I am delighted to share with you one of my all-time favorite conversations, in which superinvestor Guy Spier shares his perspective on the psychological and business aspects of investment management. The interview was recorded in 2013, a time when Guy was writing his book, The Education of a Value Investor, which became a bestseller and an instant classic.

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Beyond Mechanics and Market Noise

In the pursuit of investment alpha, the prevailing focus is overwhelmingly on the mechanics. While many toil to master the canons of Graham and Dodd, mistakenly believing the next analytical edge is the key to success, they often neglect a far more critical and treacherous domain: the internal, psychological landscape of the investor. It is here, in what Guy terms the “inner game,” where long-term success is forged or forfeited.

Guy argues that the greatest returns are not generated by superior analytical skill alone, but by a deep understanding and management of one’s own emotional and cognitive fallibility. This conversation explores Guy’s framework for mastering this inner game — a blueprint for achieving lasting success through deliberate environmental design, principled decision-making, and a commitment to authenticity.

Defining the “Inner Game”

To master the inner game, one must first diagnose the psychological malignancies that Guy identifies as the primary threats to long-term capital compounding. He describes the investor’s internal world as an “inner sea which is sometimes stormy and rough and has cross currents.” While the outward appearance of an investor’s life may seem placid, this calm surface belies the turbulent emotional reality beneath.

Guy identifies several psychological challenges that define this struggle:

• Mitigating Loss Aversion: All investors, regardless of experience, must confront the psychological pain of losing a large amount of money. This powerful emotional response can trigger irrational decisions, such as selling at the bottom or doubling down on a failing thesis out of desperation.

• Combating Self-Doubt: In a world of constant market feedback, the internal struggle to know if you’re “doing the right thing” is relentless. This is especially true when a contrarian position underperforms while popular stocks soar.

• Taming Greed and Enthusiasm: The emotional rush following a compelling conversation or a hot stock tip can be overwhelming. Guy notes how these “rushes of greed or enthusiasm” can easily hijack a disciplined process, leading to impulsive and poorly vetted investments.

Guy’s core insight is that the world often misunderstands investors, viewing them as emotionless gurus or hyper-rational professionals. The reality is far different. Investors are “sentient, feeling human beings with all the foibles everybody else has.” True mastery, therefore, is not the absence of emotion, but the conscious management of one’s own fallibility. This admission of fallibility is the foundation of Spier’s method: if the inner world cannot be perfected, the external world must be architected to defend against its flaws.

The Architect’s Toolkit: Designing an Environment for Rationality

Guy’s core insight is that since willpower is a finite and unreliable resource, the investor’s primary task is to engineer an ecosystem that minimizes the need for it. This approach acknowledges human weakness and builds cognitive guardrails to counteract it. Each environmental rule is a targeted intervention designed to neutralize the specific psychological threats identified in the inner sea.

Curating Your Information Intake

The centerpiece of Guy’s strategy is a ruthless curation of his information diet, a direct antidote to the “rushes of greed or enthusiasm” that thrive on speculation. He contends that investors naturally crave “gossip and stock tips,” and overcoming this requires “willpower and insight.” The mechanism for this is a simple but profound rule: “Send to me in writing, ideally with a set of audited accounts and no projections about the future.”

This single guideline systematically starves the biases that feed on forecasts and narratives. It was this principle that enabled him to avoid the 2000 internet bubble. He didn’t need to predict the crash; he simply had to eliminate the category of speculative information that fueled it. By filtering his intake, he ensures that only substantive, verifiable ideas ever reach his desk for consideration.

Cultivating High-Quality Relationships

To combat the corrosive effects of self-doubt and herd mentality, Guy cultivates a peer group of high-caliber thinkers. He draws a sharp contrast between the value derived from a conversation with a “thoughtful investor” and the noise generated at a “Momentum Conference.” This understanding drives his annual pilgrimage to the Berkshire Hathaway meetings.

His behavior there is not that of a “groupie,” but someone building a social fortress. By lining up early to sit at the front, his goal is not just proximity to Buffett but to build and strengthen relationships with other serious investors who congregate there, including luminaries like Prem Watsa and Ajit Jain. This curated network provides a defense against market hysteria and serves as a source of sober, intelligent counsel, reinforcing rational conviction when it is most under threat.

Structuring Principled Business Relationships

Misaligned incentives can “mess with a sane decision-making universe,” creating external pressures that exploit internal weaknesses. Guy learned this firsthand when he paid success fees to third-party marketers, an arrangement that led to them bringing him “all sorts of cockamamie schemes.”

The lesson was to structure his business to eliminate such conflicts. He developed a principle of saying “no” to certain relationships, even at the cost of turning away capital, because they are “inimical in the long term” to a sound process. This curatorial practice extends beyond information and social circles to the very architecture of his business, ensuring his environment is aligned with rational, long-term goals.

These environmental controls are not mere behavioral hacks; they are the tangible expression of a philosophy that views investing as an exercise in applied wisdom, a perspective that redefines the very meaning of success.

Value Investing as Applied Wisdom

For Guy, these meticulously crafted rules are manifestations of a deeper philosophy. He posits that value investing endures because it is a “branch of human wisdom.” The value investing community are “seekers of wisdom, of the bedrock of what makes human affairs work well.” This perspective reframes investing from a purely financial exercise into a life practice, where the preservation of psychological capital is paramount.

From a behavioral finance perspective, personal chaos creates cognitive and emotional drains that deplete the finite mental capital required for sound judgment. A stable life is not just about asset protection; it’s about preserving the psychological bandwidth necessary for rational thought. Guy illustrates how profoundly personal choices are integral to being a great investor:

• A Stable Personal Life, which recognizes that avoiding the asset division and emotional turmoil of divorce is a powerful, if unconventional, strategy for uninterrupted compounding, and

• A Symbiotic Identity, which extends Buffett’s famous insight (“a better businessman because he’s an investor and vice-versa”) to one’s personal life, prompting the question, “Am I... a better investor because I’m a husband?”

This bridge between investing and wisdom leads directly to the ultimate goal of the inner game: achieving authenticity.

The Path to Authenticity

Ultimately, the purpose of mastering the inner game is not merely to generate superior returns. For Guy, investing is a “vehicle by which we can become the most authentic version of ourselves.” The journey is not about mimicking financial idols but about discovering and embodying one’s own unique, principled approach. This final destination requires navigating the twin challenges of emulation and pragmatism.

The Fallacy of Emulation

A common trap for aspiring investors is the desire to become the next Warren Buffett. Guy argues this is a misguided goal, paraphrasing wisdom from the Talmud: the ultimate judgment is not why a person wasn’t someone else (e.g., “why he wasn’t Moses”), but rather “why he wasn’t Guy Spier.”

Translated into investing, the objective is not to replicate another’s success but to become the best possible version of your own investing self. This frees the investor from the anxiety of comparison and encourages the development of an independent process. The result of achieving this authentic state, Guy believes, is that one “will probably generate much better returns than we could in any other way.”

Navigating the Pragmatic Path

This idealistic vision often collides with a harsh reality. Many aspiring investors feel they “don’t have the luxury of being so principled.” Guy acknowledges this with a pragmatism grounded in the wisdom of Charlie Munger. He recounts Munger’s perspective that lawyers often must take on less-than-ideal clients to make a living.

Similarly, it is acceptable and honorable for a fund manager to do what is necessary to “put food on the table,” including charging fees to generate current income. There is “deep honor and respect” in meeting one’s obligations. The critical caveat, however, is that one must not become “addicted” to these arrangements. The goal should be to pivot toward a more principled, aligned structure as soon as circumstances allow. Guy offers his personal yardstick: once a manager is running around $100 million, they should seriously consider finding a way to minimize fees and focus on compounding for their partners and society. This journey from pragmatism to principle is the final stage of mastering the inner game.

Investing as the Ultimate Act of Self-Mastery

Guy’s framework reframes investing from a quest for market-beating returns into a profound journey of self-mastery. He demonstrates that the most potent tools are not found in financial textbooks but in the deliberate construction of one’s environment, the cultivation of wisdom, and the relentless pursuit of authenticity. By focusing on the “inner game,” we learn to manage our innate human fallibility.

Approached this way, investing sheds its association with greed and becomes a “decision to go on a life journey.” It is an act of taking control over one’s financial life to become a more authentic version of oneself. Mastering the inner game is the path to becoming not only a better investor but, more importantly, the best version of yourself.

Guy Spier's "The Inner Game" Blueprint

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Michael has been a wonderful mentor to the MOI Global community and t…

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We had the pleasure of speaking with Dave Sather, founder and CEO of Sather Financial Group, based in Victoria, Texas. Sather Financial is a “fee-only” financial planning and investment management firm responsible for overseeing more than $2 billion in client assets.

In this conversation, Dave shares key insights into building a successful financial advisory firm, navigating client relationships, and cultivating long-term value investing principles. Celebrating over 26 years at the helm of Sather Financial Group, Dave brings a wealth of practical experience and thoughtful perspectives to investors seeking to deepen their understanding of how to establish and sustain an advisory business grounded in trust and long-term growth.

Dave’s journey began in the modest setting of Victoria, Texas, shaped by a desire to balance personal and professional life, a decision spurred by family commitments. His candid reflections on the early challenges of cold-calling and the realization that traditional brokerage models didn’t align with his value-investing principles offer powerful lessons for aspiring financial advisors. Dave emphasizes the importance of authenticity and maintaining a clear moral compass in serving clients, often noting that great advisory relationships are built not just on financial acumen, but on understanding and addressing the comprehensive needs of wealthy individuals, from tax and estate planning to retirement and risk management.

Central to Dave’s approach is transparent, direct communication. He describes the meticulous attention he and his team give to client relationships, advocating for managing separate accounts rather than pooled funds to ensure transparency and foster lasting trust. His commitment extends beyond financial strategy, touching on behavioral finance — highlighting the need to help clients navigate not only market volatility but also their emotional responses to financial decisions.

Moreover, Dave shares valuable insights into his firm’s internal practices, such as profit-sharing and peer evaluations, which cultivate a cohesive, motivated team environment. He also outlines his thoughtful approach to succession planning, underscoring the importance of giving talented team members ownership stakes to ensure continuity and shared success.

Finally, the interview touches on Dave’s passion project, Bulldog Investment Company at Texas Lutheran University, highlighting his commitment to mentorship and education. This successful program underscores his broader philosophy and his dedication to nurturing the next generation of investors.

The interview was conducted by Tyler Howell of MOI Global in May 2025.

Topics and themes:

• Early Career and Founding Sather Financial

• Client Relationships and Communication

• Behavioral Finance and Client Education

• Building a Cohesive Team and Firm Culture

• Succession Planning and Ownership Transfer

• Insights into Practical Value Investing

• The Bulldog Investment Company Story

Enjoy the conversation!

Stay tuned for your personal invitation to our event of the year, Latticework 2025, to be held in New York on October 7th. The Latticework summit will explore intelligent investing in a changing world. Featured speakers:

• Chris Bloomstran, President of Semper Augustus Investments Group

• Tom Gayner, CEO of Markel and Director of The Coca-Cola Company

• Saurabh Madaan, Managing Member of Manveen Asset Management

• Bob Robotti, President and CIO of Robotti & Company Advisors

• Tom Russo, Managing Member of Gardner Russo & Quinn

• Will Thomson, Managing Partner of Massif Capital

• Christopher Tsai, President of Tsai Capital Corporation

• Ed Wachenheim, Chairman of Greenhaven Associates

A limited number of seats will be made available to our Substack subscribers.

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Transcript

Tyler Howell: I’m joined by Dave Sather, founder of Sather Financial Group in Victoria, Texas. I should mention we’re in Omaha. This morning, we held an event here for MOI Global, of which you are supporters. I very much appreciate that, as well as everything you’ve done for the MOI Global community.

You’re celebrating 26 years this week, so what I want to do is dive into how you built and manage your fund and what advice you would give to someone who wants to do something similar. Let’s start with your background and work our way from there. Tell me about Victoria, Texas and your process of planning and strategizing to start your firm.

Dave: Victoria, Texas is where my wife lived. As a prerequisite to getting married, she told me, “I love you, but I’m not so sure about living in Houston or any other big city.” She had family obligations in the area, and I was trying to be respectful of that.

I started trying to figure out how to move to Victoria, Texas and discovered that UBS had an office there. I ended up getting a job. I cold-called everybody in the phone book for the first three and a half years. I decided that was not how I wanted to make a living.

The oldest bank in Texas happened to be in Victoria. Even though it had run a trust department for 100 years, it never had a trust investment officer. At the ripe age of 28, the bank hired me to package its investments and start its brokerage operation. At a very young age, I was in a position to sit in on every committee a bank would have. I got to see how credit flowed through a given community, who was creditworthy, who was not, and which businesses made money.

Victoria is very much of an agricultural area. Still, we never met a wealthy cattle rancher who didn’t have a few oil wells in their backyard. There happened to be a little oil money, so that was how I got there. The first eight years of my career were at PaineWebber, followed by a bank’s trust department. I didn’t have some grand plan about leaving and starting my own firm. Rather, it was 1998-1999 and people were following the mania of the day – tech, internet, and telecom.

You could see these companies with no earnings, and many of them had no sales. They were merely concepts, and they were being bid up – sometimes 50% in a day. You’re sitting there saying, “I know that logically and rationally, this does not make sense. It will end badly, but everybody is headed in that direction, and here I am, writing commentaries for the bank’s clients, telling them, ‘There’s not a new economy. It’s the same economy. Be careful. This is going to end badly.’”

The bank didn’t want to pursue that more value investing, traditional Buffett/Munger mentality. It was a signal to me that maybe I didn’t fit in there. My time there definitely helped me to understand I was a square peg trying to fit in a round hole. The other thing I realized was that I’d never met a wealthy person who only had investment needs. They have tax planning, retirement, estate planning, and risk management needs. I thought, “If these are the highest net worth people in our community, we need to make sure we are helping them evaluate anything with a large price tag on it.”

We started doing that, and I wanted the bank to pursue it as well, but the people there were like, “No, that’s really not what we do.” I thought that’s exactly what they should be doing. The fact that they did not want to again helped me understand I was a square peg in a round hole. When I left to go pursue that, it was like lighter fluid. Our firm started growing by leaps and bounds. It made it a very easy transition for me to offer a service that was differentiated from what anybody else was offering and create great relationships along the way.

Tyler: Can you talk about your client focus? In your mind, what are the key tenets of maintaining that client focus and relationship-building skill? How has that been important to your success?

Dave: I live in a rural community. Our town has a population of 60,000. The closest large city is roughly two hours away. In small country towns, people do business based on relationships. They are very slow to move relationships. Typically, we get business based on a seed planted 10 years ago or earlier. It takes a long time for that tree to germinate and produce wonderful blossom.

There are a couple key things. One, we try to be very transparent in what we’re doing. We manage separate accounts, which is much harder than managing a pooled fund, but in doing so, our clients have full transparency into what we’re doing every day. If we buy a new holding or sell something, they see it immediately. There’s a lot more transparency. Even though that’s more difficult, we believe it gives us a much stickier relationship as opposed to a person investing into a pooled fund.

That is a huge differentiator, just being able to pick up the phone when a client calls, especially when the market is very choppy. Understandably, we spent a lot of time this year talking about tariffs – how it will or won’t impact them – and trying to teach them about the things that truly matter to them, their family, and their portfolio. If you embrace that communication, you can head off a lot of bad things before they ever happen. It’s about trying to be a good communicator.

We are big believers in being able to write out a thesis. It may be an 80-page research paper, but you’ve got to be able to write out the thesis in a one-page executive summary. If you can’t do that, then you don’t have command of the subject matter. You won’t be able to explain to your clients why it matters to them. If they don’t see how it will take care of their family, they start to veer off course. “Well, I hear my neighbor is doing great things, and I’m going to follow that path.” They’ve got to understand the how and the why – at least at a conceptual level – of how you will take care of their family.

At the end of the day, the reason we are on the face of the earth is to take care of other people. It might be investment management, it might be accounting, it might be law, but we are dealing with the most intimate thing you can ever have a conversation about with a stranger – their money. As a result, we’re often trying to help them with very complicated yet very sensitive issues. Many of our conversations turn into almost counseling sessions. There’s a lot of behavioral finance dynamics that go into helping people feel comfortable with their money, and then – as Morgan Housel would say – help build out an investment allocation that will allow them to compound for the longest time possible. Whatever the best investment strategy is, it’s the one they can hang in there with the longest time frame.

Tyler: Can you talk about the memorandum of understanding you like to write out for your clients? Even structurally, this seems like a good piece of advice for someone trying to build a client base or wanting to strike out on their own.

Dave: Yes, it’s interesting. When you’re young and hungry, you will do a lot of things to put food on the table, but in time, you realize there are only 24 hours in a day, and you’ve got to allocate them to all the stakeholders. It might be your clients, your staff, your family, or just peace of mind for yourself.

When you realize that, the 80/20 rule totally matters. The larger the client, the less demanding they are. Quite often, they are less fee-conscious. They are much more understanding of where we are headed, why, and if it makes sense.

However, many times, you get people who either want to be in control or just want to use up a lot of your time. Some people simply aren’t a fit in terms of personality. If I see your name come up on our caller ID and I cringe, thinking, “If he wants to go to lunch, will I come up with an excuse not to go?” then you’re a client who shouldn’t be in our world because I’m not going to do as good a job as I should be able to do. That’s a huge one. It’s one that comes from time.

We’ve been very blunt with clients in certain cases. We tell them, “We gave you this advice. You did not listen to us, and it hurt you. If you’re not going to listen to us, we’re not going to allocate good time, resources, and input into your life because we don’t think you value the relationship.” There has to be a two-way street. This is critical.

It’s funny. As we put it in one paper, if a doctor or a lawyer walks through our office and a guy who runs a machine shop walks through our office at the same time, nine times out of 10, we will take the machine shop operator over the doctor or lawyer. Doctors and lawyers are prima donnas. They are used to spending a lot. If they make $500,000, they spend $501,000. They’re used to people falling at their feet and telling them how smart they are. The machine shop operator is trying to run a business in the most efficient manner. You are part of his professional team. He expects you to do your job. He wants to have a meaningful relationship, but it’s a two-way street, and he recognizes we are there to provide him with value. That is the cornerstone of a great relationships.

Again, it’s knowing who we like to work for. If you’ve ever read The Millionaire Next Door or The Millionaire Mind, those are our clients, our bread and butter, what has allowed us to get to almost $2 billion in assets. It is working for entrepreneurs that work really hard. They wear boots and blue jeans and drive pickup trucks. They are sophisticated people in their fields, but they recognize their sophistication does not extend to the field of investing. They hire us to bring that together and to coordinate with the rest of their professional team.

Tyler: If I walked into your office tomorrow and wanted to become a client, would you actually write that down – the expectations you have of me and those I should have of you? I’m assuming you communicate all these things upfront. Do you give prospective clients a sheet of paper? How do you go about communicating that to a new client?

Dave: We do have a written document. It stays internal because it’s become a training tool for our staff. You are an engineer by training, and I will tell you that engineers fall into a special category. We love them, but they’re very difficult to deal with because they try to figure out what can go wrong with this process, and then they reverse it to make sure it doesn’t.

There are so many variables in the investment world that engineers often have a hard time getting comfortable with. We have become highly skilled at that, but we have some engineers who want to micromanage. Our checklist – that memorandum – contains certain items that will be a red flag to us, that say, “Tyler continues to try and micromanage the process. Every time we say we put Dollar General in his portfolio and it goes down, he immediately starts harping, ‘What’s the thesis? I need to hear this over again.’”

