Mason Morfit and Rob Hale – Quiet Activism at ValueAct (EP.462)

26:06We didn't actually know the answers. We didn't yet know what to do with Bing or what to do with Xbox. The vote of confidence that we made, they liked and that opened them up some more. we applied a tool that we had refined by that point in time called the shadow P &L, which was financials are reported out as a function of the bureaucracy of the company, not necessarily as a function of the real economics of the business. So the segment disclosures you're getting are not necessarily the true economic picture. But if you're a good securities analyst, you can deduce what the true economic picture is.

26:40You can interview people and figure out where allocations are going in terms of costs. You can understand in a way, that is complementary to existing reporting and complementary to management because they are looking at what the bureaucracy is reporting up to them. They don't necessarily have this orthogonal look at stuff. And it is estimations and guesstimations and swag math on a spreadsheet, but it time and again proves to be really insightful. I'm going to try to connect one idea I talked about earlier, which is that public company get pushed around by the public markets. Their strategy tends to drift in reaction to what's hot.

27:11Martha was going after e-commerce because it was hot. Microsoft went after phones because Apple was so hot. And so was Google. They went after Bing because that was hot. And so they poured tons of money into these initiatives that were not accurately tracked by the existing financial reporting systems of Microsoft, but you could triangulate them from the outside. So when Satya took over as CEO and I joined that board, we started presenting these outside-in, orthogonal looks at the business. And we could deduce that there was massive amounts of costs and losses being poured into these hardware initiatives to the tune of four or five,$6 billion a year that might be better spent driving Office 365 and Azure instead of trying to chase the iPhone or chase the Google search dream.

27:53Looking over this analysis and talking it through privately and reaching decisions about where we're going to allocate capital and energy and where the identity of the company is going to shift happened in that way, step-by-step-by-step analytics. meetings. And eventually we wrapped around another skill or tool in our toolbox, which was executive compensation. Once you've heard what's going on through this deductive reasoning and shadow P &L organization, and once you shift the strategy and once you have the right people running the company, how do you then tie compensation to it so that it reinforces everything you're saying and shifts these organizations that in that case, at a hundred thousand people you had to get on board with something brand new.

28:34I looked back at the Microsoft proxy this year, and I was really pleased to see that the basic architecture of what we designed over a decade ago is still in place. It's cool to have been part of how this enormous, important company reoriented itself. That's how this works. Rob did something similar to MSCI, or you guys to death with example after example of applying these methods to kind of make it a us project, us and the management team and the board working together to get to truth and get to excellence, not bullying or shaming or lecturing from the outside. What are some of the other tools that you've adapted over the years that you bring to the companies you invest in?

29:14I think about them almost like pieces of a jigsaw puzzle that all click together and reinforce each other. Number one is strategy. Are we doing the right stuff? Are we playing in the right markets? Are we focused on the right things? How do we tracking that progress? We call that either dashboarding or building a better board book or KPIs so that we really see true economics. Then it's executive compensation, which is how do you tie outcomes to that? There's CEO succession and talent management, which is do you have the right people to execute that strategy? Do the people match the strategy? Are they tracked with the right dashboards?

29:43Are they paid in the right way? And then you've got corporate identity slash investor relations, which is, are we telling the world who we are in a way that will attract the right investor base? An investor base that will be patient for what we are trying to get to because it might take us, if you're in the case of Adobe, three years to convert from a license to a subscription model. And we want investors that get it and are along for the ride and are not trying to guess the quarter. Those are the basic building blocks of how we can help reorient a company, recover from some of these diseases of abundance and inoculate itself against some of these temptations and weird things that public markets can do by creating alignment with the public markets for a mission that's usually three to five years.

30:27Among those criteria, when you mentioned getting the right CEO in place for the succession or just having the right team in place, everyone's trying to figure out getting the right people. What does that mean? And have you figured out if someone in the seat is the right person to bring it forward? Our orientation is to try to work with great management teams from the outset. So we're going in as part of our evaluation of a situation. We're hoping to prove out the existing team has a high level of capabilities. We get involved with companies for long periods of time. We say three to five years is our typical investment cycle.

