YouSaid · the spoken record

Pat Dorsey

lines on the record: 67
first: 2018-02-20
most recent: 2018-02-20
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Bridgewater, man. Come on. But that's exactly what we're trying to do at my firm because I'm a huge believer in the value of discussion, the value of conversation, the value of diverse viewpoints testing each other and then extracting hopefully better meaning from that than any individual could have arrived upon with their own more limited set of analytical underpinning. So it's Dalio's principles of excellent.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“But the central theme of let's get people together with diverse opinions and figure out how to get the best outcome from that conversation. That's exactly what I'm trying to do. And so that, you know, sort of, and this is somebody who's done it longer and probably thought more deeply about it. And so the insights from that book in terms of how do you tease out, as Daglio says, a discussion is about seeking the truth. I think the phrase was something like that. That's immensely powerful. And I think it really helps focus our team back on, look, this is not about you're wrong or you're wrong or I'm wrong or I miss this or he missed that or we should have done this. It's about what's the right answer. That's the only thing we're trying to do because if we can unbalance, find right err answers, we'll do better for our clients. And that was despite the, I was really resistant to reading the book because I was just sort of like, what the?”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's a popular book, but it definitely had an effect on me. Is Dalio's principles? And that's maybe more specific than you were looking for. But I read it over the holidays. And it's really interesting because our firms could not be more different. I mean, Bidgewater is a quant firm. We are not, they're a little different.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Because you're going to be one of five, ten, 15 managers, then the interests align. They align so well. And it just kind of made sense, I guess.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“It was really thinking a blank slate and thinking what to me is the most rational way to invest and then saying, gee, is there a place where I can do that? And the answer is no. Well, then I guess you better do it yourself because I don't view things like, say, the Morningstar style box is frankly very useful, sorry. It's certainly not how I think about investing. I wanted to be unconstrained. I think concentration so you can invest a high amount of human capital in every idea gives me greater confidence in what I own, which means I'm going to be a better investor and a better fiduciary for my clients, but also for the specific types of clients I wanted to seek, large endowments and foundations, because if you're investing for high net worth investor, they might only have two or three people managing their money. And so concentration is a little tougher, you know, being fully invested all the time is a little bit of a tougher ask. But if you're investing on behalf of a large foundation or endowment who is making asset allocation decisions a couple notches above you and wants concentration,”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“The business starting my business because it was a leap of faith. I'd never invested anything with my own money. run a big team of analysts but publishing research is not managing money these are entirely different things i mean don't let anyone tell you different i mean it was a hugely leap of faith and and i i have to i'm very grateful to some people in my life who are close to me who pushed me you know who said you can probably do this your odds of success are maybe 20, but that's better than the 2% that most people who start whatever the number is. And so I'm very grateful to those people. But that was certainly the biggest leap of faith. And, you know, in hindsight, I wish I'd done it 10 years ago.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“If you're Franklin Templeton, you kind of have to be a manufacturer. But if you're a smaller asset manager, you're a craftsman or craftswoman. And those require different skills and different structures.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“I know. I hate to say it, but I mean, it's funny. I was actually talking to a friend of mine this morning who works at a firm that is both an investment management division and kind of a private banking division. And he contrasted kind of that the one side of it was manufacturing, manufacturing product to meet demand. Within the investment management division was much more about kind of basically a giant HR function. Basically, it's about curating human capital. And it's almost like craftsmanship versus manufacturing. Netherlands or bad. And again, there's enough pejorative, but I think.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“And what's the likelihood that something above zero will materialize in our lifetimes? Well, if it will, then we probably shouldn't sell it. So it's just, again, I hate to say, but with so many things, it's a judgment call.