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Paul Black
At the time of this recording Sean is not a client of WCM.
[00:03:25] Sean: Paul, welcome to What Got You There. How are you doing today?
[00:03:26] Paul: I’m doing great, Sean. Thanks for having me.
Paul’s Mindset
[00:03:28] Sean: Absolutely. You are someone whom I’ve admired for a long time. The way you see the world, and what you’ve been able to do is just fascinating to me. I cannot wait to dive into this. I would love to know, has there been a mindset of yours that if you could pass on to someone just starting out, that’s just been incredibly beneficial for your success and your trajectory in your life?
[00:03:49] Paul: Oh yeah. It’s interesting, and it’s not something I’ve identified in my life until much later. I’m in my sixties now and it’s probably not until I hit my mid-fifties that I realized looking back at my career that the one thing that I did well is I kept showing up. I never quit. I think that mindset, and I have so many examples in my life where it would’ve made sense to quit and give up because the obstacles just appeared to be so great. And for some reason, and I wasn’t even conscious of it, I just didn’t have the ability to give up on something that maybe I should have given up.
And because I didn’t give up, I’ve ended up in a place that I couldn’t even have imagined 20 or 30, or even 40 years ago. So I tell my son, I tell my daughter, look, most of life is showing up. I think it was Woody Allen that said 95% of life is showing up. Showing up day after day after day despite obstacles, despite fears you might have going forward. That’s a mantra in our firm about everything, especially today in these markets that we’re experiencing. You’ve got to keep showing up, you’ve got to keep grinding because better days will come. If you’re not there when the better days come, you’re not going to be able to take advantage of them. So showing up, being there, longevity is huge in life, and in this business.
[00:05:20] Sean: Can you talk me through the internal dialogue that’s going on in your head during some of those difficult stretches, I know you’ve been through a number of them. What differentiates you from someone else who would’ve quit like 99% of people in those moments?
[00:05:33] Paul: It’s just not wanting to fail, and admit failure. Even if I reflect, was there a time when I was failing that I should have quit? And, I can’t point to one example of whether it was sports in high school or sports in college or business, or my first few years at Bank of America. I detested working at Bank of America and being a minion , one of 90,000 employees. I was paying 95-year-old women’s medical bills and housing bills. I was in the trust department and just didn’t like it at all. I was a bookkeeper for them. So many times I wanted to quit. This isn’t right, maybe I’ll become a camp counselor, and do something fun with people instead of sitting in an office every day.
And yet, because I didn’t quit, eventually a job opened up in the portfolio management group at Bank of America, and I applied. And fortunately for me, they had a hiring freeze at the time, so I got the job. And then I ended up in a job running portfolios at 25 years of age with no experience, no idea what I was doing, and loving every minute of it because my passion was investing. I didn’t even have a switch in me that was about quitting. I just didn’t, and I don’t know if it was just innate to who I was, or if it was lessons from my parents but it has served me well. As I said, I would never have envisioned that I’d be professionally where I am today, 40 years ago. No way.
Paul’s Passion for Investing
[00:07:17] Sean: When did that light bulb first click for you, that passion around investing?
[00:07:23] Paul: Well, it started when I was 20 years old. I had gotten a small inheritance from my grandfather. It was about $30,000, which I’ve gone back and said, that’s about probably 250 or 300 grand today. And I happened to run into an old EF Hutton broker, who had me start buying South African gold mining stocks in the late seventies and the early eighties. And you remember that was the end bout of inflation, gold went from $300 an ounce to $800 an ounce. And I’ll never forget I used to subscribe to the Wall Street Journal in college, and every day I’d open up the Wall Street Journal in that time, and let’s say I own 500 shares of Vaal Reefs or East Driefontein South African gold miners, every day I’d look at the price of my gold miners and they’d be up like a hundred bucks.
I was making $500 a day in college owning South African gold miners. And if that doesn’t give you the bug, nothing else will. I thought this is easy, if I buy a few names, they go up a lot, you ride a trend and you make a lot of money. It’s a lot easier than working for a living. And that grabbed me, and fortunately, because I had my grandfather’s inheritance, I had to figure out what to do with it. And that’s how I learned and got excited about investing. And I have had that passion ever since.
Uncovering the Deepest Joy
[00:08:49] Sean: Now, having all these years in the business, what element of what you do day-to-day brings that deepest joy for you at this moment?
[00:08:56] Paul: Well, I was thinking about this coming into work today. Business people define business in different ways, you know, competitive advantages, strategy, strength of character, and integrity. I was thinking that business is about people. It’s all about people and people are the ones that allow you to compete. They allow you to get better. They allow you to improve. So the more you work on the health and candor and trust of people around you, and frankly, to use a corny term, the more you love the people around you, I think it drives outsize returns in what you’re trying to accomplish.
People want to be a part of something better than themselves and bigger than themselves. And if you can corral the passions of people and let them be the best versions of themselves and ferret that out and find where their genius is for lack of a better term and cultivate that and grow that, it has a lot to do with the ultimate success of our investment strategies. And again, the older I get the more I see it’s about people, the more I see it’s about the individuals that you work with.
[00:10:22] Sean: I was thinking about what you were saying a few minutes ago when you were working for the trust arm of that business, where it was just draining, soul-crushing every single day.
[00:10:29] Paul: It was soul-crushing.
[00:10:31] Sean: And then you start to do something that you just love, it’s your passion. You can’t even describe it, it’s almost similar to love, you can’t put words to it. And then for you to have that insight and then to understand the advantage when you can tap into that in the people around you and the people in your business. I guess I’m wondering about the evolution of that through all these years now. When someone first comes into WCM, is that what you’re going towards trying to uncover what that deepest joy is, and the thing that lights them up inside?
[00:11:02] Paul: You are. And it’s interesting, part of that and learning that is truly being interested in people. When I meet new people or I spend time with people I’m always surprised when people aren’t curious about other people. I think the act of being curious and showing genuine interest in other people goes a long way towards unlocking their potential. I just naturally do that. I ask a lot of questions wherever I am. And I do that because I want to learn something new. And it just so happens that when you’re curious and people open up to you, you tend to start to unlock the potential that they have.