31:06In some cases, it's five, 10, even longer. CEO succession sometimes during that investment cycle is relevant. There have been 27 cases where we've been involved in CEO succession. The approach we take, we try to be quite deliberate about it. We start with the strategy, as Mason said, and we create a scorecard of success. What does the company need to achieve to reach its potential over the next three to five years? Be very specific about what the one to five key things are that the CEO needs to lead the company to achieve. When looking at internal candidates, external candidates, we're assessing, have they accomplished similar things in their roles in the past?

31:52It's about track record. Obviously, ethics are extremely important. Creating a performance culture is extremely important. In each company's unique situation, there's usually a few key value drivers and we're super focused on finding the CEO who we think is best able to achieve those objectives. Think about a public company. Unlike a private company where investors have a very specific investment thesis, we're doing this and know what they're looking for. A public company is sort of an evergreen institution and the board members generally don't have an investment thesis almost all the time. They're chosen from outside that company's industry.

32:27So they have great life stories and super impressive people and a great business judgment, but they don't know the industry and they don't necessarily have a point of view about what they're looking for. And what we observed over these many years was that oftentimes this search degenerated into adjective-based conversations. So we want a leader, we want a communicator, we want a technologist, we want an operator. And those are important criteria, but they don't specify to do what. Where we have found the most fruitful working relationship is where we can marry that judgment and network and wisdom of all these people with a specificity of mission that we can provide.

33:02and then some of the deep diligence on backgrounds of candidates matching them to these missions, you end up getting to a good outcome because it is also hard for public companies in high profile searches to really do deep background without the help of a firm like ours that has expert networks and methods that we can do to unpack a candidate's history very deeply and then do the kind of financial deductive work that I talked about in setting up these. Shadow P &Ls is also relevant for these CEO successions. We really love the synergies that come with what we bring to the table with public company boards because together it's a pretty powerful combination and everybody's stronger together.

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34:33Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. As you're doing research of something you might be interested in investing in, there's less information than, say, it was a private equity type company and you're behind the wall. What does that process look like before you get involved in a company? Mason has many strengths and geniuses, but the thing that first struck me about Mason's abilities as an investor was my first investor relations call when I was an analyst and Mason was a partner leading the call was how quickly he got from the reported financials to the actual cost structure and the actual unit economics.

35:20It's segment by segment, what's the pricing model? What's the mix of customers? The fixed and variable costs, specifically where are factories located? Where are people located? That analysis of let's just ignore what you see in the 10K, let's just build up zero base. What does this business cost structure look like? That is by far, I think, the most important exercise that we do early in our due diligence process. And there's lots of different examples that bring it to life. Mason mentioned the Office 365 example where you could just say, okay, this is the number of users. Here's what the annual subscription could be.

36:01Where could that go over time? What's the direct cost against that? And you could create a profit pool. We do that in every single case. And that's usually just primarily with the company management and the IR team itself as a first step. And then we're validating it with people in our network who work in the industry. The second key thing is the evaluation of the people, the board, the management, the strategy, because as I mentioned, we're trying to find situations where, yes, there are opportunities to improve. There's something that the market doesn't see. We always want to have a different view from the market, but we're looking for opportunities where management gets it in our conversations.

36:43They are getting positive energy over the interaction around strategy and what they could do to drive the value of their company. And we're assessing that directly and indirectly through our background checks and in the network. Those are the key things. It's a long process. We do a lot of first calls, fewer second calls, and we're trying to make two to four investments a year. So typically the cycle is at least six months before we're really sure that we have a good investment opportunity. How do you get the sense in advance if a management team is likely to engage with you on your vision of what could change at the business to improve it?

37:24We try to do it in a Socratic way. We're asking questions and they're responding and then we're getting to a shared understanding. When we do analysis on a business line's potential, we're going to put that in front of the management team and get a reaction. In that reaction, we're either figuring out, are we right or wrong, which is really important. And also, if we're on to something, how does management respond? Are they defensive or are they nodding and saying, yeah, this is right. It's an interesting way of looking at it. But it's important that what we don't do is we don't show up with a fully baked investment thesis after six months and a big stack of PowerPoint presentations and memos and say, here's your strategy.

