a16z Podcast - a16z Podcast: Mellody Hobson and Ben Horowitz Talk Investing, Career, and Star Wars!

Episode Date: December 18, 2015

Mellody Hobson, president of Ariel Investments, sits down with Ben Horowitz during a16z's 2015 Tech Summit for a wide ranging conversation on investing, the state of markets, and how Hobson began her career in finance. Oh, and Star Wars! Hobson has a little inside info given that her husband is George Lucas. And for the minuscule number of people who have not seen the new Star Wars pic -- no spoilers here.

I am Ben Horowitz, of Andresen Horowitz, and I'd like to thank you all for coming. We have a really exciting and thrilling guest tonight, Melody Hobson. And I'm going to give a brief introduction, since we live in the world of Google. I won't go through her childhood and everything. She's the president of Ariel Investments, which is one of the larger investment firms and with just an absolutely stellar reputation. She's also, and that's just, you know, like running a big investment fund is one thing, but she's also chairwoman of the board at DreamWorks on the board of some companies you may have heard of,

Starbucks and Estee Lauder. And she runs, something that I know, she runs a conference called the Black Directors Conference, which is one of the very best business conferences in the world, I think. And I bring that up because it's important to know that as an investor, she's also like she's the type of investor who could actually like run a company quite easily in addition to an investment firm and then she is married to a decent filmmaker he made a movie that some of you may have seen called Star Wars but the the big thing about Melody is that anyone who you ever run into who knows her will say

she's the real deal she's unbelievable and I had this experience two nights ago I was with the legendary musician Quincy Jones and his son is here tonight and there he is QD3 and he asked me you know what are you doing next week I was like oh I'm interviewing Melody Hapsen he's like Melody Hapsen and you have to understand Quincy Jones literally knows like everybody like he knows guys he knows like the president of Israel he knows people like who were in the Third Reich. And he's 82, so he's like way too honest. So if he doesn't like you, you know. And he goes, Melody Hapton, he's like, wow, she's the best. I give her all my money. Like, and she just keeps me going. She's the best person in the world. And so like that's

what kind of reputation she has. So everybody, welcome Melody Hapson. Thank you. So, Melody, Ariel's logo is a turtle holding up a cup. And I thought that's quite an interesting logo. And how does that reflect the firm's investment philosophy? Ariel has a turtle as a logo. We've had it since our inception 32 years ago, soon to be 33. And the idea is to really underscore the investment philosophy,

which is patient investing. We call ourselves the patient investors. And on our pitch book, it says at the bottom, patience wins. And we feel very strongly that the core of what we do is playtime arbitrage. So the short-term market gyrations and volatility, et cetera, that exist, and will always exist in varying degrees, allow us, we are able to take advantage of those moments. And because we take such a long-term view, we can look beyond. what is going on at any one point in time and say, okay, in a normalized environment,

what does this company look like? So that is part and parcel. Because we are patient, we can think independently. Because we are patient, we can be extraordinarily focused at what we do. So I always use the line that an expert is someone who knows more and more about less and less. You know, if you need brain surgery, you don't go to an internist. So we're the people who are learning more and more about less and less, but because we're very patient, we can continue to peel the onion and go deeper and deeper

in very, very niche areas. And then last but not least, because we were patient, we're able to build a team. So how does that, give us, give me an example of, like, how that might play out on an investment. Like, what's an investment that you've made, where the world had turned on it in the short term? A simple one that I think works for this audience and that everyone can understand. A few years ago, we bought Madison Square Garden. And Madison Square Garden, and Madison Square Garden was at an interesting moment. First of all, it had the Dolan family that was an owner, and they called it a Dolan discount,

because people didn't like the family running the business. Well, don't they, like, on the next two, which is... Well, it's the NICS, it's the Liberty. It's, you know, but it's also a lot of other things. They own, you know, Rockefeller, sorry, the... Radio City, video, excuse me, I couldn't get it out fast enough. They have a bunch of properties, the L.A. Forum, Cadillac Theater in Chicago.

So they own a bunch of properties around the country, but obviously the NICs are a major, major asset. And so, and Madison Square Garden itself. So at the time that we bought it, it was the MBA lockout. Okay, let's start with that. Yeah, that's a good short term. That's a classic short term thing.

They were in a retrofit of the garden that was totally over budget. I mean, just they missed big. And they were also at the same time about to renegotiate the television contract. So we looked at Madison Square Garden more as a media play than as this conglomerate of various businesses that were put together. So we said basketball will eventually be played again. The stock is, you know, people have obviously sold off the company because of the immediate situation. and we went to visit Madison Square Garden

and we saw what they were doing with the garden inside and we said this is genius. They created these skyboxes on the ground floor that actually you don't sit in the skybox, you sit in the seat and then you go back to get your food if you've ever been there. It was actually a brilliant idea, a brilliant way to use space back of the house

and sell it at a premium. So even though they were over budget, we said this is going to sell out. And we said, you know, all the television contracts that are being really, renewed because sports is such a great asset and the next are the next that they've been renewed at a higher rate. So when we looked at all that together, we said this is a great asset and you could not rebuild Madison Square Garden in New York City if you tried because of the size of the number

of city blocks that it rep, exactly. So we said there's a barrier to entry here that is pretty significant. And so we put all that together. We bought the stock. Then Jeremy Lynn came. Yeah, yeah, yeah, yeah, yeah, yeah, yeah. And, you know, they raised all of their ticket prices by 40%, dropped right to the bottom line, renegotiated their television contract. That was one where we just said, this is a moment. Everything that has gone wrong, has gone wrong, it's priced in. So let's just get beyond this and then say, what does this look like? So then when Linsanity hits, do you sell even though that short term, or how do you think about that? Yeah, we ended up owning that stock for quite a long time. We still own it, and then we benefit it from the spinoff.

right which was also another great moment now but since you yourself have public shareholders how do you so you're a long term but they're not always yeah they're not always and they do tend to be prone to panic and um you know on madison square garden the NBA lockout could have lasted years or you know the probably not years they could have you know continued to be the Knicks and and lose all all their games and trade away all their good players. But interestingly, they're sold out. Yeah. It's like the Cubs.