Everybody’s interested in telling their story. And it’s amazing how many times I’m with people and they don’t ask me questions. I’ve hired salespeople in the organization or research people, I’m often saying we’ll go out and have a drink or a dinner, and very rarely do many of them ask a lot of questions. So I’m always preaching to them, ask me questions, ask me something about myself, or ask me something about the firm because that’s how you begin to figure out and understand how to unlock the potential in that person by knowing their backstory. And it’s interesting, we just brought on a new research analyst recently, and one of the first things we told him is your job here is to make everybody around you better. That’s your job.
So he took a little post-it note, he wrote down, “Make those around me better.” He put it on his monitor and every day he comes in and he says, how can I make those around me better? If you take a very selfless approach to try to create something, and you think about, I’ve got three or four people that I can pour into, how do I make Paul better? How do I make Mike Trigg or Sanjay Ayer better? That’s a very, very powerful recipe for success and vice versa. You know Ross who happens to be the person we interviewed and brought on, I think, “What can I do based on his history to make his world better so that he can be freed up to produce?”
Paul’s Learning Process
[00:13:22] Sean: It gets back to what you were thinking about while driving to work this morning. It’s about the people. Develop them. I’m intrigued though, you said just how curious you are, and I’m thinking about your learning process. And a lot of it’s just like self-directed learning. What did the early days look like for Paul Black? What were you doing early on to develop that learning curve for yourself?
[00:13:44] Paul: Interestingly, it was there. I naturally had this curiosity about different areas of life. I’ve always had that, but my quest to become a great investor and the curiosity that it takes to become a great investor. Reading every single classic book, and trying to find in those books the commonalities between the great investors in terms of how they do what they do. A lot of reading, a lot of mistakes, frankly, Sean, we did so many things in the early years of this firm that are comical and laughable. A quick story, we had research offsite about five years ago, and we went up to Big Sur on the Coast. We stayed in a great place.
We took the whole research team up, and one of my partners, Mike Trigg did a presentation on the evolution of our investment process over the last 15 years. He went back 15 years ago, and went through some of the nonsense that we used to think was a good investment process. And it was embarrassing. I mean, there were so many things that we did that were just wrong in hindsight. And so I was sitting there because I was there 15 years ago, Mike wasn’t and I was embarrassed. I spoke up, and I said, I’m embarrassed right now because of how simplistic and foolish we were 15 years ago, but you know what we did, we kept iterating, we kept studying, we kept reading, we kept doing the classic, and we’ve gotten much better.
I want everyone in this room right now in 15 years to feel embarrassed about how simplistic we are about investing today. Let’s have that same progression of growth and it only comes from loving what you do. I think it was Steve Jobs who said, “you’ve got to love what you do because if you don’t love what you do when tough times come, you’re going to quit. But if you love it, you’re going to push through it, you’re going to grind, and you’re going to show up every day.” So loving and having a passion for what you do, not giving up, iterating on what your profession is or in your life with your kids, with your wife, with your family, it’s all the same thing. And it is about being curious and living a curious life.
[00:16:10] Sean: I’m intrigued by something you said at the beginning of this, believe me, there’s a lot about what you just uncovered that we’re going to dive into, but around your interest in the different areas of life, I’d be interested to hear you elaborate on that. Just the other things you’re intrigued by, that capture your attention.
[00:16:26] Paul:. Well, I love studying history because there are, again, a lot of commonalities and, I think it was Mark Twain that says that history doesn’t repeat, but it rhymes. And it truly does, especially in the investing world. When people come up and say, Hey, this time is different, well, usually it’s not different. There might be a couple of little angles on it. I think philosophically. I have a passion for philosophy and religion. I think those are important areas that dictate what goes on in the world. I think a lot of my values and when you look at the firm’s values, come from a faith-based background of just good principles that anybody can live their life to and have great success. Apart from the business world, those are the things that I focus on, but I read a lot of business books.
[00:17:26] Sean: Wait, when you say you read a lot, what does that learning process look like for Paul Black? I was wondering, managing that amount of money with your time being so valuable and pulled, I’m assuming in multiple directions, how do you even find the time to do that?
[00:17:40] Paul: You have to make the time. It’s interesting because I tell our research people all the time, the thing I dislike the most is when I walk into the research pit, walk into research offices, and all the research individuals are staring at their Bloomberg screens or the facts on screens. It drives me crazy because there’s literally no competitive advantage crunching numbers today. There’s no competitive advantage staring at the news. I tell them all the time to get out of the office. I don’t care if you go sit on the beach, read a thought piece, read a book, think, and ponder. You’re not going to get a competitive advantage listening to the noise, reading the noise, or staring at numbers. You’re going to get a competitive advantage by stepping back, getting some perspective, as I said, reading big thought pieces, and just pondering for a while.
I try to spend time every day, it feels like a dead time when you’re addicted to your email or responding to voicemails but it’s some of the most powerful time just to sit and reflect. And in my case, I spend most of my time thinking about the people in the firm and thinking about how I can elevate this group of people to the next level. How can we get better in five years and 10 years? And what do we need in terms of talent? And again, the longer I do this, Sean, the more I think hiring for attitude is so important. We’ve hired for pure raw talent in the past but the pure raw talent that’s not aligned with the values of the firm can be disastrous. And so, taking those moments in time and reflecting and thinking about your life and thinking about the mistakes, analyzing mistakes in the business is a huge learning experience for us. And then we’ve got hundreds of them.
[00:19:41] Sean: Are there any for you that just stand out? What are those moments looking back? There’s probably a handful where it’s just like, that was a brutal time for my ego, but foundational for my wisdom. Like a total kick to the nuts when you think back on those days, what were they like?
