Invest Like the Best with Patrick O'Shaughnessy - Anne-Marie Peterson - The Capital System - [Invest Like the Best, EP.364]

Episode Date: March 12, 2024

My guest today is Anne-Marie Peterson. Anne-Marie is an equity portfolio manager at Capital Group, a storied investment firm managing 2.5 trillion dollars and getting ready to celebrate its centennial anniversary. Anne-Marie is a seasoned investor, approaching three decades in the industry, with nearly 20 of those years being with Capital. She has become an expert in retail and restaurants and shares her proven strategies in those sectors over her career. We discuss her people-first approach, simplicity as criteria for investment, and the idea that the best retailers are cults. Please enjoy this great discussion with Anne-Marie Peterson. Listen to Founders Podcast For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus, the go-to destination for bold investing. The investment research platform trusted by 95% of the top 20 global private equity firms just got even better. Building on their solid reputation for expert insights, Tegus has expanded to become the first true all-in-one research platform. The new Tegus makes diligence faster, easier, and more convenient than ever before. Your Tegus license gives you access to over 70,000 expert transcripts, more than 4,000 fully drivable financial models, and exclusive datasets like company management checks, industry KPIs, hard-to-find non-GAAP data, and more. Tegus is the fastest way to learn about a public or private company and the most cost-effective way to conduct investment research — now all under one roof. Learn more and get your free trial at tegus.com/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.  Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Show Notes: (00:00:00) Welcome to Invest Like the Best (00:04:06) First Question - Understanding Capital Group's Investment Approach (00:05:43) The Importance of Teamwork and Culture in Investment Firms (00:07:38) The Role of Analysts in Investment Decisions (00:12:24) The Art of Running Effective Meetings with Company Management (00:18:12) Exploring the Dominance of Big Tech Companies (00:19:13) The Common Thread Amongst Great Retailing Companies (00:30:49) Comparing The Growth in The Tech Market to That of Healthcare (00:34:14) The Rise of Pharma and its Potential Opportunities (00:36:56) Power Dynamics in the Tech Industry (00:38:11) The Idea of Power in Investing (00:46:21) Unique Challenges and Opportunities in the Restaurant Industry (00:48:35) The Positive Signal of Enduring Companies (00:54:54) The Importance of Gratitude and Kindness in Professional Growth (00:58:40) The Kindest Thing Anyone Has Ever Done for Anne-Marie

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of positive sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Clients of positive sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc. My guest today is Anne-Marie Peterson. Anne-Marie is an equity portfolio manager at Capital Group, a storied investment firm managing $2.5 trillion and getting ready to celebrate its centennial anniversary. Anne-Marie is a seasoned investor approaching three decades in the industry, with nearly 20 of those years being with capital.

She has become an expert in retail and restaurants and many other sectors and shares her thinking and strategies in those areas. We discuss her people-first approach, simplicity as a criteria for investment, and the idea that the best retailers are cults. Please enjoy this great discussion with Anne-Marie Peterson. Right, where to begin? I feel as though we talked about this last time we talked, that Capital Group is such an interesting place and culture with so many investors who are so good who have been there for so long. It's a little bit opaque from the outside looking in. And so just to set the stage for the rest of our conversation, can you give a description of your personal setup at Capital Group? What do you invest in? How much money do you manage? What's your team? Like the context that you live in, I think would, inform so much else of what we're going to talk about today? Capital is very special. We're about to celebrate our 100-year anniversary, and we have 2.5 trillion that we invest on our clients,

and most of that is equity. We'll be a large fixed-income business as well. But what's special is in an industry that hasn't scaled, most don't scale, and most don't endure, capital has. I know you're interested in companies like that. I'm interested in investing companies like that, but capital itself is sort of a case study in something deeply special. And so why is that? There are a couple reasons. The first is our founder, John Lovelace, his father founded the business in the 30s. He was investing right after the Great Depression. He came to Los Angeles after the crash to basically launch an investment manager firm. His son came along, John Lovelace, who really took capital to where it was. And his interest, he wasn't a star. He was interested in assembling at a collection of people that were different

and distinctive women and men to manage money. And he was really good at assembling teams, trying to figure out who's great at what, where they shine. So it was really never about him. it was always about a collection of individuals and then empowering them and giving them freedom. A lot of investment firms are the star manager who's outraising money. In our DNA, you go back to the very beginning, it's not that. And that DNA persists. It is not a star system. And the second thing that the family did is the Lovelace family gave away the firm to the employees.

And so we were privately held the employees, our shareholders. and so we are owners. It wasn't concentrated at the top, and it's still very diffused. So I think those are really important spreading the wealth and, like, thinking about the team. And then it's the culture. And so in this culture, it's really, one, you know, the shareholders, the true north. And we have this history of evolving our products and how we do things and how we even structure our investment process and the roles and the teams to address.

address that, which is fascinating. Every seven years, the firm looks at how can we wreaks things up a little bit. You know, we purposely put stress on the system to ensure that it's fresh and we're addressing that. Then there are just some core principles that are easy to say, really, really hard to do long term in everything. It's even when we hire somebody, we give them a long time. We think it takes a whole cycle to figure out how somebody might invest. That's how we approach our investments, our average holding periods four years. Many of these companies we've held for much, much, much, much longer, and we've known them. And then it's really all about the people. We hire for a person that we think would fit culturally. We're balancing the individual and the collective. So the people we hire,

you may start covering as an analyst in one industry, but if we give you something else, if we think you're, yeah, that person's really not great at turnarounds, that industry's turn around, let them try something else. So we try to give you a lot of different experiences to see where you shine. And the more reps we get with people, the more precise we can get at putting people into positions to shine. And then the last thing I'd say is multiple perspectives. This whole system is designed on individual freedom,

but also the team and your responsibility to the collectives. You get to do what you want, but you have to share why you're doing it, and you have to share why you're not doing it. And then we invest across every asset class from small cap to income. So you have like PMs with, like a lens of different mandate lens or different regional runs. And then you have analysts with different lenses across different industries. The analysts are organized in industry clusters,

and some PMs are in that where they travel together. Anybody who covers something in the industrial complex, they travel together. They see companies together. They push on each other's ideas. And then the analysts manage money out of the gate. They manage 20% of the portfolios on average. And once you're up and running, you manage the portfolio. And the PMs manage 80%. So the analysts are sort of like the menu and the PMs are the leverage. And so for something to get big in the portfolios, my colleague Martin Romo always says, multiple people have to arrive at the same conclusion from very different perspectives. The other thing I'd say is we have these long-term relationships with companies.