38:07The best thing is for the company to lead the discussion of strategy publicly. They have to execute the strategy. So it's much better to get there in a back and forth iterative way. And then they're in a position to go out and make it happen. If you approach the problem with you're here to build something great, not take somebody down, it goes a long way. But you also can't overemphasize the value of 25 years of life experiences and insights that that brings because we just have a different conversation than others are having with them. And when we're talking to the Salesforce guys about how to create packaging and bundling solutions for their products, we were there when Office 365 was being put together and how did E1 bundle versus E2 versus E3 work?

38:51And that's something the Salesforce people are interested in. How might that translate to them? I was on the board of a med tech company called CR Bard that had one of the highest margins in the industry and was quite early in developing the China market. and I went around Beijing with the CEO in 2011 and met PLA officers and saw their army hospitals and understood how that channel worked. And then back to the US and Salesforce, how many reps did they have? What were their quotas? How did this all work? And so when we go meet the next med tech company that's trying to do a global expansion and has under earning operating margins, Rob was shoulder to shoulder with me on that investment and can apply that to med tech companies in Japan or in the US.

39:31there's really no substitute for being inside the belly of the beast, working with people for a long, long period of time to get these little nuggets. Investing is about connecting dots saying, wow, that connects to this. If this could be like that, what we're seeing in these numbers could be radically different. It's a creative act and it's an intuitive act and it's a relationship act, but it's also experience and knowledge lights all that stuff up. As you own a portfolio company over several years and things start to happen in how you had hoped and the company starts to make changes, improve the quality of the business.

40:05How do you think about selling or exiting the investment? You're picking that scab there, Ted, because as many of our LPs remind us, we sold a little too early on a couple of these things, including Microsoft and MSCI. So it's something as an organization that likes to learn and improve constantly. We've given a lot of thought to this idea. There are some investments where there's a discrete three to five year strategic planning cycle under which the company can execute a plan. And then it's going to mean revert to the average equity return. There are other businesses, the best term I can come up with is they win by winning, which is the more they win, the more horizons open, the more adjacencies, the more second order business models, the more bolt-ons, the more bundles.

40:47We did this extremely well with CBRE from 2011 until about 2023 for about 12 years. We are a significant part of building the biggest real estate company in the world. One of our partners was chairman of the board of that company. And that's a lighthouse example of a place where the stronger the network got, the more services it could offer, the more global reach, the more sticky. And as importantly, the more important the mothership became versus all the individual brokers. As a human capital franchise, if you can be the place where the best people want to work because you get the best clients and the best clients want to work because you have the best people, now you've created something really cool.

41:22We have evolved our thinking on that to be more sensitive to this building compounders for decades. We draw on this history, which ones work and which ones don't in this framework. Not everything can go for decades, but some can. We've been a part of an unusually large number of those. What are other examples of, you could call it compounding knowledge, that you gained from one investment led to another? There are countless examples. We're always talking internally and externally about the through lines between different investments. There's a whole host of investments that are about the transition from analog to digital.

42:02You could put Microsoft in that category, selling physical PCs with Windows and Office licenses. You could put Adobe in that category, selling Creative Suite as shrink wrap software on a CD-ROM transitioning to subscription. Xbox was our first exposure to the video game industry. And that went from being a very difficult industry with lots of boom bust cycles, huge inventories required to distribute the software to a much higher quality business because of digital distribution and subscription. Probably the place we applied that insight the most, again, in the analog to digital example, was at Nintendo.

42:47Historically very closed off Japanese company with, we saw the best IP library in the video game industry. because of a variety of different factors. They were behind the times in terms of adopting digital distribution, subscriptions, in-game monetization. We called on a lot of the things that we learned at Microsoft with the Xbox team to develop insights on Nintendo and to try to provide some insights to them on what the potential would be for their business if they could go from selling 20 % of their games through their own eShop to 60 % or 70 % like Microsoft or PlayStation. If they could go from a small percentage of their customers on the Nintendo Switch subscription to the majority of their customers like their competitors.

