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The Long View
Will Danoff: ‘Be Very Careful of Unprofitable Companies’
00:29:50
The veteran Fidelity Contrafund stock-picker on why earnings drive returns, how he evaluates management teams, and what separates lasting winners from early rocket ships.
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- [00:00]
Vanguard Announcer
Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline. It's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio. That's vanguard.com audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor.
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Podcast Disclaimer Narrator
Please stay tuned for important disclosure information at the conclusion of this episode.
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Amy Arnott
Hi, and welcome to the Long View. I'm Amy Arnott, portfolio strategist for Morningstar. We're taping this podcast live at the Morningstar Investment Conference, where we're delighted to be joined by Fidelity's Will Danoff. Will runs a number of Fidelity Equity strategies, the best known of which is Fidelity Contrafund, a mutual fund he has been managing since September 1990. Morningstar named Will its domestic Stock Manager of the year in 2007. Prior to becoming a portfolio manager, Will served as a retail analyst at Fidelity and assistant portfolio manager at Fidelity Magellan. He graduated from Harvard University and earned his MBA at the Wharton School of the University of Pennsylvania. Will, welcome back to the Longview.
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Will Danoff
Great to be here, Amy. Really a real pleasure.
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Amy Arnott
Well, thank you for joining us. We wanted to start by talking a bit about your origins and career path. So if we kind of rewind all the way back 40 years ago, can you tell us a bit about how you first got interested in investing and who some of your early mentors and experiences were?
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Will Danoff
Yeah, I mean, I feel so lucky that I did end up at Fidelity. I mean, whatever. It's been 40 years. It's been a remarkable run. We got a great team. You mentioned the Magellan Fund, Peter lynch, just an exceptional individual. But I guess I was always interested in games. I like to play games. You know, I used to play poker with my friends and, you know, played chess and, you know, backgammon. So I don't know. The stock market, in a way, is a big game, so I was interested. And then family friend had done well, you know, and again, I didn't really. My, my father's a doctor, my mother's a kindergarten teacher, so I didn't really have much experience in business or in the market. But this one friend retired when, I don't know, I think he was in his 40s. And I don't know, somehow it was intriguing to me. So I ended up not liking doctoring as much as I thought. I volunteered at a hospital. And I just didn't feel the calling. So ended up, you know, becoming a stock picker. And I will say I worked on Wall street for a couple of years before business school, Amy, and the people there were just having fun. It was very dynamic. These were, you know, men and women in their 40s, and they were just, you know, high fiving. And it was in, you know, it was in the early 80s. The market was going up. And, you know, I think I just liked the dynamic aspect of the market. And so, you know, luckily, Fidelity hired me and they really trained me, you know, gave me an opportunity to, you know, learn about the retail industry, which was really helpful. But before I forget, we have to look back and see if, you know, since 2007, when you gave me that great award, if the fund has done well. I think it has. So maybe Robbie will do the research before the keynote today. But, you know, it's a great team and, you know, just grateful, you know, to Fidelity. I'm also, you know, grateful to so many of the shareholders and Morningstar for, you know, believing in me and being patient. As, you know, the markets go up and down, and it's a streaky business, but the shareholders have been, for the most part, patient. And then, you know, when you look back, it's this notion of, like, utter respect for the companies and the management teams who have worked so hard to build new businesses or, you know, work hard to make an existing business that much better. You know, and there's just so much that goes into delighting customers, delighting employees, and, you know, out of that comes the delight of, you know, for the shareholders.