Then we become increasingly upfront. “You hired us to do a job. You are not allowing us to do the job. You are paying us to do a job, and you are not getting value out of it. If you’re not going to get value out of it, we’re not going to have a good relationship, and that is going to harm it, and ultimately, we’re going to move on.”

It’s on a case-by-case basis. You don’t want to come out with the big guns on day one and go, “Here are the 10 things; if you violate any of them, you’re fired.” Sometimes, this seems too heavy-handed. We try to gain an understanding of who people are. Going back to the behavioral finance side of things, if I had college to do all over again, I would major in behavioral finance. The how and the why people make financial decisions would make us so much better at what we do today, at helping them understand, “This is why we’re here, and this is how we help you and your family. If you want our help, this is how it will need to happen. Otherwise, you’re not going to get good value from the relationship.”

Tyler: Do you ever wonder if an asset manager who doesn’t have an economics education or has never been through a value investment program might have some advantage in trying to do this business?

Dave: Actually, yes. I will tell you that I have a business degree, but I have never taken an investment class in my life. I was not exposed to some of those concepts until I got to graduate school. Even in graduate school, they didn’t make sense.

Fortunately, very early on in my career – this is a story I’ve told before – I was getting ready to go to New York for some of my training. There was this older gentleman who said, “You’ll go to New York and do some of that fancy book learning.” I said, “Yes, sir.” He went, “You don’t need any of that. I’ll tell you everything you need to know in one sentence.”

I rolled my eyes and dismissed him. He said, “Eat them, drink them, smoke them, go to the doctor, and look good when you get there.” I had this glazed look in my eyes, so he went, “I’ll repeat it because I can see you don’t get it. Eat them – your food companies. Drink them – your beverage companies. Smoke them – I don’t smoke, but if people want to, I’ll invest in it. Go to the doctor – healthcare companies and things like that.”

Then he stopped and said, “You’re engaged, aren’t you?” I said, “Yes, sir.” He went on, “I’ll tell you something about your fiancée that you don’t know but need to know. She’ll allow the house to burn down around her before she goes out in public without her hair and nails done. My last category for you is beauty supplies – things that make us feel good about ourselves. If you invest in those types of companies, you will never be the popular kid at the cocktail party, but you will always be able to keep your clients in the game.”

In his simple way, he was giving me volumes of investment research because he was ultimately saying, “You’ve got to find the path that allows them to compound for the longest period of time.” I went off to New York and started my career. Shortly after that, I began reading about Buffett. He was already the largest shareholder in Coca-Cola – drink them. Then he bought all of Dairy Queen – eat them. I started studying everything I could, inhaling it.

Because I did not have a formal investment background, I was much more open to accepting that type of education – “eat them, drink them, smoke them” – and seeing Buffett buying Coke and Dairy Queen helped me understand that this is a great pond to fish in. Let’s dig a bit deeper. Let’s try and figure out what makes them great businesses. Even if I took the investments course in undergraduate or graduate school, I never would have been exposed to that. The fact that I wasn’t exposed to it allowed me to be a completely blank slate when I was.

Tyler: What advice would you give to a young asset manager about building a team?

Dave: When I started, I had been in the business for eight years. I had done some aptitude testing. They told me I was good at business, working with people, and languages. I didn’t realize it at the time, but finance and explaining value investing is a language all of its own. I’ve got that gift of being able to explain things in one page or less.

They also told me I was awful at paperwork. I am the guy that can bring it together. I can sit down with people and help them understand the bigger picture, but I am not good at organizing and collating and filing. At 19, when I took that test, they said, “You haven’t started your investment firm, and you won’t for another 13 years, but the first person you need to hire is a top-notch admin person.”

That was employee number one. For employee number two, I thought, “I do need to find a person who has the same skill set as me. In case I’m killed in a car accident, they’ll be able to step right in.” I hired somebody who is pretty much the 180-degree opposite of me. He is now the president of our firm. His skill set is so complementary to what I do, and we make a wonderful team. We have the commonality of seeing value investing very similarly, but his skill set on the technical side is something I’ll never have. My ability with people comes naturally to me, so we work well as a team.

You’ve got to find people who bring the right skill set to the table. You also have to find people who genuinely are curious because every day is a new day in this business. What worked in the 1990s didn’t work in the 2000s. What worked in the 2000s didn’t work in the 2010s. Now that we’re in the 2020s, it’s a whole new ball game. Still, at the end of the day, our job is to take care of people and to care about people. If you’re not sincere about why you exist – that my job is to take care of you – then you may have some people who are great on the technical side, but they may not have the right moral compass or may not find the fulfillment that they think they’re looking for.

Tyler: Can you speak about your peer evaluation system?

Dave: Early on, it was an office of three, and every conversation went through me. Now we have two offices – five people in one and six in the other. The other office is two hours away. I am no longer the focal point of every conversation, and that’s a good thing because it tells me I’m not the most important thing – we have a team now.

In thinking through that, I recognized that I’m no longer in the catbird seat in terms of trying to be able to evaluate who is doing well, who’s having good conversations, who’s struggling, and why we are struggling. Coming out of 2008-2009, I did two things. One, I established a profit-sharing plan in which every employee participates – 7% of the firm’s net profits are distributed once a quarter. Everyone who’s been with the firm one year or more is eligible.

Whether you are the king and ruler supreme of all investment managers or an admin person, I want you to have a bite of the apple. Otherwise, what happens is the people capable of developing new business come in, make it rain, and dump a ton of paperwork on the admin team. If the admin team don’t get a bite of the apple, they resent all that new business. That was point number one.

Two, as we got bigger, I realized that I did not have the same command. When divvying up the profit, 25% is longevity, how long you’ve been with the firm, and 75% is peer evaluations. Everybody in the firm evaluates everybody else once a quarter and says, “This is what’s working. This is what’s not working. I’ve got a problem with this person, but I love working with this person, and here are the reasons why.”

Even though our people have lots of conversation every single day, it allows me to understand who’s getting along, who’s not getting along, who deserves to be promoted, and who needs some help in getting from point A to point B. That’s the heart of it. It’s no more complicated than that. Everybody has to be evaluated on a scale of one to 10. Then I ask them to give me written feedback of what’s working and what’s not.

Tyler: When you instituted the 7% profit share, could you demonstrably see the incentive in your admins, for instance? Are there ways you can track that? Are there anecdotes you have about seeing that incentive play out in day-to-day business?

Dave: Yes, most definitely. My first admin had worked with me at the bank. I remember when we put that into place, we had a relatively new admin come in from Wells Fargo – a great organization. Cindy, my long-time admin, saw the new one throwing a piece of paper in the trash with a paper clip attached to it. She said, “Hold on a second. We don’t throw away paper clips. You’re affecting my profit sharing. That impacts my ability to pay my mortgage and send my daughter to college. Please be careful when it comes to using company resources – we try to do so in the most efficient manner possible.”

I didn’t have to say a word. The employees were reinforcing the mindset that I wanted them to embrace – building a culture of keeping our expenses very low. If we do so, profitability goes up, and everybody shares.

Tyler: If someone’s watching this, and they’re like a 1999 Dave Sather at a bank and thinking about striking out, what would you tell them about setting up? You spoke about the idea of playing defense and being prepared. What are the key things you would suggest someone do to get off on the right foot?

Dave: First, I think you’ve got to have experience in the business. I see a lot of people who want to go down a certain path but don’t have the requisite level of experience. Now that I’m 26 years in, many people have asked me, “Don’t you wish you had left the bank earlier?” Sure, in a perfect world, but a perfect world doesn’t exist. I needed those eight years of meeting people and learning how to develop my craft and manage portfolios.

For much of this, I was very much on my own. I was trying to figure out what worked for me, what worked for clients, how to explain it to people. I needed that time. I needed graduate school. I needed another eight years of experience before I went off on my own. That was point number one – get the requisite level of experience. Whether that means working for a brokerage firm, a trust department, or wherever, you are learning on somebody else’s dime and time. Don’t overlook that.

Two, I knew my job was to take care of people. I knew the market was getting very frothy in 1999. Again, understand what your mandate is and your moral compass says about why we exist. There were some cultural issues going on at the bank – they wanted to sell very high-commission products. I wanted to get away from that. I knew the combination of pursuing the highest-commission product along with the valuation of the market was going to be very bad. So, set yourself up to take care of the people you are supposed to.

The other thing is that I was relatively young when I married, and money was still very tight, but before I left, I had saved up about enough to live off of for three years. I decided that if I couldn’t make this work in three years, it may just not be in the cards. I had enough money to where I knew I would be okay. I could make sure that I didn’t have to make short-term decisions. I could invest in the business and in people for a longer timeframe. Those things were very important.

I never told my clients ahead of time that I was leaving the bank, but there were always rumors that it was going to be sold. My standard response to everybody was that there are rumors to that effect. “I have no knowledge or insight into that, but if the bank does get sold, no matter where I end up, I will always be available to take care of you and your family.” Most people were smart enough to read between the lines, so 15 months later, when I did leave, they were like, “This is what Dave was talking about.”

There was the money issue. There was the communication issue of “I am here to take care of you.” I spent a lot of time over a 15-month timeframe writing my business plan, refining it, and thinking about which people were most likely to go with me if I did leave. Those things all came true in such a manner that when I did leave, I was also very upfront with them. I said, “I am a staff of one. It is unfair to ask you and your family to move your money from the oldest bank in Texas without me having the necessary safeguards in place.”

I said, “If you come with me, if you’re one of my original clients, I’m not going to charge anybody for the first three months because I know I’m going to have to get systems up and running. Something will go wrong, and I need to be in a position where it’s not hurting you financially.” I think they appreciated that. So many of my clients were entrepreneurs. They remembered those days.

That combination of things allowed us to be positioned defensively. I’d saved up enough money. I had paid for all my technology and all that stuff. We didn’t borrow a penny to develop the business. After that, it was a matter of following up with people and doing a good job from an investment perspective.

Tyler: Speaking of getting the systems up and running, are there vendors, software, and processes that you think are key to your success or that you would advise people to look into?

Dave: Yes, absolutely. MOI Global – there’s a shameless plug. I’ve been friends with John Mihaljevic since 2009. I remember when he was starting MOI Global. He was going down a very similar path to mine. I just liked him. There’s a true sincerity in terms of understanding the business and trying to do things right.

Subscription to MOI has always been greatly appreciated, largely because of the people I’ve met along the way, but I don’t think you have to spend a fortune. You can drop $60,000 a month on a Bloomberg machine, but I don’t think it’s necessary. It depends on how you want to run your business. If you want to do this on a tight budget, you can get a Value Line subscription and a Morningstar subscription through your local library for free.

GuruFocus.com was founded by another Texas entrepreneur, Charlie Tian. I’ve known him almost since he started. That is a platform we use on a regular basis. There are wonderful tools for pulling 13Fs and for screening. There are also a lot of articles on there. That’s not very expensive.

After you get your feet on the ground, you can start trying to figure out what else works. On the portfolio management side, in terms of producing reports and things like that, we work with a company called Advyzon. It is not super expensive, but it helps us do a lot of heavy lifting, especially with us managing multiple portfolios.

The tough thing in terms of software is that the good ones are always getting bought out, and then you’re almost back to square one, trying to find somebody else hungry enough to return your phone calls and also willing to do it at an affordable price so you can then grow together. There are a lot of software providers that promise everything, but functionally, they’re not as good as they say they are.

Tyler: Has AI become a part of your process at all anywhere in the business?

Dave: Trying to. Joe is one of our new guys. He has 10 years in the Air Force, doing human intelligence. He’s got a curious mind, asks great questions and thinks about things. He is the one who’s probably spearheading that.

If we can write AI-informed or induced code that says, “Go to a 13F filing on a regular basis and start extracting certain data,” it will allow us to do more heavy lifting in a consistent manner. I won’t have to hire more and more people, so we will be more efficient.

The problem is that if the data is not in the exact same format in the exact same place every month, then all of a sudden, you’re constantly having to tweak it. It doesn’t mean it can’t help. In terms of some of the coding that goes along with how we use Daloopa for doing Excel-type add-Instagram, combining the worlds of AI and Daloopa with Excel add-ins allows us to start doing a lot more of the heavier lifting, but it’s certainly not the kind of thing where you go, “Hey, ChatGPT, tell me the best value investments to make today.”

That is pie-in-the-sky type of stuff. It’s still fairly early in the development, but we think there’s high hopes for it over the next 10 years.

Tyler: I know you’ve spent a lot of time thinking about succession in your firm. What has that experience been like? What would you impart on someone running a successful fund who should maybe start thinking about this?

Dave: A good friend of mine ran a large insurance company. I watched him navigate that. His firm got too big before they went down the succession road. They ultimately had to sell to an external party because it was the one with deep enough pockets. The employees did not have deep enough pockets.

I always had a goal that at age 50, I would start transitioning some of the ownership, with a significant portion to be moved before I turned 60. I’m 58 today. In the first round, there were four key lieutenants of mine. I gave them 1% ownership, and then I owner-financed it, so they weren’t out of pocket at all. It gave them a seat at the table and allowed them to see the profitability of the firm. My hope was that it would open their eyes and make them say, “This is something I really want to be a part of long term.”

I also think that if you have with great people and don’t give them a bite of the apple, you’re more or less inviting them to become a competitor. Why would you open up the kimono and show them everything that makes your firm valuable and then say, “But you’re not so valuable that I want to keep you here forever”? I’ve been very upfront that if I am the only one who becomes wealthy from this endeavor, I’ll be upset.

Round one was four new partners – each got 1% ownership. They didn’t have to put out any cash. When round two came around, one person was not in a position to go to an investment bank. Another person said, “I’d like more ownership, but I don’t want to write a check for it.” That told me an awful lot about their motivations. This person has since left our firm and the industry. However, the other two – Warren and John (Warren is the president of our firm, and John is vice president) – went to an investment bank. They borrowed a significant amount of money to buy 17% of the firm each – sizable ownership.

They both sat down and said, “We see the profitability of the firm. We see the clients. Why wouldn’t we want to be part of this?” It took pretty strong intestinal fortitude for them to tell their spouses, “We want to borrow a couple of million bucks to buy into this. We think it’s going to work.” I told them, “Warren, John, I want you to be my lifetime business partners. We are in this together. If I make a bunch of money, I want you along for the ride.”

There’s an opportunity for round three, for the next generation to step forward as well. I would imagine they’ll be in a position where they’ll borrow smaller amounts of money, but to me, that’s what this needs to look like.

The other thing is that I don’t have any children. As a result, succession within my family bloodline is not going to happen. I wish I had children. That would have been a wonderful blessing. I think the fact that I don’t have children to pass the business down to means I’ll make a better decision in terms of succession.

Tyler: Being involved and invested in the process can only reinforce the value of the total business.

Dave: Absolutely.

Tyler: I’d like to talk a bit about Bulldog Investment Company. I know that’s very near and dear to your heart. Can you tell me what that experience has been like for you? What do you think is unique about that program?

Dave: My alma mater is Texas Lutheran University. It is 1,400 students in Seguin, Texas, which is halfway between San Antonio and Austin. It has always had a very strong business program, but it is not a Wall Street feeder program. It’s in rural Texas, but I had gotten an incredibly good education there – great on the fundamentals and the discipline.

I was serving on an advisory board for the business department. We were talking about the importance of internships. When I left, I started thinking about what we do – day in and day out – in terms of identifying competitive advantages, running through the financials, and figuring out why a business is successful or why it isn’t and what the hallmarks of a good investment are. I thought, “There’s an opportunity to create an internship here.”

The goal was to create an internship that met at Texas Lutheran every week to teach how to break down businesses, identify it, and then package it in a Warren Buffett wrapper. The program started by teaching kids how to break down 10Ks, 10Qs, and stuff like that, but then they had to split into teams and research ideas that they thought conformed to the way Warren Buffett would analyze a business and something he might want to own inside of Berkshire Hathaway.

The teams would then present their best idea – three times a semester – to a professional panel of investors. That was our board of directors. Sometimes it would be me, sometimes the CFO of the university, and sometimes we would have guest judges. That’s how we started populating the portfolio. That was how the discipline worked.

Initially, I told students, “You have got to be in the program a minimum of two semesters.” However, at the end of the two semesters, I thought, “See you later! Have a good life!” but they didn’t leave. I thought, “Well, I’m not going to kick you out. If you want to show up every Friday afternoon for two to three hours and then do even more homework, I am going to embrace you with everything I’ve got.” As a result, some of my best students stayed in the program four and five years, year-round, and they became mentors and teachers to the new students coming in.

We’ve just finished year 15 and are now in year 16. The student portfolio is now over $2 million. They have produced returns in excess of 15% a year since inception. Just as importantly, they have all gone on to do great things with their careers, but in terms of the Bulldog Investment Company program, there’s a competition called the Texas Investment Portfolio Symposium in which other schools with student-managed funds can present their ideas, how their program is structured, their results, and then answer questions from a panel of professional judges.

For the last three years in a row, Texas Lutheran has won it all, beating tier-one schools like Baylor, Rice, SMU, TCU, and Texas State. That’s when I knew this has some pretty cool bragging rights. This last year – year 15 – our accreditation body, the Accreditation Council for Business Schools, which oversees the business curriculum of more than 1,200 schools both in the US and internationally, chose Bulldog Investment Company as the number one student-led business program out of all 1,200 schools.

When I think back on everything that has been produced, I do believe the students go on to do amazing things. They have a career in front of them that will allow them be very productive. Bulldog Investment Company has been very much a focal point of their career success. It’s nice that we’ve been able to get recognition from the Texas Investment Portfolio Symposium and the Accreditation Council. That tells me that great things happen even at small universities if you’re willing to put in the work.

Tyler: Any final thoughts or pieces of advice? We’d love for you to have the last word.

Dave: I think the investment world as a whole can be judged pretty harshly. For anybody who’s listening, I think you already drink the Kool-Aid, but the value investing world is a different subset of the investment world.

I have found there are so many kind, generous people willing to give their time, expertise, and mentorship to help young people, either in college or in the business. They are deep thinkers. They are patient. They are kind. There’s a whole different group of people you get to meet in the true value investing world as opposed to the broader investment world.

Once you realize that, you end up making some lifelong relationships. You and I have known each other quite a long time now. John and I have known each other since 2009. I think about how much better my life is because of the cool people I’ve met along the way. Coming to events like the MOI Global Breakfast here in Omaha, I’ve gotten to meet so many interesting people that I never would have crossed paths with if it wasn’t for the value investing community.

Tyler: I can’t thank you enough for being here. Thank you for your support of this event. I look forward to catching up with you again soon.

(MOI members, access all features, including ways to contact Dave.)

Dave Sather is a CFP and the CEO of Sather Financial Group, a $2 billion firm managing individual accounts headquartered in Texas. Dave has degrees in business from Texas Lutheran University and Texas A&M University. Dave serves on the Board of Regents at Texas Lutheran University, chairing the Investment Committee. He developed and teaches the Bulldog Investment Company internship at Texas Lutheran University. This student managed investment fund has compounded at 15.4% per year over the last 15 years outperforming the S&P 500 by 264 percentage points. Recently, the program was recognized as the top student led business program by the Accreditation Council for Business Schools and Programs, which oversees more than 1,200 programs internationally. Dave also created and runs the Big Dog Endowment program , also at TLU, which teaches analytical and business skills for non-profit and philanthropic endeavors.