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, for us, risk is permit capital impairment. On the option side of things, it's really tough. I mean, in Facebook's case, WhatsApp is not monetized yet. We think it will be at some point how much we don't know. And the way I think you factor that into as an investor is you say, okay, so let's imagine, let's contrast two businesses, both which we are on the dollar general and Facebook. So if Dollar General were to trade kind of at our valuation estimate tomorrow, okay, great. It is what it is. Dollar General is not going to suddenly open six times more stores than we suddenly expected. They're going to continue to kind of crank out what they do, which is basically serve rural America in a very intelligent way. If Facebook was trading kind of at our DCF fair value estimate, that estimate doesn't incorporate any value for WhatsApp. And then we have to make a qualitative judgment on is WhatsApp worth zero or something above zero.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“With risk, it all just comes down to how you define it. I mean, and that kind of also comes back to who your clients are. If your clients are people who are frankly maybe, let's say, imagine a lot of your clients for funds of funds, who are getting evaluated on monthly performance. That means you're getting evaluated on monthly performance. And that means for you, risk is having a bad month. That is risk, which means volatility is really going to matter to you. For us, risk is about permanent capital impairment because we are very fortunate that our investors have a long time horizon and that's the same time horizon we take. We sort of underwrite businesses to a five-year plus horizon. And so for us, risk is permanent capital impairment. But that's real. I mean, and so you have to think about that, especially in a concentrated portfolio. A concentrated portfolio of biotech bets where it's kind of like a completely binary upside and downside. I mean, I'm sure there's some PhDs out there who are doing this and doing it successfully, but boy, you better know that science. And your winner is better offset your losers.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, I want to be good at one thing and we do one thing, and that's all we do, so we don't really have any ambition to manufacture product or do this or do that. And again, that's not to fault those who do and build a larger platform. It just needs to be done thoughtfully and it needs to be done in a way that is leveraging intellectual capital you've built as a firm and not done as a way to capitalize on perhaps fleeting investor demand. That's where I think that strategy can, in my view, run into trouble when people create product to meet demand. Because as we've seen, if you look at the Morningstar data on asset weighted versus time-weighted returns, people tend to make pretty bad decisions about when to invest and when not to invest. And so if you're creating a product in response to investor demand, you're probably creating it at the exact right time and selling it to the exact wrong people.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Answer. And that's a really hard thing to get around. And so I think that having humility and realizing that the best insight can come from the guy with the least information sometimes. And so that means making all voices equal. That, you know, if you're looking at an oil and gas company, somebody else may have just as valuable as the oil and gas guy who's frankly incented to get more oil and gas into the portfolio. That's not an issue for us because we're a smaller firm. We're generalists that we have a very concerted portfolio. But I've certainly seen that breakdown at larger firms.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Things remember the performance is an output. Performance is an output of people in process, and that if you don't get those two things right, you're kind of lost with the game before you even started to play. And so I think firms that are thoughtful about process, that are iterating on process, that are reflective about what works and what doesn't, and that are willing to change things that don't work and that never say because we've always done it this way. I think that's a hallmark of good firms and that's something we try to do. On the people side, it's being willing to be open-minded, not just with the kinds of people you hire, but with how they behave inside the firm. I think that when you have one of the worst characteristics of some firms is that analysts can weaponize information. And so if you know more, you know more detail about the semiconductor industry, the oil and gas industry, and you can throw out lots of jargon, you win the debate. But the person who knows more doesn't necessarily have the right.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“I'd rather not, actually. These are all smart people who have created value for investors in their own way. But if they're cooking Chinese, I'm cooking Italian, whatever it might be. And, you know, I was an Italian cook trying to serve fried rice. And it just doesn't taste very good, right? It's a horrible analogy. But I think that was a mistake we made. And I think that was something that figuring out who you are, what you're good at, what your circle of competences, and just sticking with that, which means really suppressing FOMO, really suppressing that fear of missing out, that, oh, that could be an interesting idea. Well, maybe it's an interesting idea, but it's not one that you have any competence at looking at.