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Manny Stotz

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66

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2020-04-21

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2020-04-21

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1

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1. “Private place, you want to have a brand, it's human nature, it's not a Western idea at all. And if anything, in the consumers in my countries, a lot more brand loyal than you and I, I look at a Coke and say, oh, this is ghastly sort of chemical drink full of sugar and whatnot. The consumer in Bangladesh will say, oh, this is the same drink. I don't know, the present United States drinks. I've arrived in the consumer society and so forth. And the alternative is hazardous or unbranded. So it's a very strong, I think, human trait to be using brands and trusting brands. But there's a couple of important insights what makes a good brand, what makes a good category. So one is the frequency of use. How often do you brush your teeth? Two, maximum three times a day. And that's a pretty good category. And so coffee, I don't know, two, three, four times a day, some people more. Coke has famously no taste memories. So again, you can drink a lot of coke without getting too tired of it. And then there are some categories which have less frequency of use but are quite powerful when you experience them or consume them.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

2. “Yeah, 60 cents on the dollar. And sorry, it's all down the drain. So Virgin Cola is literally worthless. And so because there's no scrappage value, the barriers to compete with great brands or intangible businesses is so high. CEO of Colgate told me once you're sort of 2x the relative market share of index competitors, it's yours to screw up, basically. It's almost game over. So what makes a great brand and a great category, I would say. By the way, there's other intangible assets which are important. Of course, in consumer companies case, it's distribution, market share, shelf space, consumer trust, in Coke's case specifically. It's also the kind of IP that, of course, the recipe and so forth. But Greek brands are the most important because it is, of course, inside the minds of your consumers. So I think having, of course, a very strong brand recall, ideally with people buy these products out of loyalty habit, dare say, addiction. And of course, we're all creatures of habit. That's true for seven and a half billion of us. You stick something into your mouth onto your body.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

3. “So basically, you've got this high margin of turning commodities in the brands, and you've got low capital density of selling trust. You marry those two, you've got a high return on invested capital, which protected by a mode from intangibles where brand arguably is the most important. In Coke's case, Koch's the second most spoken word in human language. It's okay Coke taxi, apparently. I mean, it's hard to measure, but I'm not talking English. So if you think about that for a second, it's an incredible mode. I mean, if someone gave me $10 billion to compete with Coke, it's not about me setting up a scale bigger, more cost effective software. I can literally order the kit. That's not that expensive and so forth, but it's about me convincing 7.5 billion people on the planet that many Scope is no better, which I would say impossible. And the other inside about brands or intangibles at large is there's no scrappage value. So if you gave me $10 billion to compete with Coke and I don't succeed, I won't be able to give you sell.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

4. “Selling what's chemically nothing but caffeine sugar water. And turns out you don't need a lot of capital to create that. And of course, what you're really selling is the trust, the idea that this is the best sugar mod in the world, the one you grew up with, the one you love, makes you happy and so forth. It turns out selling trust or selling ideas is not very capital intensive.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

5. “But what do you actually mean by that? So, I think it's very important to have a consistent and concise definition for that. By far, I mean, there's not the only one, and I haven't come up with it. Let me give you mine. For me, the very best businesses in the abstract are businesses that have the ability to sustain a high return on invested capital without debt. And for reasons we can understand. And they can sustain that with a moat that comes from largely intangible rather than physical assets, because physical assets are easier to replicate than intangible assets. So I could, I don't know, explain the Coca-Cola company with that in that framework. You have basically high margins and low capital intensity. Why you've got high margins while you're turning caffeine, water, and sugar, free commodities, which cost very little into coke, and that's 65 gross, 35% operating margins, and your capex to sales is only 4%. Why? Of course, you need a sort of soft drinks plant, but if you look at it, you really only...”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

6. “I call it the acrobat model. Cutting your losers. And I guess I also appreciate the fact that there's no extra medal or prize anywhere in the world for making money a more complicated way. There's no style points. They were doing a lot of complicated things. They allegedly invented capital structure arbitrage with Fisher Black in the 80s, and they were very proud of the fact when they did something complicated and it worked. And I kind of said to myself, there's no style points. It's actually shouldn't be more complicated than it is. And there's elegance and simplicity. So basically the two big ideas, and there were issues with, I guess, things like time horizon and alignment and so forth, which I don't need to go into. But yeah, the two big ideas I've had, I guess, that instead of being an acrobat, I want to be rather a very long-term owner of the very, very best businesses, let them compound for me, get out of the way. And secondly, to do that in inefficient markets. And so basically having studied this idea of quality in different sectors, and maybe it's time to define this, what I mean by quality, which a lot of people say, oh, this is a great business, a good business.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

7. “I got somewhat disenchanted with some of the flaws of the Goldman sort of way of investing. I mean, only good things to say in terms of the people who were smart and terrific and supportive. But basically, I would argue there's somewhat of a lack of coherent investment philosophy. There's no sort of North Star that is, what do we really believe in? So it's putting a bunch of some of the smartest people in the business and give them all the tools and let them make money.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

8. “And it's a humble business. So being humble quickly and often early and often is, I think, a good thing. Now, I enjoyed my time at Goldman, learned a ton, was a generalist, spent time in all sorts of industries, starting everything that's listed in Germanic Europe, so chemicals and autos and suppliers and industrial companies, cement plants, and spend a lot of time then also on healthcare and TMT and branded consumer goods. And I guess if I had any insights at that time, it was the appreciation of quality, quality in terms of business quality, where I think it's a very important idea that I want to flesh out a little bit. But basically the more time I spend with lower quality businesses. So industry is the more I appreciate the benefits of quality. And secondly, I appreciate the fact that you want to seek inefficient markets pretty early on. You're RBB is more inefficient than the US. And so we had some interesting situations there, but that was an early appreciation as well. And of course,”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