Featured Events

• Latticework 2025, The Yale Club of New York City (Oct. 7)

• Ideaweek 2026, St. Moritz, Switzerland (Jan. 26-29, 2026)

• Best Ideas Omaha 2026, Omaha, Nebraska (May 1, 2026)

• The Zurich Project 2026, Zurich, Switzerland (Jun. 2-4, 2026)

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Volunteer by reaching out directly to John (john@moiglobal.com).

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Will Thomson’s path in investing is rather unconventional: Before launching Massif Capital, he cut his teeth managing a credit and political risk insurance portfolio at Lloyd’s of London and even spent time advising NATO commanders in Afghanistan. Those experiences gave Will a global perspective on risk and set the stage for the independent thinking that now defines his approach to investing.

In 2016, Will founded Massif Capital as a value-oriented investment partnership focused on the “real asset” arena — global energy, basic materials, and industrial businesses with tangible, long-lived assets. Massif takes a patient, long-term view, and has the ability to ride out short-term volatility in pursuit of outsized returns. The firm’s focus is deliberately niche: it looks for value in underappreciated sectors that others often ignore — from mining and metals to energy infrastructure and manufacturing — areas where the Wall Street herd often lacks insight.

Will’s investment philosophy stands out. He doesn’t hunt for just cheap ratios or popular names; instead, he looks for situations where the market is mispricing risk or misunderstanding a company’s true worth. As Will puts it, successful investing means being “historically informed and intelligently contrarian” — learning what others haven’t and seeing things as they are rather than as they are assumed to be. This contrarian streak, backed by rigorous fundamental research, gives Massif the confidence to invest in complex, asset-heavy industries even when sentiment is bleak. The goal is always to protect and grow the capital entrusted by investors by owning solid businesses that can thrive over the long run, even if it means going against the prevailing narrative.

Over the years, Will has become a familiar presence in the MOI Global community — you may have heard him share ideas at our online conferences or at intimate gatherings like The Zurich Project. He’s also highly regarded among value investors broadly and has been a member of the Value Investors Club.

In this interview, conducted by MOI Global’s Tyler Howell and recorded in March 2025, we have the opportunity to dive deeper into Will Thomson’s world. The conversation explores what it takes to run a differentiated investment firm and remain an independent thinker in today’s complex world. Will reflects on the lessons from his unconventional journey, the principles behind Massif’s strategy, and the importance of staying true to one’s convictions amid change. We hope you’ll find the discussion insightful.

John Mihaljevic, MOI Global’s chairman, holds a passive investment in Massif Capital. This interview is for educational and informational purposes only and should not be construed as investment advice or a solicitation to invest in any fund or security. Please conduct your own diligence before making investment decisions.

Featured Events

• Best Ideas Omaha 2025 (May 2) — special thanks to Greenhaven Road Capital, Tsai Capital, Sather Financial (FULLY BOOKED)

• The Zurich Project 2025 (Jun. 3-5) (FULLY BOOKED)

• Latticework 2025, The Yale Club of New York City (Oct. 7)

• Ideaweek 2026, St. Moritz, Switzerland (Jan. 26-29, 2026)

Share Latticework by MOI Global

Enjoying Latticework? Help us make it even more special.

• Share Latticework (simply click the above button!)

• Introduce us to a thoughtful speaker or podcast guest

• Be considered for an interview or idea presentation

• Volunteer to host a small group dinner in your city

• Become a sponsor of Latticework / MOI Global

Volunteer by reaching out directly to John (john@moiglobal.com).

We continue this series with an interview with Saahill Desai, managing principal at DS Advisors, a US-based family office characterized by a patient, value-oriented approach and the distinct advantage of permanent capital.

Six years after our initial conversation, Saahill shares his insights into the evolution of DS Advisors’ investment strategy, highlighting key learnings from navigating diverse market environments, including the global pandemic.

Saahill emphasizes DS Advisors’ deliberate strategic focus on public market investments. Unlike many family offices heavily involved in private equity or venture capital, Saahill articulates the rationale behind choosing public markets, including better control over investment outcomes, more favorable after-tax returns, and a lean cost structure. These decisions have allowed DS Advisors to operate efficiently and transparently, optimizing investment costs.

One compelling aspect is DS Advisors’ deep-dive research process, akin to a private equity mindset but applied to public markets. The firm meticulously studies each business, engaging extensively with management, suppliers, customers, and former employees to fully grasp the fundamental drivers and risks. Saahill details the firm’s long-term, concentrated portfolio strategy, typically consisting of around 12-15 businesses, where commitment to each company often spans five to ten years or more.

Saahill also provides valuable insights into DS Advisors’ perspective on risk management, portfolio construction, and leverage, emphasizing the firm’s cautious yet opportunistic stance on deploying capital. We explored specific examples, including their thoughtful management of significant holdings like TransDigm, and how DS Advisors has adeptly navigated market volatility through a disciplined, research-intensive approach.

Finally, Saahill discusses the implications of emerging technologies, particularly AI, on investment decisions and processes. He conveys DS Advisors’ measured approach — focused on understanding AI’s potential impact on their holdings rather than speculating on AI-driven investments. Our comprehensive conversation offers rich insights into the nuanced, disciplined, and strategically patient philosophy that sets DS Advisors apart in today’s investment landscape.

Our conversation covers the following topics:

• DS Advisors’ Investment Philosophy

  • Patient capital as competitive advantage

  • Deliberate public markets focus

• Strategic Decision-Making

  • Rationale for avoiding private equity and venture capital

  • Advantages of controlling internal investment costs

  • Tax efficiency in long-term investing

• Portfolio Construction and Management

  • Deep research and long-term holding periods

  • Importance of building positions incrementally

  • Role and management of liquidity and leverage

• Case Study: TransDigm

  • Investing rationale and due diligence

  • Navigating pandemic-related market volatility

  • Management engagement and capital allocation

• Emerging Trends and Technology

  • DS Advisors’ thoughtful approach to AI

  • Maintaining discipline amid technological change

This conversation was recorded on February 12, 2025.

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The following transcript has been edited for space and clarity.

John Mihaljevic: Saahill Desai has been with DS Advisors for twelve or thirteen years. We last spoke six years ago, about halfway through that journey. Saahill, I'm glad to have the opportunity to speak with you again and build on our first conversation. Welcome!

Saahill Desai: John, it's an honor to speak with you. I'd like to thank you for all the great work you do in uniting members of the investing community all around the world.

John: Today, I'd love to talk to you about your process and what sets DS Advisors apart from many other pools of capital. Maybe we could start with the process. You talked a bit about it when we first spoke. I know not much has changed, but I would love to hear how you and your team approach investing these days.

Saahill: We started with a very open mandate. We had a pool of capital to invest and a blank page to write our story.

During the first six or seven years of our organization's life, we tried many different things. We did some private deals. We invested in real estate. Of course, we invested in the public markets. As we reflected at the end of each year on what we were successful in and where we were struggling, we realized that we did need to focus and figure out how we could leverage our competitive advantages to be successful in the market and to compound capital long term.

As time went by, we realized that being a firm with a permanent capital base gave us a competitive advantage in the public markets. We had the good fortune of being able to think long term where other pools of capital might have daily, monthly, or annual liquidity constraints. We've leveraged that edge in trying to craft our investment strategy.

Over in the last seven or eight years, we’ve built what I might consider to be a holding company of about twelve to fifteen businesses. Of course, we don't have any control of them. These are all large publicly traded companies, but we've spent years perfecting our knowledge of those businesses and gone deep in engaging their managements, former employees, customers, and suppliers to truly understand what makes the businesses tick. While we continue to look for new opportunities day in and day out, our core portfolio is driven by this handful of companies that we opportunistically add to and occasionally trim to allow us to maximize our long-term returns.

John: What I find very interesting is that you have this pool of capital and focus strongly on public markets versus many other similar family offices that are also heavily into private equity and venture capital. I believe those two are very small for you. Help us understand how you came to the decision to focus almost exclusively on public markets.

Saahill: It can be broken down into two pieces. First, we tried a bit of everything and realized that we were simply doing better with our public market investments. We had more control over outcomes. We had comparable information. We didn't have to have sharp elbows to be successful. We chased what we were doing well at. On top of that, the more time you spend perfecting your craft, the better you get at it. I think this has certainly been the case. When we last spoke, in some sense, we were in the infancy of our long-term compounder strategy. We've since gone through a pandemic, which has brought to light our strategy and its ability to create a lot of value long term.

Speaking of private equity, hedge funds, and venture capital – asset classes that many of our peer organizations invest heavily in – a couple of elements have made us shy away from them.

First of all, we're a full tax-paying entity. While we don't want the tax tail to wag the investment dog, if you will, we believe we can generate better long-term after-tax returns by extending the duration of our investments. We can do this in the public markets and are not afforded the same ability in alternatives.

Second, we control all of our costs. We've internalized the entire investment activity. As such, we run on a very clear and transparent budget. It's an exercise I'm going through right now with my team to dictate what our budget will be for the next 12 months. As a result, there's an entire cost structure that we're not paying other parties.

Third and perhaps most importantly, as we looked at the returns we believed we could generate in the public markets versus more deal-oriented asset classes – like private equity and venture capital – we realized we could do better. The return profile of some of these asset classes may appear to be nominally high, but when you look over the entire arc of a fund, public markets – especially active management in the public markets – can often deliver much more attractive returns.

John: On the cost point, where would you put yourself in terms of cost efficiency versus some of the alternatives?

Saahill: This is a very timely question. There was an article in Bloomberg yesterday about some of these multi-strategy hedge funds and the value they're able to capture in managing clients’ assets. Bloomberg estimates that somewhere between 50% and 70% of the value created is captured by the managers.

We run our organization relatively efficiently. By my estimates, we spend roughly 25 basis points a year of our AUM on managing the organization. While returns are better or worse in any given year, if we conservatively assume that, on average, we could generate a 10% return – we certainly shoot for far more than that – we roughly spend only 2.5% of our profits every year to run the business.

John: To what extent do you deploy capital with external managers? If I remember correctly, it is a tiny piece, but it sounds like you may use it strategically to establish relationships with managers whom you deeply respect and would like to have a dialog with.

Saahill: That's exactly right, John. We have a small cohort of what I might call emerging managers that we partnered with over the last 8 to 10 years. These are people who – for lack of a better term – we had a meeting of minds with in terms of their investment style, their approach, and their willingness to communicate their thinking to us. We've deployed a small amount of capital to each of those teams to support them in their early stages and establish a collaborative working relationship. I still speak to those individuals on a monthly basis.

In addition to that, we've done what I might call indexing. I don't necessarily consider that allocating as much as a way for us to be more fully invested in the market. Obviously, that is a much more low-cost approach to getting market beta.

John: What kind of concentration do you have in the portfolio? How do you think about your cash in the portfolio or leverage to the extent that you ever would use it?

Saahill: This is something I'm spending a lot of time reflecting on right now.

There’s one other factor I'll share with you. We had a family business that my parents started in 1980. Since we last spoke, we've sold that business. It was publicly traded on the NASDAQ, so our liquidity profile took a step function up at the end of 2018, when the business was sold. We took the call at that point to slowly and methodically deploy the cash we had on our balance sheet.

Today, that still is a meaningful portion of the overall balance sheet. Fortunately, interest rates today are at a much more attractive level than they were a few short years ago, but we believe cash – and specifically liquidity – is a strategic asset because we want to be opportunistic. That being said, we are working on a few projects internally to find ways to increase the yield we earn on our cash by deploying a bit of leverage and balancing short-term liquidity with higher yields that can be achieved through giving up some liquidity.

We take an almost private equity approach to public markets. Our team – and it's all internal – spends anywhere between three and twelve months studying businesses. One of the things I encourage our people to do is not be in a rush to deploy capital but rather understand a business inside and out because our view is that once we're committed to a business, it's a marriage. It's a five- to ten-year relationship we'll be having with that business, if not longer. We have to be fully confident that we are committed to owning that business through thick and thin and leaning into owning more of it if the opportunity presents itself.

In terms of concentration, I mentioned we own about 15 businesses. The largest of those would represent something like 12% of the portfolio, and the smallest would be in the low single digits. We're opportunistic, not just in taking advantage of dislocations in price but even in building our positions. We have in almost no case built a position all at once. Rather, we have legged into positions over weeks, months, and years. That allows us to continuously monitor news coming out of the business, its financial performance, management's communication of their strategy, and capital allocation, whch allows us to make sure we're not caught flat-footed, deploying capital too quickly into a business and missing something important.

John: You get to know these businesses inside out. You have a long holding period. I assume a factor that plays into the holding period is also the taxable nature of the account as opposed to – let’s say – university endowments that embrace strategies with more turnover. Is that right?

Saahill: That's absolutely right. The US tax system affords us the ability to defer taxes indefinitely, as long as we don't monetize investments.

To be clear, we're not dogmatic about that. There have certainly been instances where we made an investment in a business and expected a certain rate of return over a 5- or 8-year period, according to our model, and the stock price exceeded our expectations in a very short period of time so that we found ourselves in a place where our forward-looking return was in the low single digits. That presents a very high opportunity cost to capital. We've certainly been willing to trim on the margin.

What we're not trying to do is turn the portfolio over on a regular basis. It's really saying, “What was a highly compelling investment now looks more like a risk because, according to our expectations, this business doesn't have a lot more intermediate-term growth left, and we're better off redeploying that capital elsewhere, even if it means paying some taxes.”

John: What does the pool of ideas from which you ultimately draw those 12 to 15 top holdings look like? How many companies are you familiar with to the point where they would be strong candidates for inclusion if the price is right?

Saahill: For each business in our portfolio, I would say there's probably at least one more that – at the right price – we would be willing to invest in.

The businesses we own are what I might call monopolistic or duopolistic– businesses that are number one or two in their industry or which sit at a chokepoint in their industry so that they're able to earn outsized returns on capital.

In our team, we've also developed circles of competence – healthcare, aerospace and defense, technology, financial services, insurance. What we try to do is fully understand all the players in an industry, then cherry-pick the handful we believe to be extremely well positioned to accrue value.

First, we get to know the business and the industry inside and out, but over time, we build a model to understand what type of return we can expect based on the current stock price and our understanding of the business's growth trajectory. With some companies, we may shoot for a mid-teens IRR over an 8- to 10-year period. In cases where we believe there may be a little more risk and where the moat is not as well guarded, we may say, “We need to be closer to a 20% IRR for us to feel confident that an investment is warranted.” Again, this is all on paper.

There's a science component to it, which is looking at the numbers, and there's an art or feel component, which is our internal assessment of how risky the business is and how much conviction we have in it. Marrying those two allows us to come up with this 12- to 15-position portfolio we might own at any given time.

John: It sounds like you and your team cover quite a wide range of sectors. How do you divvy up those responsibilities in the team? What's the profile of the other people on your team?

Saahill: We are an industry-agnostic firm at the end of the day. We don't say, “We're only going to stay in a certain set of industries.” If we believe there's an opportunity in a space we don't know well, we will take the time to research it in depth and find the opportunities there.

I have two senior PMs on my team. They each manage a fund within our organization. The mandate I've given them is to run concentrated long-only portfolios with a quality bias, but they have the flexibility to go where the opportunity is. While we haven't had a situation like this yet, if each of them were to find a certain company and say, “This is where I want to deploy the capital I have,” we would allow them to have overlap. Up till now, there's been industry overlap but not specific stock overlap.

At the end of the day, we want the best ideas to rise to the top, and we want our team members to feel entrepreneurial and that they have the license to invest in the best businesses at any given point in time. Part of my mandate is to make sure we're allocating capital at an organization level appropriately across these various companies.

Our two portfolio managers have been with us for seven and fifteen years, respectively. They've already had quite a tenure with us. In each case, they came to us with somewhere between ten and fifteen years of investing experience. They both worked on the sell side as bankers. One of them worked at a proprietary trading desk at one of the banks and then as an analyst at a hedge fund here in New York before joining us in 2009. The other one – after a few years of banking – spent almost a decade at a family office and another half a decade or so at a well-known hedge fund that eventually wound down. In the wake of that wind-down, he was introduced to us and has been with us for over seven years.

These are both individuals who had buy and sell side experience and came to us with an ambition to manage capital on their own. We have a great working relationship in that they have the ability to go where the opportunity is, and we provide them the resources and some modest guardrails to make sure they can be effective in their work.

John: I assume you personally also manage a portfolio within the firm.

Saahill: That's right. Each of my colleagues is responsible for a portion of the overall portfolio. I manage a separate portfolio, which overlaps with their ideas and includes some of the work I do myself.

John: How does your collaboration with outside managers take place? Are there people you’re in established relationships with and talk to often? Help us understand the idea generation process and some of the feedback loops you've built into the process.

Saahill: Are you asking about the individuals we've staked in the past or how we engage with the broader investment community?

John: Primarily the individuals you've staked in the past, but also any other significant relationships you may have and help in your idea generation and assessment process.

Saahill: I'd be happy to shed some light on that. We do a formal portfolio review with the people we've invested capital with. We used to do it monthly, but we've spread it out to quarterly now. We sit down with them for an hour or two every quarter, go through the portfolio, exchange ideas and insights, and try to understand what's going through their minds. These are all long-term investors. The conversation is never really about performance. It's much more about process and insight. It's an opportunity for all of us to learn.

On top of that formal quarterly review, we're constantly exchanging emails, podcasts, articles, and other materials with our colleagues because there is overlap in the individual companies we own and in the things we're thinking about. We want to have an open dialog with them and make sure that they have all the information we have and vice versa. If there's a piece of news or research that may shed some light on something we've talked about in the past, we'd love for them to share it with us. That's how we think about our relationship with those individuals.

The truth of the matter is that it’s certainly not the limit of the people we collaborate with. My colleagues and I have much broader networks across industries and the investment landscape that we're constantly engaging with. The good news in the US is that large holders of companies are publicly disclosed. It's quite common for us to know that another firm owns a piece of a business, and that we might even have an old friend at one of those firms. We do talk to our peers at other firms, understand their thinking, and exchange notes.

It's all about trying to create a mosaic of all the different insights – from primary documents, research, and maybe even more informally from conversations with other holders – that helps inform our thinking and tweak our return expectations to make sure we are making high-quality decisions day in and day out.

John: Let's talk about the companies you favor and consider quality businesses that you feel can be held for a long time because they will keep compounding value. What are some of the common threads to be found in all the types of investments you favor?

Saahill: I'm glad you asked this question because even though we invest across sectors, there are many qualitative factors you see consistently across these businesses.

In almost every case, the company is either the number one or number two player in a segment or sits at a very specific chokepoint where it can provide an invaluable product or service to the broader industry it plays in and extract outsized returns on capital for providing that product or service. Secondly, all these companies tend to be led by very high-quality management teams. In some cases, it's a founder or founder-like individual; in many cases, it's someone who has come up through the ranks of that organization and has been tapped to lead.

The other piece is probably a byproduct of the first two. We spend a lot of time looking at capital allocation. If a company makes a bunch of money at the end of the year, how is the management team thinking about where to put that incremental dollar?

Especially over the last three or four years where we've had quite a strong market, one of the things that’s been encouraging to see is a lot of capital return. Ordinary dividends, special dividends, and – what we like most – stock buybacks at the right prices are encouraging signs that a management team is being thoughtful about maximizing return on capital. Instead of going off and doing ill-founded projects that are value-destructive, they say, “After we've reinvested in the business and considered potential M&A that would be accretive, let’s now return any excess capital to shareholders so they can make the decision about how to deploy that incremental dollar rather than presuming we have a monopoly on good ideas.”

John: The business is obviously key, but it sounds like you also want the people at the helm to be great capital allocators. Is that possible to find? Do you sometimes have to compromise on one or the other?