[00:19:56] Paul: Yeah, well let’s go back to 2005, ‘06, and ‘07, at the time we were running a domestic large cap growth strategy. We were buying the classic wide moat businesses with competitive advantages and we were trying to buy them at a discount to intrinsic value, which by the way is complete nonsense because everybody does that. There’s no competitive advantage in that space. I didn’t know it at the time. I’m thinking, Hey, this is what Buffett does, right? You buy these high-quality businesses that have big moats, you try to buy them cheaply. Well, guess what? That’s what everybody in the industry’s trying to do. And there are no inefficiencies in that space anymore. I mean, not only do you have a lot of smart people competing that away, but you’ve got massive computer power that can run an algorithm, and ferret out inefficiencies much quicker than you can as a human.
So we made mistakes and people have heard this before, we bought Dell instead of Apple because Dell dominated the enterprise space. And it was selling at a multiple that suggested it was only going to grow at 3% a year. So you say, wow, Dell’s grown at 15% a year, at 3% a year, it’s a price to grow at three, let’s buy it. Well, guess what it grew at a negative 3% for the next five years. And it was a disaster. We bought them because we cared so much about huge competitive advantages and cheap. We bought Yahoo instead of Google, it looks foolish today, but at the time Yahoo was dominant. They had much more banner space on their website. They had many more eyeballs looking at their site and it was so much cheaper than Google, but it was a complete disaster.
One of the worst ones was eBay versus Amazon. I mean, Amazon was an unknown entity in the day and eBay was known and they had PayPal, and they had a lot of eyeballs and they had a network effect and they were cheap. So, the single biggest lesson we learned in that period of time was, that it isn’t about the size of the competitive advantage. It’s about what direction is that competitive advantage heading in? That’s the single biggest piece for us. The second one is the importance of culture, and people in the success of any enterprise.
And we learned that from the history of our firm, where we had one person who controlled everything, never shared the wealth, never shared decision making, and as a result, the firm couldn’t grow because talent would leave. You get talented people, you need to give them a voice. We learned very quickly that that was toxic to the future growth of the company. And, it’s ironic, but if you want to grow, you have to start giving stuff away. You got to start giving power away. You got to start giving money away. You got to start giving equity away, decision-making away. You’ve got to trust other people if you have any hope of building your business or building your life.
Paul’s Early Days in WCM
[00:22:52] Sean: Paul, can you even walk through just that evolution, the early days with you joining WCM? I think that would help add some clarity for people who are unfamiliar with the story to understand the importance of some of these principles, and these values because you saw both the negative and that you were able to implement the positives here.
[00:23:07] Paul: Yeah, for sure. It’s interesting. I joined the firm in 1989 and I was the so-called director of marketing. We had $200 million under management. They hired me and I was a portfolio manager, but they hired me to head up sales for the organization. And the firm had been at $200 million for 10 or 15 years. But they had just gotten into one of the first Wrap Programs through Merrill Lynch called Merrill Lynch Consults. And my job was to go out and pitch all these brokers throughout the country on, Hey, how great we are. We ran a balanced strategy. It was probably 50% bonds and 50% stocks.
We got in there, we had a good performance, but then, of course, performance tailed off. We were horrible for the next five or 10 years. And I was pitching this strategy against people that were absolutely crushing it on the investment side. And, I remember one day the founder who was a little rough, came up to me and said, Hey, Paul, how do we create more success on the fundraising side and the asset raising side? I looked at them and I said, it would be great if we had some investment performance, because we were bottom quartile across the board in every timeframe.
And I said, if I had investment performance, I could probably raise you some assets and that didn’t go over well at all, that meeting was pretty much over immediately. I went back and I had all these sales and marketing guys from other firms I was competing against who were literally raising hundreds of millions, if not billions of dollars, and I’m raising 10, 15, 20 million in a year back in 1989. And I remember that I had a few of them say, look, I could do the same thing at your company that I’m doing where I am. And I said, no, you can’t. No, it’s not about you. It’s about that track record that’s so good. Don’t confuse your position with the fact that you’ve got great performance. That’s what it is.
And it’s the same thing when I meet with people in the industry and they might be a little caustic or something, I say, look, the only reason that you have control over these assets is because of your position, the day you leave your position and you remove that title from your card, from this big allocator is the day you’re going to call me up looking for a job. Those early years were tough. I tried to talk to the founder about how we need to change our process but it just didn’t go over well at all. It was very toxic, I have so many side stories of simple things that we think about today, bottled water, Hey, why don’t we get some bottled water in the office? And he would say, well, I don’t want to buy bottled water. People will make coffee with it. It’s a little thing, but it’d be transformative to how people feel about working here. I didn’t get it.
Fortunately for us, and for me, the founder decided to retire in 1998 but we still had $200Million under management, 10 years later in a robust bull market. And we bought the founder out and we literally, at that time said, we’ve got to change this culture. So what did the founder do? Well, he controlled everything. Hey, let’s share the wealth across the board. We have 44 owners today. He made all the decisions on the portfolio, you know what, if we have young talent, let’s give him a voice in the portfolio. Made all the decisions on the business, let’s go the other way. Let’s share that decision-making process with those talented individuals. And, as a result, we started to uncover these different ways of managing money.
And as I said, when we made those mistakes in the mid-2000s around competitive advantages, we realized. Hey, we’ve figured out something that’s very powerful, which is the directionality of the competitive advantage, more so than the absolute size. It’s been a huge win for us across the board. And then we started hiring more talented people and giving them more freedom, giving them equity. We’ve got 11 people that own over 2% of the firm or more now, which is huge. I’ve diluted from 40% equity at one time to now 20% equity, all that dilution happened at book value. We didn’t do it at market value. So you can’t saddle your next generation with a lot of debt. And, I know, I’m absolutely convinced that because we implemented those cultural norms that were different from the old ones, that’s the reason we’re sitting at $75billion today.
[00:27:47] Sean: That’s awesome. Lao Tzu said 2,500 years ago, you’ve got to give to get. The more you give the more it’s going to empower others.
[00:27:53] Paul: It’s so true, Sean. That is so true.
[00:27:57] Sean: It’s a beautiful thing to see it come to fruition. I think a lot of people, especially my age too, grew up idolizing that draconian type of leader, this is the way, and that doesn’t work.
