Mason Morfit: New Technology is Terrifying, But Incumbents Can Win AI Race

28:47If you go visit one of the Salesforce towers, it looks a little bit like Disney World. There are animal characters and, you know, it's very Hawaiian themed. The culture has been the word they use is ohana, which is the Hawaiian word for family. And it has some very interesting cultural dynamics to it that I think have served it fantastically well, but had to evolve a little bit. But in 2022, remember that tech collapsed, stocks collapsed after a huge run up from 2016 to 2021. And Salesforce at that time's margins were not where they ought to be. Salesforce was swarmed by a number of activist investors.

29:37We did a bunch of analysis and presented it behind the scenes to Mark, the CEO, of lessons learned from Microsoft. And I will put them into two simple buckets. One was this matrix of like, where are you making money? Where are you losing money idea? And the second was the pricing and packaging advantages of bundling things into very nice packages that customers really value. The office bundle is the most paradigmatic example of it, but it also manifests in Azure credits. And the idea being the more that you can kind of package together in a synergistic way, the happier the customer is, the longer you retain them, et cetera.

30:18Salesforce had acquired a lot of businesses, hadn't rationalized them in terms of product bundles, nor cost structure. And we went to work on that issue. And to this company's credit, the results were unbelievable. And if you look at the stock chart, we came in, um, in the low to mid one hundreds. And for the next two years, it went up into the mid 300s so it was a great run just in time for ai to show up and hit the entire opera industry on the side of the head with a two by four in some ways this feels exactly like the microsoft platform shift from pc to cloud and this is a platform shift from sass to ai uh work and it is complicated on a number of different dimensions.

31:05But I do think that this organizing step that I talked about in the middle is super, super critical. And customer data is particularly regulated and protected and sensitive for not just legal reasons, but if you mess with your customers, you know, you're going to lose them. And so there is very precious how this stuff is handled by customers. The key question for me is in the last month or two in particular, I think people look at sales forces perhaps the bellwether for all of sass in this regard and wonder is ai going to eat its lunch or as mark benioff would say and i imagine you would say is ai gonna empower it um from here why is the market wrong in the last six weeks that's in the recent pullback suggests sass is going to have its lunch eaten um okay so things that have happened in the last few months.

32:01By the way, this is a theme that started manifesting in the second half of 2025. And for all of us, the listeners who are listening to this five years in the future, I'll give you some context about what we're talking about here. And only in the last month or so have there been breakout launches like Claude Code, which seem to suggest that one can code software through laypeople language and prompting and therefore existing software incumbents are dead. I want to analogize to Microsoft for a second because it is relevant and I'm not avoiding the question here. But at the time that we invested in Microsoft, there were several productivity suites that had launched that seemed to be better than Office.

32:39One was Google G Suite and one was a, there were a product called Evernote, if you remember that. And there was a product called Quip, which was a, Quip was a word processor that allowed for collaboration in real time in Office. Word couldn't do it. And so the belief was that because there are superior products now in market that are perfectly aligned to the new architecture of cloud, Office is dead. Well, it turned out that wasn't the case for two reasons. One is that the value of the Office suite wasn't the design of Word versus the design of Google Docs. It was the control system, the identity system, and the access and permissioning system called Active directory that sit underneath it.

33:21In other words, if I work at a company, it isn't just that I have Word, it's that I can open up the Word documents that Wilfred has made, or I can't because those are private or protected or legally sensitive or what have you. And it was the management of the data and the actors in the ecosystem that was the key, not the actual productivity software. So if you fast forward to today, if you can author software at the drop of a hat by sort of speaking it in plain English, great, you may be able to design really good looking user interfaces and functionality. but do you have the data provisioning and that you're plugged into the nervous system and of the organization as managed by the chief risk officer, the chief information officer, et cetera, so that business processes can be executed compliantly, repeatedly, and auditively?

34:18I just don't think you can. And so time will tell if we're right or we're wrong, but we are focusing all our attention again in this organizational stage like is the data protected is the data anonymized and and compliant is the data auditable so later you can see why did we make this decision was it the right thing to do or not and and so it's it very often is the oblique thing that is not just the authorization the authoring process of writing things or creating things but the integration and coordination planes that become uh most important and so So the incumbents are hugely benefited in this and they can catch up.