Saahill: I'd be lying if I said that every single capital allocation decision in every single one of our companies was perfect. Quite questionable decisions certainly happen, but the beauty of the businesses we own is that almost all of them have been publicly listed for at least 10 to 20 years. There’s a long history to track, and we definitely engage with management where we can.

In 2025, the beauty is that almost everything management say publicly is now available through transcripts or other electronic communication. We can understand their thinking much better than maybe 5 or 10 years ago, when those resources were not so readily available.

These decisions don’t always make sense to us out of the gate, but by asking the right questions and talking to other people in the industry, we start to get comfortable with them. In other cases, we say, “This acquisition doesn't seem like a fit, but let's give it time. It's not going to make or break the company. This is a small bolt-on.” In many cases, we've almost been proven wrong – something we were skeptical about turned out to have real strategic logic behind it but it took a few years for that logic to present itself. We've been pleasantly surprised in a few instances.

John: I respect if you don't want to talk any specific case studies or examples, but to the extent that you do, feel free to use one to illuminate your approach.

Saahill: I will take a few minutes to talk about one of our larger positions. It's a business that I'm sure many of your community members will be quite familiar with. The company is called TransDigm. It makes tens of thousands of different parts for commercial and military aircraft. We've owned the stock for about seven years now.

TransDigm is an example of a company that is certainly not the biggest in its space on a revenue basis but makes so many absolutely mission-critical parts that it’s able to earn really high returns on capital because it can charge a premium for the parts in exchange for providing excellent service and very high-quality parts. TransDigm’s growth has been a combination of organic, volume, and pricing growth – like many businesses – but one thing it’s been great at is strategic acquisitions – bolting on smaller, fragmented players onto its platform, rationalizing costs but retaining top talent, and earning outsized returns on those acquisitions.

Last summer, we had the good fortune not just to meet the company’s senior management – who we've spoken to in the past – but participate in an investor day where investors were given access to some of the leaders of the individual business units. We couldn't have been more impressed with the quality of that next level of leadership. It gives us a lot of confidence that a company like TransDigm is not just leaning on a high-quality legacy portfolio but is every day identifying great products and people it can bolt onto the organization.

Perhaps I should also tell you about a few challenges we had with TransDigm, especially in the context of the pandemic. This might illustrate where we believe our permanent capital gives us an edge.

We've owned the company since 2018, but almost exactly five years ago, we had a global pandemic brewing. Airline traffic ground to a halt. TransDigm relies heavily on providing replacement parts to aircraft across the world. If planes aren't taking off and landing every day, the airlines don't need new parts. That business totally ground to a halt. As a result, TransDigm’s stock sold off big. I'll have to check my notes, but I believe it sold off over 60% from its high – at that time – in January 2020, and the company is highly levered. It runs at about six times EBITDA/debt. We were understandably concerned.

However, our team paused and said, “We can't change what's happened. Let's think about what's going on under the hood. What are management doing? What does the business really look like? Is it true that all of its revenue has gone to zero?” We saw a few things that gave us a lot of confidence.

First and foremost, we looked at how management were behaving. They took swift action to reduce the cost structure and said, “We're not going to be producing as many parts. We don't need to be running full shifts anymore.” They were able to reduce the burn on that front. They went to their lenders and negotiated some breathing room on the debt. Those were the two significant pieces we saw from management.

The other thing we realized is that the company had a meaningful business selling parts for military aircraft. At the time, it was about a third of revenue. The realization we came to was that this piece of the business was continuing to chug along. The US and other countries have to maintain their aircraft across the world. If anything, that business was thriving. As it turned out, the company stayed EBITDA-positive through the pandemic, and it was on the back of that military business.

Relatively quickly, by the end of the summer and into the fall of 2020, the commercial business picked back up, and what looked like a dire situation for the company ended up being a 6-month blip. However, the fact that we were patient and didn't have to worry about investors knocking on our door and asking for their money back allowed us to take a long-term view and engage with management to understand how they were reacting. It gave us the ability to add meaningfully to our position during the summer of 2020 and see the company come out of the pandemic even stronger.

Fast forward to today, it has continued its M&A trajectory, but management have realized that they've accumulated a lot more cash on the balance sheet than they believe they can reasonably deploy into M&A or into capex, so they've done a series of special dividends to return capital to shareholders, which we view as lowering our effective cost basis in the stock.

It's been a great ride for us. We think TransDigm continues to have a very high-quality leadership team and a long runway for growth, both organic and inorganic. We remain confident in the company as a business. In terms of acquiring more shares, that's based on price. It’s not a reflection of our belief that – at today's prices – it would be the time to be buying the stock.

Hopefully this illustrates to some extent our thinking on a specific business. I’d be happy to answer questions if there's anything I may have glazed over.

John: That’s very helpful, thank you. Maybe a bit on the balance sheet leverage and how you got comfortable with that. I guess it's a very high-quality business, predictable and all, but what kind of leverage are you willing to take on? In this particular case, would you like it if management prioritized bringing down debt, or do you feel that the balance sheet is quite efficient and should remain as it is?

Saahill: For TransDigm, our view is that the level of leverage is appropriate given the stability of the business. I'm not suggesting that every single business should run at 6 times leverage. I think much of that is a function of how stable earnings or cash flow are, but this is a conversation we have every time we engage with the company, and we've built confidence that it can have real stability in its profitability even in the most dire situation. There was certainly a dip in the commercial operation, but we believe the business supports that level of leverage. In fact, the capital return it has done over the last few years has effectively been taking accumulated cash off the balance sheet to then return to that 6 or so times leverage the company has maintained over its history.

To answer your question, we look at leverage on a company-by-company basis. We don't take a house view that leverage is appropriate at all, let alone that such level of leverage would be appropriate for every single business.

John: Has TransDigm also been an M&A story? Is that something you’ve found a potential source of good ideas when you can find a well-executed M&A roll-up consolidation kind of company?

Saahill: It certainly has been a serial acquirer. That being said, we definitely would not want to fall into the trap of assuming that every serial acquirer is doing value-accretive deals.

You have to look at each situation on its own and assess – both quantitatively and qualitatively – if the M&A a company is engaging in is truly adding value. You also have to look at the trajectory of time. Sometimes, you do M&A today, but it will take two or three years for it to prove synergies, for the strategic logic to play out. We give companies some benefit of the doubt as we evaluate them, but it's been our view that there is probably more serial M&A happening that is value-destructive or value-neutral than truly accretive and value-creating.

This is maybe a mental model we look for and assess, but you have to be almost maniacal about going back over the history of a company and evaluating how much of its growth is driven by the core business growing its customer base, increasing prices, and expanding its footprint and how much is driven by accretive M&A.

John: We live in a rapidly changing world. With AI, you could argue that change is accelerating. Looking out many years may have become more difficult than in the past. How do you think about those macro or technological innovation factors when you evaluate your businesses and potential threats or opportunities that might be coming down the road, maybe specifically related to AI?

Saahill: I'm so glad you asked that question because for the better part of the last two years, AI has been on the tip of everyone's tongue. In our weekly internal investment committee meetings, we’ve thought a lot about how we should view AI.

We've come to a few conclusions. There's no question that AI and related technologies will fundamentally change the way we do things and the way the businesses we invest in operate, but we're also willing to acknowledge that we are not the authorities on these technologies. What we certainly have not done is try to invest in AI because we feel like it's still very nascent, and the winners and losers are yet to be determined. What we have tried to do is learn as much as we can to understand what the trends are and how companies are leveraging AI, and then, on a company-by-company basis, take a hard look and say, “What are the new threats that maybe we hadn't underwritten in our initial thesis?”

There's another component to AI that many of our peers are talking about, which is using AI in the investment process. That's one where we are largely standing pat. Not that there aren't phenomenal ways to leverage AI to distill and aggregate information, but going back to leaning on our competitive advantages, we have an inherently slow and methodical process. Being too dependent on AI resources to speed up or shortcut our process would result in us losing touch with the core decision-making and information absorption we undergo when we look into companies.

To take an example, if I'm looking at a new company today, I might go all the way back to its initial public offering – or at least 10 years back – and read all the Ks and Qs to truly understand the evolution of that business. What was the company saying in 2015? What were its biggest risks then? How has it grown? How have the risks evolved over time? Yes, you can plug that into an AI application and get some feedback on how the company has changed, but I don't think it allows you to make well-informed decisions, so we've largely avoided being too reliant at this point.

John: Let's talk about valuation. You mentioned that maybe TransDigm isn't a screaming “buy” today on a valuation basis. How do you think about the price you're willing to pay to get into a position, and how do you think about selling or trimming based on the valuation in the public markets?

Saahill: This has been a significant learning for us since you and I spoke last, John. I'll take a step back and say that our process is IRR-driven. That incorporates the current price of the stock, our expectations for growth, and then our view of a reasonable terminal multiple.

We monitor every single day what we believe the today IRR for the stock is. Generally, we project that out somewhere between 5 and 10 years. Ultimately, in our model and spreadsheet, we have price targets driven by an acceptable rate of return for that stock. I'll be honest – today, the market is relatively close to its all-time highs, and we don’t see a lot of screaming “buy” opportunities, or really any at all, so we're being patient. This was a tough lesson we learned.

Circling back to the pandemic, 2020 was a steep decline in a steep recovery year. In fact, I believe the S&P was net up for the year. We deployed a bunch of capital in 2020. As a firm, we probably built a little overconfidence in continuing that capital deployment through 2021 and into 2022. If there was any lesson we learned, it was that we have to stay disciplined and not move the goal posts unreasonably. Rather, we need to be very objective, very methodical, and willing to sit on the sidelines when opportunities are not as compelling as our opportunity cost of capital.

The thing about investing is that you make mistakes every day, and you have to learn from them. One of the things we remind ourselves today is to not be overconfident. We're willing to give up a bit of short-term upside if it means keeping liquidity and being disciplined so that we have the ability to lean in strongly when either the whole market or an individual company or industry presents compelling opportunities.

John: When you say “keep liquidity,” what does that look like? How do you get at least some yield on that liquidity? Would you consider moving part of the portfolio into more special situation-type investments that have a timetable and are not as correlated to the overall market when you feel that valuations may be getting out of line?

Saahill: Absolutely. We believe deeply in being focused – doing a few things and doing them really well. Right now, interest rates have come down a bit from their peaks, but you're taking effectively no risk owning Treasuries or money market funds. You can earn in the mid-4s today.

We believe there are a few products or funds out there that can extend our yield by 100 or more basis points, but the other realization we came to is that we don't have to have 100% of our liquidity available to us overnight. One of the projects I'm working on is figuring out how to manage our liquidity more effectively, such that we take some of the capital, give up some liquidity in the short- to medium-term, but are paid for our willingness to give up liquidity and potentially even use some amount of leverage to get that. In this way, we can have our cake and eat it, too. We can maintain liquidity but still earn an attractive yield on our capital.

To be clear, because you asked about special situations, we don’t generally do that type of investing. Most of what I'm talking about amounts to yielding investment opportunities – like real estate, infrastructure, private credit, and the like, things that throw off a consistent cash flow. To us, that's compelling. Getting too far outside of that, we're concerned that the timing of our return becomes a lot more unpredictable, and it's harder for us to underwrite those types of situations.

John: How do you look out over the next five to six years? Are there any particular initiatives you will be pursuing – within the firm or personally – to position yourself and DS Advisors for what's coming over the next decade?

Saahill: I have the great privilege of wearing a bunch of different hats. I wear an investing hat. I run our business day-to-day, and then I get to look into the future and say, “What are the things we're not doing today that we can be doing?” That’s a double-edged sword. On the one hand, you want to stay focused on the things you're good at and continue to perfect your craft. On the other hand, you don't want to be going through life with blinders on and miss an opportunity that could work great.

At the moment, we only have two primary objectives – to keep getting better at stock-picking and investing in the public markets more broadly and to manage our liquidity. We view these as complementary pieces of our portfolio – an appreciating portfolio that will strongly compound capital over time and a yielding portfolio that delivers cash flow we can then deploy. Our hope is that over time, we can create a nice virtuous cycle of generating cash flow and then putting that cash flow into the ground and seeing it grow over the long run.

Outside of those, we're hesitant to start opening up new avenues for growth because we do feel like it would stretch our focus to a place where it would be value- or return-dilutive.

John: Saahill, this has been terrific. I truly appreciate your time and insights, helping us understand your process and what sets DS Advisors apart from other pools of capital. Any parting words or anything we haven't covered that you'd like to touch on today?

Saahill: No, I've hopefully painted a good picture of how we think about investing and how we run our organization. Thank you again for taking the time and for your interest in our organization.

John: Thank you so much, Saahill.

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Aligned Capital Partnership is the trustee and investment manager of the Aligned Capital Partnership Investment Trust, which is open exclusively to “Wholesale Investors” who are approved as being suitable and deemed to be like-minded investors.

Erling ended his executive career in 2017 to set up Aligned Capital Partnership, with the objective of institutionalizing managing his family’s money and, ultimately, opening up to a few like-minded co-investors.

We cover the following topics, among others:

• Erling’s path in investing and the genesis of Aligned Capital

• Founding principles and co-investor alignment

• Investor communications

• Definition of investable universe, and idea generation

• Stock selection criteria

• Assessing competitive advantage

• Contrarianism — being “prepared to be contrarian”

• Assessing the quality and incentives of management

• The art of valuing a business

• Concentration versus diversification

• Right level of cash in the portfolio

This conversation was recorded on February 5, 2025.

The following transcript has been edited for space and clarity.

John Mihaljevic: Erling, it is so great to have you here with us. I would love to hear about your path in investing, the genesis of your firm, and some of the principles that have guided you since starting it.

Erling: Let me take you back. I left home when I was about 15 and joined the merchant navy in Denmark as a deck officer cadet with a company called Maersk. That’s one of the largest companies in Denmark. That experience taught me very early what it means to work hard, sacrifice, and work thoughtfully with others. I also learned the importance of perseverance.

In terms of capital markets, I’ve been involved in them since 2010 – as an investor, as a business founder, and also as a business operator. I come back to the Buffett saying, “I think I’m a better investor because I’m a business owner, and I’m a better business owner because I’m an investor.” Before that, I spent some 20-plus years in global commodity markets, operating out of Copenhagen, Singapore, Oslo, Melbourne, and London. Effectively, my entire career post-maritime has revolved around optimizing allocation of capital and resources. I’ve cobbled that with rigorously thinking about risk.

Very core to the way I sought to structure the partnership trust and management was the importance of complete and uncompromising alignment with the investors in the partnership trust and also treating our co-investors as true partners. For me, that means complete transparency of what we own and why. It also means not charging our co-investors any fees at all other than performance above a 7% per annum compound hurdle. Allow me to explain these two points in more detail because they do go to the heart of our existence and belief.

When I established Aligned Capital Partnership, I was very clear with myself that I wanted to ensure all of my energy and all of my endeavors would always remain fully fused with the partnership trust and continue to compound capital for its co-investors. I truly wanted to ensure there would be only one investment fund, one strategy. I didn’t want to have separate classes of units in the partnership trust, and I didn’t want to go out and raise new funds or new strategies depending on the time and the environment. Everyone in the partnership trust is invested on the exact same basis, in the same class of shares, in the same strategy. I wanted to ensure there was never going to be any splintering of my time or focus on interests not aligned with the management of the capital that co-investors entrusted me with.

It’s important to note that my wife and I have all of our money invested in the partnership trust, on the exact same terms and in the exact same class of units as all the other investors. There’s no difference here. This goes to the absolute heart of what we do and how we do it. We look for complete alignment with our co-investors. We believe it can only be achieved if we’re not distracted by having any of our money invested elsewhere.

Furthermore, we are and always will be the largest individual investor in the partnership trust. This way, none of our co-investors should feel that we’re at risk of being influenced by a larger co-investor, and we can confidently tell them that when things don’t go well, we will feel it.

Over the years, I’ve observed that for many investment managers, the skill of attracting money seems to be more important than the skill of managing money. That’s not something we subscribe to. We would be doing what we’re doing anyway with our own money, so I don’t see how it’s right that we seek to charge co-investors a fee to manage money that they want to invest alongside us. There’s virtually no incremental cost for us in running additional money. Why would I pretend there is and charge for that?

Therefore, the only fee we’ve chosen to charge is what we call a performance fee – that is, if the partnership trust returns more than 7% per annum compound. In case we do earn such a performance fee, then that’s 20% of the returns generated in excess of the 7% per annum compound. Very importantly, any and all performance fees earned by us are reinvested straight back in the partnership trust.

We sought to set this up in a way allowing us to demonstrate that we had the best form of alignment we could figure out. That’s what we sought to achieve here. We take this alignment extremely seriously. Frankly, we wouldn’t look to manage money for any other people any other way.

The core values of Aligned Capital Partnership are deeply ingrained principles that guide pretty much everything we do – whether it’s with our co-investors, with portfolio investment companies, with our service providers, or with all other stakeholders and people we interact with. There are just two of them: We always act in good faith, and we always seek out the truth. These core values serve as our cultural cornerstones. We will never compromise on them, neither for convenience nor for economic gains.

When it comes to investment principles, we aim to build a strong multi-generational investment track record. Frankly, in doing so, we have found ourselves coming back to being guided by Charlie Munger when he said, “Avoiding stupidity is a lot easier than seeking brilliance.” Our aim in making investments is to be approximately right on average over time. Our clear focus is just on long-term outcomes. In achieving that, we expect to be misunderstood in the short term quite frequently.

I’d say our investing principles largely come down to common sense, which we seek to apply vigorously. When asked about investing principles, I prefer to start with highlighting the things we don’t do rather than what we do. Some of the things we don’t do include shorting and employing leverage, i.e., at the fund level. We don’t hedge. We don’t trade frequently. We don’t rely on being able to sell to a greater fool than us.

There are certain sectors we simply don’t know anything about, that we can’t understand, or where we think the odds are stacked against us succeeding, so we don’t invest there. For instance, if we look at historical success rates, where we see the odds stacked against us would include biomed or exploration, so we don’t go there. Conversely, some of the things we do include only making investments when we believe there’s a reasonable margin of safety in place. We always believe that this time is never different. We’re always seeking to be patient. We’re prepared to be contrarian and very mindful of balance sheets we invest in.

That’s a brief summary of where we come from and what we seek to do.

John: Thank you so much for sharing that. Given how aligned you are with your investors – I hesitate to even call them investors at this point given what you described – how do you go about choosing who invests alongside you? How do you communicate with them? What are some of the most important considerations in that regard?

Erling: It’s a hugely important question for us. We don’t actively solicit or market to prospective investors for the partnership trust. In addition to not undertaking any marketing, probably the biggest reason for us being so obscure stems from our fanaticism about only allowing the right investors to join.

We have turned down a great number of investors – not because we don’t like them; they’re great people – and we’ll most likely continue to turn down a great number of investors, but it’s more because they may not be right for us. In saying no to some people, we accept that we’re the obscure people.

It’s important for us to understand the significance and the value of selecting the right co-investors. In doing so, what we set out to do in selecting and attracting the right quality of investors is to be one. We think the best way to attract someone is to be someone of that ilk ourselves. We’ve concluded that – in the absence of some past precedence – we need to have enough reason to believe that potential new co-investors possess the same long-term business owner orientation as the rest of us currently in the partnership trust do.

Without this clarity, frankly, we face the risk of initiating disagreeable relationships that may be based on shaky foundations. That’s not a risk we’re willing to take. We want to continue to enjoy the intellectual challenge of finding interesting investment opportunities through the rigorous research we undertake, all while knowing that we’re in the company of people we trust and admire, who know and understands and, importantly, are comfortable with how we think and invest.