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“But if you're an investor, you want to partner with someone who is going to be around in 10 years, especially if our clients are mainly endowment foundations, which are perpetual entities. And so you need to be thinking on a perpetual time scale. So I think that's one thing we did okay at. We got right. And sort of thinking about what should this designing it for durability. I think one thing, we got some operational stuff wrong at the outset, which isn't that important. But I think one thing I got wrong personally is at the outset of the firm I didn't do the best job being who I could be. I tried to be other people. I was too influenced by other investors I was close to and some of the things we purchased were more things they would have purchased. Can you give us a give”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“So I would say that the first thing is know who you want to be when you grow up. Think about what should this firm look like in 10 years. And I actually don't think a lot of people who start asset management firms do that. They're thinking about what kind of carry am I going to get next year this year. Sorry.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Really, kind of for us comes back to the competitive advantage analysis because competitive advantage is created via human capital. It's created via the construction and maintenance of a brand. It's created via the increased engagement of a network effect. It's created by making a product difficult to switch away from. You didn't just build a factory. You did something with the product, with the intelligence of the marketing guy and the product designing guy and woman who codes or whatever it might be that makes that product difficult to switch away from or whatever it might be. So that's kind of the, for us, that's the output. But we certainly don't do kind of like because you have more engineers, you're more valuable. I mean, it's monetizing matters. I mean, look at Twitter and Snap. Need I say more? I mean, lots of human capital and product that people love products. People love Twitter.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Because for many decades, if you'd ask the best and brightest person in any given country, you could live anywhere in the world where would it be, five out of ten, six out of ten, pick a number, would probably say the US. And if that goes down, Then we at the margin lose because that's the scarce resources human capital.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“It becomes the output of human capital is poorly reflected on financial statements. Maybe it's the best way to put it. If you build a rail or if you put a building up, that's on a balance sheet. I can look at that. Build a steel mill, less right there, okay? But what's the value of Google's engineers? I don't know. I mean, the RD is expensed. It's price to engineer. We could create a new reason. Exactly. There you go, right? It's not capitalized. And if you had to ask me, like, what is the scarce resource right now? It's human capital. It's the scarcest resource. And I mean, just as a brief pivot, it's one of the things that scares me most about the current immigration debate.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, both attention and I think it also more, it's human capital versus financial capital. And so attention may be the scarce resource now because people have more leisure time than they did 20, 30, 40 years ago when you're out on the south 40 plowing behind a mule or whatever. And so the competition to get a piece of that time is higher today. But I think more broadly speaking, and this is where I think it's very applicable for a lot of investors and kind of harkens back to that 60 cent dollar point I made earlier, when the scarce resources human capital and not financial capital or physical capital”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, really interesting. I'll bet you a lot of people would. Especially because if the dopamine rushes going, right? Of course. What you would want to do is, you know, they answer.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, one way mobile gaming companies have really, it's become very common for mobile gaming companies to say, okay, you can spend more time playing or you can level up by watching this ad. That's a pretty common way. So what if they said, okay, if you have one question, there's another question you could try to answer. No guarantee, same thing. You may not get it right, but you'll only get this new question. You only get a chance to play the lottery if you watch this ad.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, in some ways, that's a cool question. It's kind of the same thing in some ways because there's only so many hours in the day. And one of the beauties of both Facebook and Google in terms of mobile devices is suddenly you actually have more attention because people dual screen. 20 years ago, TV watching was a zero-sum game. If you were watching CBS, you were not watching NBC. And people just, you know, that's why it's such a cutthroat industry. But now people have a phone in front of them while they're watching TV. That has, in essence, created more ad time because the ad can be shown on TV, the ad can be shown on a mobile device, which is really an interesting dynamic, but it's still attention. You've still got, so in some ways, hours of attention have been created in some ways with mobile devices, which is kind of a fascinating thing to think about. The time got created in a way. But it's still aggregating that attention onto one platform, be it Google, be it Facebook, be it Netflix, be it whatever. And then demand would be more for, I think, I guess I think of that more as a physical product. If you're aggregating demand.