They sell out anyway. They sell out. You know, it really is true. I'm from Chicago. It's sold out. So, you know, there may be a perspective of if they're winning or not winning, but the proof is in, we could look at data like season ticket holders buying every year. That's data you can just see.

Right. So it gives you a great deal of confidence. So you're right. We have public shareholders in our mutual funds, and then we have institutional shareholders that we manage big pension fund accounts or endowments and foundations and there's no question we call it the velocity of money has gotten much faster when i first started in the business i started aerial is the only place i've ever worked i graduated from princeton and went to aerial and i've been there for 25 years next year um the average mutual fund investor held a fund for 10

years then it dropped to seven now it's more like three for a mutual fund for a mutual fund Not an individual stock. God help you for your stock. Right. Oh, my gosh. And do mutual funds get electronically traded in the same way that stocks do or not as much? Are there, like, do computers enter the picture on mutual fund trade?

There are people who do program trading around everything, as you might expect, and some do it on mutual funds. The thing about mutual funds is a delay in pricing, so what has really taken the place of that are ETFs. Yes. You can't do high-frequency mutual fund trading. Not really. It's hard to do.

Damn. That's my next startup idea, too. So you said, or you've been known to say that don't make decisions based on money, which is kind of a different sort of thing for an investment manager to say, what do you mean by that? Like, what do you make the decisions on if you're not making them on money? So I got this advice when I first started working, and it actually came from the person who's the chief investment officer of Ariel who started our firm.

John started our firm when he was 24 years old, when 24-year-olds didn't start investment firms and go to pension funds and ask for money. And he had an unusual way of coming to be just more than a casual observer of a stock market but obsessed with it and that his father gave him stocks every birthday and every Christmas instead of toys. And he said in the beginning it wasn't very fun.

He'd runches Christmas tree. And he'd only have a terrible childhood. lot but he let him keep the dividend check so he was a 12 year old with cash flow and he said if he wanted to buy a candy bar he could and slowly he did in this modest portfolio started reinvesting the dividends etc so john this is the backdrop to the story of this is the chief investment officer of our firm he has started aerial i'm 22 years old and the first thing he says to me on the first day of working don't make any decision based on money so i'm like well that's just incongruent what what I would think an investment person would say.

And he said, I believe people undervalue time and overvalue money. And because of that, they make a lot of decisions that are actually not rooted in the right set of circumstances. So, example, he said a lot of people will take a job based upon money and not the job. Yeah, we see a lot of that in Silicon Valley. And they may not. And they may not. And they may not. You know, they may never be happy in that job.

they're chasing the money and it's not worth it right well it's your life yes or make big decisions about it could be marketing at aerial or hiring somewhat at aerial he said the biggest decision mistakes that he made is in the very very early years of our firm when we literally had no clients and no money under management he went to all of his friends and family and asked them to give him $20,000 each so that he could have a track record he started the aerial fund which is now a $2.5 billion publicly traded mutual fund and that was to get

$500,000 together to have a track record so he said during that period he was so, you know, fees on $500,000 in our business is $5,000 a year, 1%. So he said he was so concerned with making sure that he was very

frugal and thoughtful that he let really great talent go away. He didn't grab them when he could because he was concerned about making sure he didn't overextend himself. And he said that was a bad decision. That was making a decision based upon money, and he probably lost people who would have accelerated the growth

had he hired them. Right, right. And then is there an application of that to investments themselves as well? Or is it more of a management life philosophy, or is it also an investment philosophy? Like, are there investment decisions that you shouldn't make, based on Miami, it sounds like almost an oxymoron, but.

I don't think we would say it that way, because we're obviously modeling a return. Yeah, no question. And while we're taking a long-term view and we're patient investors, there's a sense of urgency, so we don't want you to think we're like zen, hoping it works out. We actually believe that a company lays out

its goals and objectives, and unless they have a very good reason that they don't meet them, we shouldn't be there. So that might change our investment decision, but our decisions are made based upon what we believe the intrinsic value of a business is worth. At Ariel, we call that private market value. So we say what would a rational, reasonable person pay

if they were to buy this whole business or if it were broken up into pieces and sold. And so ultimately, there's a price applied to that. We wanna buy companies when they're selling at a 40% discount to what they're worth. That to us creates a margin of safety for us, and or 13 times or less next year's earnings, which is why a lot of your companies don't fall into our purview

unless something has gone wrong. Yeah, I don't like that. Well, generally, if a technology company is in that position, it's probably not a good thing to buy. Well, it's interesting. Not necessarily. I mean, Microsoft was in that from an earnings... Were they at a 40%?