Irrespective of the co-investor and the partnership trust, there’s this tribal-like affinity for long-termism and pragmatism that runs through our investor base at the moment. Most of us think of that investment as one for the grandchildren of our grandchildren’s grandchildren. This would probably place us in a category of investing misfits. If that’s the case, happy for it to be so. We consider these non-financial ties to be of irreplaceable value. If we take in new co-investors in the future, they will come either from within this ecosystem or they’ll understand, agree, and embrace the philosophy we’ve set out.

One of our key advantages is the aggregate patience of our co-investor base. We’re genuinely investing for the long term; from our observation, only a few are. If we are to have a competitive advantage over our peers in the investment industry, it will come from our capital allocation skills as the manager, if any, and it will come from the patience of our investor base. Only by looking further up than the short-term crowd do we believe that we can do better than them. Frankly, it’s for this reason we named the partnership trust an investment partnership and not a fund. The relationship we seek is very different.

As for how we communicate, we write some pieces every time we believe we have something intelligent that should be shared with our co-investors, and we provide them with a semi-annual update on their performance in the investment trust.

John: Switching gears to your investment process, how do you define your investable universe? How do you generate ideas?

Erling: Yes, the question of the investable universe. We have to remember that I started Aligned Capital as a vehicle through which to invest the money my wife and I had. As such, I saw no reason to place any restrictions on where we would invest – keeping in mind, of course, the investment principles I talked about earlier.

With this in mind, the partnership trust can invest across the capital structure of businesses and assets both in public and private markets in Australia as well as overseas. That said, we’re quite concentrated in what we do and where we invest, mainly because there’s just not so much we can get our heads around. Currently, our portfolio has 15 holdings, 13 of which are equity-based, and 10 of these represent about 80% of our total assets.

As for how we generate ideas, firstly, we tend to read an awful lot – newspapers, annual reports, company filings, lots of books. Then, we’re old school. Our office is probably more like an abandoned library with a couple of bums loitering about. We sit around reading, thinking, talking among ourselves. Then we wait for the right opportunity to come by. Of course, we run the occasional screens and the rest, but we have found that our best ideas come from reading, discussing, and thinking.

I’d like to bring this back to your earlier question about investors and the partnership trust because when we meet and discuss with prospective new investors, we rarely miss the opportunity to stress the importance of having the right co-investors and strongly emphasize that the right co-investors are what enable us to unleash what we believe to be one of our biggest weapons – inertia.

What else can I say? We put as much premium on figuring out what to buy. We probably put even more of a premium on what to avoid buying. Typically, we like to prioritize what’s simple and easy. We’re very quick to say no and discard what’s complicated. We continue to follow what we believe is a common-sense approach to solving the problem of investing. We see intellectual honesty and rigorous analysis as the keystones to success in doing so.

John: Erling, tell us a bit about the stock selection criteria you use in choosing where to commit capital and the types of businesses you have favored historically.

Erling: In his book The Theory of Investment Value – first published nearly 90 years ago – John Burr Williams wrote that the value of any stock, bond, or business today is determined by the cash inflows and outflows discounted at the appropriate interest rate that can be expected to occur during its remaining life. In the same book, he also said a long-range forecast is too uncertain.

The type of businesses we love and favor investing in are probably very similar to those most other investors favor. That’s the proverbial business that can generate a good return on the capital it employs. It’s one where the profits are not too dissimilar to its cash flows. Ideally, it can reinvest a very high percentage of the cash it generates back into the business at similarly high returns. That’s the formula most sound investors would probably seek to apply. It’s probably how they would describe the ideal investment. The problem we are faced with is that there are certainly such businesses around at the moment, but we can’t invest in them while upholding our investment principle of making sure that a reasonable margin of safety exists – not in our opinion, anyway.

What we’ve noticed is that when this very discussion is taking place with a whole number of investors, and they’ve found a high-quality business that they’re buying or have bought or are considering buying, if the question of price comes up, we’ve noticed some people fall back on this quote by Charlie Munger, “If a business earns 6% on capital over 40 years, and you hold it for those 40 years, you’re not going to make much different than a 6% return, even if you originally buy it at a huge discount.” He then said, “Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you will end up with a fine result.” The trick is getting into better businesses.

It’s very compelling. This quote is frequently referred to when someone is looking to justify a price they have paid or are looking to pay for an investment. Mathematically, what Charlie taught is correct, but we believe some very important inputs were left out from that quote.

One, as investors, we don’t earn the same return on capital as the business we buy into because we’re often required to pay a multiple of the capital that is employed in the business. Because of that, in our opinion, the critical components of what Charlie said are that (1) the business must remain in business, and (2) it must continue to generate those very returns for many years in the future for us investors to eventually be able to generate the same returns as the business.

We sit around in our office, talk a lot, and study a lot. In studying a great number of businesses in a great number of sectors in a great number of jurisdictions over a long-time horizon, we observed that there aren’t that many businesses which (1) remain in business for that many years, and (2) that continue to generate high returns. For us, the important thing for an investor is to be able to – with a high degree of confidence – foresee that (1) a company will be around for decades ahead, and (2) what the competitive landscape that it is operating within will look like. Hence, how will it be able to grow over those decades?

The issue is that the higher the price we have to pay for a business, typically, the longer we’ll have to be able to justify being able to look out, and the more certain we have to be about this competitive landscape in those years out for that business. This becomes tremendously difficult because our job is to be intellectually honest. Based on the prices of high-returning and/or high-growing businesses that I referred to earlier, there’s just not that many around today where we can build a high enough confidence on these matters.

We like a lot the framework by Michael Mauboussin and Alfred Rappaport in their book Expectations Investing. We find it a tremendously useful framework. Therefore, based on that book and the framework they lay out, one of the most important questions we ask ourselves in the role of allocating the partnership trust capital is, “What do we have to believe about the future to generate respectable investment return from here?”

Frankly, the less ambitious assumptions we have to apply about the future, the better we feel about that investment. At the moment, the partnership trust has part ownership in a few retailers of different varieties – a finance company, a cement company, a bank, a food and beverage company, a property company, a gaming company, a technology manufacturing business, an industrial equipment business, and a few mining companies. Some of those companies can reinvest the cash they generate at good returns. Importantly, they do it. Some of them have fewer reinvestment opportunities, and they return capital to us, typically in the form of dividends although we tend to favor buybacks if they’re trading cheaply. In fact, we engage quite actively with the companies to make this view known.

Some of these companies are generating operating cash at what we believe – based on history – are low points of a cycle with what we deem to be very solid balance sheets. Virtually all of our companies or the companies we own part of are trading at low valuations relative to what we estimate their conservative value to be. We don’t have to believe very much about the future for these investments to work out just fine. Ultimately, we look to assign realistic probabilities to likely outcomes. That should be the job of most investors.

At the moment, we are more focused on our slugging percentage than our batting average. For us, the magnitude of correctness matters more than the frequency. Of course, if we could fill our entire portfolios with high-quality, high-returning companies at prices where we didn’t have to be heroic about the future, then we would change our focus to be more on the correctness of frequency, but in our opinion, the markets are not offering up that sort of opportunity at the moment. It has in the past at times, and we believe that it will again at some point in the future.

John: I love how you link the price you have to pay to the ability to gauge how long a business will maintain its competitive advantage and be able to reinvest at high rates. It seems to me that’s sometimes lost in the dialog in the investment community – when people focus only on the quality of the business without reference to the price. As investors, we do need to take both into account.

Erling: It’s a fascinating point. In your own local markets or the best-known companies in the world that we can all ramble off the seven names of, the calculation is reasonably simple to do as to how long they have to reinvest at those rates for us as investors to generate the same returns as the business itself based on the price we’re currently paying.

That’s a fascinating calculation to do because that brings us back to Charlie Munger’s quote. It should give us some guidance as to how long a period we need to know the future of. If we run the numbers on what we deem to be pretty highly priced companies, we have to be able to see very clearly for a very long period of time. That’s just not something we’re able to do.

John: Absolutely. When it comes to durability of competitive advantage, have you found some sources to be particularly predictive in terms of how long a company can sustain it, or perhaps even some types of businesses where you’ve seen it sustained over time more so than in other businesses?

Erling: It’s a fascinating one. It’s tremendously important, of course. I’ll mention a couple that we have found to be quite durable.

One would be scale and location of a natural resource; hence, a cost curve advantage. That would be one source of competitive advantage that would be extremely hard to compete away. Another might be a company operating in the proverbial town that’s too small for a second competitor. That was largely the thinking behind how Walmart started out. Then it would be products that are etched in the minds of consumers and occupy a high share of their mind. Of course, these are subjective measures. They’re not quantitative. Hence, there’s a large element of emotion involved, but because of that element, it’s also extremely difficult to compete away.

Generally, products or services that can be quantified, meaning they are objectively better or worse – for example, the iPhone might have better features than a Nokia – can more easily and quickly be disrupted. Another example might be what we saw last week with DeepSeek and ChatGPT. Advantages that are very objective can probably be more easily competed away than those that are subjectively better in the minds of individual consumers. For example, some soft drinks might be healthier or have more organic ingredients than others. Taste is personal, and it’s less likely to be intruded on by innovation or technological change once the person has determined that they like it or it’s their favorite. While the world might change rapidly, the human palate changes slowly, if at all.

Those are ways we like to think about competitive advantage.

John: Those are really thought-provoking points. When you say that Aligned Capital Partnership is always prepared to be contrarian, what does that mean to you? How do you prepare for those moments when it does pay the most to be contrarian?

Erling: Let me be clear about what it does not mean for us to be contrarian. It does not mean that if consensus growth for something is 15% per annum, we instead believe it’s going to be 20%. That’s not what we mean when we say contrarian. In our minds, being contrarian largely refers to being countercyclical. It can also refer to us being willing to invest in a place when few others are. It’s not long ago that we heard China had become uninvestable – that sort of stuff makes our ears prick up. That’s when we were prepared to be contrarian.

John: That’s a great example. I agree that such absolute statements can offer opportunity because investing is often about the odds one gets rather than saying yes or no in absolute.

Erling: I completely agree.

John: Another factor that does play a role — both in those kinds of quality compounders that a lot of investors seem focused on, but also in companies in the mining sector, let’s say — and may be even more important is the management that operates those businesses. How do you assess the quality and incentives of management? Are there some CEOs you particularly admire that we should also be aware of?

Erling: This is an extremely interesting question because an important factor for us as investors is to make sure we don’t fall prey to our own hubris. This dawned on me recently when I had dinner with someone who’s an organizational psychologist. Afterwards, I reflected on this very point you raised.

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Are you interested in building an investment firm that attracts endowment capital? Have you found it challenging to capture the attention and capital of well-known institutional investors? Have you generated interest but failed to cross the finish line with the investors you meet?

In an 87-minute recent interview, I had the pleasure of speaking with Sal Del Giudice, a Director in the Investment Research Group at GEM. Sal is an active participant in The Zurich Project and a valued mentor to the MOI Global community. In this wide-ranging conversation, we go deep into issues facing emerging and established managers.

Sal focuses on sourcing new opportunities, directing due diligence and research, and monitoring existing investments at GEM. He is a member of the portfolio strategy group and focuses on both strategic and tactical asset allocation. Sal joined GEM in 2015 and has held several prior roles on the Investment Team, including as an analyst, Senior Analyst, and Associate. Sal received a degree in Economics (magna cum laude) from Davidson College, where he was elected to Phi Beta Kappa. He is a CFA Charterholder.

The following transcript has been edited for space and clarity.

Sal del Guidice: GEM is a leading provider of institutional investment solutions for endowments, foundations, and other long-term investors. We work with our partners in a variety of ways – customized to each of their specific needs – but the most prevalent way that we partner with people today is via an outsourced investment office or an OCIO. In this model, clients entrust us with the stewardship of their entire endowment, and we integrate with them on everything from asset allocation to budget planning, capital campaigns, et cetera.

In addition to our investment research group which I am a part of, we also have a 10-plus-person client portfolio management team who is dedicated to and deeply integrated with our underlying partners.

On the value proposition, it's simple; we provide a more effective governance model, a level of portfolio sophistication, and access to talented investors that these institutions would be unlikely to achieve on their own. Pooling together the resources of multiple underlying partners allow us to invest and manage the portfolio as if we were one large university endowment. We believe that, over time, this should translate into exceptional long-term results.

Philosophically and practically, how we do this is also quite simple. We partner with exceptional people and talented investors across a wide variety of underlying asset classes and opportunity sets – the traditional multi-asset endowment model. There is a lot of nuances in exactly how we look to do this across the various asset classes, but I am sure we are going to get into that, so I will stop there and we can dig it a bit more.

John: I would love to hear about longevity with your clients and how they gain confidence that this is the right approach because it's certainly a high degree of trust required to outsource the entire endowment management.

Sal: Yes, it is. Our deputy CIO – Matt Bank – likes to say that we have to clear the highest trust bar in asset management, taking responsibility and stewardship of an entire endowment. These are perpetual institutions, so we try to have very long duration relationships with our underlying clients.

We spend a lot of time upfront, and they spend a lot of time upfront with us – understanding our process, our philosophy, and our approach – many of the things that you and I will get into today to make sure that it's a great fit. That's very important to us as well.

We really want to be true partners with our clients and our investors – in the same way we're true partners with the managers in our portfolios – to make sure that it's a two-way street, and that they're getting the value they need out of us.

We are not a vendor who flies in quarterly to meet with their investment committee. We really are deeply integrated. That's a big piece of having that large-client portfolio management team.

The duration is long, the relationships are great, and we feel that continuing to evolve is our responsibility. They're entrusting us with the entirety of their corpus, so we have to continue to stay on the front foot and make sure that we're delivering value for them across a wide variety of market environments.

John: How is your team organized? How do you think about the structure of the portfolio?

Sal: Because we work with our underlying partners to tailor their portfolios to their specific needs, this can look a little bit different in terms of portfolio structure by client, but what I'm going to do is describe our typical endowment-style client’s portfolio then get into the team.

For a typical endowment style client, we start by building policy portfolios which target risk exposures across a wide variety of underlying factors – those factors being equity, credit, real estate, commodities, treasuries, and tips.

Given our endowment-style clients need to balance the long-term growth of their capital with the requirement of funding annual spending needs, striking a balance between these different risk factors is a key element.

Once we've set this policy portfolio, it's the investment research group's job to bring that to life by finding the best bottom-up opportunities within the constraints of that policy portfolio. Given that many of the underlying investments can touch one or more of the traditional asset classes, every investment we make is very simply just a purchase of cash flow streams.

We think it makes sense to have a team who can look across a wide variety of opportunities, so we are mostly structured as generalists with some specialization in areas of the portfolio that are more execution-intensive – like our independent sponsor program.

I know we're going to get into a lot of how we think about our manager selection process and building that funnel, so let me take a second to talk about our long-only portfolio because I know you and the MOI community are primarily focused on public stock picking, and I think it's critically important to hit on that philosophy and foundation upfront because it really informs the way that we build our process. Does that work for you?

John: Yes, that's great.

Sal: Within our long-only equity portfolio, that serves as the equity driver – next to private equity and venture capital – in the portfolio. The goal is very simple. We are here to beat the MSCI ACWI index – full stop. That is our North Star.

When we think about that goal of outperforming the MSCI ACWI over a long period of time, we look at what tools we have available to us to achieve that goal. There are really only three ways to outperform the index over time – either via allocation effect which is picking certain geographies, sectors, or styles of investment; selection effect which is good stock-picking within those sectors, geographies, or styles of investment; and then, leverage or market timing.

I group leverage and market timing together because holding cash is a form of negative leverage, and that really is market timing. It’s the degree of investedness over underinvestedness at any given point in time.

A key learning that we've had – a key thing that I think separates running an endowment-style portfolio from maybe many MOI listeners who are fund managers – is that we drive a school bus and fund managers drive a Ferrari.

Here's what I mean by that. Fund managers are concentrated enough that they don't have to worry much about allocation effect or maybe even market timing. Because of selection effect, the degree of which they get from any individual stock pick is very large and can drown out that impact.

However, in an endowment-style portfolio, we have many underlying manager partners, and all of those holdings aggregate up to a level where allocation effect becomes very meaningful to us. We want to win, and I want to be clear primarily on selection effect.

However, allocation effect over time is more volatile in a year-to-year or even three- to five-year basis. If you were in semiconductors or not in semiconductors over the last two years, or whether you were US-biased or maybe European-biased over the last decade, those things matter a lot more in more diversified endowment style portfolios.

Given that we don't think there's a massive edge in allocation effect, and given that we want to win primarily via selection effect, our job is to squeeze down that volatility of allocation effect, so that the selection effect can shine through, and that informs the way that we build our portfolio from a long-only perspective.

We're very deliberate in looking at our sector exposures; looking at our geographic exposures; looking at our style exposures – be it value growth or quality-oriented businesses; trying to tilt the portfolio from an allocation effect perspective towards areas that should be long-term winners – either higher returns on capital or having secular tailwinds; but primarily, trying to bring down the risk, so that the great selection effect work of our underlying managers can shine through

John: That makes sense. I was also wondering whether there are big differences in the endowment spending rules of your clients. If so, how does that inform the portfolio construction?

Sal: Absolutely. Depending on the underlying client and their near-term and long-term spending needs, that really informs two things – one, how much risk they can take in the portfolio in terms of equity beta, and how much illiquidity they can take in their portfolio in terms of private assets. We have active conversations with our underlying partners to understand those dynamics.

If somebody is more reliant on endowment draws over a shorter period of time, it most likely makes sense to have less equity risk in that portfolio and less illiquidity whereas, if somebody has perhaps a very active donor base or the ability to raise capital elsewhere, perhaps it makes sense to be more equity-oriented and more illiquid in an effort to grow the corpus.

John: Let's talk about the manager funnel and your manager selection criteria. I'd love to hear how you think about that?

Sal: I would say our funnel starts as an investment funnel, and managers play a very key role in that.

Every decision is three things. What are we looking for in our portfolio? How do we think that exposure is best executed? Who do we want to partner with to give us that exposure?

Again, using that top-down framework, sometimes, there are areas in our portfolio where we have a hole versus a global equity index and, again, we want to make sure that allocation effect doesn't swamp selection, so we need to fill that hole.

We say, “What are we looking for?” Perhaps it's a certain beta. Let's use US exposure for an example. Beta is not a bad word. If you are underway to beta and you don't own it, and if you don't have an explicit view that that beta is worse to own, you should go out and find a way to own it.

The next thing we say is, “This is what we need in the portfolio. How should we get that exposure?” This is where we look at dispersion and opportunity for outperformance. “Is this a beta or an opportunity set where there is a large amount of dispersion between the top and bottom performers?” That would suggest a very ripe opportunity set for stock picking.

If the dispersion was extremely tight, maybe there's not room to generate alpha via stock-picking and owning this either passively or in a highly liquid, low-fee way is the right decision to make.

Is the opportunity set large enough? Do the indices that are available to own cheaply actually reflect the underlying opportunity set? There have been many markets over time where the index construction has not been aligned with our perception of the opportunity set. That forces you into active management.

The vast majority of our portfolio is with third-party active managers. That comes to the third pillar of the who. Who do we want to follow with? Who do we want to partner with? The who really comes down to underwriting their ability to generate alpha versus the passive benchmarks.

Our underwriting philosophy really comes down to six key pillars – strategy, opportunity set, structure, investment analysis, portfolio management, temperament and team.