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Aggregate demand in some way, whether it's a distribution like a classic distributor, like a dental distributor, etching area, or fasten all, or platform company, which is a very overused word. Things get very interesting very quickly.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Especially So, one to think about is sort of a demand aggregator, so a company that aggregates demand in some way. So sometimes this is a distributor. That's a classic example where you essentially pool variants. So let's say you're a distributor of widget parts for making widgets. And some types of widget parts are purchased very frequently. Some are purchased very infrequently. The bigger you get, the more frequently your stock of infrequently used widgets will turn, which means it's more efficient for you to carry them as opposed to a smaller competitor who with that product, that inventory just sits there for a longer time period. It's called pooling of variance, and then you can also think about it as aggregating demand. And you can think about one of the reasons Netflix can afford to invest in tons of content is that they have aggregated demand. They have a large number of people to whom, with whom they can monetize that spend on content, they've aggregated content demand. And so I think that when you have businesses that”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“You should be plowing every cent that you have into expanding your sales force. And like that just never really clicked with them. It was very, very frustrating for us. So yeah, you're absolutely right. If that ratio gets too big, it means you're not acquiring customers.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly right Yeah, I mean, I don't know what the right number is, but you're correct that there is sort of an upper ceiling at which point that sends a signal that the company is more interested in sort of milking the current client base than growing clients. So some years back, we owned a company called Diligent Board Books that basically made software to put together electronic boardbooks. So you think about the big packet, a board member of a Fortune 500 company will get. Well, if you can do that online and do that in a PDF form so that when you have to change that page two hours before the meeting, which always happens, you don't have to reprint out all of them and it's more secure and everything, great business. One thing that drove me, we don't own this anymore. One thing that always drove me nuts is they're always like, yeah, we're so very proud to be profitable. No, not like this is a New Zealand company, not like those money-losing American companies. And it was like, yeah, but you're not growing very fast and your customers never leave.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“To their product instead of Donnelly or Merrill. You use that product, our product is superior. Customer goes, why yes, it is? There is no socks product. There is no product for socks reporting. It's a whole bunch of clujed together internal processes. So that's a much harder sale going in and saying, pay money for a product that is replacing an internal process that you're not actually spending money for. It's just sort of wasting people's time. Like that's harder to put a number on if you're a CFO or CEO. And so that really spiked up their customer acquisition cost. Once they kind of pivoted back to enterprise sales for internal reporting and frankly just reorganized their sales force geographically as opposed to functionally, which means less travel, which are closer to your customer, customer acquisition costs came back down.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Again, you've been arguing for years about how to calculate this, but conceptually, lifetime value of the customers, how long would the average customer stick around? And it's like a discounted cash flow, basically. Do two months or whatever it might be. And what kind of margin are you making off of each of those customers? And then that typically will include some assumptions around cross-selling or pricing power because that's kind of the revenue stream you're going to get. And the acquisition cost is basically sort of your marketing spend per customer over some time period, over six months or trailing three years. You can pick different ways to do it. And I would say that, you know, so in Borkiva's example, their customer acquisition cost really spiked about a year and a half, two years ago, because instead of going after the broader internal reporting market, they tried to pivot of going from the SEC market to the Sarbanes-Oxley market.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“The path of least resistance is just keep using it, you know, especially if that piece of software is the plumbing that runs your business and is a relatively low cost relative to the revenue that you're generating.