You can look, since we've been around so long, I was researched from the 1930s, meeting with the Dow ages ago. And I brought the analyst report from like the 40s and just had such a fun. And we have these long heritages with companies. And when you're the analyst covering a sector, I was hired to do retail. You almost look at it like you're the ambassador for capital to that sector. And there's a handoff on the relationship. And then you hand it off again.

That's capital. And the way that people are incentivized, all ties back to the behavior that we want. One way that I think I evaluate cultures is what are like the practices that you have that are special that reflect your culture. that are weird. For us, we have retreats. We retreat a lot. I mean, to the point where sometimes people are like, oh my gosh, we're going on another retreat. Some of them are really work heavy. Some of them are fun heavy. But what we really want to do, the whole point of that, is get to know each other because people are here their entire careers. And to have these types of conversations to kind of unlock people, you have to build trust. What we are doing is you're just going to be wrong. It's part of

the job. You're going to look stupid. So you have to create the conditions. where people can challenge each other when it's okay to look stupid. It's okay to feel like you're selling at the bottom or buying at the top. You have to spend time together and like each other and have to have these conversations. And we celebrate each other. So when you join your first retreat, someone has picked to tease you through a video about you or your life. For me, and I was shocked, they called my mother and recorded her and asked her to tell them all these stories about me as a child. mom has no filter, so it was a little bit humiliating. But it was fun. And so we have fun with each other.

And we do that for five-year anniversaries, 10-year anniversaries, 15-year anniversaries, 20-year anniversaries. So there are these rituals of celebrating the individual, you know, their accomplishments, but they always involve some teasing. We can't take ourselves too seriously. And I feel like this system, people don't want to leave here. Even my friend, Dina Perry, was vanishing when she was 75. She went through two cancer treatments and calling in from chemo, like saying what she thinks, what we're missing.

She's a deep contrarian, and she was one of John Lovelace's people. She immigrated from Israel as a child and ended up as an economist at IBM in a day where there were no women in finance. And John Lovelace found her and brought her here. And she was just an incredibly passionate, talented, fighting against the system.

She always wanted to go the other way. But when she got sick, and after a chemo, we all flew to New York to have dinner with her and did a special dinner. It's not family because it's a business, but this team element and these bonds, it's so intertwined. What an incredibly fun way to be an investor. The stunning colleagues thing is so real. They're having met a number of your colleagues to a person that there's this intense passion and curiosity for like the craft of investing. And I think our whole conversation, I'll just use as an excuse to ask about some of these particulars. So like one that jumps out right away is running a good meeting with management of a company.

You've done this a ton. So what have you learned about really effective, great meetings with company management and how that's evolved over time through changing regulation, through an evolving industry? What's the difference in great and good in management meetings? My colleague Greg Johnson told me aside. He had been in a couple of my meetings. These meetings, you can go over any. topic. It's important real estate. You know what are the two things you want to get out of this

meeting? What does success look like when we get out of here? Because we need to translate whatever that is into what's going to happen to the stock over the next three to five years. So what are those things? Two or three things. All those meetings should tie back to that. So I think one, identifying in advance what success looks like. Almost in my head now I've got the note you want to write at the end of it. Another one of my colleagues, Claudia Huntington, who's for had told me, you know what? Best investors run the best meetings. And you know why that is? It's because they figure out what matters and they use the meetings to get to the heart of it. So one, you have to understand what are the big things that matter here? One or two. And usually

it's just one or two for the investment case. There's a lot of complexity that goes into it. But you have to be right about things that matter. Having strategies to keep poking at it. And this sounds random. But I love listening to Howard Stern interviews. I think he's one of the best at running meetings. He'll poke, Chris Martin, what's it like to have everybody hitting on you, backs off, and then he'll kind of circle back in with a different tap. And before you know, they're just openly speaking. You want to create the conditions. And part of that is just recognizing, we're just chatting here. We're just having a chit chat. What's it like to be you right now as CEO? A lot of these executives program, they're humans. My gosh, this is like a hard,

lonely job and what's that like? And so I think just setting the stage for what matters, but then having some fun. I mean, my colleague Greg Wynn, one of the first meetings I went to with him was a little small cap retailer and he walks in a meeting a little late and there was two women's CEO, a woman I are and a male CFO and he looks at the male CFO and he goes, ah, my body double. And it wasn't a compliment, when we start laughing. So you have to check some humor. It was pretty funny. And then the meeting was just great. They opened up about everything, all the problems, but just set the tone. You sometimes need levity. And I think that's really important. And I think using the meeting too often, I say especially with CEOs or the leaders at times of change to kind

of understand, why are you doing this? What motivates you? Just simple question. It's, If you ask that, it unlocks a lot because we have to understand the why. And I also think just we're in a privileged position where we're not activist. We are long-term shareholders. We are their partners. So one, figuring out what matters, two, setting the tone, having a little fun. And then three, I don't know, there are lots of good ways to get at what matters, but there are also lots of good ways to get at persons.