Absolutely. I think got down to 10 times. Yeah. And, you know, in the last couple of years that our portfolio managers owned it has been a great stuff. for her. We didn't know they were going to fire Steve Balmer. Sorry. But that's taking the long-term view. No, interesting. Like, this is true. So one of the things we think about it, Ariel, we'll have a company where there'll be a subsidiary that's dragging

down earnings, or there's something broken inside the company, or it could be a leadership issue, although we tend to align ourselves what we think are strong leaders. But we say, what is the likelihood that this company will let itself keep going in a way that is not on a good path? And so at some point, you say with a company like Microsoft, how much more can Bill Gates take before he actually makes it a decision? Or, I mean, Balmer says he opted out himself. I mean, he clearly has more at stake than Bill Gates in terms of his, you know, how he sold that. How do you predict that or how would you think about something like that? It really is a, you know, you are, in our situation, we are literally looking at.

We do scenario analysis. If this, then this. What would happen if? And we're modeling, actually, the company based upon multiple scenarios. So it could be, they shut down the division and take the loss. They sell the division.

They fix the division and it starts to grow. I mean, that'll be just one. We used to own McCormick Spice Company. And McCormick Spice Company is, you know, the largest maker of Spices in the world. Their annual reports are, are scented with spices, open them up. You get paparica or cinnamon or what have you,

which is a way of, it comes in a mylar envelope. And McCormick Spice was interesting. They had a real estate division that was like completely a debacle at McCormick Spice Company. So we looked at that, we're like, world's largest spice company, sold to both the end user consumer and the food company. So if you're Sarah Lee or craft, they got

You are a huge buyer of their spices. They are it. But also, we're buying it for our table. Interesting philosophy. In a bad economy where people can't buy maybe as upscale an item like steak or shrimp or whatever it might be, they buy cheaper items that they season more. So it ends up being counter cyclical in some ways. But McCormick Spice Company, we were modeling it.

We said, there's no way this great business, this unbelievably dominant brand, lets this ridiculous real estate division take the company down. And they sold it to Rouse, which was another one of our companies. Wow. Okay, so you said two things earlier that I know that a lot of our portfolio CEOs are thinking is extremely interesting. One, John found you when you were 22 years old, which is like, how did he identify you at that age and know who you are going to be? And then you've been there

25 years? Next year. Which is unheard of where we are. Yeah, the average American will have 11 jobs in their lifetime, average, and obviously tech gets much higher. Yeah. And so, and, you know, it's interesting you've probably had 11 jobs if you count all your directorships and other work that you do but but that area all the whole time so how does he accomplish that like one how does he get how does he identify talent like you that early and then hold you that long this is a genius thing and I give John a lot of credit because I have to say I've struggled with this I haven't been able to replicate it in the same way John met me when I was 17 so that's even more impressive like I know a lot of 17 year olds and they just scare me they

He met me when I was 17. Now, I wasn't your typical 17-year-old. I was very driven, very focused for a whole host of reasons. And I was a summer intern at Ariel when I was 19 years old. When I was 20, John sent me to be an intern at Tiro Price. I was the first undergraduate intern they'd ever had. And he said, you know, I've got this woman working with me. She's great.

We happened to be the largest shareholder of Tiro Price at the time. So obviously, the gentle nudge worked. So I was sent to Baltimore to work on the research side for a very famous portfolio manager named Jack Laporte, who managed the New Horizons Fund, which was a famous small-cap fund. And the joke at Tiro price was that they were training me for John, which was true. Yeah. So I graduate from college and go back to Ariel, and this is something that I have never seen or heard before. John used to take me to meet people, and we would go meet people we didn't know.

And he said, your job is to get us in. And I was literally like 23, 24 years old. And hold on, can you pause? You have to know John, because John is like, he needs that service. Like, his personality is, because he's sounding like, because he's so genius on this, it sounds like he's the most extroverted, like. Totally introverse it. You've got to pull, it's pulling teeth.

Yeah, he won't look in the eye really, very uncomfortable kind of. He's like the classic. He'd fit right in and so. Yeah, probably a little. So probably I say this to him with love. I'm like, you had Asperger's, and like there was no spectrum back then. You know, like you, like, but he's genius and great and wonderful and slightly awkward and wonderful. So I'm 24, and it's true.

He said he hired people to do things he couldn't do. True story one day. He read an article about Dick Parsons who was running dime, savings, and loan. He was featured in the New York Times Magazine section. And he said, Melody, get us in to see Dick Parsons. So Dick Parsons in this article says he loved bacon. So I wrote him a letter. Who doesn't love bacon?

I wrote him a letter and I said, you know, I tried to connect some dots of how he might know us. And we don't want anything. We just want to come in and tell you who we are and what we're doing. And if you say yes, we will bring bacon. And he said yes. Now that's really loving bacon. And Dick is on the board of Esty Lauder with me. He brought me to Esty Lauder.

We're literally like Pipsqueaks coming into his office before Time Warner. He went to Time Warner right after that to be COO. So John would have me go and make this effort to, you know, see people. He was on the board of Prynco, Princeton Investment Management Company, and Jack Bogle from Vanguard was on the board as well. So one day John called and he said, instead of you actually getting us to Jack Bogle, I'm going to tell Jack Bogle I want to come and see him and I want you to follow up and make it happen. happen. So I'm emailing back and forth with Jack Vogel's office and, you know, Jack

Vogel says, listen, I'm really busy, but I'm riding the train from New York to Philadelphia on this day, buy a ticket, and you and John can ride to Philadelphia with me. So we fly to New York to write the train to Philadelphia. We get on the train. And Jack Vogel is like, you know, industry legend, you know, invented vanguard and was his senior thesis at Princeton, and, you know, this is, you know, someone who's just very, very, very, you know, big in our world. Oh, yeah, yeah. So we're on the train, and John says, I wanted Melody's to meet you because she's going

to be president of Ariel. And how old are you at 24 then? I, like, fell off the chair. I'm like, what are you talking about? And he said, I think it's really important to expose her to all the people that she needs to know and help her. But when she's 30, she's going to be president. So that's awesome for you.