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Cross selling more so Think one thing that does happen sometimes in vertical market software, and I think any user of Bloomberg or Advent will appreciate this, is what's called abusive pricing power. And yes, I'm talking to you, Bloomberg and Advent, where your share of the economics is becoming, to some extent, unfair. Advent looks like a DOS program from 1975. I mean, they haven't improved that thing in years, but we have no choice. I mean, no user has a choice in terms of using Advent. There's really no real substitute for it. And so I think that's where these products that are very sticky can be, you can create a pricing umbrella that creates a profit pool for a competitor to come in and try to take it. But as long as you keep improving the platform and offering more functionality each year, more ease of use, whatever it might be, and you're taking prices up 2%, 3%, 4%, something modest.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Much greater. And the number of users become much greater. And the more users you have in an entity whose workflow needs to get disrupted if you got a new product, the stickier the product becomes.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a great question. So it's not an easy product to create because essentially what they had to do is replicate Excel in the cloud and enable it for scores of simultaneous users. There's no check-in, check out the worksheet. And also the data points get linked inside your enterprise. And so you might say, okay, we need to report this eBit line. Well, that's the function of Bob here and Jane over there. And their numbers roll up into mine. I link that inside my enterprise. So if you had a new product, you'd have to break all those links and reintegrate it. So not impossible, but external reporting teams, even Walmarts it was a huge company. Their external SEC reporting team is like 20 people. So it's feasible. It would be feasible to do a rip and replace. But where things get interesting for this business and where the TAM gets much larger is internal reporting, where basically you're rolling up data across the entire enterprise and then putting it together for the CFO, CEO, whatever. Because then your linkages become”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Want to get a rough idea. But if you're getting a 3 or 4x delta between those two, you should be reinvesting every cent that you have, right? I mean, you shouldn't be generating free cash flow. So we're Kiva, the business that we happen to own, which is kind of a very sassy business. They have about 96% client retention, 106 revenue retention, because they keep upselling clients. And what they did is created a product that enables companies to do SEC filings much more efficiently than the old way, which was mark up a PDF and send it to Donnelly, and then Donnelly sends it back to you. And then you mark it up, and then you send it back to them. It was prehistoric. And so needless to say, they took went from zero to 50% share in about six years. In fact, the people who do external reporting, they've got about 80% share of the Fortune 500 right now. People actually won't go to work for another firm that doesn't use Workiva if you do external reporting. That's how strong the product is.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“SaaS model, I mean, it's interesting because it actually kind of ties back to the whole idea of things being mispriced because you're getting paid over time, it's your lifetime value of the customer that matters and you're stretching the value of that customer over many, many years as opposed to the old software model, which is getting a big juicy license payment today and then a little bit of maintenance revenue going out, which pushes the value into the future, but also increases the lifetime value. Companies that go from license to subscription often see a 1.5 to 2x increase in the lifetime value of the customer, but you don't get all the cake today. You have to wait for the cake. And the market doesn't always like that. I mean, look at when Adobe or Autodesk went through their subscription transitions and the stock's got hammered. But if you kind of look through that, those wound up being opportunities because the product was still very sticky. And so the metric we think matters most is sort of the ratio of lifetime value of the customer to customer acquisition cost, which there's 8,000 different ways to calculate those.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Can achieve scale by buying other businesses and consolidating that market. And the next largest firm is only 2% and is way behind in terms of gaining scale, that flywheel will only accelerate.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's very true. An interesting question because I think market share is often conflated with competitive advantage, which it's not. Generally speaking, you will have better economics as a business. Speaking broadly, if you have 6% share and the next biggest guy has two, then if you have 40, but the other guy also has 40. I mean, look at Boeing and Airbus. The planes are functionally equivalent. The barriers to entry are, and this is another barriers to entry, there's another kind of not sort of misleading mental model. It's unlikely there's going to be another airplane manufacturer anytime soon. Barriers to entry are high. But Boingan Airport's returns on capital are okay. They're not great. They're okay because at the end of the day, if you're American Airlines, you're a Japan Airlines. A320, 737, what do you care? You don't. Your job is to get butts and seats a certain distance. You or I don't care which kind of