I can't say who it was, but there was a CEO who was running a company and she'd been very successful in like a bunch of other companies. But she was in this situation where it was like kind of a turnaround. And you could just tell, but it was a big job. Yeah, I'm sure I know who it is based on the description. I just could feel her energy of tightness. And it was just so different. But I was just like, are you sure you're the right person for this job? You're so talented. You've had so many incredible accomplishments, but you've put yourself in a totally different position. There are wartime CEOs. You kind of need the right person for the right time. I didn't say the voters said, when you look at herself in the mirror in the morning, what do you think? Highest and best

use or wrong fit. And she was just stone silent. And she's like, it's a really good question. I'm contemplating. We don't like making people uncomfortable, but there's a loving way that want to see people. I'm obsessed with this David Brooks book. He just wrote the art of being seen and seen deeply, others. And I just think that there's so much of an unlock, but like, you can only do that if you have trust. And our institution has trust. And we have these long relationships. I tell the analysts, too, look, also these meetings are like dinner parties. There's the dinner party when you're like in-laws are over with your parents. That's one thing. There's the dinner party with like college friends. That's another thing. There's different music. There's different

seating charts. There's different topics for discussion. There's a different vibe. And there's a different time frame and there's a different amount of alcohol served. But you have to understand. So if your objective is an analyst, you're in a meeting with a PM, and I remember doing this with my holdings, I was like, all right, I get everybody into it, but you're like, okay, now they need to hear it from the horse's mouth. You just ask the three things that matter. You already know the answer. You've done all the work. You've had all the discussions. The PMs need to hear it. They need to ask their questions. That's one meeting. Then there's the meeting where like something's going wrong. And in that case, maybe you plant somebody to ask a tough question. If you as an analyst feel like, oh, it's too

much. Can you ask the question about why did they do that deal? When are they going to cut the cord? So there are even these little strategies, a thousand little details that go into what makes something great. At the end of the day, what matters, having a little fun, and unlocking the human condition, because life's too short not to respect that, appreciate it, acknowledge it. I mean, we spend so much time working. Gosh, I don't want to do this if I don't feel like I'm able to connect and make something better. You're such an interesting, almost perfect person to apply some of these ideas to the current crop of companies that's dominating. They're all growth companies, classically, lots of nicknames. It used to be called Fang. Now they're

called Magnificent Seven or whatever. As I think about the stuff happening, AI, et cetera, If you use the classic definitions, it seems so much like a sustaining innovation, not a disruptive one, because so far, it's like Microsoft, NVIDIA, Google, and meta are like the four dominant companies that have benefited from AI in terms of market cap, in terms of what they put out into the world. I'm sort of counting open AI as quasi-microsoft. Maybe you could just open-ended riff on the nature of these companies, their dominant position, how you think about them from an investment. perspective, like they're obviously consensus great companies, and usually consensus is hard to earn a great return in, at least historically, just riff on this category, because I'm sure it's like center of the bullseye for the kinds of companies that you care about and might invest in.

My simple framework, very simple. Who's spending money and who's going to get the money? There's this big wave of spending happening, and there's this one guy who's got all the goods. The Vidia's got the goods. The other guys have the demand, and they have the balance sheets. they have the cash flow to buy, and they have use cases to get an ROI. Sounds great. For the next couple of years, if they're going to be buying, I know who they're buying

from, Invidia. I don't know if they're going to get a return. One of our colleagues, Annie Rizomsi, asked this provocative question two years ago, and he was like, could AI be asbestos for Microsoft? Wow, that's a provocative question. We own a lot of Microsoft. Logically, on paper, it sounds good, but I've been in a situation, logically on paper where, like we said, they're consensus longs, and sometimes the consensus

is right. But what I think is more interesting. What's great is we can own those. But just even on like Google and meta, I go, hmm, those are advertising businesses. In the offline world, advertising is a low multiple, cyclical business. Maybe that won't be the case here. And then what's Amazon going to do now? Amazon's saying, okay, we admit we can't make money in our core e-commerce business, totally admit it. We've got this strategy. We're going to monetize it across advertising. So these things go through when you say, is digital advertising over capitalized or under capitalized? There's an argument that's growing the market. There's an argument. There's high returns, taking share. But I asked, where are the cracks in the armor three to five years from now?

That seems less clean to me than backing Jensen, what he's been doing for 30 years and their dominant position. So then I say, what are the less obvious answers? To what you said, these are already big and dominant. I saw stat over the last five years, only five percent of the actively managed growth funds beat the index, of course, because you had to own all of that. I try to just keep it really simple, where I feel like I have a degree of just simple understanding. Shopify, you've done a bunch of work on that. I think that's fascinating. This is the time you imaginative and have a vision. We want companies to do that as investors need to do that. And it's really fun. And okay, this is a crazy idea. But if Shopify wants to be the global operating system for

commerce, are they Microsoft 30 years ago? Microsoft was the operating system for the PC and the enterprise. How big could it be even better? Maybe Microsoft had to hire the engineers. Shopify has their own and they also have a partner network, as you know, that develops product. Microsoft had to ship out the software. It was expensive. Shopify can update things and launch a product, no problem. The global market for IT spending, enterprise IT spending is like $5 trillion.

For commerce, it's $6 trillion. And there are plenty of billionaires that have made their money in retail, a luxury. So we're just talking about this. Why wouldn't it be that? Shopify has $7 billion of sales and a billion dollars of operating profit. And I think Microsoft is somewhere in the $70 billion of free cash flow. Toby, super special.

I mean, talks in a hundred-year terms. It's almost uncomfortable. And then all of his principles. And he's just maniacally obsessed with a customer in this experience in a way that I am not sure is happening at these other big companies. I mean, he's maniacal. You want almost a religious fervor back to culture. He's not about his money.