But I have to ask this as a CEO question, what about the other people at Ariel that didn't make them like, did they hear about it? Did they make them jealous? Were you able to keep it contained or did you roll back into the office and go, I'm going to be the president? No, no, no, I didn't do that. No. I was in such shock.

I think it was brilliant for so many reasons, but one being, I knew, and then I knew I had to be up to it. So I was like, what do I have to do to kill it? So he just read your personality and said, if I say this to Melody, she's going to be the president. She's going to fulfill it. And then the second thing was, I think it gave, it was, by that point, I was probably six years away,

it gave everyone time. And they knew. I mean, we all knew. But it was a very, it was a, it kept me very loyal. Ariel became my company too I mean a lot of things happened in that six year period and I tell you I don't know how he knew to do that but he did

and I assume he didn't tell other people they were going to be president so he just needed that for you and there were you know there was one person who had a problem with it and you know he was like if it's a choice I choose her Wow. That's amazing. Now, I haven't been able to replicate that. I always joke with John. I want me.

Yeah. I want one of me. I want the person who you can take all that shit off your desk and give it to, like you do to me every day. And he's like, no, no, no, that's you. Well, the other thing, I'll just tell you one other piece that I thought was interesting. So early, you know, I'm having things thrown at me that we divorced our mutual fund company. It had never been done before. We took two operating mutual funds out of an operating mutual fund company called the Calvert Group and went off on our own. And I made this

presentation to our board to say that we should do this. We spent our life savings on it and it had all sorts of repercussions. And at the time it was when they came to us, it was $300 million in assets. And today in those mutual funds, we have $5 billion in assets. So it obviously worked. But John during that period, which was extraordinarily difficult and hard and a lot of stuff was going on. He was really smart about making it clear to me what the rules were. So one day, this is the rule. I walk into his office and literally, I'm a pipsqueak. Like, I'm literally, like, I was called John's Grasshopper. I was the one who just did everything he wanted me to do. So I walk into his office and I'm having a meltdown full on about something not going well. And I start

crying. And John is like the nicest, most gentle person that you've ever met, ever. Like has Winnie the Pooh in his office. That's too far. It's weird, but it's true. Winnie the poo, stuffed animals, all sorts of things. He likes teddy bears. So he's like, this is not the playground. And he said, and I want you to understand something today and forever more. you do not bring me any problems I give you problems to solve and I was like in shock and I just pulled myself together and walked out and then the follow-up to that this big issue that I was working on we're on a plane and I'm like you know deep in thought riding like crazy he's sitting right next to me and he says what what is wrong with you so I finally tell him what I was working on he starts laughing his

hysterically. So I said to him, why are you laughing? He goes, I'm so glad it's your problem and not mine. Now, do you think he would have given that same kind of instruction to somebody else? Or was that like special for you because he knew who you were? That was the role he wanted me to serve. I was the fixer. I was not the person. I was to simplify his life, not make it harder ever. I was, my job was to leave his brain free to think about investing. Right, right. Amazing. So are the other employees at Ariel, like how long do they stay? What's the... Long time. Yeah, long time. So there are a ton, you know, we have 100 people approximately, but there's a bunch of us that are really young but have been there for a long time. So we have multiple 20, 25 year, you know, 15 years and the people are not 40 years old. So it's pretty amazing. I mean, we say, Patience is not just a slogan for us.

It's a way we do business. And we want to attract people to our firm who take a patient view. So when we read resumes, we nix job hoppers. If you've had too many jobs, we throw out your resume. We won't even interview them. We said, you're not going to be the person who comes and stays here. Right, because they haven't given those jobs a chance to work. Right.

And that's what John always says. Even with CEOs that we're looking at where we're investing, he said, there's nothing worse and the person who, he said, some people move just in time. Yeah. And we all know those people, right? Where it's like they fail up. Don't we know them? Do we have any startup CEOs here?

He's like they fail up. They go just in time before the thing falls apart and they can take credit for something. And you never quite know what they built. Yeah. No, no. Well, we see a lot of that here. And it's interesting because here, you know, we're at this hyper-competitive talent environment. and, you know, it's an advice that I always give,

but it's very, very hard for the CEOs to follow because the bar for engineers, you have to be not just a good engineer, you've got to be a great engineer, and then there's only so many of those, and then one shows up, but guess what? They were only at their last job two years. You know, do you take them or do you not?

And more often did not people take them, and I think that more often than that, they're gone in two years. It's interesting because I've often thought, you know, from my glimpses at your world and times that I spend on the group on board, that, you know, it's like mercenaries, you know, that to get that person who's truly committed to the company is so hard to do because there's that sense that you can trade up. And so I get that it's harder, probably in the technology space than maybe what we do in terms of what we're looking for because it's just the natural, you know, ebb and flow of people moving around. Yeah, part of the challenges to the companies themselves

are ephemeral to a large degree. So there aren't that many long-lasting technology companies. Like Microsoft is one of the oldest technology companies, you know, and they were founded in 1975. In your world, that's not that old. Right. Whereas in our world, like, they're ancient. You know, they're only guys older than them.