plane we sit in, right, for the most part. Whereas if you have a business that might only have 6% of a very fragmented market and they”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's quantifiable in some ways. What's not quantifiable, but is just as much of a risk is what you don't know because you don't live there. You're not on the ground listening to the news every day. And that's why, I mentioned the case of India, we will probably our first foray into looking at businesses there will be global businesses, businesses that export on a global scale because we think those are more understandable for us. A business that is very tied into local consumer behavior that could change without us knowing for a country you might visit twice a year, that's going to be a tall order for a concentrated firm like us. Now, if you're 120 stock EM fund, great, but a small position for us is 5% or 6%. So you need to be very aware of what you might not know.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. And the thing that could affect us most in the short run is currency. And the key for us in terms of risk is simply getting paid, getting paid for the risk we're taking. To choose two countries with very volatile countries, Brazil and South Africa, both of which we've invested in in the past, our hurdle rate for investing in a Brazilian or South African equity is significantly higher than for a US equity because over time the real and the RAND will depreciate. I don't know what they'll do over two or three or five year period, but the inflation differential, just going back to the old Phillips equation, They will depreciate relative to the dollar. And so I need to get paid for that because my clients are in dollars. Now Japan, obviously the yen, I mean, people like to bet on the yen doing whatever it does. We don't have a strong view on that. But I think you have to be aware that if you're buying a business in a volatile currency when the currency is at the top of the Big Mac index or is sort of hitting new highs, you're taking a risk and you better get paid for that. Now that's the quant.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“So I wouldn't say we focused there. It was simply our first time there, right? Yeah, it was our first trips there. I mean, you know, we went to Europe probably five, six times last year. Just didn't happen to make one of my letters because there was nothing really less interesting in some ways. Although I did mention one of our letters that I ate moose for the first time last year when I went to Norway. So that was fun. It was good. So it was very opportunistic. Just kind of the opportunity popped up for India and did it with Japan. I had a friend in the industry going there and we were able to kind of tag team on companies and we found a really good translator who was easy to work with and who was not connected to a bank. So we didn't have to like do a whole bunch of trades with them. We just could pay this translator cash and that worked out pretty well. Japan, A, corporate governance is improving there. Capital allocation is improving at the margin. And there are a lot of phenomenal global businesses there. But again, you really can't do calls with them. Japanese companies prefer visits and especially to kind of break the ice. Okay, so that means you need to go fly over there.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“It was only a week there, was that we're probably never going to invest in businesses that are tied to consumer taste in India because we can't travel to 16 rural villages and figure out why they use this brand of hair oil versus a different one. That's out of our wheelhouse. But there are plenty of good Indian export businesses that compete on a global scale. Well, gee, if you compete on a global scale and you just simply happen to be based in India, but the products are sold globally, the value chains are global, that could be in our wheelhouse is something we could understand. And so it was really kind of understand. So we'll go back once, twice a year, and it could be five years or never before we buy something in India. But I think we would be doing a disservice to our clients if we just wrote it off. It's too far in the food's bed.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, I mean, I think part of it is that you don't know what you don't know until you go out and find out about it. And I think part of it also is once you're, and we didn't have the freedom to do this maybe our first couple of years because you're kind of getting up and running as a business, but I think one thing you should do always do as investors think about when will this knowledge that I'm generating pay off? And there's some work that you do that needs to pay off ideas and whatever, but you should be thinking about what will matter in five years' time? What part of the world will be larger, more consequential, whatever, and start investing now? Because then if you wait until five years from now, maybe it took you five years to figure it out. And so that was the reason for going to India, really, was that this is a large economy. Corporate governance is improving materially. It's actually a very vibrant stock market with a very vibrant investing culture in India. And we didn't know, honestly, whether it was kind of diligenceable, if that's word, for us, not speaking the language and not being on the ground. And what I learned after...”