I want the ecosystem to make more money than we make. I don't really hear that from the big tech companies. I'm interested in durable duration. There's some element of we're undercharging and over-delivering in every single possible way. I was recently visiting Costco with her analyst Ced Chen, and she came back to remind me the culture. And so Richard Galante, the CFO, pulls up a video of Jim Sinigal talking about

Gloria Vanderbilt jeans. They got 1980. Their markups 10%. So he's like, we're going to sell the Gloria Vanderbilt jeans. The price is $29.99, even though they were selling for like $80 at other discounters. And there wasn't even a question that you just market up 10%. That's that. That is what I want.

I have to trust as an investor that the management team is going to do the right thing. and not cheat. I've watched too many retailers, some large ones kind of just okay to make the, yeah, we deserve more margin. Walmart scores margins went from 20 to 25% over 2000 to 2010, even as grocery went from a small part of the business

to most of the business. How did that happen? Not okay with that. It just doesn't swear. If I had more confidence in the focus of the customer and the willingness to restrain, I feel better about the duration. I own Netflix for a long period of time through ups and downs

just because basically I got there with Reed Hastings. His battle tested and I trusted him. But I have other situations where I know myself now. If I don't trust, I am selling at the bottom. I've done it many times. I've that little doubt, one little thing goes wrong. And I'm like, oh, so when I have a little doubt, I'm okay.

The great thing about capital, lots of other people have different opinions on these stocks. I'm okay letting others own it. and focusing in my area. We were talking about the last cycle in 2000. Cisco was the Darling. And I was looking at the 2000-Sisco annual report letter. It sounded like kind of today. We're transforming.

Land's End is their customer. We digitized the call center. And it's just really humbling. And who would have thought, who created the cloud? Not Cisco. Amazon, because they were solving a need. And then Microsoft, the big incumbent, again, power of the incumbency comes in and is number two.

Who is the hardware form factor? Apple, not Palm, not Blackberry. So I respect that that's probably within those big companies. There are some winners. I also think it's right for a loser. You have to be really careful. You mentioned retailers a few times. And I remember talking about this in an episode like this with Steve Mandel,

who started his career covering. retailers. And it's interesting how many of the world's richest people are retail entrepreneurs. It's kind of wild. Like it's very well represented. What do you think it is that is common in the DNA of the great retailing companies or great retailing founders? This is stealing from my colleague, Alan Wilson. He said it perfectly. And I had covered it a long time. But when I was an analyst, we went to see Lou Lou Women together. This is after a couple years after the IPO. I would get back and he's great at analogies. He's a creative thinker. He's a creative thinker. He's a so fun to talk to. I would pay to listen to him talk about stocks and companies. He comes out of the

meeting and he goes, huh, I get it. And the best retailers are cults. This is a cult. And I was like, it's kind of true. Okay, so Costco is Costco a cult? And I meet it in the best sense of the word. It is because all their management started at the store. They don't recruit from the outside, corporate. They don't even question the 10% mark of. No one does. It's like religion. You go visit that company. It's all stuck. E-commerce. Maybe someday. They're still way behind. They're killing it anyway. They believe in simplicity. They say, no, we're not going to do that. Complexity is cost. We're not doing that. Okay. And then I went to see them in Mexico. We went on a sub-management there, some management in the UK. They all dressed the same. They're like in a uniform. They all look the

same. They're in like a blue Kirkland button down. Even though they don't have a uniform, they all speak the same. They all speak in the same language. There are these rituals. Colts have rituals. They all fly to Seattle once a month. They all been doing this forever and ever. I mean, not much has changed there, but there's just, they won't mark up, gosh darn it, the hot dog's going to be a buck 50 no matter what. So I think there's this element of cult. Even with Home Depot, they all have some sort of obsession about the customer experience, what they do and why it matters. The way I got interested, and I'll tell you the story, because this is like another, why the cult thing matters is somebody introduced me to Ken Langone when I picked up the

large cap retailers. This was like in 2008, Frank Blake had just come in. I was sort of dismissive. He drove me around for an entire day to look at stores. And he explained history. One of the things that happened, why Frank Blake was so powerful. And he said, look, the whole catalyst, like we thought we hired Nardelli because we thought we had to fix systems and process, which we did. But the cure was worse than the disease because he added all this complex city and reports. He didn't go to the issue. And he didn't understand the culture and the cult. So he stopped no more store parties with kegs. The lawyers got involved. This was a company that basically hired ground up like Costco. Employees got stock options, made the average American rich. He's like, this is what we do. It's our

purpose. It's our customer. It's our employee. We want to give these people opportunity. That's America. Ken's from an immigrant family. It's America. We have to give opportunity. And he said, Nardelli was abusing this. And he said, Bernie Marcus had this bad experience with a dishwasher delivery at one point. He was getting upset. And he basically called and said, he's abusing my child. We always stand by our product. He doesn't get what we're doing. It's got to stop. He's got to go. So Craig Blake comes in and he recognizes he knows nothing about retail in a stack of 100 resumes you've never pick him for the job he was hired by nardelli he was like a lawyer at g-e doing m&A bad deals for nardelli and he said first thing we're going to do is

have bernie come back and talk to us second thing we're going to do is throw the stores a keg party what sort of freedom do we want to allow even though some maybe some bad stuff had been happening with that and then the third thing we're going to do is we're going to start bleeding orange again bleed orange they have a motto he had something to tap into it was latent He was waiting for Superman. It was just there. It just needed a leader to come back in and say, I get the magic. Our Deli did not.