[00:28:11] Paul: No, it doesn’t work today at all. It just doesn’t and I’m still stunned that people do it.
[00:28:17] Sean: Can you talk about what you thought when you were buying out the business at $200 million? Could you have foreseen what was going to take place over the next 30 years?
[00:28:25] Paul: Never. If you would’ve told me in those days, Sean Hey, you’ll be a $5 billion firm, I would’ve thought, okay, we can get this thing up. I can get this up to 5 billion. I can do that. We can figure that out. I can muscle through that. And we did, we got up to $4 billion in 2005 running a US large-cap growth strategy. And then because of those mistakes that I mentioned earlier around competitive advantages, we ended up performing very poorly and it was also a commodity run market, gross stocks didn’t do well. We lost almost all that money and went down to about $800 million. And frankly, at $800 million, our revenue stream was $6 million. 6 million revenue stream with about 20 people in the firm.
It was a very difficult time because you work hard to build something, and you put your heart and soul into it, and then when it fails frankly, it’s tough because when you work with allocators or high net worth individuals and you don’t deliver what you said you could deliver, that’s not fun. There’s nothing enjoyable about that at all. So we got fired from a lot of money, but fortunately, we had one guy, and this is part of giving people the ability to create and be curious. One individual who was in operations decided that we needed to run an international large-cap growth strategy because nobody in the world was doing it.
Everyone was doing international on the value side, trying to buy these cigar butts, and he said, why don’t we run a growth strategy international 2004? And we said, sure. So we put about $250,000 in a portfolio. He built a portfolio with 20 names in it and we just incubated it and left it. We knew very little about investing internationally at the time. We didn’t even know how to trade an ordinary, and all we knew were domestic securities, and lo and behold, we looked up for four or five years and the track record was solid. And we said, boy, you know, this is interesting. There’s nobody in this space, there are a lot of inefficiencies in this particular market, why don’t we start building this product out?
We added a bunch of people to the team, performance got even better, and we came from literally the ashes in 2010 and ‘11 to realizing that through a stroke of good fortune that the international growth space was almost nonexistent there. And even today, Sean, there might be 12 good competitors in that space and we’re doing a great job in it versus the US domestic space for investing is crowded with people. There are thousands of products there, so I’ve never understood why competitors haven’t adopted what we do and tried to rationalize the market in this space, but they haven’t done it.
Navigating the Difficult Times
[00:31:25] Sean: I would love to know Paul, how you navigated going from $ 4 billion to $800 million. We have a lot of business leaders and coaches, I’m just thinking about navigating the difficulties, that internal dialogue, a lot of the employees are feeling, what does that look like behind the scenes at WCM during that time? How do you lead through that?
[00:31:43] Paul: That’s a great question. It was brutal. I can’t tell you that I was great in that period of time, but I can tell you this, nobody pointed fingers. It would’ve been very easy for some of the younger people who had come on the portfolio to point fingers at me and my partner Kurt and say, look, you guys missed it here, you missed it there. There was no pointing of fingers, and I’ll tell you what I’m most proud of from that period of time is none of the talent left, no one left. And, Hey, we’re on a sinking ship right now. This is going nowhere. I hired a bunch of guys out of Morningstar at the time, and they were great investors, they could have left because we didn’t raise their salary. It’s two things we did. We never hit anybody on the salary side.
We took all of the financial hit at the principal level, which was primarily me and Kurt Winrich. We took all the financial hit from going from $4 billion down to $800 million, and never decreased anyone’s pay. They never left. We survived and the reason they never left, I’ll tell you exactly why is because people knew, we cared about them. People knew at the end of the day that we had their back. And again it could have been a very different story if we were draconian and we cut pay, we were blaming people and hostile. It would’ve disintegrated and I’d be flipping burgers at a burger house. But we all stuck together, and that’s in my business career one of the things I’m the proudest of is that we never lost the talent. And so we could rise and finish this game over the next 15 years.
[00:33:29] Sean: This might end up being a nuance-type question, but I got chills hearing that, thinking about your ability to instill trust and inspire during the most difficult moments. When you face challenges and hardships, most people go the opposite direction. And when you can develop that and push going towards those extremities with those people, I’m just thinking what else. And this is hard to answer, I should be asking the people who stuck with you. What else did you think they saw in you? That not only you’d get them through this time, but there’d be greener pastures once you got past this as well.
[00:34:08] Paul: I thought about that, Sean, there was a belief because we had done it once that we could do it again. I’m very optimistic. It’s interesting. I just wrote an email to the team today. We’ve gone from about $100 billion in assets to $75 billion in this market, which is a lot. 25 billion is pretty much just gone but I’m forever optimistic. I know over the long run that investing in equity versus common stocks, that’s a winner’s game. I mean, 65, 70% of the time the market goes up, we’re in a downdraft right now, but what I keep saying is now is the time, right now today, July 21st, 2022, today is the day to play offense. Today is the day to take that next hill. The time to play defense was six months ago. The time to be on your heels was six months ago, not today.
Today, we need to build this thing going forward, and we need to make sure that the portfolio is positioned in such a way to catch the next leg up. We just did a final yesterday for a 25 million piece of business, which is a great bread-butter piece of business with good fees. We were competing against another firm, we won the business. I just wrote an email to the whole firm saying that very same thing. I said, “Look, don’t ever think that a 25 million piece of business, isn’t a great piece of business, but especially in this time when people aren’t allocating to this market, because most people sit on their heels when they should be allocating to it. But to get a 25 million piece of business in a downdraft as we’ve had now is a brilliant win.”
And I just reiterated now is the time for us to play offense. That means, positioning the portfolio for the next leg up. And then make sure that we’re still out there doing what we do for clients and serving them, but also going out and winning new business. You just have to keep going after it. I think that that attitude and some people say, well, an optimist, there’s a realist and you can be an optimist or realist. I think I’m a little bit of both. I tend to lean more towards optimism because I know how the story ends 10 years from now.