We're like IBM and HP. And generally, when you get really old, you struggle in technology because the product cycles are so short. So actually, that's a good segue into, you know, one of the big memes that we have in technology is it's a bad idea to go public because public investors are all just totally short-term. And that actually becomes extremely dangerous for a technology company because if you don't invest in the next product cycle, which only makes your bottom line worse, you're going to be dead soon because no product cycle lasts more than, you know, five to ten years.

That's the longest, and some are much shorter than that. And you can see that with companies like, you know, Facebook got like roundly attacked in the public markets and by public market. analyst and on CNBC for buying Instagram, but that was the exact right thing to do. And that story is repeated and repeated and repeated. And so how would you advise us on that, given your position as a public market investor? So on which piece? Well, on that, like, we shouldn't go public because public market investors are all short-term I would wait as long as you possibly can.

And if you would wait forever, wait forever. I think that, I think it's interesting how Travis is talking about it at Uber, saying, you know, we're just starting to crawl and you want us to go to the prom. I thought that was pretty genius. That the one thing that is we see that is true is companies are going public faster than they used to go public. So when you and I were talking about this on the phone, I said if you looked at the history of companies being born and going public, even in technology, that that period is getting shorter and shorter and shorter. and to be public is a very transparent existence, maybe leading up to it with some of the filings you have to do. Obviously, there's transparency there

when you get over a certain number of shareholders, but it is a transparent existence, and I think it at times, if you are very concerned about public sentiment, may lead you to do things that you don't want to do. So I think you wait as long as possible. I also think that the public, the analyst engaged, And what you have to do there is going to take a lot of time and energy that you have to learn how to handle. I mean, you're talking about how you have to go out and see your investors.

We own in some of our cases of aerial stocks where we own 20% of the company and we call and say, we want a meeting. They stop what they do and give us a meeting. They just do. And that is, you know, challenging. That's a bad day in the stock market if you're 20% hold and start selling. And it's not yelling. It's just saying we want to sit down with you and understand whatever this issue is. The way that I often tell people, you know...

And what are those meetings like? So you own 20% of my stock and you call me up and you're like, Ben, I'd like to have a meeting. You know, what would I expect in a meeting like that? And what are the kinds of questions that you want to ask me? So we're not going to ask you about a quarter. We're not going to ask you about any earnings short term. We don't care. We're going to ask you about long-term issues.

We're going to talk you about strategy. Do you have a plan to win? And it's not going to, even though we're asking for a meeting, we're talking to you every quarter. One of the reasons we want to talk to a management team every quarter, and we want the same people to do it, they get to know the people, and they can start to discern moods, how they answer questions, how upbeat or downbeat they are. You get lots of nonverbal cues, and that's very helpful, especially when you've talked to someone for 10 years every quarter. We ask questions that are different. I've heard Charlie Rose once say,

it's not the first question, it's the follow-up. It's always about the follow-up. And so many people leave the follow-up on the table, which is the critical issue. We actually use an organization called BIA Associates, business intelligence advisors, ex-CIA agents, who help us in questioning. And they literally...

Did you bring the light? they are unbelievably great they literally train you to understand and know when someone is uncomfortable when you're starting to probe so it's not some kind of all the things you think it is like eye contact or they shifted it's not it's not that simple um generally what happens when someone is uncomfortable they do a cluster of actions at once they'll like move in their chair wipe their brow look away there a few things happen that shows their their body gives away the issue the other thing they teach us to do is again not ask the obvious so here's a simple example we would ask a you know reg fd means they can't tell us something that

they're not telling everyone right so we will say we don't want to ask you about next quarter but we're we'll say god considering how oil has traded down so dramatically we wouldn't be surprised if you missed earnings by 50 percent we'll come with a wild answer That's called planting a virus and the goal is to see how they react and if they say like oh god What are you thinking that's crazy or if they don't they could be then you know you're closer than not They're they they're like aha sympathy You'll ask that's very tricky presumptuous question Yes that's exactly right makes me feel bad we learned carrot works better than stick you don't yell at people

You want them to feel aligned with you and we are they we are in it together with them we are owners of their business with them. We often are often the largest shareholder of the companies we're invested in, especially on the domestic side. So if you say that to me and I go, we could miss by 50% like our, do you just like sell my stock?

No, no, no, no. No, it could be the person says something like, you know, it's going to be really tough and, you know, we're looking at everything. You kind of know you're in the right ballpark. Well, we may be saying at that point, are we going to average down because this is a temporary moment? They're going to report. They're going to disappoint.

And then we're going to go in and buy if we have that high level of conviction. And then that way, over the long term, it ends up being an even better return. So the stock that we've been doing that on lately that has been just a real problem child is this company called Bristow. So Bristow is a helicopter company that takes oil workers back and forth to oil rigs as far as 600 miles offshore. Right, right. Well, hey, the oil business way it is. No, this is interesting. That would be a good question. No, this is the perfect example of an aerial stock.