We've talked about strategy and opportunity set in terms of looking at dispersion and returns on equity and breadth of the opportunity set.

Structure – what is the manager's underlying liquidity? What are their fees? Do they have a business structure that's resilient?

We often do a lot of market mapping upfront to understand people who are executing similar strategies, going after similar opportunity sets. Are there structural differences where one person wants to lock up our money for three years and the other is more willing to give it to us quarterly?

When we dig into the specifics of any individual manager, it's really focusing on that investment analysis, their portfolio management, their temperament and their team. Those four pillars really interact with one another.

So many conversations you hear about markets and earning excess returns talk about having deeper investment analysis, about having better understandings of businesses, and about edge, but in our view, portfolio management is equally important. Are you able to monetize that insight and edge that you have versus the market?

Portfolio management – buying and selling and sizing – is your primary mechanism for translating that advantage into returns for LPs. Do you have a temperament in a team that is going to enable you to withstand the inevitable drawdowns in your strategy?

If you build an extremely large team upfront, that likely burdens you with fixed costs and places more performance pressure on you in the interim which can impact your temperament and which clouds judgement on investment analysis and leads to poor portfolio management decisions.

These things are all interrelated, but what we're really looking for is some kernel of excellence – something that says, “I have talked to a thousand managers this year,” which is not an unrealistic number given the breadth of our team – “and this person stands out. They are doing something exceptional versus the rest of the market that we've had a conversation with, and that's worth looking into more.” That is the primary way where, if somebody enters our funnel, we decide to spend a lot more time with them.

John: How heavily does track record weigh? Or how do you evaluate the track record of a manager?

Sal: We have invested with managers with no technical track record and managers with extremely long track records.

Track record is the evidence of skill. It is a piece of evidence of skill – a very strong one – but there can also be other pieces of evidence of skill – whether they have networks where people have pointed to them repeatedly as the smartest person they know.

That's one reason why we travel a lot to understand who's the smartest person you know. If you ask 10 people and they all say the same person, that's a very good lead.

Other pieces of evidence might be a track record of success at a wide variety of firms – even if it's not a formal investment track record.

What we focus on are data points that have predictive value or allow us to believe that something is repeatable. We don't talk about good or bad track records. We talk about repeatable track records or data points that give us predictive value towards the future which is really what we're trying to handicap.

When we analyze a long-term track record, we are trying to separate the betas and alphas. How much of this was the manager making an allocation decision perhaps making it correctly which they get full credit for but we view as a less repeatable strategy than getting selections go right?

Maybe the track record doesn't look as strong because they were unfortunate from an allocation perspective, but they have demonstrated really strong selection and – in the context of our portfolio – we can take a more of that allocation risk to go after the selection risk.

It's really trying to break track records or break people's backgrounds into predictive data points and repeatable data points. Yes, very long duration track records are the strongest evidence of that, but they are also rare in investing, so we have to find other ways to be creative.

John: Let's talk about some dealbreakers for you. What are some criteria you use to exclude managers from the funnel?

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Sandra Powers Murphy discussed her book, The Road to AUM: Driving Assets Under Management through Effective Marketing and Sales.

Sandra is a globally recognized investment management marketing and sales consultant. After more than a decade serving in a marketing and sales capacity on behalf of State Street Global Advisors and State Street Corporation, Sandra founded ARK Global LLC. As CEO, Sandra drives product and business development initiatives on behalf of a diverse group of clients. Sandra has helped numerous managers expand their investor base, add product structures, secure strategic partnerships, define business plans, create market presence, and improve profitability.

The following transcript has been edited for space and clarity.

Sandra Powers Murphy: It’s a real pleasure to be with you today to talk about The Road to AUM: Driving Assets Under Management through Effective Marketing and Sales. After many years of providing marketing consulting and distribution services and screening hundreds and hundreds of managers, it is clear that there’s a lack of content in this area for managers. Regardless of their size, time in market, product structure, and channels, a basic blueprint for business development is required. Having spent over a decade working with these managers, we sought to determine what is out there for them and realized there’s very little.

There’s a lot of great theoretical ideas you can read about and get passionate around, but when it comes to the implementation – the doing of business development around investment management – there is very little in the marketplace for managers to quickly and efficiently integrate into their business. I was pleased to be able to bring The Road to AUM to that audience for that express purpose.

John Mihaljevic: How would you summarize the core message of the book?

Sandra: It breaks the marketing process down very efficiently into 12 core elements. Many readers of the book who are running different kinds of businesses – not only investment managers but wealth management practices and other types of businesses outside the field – found that the blueprint truly defines a path for managers who need to be able to answer questions such as “How do I establish a firm’s framework? What is our value proposition? Who are the competitors? Who are the prospects?” The book goes through the process step by step.

Oftentimes, managers are guided by an incredible passion for what they do in managing portfolios, but that does not translate well into business development and running a firm. What this book provides is truly a blueprint – an actionable, immediate blueprint for managers who want to figure out, “What do we need to do? What do we need to do better? Why are we stuck in neutral? How do we access an additional channel? How do we launch an additional product? What are the actionable steps we can take today to be able to deliver that to the marketplace efficiently and effectively?”

John: Starting close to the beginning, tell us about what you call “the institutional lens.”

Sandra: That’s an extremely important question because this book was written after a decade of marketing to large institutional investors. For the purpose of the book, we’d identify that as any organization with a structured research team where they are taking an active look at investment policy and decision and determining how to fit managers into that construct. This can happen at a family office, a wealth advisory firm, all the way up to larger institutional corporate plans, DB, DC, the institutional consultant market, bank trust, and platforms where advisors turn around and market those products to clients.

This book is targeted at anything beyond an individual sale where there is a research component, aiming to help managers understand what the moving targets are to assist them in best positioning themselves to pursue assets under management.

John: Tell me whether this is correct, but it sounds like the institutional lens comes in where it’s not just a one-on-one relationship with an individual who also happens to be the owner of the assets and can pull the trigger – just on sympathy, if you will – but where there is a more formalized process around picking managers and allocating capital.

Sandra: Yes. If you have a team spinning out of a larger firm or a homegrown organization that came out of a family office, an individual portfolio manager with a fantastic idea will typically start with money from family and friends. They may then go to colleagues and their network from college or graduate school days. Ultimately, once they get beyond that direct sale, they need to go to organizations that can move the needle more broadly for them – for reasons of efficiency, scope of capital, and diversification.

When you sell institutionally, there is more of a process. It’s not done through get-togethers, dinners, golfing, or any sort of conversation. It’s done through a more structured process. Managers who are very passionate about the underpinnings of their portfolio tend to be able to tell that initial story well, but the ability to translate it into an investable investment on behalf of a larger institution is extremely difficult. It is a highly structured process managers need to follow in order to be successful – bigger picture.

John: I like how you structured the book in terms of communicating these 12 steps. You call it stepping back, in, up, and out. Maybe we can start with stepping back, or getting in a position to win. What do you mean by that? What are the key messages there?

Sandra: Everyone hates this part. You’re an excited manager. You want to go raise assets. You’re running a wealth shop, and you want to go and attract clients. You want to dive in and tell your story.

The book is based on us having spent a decade in the market and still feeling like maybe there’s part of the story we don’t understand. We’ve been doing a lot of marketing, consulting, and sales, but what is it that the institutional buyer perceives? What’s valuable to them? Where do they step in? Where do they get engaged? What works and what doesn’t?

We started that conversation with the first introduction – whether it’s through a connection, an email, a meeting, or an event. There is that first introduction that begins the process. However, what we found was that most managers should not have stepped in as quickly as they did. The reality of it was that maybe their performance was excellent, and most managers can demonstrate a phenomenal growth of $10,000 chart. You might have to step further back for some versus others, but you can make your data look fabulous against a self-defined benchmark.

However, what these firms look for is an entity they can invest with. They’re worried about risk management and process and how that strategy will change and morph as time goes by. What changes have occurred in the past? What are likely triggers for changes in the future? They’re worried about fit – how it fits within an existing portfolio – because these institutions don’t have a raw pool of capital. They’ve already made an allocation. They’ve got an investment committee. They are looking for very specific things, and the manager is trying to come in and say, “Wait, this idea, this opportunity is different, and here’s why.”

The ability to step back initially and say, “Are we indeed providing the right thing to the market? Maybe we do have the performance, but is the offering correct? Is it structured correctly? Are the terms viable?” Some managers come to us with lights-out performance, but because of the structure of the product, the fees they’ve applied to it, or the team they have in place, they are not going to be successful in the market because there’s too much risk inherent in the model.

Taking that step back and saying, “Are we sure that this is the team, that this is the offering, that this is the brand and how we want to position the firm, and, most importantly, that we are committed to this business development process not for three or six months but for the next two to three years so we can really build ourselves into the market where we want to be?” That step back assures that when the first outreach happens, it is so much more likely to be efficient in finding quality prospects because it’s clear, concise, targeted, and built upon a firm, a product, and a structure that is viable to these institutional buyers.

John: What are some common pitfalls? You alluded to managers who may have strong performance but somehow trip themselves up in other ways. What have you seen many times that is perhaps not too difficult to correct?

Sandra: Excellent question because you can trip up anywhere across these 12 core elements. While we have created this research prioritization matrix about what is de minimis versus a game changer so that managers can quickly say, “This matters more than that,” it all matters. Red flags can be raised anywhere across the board.

Where we see managers most often tripping up is in their structure and the terms around that structure. They may have a great performance track record, but if there are many competitors out there offering it in a more viable, liquid, and accessible structure at significantly lower fees, it takes a lot of outperformance and some comfort level that there won’t be significant underperformance because once you have underperformance, fees are exacerbated in terms of what that looks like. From our perspective, one of the places we see managers trip up initially tends to be carefully considering the offering in all of its terms against a competitive matrix, not just the performance.

Another area where we see managers falling down is presenting. Often, managers are deeply passionate when telling their story initially, but when it comes to answering questions, being responsive to specific inquiries, and providing ongoing commentary related to the market, they tend to have a much more difficult time. Maximizing the interaction time they do get, building confidence and a relationship, and answering questions – directly, succinctly, and clearly – is a place we think managers generally can improve a lot.

Often, there may be a manager or a business development person who’s highly adept at telling the story, but what institutions tend to want is to get comfortable with the firm as a whole over time. You absolutely want to make sure the whole team is up to speed and fully understands the philosophy, the process, the positioning, and how specific questions and answers can be addressed. It’s surprising how many managers don’t have a written Q&A where they understand exactly what questions are likely to come up. They’ve had a devil’s advocate work with them to make sure they’re strongly positioned to turn that answer into a positive on behalf of the firm versus a question they struggled with.

The third and final place where we see the most problems is ongoing communication. Typically, firms are hugely excited initially to get their story out, have an initial presentation, but their ability to define how the strategy is working and what it is doing over time so that institutions can think where it fits is a place where most managers – regardless of size – tend to have greater difficulty providing content on a timely basis that is truly differentiated, that tells the story about their strategy, their team, and their approach.

John: How should a manager think about that relationship over time? I believe you also talk about the marathon that’s involved a lot of the time because it seems like there are some smaller allocators who may be nimbler and can come to a decision quickly, but then there are also those who just meet with hundreds of managers a year to make one investment and that can be frustrating for managers because it seems like everything went well in a meeting, but then there’s no real check being written. How should one think about the time investment in that kind of a relationship, how one gets the allocator on board over time?

Sandra: The institutional marketing effort is a marathon. It’s a two- to three-year process. Nobody wants to hear that. Nobody wants to talk about it. Can you get lucky and get an allocation within the first few months of marketing? Absolutely. If you do a great job defining your prospect list – which we dedicate an entire chapter to – understanding those prospects, and being very channel- and prospect-specific in your communications, you can be more efficient.

If you believe you are a good manager for larger institutional mandates, the reality of that process is you are trying to replace an existing manager more often than not. These institutions don’t have a lot of dry powder for new ideas. They tend to have already allocated in the spaces where most managers are and it is very difficult to find new pools of capital. Where you will more likely find them is family offices, smaller wealth advisory firms, and bank trust departments. You will find those organizations, endowments, and foundations – particularly the ones that go direct and do not use consultants – to be the nimblest investors. Those and, of course, your ultra-high net worth individual investors.

From the perspective of institutional marketing, it is essential to see it as a marathon. The whole reason to name the book The Road to AUM is that it is a road. Over time, adjustments will need to be made. There will be stop signs. There will be fantastic thrill rides of working with these entities, but it is a path, and managers typically make the mistake of going full bore at the beginning, putting a lot of resources in upfront, and petering out way too soon.

They make it six months, then they’re deeply frustrated, and they tend to try to change what they’re doing on the marketing front, which may be necessary, but it would be so much more efficient from a cost and time perspective and result in better asset flow to step back, have a very clear and structured perspective on where the product is differentiated and who the market is, go to that market, and remain laser-focused on it for a period of time until there is a relationship built and that interaction of trust where they find a slot and can put that manager to work.

John: How do you think about differentiation or the concept of edge when it seems like some allocators meet with hundreds of managers and they might, over time, all sound alike? How should one think about what’s truly a differentiating point?

Sandra: You hear these trite used words over and over. “We have integrity. We are risk managers.” Those tend not to mean anything to the market. What matters to the market is your ability to demonstrate your fit in a portfolio, how your specific holdings added value in periods of market stress, exactly where you’ve taken advantage of opportunities, where you’ve been forward-thinking, where you’ve been active, and where you’ve chosen to step back.

Being an active manager doesn’t always mean jumping ahead. In some cases, it means pulling back. Having the ability to tell those stories with great specificity, we find that managers are perhaps worried about giving away their secret sauce, or feel that it’s too complicated to get into, or they’re concerned that if they mention a holding, they have to take this deep dive and may get pushed back about the value of it.

Institutional research people are closet portfolio managers. They love the notion of managing money. They love a good story about a security, and they love a contrarian thinker. They said over and over again in the interviews, “Who we read most, who we’re most interested in are those that are contrarian, that have a different way of thinking about things, and that we feel can give us an edge or some value because they’re different.” Whether that difference is sticking to their knitting in times of market stress, having a peg of one and never going away from that, going completely to cash when they feel that’s appropriate – whatever that is, to not only say it but demonstrate it through case study examples.

That’s where we see managers fall. Sometimes, they can articulate some differentiators. They very rarely can back it up with specific examples in their portfolio and in their process. I will make one other comment about these firms that are seeing hundreds of managers across areas. Managers have to spend time on prospect identification and competitive analysis. It is not useful for them to go to 80% of the market they choose to go to because they’re not the right size and the right fit, they don’t have the depth of team, and they don’t have sufficient brand.

It is valuable to identify selectively institutions that, for a variety of reasons, the firm feels it might meet their criteria or might be a good fit – culturally or in terms of the types of asset management philosophy the firm has – but it is not a good use of time and resources for managers to keep trying to get into large institutions that tend to allocate to the same big brand firms over and over. They will generally take a meeting if they’re in research although that has gotten more difficult, but at the end of the day, they’re looking for nuances and for interesting facts and figures. They are not in a position to invest in that management firm because it doesn’t meet their base criteria.

Upfront, defining a prospect list and asking those prospects, “What is your criteria? What is the smallest investor you’ve invested in? How long of a track record is required?” and making a decision. “Are you more growth- than value-oriented? Do you even consider core managers? How much are you doing active versus passive? Where are you active?” Getting a better sense of whether they’re even thinking to allocate where you have expertise can save a lot of time.

Managers typically want the meeting. They want the chance to go and present. It usually goes well because it’s human nature to make a nice dialogue happen. It’s very rare that the manager leaves thinking it didn’t go well. However, the picture may look different if you ask managers to take out a piece of paper and write down the answers to questions like, “Over the last year, who did we meet with, how have we followed up with them over time, and who is invested? Over the last three years, the same thing – who have we met with, how have we followed up with them, and how many of them invested?”

What managers will find is they had a series of good introductory meetings, a big chunk of them were probably not the right prospects, and their ability to follow up was not as strong as it needed to be to keep telling their story in front of that firm. You get so few chances for these excellent introductions. It’s critical to maximize them by confirming it’s the right type of prospect, being diligent about preparation to maximize the meeting time, and then being incredibly vigilant about ongoing communication with that audience so as not to lose them.

John: You talk about creating a content library. What is some of the core collateral that needs to be in place to truly have a chance out there in the institutional world?

Sandra: We feel such a body of work is a critical statement about the manager, and most managers will sort of check the box. “Yes, we’ve got the numbers. We’ve got a pitch book. We’ve got a fact sheet. We’ve got a website.” However, a true content library is a body of work that clearly defines every aspect of the manager, the manager’s team, the manager’s philosophy, and the manager’s process, and then utilizes that content library to feed a whole bunch of different marketing collateral and media interactions.

The reason it is so pivotal is that, typically, managers will have a fact sheet and a presentation. If you then look at their website, the fact sheet and presentation often don’t match the content in the website. If you look at the data they’ve put in a database, the answers in the database don’t often match what is featured on the website or in the collateral. If you ask them to respond to an RFI, they will provide different answers yet again. There is no common portal of real, clear language around the firm’s philosophy, process, team, the way it thinks about managing money day to day, and the way its investment committee works, if it has one.

It’s about truly going through this exercise of putting that in writing, making sure the whole team understands it and is on board with it, and that every communication coming out of that firm utilizes the core messaging – whether it’s visible online, whether it’s how someone presents the firm in a meeting, whether it’s what someone says to a colleague at a networking event – and that the message about the firm is so consistent, clear, and concise as to leave no room for poking holes in the story because institutional research people in particular, especially in today’s day and age, keep their databases for years.

We will walk into a meeting with a manager or call them on the phone and they’ll pull notes out from five years ago. Five years ago, the manager was significantly less polished. The story wasn’t anywhere near as good. It wasn’t as concise and clear. That is in their databases. That is what any analyst from that firm is going to read – the impression of that initial meeting.

It is very critical that you determine ahead of time what the messaging and core content of the firm are and that they’re consistently applied in database responses, RFIs, fact sheets, presentations, and websites. Every touch point with the market needs to be consistent and driven by this content library.

John: Some firms or managers like to write up every idea in detail and share it freely or have lengthy letters. Is there such a thing as too much information? It seems like the managers that get a lot of interest sometimes have a mystique around them where maybe not everything is out there for public consumption.

Sandra: Yes, I think managers culturally have to make a decision about who they want to be in the market. I mentioned earlier that a lot of institutional research consultants talk about folks who are very contrarian – maybe a Grantham from GMO or voices that are very active in the market, typically of a contrarian nature. What they like is that they’re willing to put out an opinion. Jeff Gundlach is another example of someone who’s very active in the market.

Most managers need to keep in mind that they are not going to have the budget, time, or resources to be that prolific in the market. They don’t have that behind them to be able to constantly push themselves out. As a result, it’s going to be more targeted and specific communications. One thing we see managers do that is a mistake is vomiting on the page. They just want to write, write, write, and provide so much information. The other is minimalists. In the book, we talk about the concept of minimalists with communications where they don’t want to tell you anything because they’re afraid they’re giving away some secret sauce or some great stock idea.

Managers need to find that happy medium where it is a bite-sized but meaningful piece of communication that doesn’t stretch beyond six to eight pages, preferably keeps to two to four, but is still a meaningful piece of information that speaks to their philosophy, process, and unique edge in finding names. It doesn’t necessarily have to be done at the individual security level. For regulatory reasons, some firms are very hesitant to talk about individual securities, but it can also be done at the industry level, the sector level, or the country level if you’re a manager in the global market.