And he was able to address all those problems through simplifying, through focusing on a couple of the right things, through unleashing the culture. But I think retail is an industry where you have a clear customer. You can see them. And you have these store employees. So you have to mobilize them to care about the customer. In a corporate, if you can buy properly and be disciplined on the, values. When you do that, there's just such loyalty and persistence. There's a habit in going back.

And then you earn the right. You have trust to sell the other things. So can compound. And retail is the classic flywheel business. Comps one year for money to invest in the value proposition, which means widen your value gap in the next year. Your dominance just grows. So it's a classic compounding, but you have to stay true to the discipline. And the people are really important. you and I had a discussion about like the people versus the culture, but the leadership sets the tone, whether you can unlock the culture or you splulch it. Then just open up stores kind of grow.

There's a habit element. And we met with Mark Casey covered my colleague was he did the internet company. So he covered Amazon and I did the retailers. And like during this time we were figuring out, okay, but Amazon might be poison to retail. And there might be really something big here. We were visiting the companies together. And we had this meeting with Jeff Bezos that I'll never,

forget, and this was in 2010, Mark said, I don't need to be ungrateful, but I don't understand given how great this is, why your retail business isn't growing faster in these new categories. And Beza said to him, let me tell you something, habits are really powerful. They take a long time to change, but when they change, they're very hard to disrupt. We're working on changing habits, but when they do, they're going to stick with us. So be patient. There's a habit in these retailers. And Costco, I mean, they have earned the trust of their customer.

Pay to shop in a warehouse with a limited selection. They can do anything almost. They're so disciplined. So when you earn the trust, you just kind of keep getting more and more of the pie. And the bigger you get, the easier it is to grow in some cases. Can you tell me a little bit about what you've observed, obviously, is such a tech dominant couple decades in markets, comparing the dynamics of the tech market and the growth tech market to that of healthcare, which seems to me like the other big behemoth on the

com, also some just huge companies there already. If you had to compare and contrast those two sectors, what have you learned? So what's interesting about healthcare, I'll give you the kind of the healthcare narrative, having watched it for 15 years and our analyst, Rich Wolf and Chris Lee and We have this really amazing healthcare team that has like this long history covering the industry. So anytime I go out of my expertise zone, I'm copying from others inside of capital. But what's fascinating to me about healthcare is you have payers and you have regulators or regulation that basically they can be inhibitors to or accelerants of change. Unlike tech, you just need a new product.

Go. Adoption happens. That's something to respect. But it's fascinating because. what you've seen, and I'm going to go back through the history because I think it helps us understand where we are today and the potential opportunities is when the HMOs came to like place fee for service because health care costs were out of control, the payers had the power, and the government sort of accelerated that with Obamacare by Medicare

Advantage. All these HMOs basically controlled, who got access to what and they keep the spread. So first place they go, hospitals are the biggest chunk of health care. It's 40% of health care spending. And that was egregious. The first place they go is they just cut the hospitals, the volumes, the price, go to out patients. They whack that. And that hurt the hospitals, suppliers, the med tech companies. Hospitals started appoint doctors and consolidating. And so the med tech companies, their pricing was pressured, their volume was pressured. And so a lot of just like needless activity was coming out. But it really crushed the hospital industry and the med tech industry. A couple of companies within that emerged and got stronger at HG.

is hospital. That stock's like for the 25% compounder for a decade hospital because they dominate these local markets. And then in MedTech, Boston Scientific, the industry structures improve their fewer and they have more power and they're innovating and they're solving problem. So now, pharma, whereas pharma, it's 10% of healthcare spending and they take a lot of risk. They have 20% of sales is R&D. They've all these pipeline cliffs and the government's like always pressuring them on price on YouTube products. But pharma is also consolidated. and now innovating, which is really interesting because Eli Lilly with the GLP-1s, obesity, other diseases, Alzheimer's. I mean, it's pretty fascinating.

And unlike other drugs in the past, there's a moat for generics, which is the manufacturing. It just makes no sense for a generic company to try to, they can't invest or copy. And even Vertex in their cystic fibrosis business, they've got a process that, you know, lots of generics have tried to copy the drug and can't. So they've held on to that cash flow stream after the patent window expires. And then they're investing and they're creating new things like pain. So what I think is interesting about that is pharma is such a tiny part of the pie. And they're actually now preventing up front. There are these drugs that are emerging that can solve lots of problems up front.

And they have the long, assured tail of a patent without generics and possibly addiction, Alzheimer's or other applications. So Eli Lilly, I know you've talked with my colleague Carl Quagia about it. He was the first person to tell me about any of this stuff when it was just emerging. Yeah. His superpower is products. He's walking around the office right now with the Apple Vision Pro. So he just...

I can picture it. Yeah. What I think is interesting is I just wonder in healthcare if some of the dynamics that played out in tech, if you were bigger, stronger, kind of these dominant platforms aren't in emerging. Eli Lilly has Lily direct. We just saw them like a month ago. That's fascinating. That's so fascinating to me. Why does United get to decide who gets the drug? Government can do whatever they want. They can contract with Lilly. United built Optum Health so they could like hedge their HMO business and leverage that. I don't know. What are they going to do with all this

capital? It's crazy. I mean, and they've been working at this for a decade, a decade. A decade. You know, a decade ago, they were 12 times earnings and Pfizer was it 12 times earnings. They've grown a ton of the multiples, higher, Pfizer isn't grown multiples lower. It's just a reminder of within a sector, what's mattering over long periods of times there can be these divergences. So what I say is, I just wonder if there's a pocket within healthcare. It's like pharma is now striking back. Scale might matter.

It wasn't a biotech, back to the power of the incumbents. You'd invest in these biotech companies that's sort of like, well, we hope it hits. We hope it passed this trial, that trial, that trial, that trial. It's really hard. So if anything, my view is, this of course could be wrong, but just to answer your tech question, there were dynamics that let the big get bigger. Like in social media with Facebook and Google, you need to scale the bigger you were. That enhanced the social media experience, the search experience, and the investment.