[00:36:27] Sean: Can you talk about that internal battle between optimism and realism? I have to assume at some point you toggle back and forth before going full optimism. I guess I’m just wondering how you stress test your thinking in those moments.
[00:36:39] Paul:. Well, you know what the reality is, Sean, is that I have some realists around me who are always grounding me. That’s because I tend to lean more towards, Hey, let’s go. We can get this done. And I have some realists around me that point out well, Paul, that may not work. I don’t care, let’s go. We have the most extraordinary leadership team in this firm that I could ever imagine. I say it all the time, it’s myself, Mike Trigg, and Sloan Payne. One of the founding partners, Kurt Winrich retired last year. We’re good friends. We have three people that bring such different elements to the game that they keep me grounded and more realistic, but more importantly, there’s nothing we wouldn’t do for each other.
It’s funny when we’re analyzing businesses, we look for some of those characteristics of, Hey, do these people truly care for each other? When I’m interviewing teams that maybe we’re trying to lift out of another money management firm one of the first things I look for is, do those three guys like each other. Because if they don’t, when they go through a bout of bad performance, they’re going to turn. And you see it all the time in our business all the time that when performance goes bad if there’s not a real strong bond and trust, and true love for each other, you’re going to get smoked.
But if you’re all in that together and you’re going up or down whether it’s success or failure together without blaming it’s a huge recipe for success. And, one of the things that we’re looking for now is who are those next people in our firm that can step into a leadership-type role. In fact, we’re going on a retreat up into Vancouver and some remote islands taking 14 people in the firm that we think are potential future leaders and cultural torch bears for the organization so we can keep elevating for the next 10 years.
Vulnerability
[00:38:38] Sean: What’s going to come out during that offsite that will strengthen your conviction towards someone?
[00:38:44] Paul: Well, that’s a great question. And we’re wrestling through that in terms of what’s the purpose. But when we do offsite and we do them all the time, Sean, again, I would encourage anybody who has a business, you have to get out of the company and off the company grounds and go someplace remote and spend a few days together. The power of doing that just strengthens the relationships, it creates a space for people to be vulnerable, and my hope for this is that more people will step up and be more vulnerable. In fact, Mike Trigg is going to open with a talk about how leadership can be lonely at times because sometimes you just feel alone in it.
People don’t think you’re alone because you have all these people around you, but it can feel very lonely. He’s going to talk in a vulnerable sense about how you don’t feel like you have all the right answers. You know you make mistakes and you know that maybe you just don’t quite get it sometimes. And I think one of the powers of our firm is that we do as leaders show a lot of vulnerability we don’t think we know everything. And so to me, I’d hope to get out of that retreat is some vulnerability from people which then draws you closer to them if you’re even remotely human. And out of that, vulnerability can come great things I think going forward. And so hopefully too, we identify one or two people. If we identify one person who can rise in the organization there, that would be a huge success.
Culture
[00:40:40] Sean: Yeah. It creates this virtuous cycle right back to Lao Tzu give to get, so you show that vulnerability, it opens the other people in the organization up, it builds that trust on that trust. You’ll go deeper and stick together through the tough times with each other. And it just keeps going. For you, how did you discover that culture was just such an essential component of business, especially in a business where so many people need it to be quantified. I’m wondering how you saw that insight.
[00:41:06] Paul: Yeah. That’s a great question because you’re a hundred percent right. And it’s interesting when we’re talking to potential allocators and we start talking about culture and how we do the work on culture and how we ferret that out in an organization, the first thing they ask is how do you quantify that? And the answer is you can’t. I know people have tried hard. I know there is a guy named James Heskett, a former Harvard Business Professor who wrote a book called the Culture Cycle a brilliant guy. He worked as a consultant for us for a while, and he’s helped us a lot. He wrote that book and it was part of it was trying to quantify culture. I never got it.
I never understood it because what you’re doing is you’re building a mosaic. You’re taking little pieces from different sources and building this mosaic to try to understand what the DNA or the values of the business are. Not what they say, but what they are. It’s a lot of hard work and most people just don’t get it. I got it because as I said, I saw the culture at Bank of America, which was, I think it was Jim Collins in Good to Great that talked about different types of leadership. And there’s one of them that’s pretty poor is the genius at the top with a thousand helpers. And that was Bank of America, they had this genius CEO of the company and then he had a bunch of minions working for him.
And then when he left and went to the World Bank and then deregulation hit the banking industry, BOA, almost went out of business at the time because they had written so many bad loans, and made so many poor decisions. And when that leader left they were left wanting because there was nobody that could step into that void. So I saw it at the Bank of America, poor leadership with the genius at the top with a thousand helpers. That was the founder’s mentality as well. I’m the guy, I got to be the guy, I got to do everything. In his case, though, when he left we had enough experience with how poor it was run that we could pivot to a model that was more about, Hey, we’re all in this, and let’s build something fun, and let’s build something great.
Assessing Culture
[00:43:14] Sean: I’m wondering about the evolution for you in terms of looking at a company’s culture, what were you assessing early and how did that change and evolve over time?
[00:43:25] Paul: It’s interesting. We, early on, knew intuitively that culture was important. We knew that there was something there. I mean, if you look at the difference between a Costco and Sam’s Club, and how they perform financially, there’s no comparison. If you look at the business, they look exactly the same, but if you look at the financial metrics of Costco, every financial metric is twice as good at Costco as it is at Sam’s Club. Sam’s store square footage is twice as big as Costco’s as it is at Sam’s Club. And the most important one is employee turnover, which I think is 12% at Costco, that’s low, and then Sam’s Club is more like 55 or 60%. So we started looking at that and we said, why do these perform so differently?
And it’s got to come down to the core set of values of the business that animate what it does. And at Costco, they care about their people, right? They pay them extremely well. They treat them well with respect and dignity. The CEO at the time, Jim Sinegal, who was the founder, only paid himself $300,000 a year. He owned hundreds of millions of dollars of stock, which is great, but he never paid himself more than 300 grand a year. So he wasn’t making 150 times what the average employee was making. And, that speaks volumes to the people that work in that organization. We intuitively knew it. We saw it in a lot of businesses and then we started putting a framework around it.