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Vanguard Announcer
But,
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Will Danoff
you know, I got dinged at Fidelity in the summer internship, you know, coming out of Wharton. So I. I was not, as, you know, I was immature, and I can see in hindsight why I didn't make the cut. But, you know, for all your listeners, don't give up. And one of the fellows who was graduating one year ahead of me at Wharton, I had discovered at a party that he worked at Fidelity. And I was just like, I have to meet this gentleman, Steve K. Who runs the, you know, we did the health care stocks and then ended up, I think, running Growth and income, did a great job. Great investor still at Fidelity. And this is before email and everything. So I literally wrote him a handwritten note, and we all had little folders, and I said, I need to meet you. Yeah, right, exactly. I have to meet you. You know, I want to talk to you about Fidelity. And he just said it was a great place he had a great summer internship and that I should apply again. So with his encouragement and with his advice, I applied and was able to get the job full time. And we've been colleagues together. And, you know, you think about, you know, just like Morningstar. So. So many people have been there for a long time. You made a career there. And I think you can be honest, more honest with people that you know and you've worked with. And, you know, sometimes you have to deliver messages that people don't want to hear, but, you know, there's respect, and you can also move faster, you know, when you've known somebody for a long time and, you know, we need to sit down and talk about this, but. And I think being a retail analyst, it's sort of like healthcare or tech. It's a very large group. And there were all sorts of companies in the mid-80s. You know, it was the time of the superstores. So, you know, the Toys R Us, the Home Depots, and, you know, you sort of saw growth stocks. Then there were turnarounds. You know, the great, you know, Chicago company Sears, Roebuck was trying to turn around. It was a perpetual turnaround. Kmart was trying to turn around. So you had lots of different types of companies, and I think that makes you a better investor. And that really helped me. I mean, honestly, Amy, I was a mediocre analyst for the first 18 months, you know, but retailers liked to talk to Fidelity. I remember, you know, many of the companies had stores in the Boston area. And I would really just say, listen, when you're visiting your stores in Boston, come and see Peter Lynch. You know, that was my pitch. That's why I was a good analyst.
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Amy Arnott
Yeah.
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Will Danoff
And so they would come and Peter would say, that was remarkable. I'm so happy to have met, you know, this particular executive or that executive. And I learned how to ask questions what to think about. And, you know, the other point about retail that was so great was this idea of unit economics. You know, opening a new store. How much does it cost? What is the expected, you know, early sales?
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Amy Arnott
When do you reach same store sales number?
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Will Danoff
Yeah, assuming same store sales are pretty good early on, you know, when do you reach break even? What is the quote, unquote, four wall margin? So you can sort of say, oh, you know, I put in a million, and by year three, I'm making 400,000. That's a good return. And, you know, yeah, anyway, so that it was a good group to stretch yourself as an investor. And then, of course, you know, you have to and there's all sorts of, you know, auto parts retailing or computer supply retailers, office supplies. So you, you know, of course I got to know, you know, Liz Claiborne and other apparel companies because, you know, a lot of it is apparel. So you learn and you just, you know, rinse and repeat. Amy, you know, I, I'm, I'm the Woody Allen of fidelity. I just keep showing up. You know, as I said, the reason I'm late and I apologize for being late is we squeezed in a meeting with cdw, which is a mid cap that I knew before they went private. Then they've gone public again. So I've had a long history with cdw. And then Terry Duffy, the, you know, the great CEO of CME agreed to see us. So, you know, I had two good meetings today in Chicago. You know, you got to keep learning, you got to keep showing up. But that notion of unit economics, I think back to I, I forget when Starbucks went public, I think it was 92. So maybe before we met, but it was so obvious that selling coffee at a premium. Here's my Starbucks still, whatever this is. 40 years later. It was like, I forget the numbers, but he was leasing his units and he was just so profitable that I think it was like a 60% ROI. And so you just knew he could self fund. And at the time I think he had 140 units. He might have 14,000 now in the United States. And he even said, I was inspired by Italy. This is Howard Schultz. But honestly, if you look back in the annals of fidelity, in many cases we had the stock a hold. It was too expensive. It's like, how could it be too expensive? Well, you know, people were expecting, you know, continued comp sales growth and optically it's, it looked expensive, but it was fairly valued for a really unbelievable company. I mean, his, you know, same store sales were double digit, you know, since like forever. He was very successful in the Pacific Northwest and he was just opening in like San Francisco. He didn't, you know, and it was going well there. And then, you know, he went to New York and everyone said, oh, labor's too expensive. The New Yorkers are going to, you know, crush you. They ate him up. They loved him. So anyway, but the, a high roi. You know, you think about what we're doing, we're giving money to these companies, going public. What are you going to do with the money? You know, going to do a bad acquisition? No, you know, I'm going to open stores or open restaurants that are going to Generate really good returns.
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Amy Arnott
I wanted to ask about meeting with management. I know it's always been a big part of your process. You were just doing it today. We talked to Charlie Ellis within the past year and he referenced Regulation FD as a game changer for active management. Just saying that everything changed when fund managers didn't have that access that they once did. Can you reflect on that? Was that a pivotal event for you and your process?