They trade in tandem with oil and their contracts have nothing to do with oil prices because they have contracts that are stand in wait for the client. Because if there's an accident on a rig, they have to get there very quickly. Right. So their contract is three to five years. Okay, so nothing to do with oil prices. People trade it with oil. So when oil goes down, you buy it very quickly.

it regardless so that's very good but their numbers but they'll still hit their numbers anyway well they're actually they're they're on long-term contract they've had some issues that have that have affected their earnings because they have a search and rescue business that's pretty significant and they provide search and rescue for the UK governments the oil business is so dirty like really they they they literally have guys in helicopters to search and rescue for like the people who die in the oil rig for No, or it could be search and rescue for anything. So in the country of Britain, they are the

outsource provider for search and rescue for the country. No, for the country too. Even though they're number two competitors based in Britain. Oh, interesting. Interesting, right? Yeah, so they're diversified. The stock is trading for less than all the helicopters if you sold them. Interesting thing about helicopters. They don't depreciate the way other vehicles do because every five years, you have to replace the engine and the rotor. You basically have a helicopter every five years okay so that's already baked into the price so we do all that math and say right this makes a lot of sense okay so when we have those conversations with them we are going to add that the issue with them is they have to put a hundred million dollars in

their search and rescue business in the UK so people think they're going to raise equity we don't believe they are we think they're going to just borrow the money yeah so the stock has traded down on that yeah very very very interesting so i i know kind of from from previous conversations with you that you're a student of leadership and you and you look at leadership in the companies that that you're invested in. What do you look for, you know, in those conversations from the CEO to go, you know, this is somebody who knows where they're going, who can get the organization there and like maybe he's got a bad quarter, maybe she's got a bad quarter but I'm not even worried about it because I know like this this is a

person and when you go I don't care how good the quarter is like this thing is going to be in trouble over time so you're always worried about something I mean I wish I could say we're never worried because anything can happen but I would say we're looking for leaders who are aligned with the shareholder if we see CEOs who don't own any stock that's just not good if we see CEOs who you know pay themselves too much or where you have a close held business and five family members are on the board. No. Yeah. You know, and they're all making, you know, huge, they have sort of phantom titles and big paychecks. Those are the kind of things

we don't like to see. We like to see companies that, where the CEOs are smart allocators of capital. That's really important. And as you've already suggested, they have a vision and they can articulate with that vision. Because remember, we're going in as value investors when something's wrong. Something has not gone well if we're interested in your company. Right, right. So it seems like, uh-oh, so if Melody shows up, I guess you probably are, they probably already know they have problems, so yes. But they love us when we show up because we're such a long-term investor.

Shareholders, I mean, company management teams want Ariel in their stock because they know we're not going to trade around and whipsaw their shares. Right, right. Well, and also, you've got potentially very large built-in gains. I remember when my stock went to 47 cents, 35 cents. But the people who invested then held it forever because, you know, they held it all the way to 1425 because they, if you could buy it then, then you would take the time to understand what it was,

whereas if you're buying it on the rise, you're just buying momentum. You really are asking yourself, do you believe in the people? You know, there are certain people who hype everything, and we want to avoid that. And there are certain people who are truth tellers. You know, they're telling you the pros and cons, what they're really confronting, what's going well and what's not going well, so that you have an honest assessment that you can look at it in hopefully an unbiased way. We have to force ourselves.

We talk a lot about behavioral finance not to get anchored in what was, and to really try to understand what could be. You know, Warren Buffett has a way of saying, you know, don't get mad at the stock. It doesn't know you own it. You know, so, you know, if it goes down, you know, you're looking at it fresh from today, not what you paid for it. And that's very, very hard for some people to understand. Yeah, no question. And so, like, of the companies you look at, like, how often are they trip tellers versus hype people? We're avoiding trying to avoid the hype people.

But we're trying to, and there are signs. But, like, of the CEOs that you look at, like how. unusual is it for the CEO to be honest is that most of them is that 25% of them no I think ours are largely you know if we're investing alongside of them we believe in them and that doesn't mean we always get it right we get we you know that's the one thing about again investing your batting average doesn't have to be 100% to do very very well so we miss sometimes we get we invest in the wrong person or the the strategy is not doable and of the deals that you look at like how often would you invest?

We look at a lot of things before we buy. We look at a lot. So our universe is about, in our small cap product is about 400 stocks, but we only own 40. And if we found a new name, we wanted to buy it, would force a name out of the portfolio.

We won't go over 40. We like less is more, so we've concentrated portfolios. Ruppel Bonsali, who runs our international and global portfolio, you know, she's looking at thousands of stocks. She eliminates two-thirds of them right off the top. Her process is one of elimination.

In the way she describes it, which I love, she says, she assumes she doesn't want to own anything until she can't reject. Everything is a rejection. And what is the basis for rejecting all these stocks? Lots of things. It could be anything from the business to cyclical. It has too much of a commodity emphasis, which is something we cannot predict. We want companies that have brands or franchises that have moats around them, as Warren Buffett talks about, that are very hard to copy or for new competitors to come in, or they have some defining aspect of them that gives us great confidence in its long term.

So we don't like commodity businesses. We don't like new people doing new things for the first time. We actually avoid that. where you don't you can't see any history or track record so that's not to say we won't buy an IPO we usually are buying cold IPOs but we're buying IPOs that the company's been in business for enough time for us to look at the history but it sounds like you start with the business not the financials is that accurate and the financials come next right okay interesting but we're screening for a whole host of issues i mean we're looking at thousands of companies yeah yeah so yeah so there's

plenty to like that. So what's an investment that you didn't make where you said, look, that's like, we're taking that off the list and then went back and said, boy, that was a mistake. John has one that he talks a lot about. So we have had a tremendous, we had tremendous success over the years in casinos. We own Caesars three times. And they were, you know, obviously leveraged buyouts, all sorts of things happened along the way that made that just a really wonderful stock for us.

when we owned it. And John at one point was looking at the casino space in 2008, 2009. Mandalay Bay was the stock he didn't buy because he thought there was too much debt. Because debt will be a reason we won't buy.