We brought in a full-time culture analyst that only analyzes culture. We just added another one. So we’ve got two now, and we’re looking for a third because we have such a lead in there. We built out a process and what we look for in cultures now as opposed to it being intuitive. In the early days, Sean, we used to look for companies that had similar cultures to WCM. We used to say, okay, yeah, we’re a good group of guys, we work hard, we show up, we get after it, let’s look for a company in our portfolio that has the same values that we have. And then we realized pretty shortly that’s not maybe the perfect culture to run a railroad. A railroad takes a very different set of values at the core than running a great retail shop or a money management firm.
So we’ve learned that there are cultures that if they’re properly aligned with their strategy can be very successful. So we’ve identified three big ideas around what you need to look for in culture. The first one is alignment. You want to find alignment between the core values of the business and what they’re trying to accomplish on the strategy side. Once you find that alignment, then you have to determine how strong is that culture throughout the organization. Is it embedded in every level of the organization where people literally live, breathe, and die for those values? And then third, and probably more importantly in the world that we live in today, is it adaptable? Can that culture adapt over time? Because as the world changes, we expect our portfolio companies to make those pivots and those moves in their strategy.
And the only way you can do that is if you have the strength and adaptability to move forward and maybe change a little bit. So those three things. Alignment’s the most important, as I said earlier, there’s a certain value that drives tech companies. There are certain kinds of values that drive retailers, and there are certain kinds of values that drive industrials or other types of consumer companies. All you want to see is alignment. Like you wouldn’t want to see a railroad where they’re all about having happy places and safe spaces and stuff. You want people that are going to get after it, that are more linear in their thinking, there’s more top-down decision-making that’s going to be effective in a railroad that’s probably not effective in a retailer or a healthcare company.
[00:47:14] Sean: I have a note written down this, I don’t remember when you said this, I have a whole document of different things I’ve captured over the years. And one of them is that “80% of your excess returns come because of culture.”
[00:47:25] Paul: Yeah. I believe that. It’s huge. We built a portfolio, Sean, that we just call our cultural leaders portfolio. It’s like, where do we have the most alignment, strength, and adaptability culture-wise? And almost in spite of the business, we’ve built this portfolio in-house that owns about 20 names. And it’s done extremely well. Culture shows itself in periods of time like this. When everything’s going great, culture is not revealed. Culture is revealed in hardship and difficulties. In this period of time, when the market’s dislocating on price, we look for those companies whose culture begins to shine, and that’s a telltale sign that you’ve got a long-term compounder over decades.
[00:48:30] Sean: What about prior to making the investment? How are you assessing that culture?
[00:48:46] Paul: It’s a lot of leg work. That’s why we’re adding another culture analyst. One of the most effective ways to ferret out culture is to talk to former employees that left on good terms. That’s one of the best I think. And we use that expert networks to get connected to formers at high levels, and ground level. We probably do 10 to 15 different calls with former employees and ask the same series of questions to ferret out what drives that business, and how it operates. Here’s the real truth, I think it was Walter Schloss that said you don’t know a company well until you own it. Well, I would say that is so true in life. Most money managers can’t admit that but you know a business better after you own it.
We get way better on the culture after we see how they behave during difficult periods of time. So a lot of work upfront, but that’s not all the work that work is ongoing. We’ve got one of the names we’ve owned for 17 years now, Taiwan Semiconductor, and we’re much better at ferreting out their culture today than we were when we bought it. We’re much better over time. And we will sell a name if we uncover something where either the alignment isn’t there, it took us a few years to figure it out, or the strength of culture’s not there, or they don’t show themselves to be adaptable in a tough environment. We’ll sell companies for that reason solely even if the business is doing great.
[00:50:15] Sean: I’m wondering about that adaptability and also the change, how much can you expect the culture to adapt, but then over decades, how much of that changes over time, especially as leadership changes?
[00:50:28] Paul: Well, that’s the hard part, right? A big red flag for me personally, and I think about that in our firm, anytime a portfolio company brings in leadership from the outside to me that’s sort of a red flag that they haven’t built the depth of talent within the organization. Think about it here, if all of a sudden we brought somebody in because I didn’t want to be CEO anymore, and we brought somebody in from the outside, if I’m an all allocator, that’s a huge red flag because that person has very little idea of the stories that made the firm or the values that have been lived for so many years. And so the adaptability, years ago, you remember Bob Nardelli took over at Home Depot, he was GE Operator, and he took over from Bernie and Marcus who were the entrepreneurial founders who had built a brilliant culture.
He came in and he is an operator and a systems guy, and he tried to systematize that whole organization, which basically crushed it. The funny thing is that the financials looked good, but he crushed their long-term ability to compete. And so by the time, after five years, they figured out that he destroyed the culture that made it great through his systems and his HR people in stores and taking power away from store managers and quantifying everything, they fired him and they paid him, I don’t know, a hundred or $200 million when he failed. Those are red flags. Big companies that go to the outside to hire CEOs are a problem for us.
We want to see them adapt internally and develop. We have a portfolio company right now, I won’t name it, but it’s a bank out here on the West Coast, they have a brilliant founder. He’s driven the firm for years, great culture, great in the wealth management area but they’ve had a very difficult time with succession planning. And one of the persons that were in line to succeed the CEO, who was primed and ready just left the organization, that’s a big red flag. We like to see companies grow their leadership organically.
[00:52:49] Sean: Yeah. I know at the beginning of this, you said you loved history. I’m thinking about this backward-looking analysis that you just dove into there, any other interesting case studies? We just have a lot of listeners that are voracious learners, if there are certain ones you’ve studied in the past, do any come to mind for you?
[00:53:02] Paul: In terms of cultural differences?
[00:53:06] Sean: Correct.