9. “From the folks behind Farallon and Taconic and Lee Lampert, Perry with that, the whole TCI gang more lately, Danny Ork or Eric Mindich or the Soroban people. So that's kind of the training. Very fundamental, trying to figure out what is it that makes a great business from scratch and analyzing and modeling that in a lot of detail. And then having a stock picker's hat on, but being trained across the couple structure. And so, yeah, I joined that team. I thought I had arrived. And nine months later, we almost went bust as a firm. And in hindsight, there was a good experience for me because number one, of course, I had so much to learn and you learn a lot more in a dislocated market. Number two, I had no money personally to lose, was still kind of paying back modest amount of student debt and so forth and living off the scholarship savings. Number three, that was far cheap to get rid of, basically. And number four, if there was any ego, which there probably was, having sort of overachieved, I think, landed his job at Goldman, like that was dealt with very quickly.”

   2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

10. “One does, So I signed that contract in late 2007 when arguably Goldman was on top of the world. And I didn't join the investment bank, but the internal hedge fund of Goldman Sachs, Goldman Sachs Investment Partners, which is effectively a successor group to what the proprietary equity investment business had been for something like 30 years. Rubin started us in the 80s under the banner of risk arbitrage, became”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

11. “We returned that favor largely by now. But it was a really big stroke of luck, and I think luck is very important, both in life and in investing and recognizing it and so forth. It's really changed my life in the most positive way, both personally. I met my wife in London, and we've got two lovely daughters, one on the way, but also professionally. Basically, I was able to follow my interest that was building around business and investing, not only in theory, but reading everything, but in practice, by working within four practitioners. And that's what I did every free summer and every minute in between, a bunch of internships, investment banking and private equity and hedge funds. And then I ended up with Goldman Sachs for my sister.”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

12. “Return settlers at work, let me on a journey of reading everything I get my hands on, keep that up to this day. And then I got very lucky in life, I got a full scholarship at the London School of Economics, LSE, paid for by a Greek airline billionaire called Stelios Hagianu. So curious case where the Greek was paying for the German. I've reminded him.”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

13. “The good news was the top spot on both lists was occupied by the same person who was Bill Gates at the time, largely unchanged. So the good news, it's not mutually exclusive. The bad news was I couldn't invent anything useful at all. So I had to settle for second or third best and came across Warren Buffett aged something like 16, 17 or so. And I didn't understand anything about investing. And of course, apart from being a great investor, which he is, he's got this incredible gift of explaining complex things in a very easy to understand way, which was very helpful to me. And I still didn't understand very much apart from one insight that if you have a high return for many, many, many, many years and does taken off a lot of time, but then you don't need to start very much. And that suited me well. I had no capital, lots of time.”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

14. “Is interesting to some. So I'm not from any of these countries myself. I'm from Black Forest, Germany, which is a lovely but rather provincial part of the world. Grew up there, humble middle class background, dad's engineer, mom, psychologist, so they're academics, but had very little or nothing really to do with big business, let alone global finance. I was sort of ambitious, entrepreneurial, and slightly naive as a teenager. And the disclaimer is, I guess, not much has changed. So I had two big goals in life. One was to change the world, second was to make lots and lots of money, and realized pretty quickly it's hard individually, let alone together. But I was stubborn, wanted to do both. So the first idea or insight was to swap the order around. I think that was the right call. It's hard enough and almost impossible in changing the world first. And the second insight, I guess, was to get some inspiration who's got the most credibility on those two subjects, which I was fortunate enough to get some lists which exist for that.”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

15. “And of course, it's been absolutely spectacular. The Chinese equity market basically didn't exist something like 20 odd years ago, and it's now shy of $10 trillion. India's market cap is $2.5 trillion or so. And of course, that's just the public equity. And if you just look at the wealth creation in emerging markets, it's with nothing short of remarkable. And so frontier markets are the idea is basically in terms of look at the level of GDP per capita, look at the level of consumption per capita, look at the level of market caps, both in absolute dollars, but also in terms of multiple. Those are countries which are basically 10 to 15 years behind, in my mind, behind the bigger emerging markets, and throw some names out there. So we look at kind of Vietnam downwards. So Vietnam is one of the most developed countries we're in. Our biggest country is Bangladesh, which I'll talk a little bit about, where in Pakistan, when the Middle East, we're in sub-Saharan Africa. The way I came to this journey, perhaps”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source

16. “Sure. Well, first of all, Patrick, thank you so much for having me on this. As I said to you earlier, I was quite hesitant to do anything on the record, which is not our style. We believe there's no glory in this business, but only results. And hence, we don't even have a website. But I do agree with your sort of high-level observation that there is an very interesting moment in time where, again, the US market has done so incredibly well. The rest of the world has not, and there are certain individual geographies that are entirely bombed out. I happen to be an investor in those geographies. So Kingsway was conceived just over six years ago. We are an investor in what we call frontier emerging markets. So the idea is basically if you look at the kind of bigger emerging markets of today, whether that's China and India, Brazil, and so forth. So we've studied a lot the wealth creation in these markets.”

    2020-04-21 · Invest Like the Best · Manny Stotz - Frontier Markets Investing - [Invest Like the Best, EP.169] · IDENTIFIED FROM THE TRANSCRIPT · source