Managers can be creative in realizing that research entities are looking for content they can utilize in their own thinking and in their own presenting internally, how they’re positioning to their clients, and what is unique and value-added about them. Give them some content so that they think of you as a source of value. That’s not going to be done with a 10- to 20-page write-up on a specific stock, nor with a one-paragraph write-up.

Somewhere in the middle is a sweet spot – ideally two to four pages of a meaningful conversation about a topic that matters to the manager or where the manager has some specific expertise. It doesn’t have to be overly involved, but it also needs to have enough detail for the research person to take some bite-sized pieces of information from it and integrate it into their own thinking and process and look forward to the next thing they receive from that manager.

John: Tell us what you mean by establishing active voice with commentary.

Sandra: One of the challenges a lot of managers have – particularly managers that may not be as large – is they have come from a wealth management framework and perhaps even have wealth management as a construct of their business. It seems they want to provide this global macro content that is pretty mundane and repetitive from manager to manager. Some even outsource it to organizations that produce content that they can basically private-label. It is understandable because it is macro, and that’s not what most of these managers are.

You might need that because you may have some readers who look to you for the broader picture, but what we suggest to managers consistently is to make sure that, right on the first page, they put something of real meaning about their portfolio that isn’t general in nature – some idea or some perspective they can at least start in a sidebar or in a column and then carry that over into the rest of the piece because that is what’s differentiated about them.

Nobody – particularly in the institutional market – needs the majority of managers to provide them with the macro outlook. That’s being done by the largest firms in the industry that have paid economists who do nothing but opine on that in the market. What they want from managers is specifically what is happening in their space, in their portfolio, in their little corner of the world. Managers tend to want to hide under the shell of general macro perspectives when what the market is truly excited to hear from them is what they see in their area of expertise.

John: You have a chapter called “Games Managers Play.” Tell us more about that.

Sandra: That was probably the most fun chapter of the book to write because institutions play games, too. Let’s be honest about it. It’s human nature to want to look good, to want to demonstrate high integrity, and to want to tell a good story, but there are some things managers consistently do that are particularly obvious to institutions, and they kept coming up over and over in my discussions in the interview process.

I felt that a great way to capture them would be to create this chapter, which talks about games like Capture the Flag and Battleship where you are trying to figure out where that manager is, and you can’t quite pinpoint, and you keep guessing. It’s like 20 Questions, and you can’t quite get the coordinates right. There are many other examples of games managers play in terms of trying to either not answer questions directly or clearly or trying to come across as bigger, more experienced, or more differentiated than they are.

Unfortunately, from an institutional perspective, that’s very harmful because these institutions generally see hundreds of managers a year – maybe not hundreds of managers for a specific search, but hundreds of managers a year. They are adept at understanding, and so are we because we screen managers every week. You can take a quick look at some materials and determine very quickly what makes sense and what doesn’t within that collateral system.

“Games Managers Play” is about poking fun at the notion of the humanistic nature of trying to be effective at business development, marketing, and sales. It’s meant to remind managers of things to avoid because there’s what to do in marketing, but there’s also a lot of what not to do. A lot of being successful in this marketing run is not getting yourself thrown out of the process. It’s staying in the game. It’s musical chairs. It’s staying put long enough. It’s survivor. To do that, you can’t raise flags along the way.

Institutions know right away when managers work hard to cover up periods of underperformance, issues with individual team members, a benchmark that’s not the right one they should be using (although they look great against it, it’s not realistically what the portfolio should be compared against), or a whole number of things. You get a lot further with investors by having an effective marketed positioning but also one that is accurate, truly demonstrating integrity, and honestly portraying the team, what value they bring, and what they’re passionate about.

John: Given your experience in this business, to the extent we can generalize a little, what is the type of manager you’ve seen succeed over time? What’s the type of manager you personally like to work with?

Sandra: We love managers. That’s why we’re in the business. Who is the easiest person to sell? A salesperson. We love the stories. We get excited for managers to come and tell us what they do that’s different, and they’re so passionate and engaged.

The managers we like to work with that we believe are ultimately the most successful are those willing to take these steps. Most managers you talk to say, “Our performance is great. It’s better than BlackRock’s. Why can’t we raise money?” They’re dogmatically focused on performance as if it’s the only criteria. It is absolutely not the only criteria. It is required. Without good performance, it’s extremely difficult to move the needle, but it is one of many criteria.

We most enjoy working with managers with the ability to self-reflect and willingness to engage their team around the thought process of “What are we as a firm? What is our philosophy? What is our process? Who are our competitors? Have we done a full enough analysis? Who’s the right prospect for us? We’re going to stick with it, we’re going to produce content, and we’re going to get out there with our messaging with a high amount of integrity, honesty, and clarity. We’re going to do that for the period of time it takes, and we’re going to understand how the process works.”

Ultimately, they’re the managers that get hired. At the end of the day, institutional researchers are human beings. They don’t want to work with people who get thrown off by a question or become confrontational if they don’t get a response quickly enough. It’s very much a dance of trying to stay in front of them without pushing at the wrong time, trying to provide meaningful content without bombarding them with too much. Managers willing to do that self-reflection and think cautiously and carefully about the best use of their resources but then commit to that process for a two- to three-year run make the best clients. They are also the most likely to succeed.

John: There’s obviously the question of what kind of time investment is required by a manager who does have a day job of running a portfolio and choosing investments. What would you say is the level of commitment you need to see to invest in this process before it can be successful?

Sandra: There are two answers to it – one is the capital commitment, and the other is the time allocation.

One of the reasons this book was so important for me to write was that I am a business owner. I understand that you have a lot of economic pulls at your time and resources. You have a certain amount of team. What do you outsource? What do you insource? Some firms should outsource more than they do; some should outsource less and build more inhouse. That’s a constantly changing model as firms grow and develop.

From the perspective of what is it that managers need to be thinking about in terms of capital and resource commitment, in terms of time commitment for portfolio managers, we define 20% of portfolio management time. It does not need to be one person. It could be split across two or three PMs, but that’s the amount of time needed to drive effective relationships and thus business development. When it comes to resources and capital commitment, many organizations have existing resources. What they simply want to do is add these very different tasks and business development requirements onto resources that often are not well enough trained or prepared to deliver on them.

Firms have to think about two things. One is the simplicity of training. Most organizations will make sure their lead PM can tell the story, and if they have a business development or sales person, that person can tell the story. However, everyone in the organization truly needs to understand what the organization is driving for, what that philosophy is, what that process is, and how it should be articulated because there has to be a consistent and clear response, whether it is institutions coming through the office for an onsite visit, whether it’s just a phone interaction related to follow-on questions, or whether it’s the junior person filling in the databases.

Thinking about team training and making as many team members as possible engaged in the outcome of the business development trained to present the firm most efficiently will both free up time for the portfolio manager and ensure that every interaction an entity has with that organization is consistent.

We also suggest a capital commitment of being able to fund the marketing and sales effort for two to three years. Many firms will make the investment for 3, 6, or 12 months, then they get frustrated with the lack of results. Right at the time when they’re starting to create some groundswell of at least brand awareness and opportunity to get into searches, they pull the plug, saying, “This didn’t work.” For managers to truly have a longevity approach, to make the effort sustainable, it’d be better if it’s a lesser effort, more targeted but sustainable versus trying to throw too much against the wall to see what sticks, and then planning to just continue in that vein. Careful planning of resources is critical.

The other factor to consider is that portfolio managers obviously need to be managing the portfolio. Some portfolio managers are great presenters, others not at all. They have a difficult time answering questions and can be confrontational in their response. They don’t understand why the question is being asked. They think they should be able to focus on the high level. They don’t want to talk about historical performance. They struggle greatly. In that case, firms need to make an honest assessment about who the best person is to go out and position that firm and/or work with that portfolio manager to get them more comfortable answering those tough questions, and – better yet – building more of those answers into the presentation so that the manager is not on the defensive when the question gets asked.

So, training, training, training around portfolio managers. It’s nothing they enjoy doing, but portfolio manager after portfolio manager we have trained are significantly more successful because they are more prepared to have an engaging, positive dialogue that the institution feels it’d like to continue after the initial meeting.

John: Sandra, are there any concluding remarks you’d like to make? I know you’re involved with a couple of different entities. It would be terrific if you want to delineate that or tell us a little more.

Sandra: When I put the book out there, the first piece of advice I got was, “You do know that 85% of people don’t read books.” I thought, “This book is not a ‘put your feet up and take in some philosophical thoughts’ exercise. It is a tactical game plan.” When I meet with managers who have read it, they will have dog-eared or flagged hundreds of pages, and they can’t wait to figure out what’s working and what’s not in their organization. There are checklists, matrices, actionable steps that can be implemented, and it is very bite-sized. You could do an element a month. You could do all the elements in one review with the team and then split up who will be responsible for carefully looking at them. You could work with a consultant to maximize that game plan.

What we did do out of the book was create an entire curriculum series for managers the book is not sufficient for. It’s on Audible. It’s an ebook. It’s Kindle, but how do you get a team to truly engage around it? There is a full curriculum series that allows managers to take one unit at a time, to self-facilitate, to have it facilitated.

The bottom line is to stop the practice of saying, “Our performance is great. Our problem is we don’t have the right marketing. Our performance is great. It’s just that we don’t get out enough.” It is bigger than that. It is about saying, “What will make our business the most sustainable and successful it can be, where we’re diversifying our revenue stream while putting in place a plan that will last beyond the next 1, 3, 5 years?” and committing to that process, which doesn’t have to take much time but is critical for long-term success.

John: This has been terrific. Sandra, thank you very much for taking the time to share your insights into this critical topic.

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For emerging and established investment managers alike cracking the institutional allocator space is no small feat. Institutions tend to be highly sought-after clients due to the large amounts of capital they deploy and the imprimatur bestowed on a manager by a highly reputable institutional client.

TIFF, with offices in Radnor and Boston, is such a client. Having been in business for more than three decades and managing or advising many billions in capital, TIFF is quite unique due to its status as an employee-owned Public Benefit LLC. The firm specializes in Outsourced CIO and private market solutions, assisting endowments, family offices, and other institutions in allocating capital. In fulfilling its mission, TIFF partners with a wide range of investment managers.

We had the pleasure of delving deeper into TIFF’s manager selection criteria in an exclusive conversation with Jay Willoughby, the Chief Investment Officer of TIFF Investment Management and the chair of TIFF’s Investment Committee. Prior to joining the firm in 2015, Jay served as Chief Investment Officer of the $50 billion Alaska Permanent Fund.

The following transcript has been edited for space and clarity.

MOI Global: Please elaborate on your organization’s mission and structure.

Jay Willoughby: TIFF is short for The Investment Fund for Foundations. It was formed in 1991 when a group of larger foundations, including the MacArthur Foundation and the Rockefeller Foundation, decided that smaller non-profits needed a way to pool their capital to become more effective investors. Many of the smaller charities couldn’t afford to hire their own investment staff.

TIFF was created to help point non-profits in the right direction, and we operate as a not-for-profit ourselves. Our first endowment strategy was launched in 1995. Our members are non-profits.

MOI: Tell us about your background and how you became interested in investing. Also, how did you come to be a part of TIFF?

Willoughby: I will tell you what got me started: I was a senior in high school and bought $1,000 worth of a stock in a company called Superior Oil Company of Nevada. A few years later, when I was a sophomore at Pomona College, I sold it for approximately $7,000 and it paid for a full year of college. I said, “Now this is the sort of thing that I want to do for the rest of my life!” After Pomona, I went straight to business school at Columbia, knowing full well what I wanted to do, which was be in the investment business. For the first three years or so after school, I was on sell side of the business and then starting in 1986 — so for 30 years now — I have been on the buy side.

For the first 25 of those 30 years, my job was to actually to pick securities. Over my career, I’ve managed money market funds, government bond funds, corporate bond funds, equity funds, and funds focused on Real Estate Investment Trusts. I have also managed exchange funds – a type of a tax structure – not to be confused with ETFs. I never did private equity, but I managed pretty much all kinds of assets throughout the first 25 years of my career.

In late 2010 / early 2011, I was the co-managing partner of a hedge fund when the managing partner decided that his health wasn’t what he wanted it to be – so we shut the hedge fund down and I started managing my own capital. That gets pretty boring pretty fast if you are a value-oriented guy, so another friend of mine said, “Hey, there is this CIO job in Alaska at the Alaska Permanent Fund that you should apply for”. To make a long story short – I did apply, and I got the job, and so in the second half of 2011 my wife and I moved to Juneau, Alaska. I managed the Alaska Permanent Fund, which is the state’s sovereign wealth fund, for four years before moving back to Boston, where we had lived back in the mid-1990s, to join TIFF.

MOI: You’ve called yourself a “value-oriented guy”, is this a Charlie Munger business-quality orientation or a Benjamin Graham asset-focus? Where do you put yourself on the value spectrum?

Willoughby: I put myself on the spectrum somewhere between GARP — growth at a reasonable price — and traditional value. I am not looking for cigar butts that are half-smoked. It is probably more the way that Warren Buffett looks for opportunities today than the way he did perhaps 30 years ago. I am looking for quality businesses where there is a margin of safety.

I also have a contrarian bone in my body. When I was in Alaska our Executive Director said, “Jay likes to run to the fire” — and that is true. I think you find your best investment opportunities where there is the greatest amount of stress. This has been harder as all the central banks have been pumping capital into the system, for the last several years.

During the earlier part of my tenure at Alaska, in 2012, we made the decision to go out and buy single-family homes that were for sale at distressed prices, mostly on the courthouse steps. Wayne Hughes, the founder of Public Storage, was in the process of doing the same thing; we formed a partnership that is today American Homes 4 Rent, which is the largest single-family REIT on the stock exchange. Before their recent sale of shares, Alaska Permanent owned about 20% of the entire REIT. A situation like that, where there is pressure from significant price declines, is what I am attracted to. When I joined TIFF in 2015, we were attracted to energy – we looked and looked and actually found less than we imagined, so we didn’t leap in with very much capital.

MOI: What is your typical workflow? Are you identifying compelling businesses, identifying compelling investment managers, or identifying compelling private deals?

Willoughby: We are a manager of managers; we don’t pick individual stocks, we hire managers. We partner with managers, and what we try to do is partner with the very best managers we can. We are looking for firms where we think the people are really strong. Typically, they may have spun out from another really good manager who, essentially, taught them the business. Typically, our managers have learned the trade for a decade or so. That is kind of ideal.

The single most important quality we seek in a partner is a sustainable competitive advantage. Sometimes these come in the form of better information, sometimes in a different or better way of processing that information, and sometimes in the time frame that a manager brings to the security-selection process. When we uncover a manager that we believe possesses a sustainable advantage, we work hard to try and articulate their edge. As long-term investors, we remain comfortable with a manager who hits a rough patch so long as their edge remains. Often, the outperformance after one of these patches can be very meaningful.

Also, we are very interested in the way managers set up their business. If a manager is trying to do a whole bunch of different things, and gather a whole bunch of assets, we are not interested. Ideal for us is the manager who does one thing very well, wants to do it better than anyone else in the world, and purposefully limits the fund’s AUM. Size is generally the enemy of alpha, and we are interested in alpha.

We want to look at the investments the manager is making – it is one thing to talk about the concepts we like to hear – we want to see it reflected in the investment choices that the manager makes. I like to learn as much as I can about a manager or an organization, form my own opinion of how the manager should relatively perform in various market environments, and then test my own assumptions. If I don’t understand the results, the performance doesn’t fit with what I expect, then I need go back and try to figure out why. The final thing we are looking for is the right fit with TIFF, and this is my primary role: how does the manager fit into the portfolio? If we already have several talented value-oriented global managers, we don’t necessarily need another one. We might replace one, but potentially we are looking for a US-focused manager or a China-focused manager, or something similar.

TIFF has a pretty good track record of picking managers who can add alpha, which is one of the things that attracted me here – in addition to the mission. We have two unbelievable boards, one for our main advisor and one for our mutual funds, which are comprised mostly of CIOs of major institutions.

Over the years, they’ve represented such non-profits as Harvard, Yale, Notre Dame, Williams College, the University of Virginia, MIT, Oxford, Columbia, Duke, Michigan, the Metropolitan Museum of Art, the Institute for Advanced Study, the Hewlett Foundation, and other great organizations. They are trying to identify managers and construct their own portfolios. A board member may have already worked with a particular manager we are researching or have previously passed over a manager we are in the process of exploring. Comparing manager notes is always interesting. We think our board members are the best in the business.

Lastly, I would suggest that many of the managers that you meet today who have been really successful in their lives are somewhere in their 50s. In some way or another, many of these talented managers are looking for ways to give back. When and where a manager has an underlying drive to do something good for society — they see us as particularly appealing as a client. That is one of the beauties of TIFF as an organization, with 700 not-for-profit members. Managers can manage capital for non-profits and do a really good job, as they have generally done throughout their careers, and feel like they are giving something back – because they are. They are supporting the missions of every one of these non-profits.

MOI: Invest too early in a manager and one doesn’t know enough, invest too late and one misses the prime opportunity. How do you think through this paradox?

Willoughby: I think that is a really interesting question. When I was in Alaska, our executive director said, “I don’t want you to come to me and tell me you’re going to invest less than $200 million”. We were over $50 billion in AUM, so we had a more limited universe. Here at TIFF we are really at an ideal size, in my opinion. We are big enough to be important, small enough to be nimble — we can be both.

I think part of what you look for depends on who you are. We have managers who are brand new; in 2016 we seeded a hedge fund where the founder was spinning out from another firm. The founder had been part of two other really good hedge funds in the past – we liked him and believed he is a money maker. Our due diligence suggested that he was who we thought he was, so we participated in the founder’s round. Similarly, we have set up a unique relationship with an industry veteran on the short side who has an extensive track record of alpha creation. So, one manager has more than 30 years of track record while the other launched only within the year. With the right asset size, we can look at both of these opportunities, and again the question becomes one of portfolio management and fit. We can craft a portfolio in a manner that incorporates the best of both emerging and established managers, and the key for us is that we incorporate differentiated alpha-generating return streams that will also bring diversification to the existing portfolio.

I joined Merrill Lynch Asset Management in the 1990s — and in the early/middle 2000s I was the Head of Research for equity funds. I got to work with a lot of portfolio managers, and everyone behaves differently when a market environment changes. It is also important to understand how a shifting market environment affects a manager, especially new managers, and how it impacts the way they make decisions.

MOI: How do you assess the incentives and alignment of investment managers? Do you apply a checklist? Do you adapt a framework?

Willoughby: It relates to the four elements we explore as we hire managers: business, people, investments, and fit with TIFF. We want to find a business that is focused and not over-proliferated. With regard to personal incentives and alignments, we want to make sure that there isn’t one person who is trying to benefit at the expense of the rest of his or her team. We are really looking for people who are fair, if you will. We are looking for people who aren’t trying to charge the absolute highest dollar that they can to clients, to people like us. Oftentimes, because of our size and who we are, we are able to achieve more attractive fees than whatever the rack rate is.

MOI: Let’s explore the attributes of exceptional managers and how you differentiate great from good. Do you identify excellence by looking for common patterns or is each situation case-by-case?

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In this interview, Marcos discusses his views on hedge funds and the firm’s approach to selecting investment …

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You may know John Huber from his excellent Base Hit Investing substack. We are long-time fans of John’s research and were delighted to have an opportunity to sit down with him for this interview.

For more than a decade, John has run Saber Capital Management. Saber manages separate accounts and a partnership modeled after the original Buffett Partnerships of the 1950s. John believes investment success comes from a combination of value principles and behavioral traits, above all patience and a long-term mindset.