[00:53:07] Paul: Home Depot is one of my favorite. It’s interesting, I’ve always thought that Larry Ellison was just a tough, tough guy to work for, and he created more competitors for himself than anybody else. Tom Siebel left. So many people left and formed their own companies to compete against him and they had success, but unfortunately, Larry had so much money that he ended up buying all those competitors back and bringing them in. I always thought Ellison was not a guy I’d want to bet on just because he’s one of those geniuses at the top with a thousand helpers, but you know what, to his credit, he does bring in some pretty good talent across the board. In terms of other companies, I’m trying to think off the top of my head where there have been big disruptions. Let me ponder that for a while.
Great Sports Teams & Culture
[00:53:59] Sean: I feel like you’re very good with your pattern recognition and a generalist overall, and I’m wondering, have you studied outside industries that don’t deal with business? I’m even thinking about like a great sports team and understanding those cultures and seeing if they have any influence. Do you study anything like that?
[00:54:18] Paul: Oh, absolutely. You know it’s interesting because I’m a big Patriot fan, which some of your listeners may not love, but you look at the Patriots and I’m a Belichick fan, but I’m more of a Brady fan, you know? It’s like that’s the question I always ask. If you had a choice to make 25 years ago or 20 years ago, you could take Brady or you could take Belichick, who would you take? I’d say, give me the talent. I’ll take Brady. It’s hard to tell. Yes, Belichick’s brilliant. He’s a tough guy, he’s hard-nosed, and he makes difficult decisions, that’s great but I would argue what makes the organization brilliant all starts at the ownership level.
It all starts at the ownership level. I used to use the example years ago of the Clippers versus the Lakers. Two organizations in the same city playing in the same league, and all the Lakers did was win, why was that? Well, that had everything to do with Buss at the top who created a culture of caring for his people. He empowered people. He gave them the freedom to move. Was it Sterling at the time that owned the Clippers and had this constant revolving door of coaches? Every season, he’d fire a coach, and he’d get rid of players. He’d never pay them, it was a complete disaster. Sports teams are brilliant ways to try to ferret out what works and what doesn’t work. But, you know, again, everyone raves about Phil Jackson, how brilliant he is, yeah, but look at the talent he had everywhere he went. Was it Phil Jackson or was it the players? I’d probably argue it was the players.
[00:56:02] Sean: I’m in South Florida, so Brady coming here, I’m usually a huge Eagles guy, but I love what he’s been able to do, the evolution. Have you picked up a book, I think it came out two years ago, it might be called Dynasty? It’s all about the evolution of the Patriots.
[00:56:14] Paul: I have not. I’ve got to read that.
[00:56:16] Sean: I’ll send it your way after this, Paul, it’s fascinating. It goes a lot into Kraft and his thinking and what he was able to do. This has me interested now, if you could study with a master of their craft, so someone like Robert Kraft or Belichick, who would you love to study with outside of the investing industry?
[00:56:32] Paul: Who would I love to study? It would be a Robert Kraft. It wouldn’t be Belichick. It would be a Kraft or if Buss was around, it would be Buss. Anyone that’s built, it would be a Bill Walsh. It would be a lot of sports people. It would be anybody that’s built something great that’s sustained itself. Even in money management, very few money management firms sustain themselves for decades. We’ve been talking about that, we just have a good run because we’ve had the wind at our back and growth for a period of years, and is that still going to happen over the next 10 to 15 years?
What we’re wrestling with is how much we adapt to a changing environment versus, Hey, we’ve always done it this way, we’ve always owned consumer names, we’ve always owned tech, we’ve always owned healthcare, that’s what we do. Well, the world’s a little different. Is energy going to be a long-term driver of capital returns going forward over the next 10 years or so? Those are the things you have to constantly wrestle through. So yeah, mostly anyone that’s sustained a high level of success for a lot of years, I’d love to see. One of my favorite books on culture is Creativity, Inc. Have you read that, Sean?
[00:57:52] Sean: Yeah. By Ed Catmull of Pixar.
[00:57:54] Paul: Yeah. Catmull and Pixar, love that. That’s more my heartbeat, it’s just a series of stories about how brilliant the culture was that led to the success of its designers and developers. It’s my favorite by far.
Moving Forward
[00:58:15] Sean: I’m just wondering then how are you thinking about everything moving forward. When does it codify in your mind the direction forward to go? I’m just wondering, looking at your past, how long does that usually take for you to understand where it’s going, moving forward?
[00:58:30] Paul: In terms of?
[00:58:33] Sean: The firm as a whole. You mentioned a minute ago, are you guys going to adapt or you know what, our processes work incredibly well? I would love to hear how you think through this.
[00:58:42] Paul: Yeah. It’s a wrestling match. We’ve got a number of people on the research team that is digging in and trying to understand the life cycle of energy. It’s very difficult now because you have so many crosswinds going on. I mean we’re not drilling as much as we used to. I just learned recently that a lot of people in the US think, well, prices are up because we’re not drilling as much, you know, Biden shut down drilling across the country. But more importantly, it’s about refining capacity. It’s that the refiners haven’t built a refinery in 50 years in the US and they’re running at full capacity and they can’t run any higher. So, one of the issues at least in the US with the price of fuel is at the refinery level.
Then you start to wrestle with, well, is there a way for us to play that as an investor and then, of course, Europe’s going to use more liquified natural gas. They’ve got to get it somewhere else. We are going to build terminals that export it. And so we have a bunch of guys that are wrestling through the long-term implications of that, but then on the other side of the equation, you go, okay, we elect a Republican regime in a couple of years, do we open up drilling again? Do we open up fracking again? And if we do price of oil probably comes down, because we can move the spot price of oil by just opening up the wells here in the US.
And then you have other people that sit there and say, well, how about we use everybody else’s oil first, and then if the world runs out of oil, we’re still going to have it in the ground for us? A Shell executive told me that about 30 years ago and I always thought it was fascinating. Burn the rest of the fuel around the globe, and then we’re the last man standing with oil that we can drill and use. That’s a tough space because there are so many geopolitical concerns and that’s why we tend to stay away from that kind of investing.