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Will Danoff
That's a very good question. And Reg FD has changed the communications for companies. I feel, Christine, that the information we want is just to understand the business. We're not interested in anything that's, you know, certainly material non public, but even, you know, we just want to know what the company's sharing and you know, how they view their own business. So it's changed a little bit. It's probably changed some of these short term investors. But you know, Fidelity, we're interested in long term investing and you know, Peter used to always say the big money is really made in like year four and five. So get to know management, understand the ROI of their business and you know, why they are so profitable, why they're generating a lot of shareholder love and you know, what the value proposition really is. You know, most stories come down to three or four bullet points. It's not anything that, you know, management can't talk about because of Reg fd. You know, I mean when I first met Warren Buffett, he said if I were you, I wouldn't talk to any CEOs. I was like, that's what I do, you know. And he, you know, he had a good point. He said everything's in the K's and the Q's. And it is funny when after I go to a meeting and I'm sort of saying I got to, you know, dig in a little bit here and I look at like the last presentation or the 10k and it is all there. But you know, he also made the good point which is, and this is probably a pre Reg fd, but it is, it's still applicable to all investors. Any good CEO is going to tell you exactly what they think you want to hear. And so you have to be very careful. You know, management's coming around. Are they trying to goose their stock so they can do an acquisition? Are they goosing their stock so they can, you know, sell some stocks? You know, and so, you know, what you want to do is sort of take what the market gives you. And Reg FD probably has given us less information, but it's still out there and in many ways arguably could play to fidelity, strength and the other big firm strengths because we do have industry expertise and we can hopefully use our mosaic of, you know, going to, you know, industry conferences, going, talking to customers, talking to distributors, talking to, you know, other industry players and you know, government officials and this sort of thing and piece it together. And. But I'd say, say Charlie, I don't know Charlie, but I tell him he should work harder. You know, hard, hard work doesn't, you know, can solve a lot of problems. But you know what, I don't want to have any information. I don't, I shouldn't have that, you know, restrict us. But you know, management, you've got to, you know, as I said earlier, I mean it's remarkable what they do and you know, so I think one of my value adds is to look back, you know, like Terry Duffy's been running CME for 20 years. I mean it's just remarkable what he's done. And he actually has been an outstanding capital allocator. You know, he bought Nymex and he bought I think the CBT's anyway, you know, and you can just, sir, you know, Jensen Long, I mean when Jensen reached a trillion market cap, we happened to be doing a tech trip and we were out there and I had the insight. We can't just show up and say, thanks Jensen, you know, you built a trillion dollar company. So I had one of the junior analysts use the early AI applications to make some AI art for him. And it was like Jensen is like an astronaut and Colette, who's the CFO was the co, you know, co pilot and it was the rocket ship Nvidia. But you know, 24% compounded growth for 25 years. You know, you just don't see that that's, you know, upper echelon. I mean it's remarkable.
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Vanguard Announcer
Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline, it's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio. That's vanguard.com audio. All investing is subject to risk. VANGUARD MARKETING CORPORATION DISTRIBUTOR so when you're
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Amy Arnott
looking for that type of best of breed company like an Nvidia or Starbucks, how do you kind of separate out something that looks like it's growing quickly, looks good on paper, but may not have kind of an enduring advantage.