You hear that CEOs? Watch the debt. Especially small cap. No, you know, debt is poison if you're a small cap and you can't, you know, you don't have the cash flow you can't finance it is it's it's a disaster so debt interest coverage ratios we play a ton of attention to and mandalay bay was one that was really on the edge on the

debt side even though the cash flow there is unbelievable john didn't buy the stock he still talks about it still it's like i missed that mandalay bay you know hit spectacular returns from the bottom spectacular and he just misunderstood that or he didn't weigh his own principle the core business hard enough. I think he felt he was discouraged by the debt piece, but the debt piece was manageable because of the cash flow. And so it was a little bit of a chicken and egg thing. Yeah. So I'm going to switch gears a little bit or a lot bit. Your husband, George, his entrepreneur story is quite an amazing story in that he was the entrepreneur that no investor believed in, at least having watched the making of Star Wars, which is an incredible story if you

haven't seen it. They tried to shut down the movie. I don't know how many tell. Like every week they'd come in like, we're shutting it down. Like it's over. And then he finally negotiated that the movie go on by saying, look, you don't have to pay me any money for this film at all. All I want is the merchandising rights for the sequel and the next sequel. And they gave it to him and it was like the greatest deal anybody's ever cut in the history of mankind. You can imagine that. So he is like the ultimate person that nobody believed in. And what do you learn from that, knowing him and who he is?

And do you look for that sometimes in companies? Well, your backs are close, but a little bit off. Oh, well, correct it. So I'll just... The original Star Boar's budget was $10 million, and George made it for 13. The board actually greenlit the movie. hit at people like Princess Grace on the board of 20th Century Fox at the time. He was paid a director's fee for writing, for directing the movie.

And he was so concerned, when he wrote the original Star Wars, the script was so long, it was 100 pages, that he divided it up into three movies and said, no matter what, I will get these movies made, no matter what. So the first movie was made, it ended up being this giant success. It was in the theater for over a year. Like we can't even imagine that today, right? No, no. Over a week is hard. Right. So now it's time to make the sequel. So they say he's coming off of American graffiti, which it was made for $700,000 in grossed $100 million. And he's coming off of Star Wars. He's going to ask us for a huge amount of money for this next one. If they thought he was going to change the terms of the deal. So he said, no, I won't change the terms of the deal,

but I want the, because I want to make these two others, I want the sequel rights. So he cut that deal at the beginning of the front end. Right, exactly. So they, there was no such thing as licensing. Yeah. There were no action figures. There was no, he said the, you know, toys were like G.I. Joe and they were dolls that were 12 inches tall. So he would, he thought the licensing would be that they could do T-shirts, and the T-shirts would be a form of advertising.

And so that's what he thought he was doing. And then it turned into, obviously, toys and, you know, 50,000 separate licenses and all these other things. And so they gave him, this is classic corporate America. Yeah. They gave him the sequel rights in order to make their quarter. Short-term thinking. Make their quarter. They were a million dollars off, which was George's fee.

Wow. And what did the ballpark? What were all those? rights worth that they did make their credit. Well at least we know four billion dollars that they were you know Lucasfilm was eventually sold for but you know and obviously all the revenues and what have you that were generated over those 40 years but you know it was a big mess yeah but it was to make their quarter that they made that trade but knowing that story um that you have an entrepreneur like that who's got the confidence in himself to cut the deal but then even he didn't know

what he had right how do you think about that when you're looking at new entrepreneurs or new businesses like does that affect your thinking do you see George in any of these people like like okay I know what that is that person's got a vision I see George more in investors than I see in the companies just because of the vantage point that I have so we did a dinner with Mario Gabelli Mario Gabelli is a great media investor great and sitting down with Mario Gabelli and having Mario talk about media for the last 40 years with detail that was like at a level of detail that I've never it was exquisite like earnings for Time Warner in 1989 you know where I'm like

I'm just going to look this up and see if he's right and he's right you know just exquisite that was the kind of you know that kind of conviction around the set of beliefs and seeing something that other people don't see, I see that a lot with some of the great investors that I really admire and them, again, taking the long-term view. George was in it for the long-term. He will tell you he did nothing to make money. He was practicing his craft, and he happened to make money. But he ended up being incredibly thoughtful about how to monetize those assets.

So, for example, one of the things he said to me was, Every movie had different stuff. Yeah. Different toys to buy. Different toys, yeah, yeah. Ah, so he put different things in the movie to drive his merchandising business. You said he wasn't in it for the money.

No, but I'm saying, for him it was about the story first. You know, this is why he says, people think that in the movie business, you can have a property and just have merchandise. And he says it's very, very hard. There are 10,000 names. characters in Star Wars he's like we all wait 10,000 named characters you know it does always seem so amazingly intricate like one of the things that that that we tech

people love about it is just like the just sheer force of imagination to create that whole thing with all those all that stuff all it's a whole other world like it's so he said when Jim Cameron like and populated I guess with with that many when Jim Cameron did Avatar yeah the New York Times called George and they said they were making Avatar at Skywalker and he said they were mixing it at the end and they did some of the visual effects so he said the New York Times called him and they said well what do you think about avatar and George had seen and he's like I will just tell you one thing it's

very hard to create a world so when you go to our if you go to George's writing room yeah every planet has a binder and when I went there and saw this for the first time I was like this is the level of detail that you are with your business that these entrepreneurs are in this room with their startups, that the Twitter product guy was telling me about his new product. It's the same level of, I mean, fanaticism in detail. So you pull out tattooing, language, clothes, plates, silverware, terrain. Like, it's this big.