34:57It took years and years. I remember being in a meeting with Microsoft where people were like, how are we ever going to get Word to sync like Google Docs? Because we have a different code base for Windows, a different code base for IMAX, for the browser-based Windows, for et cetera. It's just like a mess. But they got there, right? Because they have time. The incumbents have time. They have multi-year contracts. The duration of a contract at Salesforce is 10 to 15 years generally. and they're plugged into the roadmap of the organization. So it is always terrifying when new technology paradigms happen, but it doesn't mean that all the dinosaurs die.

35:34It's really compelling that as someone that has worked and continues to work for a number of big companies, good luck to Claude or the next AI company to suddenly get an oil tanker to shift on a dime away from their existing providers. By the way, I love that you mentioned Evernote. I really like that product because the company I work for all the time forced it upon us, so I got used to it.

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36:23there's more areas i want to get to um including your new position in blackrock but just before we get to that i think i have like off the back of salesforce two key questions for your investment approach yeah the first is time horizon i guess you need the luxury of your investors giving you a long period of time to make these things work? Yes. Most of our investors invest with us on a three to five year lockup basis, but all of them are aligned to the idea that the investment theses take time to play out. In many cases, honestly, they have a J curve. They actually lose money right off the bat and things get worse, but the worse they get, the more the pressure builds to get things right.

37:11And so it's not something we're particularly terrified of. But yeah, you need to have time. And getting back to why I think we do things the way we do, we realized a long time ago, particularly waking up in San Francisco, three hours behind New York, we were never going to get people. We were never going to beat people playing an information game. We just weren't going to be able to like outrun them. Right. And the only way that we could win was playing the understanding game, which is understanding how longer term tectonic forces at work and then the influence game of having a voice in the system and understanding and influence take time.

37:45They take trust and they take, you know, really unpacking structural things. And so that does make our returns lumpy. We can, as you said, we're very concentrated and we might have value recognition at one of our core positions that comes very quickly and it doubles in a year or it might J curve and you layer all these things on and you sort of have a very idiosyncratic looking return path that tends to be quite good in the long run. But the key is that you have people who are willing. It all rhymes, right? We give our management teams time and trust and our investors give the same to us and the kind of the chain all winds up.

38:23The second follow-up question on the investment approach is how do you make sure you don't get too close? I guess to the companies that you invest in, but perhaps more importantly to the CEOs. I mean, I think I'm right in saying you're a pretty close personal friend with Mark Benioff. How do you know when to say, do you know what, guys? We've got this wrong. or Mark's got this wrong, and we need to dump out of this position when you're so close to them. Yeah, it's so interesting because we've tried to calibrate this issue back and forth to get it correct. And every time we sell out and stock runs as it did with Microsoft, people are saying, what are you doing?

39:02You had it all nailed. You should stick it out and write it for a decade. And you sold too early. And then there's the converse where you held too long. And so we you know, investing is a never ending series of lessons learned. Um, I will say just a few points about that. We've, we've over the course of our history had roughly 150 core investments and we only have 10 today. So it's not like we don't know how to do this. Many of those CEOs are now investors in the fund and we keep them in the family as advisors, uh, and assets to us. And so that keeps them close. And all of them understand that we're in the business of running a fund and we're in the business of making money and allocating capital and allocating time.

39:49And there are periods of time where our capital and our time can generate extraordinary returns. And there's times when we're the returns are skinnier and our role is lessened and they get it. And so we've gotten good at that breakup conversation. but again i think with my in hindsight mistake uh was sticking around for the first chapter of the microsoft story which was not brief i mean it was 2013 to 2018 where they made the successful pivot to the cloud and then i felt like the story was written and there wasn't much else to do even though i could tell that things were going to keep going well and i was better off allocating resources and time to some new project, which was Citigroup, which didn't pan out as well as we'd hope, but we can go into that if you'd like.

40:40But with many of these large platform tech companies, chapter one begets chapter two, begets chapter three, begets chapter four. That is, I think there's two types of businesses in the world. I call them ones that win by winning and ones that lose by winning, which sounds, I guess, like Donald Rumsfeld's no, no, no, no. But bear with me. In many industries, mean reversion hits. If you win, more capital floods into the industry, which compresses returns and things collapse. And that is true for oil and gas or retail. There are other ones where the more you win, the more optionality you have because you have a deeper set of customer relationships that you can add new services to.