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Will Danoff
Yeah, no, Amy, it's a very good question and it's a good point. What is the value proposition? You know, it's like, do customers want what you're making? And then the key second question is, can others do what you're doing right? And that is hard. And honestly, Amy, you know, listen, I got my notes. You know, Jensen, I first met you in 22,002. You were talking about the GeForce 256. And he was like, oh, that was the first GPU. I had no clue how important GPUs could be. And a matter of fact, for, you know, the first 15 years, it was very competitive between Nvidia and then the other company I think was the ATI or something. But, you know, originally it was graphics accelerators. And then he had the great insight. He was talking to his customers. Often the great entrepreneurs are close to their customers. He realized that people were buying GPUs to do things like in hospitals, analyze X rays. And also, you know, then he saw the AI boom. You know, he delivered that first GPU to Elon and the folks at OpenAI, which is remarkable. But I would say for me, it's what have you done in the last five years? And if you've grown profitably and gained market share, you're probably doing something better than everybody else. If you're growing really fast, you're onto something new and that can be very powerful. But often it's better to wait and you find out who's really good after the competition hits you. I mean, I was an investor, Chicago based company, Groupon. And I was like, wow, this is exciting, you know, because we like did some Google search and it was like they were the fastest company to a billion in revenue. And I was like, I have to own this thing. This is, you know, taking off. And then at least Amazon and maybe somebody else copied them and it didn't scale and it ended up being a rocket ship that blew up pretty badly, unfortunately. But so, you know, I don't know if there's any secret sauce. It's a bit of a slugging average where you have to hope that the company keeps executing. One of the strengths of Fidelity is despite reg, FD is just monitoring what's going on. And I take my notes. And in the case of Terry, I was like, terry, I haven't seen you since 2024. This is what you said two years ago. What's happened? You know, have you executed? And you know, there's always stuff that happens to management teams. And it's fine if, you know, yeah, we were wrong. You know, well, what did you learn? You know, it didn't work in India. Well, what did you learn? Didn't work in California or something. What did you learn? But so for me, it's like, what happened in the last five years? Do I like this earnings trajectory or the, you know, the sales trajectory? And then, you know, without getting into reg fd, you know, what is the opportunity? Looking out the next five to 10 years and hopefully you have confidence that management will be able to execute. But I've been shaken out of a lot of good stories, Amy. And the beauty of the business is you can, you know, I tell the team and I tell all your investors and tell you guys, if a stock has doubled, you haven't missed it. And lately I've been saying, if a stock has quadrupled, you haven't missed it. There's a lot of stocks are up now, but. And that. That it is a little hard. You know, you know, these. But, you know, Munger, of course, advised Warren Buffett, better to buy a great business at a fair price than, you know, a fair business at a great price. But, you know, some of the PEs get up there and you're like, you've got to believe further out and you've got to believe that you really understand the business. And. But yeah, I would say we're continuing to learn. And sadly, Amy, I always joke, it's like mistakes are part of the game. Just try not to make the same mistakes. And somehow I keep making the same mistakes, but we're trying.
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Amy Arnott
You mentioned rocket ships a couple times, and we noticed that SpaceX was among your top 10 holdings as of the end of April. Can you reflect on buying companies before they go public? Buying stakes in companies before they go public? How do you decide when to do that versus waiting until a company's public?
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Will Danoff
I can't comment on specifics, but at some point my colleagues and I said, hey, we're pretty good at analyzing public companies. We have all this industry expertise. Might there be some private companies that we could help? And I'd say it's cyclical. And as you know, many of the private companies have stayed private longer, partly because they have access to capital as private companies. But many of them are doing extremely innovative things. And Fidelity is always interested in finding new innovative companies. The entrepreneurs are remarkable, and the scale of a firm like Fidelity enables us to do that. Often the public companies are a little less mature, and we have to be careful about that entrepreneurs are very talented but they can be needy. But I've been very impressed and often it's just once in a while there is someone really exceptional. Contrafund is an investor in Zipline, which is run by a fellow named Keller Clifton who's just remarkable and he's one of the leaders in drones. Again, it's just one of these crazy stories. It's like what happened, they tried to make a drone drone and they were out in Nevada I think, and they were struggling a bit. And then I'm not sure exactly how, but he convinced the health minister of Rwanda that he could deliver blood to rural hospitals. There was a very high incidence rate of young mothers dying after they delivered their babies because there was no roads out in these hospital. That's remarkable. And so again they figured out the technology in Rwanda of all places. And now they're working with Walmart and others in the United States. But it was just sort of like this is, this is unbelievable. And he's a great entrepreneur and you know, so I decided to do it. I mean sometimes it's, you make a mistake and you make a judgment call and as you all know, there are people who can do a good job of convincing you. So that was just one, but there are others. And you know, the key then is to monitor what's going on. And you know, in the case of SpaceX, when we first got involved, I think it was in 2012. The one advantage we have, Amy, with the privates is you can't sell. So you know, I believe in long term investing but there's so many opportunities to panic out.
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Amy Arnott
Right.
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Will Danoff
And so with the privates you can't really panic out because there's not that much of a market.
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Amy Arnott
So you talked about mistakes and how they're sort of inevitable. And I know you have referenced Tesla, the fact that you sold part of your position back in 2017 and 2018.