43:39So analog to digital is one really big category. A little esoteric, but it relates to a few years later, we built a big position in Roblox because we understood the direction of travel of the video game industry was to massive multiplayer, user-generated communications and social dynamics into it. While Nintendo has closed the gap, we'll forever have the best IP in the whole industry. They were lagging in these things. And then the absolute leader was Roblox. So I can connect learnings from Microsoft to Nintendo to Roblox. There are analogous lessons from the Roblox matching systems and algorithms and how they've used AI to pair you with something that some creator has made is super relevant for Disney thinking about how to match viewers to a TV show or from meta for an advertiser to an eyeball or for Expedia from a hotel room to a traveler.

44:30These online, massive matchmaking business models that have a take rate based upon pairing you up with something that you're really going to love are undergoing a very significant technical revolution and have been for the last several years. It's really hard to overstate how connected all these issues are and what we learn from going deep in these companies and how it opens up new sourcing for us and new conversations with people and then new insights that are unique. As you go through that last list of companies, there are some where as an outsider, you might think you can get in there and have an influence.

45:03And there's another, say, like a meta. Are you really going to be influential in the boardroom or talking to the executives? How have you thought about the importance of the degree to which you want to be influential in your investments? Rank ordering is always investment first, influence second. If you flip those, you're going to end up with mediocre investment returns. The number one thing is great company that we have a vision for and a unique insight into that we think is differentiated from the street that we can hold for a long period of time. And then secondarily, do we need to have a voice in it?

45:40It really does need to be belabored. Where I've seen companies go off the rails is when they flip that ambulance chasing. looking for a problem that needs to be fixed, you're going to have some serious adverse elections if you put the number two in front of number one. In terms of influence, because we don't think in terms of shareholder voting first and foremost, or shareholder rights first and foremost, or how successful could we be in a proxy contest? In our entire history, we've only had two proxy contests, over 125 investments, 55 five board seats, only two proxy contests. Because that's not how we think.

46:15We think that the way that you persuade people and you get influence is through good ideas and good relationships. It's not a problem for us if there's a founder who controls the company, if we think that we can achieve alignment with them, if we think in an adverse situation, talk to people that we know on the board that we have a relationship with. We've had a lot of successful investments that were companies that were completely or almost completely controlled. KKR is one example. We had great relationships. 21st Century Fox is another example. Spotify, another example. We've got to be the only quote unquote activist investors that have a body of working controlled companies.

46:59It's a long list. In the two situations where you were involved in a proxy, There's always this question of how deep do you want to get versus just exiting because you have the liquidity option in the public markets. What was the story behind why you would get into a proxy contest when that's not your normal playbook? The first one was in 2006. And as we laid out the history of the firm, we found it in 2000, 2002, 2003, the world changes with these scandals. It was our opinion that in that scenario, the corporate behavior was so egregious that we had to take a stand on principle for the shareholders.

47:35We couldn't let it stand. There was a lot of stuff in there that's in the public record. I don't need to restate it. But it sharpened our ability to intuit situations that are going to be intractable and has led us for most of the rest of the firm's history to avoid situations like that where we're going to get into loggerheads. So that was 2006. And that brings us to probably 2022. The second one was in Japan. It was the largest ever proxy contest in Japan, a company called Seven and I Holdings. Very similarly to what Mason described in the situation at Axiom in 2006, we thought that the corporate behavior was so misaligned with the general shareholders that it was the right thing to do and B, that we would make a better return on our investment if we pursued that proxy contest.

48:27We have three major constituencies outside the firm. We have the people in the walls of the firm who are very important. But outside the firm, we have our investors, number one, who trust us and they're really important. And we have two constituencies that I would put on equal footing, the boards and the corporate management community and the institutional shareholder community. Our relationships with both are very important. We need to have credibility to influence management, and we also need to have credibility with other shareholders who, in some cases, can be advocates for us or can get aligned on a strategy that makes sense for the company and can be influential as well.

49:09When are we going to do a proxy contest in the future? I hope it's never, but if it does ever happen again, it will be because we're so convinced that we're going to make a great return. We know that a lot of other investors that support us are on the same page, and we think the situation is so egregious that we can easily explain it to the corporate community and our reputation will be intact. That has proved to be the case in both of those situations. Through several of those examples, you described two quite different investments in Japan. Nintendo, which was pulling the same thread, and then Seven and I, which turned into this proxy contest.