Like, I think it might be happening in pharma. It's really interesting. But I don't know. I'm out of my league. And what's interesting, too, in health care, like tech, you know, everybody worries about regulation. Oh, God, the government could not let them do this or they could not do that. And health care would make the government's United's customer. The government can decide, here's what we want to do.

And we've seen that happen. United was an incredible investment for a long period of time because they had multiple waves of growth and the government was supporting it. Big pharma is more interesting than just as a broad statement to me. than big tech. And this is back to the imagination. You know, what's, what's Lily going to look like? If I were running Lily, I would definitely be figuring out how to invest my winnings into having more control and power. How much do you think about power in investing, especially versus other things that you've talked about like culture? I know you're a huge believer in great cultures and people driving long-term outcomes. And that's definitely true. How do you stack something like

that up against the source of power for a business. Visa has incredible power. I've never heard a word about Visa's culture. They may not have one. It's like business perfected. And so you don't need a good culture. So what trumps what? How do you think about the role of power in your investing? Well, I think it's yes and. I'd say I think the power dynamic matters a lot in an industry. I mean, look what we saw in tech. You know, Apple decides they changed the rules, IDFA, and all of a sudden, like Facebook and Snap have to re-figure out how they're going to target their customers. Have you understand that simple point of who has the power? I personally underestimated the power that that ecosystem and that handset head.

It's the mall. It's the device. They have the power. They can say yes. They can say no. I think it's an and. The thing that's interesting to me about Visa and why after the crash, the gross stocks went up, they went down.

And then I said, okay, what have we learned the last decade? To your point on this, certainly made me appreciate power. Move ahead of 100 meetings with Visa. Nothing's been particularly like, wow, inspiring or magical. But what we have seen is we've seen payments attacked from multiple different angles. I mean, every angle you can imagine. And what happens to Visa?

Absolutely nothing. They're still relevant. They still grow. In that case, that's enough for me. I've learned, and it's a little as you get older, you become a little soft. about rigidity around things and lacked a little. And I've done a lot of that as a PM over the last couple of years. And one thing I do feel like I underappreciate and what I'm paying more attention to is the past is a predictor of the future.

They've been battle tested. That's worse so much. A lot of people look at the future. Well, how fast is it growing while these debates? I say, I don't care if X is growing slower than why. I'm going to pay more for the history. I've seen that company battle tested three times, emerged stronger every time,

Intuit, synopsis, cadence, like those companies were all born in the 80s. Microsoft tried to kill into it tons of times. They're still thriving. There's something there that suggests power. And I do appreciate when the power dynamics are changing. I think it's back to the healthcare thing. That just matters.

Have you read that book, Seven Powers? You have to sort of respect it, watch for it, look for it. The luxury goods companies, I don't know about the culture. Yes, it's like all magical or whatever, but these brands have been around since the 1800s, and you can't disrupt. As long as they're managing the scarcity and the desire, Nike versus Hermes, not a question in terms of duration. So that brand power is really rare. Costco has power over their supplier, because they're,

have two skews. You know, I love it. And they advocate. They use the force for the good. I think they kick Coke out for a while because they have Kirkland. They have private brands. They have their own factories. They have their own chicken factory. I mean, it's just crazy. But they wield it for the customer. I mean, I can't say, I think Visa wields their power for the customer. Yeah, it's just an incredibly elegant business model and they just let it be. You've never heard of a Visa alumni. Like, you're never like, oh, he used to work at Visa. Now he's starting this company. I mean. No, that's right.

It's like not a thing. No, it's totally true. But back to simplicity, I do think that's the story that's just never changed around the edges. For a while, I was like, oh, let's own MasterCard. I thought MasterCard was more interesting because the management team and it actually had been the same thing. It's the same thing. Don't know how complicated.

What do you think are the biggest categories of mistakes made by analysts versus portfolio managers? Well, I think the analysts get attached to their ideas. One of the beautiful things about our system is it's an inverted pyramid. Really, the analysts are like the intellectual capital. They're kind of the kings and queens because they see the industry. They kind of can see the future. They come up with ideas. PMs just, what do I know about this new technology, but I have pattern recognition about people, about business models, about growth cycle phases. So I think where the analysts can go wrong is you get wed to an idea. You go out. there, you have to say to the PMs, we're doing X, and there's just this human aversion to being

wrong, especially publicly. Somebody, some odd people in our group, you decide you're selling something. Prover was a mistake I made a long time ago when I was an analyst. You come in and you're like, guys, I know the idea is to buy low and sell high. Here we are. We bought high and we were going to be selling what's going to be looked like low, but you have to come in and admit you're wrong and people don't want to do that because it's just really, really just psychologically heard.

back to like the culture that we try to create and the space that we try to create for mistakes. So I think that one, just the mistake is even when you know you're wrong, the cycle time to admitting that, you need like multiple data points. It's sort of death by a thousand cuts and then it occupies your brain power. And I think often it's wed for me, wed to a person. And I was like, no, but that person's so great. I can't be wrong. That person, I think the analysts are slower to recognize change that is bad for the thesis. It's just the nature of it. But it's okay because there's friction, back to this concept of friction, there's friction to buy an idea and there's friction to sell an idea. Because when you buy it, you have to come in and say, bang, this is what we're doing. And when

you sell it, you have to come in and admit to a lot of people. It's not just Patrick and Marie Capital Management. It's a big thing. So I think that that's hard. And I think also that's number one. And number two, not seeing something for what it is, miscategorizing it's something for what it is. I've seen it in multiple cases. I was very guilty of this. The off-pricers, one of the PMs was like, oh, these are great businesses. I said, no, the math does not work. The spreadsheet math, because you miss the vision, what's happening.