Wow. Every planet. Hoth. Same thing. You know, you go on and on. You sit, see next to his bed, he just writes. writes names yeah so one day it said to george i made a joke with him i was like you know you really need to lufa and he's like lufa pinetti that's going to be the character in clone wars

and i was like and he was like literally like like wrote down lufa pinetti it was a character wow wow like so was that intimidating when you when you had the baby to name the baby He was like, he had George there, and he, like, is this baby going to be in Star Wars? No, no, that was not intimidating. But there is a genius there that has been very, his brain and the brains of his friends. They work in a completely different way. Probably more similar, you know, a lot of everything he did was tech-based. So, you know, he sold Pixar to Steve Jobs when it was a medical device company that, and they,

and Ed Kappell wanted to take it into the direction and John Lasseter of animation. He created THX sounds. He, yeah, which is now, you know, in cars. And THX was from his first movie, THX 1138. He created Edit Droid, which was a way that they edit movies. I mean, there are all these, he used technology to serve the art.

And he always tells people that art is just basically a process of hitting up against technology. And he gives you this lecture on it that's brilliant, where he talks about the fact that the greatest thing that ever happened to artists was oil paint, being able to go into a tube, which allowed you to go outside. Ah, right.

You know, and he, because before that, it was frescoes. Yeah. And you did those in the dark. Yeah, and it showed. Some of that stuff was a little depressing. You chair the Board of DreamWorks. So when you, you know, are looking at what they're doing and they are, you know, they're kind of in the, they're almost like modeled off of George's work in terms of technology and in the kind of creativity that they do, do you bring some of what you learned at home to the job and say, you know, like I know how this gets done, but like the way you guys are thinking about this is too jealous.

I try not to do that. So I think when you're on a board, you serve. a role you are a representative of shareholders and you're fiduciary my job is not to be the creative force at dream works right my job is not to even create critique that you know we watch a lot of movies in our board meetings which is also pretty cool and fun you know a lot of board meetings are we're just in a movie theater and it's interesting because we come out and everyone I hope people are taking notes. The next board meeting I go to, I would like to see a really good film. And I say, I'm always wrong.

What I love, other people don't. What I don't love is like a giant hit. So I don't guess. My job is process, you know, big issues. Process, budget, vision. You know, have we diversified our business enough to live through all the things that could happen when you only make two movies a year. And that's the giant source of your revenues.

So those are the things I spend a lot of my time on, not did I laugh at this joke? Because that's not what my expertise is. My expertise is the management and governance of the company and making sure that we're holding the team accountable. I mean, Jeffrey has voting control of DreamWorks, which is interesting. Both of my DreamWorks and SD have voting control.

And to be with people who hold voting control and make sure that doesn't get in the way of them making the best decisions for the company. I know that may sound counterintuitive, but it really is something like if you have an independent board in there, you want to make sure that your own point of view doesn't limit you. So it's almost as though you're bringing perspective. So there's no reason for them to lie to you

because they have voting control but they might be deceiving themselves or how would you describe that phenomenon? You know, certainly when you have those kind of executives and certainly there are a lot of them in this room who have those stock structures, you want to challenge their thinking and you've got to be able to go toe to toe with them

in a way that is not aggressive where they turn off to being open to the point of view. So I ask questions always. So it'll be a simple thing like, we'll be debating that we're going to do something or not do it and so one of my standard questions which I always told you is that I told you already told you is will we do this if we were private right and it's interesting the number of times someone might say for sure and you say to yourself well then that just answers the question yeah because the not doing it is more about how's the market going to react how will we explain it to Wall Street you know what will be but that's not necessarily in the best interest of the company long term. So when they say for sure, I'm like, what are we debating? You know, it's interesting because there's probably an analog for private companies, which would you do this if, would you do this if the press didn't attack you? Or would you do it if you were public? Or would

you do it in the light of day? Right. Yeah. Which is, you know, it's not about being honest or dishonest because I don't spend time with people or involve myself with people where I have to ask myself that question. I assume a high level of integrity, and we assume actually that with most of our management teams, unless we are led to believe otherwise. If we're sitting with people and we believe they're being straight and honest with us, everything won't go right. So we're not going to assume that it went wrong because they were lying to us. Now, if they don't have a good answer, then that's a different story. But the back and forth with someone like Jeffrey is so robust and so energized because he wants you to poke holes and he wants your best thinking

and he doesn't want you to handle him with kid gloves and you end up with a better outcome when a bunch of diverse people around the table challenges thinking and diverse in terms of all of our backgrounds so we come at it from all different ways I have the Wall Street perspective I have the media perspective you know we have Mike Montgomery who is the investment banking perspective. We have Tom Preston, who has the big media perspective, Viacom, Vice, etc. So everyone's in that room with a different point of view. We used to have Nathan Mervald and we used to have Meg on our board. I mean, the board was just unbelievable. And Paul Allen and David Geffen. I mean, it was like, I called it Moguls are us. You know, it was like,

but when you, when someone asked a question, it was, you know, this wasn't the guy holding all the marbles, you know, you don't invite those kind of people into the room if you're that guy. Right, right. And you don't get, you don't put something over on that group. You know, you just don't. And if you think you are, you're really wrong. It's like the best word ever, movies, moguls. It's tremendous.

So we, I've got over my time a little, but I just want to say thank you to Melody. This has been incredible. I've been so, like, fascinating. that I caught up and ran right by it, but thank you everybody. Thank you so for having me.