The a16z Show - 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. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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. And 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, 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 Hapton. 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 place. time arbitrage. So the short-term market gyrations and volatility, etc., 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're patient, we're able to build a team. So how does that, give me an example of 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 was at an interesting moment. First of all, it had the Dolan family that was the 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 Knicks, too, 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 Cene. Mediastewa. 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, and... Square Garden itself. So 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 a 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 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, yeah, yeah, yeah, yeah, yeah, Lynn sanity. 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 Lincanity hits,

do you sell even though that short term? Or how do you think about that? We ended up owning that stock for quite a long time. We still own it, and then we benefited from the spinoff, 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

you know on Madison Square Garden the NBA lockout could have lasted years or you know they could have you know continued to be the Knicks and lose 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's from Chicago I'm from Chicago it's sold out 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. 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, Ariel is the only place I've ever worked. I graduated from Princeton and went to Ariel and I've been there for 25 years next year. 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? Or do computers enter the picture on mutual fund trading?

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, I see. So 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, say that don't make decisions based on money, which is a 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 a and observe 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 brunches Christmas tree. And he'd only have a white envelope.

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, he started reinvesting the dividends, et cetera. So, John, this is the backdrop to the story of this is the chief investment office. of our firm. He has started Ariel. 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 incongruate 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 talk them out of it.

You know, they may never be happy in that job, but they're chasing the money. It's not worth it. Right. Well, it's your life, yes. Or make big decisions about, it could be marketing at Ariel or hiring somewhat at Ariel. 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 Ariel 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, you know, making sure. 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 want to 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 from a P ratio absolutely I think got down to 10 times yeah and you know it in the last couple years that our portfolio managers owned it has been a great stock for her we didn't know they were going to fire Steve Balmer sorry but that's taking the long term you know no interesting like this is true so one of the things we think about at 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? Right. And so at some point you say with a company like Microsoft, how much... How much more can Bill Gates take? Right. 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 it's hard to predict it really is a you know you're you are in our situation we are literally looking we do scenario analysis if this then this right what would happen if and we're modeling actually the company based upon multiple scenarios right 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 scented with spices open them up you get like paprika 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. And 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 crack, 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 short. 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 right 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 one this is a genius thing and I give John a lot of credit because I have to say I've struggled with this I have haven't been able to replicate it in the same way. John met me when I was 17. So that's even more impressive.

I know a lot of 17-year-olds, and they just scare me. You 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 LaPort, 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 a, 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... 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... But he's genius and great and wonderful

and slightly awkward and wonderful. all. 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 dial. 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 pip squeaks 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 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. So I'm emailing back and forth with Jack Bogle's office and, you know, Jack Bogle 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 Bogle is like, you know, industry legend, you know, invented Vanguard. And it was a senior thesis at Princeton. And, you know, this is, you know, someone who's just very, very, very, you know, big in our world. So we're on the train. And John says, I wanted Melodyis to meet you because she's going to be president of Ariel. And how old are you at 24 then? 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? 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, at that point, I was probably six, six years away. It gave

everyone time. And they knew. I mean, we all knew. But it was a very, 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. Wow. And I assume he didn't tell other people they were going to be president, so he just knew that for you. And there were, you know, there was one person who had a problem with it.

Yeah. 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.

Like, 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.

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. Right. 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 Pooh, 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 forevermore.

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 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 him. his life, not make it harder ever. 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 other thing? 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 track 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.

Because we say you're not going to be the person who comes in. days 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 than 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 in 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, 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 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, and they were founded in 1975 in your world, that's not that old. Whereas in our world, like, they're ancient. You know, they're all guys older than them were 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 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 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 analysts and on CNBC for buying a business. 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 progress. I would wait as long as you possibly can. And if you would wait forever, wait forever. Because 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 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 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 engagement 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% holding starts 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... 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've shifted. It's not that simple. 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. A few things happen that shows 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'll say, God, considering how oil has traded down so dramatically, we wouldn't be surprised if you missed earnings by 50%. will 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 could be, then you know you're closer than not. They're like, aha, sympathy. That's very tricky. Presumptuous question. Yes, that's exactly right. That 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. when we are. We are in it together with them. We are owners of their business with them. We 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, 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,

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. Regardless. That's very good. But they'll still hit their numbers anyway. Well, they're actually... Because they're on long-term contracts.

They've had some issues 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. Boy, the oil business is so dirty. Like, really? They literally have guys in helicopters to search and rescue for, like, people who die in the oil rig fires? 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 road. You basically have a new 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, the issue with them is they have to put $100 million 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. So the stock has traded down on that. Yeah. Yeah. Very, very, very interesting. So I know kind of from previous conversations with you that you're a student of leadership and you look at leadership in the companies that you're invested in.

What do you look for 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 who you know pay themselves too much or where you have a closely held business and five

family members are on the board no you know that 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 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, 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 are avoiding trying to avoid the hype people. But we're trying to, and there's 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, 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 invest in the wrong person or 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. Rupero 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 like what is the basis for like rejecting all these stocks? So 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. Right. 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. 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 tremendous success over the years in casinos. We own Cesar's 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 go to see you. 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 floor.

you can't finance it. 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, it had 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. So I'll just... The original Starboard's budget was $10 million, and George made it for 13. The board actually greenlit the movie and had it 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?

Over a week is hard, yeah. Right. So now it's time to make the sequel. So they say he's coming off of American graffiti, which was made for $700,000 in grossed $100,000, and he's coming off of Star Wars. He's going to ask us for a huge amount of money for this next one. 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. He cut the old on the front end. Right, exactly. So 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 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, 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, 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 had 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. 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'd say, 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 named characters in Star Wars. He's like, we all wait 10,000 named characters. You know, it has always seemed so amazingly intricate. Like, one of the things that we tech people love about it is just like the sheer force of imagination to create that whole thing

with all those, all that stuff. It's a whole other world. So he said when Jim Cameron, like, and populated, I guess, with that many people. When Jim Cameron did advertising. 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 it? 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, 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 story, 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 well every every planet Hoth same thing you know he go you go on and on you sit see next to his bed he just writes names yeah so one day I 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 You got George there. They're 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. and Ed Capmel 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. 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, is 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 artist was oil paint, being able to go into a tube, which allowed you to go outside. Ah, right. You know, because before that it was frescoes. And you did those in the dark. And it showed. Yeah.

Some of that stuff was a little depressing. You chair the board of Dreamworks. So when you are looking at what they're doing, and they are kind of in the, they're almost like modeled off of George's work in terms of technology and 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 yellow. 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 a fiduciary. My job is not to be the creative force at DreamWorks. My job is not to even critique that.

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 says. Hope people are taking notes. The next board meeting I go to, I would like to see it. They say, what do you think?

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 is it, 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 do you describe that phenomenon? Because, 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 to 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 already told you, is, would 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? Right. 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 were 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 at the Wall Street perspective of the media perspective you know we have Mike Montgomery who has the investment banking perspective we have Tom Preston who has the big media perspective via com 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 Mughals Are Us. You know, it was like, but when someone asked a question, it was, you know, this wasn't the guy holding all the marbles.

Yeah. 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 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 fascinated that I caught up and ran right by it. But thank you everybody. Thank you so much grabbing me.