The department stores are this big. They buy their goods from the department stores that they don't want and they resell it. But the stocks to work, they have to be as big if not bigger than the department stores. What I was missing is they were becoming the department stores because they were getting their own goods. They were upgrading their stores. I didn't see it for what it was. And so I had a stale voiceover.

Things change. Companies change. Positions change. Sometimes it's just lack of imagination. P.M. So many mistakes you make. Misunderstanding early, just kind of rising tide lifts all boats to there's something special happening, getting caught up in the fray.

I think also PMs, I've definitely sold at the wrong time because I've given up on something. And I don't understand it. As an analyst, PM, you're going through a middleman, which is really powerful. And then there's no friction because you can just sell something and move on. You don't need to publicly admit your mistakes. And I think PMs have biases, have not owned Google because I'm just advertising. I'm saying the same thing. Advertising is a low multiple cyclical business.

it's just like missing a point. And also being afraid sometimes distinguishing, this is the other thing on valuation with PMs. This is my view on valuation. It's a price quote. It's telling you what you need to get right. It's 10 times earning and saying there's something wrong with the quality, the duration, the rate.

You're really paying 30 times. And if it's 50 times earnings, so often there's something that's really, it's either going to earn a lot more, just the rate and duration is longer and the quality is greater. And so I think PMs have these shorthands to like, we don't know. So we're like, okay, I'll not look at that. I'll not look at that. I'll not look at that too expensive. Interesting, cheap. So I think using valuation as an excuse to own or not own

something at extremes is fraught with error. Can you do the same thing you did for retail for restaurants? Well, what's interesting is the restaurants are different from retail because they're very hard to scale. Why is that? It's because the labor and the customer experience. happens at the unit level versus corporate. Corporate, you're buying inventory, you're allocating it to stores. A lot of the big decisions happen. Yes, you have to keep the stores clean from on high, getting that right and then adding the service. But you're making the food. You're delivering the food. You're greeting the customer. Restaurants would run into a problem. Actually, my first boss was a restaurant analyst. I did all this primary research forum, but you know, we said, this is the number where they can't grow

beyond because you can't hire that many good managers with 20% turnover, grow the units. Retail, there are no such constraints. That is something that just naturally can't scale at a company level. That's why the big ones are franchisees like McDonald's. You've got like a collection of people that have skin in the game, own eight units, and corporates taking fee for rent and sales, but they care. It's just hard to get people to care. And so it's dirty and it's not nice and well, let me experience bad and the food's cold.

it's hard to scale. That is why when Chipotle came along, oh my gosh, it was really special because you're like, this is the one company operated chain that's going to be able to scale because you have a founder who's obsessed with this food with integrity, what's fast, he's addressed simplicity. He's addressed all the problems in the system. Simple menu. You don't have 20 items on the menu, so anybody can kind of do it. Inverted pyramid, store managers made more than the district managers. why do you need a district manager because there's a problem with the store manager, so make them the entrepreneur and owner. And just incredibly unit economics.

I mean, you see things like ATM machines. It's insane. And you just like capitalize on the zeitgeist and build this cult-like following. So restaurants are different from retail because it's not as easy to scale. There aren't a bunch of large-cap restaurant chains unlike retail. The franchise model is pretty powerful. And what Chivalay has done is pretty powerful too. But the similarities are like real estate matters.

our experience matters. But in a tight labor market, it's tough. And what's interesting about McDonald's is such an affection for that company. It works everywhere. They have one concept. I think it's 60 or 70 percent of their operating income is from rent. They're a landlord. They control the real estate. The others didn't. So that's why they've endured. They had a big insight about like let's own the real estate so our franchisees don't get whipped around with pricing and we can co-invest with them and the experience. And now digital's, the mobile ordering, is enhancing the productivity and reducing, you know, even those kiosks, the need for labor. And in a tight labor market, it's big, the little guys can't invest.

They have some external dynamics now that are contributing to scale. But it's really interesting. I mean, even with McDonald's, like, if you look at all their good ideas, the franchisees have come up with. It's almost like Shopify, how they have that partner ecosystem. They have franchisees, this ecosystem. And the franchisees are always mad at corporate, no matter how much money they're making. when I used to cover McDonald's, I'd go speak to the franchisees and I knew a bunch of them and they're killing it and they're just so mad and it's not good enough.

But that like tension of two owners with the same kind of objective is unique and love that about it because I feel like that's a hedge that they're going to get to the right decision because you have so many eyes on it, almost like our system for something to rise to the top of the egg McMuffin to go everywhere in the 1970s. By the way, McDonald's is a big breakfast business. Breakfast is a habit. That's like an annuity. I love the time you described spending with analysts.

If you had to assign the study of the history of three companies to every analyst that was totally new to the investing business, what three companies popped to mind and why? Hermes is a family business. They were disrupted or settles. You could have painted a case at the time. They're in trouble. Caterpillar. I just think the industrial are fascinating. Those things aren't disrupted. I mean, many of those companies have been around. I mean, think about it. Their histories are like 100 years. Dear, I mean, even carrier, 1910. I mean, these are enduring businesses that have gone through various iterations, conglomerates, spin-offs. But if you and I wanted to create a Costco, we couldn't with all the money in the world, real estate, loyalty. We just couldn't. And if we wanted to create a caterpillar, we couldn't. Pretty dominant, big power business, big

construction business and they're kind of like the arms dealer to the global infrastructure build out. And you've got Kamatsu, but they're sort of behind. And it reminds me a little bit of Home Depot and that the analyst is like, look, Gigi Partisini. She said there's this tailwind. She's for their utility analyst, Dominic Phillips. There's a tailwind from the Inflation Reduction Act.