You can’t predict the price of energy or of commodities, so we tend to stay away from that. But if there’s a way that we could invest in it where there’s a picks and shovel play on it, we might do that. And that’s how, by the way, we tend to think about healthcare. We don’t tend to make binary bets in healthcare. We want people that maybe supply the tools and the equipment that allows people to discover drugs. We don’t want to bet on a company that’s trying to get one drug approved. It’s just too risky for us.
Conversation with Anyone Dead or Alive
[01:01:04] Sean: Paul, I’m smiling because that was perfect. I cared more about how you think through things, so to me, that was awesome. Hearing that live, in real-time, there is such a pleasure for me getting to understand a bit more about you, and what you’ve built at WCM. I am wondering if you could do this with anyone dead or alive, just not a family member or friend, who would you love just to be able to just bounce questions off nonstop?
[01:01:28] Paul: Well, I mean, come on God. I’d like to ask God a few questions.
[01:01:34] Sean: You know what, so 300 plus interviews, no one’s ever said, God.
[01:01:37] Paul: If you could talk to God directly, wouldn’t that solve a lot of issues in your life?
[01:01:46] Sean: It most definitely would.
[01:01:52] Paul: Abraham Lincoln, that guy, what he went through and what he did for the country, I’d spend time talking to Abraham Lincoln. I would love to talk to Patton, that guy who almost single-handedly turned the tide in World War II and I love people who are bigger than life. And he was bombastic. He got fired several times. He had a lot of failures. He had a lot of success. I love to talk to someone like that as well. So God, Patton, and Lincoln
[01:02:35] Sean: Final one, I need to expand on this, I’m curious. You were talking about these different characters early on, you were talking about studying some of the greats like Buffet, but then you started to realize that maybe his mode of thinking wasn’t the best moving forward. When did you feel that integration between learning from the best, but then also what you naturally do well? When did that merge together for you?
[01:02:55] Paul: Probably in the 2007 to 2011 period of time. And it was interesting because Kurt and I at the time were wrestling with, Hey, this wide-moat business isn’t working real good for us. And then I happened to bring in a guy from Morningstar and one of the partners now, Mike Trigg, who had been writing a gross stock newsletter for Morningstar. How I got connected with him, I was reading his letters and he’s talking about Phil Fisher, he’s talking about Walter Schloss and he’s talking about John Maynard Keynes. Keynes, by the way, was a brilliant investor. People don’t know that. He wrote a chapter in one of his money books about…, I should send it to you, Sean, it’s brilliant. He was a great investor. He owned about 20 names and he would hold them for long periods of time.
But Mike was talking about all these people that I had studied, and then he started writing about buying companies with emerging moats. I remember Morningstar was all about buying wide-moat businesses, but he was at Morningstar and they were highly ranked wide-moat businesses selling cheaply that never went anywhere. He had the same issue that Kurt and I were experiencing at the firm. All these great businesses with big moats, they’re cheap, they never move. And so he started wrestling with buying companies with emerging moats. I went back, read his newsletter, and set up a lunch with him.
I met him at an Italian restaurant across from the Morningstar office in Chicago. We hit it off. It was a cold winter day and I started to draw out on a tablecloth what I could see his life looking like over the next 10 years at WCM. He still remembers that. And literally by the end of the two-hour lunch, I asked him, would you ever consider working for a money management firm out in Laguna Beach, California? And he’s like, well, yeah, but I just got married and I love Chicago and I said, well, why don’t we talk further? Boom. We ended up hiring him probably three weeks later. And when he came in, he brought that added dimension of, yeah, I’ve been wrestling with the same question, why don’t we wrestle through this together and figure it out?
He joined in 2006. And then we brought in one of my favorite stories and person, Sanjay Ayer who’s also a partner in the firm. We brought him in 2007 and I love his story because he was at Morningstar, he quit and he went to Columbia Business School. You might have heard this, he went to Columbia Business School, the top business school for investing in the world, and after three weeks he quit because he just didn’t feel like he was learning anything new. He quit Columbia Business School, and then he thought to himself, maybe I’ll open up a hamburger chain and go into the hamburger business. That was his first midlife crisis. He’s had several since then, but that was his first midlife crisis. The other one was at a Taco Bell annual meeting.
He’s at a Taco Bell annual meeting with about 30 other analysts from Wall Street, and they’re talking about the new Taco Bell product. And he’s sitting there going, I’m 30 years old, I worked in Morningstar, and they’re talking about this new taco that’s coming out. What the hell am I doing with my life? And he had this second midlife crisis, but what we all four wrestled with is the investment equation around competitive advantages. We knew it was wrong just to buy the wide moats, so we just started evolving in our work, and identifying different typologies of competitive advantages. And what are the patterns that companies that grow their competitive advantage have? What is the consistent pattern across the globe? And how can we ferret out those ideas?
[01:06:40] Sean: It’s a constant evolution. Paul, I can’t thank you enough. I know you don’t do a lot of these. Your insights, your wisdom, and your humility throughout all of this are truly just an inspiration for other leaders. The way you’ve done it, I would say is the correct way. I just have so much respect. I just appreciate the hell out of this.
[01:07:01] Paul: Thank you, Sean. And I’ll tell you what, anyone listening out there that wants to do work on culture, you give me a call.
[01:07:06] Sean: Fantastic. Paul Black, I can’t thank you enough for joining us on What Got You There.
[01:07:10] Paul: All right. Thank you very much.
Located in Laguna Beach, CA, WCM is an independent equity portfolio investment manager, registered with the U.S. Securities and Exchange Commission. The securities identified and discussed do not represent all of the securities purchased, sold or recommended for client accounts. The listener should not assume that an investment in the securities identified was or will be profitable. Past performance is not indicative of future results. For more information, including a list and description of WCM’s composites, visit WCMInvest.com.
[01:07:12] Sean: You guys made it to the end of another episode of What Got You There. I hope you guys enjoyed it. I do appreciate you taking the time to listen all the way through. If you found value in this, the best way you can support the show is by giving us a review, rating it, sharing it with your friends, and also sharing it on social. I can’t tell you how much I appreciate it. Looking forward to you guys, listening to another episode.