Saber manages nearly all of John’s personal capital along with a majority of his family’s net worth. The names Saber and Base Hit Investing are metaphors that reference baseball and John’s broad philosophy: to make steady progress day after day, focus on continuous improvement, and emphasize value investing.

In this conversation with Tyler Howell, John delves into his process and some of the mechanics of running a small investment firm. Whether you are looking to become a better investor or learn about what it takes to run an investment partnership, you will find this interview highly relevant.

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Professor Cohen is the Faculty Co-Chair and Designer of the HBS Executive Education course “Building a Legacy: Family Office Wealth Management,” designer of a first-of-its-kind MBA course entitled “How to Not Bankrupt Your Family,” and Faculty Co-Chair and Designer of the HarvardX Fintech course.

This conversation explores the topic of family office wealth management:

• Key criteria in deciding to set up a family office

• Running a family office

• Involving children in a family office

• Allocating capital across a portfolio of investments

• Longevity: how to protect wealth over many generations

(MOI Global members, access all features, including ways to follow up with Prof. Cohen.)

We conducted the following Q&A with the investment team of Charlotte, North Carolina-b…

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How do I know? Because the insights herein have truly stood the test of time. MOI Global interviewed the team of the MIT Investment Management Company in 2014. A decade later, not only is everything you’ll read below as relevant as ever, but the three interviewees continue to do exactly what they did back then: scour the globe for the very best investing talent, and enroll that talent in the service of MIT’s mission.

In this exclusive Q&A, President Seth Alexander and global investment team members Joel Cohen and Nate Chesley provide a glimpse into the decision-making process at one of the world’s finest investment organizations.

Seth, Joel, and Nate share their process for identifying and partnering with exceptional managers. The team also provides invaluable lessons to those aspiring to become the superinvestors of tomorrow.

In their mission to deliver outstanding long-term returns, the MITIMCo team seeks to cultivate an ecosystem of enduring partnerships, with no investment manager “too small, too young, or too non-institutional”. The team’s perspective and advice are truly invaluable for emerging managers looking to build a great investment firm. Enjoy!

John Mihaljevic: How did you get interested in investing?

Nate Chesley: I didn’t grow up with a lot of exposure to the stock market but was always inclined to view the world through an economic lens. I studied finance and economics in college where I came to appreciate the role of the capital markets as a sort of circulatory system for the global economy. My early professional experience at an investment consultancy was influential in my desire to invest for the benefit of an extraordinary institution like MIT, where the capital we manage is reinvested in world-class scholarship, research, and global problem-solving.

Seth Alexander: I took a course on endowment management taught by David Swensen and later went to work for him. He is both a wonderful investor and a wonderful teacher so it was a very fortunate experience. I think I was initially drawn in by the quality of the people at the Yale office and later by the breadth of the business.

Joel Cohen: Similarly, my interest in MITIMCo came first and my passion for investing came after I started working here. In my job search during my senior year of college, no one else came close to what MITIMCo could offer in combining interesting and challenging work, a real commitment to investing in every member of its staff no matter how young, and an incredible mission.

Within a few months after I joined MIT as a 22 year old, I realized that investing was actually an even better fit for my interests and personality than I thought. I’ve always been intellectually curious and enjoyed reading widely—I was a philosophy major in college in addition to econ, after all. So when we read Hagstrom’s Investing: The Last Liberal Art, it clicked for me why I found it fascinating: investing is an ongoing quest to integrate mental models from a variety of disciplines into a framework for understanding the world and making decisions. I feel very lucky to have joined an organization that thinks about investing that way.

John: Which people and/or experiences have shaped your investment thinking?

Seth: It is honestly a little hard to pinpoint the exact source of what has influenced our thinking most. We gather thoughts and ideas from lots of different places and try to amalgamate them into what makes sense for us. Probably our best source of investment thinking comes from conversations with managers in our portfolio. There are lots of challenges they face—how to build an organization, how to size positions, how to structure a typical day, when to hold cash, and so on—that are analogous to challenges we face and so we have been influenced a lot through those discussions.

For example, we restructured the organization a few years ago to make everyone generalists based on what had worked well with some of our managers. We also read a great deal. We have an internal book club that covers science and history and other subjects to help us generate ideas from outside the investment world. We are very happy to borrow ideas so we do that liberally and work to fit them into our frameworks.

John: How have you gone about building the organization and team?

Seth: We have tried to find the best athletes with a passion for investing, not necessarily the most experienced investors. We also look for people who get excited about the ways MIT contributes to cancer research and alternative energy research and other efforts. We started early on with a vague organizational chart and eventually eliminated it altogether to make it clear we wanted people with all levels of experience to come in and contribute as investors and partners.

We do not try and hire someone every year or anything like that. Instead, we hire opportunistically. If two great people came along in the same week who would both be a great fit, we would hire them. We are always looking to hear from passionate investors about working here and really encourage people to reach out to us.

John: What is similar/different in the skillset required to successfully invest in securities versus investing in managers?

Nate: We avoid drawing too bright a line between our approach and direct investing because there are more similarities than differences. We have a culture and mindset of thinking like owners and focusing on the micro that is motivated by Graham’s sentiment that “investing is most intelligent when it is most businesslike.” That leads us to focus a lot of our time understanding how our capital is invested bottom-up in the specific companies, properties, and other securities we own through our managers. One similarity between the two skillsets is the emphasis on evaluating people.

Our approach to underwriting investment managers is quite similar to the way a stock-picker might analyze a company’s management: an intense focus on integrity, a track record of outstanding judgment, and a clear alignment of interests.

Also, for every investment decision we make we evaluate the margin of safety, the range of potential outcomes, and the associated probabilities—just as one would do when investing directly in a security.

One difference might be our generalist approach. Each member of our investment team has the flexibility to cover the entire waterfront, whereas many investors are intensely focused on a very specific niche, such as biotechnology stocks or early stage consumer technology companies—or at least one particular asset class or geography.

The Process of Identifying and Partnering with an Investment Manager

John: You have stated that you “aim to establish investment management relationships that last decades.” What are the key implications of such a mindset on how you go about doing business and what managers you look for?

Joel: MIT, which hopefully will continue to be a leader in education and research hundreds of years from now, is one of few market participants for whom even decades are a comparatively short time period. We think this creates an enduring competitive advantage in a market where three years passes for long term. Thinking about partnering with managers for decades naturally leads us to ask a lot of questions to understand the trajectory they are on and what they are trying to accomplish.

For example, how do you define success? How are you building an organization around that goal? Which investors do you hope to emulate? What are you doing to become an even better investor 10 years from now than you are today?

Another implication of this multi-decade mindset is we have a willingness to engage with managers earlier in their careers. These managers can have decades of compounding ahead of them. Will the 25 year old manager we just hired still be compounding our capital half a century from now? We are excited that it is even a possibility!

John: How do you categorize investment managers?

Seth: The biggest way we categorize managers is whether or not they fit into our comfort zone. For example, in looking at public markets investors we have defined our comfort zone as long-term oriented, fundamentals-based, value investors that pursue strategies we can understand and underwrite. This narrows the field quite a bit, as macro, quant, momentum/trading, and benchmark-driven strategies tend to fall out.

Beyond that, we actually try pretty hard not to categorize managers. We tried for a while but every time we came up with a classification scheme, we would come across an interesting manager that did not fit.

The more we thought about it, the more we realized that perhaps exceptional investors by definition could not be easily classified.

Once we got comfortable without having classifications and just focused on finding great investors, we were much happier.

John: What is your process for evaluating managers to find the ideal manager? Does that process differ depending on the type of manager, and if so, how?

Nate: Our process deemphasizes asset class distinctions in favor of a manager-centric approach, so our process is generally consistent across all types of strategies. However, we have accumulated a variety of mental models for different strategies that provides a framework through which we hone-in on the key risks and areas of potential exceptionality across investment strategies. This manifests in a sort of internal lexicon that allows the team to evaluate a wide range of opportunities with the same process, but more nuanced understanding.

For example, we’ve developed an appreciation for equity strategies that are unusually long-term in nature. It occurs to us that there are huge inefficiencies when you to try understand what a business could look like five or ten years from now. This is not easy, but we’ve studied investors who have pursued this approach and have developed our own understanding of the attributes a manager might have to succeed with this style of investing.

Jeff Bezos talks about this, saying that on a three-year time horizon, you’re competing against a whole lot of people. But if you’re willing to really lengthen your time frame, there is a fraction of the competition because so few people are willing to do that.

We focus on evaluating opportunities that are within our circle of competence, which is bounded by our core investment principles. The nature of our research really boils down to: developing conviction in the quality of an investor’s judgment; understanding the risks to which our capital is exposed; and ensuring that the right structure and alignments exist to serve as the foundation for a long-term partnership.

On a practical level, we spend our time conducting in-person meetings; reading any relevant materials, such as letters, investment case studies, or company materials; conducting reference calls; and analyzing historical data.

John: You have stated on your website that “since exceptional judgment is crucial to virtually all investment strategies, a critical element of our due diligence process is to evaluate historical decision points.” What are some examples of such decision points and how do you go about evaluating them?

Joel: I’ll give an example from a manager we recently underwrote. In the mid-2000s, he stumbled across a small, sleepy community bank that had earned high ROAs and ROEs for decades. He thought to himself, how on earth do they do that?

As he explored further, he discovered that there were quite a few others as well, and eventually it became clear that these were gems of businesses if they had certain characteristics. Of course, banks at the time were very overvalued because it was a boom time for the financial industry. Nonetheless, he knew the industry was prone to the occasional crisis so he did his work and identified a handful he would love to own—at one-third the valuation, of course.

Four years later the financial crisis hit, and these great banks were babies thrown out with the bathwater, so he got the chance to participate in their high rates of internal compounding at discounts to book.

Now, what does this tell us about the manager’s judgment? First, he correctly identified these banks as quality assets. Second, he had the discipline and patience to wait four years before touching them. Third, he had the stomach to buy them in the midst of a financial and economic panic. These things are all as unusual as they are impressive.

John: How do you define a manager’s investment record and how important is it in your overall due diligence? What do you look for in a track record?

Joel: Over time, we have learned that great investors tend to be more focused on process than on outcomes. So, we try to follow this principle as well. The idea goes that if the process is correct, results will take care of themselves over the long term. Of course, a track record, if presented over a long period of time, is an important check on whether what should work is working. But we have to be cautious about this, as even great managers have multi-year periods of meaningful underperformance—there is a great Eugene Shahan article from 1985 about how plenty of investors with great long-term track records looked mediocre in any given year and underperformed for three or more years in a row in many cases.

If our own investment process works well we should be able to identify great investors even when their backward looking track records temporarily look mediocre—and I think developing conviction in their processes is the way to do that.

A number of years ago, we hired a health care focused manager who had earned essentially market-like returns over the prior seven years, but we understood the reasons for their performance and had enormous conviction in their process and judgment. Subsequent returns have more than justified our decision.

John: How do you make decisions throughout the stages of the process? What are some instances that make decision-making especially difficult/easy?

Seth: For every new investment opportunity, we form underwriting teams of two to four people. They work together to establish a due diligence plan with appropriate checkpoints to keep the rest of the team informed. If we want to proceed forward on something, we put our thoughts on paper into an investment memo that describes the investment manager, our reason for investing, our concerns, our sizing calculus, our due diligence, and anything else that might be relevant. This is important because we want to have a very transparent process that provides plenty of opportunities for the rest of the team to give feedback, ask questions, and debate points of disagreement.

Ultimately though, it is the underwriting team alone that makes the final decision to make sure we avoid group-think. I meet every manager, usually near the end of process, and technically can veto the underwriting team’s selections but that does not happen very often. The underwriting teams have imposed a pretty rigorous process on themselves to ensure that the things that make it through our process are compelling.

Honestly, we do not seem to have a lot of easy decisions. That may be because there are shades of grey in every decision for us to argue about. Even if we don’t argue about the soundness of the decision itself, we can still argue about the sizing of the decision or what red flags to watch out for or the appropriateness of the fee structure.

The other thing that adds complexity is that we tend to focus on managers earlier in their careers so there is less evidence to examine and we are always going to have to make a judgment call on the future potential of the people involved. For example, of the last twelve managers we’ve hired, eight founded their firm in the last two years.

John: What are the attributes of exceptional managers/firms?

Joel: We try to be humble about thinking that we can crack the code of what makes a firm exceptional, even though we will spend our whole working lives trying to do it. We have developed our own, constantly evolving, always imperfect view of what constitutes an exceptional investor based on many years of working at it.

If you define an exceptional firm as one which achieves outstanding returns over a very long period of time, one trait they all seem to have is that they view investing less as a job and more as a vocation or a form of self-expression.

There are a lot of nice side effects that you often see from people who come to investing this way. First, they tend not to take a cookie cutter approach to investing or try to cater to what they think allocators want, but instead spend more time tailoring their methods to their own personality and what works for them.

For example, with the manager I mentioned earlier who studied small community banks, he realized that the intellectual engagement of identifying great assets regardless of price, adding them to his list of things to follow, and then waiting for a crisis felt natural to him, and leveraged the skills he has that are most uncommon.

Second, if investing is someone’s passion, they are going to be thinking about it in the shower, on the subway to work, etc.. Most importantly, their efforts are going to be sustainable. Time spent working is not a sacrifice, but an indulgence. Those who pursue investing for intrinsic reasons seem to keep performing at a high level for long after those who were in it for the money.

John: Seth Klarman is quoted as saying, “Value investing is simple to understand, but difficult to implement. The hard part is discipline, patience, and judgment.” How do you define these elusive traits—discipline, patience, and judgment—and how do you recognize them in a manager?

Joel: These traits are hard to define, and if you asked different people on the team I’m sure you’d get different answers. To me, discipline means a willingness to keep one’s standards incredibly high across an organization—in hiring people, making investments, and making business decisions. Patience is a willingness to forgo activity today in order to end up with better results over the long term. Judgment is the ability to conquer the behavioral side of investing, think clearly in terms of probabilities, identify the key variables, and weigh difficult tradeoffs.

Given the amount of time we spent with managers analyzing their historical decisions and talking about companies, there is generally a good body of qualitative evidence to make a reasonable judgment along these lines. One thing to look for is whether the manager has worked to create an environment, structure, and set of routines that enable them to be patient, disciplined, and to exercise good judgment.

The great investors seem to design their whole operation with these things in mind—from the people that they partner with, to the way they spend their time, to the things they focus on in their letters, to the way they set the organization’s culture and habits.

John: You have talked about the need to “identify and underwrite the competitive advantages that allow sustained outperformance” of a manager. What are some examples of such advantages?

Nate: Bill Miller’s categorization of competitive advantage is a sound framework. He offers three with which you are most likely familiar: informational, analytical, and behavioral. I might add to that list “structural”, which serves to reinforce an investor’s ability to leverage their behavioral advantage.

For example, access to stable capital is a huge tailwind to an investor’s ability to be patient and disciplined. I’d also note that competitive advantage may be derived from the accumulation of many small advantages thoughtfully linked together and executed well. This is in contrast to what you might find with an exceptional company that operates with one big competitive advantage—for example, a cable operator that benefits from a regional monopoly resulting from the local ownership of privileged physical assets.

Larry Pidgeon of CBM Partners is an example of an investor we really admire whose competitive advantage came from a long string of small advantages. Before starting his partnership Larry worked with Lou Simpson at GEICO. He was someone whose many years of experience had given him a deep reservoir of accumulated knowledge and wisdom about businesses, which complemented his even temperament, thoughtful and methodical nature, and instinct to behave in a highly principal-oriented way, as if all the capital in the fund were his own. None of these may seem so unusual in isolation, but together they create a powerful advantage.

John: Do you prefer generalists or specialists among your managers?

Seth: It really depends. We try to think carefully about where the competitive advantage might be. Sometimes the generalist has the competitive advantages and sometimes the specialist has the advantage.

If I think about the biotechnology sector, I am pretty sure I want to work with a specialist because the industry is complicated enough that focused expertise and analysis can be of real benefit.

For a distressed debt manager, on the other hand, we would typically favor the generalist because this opportunity set is created by distress and fear that could arise in any industry anywhere in the world and there would be a benefit to being able to allocate across a very wide universe.

John: How do you approach your manager relationships?

Joel: Once invested, our primary objectives are continued learning, relationship building, and trying to help our managers achieve their goals.

On the first point, while we aim to do most of our work upfront, we tend to find that great investors evolve in interesting ways and so we continue to learn a lot—both from them and about them—after we invest. A lot of this is work we can do on our own—for example, by learning about companies they own, or by reading the books the manager recommends to us.

In terms of relationship building, we are working to build the kind of trust and open dialogue that can help the partnership withstand difficult times. The emphasis on helping our managers achieve their goals in any way we can is another implication of our multi-decade partnership mentality, because we believe that working really hard to be great partners can expand our managers’ moats and make a difference to their long-term performance in a modest but meaningful way. This can be anything from using the MIT network to help a manager solve a problem to structuring our interactions differently in order to minimize disruptions to their productivity or thought process. Usually of course the best way we can add value is if we just get out of the way and let a manager do their thing, and we’re happy to do that too.

John: How do you decide when to part ways with a manager?

Nate: This is a very difficult part of our process, but an important one if we are to fulfill our duty of producing truly exceptional returns for MIT over the long run. Our ideal outcome is to partner with a manager for decades, but this isn’t always the case.

First, we make mistakes. We have to be brutally intellectually honest with ourselves in recognizing our mistakes and seeking to learn from them. We have an internal culture of transparency and open debate in which the entire team has exposure to all managers across the portfolio and can identify where we may have weaknesses so we can have an open debate about them and take action if need be. Firms also can evolve. Our ongoing relationship and monitoring efforts evaluate an investment’s evolution relative to the expectations we established during our initial underwriting.

Competitive advantages can erode, key people can depart, small stresses can develop into considerable issues, and incentives can change. We are mindful of these shifts and must create sufficient pressure on ourselves such that we are always raising the bar of exceptionality within the portfolio. In a recent example we parted ways with a manager because AUM had more than tripled since we invested, and we felt their competitive advantage depended on being small and nimble.

Advice to Emerging Managers

John: What is the best preparation a manager can have before starting to manage other people’s money?

Seth: One perhaps obvious thing that we have noticed is that it is helpful for people to have a good mentor. Good mentors are thoughtful people who are motivated by a desire to help you grow and succeed, and generally don’t have a vested interest beyond that. This makes them likely to give honest feedback and invest time in helping you.

Some people start naturally with a mentor because that is how they were introduced to the business but others have to proactively search them out. From our vantage point it seems like the people who have spent the time to find a good mentor have found the effort involved to be very worthwhile. In some cases, we have been able to provide introductions of experienced investors to younger managers to help create a relationship.

John: What are some common mistakes you see emerging managers make?

Nate: The most common mistake we see is when an investor makes small compromises in the early days of the partnership in ways that limit future success.

These seemingly small compromises at the outset compound over time into considerable stresses, which are prone to fracturing at the least opportune times. People compromise on the quality of their LP base, unwilling to turn away the wrong investor. Start-up managers sometimes have the misguided view that they need to be all things to all potential sources of capital and compromise by adjusting their strategies to investor demands.

We also see investors give away economics in their business in seed deals in order to scale-up as quickly as possible. We’ve observed that almost all the very successful and established firms we work with turn away large amounts of capital—they even did so when they were small, by the way—because they understand the need to apply the same high bar to their choice of partners as they do their choice of investments.

John: What is the biggest misconception emerging managers have in terms of attracting institutional capital, including from MITIMCo?

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