49:52How have you thought about the aspects of the playbook that you've applied in the U.S. now being much more involved in Japan? We've been looking at Japanese companies since 2013. team. It's been a long time of looking at companies and engaging with them. We've seen a lot of change during that period of time. We made our first investment in Japan in 2017. What attracted us was that there are so many great companies. If you look at the companies in the world with over 40 % gross margins, 40 % gross margin is our proxy for pricing power, business quality. The number one market is the U.S. with about 1 ,000 companies with over a billion market cap and above 40 % gross margins.

50:35The number two market is Japan with 250. After that, you get to numbers around 50 to 100 in countries in Europe. A lot of people talk about Japan and they talk about the valuation, the low price to book. We talk about the quality of the businesses. There are lots of great companies there. The issue was that there was not a shareholder-oriented corporate governance system. We talked about the diseases of abundance. Great companies have lots of opportunities to say yes. They get distracted and unfocused. In Japan, under their corporate governance system prior to 2012, 13, when the corporate governance reform kicked off, disease of abundance was everywhere, and there was no really corrective mechanisms in the public markets.

51:21But that all started to change in 2012, 13. Abe came to power. He emphasized corporate governance reform. There has been a big generational shift in Japan of corporate leaders who looked at in a period of economic and market malaise and want to improve productivity of their companies, improve the productivity of the economy. That generational change happened at the same time as the corporate governance reform. By 2017, we thought, there are great companies. Let's see if our model can be successful. We received a lot of advice about ways that we should try to adapt our model to be successful in Japan.

52:02But Mason and I thought we should see if our approach with as little change as possible can be successful. We started with one investment in Olympus. Olympus was perceived as sort of a multi-industry holding company. They had a camera business that was quite well-known publicly, but that business had been challenged by smartphone cameras. What was left was an incredible medical device franchise in GI endoscopes. We thought that they could build a strategy around that business, and we were able to sync up with a management team that saw the same opportunity. But what we didn't do was try to change the way that we would approach the engagement.

52:43There's no special category of competition for Japanese companies or European companies or American companies. We're in a globally competitive world. The approach that we've taken for Olympus and every investment since then, including Nintendo, including Seven and I, is to try to have very high standards for competitive success for the companies. At this point, we've invested over$7 billion. dollars into Japan since 2017, 12 publicly disclosed investments, many others that haven't seen the light of day. We find consistently that there are management teams that want to up-level their performance and they care about their share price and they are trying to create value for stakeholders.

53:28What are some of the differences that you found in your engagements in Japan. Someone said early on that in the Japanese languages, there's six different ways to say yes, and five of them actually mean no. To some extent, it's an exaggeration, but decoding the communications has been the biggest challenge. Our approach just naturally to be polite, humble, empathetic, but direct has worked well getting through differences in communication. We have a great team, including people who are Japanese natives who have upped our game in that regard. One thing that we've learned to focus on is when you hear yes, you always have to ask, yes, when?

54:10Because yes can mean yes, but in 10 years after I've retired. And you want to make sure that that's not the source of the misunderstanding. That is always a source of tension in our investing is we like to have a sense of urgency. We acknowledge these things are difficult, but if you're not in full strategic alignment with where you need to go, the best time to get there is tomorrow. That's the central challenge, just aligning on the direction and aligning on the timeframe and how to get there. With the depths of engagement concentrated portfolios you run, I'd love to ask you about mistakes. There was certainly Valiant back in the day and others where something happened that didn't go as you thought it might.

54:55We can do a whole separate podcast on mistakes. We do ruminate on them a lot and we try to learn from all of them and they span issues of portfolio concentration. We manage the portfolio slightly differently under my management than under Jeff's. We are more discerning about the types of problems that are really perfect for our kind of engagement. It's easy to get a company to shift its allocations away from making Windows phones to focusing on Office 365 than the one we took on at Rolls-Royce, which was how do we engineer your engines to have a lower cost of goods than what they currently have and try to get them to GE's standard of excellence with a workforce in the UK.