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Will Danoff
I think, I think for me the biggest mistake with Tesla was when they opened the factory in Shanghai, Uh huh, successfully, you know, earlier than schedule, under budget I think. But they were able to sell the cars at western prices when they had a Chinese cost of goods sold. So they were very high margin, I forget the third quarter, the fourth quarter of 2019, maybe they had a blowout quarter. And you're talking about if the stock has doubled, we haven't missed it, they report a good quarter, stock goes up a lot. And I was like, I can't buy this up 20%, I'm going to wait. But that was the moment when earnings estimates started going up. I mean, the one lesson we haven't really talked about and why I think Contrafund and Fidelity have done so well, it's this notion of stocks follow earnings. The earnings per share and the stock price are very highly correlated. So in that case, in every quarter, reg D or not reg FD or not, you get a report card company, you know, growing earnings, 20 growing earnings, 10 growing earnings, 40. You can decide, you know, which ones you want to play in. But I hesitated and I was just like, this was a blowout quarter, but I can't pay out aftermarket or, you know, the next day. But it was the beginning of a six or eight quarter explosion in earnings and I kind of missed it. And a lot of growth managers either jumped on or were already involved, but, you know, we gotta. That was a big mistake. So that was, that was a miss. And I knew the company and I, I shouldn't have missed that one. I don't know what. Just other mistakes in general. I mean, going for the long ball. The corollary to stocks follow earnings. I used to work next to a great investor named Jean park. And Jean used to say, I think she was the Morningstar manager of the year one year, or maybe she wasn't, but avoid unprofitable companies. So if I have any advice to the Morningstar community, it's be very careful of unprofitable companies. You know, maybe you miss a double or triple or quadruple, but if you wait until they're profitable, that's a lot safer.
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Amy Arnott
Right.
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Will Danoff
You know, and. But it's hard because Steve Limer, who's done a great job for us in, in growth and the Growth Fund, you know, unbelievable record, unbelievable investor, has done a lot in biotech, and biotech companies are unprofitable until their drug is approved and then they're very profitable. Yeah. So burning through cash there, there's really no, you know, easy rules to success, but.
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Amy Arnott
Right.
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Will Danoff
Stocks follow earnings is a good one. And in general, you know, you're, you're wise, especially if you're not a professional, to avoid unprofitable companies. And, you know, the, the corollary is. Oh, my God. You know, sort of the exciting new blowout, you know, long shot. The Hail Mary passes are often difficult for the shareholders.
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Amy Arnott
Well, Will, it feels funny to have you reflecting on your mistakes here at the end of what has been, or toward the end of what has been an amazing career. It's a real honor to have spoken with you today. Thank you so much for taking the time. Oh my God.
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Will Danoff
I'm just getting started. It's been so much fun. And I want to say that, you know, Amy Arnott, you found us very early on. So listen to Morningstar and buy more. Fidelity. Fidelity is a great place we are going to continue to execute for our shareholders.
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Amy Arnott
Well, congratulations on your retirement. I know you'll be around for another six months or so, but we're really glad that we.
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Will Danoff
I don't think I'm going to go very far. I love Fidelity. Yeah, they're part of the family.
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Amy Arnott
They might show up and Morningstar is
- [27:48]
Will Danoff
part of my family.
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Amy Arnott
Yeah.
- [27:50]
Will Danoff
So thank you.
- [27:51]
Amy Arnott
Yeah, thank you so much.
- [27:53]
Will Danoff
Awesome.
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Amy Arnott
Thanks for joining us today.
- [27:55]
Will Danoff
Been a pleasure.
- [28:01]
Amy Arnott
Thank you for joining us on the Long View. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts, you can follow me on social media, AmyArnot on LinkedIn and @ChristineBenz on LinkedIn or ristinebenz on X. George Cassidy is our engineer for the podcast. Jessica Bevel produces the show Notes each week and Jennifer Garrett copy edits our transcripts. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongvieworningstar.com until next time. Thanks for joining us.
- [28:47]
Podcast Disclaimer Narrator
This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates. Unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented herein. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analyses or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principle. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile. Before making any investment decision, please consult a tax and or financial professional for advice specific to your individual circumstances. MorningStar Investment Management, LLC is a registered investment advisor and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar Inc.
- [30:44]
Vanguard Announcer
Lots of firms throw a couple flashy funds your way and call it a day, but not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline. It's a commitment to your clients. It means top grade products across the board. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio. That's vanguard.com audio all investing is subject to risk. Vanguard Marketing Corporation Distributor.