41:17And you can have Spotify start with music and add podcasts. And after podcasts, add audiobooks. And after that, add user-generated content that filters into it, et cetera. And so when you find Microsoft's a great win by winning story, because the more office you have Word, you add Excel, you add PowerPoint, you add Teams, you add cybersecurity, you add identity, you add et cetera. And so what we have been working very hard to rotate the portfolio into over the last five years, having learned this lesson from Microsoft, is that we want to have a lot of win by winning business models, which extends the duration.

41:53and that doesn't mean that they go up every single year metronomically. You might have a big drawdown in one particular year as we see in Salesforce. But if we think that the potential is there for these endpoints to expand and expand and add and add and grow more and more interesting and more and more fully developed, we'll stick it out and ride the downs to get to the long-term upside that we see. I know that we've only got sort of 10 minutes or so left, Mason. There's so many stocks I want to, I'm going to drag you kicking and screaming back for another episode because i want to talk about city and morgan stanley and visa and disney and rocket if i can have you back but the one i did just want to dwell on before big picture conclusion is a new position uh i think a new position in q4 i don't think it's actually been talked about publicly yet which is blackrock yes so this is not just because you think they're really good asset management and they're the biggest player it's it's deeper than that it's the evolution of the market space and i guess the scale that they do have allowing them to to dominate the industry going forward yeah uh and you know it should be the quiet part should be said out loud this is the biggest force that's going to potentially wipe out all active management managers including myself so it's a little bit strange to invest in them and champion what they're doing, but it is so fascinating what they're doing.

43:17And it does relate to this digitize, organize, automate idea. With all due respect to all of us in the investment management industry, there's a lot of inefficiencies in what we do. And it is almost a perfect problem set for computer algorithms to attack. How to allocate your assets, how to tax optimize them, how to hedge them, how to manage your life stages, et cetera. Whether you're an individual that is middle income or wealthy or an institution, that is very programmable. The manufacturing of products that meet those needs has been very fragmented and bespoke. And so there's need for organization of all of this workflow.

44:04So BlackRock has historically been viewed, I think, as a diversified asset manager that's really good at making ETFs. And it's been in a price war with Vanguard on plain vanilla ETFs for a long period of time. And so the S &P 500 ETF price and market share war has been going on forever. But the interesting thing that piqued my attention in the last 12 months was that BlackRock is also one of the best data and software companies in the industry. It has a platform called Aladdin that manages your positions and your risks, et cetera. And it was beginning to place that software asset on the desktops of wealth managers and asset managers around the industry and driving the adoption of something called a model portfolio, which is what I'm describing to you.

44:51Right. Which is automatically software managing your investment decisions and optimizing things far better and faster than and cheaper than a human being could do it. And when it had that beachhead, right, and it won that landing place, it could expand and expand and expand with more and more services. And what it is pulling in now is a set of ETF products that is different than that plain vanilla S &P 500 price war set of products into more bespoke, active and optimized products. And that means the price per unit of assets is going up for the first time in decades. And once they control that control plane, and I think in the AI world, this concept of a control plane is going to be critically important.

45:40Where does the decision maker engage with the agents and the software? And if that is Aladdin and that is the BlackRock front end, they are in an incredibly advantageous position. because from there they can organize the asset allocation of much of the industry and pull through their products in a way that is almost impossible to dislodge for competition unless they can kick out that software front end. Almost impossible to dislodge and presumably over time going to be much higher margin? Yes. First of all, they do get directly paid for the software. So the business has a mixed shift of, of just fee-based AUM with faster growing software.

46:26Their product menu is expanding and expanding and expanding, not to waste too much of the clock on this, but what they did with Bitcoin ETFs is truly remarkable. And I will call that a form of organizing a blockchain based traded asset that was largely inaccessible to the average person could get converted, almost like alchemy, into a traded stock called iBit, which is by far the biggest ETF for crypto. And by organizing it in that sort of digestible wrapper, it could then fit into the model portfolio in Aladdin and everybody could have access to Bitcoin. They did something very similar with treasury bonds, which were traded on a dealer-to-dealer market that's somewhat opaque.