So the market is underestimating the GMP plus growth that could happen. and at the same time, under the current CEO, he's been in the slot since 2015, he has improved every aspects of their operation. He's simplified their products, reduced the catalog of the products, he's reduced working capital, he's reduced the number of factories and simplified every aspect of what they've done. He's simplified and streamlined. So incremental margins, last three years, the top line's grown 4%. The free cash flow has grown 22%. have gone up. So there's no disruption risk. You just have a cycle. There's no competition, really. I mean, there's Kumatsu, but like they've got brand loyalty. And you've got three big

businesses. They have a big power business. I mean, all this AI stuff, speaking of, it's going to need power. And so there's like a big electricity. There's that redoing of the grid that's probably going to happen. Rebuilding of war-torn zones. There's a lot reshoring. You know, there's lots of demand. And the companies just become stronger. And they basically, they've been in the demand desert for a decade. And so I love these companies. It enables you to do tough things. Home Depot coming out of the crisis. It can accelerate change. I just love to understand the history. True, very different kinds of enduring so far, Hermez and Caterpillar. The other one I think is really interesting is HCA. Local monopolies. Yeah. And also, I mean,

went down and saw them in Nashville at the analyst and a couple of PMs. And I just think that's fascinating. the Frist family ownership and involvement and the CEO is, wow, he is something else. He's a masterclass. I love these situations where it's like dark and they invert it. The advantage is the disadvantage becomes the advantage. Compounded earnings with 15% operating margins consistent 15% RIs and they're a hospital. They have the power. United has lower margins in HTA's markets, lower medical margins.

why they're the specialists they have the facilities you can't read like you're building new hospitals or outpatients this being of power i think they have power but the history of the hospital industry and like how hCA became hCA was it the family was it luck how cool would it be it's top of mind because we're starting to do more writing in the media business and i'm thinking a lot about compression ratios so like this podcast takes whatever the same amount of times to create as it does to consume. But what if it took 400 times as much to create as to consume? And you can do that in great writing. Imagine how cool it would be to have access to your historical notes on a Caterpillar going back 100 years. And then how amazing that report would be, like the case study

report of Caterpillar with first party accounts and data of the thing. You should do it. It'd be the coolest thing ever. You're inspiring me, Patrick. This is like bringing it home to capital. We'll go out and say, let's get expert X and to talk to us about Y or, you know, no, no, no, no. The most interesting people are inside and in the room. It's all here. You have three equity groups. There's three different investment management organizations and a fixed income manager. So you think about how many people are looking at each sector and each company and been writing on it for how long. It's mind-blowing. I could sit and read. I can just study these companies. I feel very blessed. I don't have the background. Go to business school. I started as somebody's secretary just because I needed a job and wanted to live in San Francisco. And then I wanted to go to Montgomery's securities. That seemed like a fun place to work. And there have been a bunch of people along the way saw something in me and spoke positive words into me about potential and saw, you know, a vision for me. And I just feel so grateful to be here. here, like I would pay to work here. You know, I want to say that I'd buy a lot of our meetings at

auction. I'd pay for our research. And I learn so much from everybody here. And I love it. And I love getting older, too, because it's like you have more mistakes and scars. And I love all these talented young analysts we hire. It's just paying it forward where you say, I see something in you. You're so amazing. And the system, the whole point of it is just to find out what you're great at, put you in a spot to shine and believe in you. And just belief is so powerful. You're not always right. Just even the fact that I get to talk to you.

It's not because of me. It's because of capital. Anyway, I just feel very, very grateful. And I feel like, too, also our industry, active management serves such an important role in the U.S. economy. And we're a long-term shareholder that has, I think, too, having like a vision for a company is as important to us as sometimes to them, speaking belief and power into what's possible.

And there are just all sorts of like lovely knock on effects too. So at the end of the day, I'm grateful. I get to do what I love. You've set me up perfectly from my traditional closing question. I'll force you to zoom in on the category of gratitude. What is the kindest individual thing that anyone's ever done for you? Well,

I'm going to focus on professional, just given that's the tone. Because if I had to go to personal, it would be my husband, but I'll go to my professional story. which is my original boss, John Weiss, who was the restaurant analyst of Montgomery, who hired me as assistant, saw something in me. And actually, he and I just had dinner on Monday night. We still stay in touch 30 years ago, hired me as assistant. And I made his travel arrangements and marked up old-fashioned

maps on how he should get to the different restaurants that he was going to go see with a restaurant analyst to go see. Anyway, he promoted me twice, once to his research associate. And I didn't even really want the job. And the second time when you retired, he gave me his job as a self-sign analyst. And not only did he do that. I said, I don't want to do this. I want to go work in a nonprofit. Like I had traveled. I was like, this is not what I want to do. I'm not good at numbers. I don't see it. He said, you're going to be better than I ever was. You've got a lot ahead of you. You're going to take my job. The answer's not no. It take you to meet the clients, you know, and saw Jonathan and Fidelity and all of his friends. And he's like, and I'm going to be there for you. And you're going to be great.

had he not done that, I had no interest in doing this. But I love what I do. He said, this is what you're great at. Stop focusing on the things you're not great at. You're going to be great. And that's why I'm here. And there were a series of people that have done that along the way. My friend Greg went saw something in me.

But that was the original act of kindness. If I was consistent with my conversation with Carl, your colleague, a couple of them. If I was a young person interested in investing, I would so encourage them to look at capital as a place to be. I mean, it's just as an ecosystem of curious, voracious, general investors. There's just really not other places quite like it. As I expected, it's been a total pleasure to talk to you and hear about your experience, your ideas, your theories, your curiosities.

Thank you so much for your time. Thank you for giving me the opportunity to do this. I enjoyed it, Patrick, and thanks for all you do. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.