55:40It also didn't help that one of their engines was recalled by the FAA and then COVID hit and grounded all the fleet in the world. Fundamentally, that was a biting off more than we could chew type problem. When we make mistakes, we refine, what are we good at? What are we not good at? What can we learn from this? In investing, you're going to get some things wrong. Making sure that you size the things that you get right versus wrong is really important to your overall result. Another is to just let the team be explicit about what could go wrong. We have this idea of the value act thesis. What's our point of view?

56:15What is the market's point of view? We want to think that we're going to buy at a discount. That will close the gap. That will drive the share price up. That framework's important. Mason has added to that. What is the antithesis? What are the things that you could honestly write the story of how does this go wrong? Let's talk about it. Let's think about how correlated those things are to other things in our portfolio and how will the company perform in that situation. And that leads us to just try to focus the portfolio in things that have a very attractive risk reward skew where we think the downside is limited, it's protected, we have a margin of safety.

56:53If we're right, if the market comes around to our point of view, if management executes, we can make a significant multiple on our money. There are lots of mistakes that we've made, some on a small scale, some like Valiant on a larger scale that have led us to those lessons. We call that the value back triangle, our thesis, the market thesis, and then the antithesis, and we write them out very explicitly. And then we run down that antithesis with as much intensity as the thesis. People in investing tend to get wrapped up in the stories that they've got behind the stock. You've got to run down that really scary thing.

57:26In the aftermath of Valiant, we made an investment in Morgan Stanley, which was a G-SIFI bank, not too long after the great financial crisis. It was eight years after, but it still felt recent. And I said, well, this is a industry that's hated by a lot of people in government and people in our society. Let's go meet with them. So we went to Capitol Hill and we met with this banking committee and we went to the Fed and we talked about regulators and we even went to try to get in to visit Occupy Wall Street so that they could give us their point of view. They told us we were Wall Street, so they refused to meet with us.

57:56But we found that there was a play on Broadway that was a taking on banks and private equity, we called the playwright up. If you're going to have an investment that might have a severe downside, however remote that might be, you have to understand it from every angle. That might've been a little overkill because of its timing and firm history, but that gives you a sense of how seriously we take that other side of the coin. I'd love to ask you a couple of questions about the business of Value Act itself. The first that comes to mind is so much of what you're describing feels like the playbook out of private equity.

58:28I'd love to hear if you've thought over the years about either having a sleeve or a strategy where I imagine there are companies you're involved with that at times could be take private candidates. We have rolled into take privates of a couple of our portfolio companies, but very few. In investing, you have to be very good at one thing. That white space that Jeff identified 25 years ago, that nobody is playing this. think like an owner, long-term business builder in public markets remains true to this day. It's a white space and we are the best in the world at it. That's where we need to stay focused because we're not going to be the best private equity firm in the world.

59:08We know how to work when we don't have a board seat at a company, when we have an NDA at a company, when we have one out of 10 board seats at a company. We know the ups and downs, booms and busts and bubbles can warp public company thinking. We have a depth of relationship with the people that vote all the shares, whether that's BlackRock or State Street or T. Rowe Price or Fidelity, we've got those people in our corner. We understand how to navigate as a minority, sometimes even a very small minority shareholder. We build expertise in this one narrow thing and we're good at that. If you abstract it as private equity, trying to choose a great business, invest at a great price, have the company have the right strategy, create the right incentives, yes to all those things.

59:53And those are all things that we're also trying to do, but the execution is very different. I worked in consulting. A lot of the projects were private equity due diligence. When those projects kicked off, we knew that we had a three-month period of time for the initial consulting presentation that would go into the investment committee to make a decision on a first bid. Then there would be another one month. They'd have an opportunity to make their final bid. That would be a defined auction. In the meantime, not just the business due diligence, but the accounting diligence, the tax diligence, all the management meetings, the data room is populated with perfect information.

1:00:32That process is trying to accomplish the same thing that we're trying to accomplish, but we don't have the data room. We don't necessarily have four months to make a decision. We have a share price today. We know what it is today. We need to deduce whether it's a good investment. Now, we generally take three to six months to make a decision, but in the meantime, we can be buying the stock, interacting with management, getting iteratively more confident. And then when we're trying to create the right strategic alignment, the right incentives, that's taking place mid-course as opposed to mostly at the outset, like a private equity firm.

