just love this business so much. You know, I'm not trying to run away from anything. I love it, and I love the people in this business. So I probably would say, get a little bit more balance there, Paul. A little bit more balance. Because I think, you know, in 20 years, I'm going to say, okay, I don't have to do all that. I can get other people to do that and just kind of, you know, slow it down a little bit because we're running pretty hard right now.

Ted Seides (55:13)

Great stuff. Thanks, Paul.

Paul Black (55:15)

Thank you, Ted.

Podcast Host (Ted Seides Intro/Outro) (55:17)

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Disclosure Narrator (55:40)

This testimonial is being provided by Ted Sides and Capital Allocators, who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and does not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADV and further information.