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Ooh, that's a good one. So it was probably about on the aerospace aftermarket. So, yeah, sorry, switching gears a little bit. So a few years back, we owned two, actually, companies. Confluent, I think that's a word, events that made it much more common. First of all, cheap capital. And basically people giving money and just to say, hey, you go out and buy a bunch of plans and part them out and we'll share the proceeds, cheap money. The other is that you had, because of hugely ramped up production on new models by Boeing and Airbus, a lot of planes hitting the Boneyard that were relatively new and still had a lot of life left on the parts, which meant that the amount of spare parts from basically dead planes on the market was way higher than it had ever been. Well, if you're an airline and you can buy it for X from a dead plane and you have to buy that same part brand new for 10x from the manufacturer, I think that manufacturer sales are going to be weak. And we had no idea that this parting out part of the market had grown to be meaningful and material. And so that was like, I made a real wake-up call that”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Have the work done on a certain day of the week. And so if you can save 15-20 minutes by getting all of your stuff in one spot as opposed to driving to three or four others, you'll probably accept a higher price because your time is viable. But you need to back up that intuition with talking to landscapers and saying, well, is that true? Would you pay 3% higher for that brick if you didn't have to drive around? Oh, sure I would.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“At the end of the day, it's about kind of like what we mentioned a moment ago about the businesses should kind of ignore the bankers do what's right for the customer. You can't understand a business unless you sit in the customer's shoes. And the best way to sit in their shoes is go talk to them. So if it's vertical market software, go to the industry conference. Find out why you can't switch to a different type of software. In the case of Cheg, we did a survey. We did an online survey of 800 students across the country to understand name recognition, were they using it for other subjects besides science and technology. And that gave us some really valuable data points. You've got to get off your rear end and work the phone. The insights we get from just talking to people who are deep into the industry is phenomenal. We own a landscape distribution company called Site 1, and we've been to a couple landscaping conferences and basically trying to understand what's the motivation of someone to sell, what's the motivation of a landscaper because the intuition is that their time is valuable, whether it isn't good every day, homeowners want to have”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh, Patrick, I wish I had a good answer to that. I'm stubborn, maybe? No, I mean, here's the real reason. I didn't appreciate the power of AWS until recently. That's the real reason. Because you can make a credible argument that AWS is worth a very significant fraction of the share price right now. We actually have a meeting at my firm later this week to basically go over people's takeaways from a recent, the reinvent conference in Vegas about a month ago. I don't have a really good answer for why we don't, because it checks everything. It checks every box. It fits your model. It really does.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think one is take care of your customer and ignore Wall Street. I mean, a private business doesn't deal with Wall Street, but they might deal with bankers. They might deal with other people. And because that's what Facebook's done. I mean, that's what I think Google, what they've both done for a long time. That's what Amazon's done. I mean, it's only recently that Amazon's become quite the darling that it is. I mean, for the longest time, it's a bankrupt business. So I really think that, I mean, if you, at the end of the day, the guy who pays your bills is the guy who matters. And that's the customer. And so you do what's right for them and things tend to work out well in the long run, regardless of what the banker says.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“Bingo, we can't figure out what they're going to spend it on. And we think it's basically political cover because their last, you know, not this quarter's earnings call, but the one prior was right after they'd been halted in front of Congress. What are you going to do? Say hi, we're really profitable? No, no. We're going to spend all this money. I mean, they're projecting earnings growth of 45 to 60 percent. Last year, headcount grew 45 and expenses only grew 34. We can't figure out how they will spend that. But maybe we're wrong. And if we're wrong and expenses really do ramp up a head of revenue and they deleverage on the operating margin side, we would be wrong.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a risk. It's a non zero risk, right? So just doing Google X type stuff, that would be a concern for us. Or if they actually spend as much as they say they're going to spend. Like they say they're going to spend $14 billion next year in CapEx, which is double this last year's CapEx.”
2018-02-20 · Invest Like the Best · Pat Dorsey Returns - The Moat Portfolio - [Invest Like the Best, EP.77] · IDENTIFIED FROM THE TRANSCRIPT · source