1:01:11We think along the same lines and we have rolled as a minority investor into some private equity deals. We just have one such case in Japan with a company called TopCon, which is being taken private by KKR and JIC Capital, and we'll probably have other opportunities to do that. Another aspect I want to ask you about is communication strategy. Part of the toolkit you talked about when you go to your companies is making sure what they're doing is aligned with how they're communicating with their shareholder base. despite all of the very engaged work you've done with companies and particularly in the world of activists, you've not been in public.

1:01:53We'd love to hear your thoughts on how you've approached ValueAct's communication strategy to your clients, to the investing world. We've been much more comfortable behind the scenes. Some of it's personality, some of it's culture of the firm and some of it's expediency. It's just people will generally be more inclined to work with you if you're not going to go on the front page of the Wall Street Journal and say, that was me. It never is us. It's always a team effort. And we're very happy to let other people narrate their own stories. And they do deserve more of the credit than we do. That makes for a sales challenge.

1:02:27When you're running a business and have to promote your story, people tend to overstate and sell and celebrate and wave the flag. And that's just not what we've done. That's the downside we've just chosen to accept of the methods that we use and the culture that we have and the mission that we're on. It's authentic when he says that we don't deserve the credit because there's not just the CEO and the board. Usually when we're investing in a company, there are a lot of people inside the company who see the exact same opportunity that we see. It's almost never the case that we have some idea that nobody in the company has ever thought of.

1:03:03There's usually a troop of people who are celebrating when we get the CEO to pay special attention to the idea that they already had. Those people aren't going to get the credit either. The reality is that maybe nobody deserves the credit because it's a collective exercise. We tell our story to our own investors. We don't do much in public. That's why we're grateful to have this opportunity with you, Ted, because it does require long form. Most media orients around conflict, around hero, villain, A versus B. First of all, it isn't really how the world works. Companies are not monoliths or autocracies run by one person and everybody thinks the same.

1:03:42They're tribes and communities of people with lots of different ideas. Most of the time we're coming in and being part of the conversation and empowering one group and their point of view and being part of the gradual shift internally rather than this A versus B. And that's just not the story the newspapers want to write. I'd love to ask for any other reflections that you have that we might not have talked about over this last quarter century of investing. There are elements of the culture that were put in place from the very beginning that I think have served us really well. We all have the vast majority of our net worth in this product.

1:04:19We eat our own cooking. We all get paid on the performance of the whole. Nobody gets paid on their idea or their sleeve of it. And those two things have led to everybody on the team rooting for each other, supporting each other and working with each other rather than compete. You don't want the other guy's idea to blow up and go terribly so that you can get his sleeve of capital into your book at all. It's also had this thing that I really benefited from is that if you're running your own book, you're going to be very scared. And when things leg down is a lot of our best investments went down 20 % before they went up 200%, you're going to stop out and panic and freak out.

1:04:54But if you're on a team, you can press that bet. And your ability to take risk and ride the J curve is so much more enabled when you aren't about to be stopped out and fired on the first leg down. This culture of we're all in this together, we're here to help each other in the way that we take risks and the way we think about the world has been enabled by how we built this organization. It's also extremely flat. I remember somebody coming in for a performance review one year and saying, what do I do next year? How does my job look next year? And I said, look at me. I do basically the same job as you.

1:05:24We're at the destination. I should be building models and getting my hands dirty with customer calls and you get to come to meet the CEO and have dinner. That's just the way we work this place. That lack of hierarchy is important. Somebody came from another firm who shall not be named. And he said at that firm, the people on the lowest part of the totem pole want to do as little work as possible. The ones in the middle want to get done as many deals as possible into the book. And the ones at the top are looking down and thinking everybody's lying to them. And I was like, well, that's not the layer cake we want.

1:05:54We want everybody hooking together, thinking we're all telling the truth. That is something wise that the founders of this firm put in place and we've carried forward. The idea that the snowball effect of relationships, networks, and life experiences gets stronger and stronger over time. As we're entering what may be the fourth industrial revolution in terms of AI, there's a lot of change management that's going to have to happen at a lot of companies and a lot of securities that are going to fall out of bed. Having that 25 years of history, being part of some of the biggest previous platform shifts, PC to cloud, linear television to streaming television.

1:06:31We have a lot of pattern recognition and a lot of people in our corner to help us work through that with all these building blocks. We're locked in on a lot of fascinating projects in the portfolio today with some of the companies that will be among the most important for the next decade. I get up every day loving my job. This is the best job in the world to think critically about the world with a group of people that you like and respect and this army of advisors and to be building and not just trying to make a trade on a quarter, but actually building the most important companies for the next century is a real honor and privilege.

1:07:11and I feel very blessed. I think that's a great place to turn to a couple of fun closing questions before I let you both go. So Mason, let's start with you. What's your favorite hobby or activity outside of work and family? I play guitar and a little piano and drums and write songs in my little recording studio in my basement. Some of these are on Spotify. If your listeners look really closely, they might be able to find these things. They'll find that they are somewhere in between embarrassing and mortifying. I've had the opportunity for Mason to play behind me for my very mediocre karaoke vocals on the guitar at some of our events.

1:07:48So that's always fun. It was a roadhouse blues by the doors. It was incredible. We should put that tape on, right? Maybe as your outro music on the center. He's a great guitarist. Rob, what was your first paid job and what'd you learn from it? I worked for a house painting crew when I was 15 years old and growing up in Massachusetts. My parents were very focused on that I have summer jobs and actually do manual labor. I thought that as a house painter that on the spectrum of manual labor, that was going to be a little bit easier. But I didn't understand that when you're the most junior member of the paint crew, your job isn't to put the paint on, it's to take it off.

1:08:28Up on the ladder, 95 degree heat, scraping paint all day, inhaling paint chips despite the mask I had on. And it was the first lesson in hard work. Also, we had a foreman who was an excellent leader of the crew and patient with me and made it fun. He kind of set the tone, got everybody working hard in some very hot summer Massachusetts days. So seeing that benefit of leadership was also key. Let me ask you both separately. What was the best advice you ever received? Satya Nadella was a huge influence on me. I was still fairly young when I was working with him. And he had this mantra that the learn it all always beats the know it all.

1:09:07First of all, nobody wants to work with a know it all. You're not going to get to the right answers unless you have a learn it all mentality. A decade later, when I started working with Mark Benioff, he had his version of this, which was the beginner's mind, that there are many possibilities to the beginner's mind, but to the expert's mind, there are few. That is also very profound. We are all generalists in every industry we invest in. None of us have this hard-baked expertise. We come in with these basic, generous questions that often unlock things that nobody's really talking about. Those two together, learn it all in beginner's mind are the best.

1:09:40When I went to college, both my father and mother said, don't choose classes, choose professors. I didn't really know exactly what they meant. It took a year of stumbling through some subjects that I thought might be interesting, but didn't have great professors to finally get the wisdom. I tried to carry that forward into my career, making sure that I was choosing mentors, choosing people I worked with. The inverse of it is people don't quit their jobs, they quit their boss. And so as I think about people who work on our team, make sure to keep them engaged and be generous with my time and make sure that I'm serving them in addition to doing my own job.

1:10:20One more, Rob, we'll start with you. What life lesson have you learned that you wish you knew a lot earlier in life? learning that it's okay to cut your losses and move on to change your mind learn that from mason probably more than anyone else as you get into an investing career that's really important because there are going to be some situations where you're wrong and sometimes it makes sense to be persistent and stick with a situation and sometimes it's better to cut your losses and move on to the next thing maybe the other side of that coin and i learned this from rob is that in every setback, there's an opportunity.

1:10:54Rob is a very steady hand and I'm a little bit more emotionally expansive. And so when things go really wrong, Rob is utterly cool customer and figures out how there's actually a blessing in this and how we're going to make something good out of this. Mason, Rob, really appreciate you both taking the rare opportunity to share your story. Ted, thanks a lot for having us. It was a great conversation. Thanks, Ted. And thanks for all you're doing for the industry. And we're big fans of the show and lots of our friends and people we respect and even some of our clients have been guests on your show and we really are happy to be part of it.

1:11:28Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.