47:09They converted those into ETFs that could then fit into the Aladdin software that could then fit into the portfolios of everyone, really. I believe that they will do the same thing to alternative assets, many categories, private credit, real estate, etc. Package, format, organize, and slot into these sockets in their existing software. Beach heads. And all of that, yes, It means fees will go up and up and up. Tracking value delivered is able to make your life easier. You'll have access to products you couldn't otherwise get. All the fee leakage that you don't see that's happening in these opaque dealer to dealer markets gets washed away.

47:51And the customer ends up with a optimized, cheaper, better managed portfolio construction process. and that is dynamically adjusted using machine learning and AI to get the best outcomes you can have, as opposed to a daisy chain of human beings using phones, batch reported trade consults, et cetera, to try to, in an analog way, get to the same place.

48:26BlackRock's obviously there, Goliath, that really interesting to hear that take on it. I've got a couple of final big picture questions. I know we're right up against the clock, Mason. But your performance since the year 2000, since inception, has been 13.7 % per annum. Phenomenal over a 26-year period. The MSCI world for context over that time has been 6.8 % per annum. I think fair to say over the last five years, and I know you're super long-term and you're thinking it's lagged if say measured against the S &P 500. The markets there's lots of questions I know you don't like dwelling on short term bubble this or not kind of talking points but the markets obviously there are questions of evaluation overall how confident are you in the 10 or 12 big positions you have in absolute terms rather than relative terms over the next three to five years that it will be very much positive returns for investors or could massive overall equity market pullbacks prevent that we manage ourselves to an absolute standard as you suggest with it with a target of delivering the teens returns to our investors which you've kind of delivered over any uh measurable period um and with very very little loss of capital which is an interesting thing underneath the surface of those numbers.

49:57Because we do invest with both a margin of safety attitude in terms of valuation and asset value, as well as an opportunity from these transformations that we talked about into getting more aligned with the megatrends and releasing your psychological paradigms, et cetera. And so I feel very, very good about where we're going from here. In fact, I was just reviewing our price targets to where we think they're going to be on the one and three basis. And it's quite eye popping at the moment because there's so much fear in the market and just disruption happening that there's, there's wild activity so far in 2026.

50:33I never thought businesses as high quality as Moody's and S and P would plunge the way they have that. Um, so, uh, we're seeing interesting clustering of people hiding in consumer staple stocks and other things. And the AI physical infrastructure complex is obviously going to the moon. But sorting through all of those sector rotations and emotional swings of the market, I think it is starting to come into focus what the world is going to look like on the other side of this reorganization that we're having. I think I have a hokey metaphor. If you've seen the Jurassic Park movies, the T-Rex was the apex predator of this amusement park called Jurassic part.

51:15And then in one of the sequels, they infused it with Velociraptor DNA to create something called the Indominus Rex, which is an apex predator, bigger than the apex predator that we've ever seen before. The BlackRock story I told, hopefully articulate some of the, you can see what I'm talking about here. It was already the apex predator in asset management, but with the ingestion of software DNA into its dinosaur body, it becomes even more and more powerful. So I think when we look out in the future, I think industries are going to see particular cases, extreme market share grabs by the these new Indominus Rex dinosaurs.

51:52And there are going to be new interfaces in the way the world works around certain platforms. Visa being one for payments, meta being one for advertising, et cetera. And so long-winded way of saying right now, there's a lot of reductionist narratives, I think, about what's going to work and what's not going to work. You see tremendous capital flooding into semiconductors and data center buildup, asset-heavy industries. But most people seem to be fearful or confused about what is the mortgage market going to look like? What is the asset management market going to look like? How are consumer products going to be made, marketed and distributed to people?

52:35How are you going to buy a car? Are you going to buy a car? These are the problems that we're working through. And I think we have the advantages of relying on all the CEOs that we've invested with over the last 25 years that now invest with us. We have the asset of being inside the boardroom at Salesforce and watching the agentic revolution happen at all of their customers and at it as well. um we didn't get into it but we're wall crossed under ndas at several of our other companies to understand how creativity and media is going to shift and what is the movie of the future going to look like and and then what is human life going to look like and this sounds grandiose but we do need to ask that question given what's happening in the in the in the world today on the on the other side of this revolution and i believe that we are picking up some of the software and services assets very cheaply that are going to be extremely relevant for this um new worldview and you know because of these vantage points we have um if we're wrong we'll just adjust the portfolio accordingly as time goes on i mean maybe we're not going to get all these right but i feel very good about it is the short answer you're right we didn't get to media and i'm going to kick myself if we don't so i'm going to squeeze in one question very quickly on disney is the sale of warner brothers discovery to not disney a big blow and are you happy with the ceo choice uh very happy the ceo choice um in part because i think his his view of how ip can be used across multiple form factors is super important in a world where I do believe user generated content and interactivity with TV shows is going to increase and your experience on these streaming services is going to look radically different in the future.

54:29And he's got this breadth of understanding. I've met him, Josh, many times and he's great. Industries have chapters in their evolution. The chapter that we engaged with Disney on, chapter one, was coming in right during the the worst of the streaming wars and the worst of the creative strikes. If you remember, all the actors were on strike, the writers were on strike, and the streaming wars were a total bloodbath, and Disney was losing billions of dollars a year on Disney+. The idea that we had was similar to Microsoft, was that you could bundle more and more products together to create higher ARPU and lower churn.

55:01And we helped them recruit the new head of technology to the company, technology and product. You can see they integrated Hulu and Disney Plus and ESPN into one app, which drove up retention, up ARPU. Profits went from losing billions of dollars to making billions of dollars. And that was a successful run. In my heart of hearts, I had wished that the non-Netflix coalition had then, meaning Paramount and Warner Brothers and Universal, had jumped on. Shout out for Comcast family there. Thank you. Exactly. I wish they had all gotten together on the Disney Plus architecture because we hired the best tech team to build the best rails to go to war against the evil empire of Netflix.

55:45That was kind of the idea circa 2023. Unfortunately, Disney got all of its internal assets onto one platform and did had a great turnaround to Disney Plus. But between the Ellisons coming into Paramount and then the war for Warner Brothers, it didn't coalesce into the sort of platonic ideal. that I was envisioning, but we got pretty far towards it. And we'll see where things go from here. Well, I don't know if you saw today's announcement in the UK. Sky in just this region in the UK have bundled everything, including HBO Max, which now launches here. So it's not quite the same as your dream scenario there in the US, but it's also not a million miles from it.

56:29We are really out of time now, Mason. And I wanted to end with the question I flagged to you that we ask all of our investors. And that is, you know, as we want to try and provide our listeners an edge, what is your overriding piece of investment advice for the Master Investor Podcast listeners? Well, I have one that's totally impractical, but it's going to, I was thinking about this question. Have a 10-year-old boy in your house. I have a son who's 10 years, and he, watching Generation Alpha engage with the universe is fascinating. From how they consume media to how they play video games to how they, we didn't even get into our Roblox investment.

57:04And that's been a very successful one for us. And I think going to be one of the most important platforms for the future. And staying young, you know, again, not the most practical recommendation. However, I can't overstate how important it has been for me to have a young kid in my house and how much fun I have with him seeing the world through his eyes. well he deserves extra love and affection because he helps you in your job as well as i'm sure your your happiness at home i have a two and a half year old so i don't think it's informing my investment decisions yet but it's certainly it's certainly driving my life in the next couple of years and you'll hit a you'll hit a real sweet spot yeah well as you know i started as an investor and i know and i'm and i'm not doing it anymore perhaps for a reason I like the volatility in the discussion points without having quite the responsibility.

57:58Not to be too pandering, but what you do in terms of trying to dig beneath the surface and develop authentic relationships and sources and stuff, it is analogous to the spirit in which we try to do our job. which is why I'm making this rare exception to talk to you because it's very important to have this content out there in the way that you do it. Well, I really appreciate that. I particularly appreciate your time and your candor with us today. And there was a lot of stocks we didn't get to. So maybe I'll twist your arm again in the future to come on again. But for now, Mason, it's been a real pleasure having you on the Master Investor Podcast.

58:42Thanks so much for joining us. Thank you. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. this podcast is produced by Paradigm Productions and Master Investor Limited in association with Birdline Media if you've enjoyed the show please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops