Anne-Marie Peterson - The Capital System - [Invest Like the Best, EP.364]

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1:23 To learn more, visit psum.vc. Mm. My guest today is Anne Marie Peterson. Anne Marie is an equity portfolio manager at Capital Group, a storied investment firm managing two and a half trillion dollars. and getting ready to celebrate its centennial anniversary.

1:41 Henry is a seasoned investor approaching three decades in the industry, with nearly twenty of those years being with capital. She has become an expert in retail and restaurants and many other sectors and shares her thinking and strategies in those areas. We discuss her people first approach, simplicity as a criteria for investment, and the idea that the best retailers are cults. Please enjoy this great discussion with Ann Marie Peterson. Right, where to begin, I feel as though we talked about this last time we talked, that capital group is such

2:11 an interesting place and culture with so many investors who are so good who have been there for so long. It's a little bit opaque from the outside looking in. And so just to set the stage for the rest of our conversation, can you give a description of your personal setup at Capital Group? What do you invest in How much money do you manage? What's your team like

2:30 The context that you live in. I think would inform so much else of what we're gonna talk about today. Capital Is very special. We're about to celebrate our hundred year anniversary.

2:42 And we have two point five trillion that we invest on behalf of our clients. And most of that is equity, but we have a large fixed income business as well. But what's special is In an industry that hasn't scaled. Most don't scale.

2:55 And most don't endure. Capital has. I know you're interested in companies like that. I'm interested in investing companies like that, but Capital itself. Is sort of a case study.

3:07 Exactly. Deeply special. And so Why is that? There are a couple reasons.

3:13 The first is our founder. John Lovelace. His father founded the business in the thirties. He was investing right after the great depression. He came to Los Angeles.

3:24 After the Crash. T. Basically launch investment management firm. The son came along, John Lovelace.

3:32 who really took capital to where it was and his interest. He wasn't a star. He was interested in assembling it a collection of people. that were different and distinctive. Women and men to manage money.

3:46 And he was really good at Assembling teams. trying to figure out like who's great at what. Where they shine, so it was really never about him. It was always about a collection.

3:57 individuals and then empowering them and giving them freedom. A lot of investment firms are the star manager who's outraising money. This in our DNA, you go back to the very beginning. It's not that and that DNA persists. It is not a star system. And the second thing that the family did is The Lovelace family gave away the firm.

4:15 to the employees. And so We were privately held. The employees our shareholders.

4:22 And so we are owners. It wasn't concentrated. At the top. And it's still very diffused. So I think those are really important.

4:30 spreading the wealth and like thinking about the team and then It's the culture. And so in this culture, it's really One, you know, the shareholders, the true north. And we have this history of evolving.

4:45 our products and how we do things and how we even structure investment process and the roles and the teams. to address that, which is fascinating. Every seven years the firm looks at how can we raise things up a little bit. You know, we purposely. put stress on the system to ensure that it's fresh and we're addressing that. Then there are just some core principles that are easy to say, really, really hard to do. long term in everything. It's even when we hire somebody, we give them a long time. We think it takes a whole cycle to figure out.

5:15 How somebody might invest. That's how we approach our investments, our average. Holding periods four years. Many of these companies we've helped for much, much, much, much longer. And we've known them. And then it's really all about the people.

5:29 We hire or a person that we think. But it fits. Culturally we're balancing the individual and the collective. So The people we hire, you may start covering as an analyst one industry. But

5:41 If we give you something else, if we think you're, yeah, that person's really not great at turnarounds, that industry's turnarounds, let's let them try something else. So we try to give you a lot of different experiences to see where you shine. And the more reps we get with people, the more precise we can get at putting people into positions. To shine and then The last thing I'd say is multiple perspectives. This whole system is designed on individual freedom. but also the team and your responsibility to the collective.

6:09 You get to do what you want, but you have to share why you're doing it and you have to share why you're not doing it. And then we invest across every asset class from small cap. Income. So you have like PMs with like a lens of different mandate lens or different regional runs, and then you have analysts with different

6:25 lenses across different industries. The analysts are organized in industry clusters and some PMs are in that where they travel together. Anybody who covers something in the industrial complex, they travel together, they see companies together, they push on each other's ideas. And then the analysts manage money out of the gate. They manage twenty percent of the portfolios on average.

6:44 And Once you're up and running, you manage the portfolio. And the PMs manage eighty percent. So the analysts are sort of like the Menu and the PMs. or the leverage. And so for something to get big in the portfolios.

6:57 My colleague Martin Rum always says. multiple people have to arrive at the same conclusion from very different perspectives. The other thing I'd say is we have these long term relationships companies you can Okay. since we've been around so long, it was recently from the nineteen thirties. Meeting with the

7:12 Dow. Ages ago and I brought The analyst report from like the forties. And just had such a fun. We have these long heritages. with companies and when you're the analyst covering a sector, I was hired to do retail.

7:26 You almost look at it like you're the ambassador for capital to that sector. And there's a handoff of on the relationship, and then you hand it off again. That's capital and the way that people are incentivized. All ties back to the behavior. But we want

7:41 One way that I think I evaluate cultures is what are like the practices. that you have that are special that reflect your culture. That are weird.

7:50 For us, we have retreats. We retreat a lot. I mean, to the point where sometimes people are like, Oh my gosh, rely on another retreat. Some of them are fun heavy, but What we really want to do, the whole point of that is get to know each other because people are here their entire careers.

8:06 And to have these types of conversations to kind of unlock people. You have to build trust. What we are doing is you're just gonna be wrong. It's part of the job. You're gonna look stupid. So you have to create the conditions where people can challenge each other when you're it's okay to look stupid. It's okay to feel like you're selling at the bottom or buying at the top. You have to

8:26 spend time together and like each other and have to have these conversations. And we celebrate each other. So when you join your first retreat. Someone has picked. To tease you through A video about you.

8:39 Or your life for me, and I was shocked they called my mother. And recorded her and asked her to tell them all these stories about Me as a child and my mom has no filter, so it was Well they're humiliating. But it was fun. And so we have fun with each other. And we do that for five year anniversaries, 10 year anniversaries, 15 year anniversaries.

9:00 twenty year anniversary. So there are these rituals of celebrating The individual Yeah, their accomplishments. But they always involve some teasing. We can't take ourselves too seriously.

9:13 And I feel like this system People don't want to leave here. Even my friend Dina Perry was managing when she was seventy five. She went through two cancer treatments and calling in from chemo like Saying what she thinks what we're missing.

9:27 She's a deep contrarian and She was one of John Lovelace's people. She immigrated from Israel as a child and ended up as an economist at IBM in a day where there were no women in finance. Yeah. Sean Lovelace found her and brought her here. And she was just just an incredibly passionate, talented.

9:45 fighting against the system. She always wanted to kinda go the other way. But when she got sick And after a chemo, we all flew to New York to have dinner with her and did a special dinner. It's not family because it's a business. But this team element and these bonds. It's so intertwined.

10:03 What an incredibly fun way to be an investor. The stunning colleagues thing is so real there having met a number of your colleagues. To a person it there's this intense passion and curiosity for like the craft of investing. And I think our whole conversation I'll just use as an excuse to ask about some of these particulars. So like one that jumps out right away is running a good meeting with management of a company. You've done this a ton. So

10:27 What have you learned about really effective great. Meetings with company management. And how that's evolved over time through changing regulation, through an evolving industry.

10:39 What's the difference between great and good in management meetings? My colleague Greg Johnson. Pull me aside, he had been in a couple of my meetings. These meetings you can go over any Topic.

10:49 It's important real estate. Use the MR. What are the two things you want to get out of this meeting? What does success look like when we get out of here? Cause we need to translate whatever that is into what's going to happen to stock over the next three to five years. So what are those things?

11:03 Two or three things. All those meetings should tie back to that. So I think one identifying in advance. What success looks like. Almost in my head now I've got the note you want to write at the end of it.

11:16 Another one of my colleagues, Claudia Huntington, who's retired, told me, You know what? Best investors were the best meetings. And you know why that is? It's because they figure out what matters and then use the meetings to get to the heart of it. So one, you have to understand What are the big things that matter here? One or two, and usually it's just one or two for the investment case. There's a lot of

11:35 complexity that goes into it, but you have to be right about things that matter. having strategies to keep poking at it. This sounds random, but I love listening to Howard Stern interviews. I think he's one of the best. At running meetings.

11:49 Sure. Poked. Chris Martin, what's it like to have everybody hitting on you? backs off and then he'll kind of circle back in with a different tap. And before you know it, they're just openly speaking. You want to create the conditions and part of that is just recognizing

12:03 Just chatting here. We're just having a chit chat. What's it like to be you right now, a CEO? Why did these executives program. They're humans. My gosh, this is like a hard lonely job. And what's that like? And so I think

12:18 Just setting the stage for what matters, but then having Some fun. I mean my colleague. Right when? One of the first meetings I went to with him was Little small cap retailer.

12:29 And he walks in the meeting a little late and there was two women and women's CEO. woman I are and a male CFO. And he looks at the male CFO and he goes, Ah. My body double. And it wasn't a compliment, start laughing. So you have to check some humor.

12:46 It was pretty funny. And then the meeting was just great. They opened up about everything, all the problems, but just set the tone. You sometimes need levity and I think that's really important and I think Using the meeting too often, I say, especially with CEOs or the leaders at times of change to kind of understand.

13:06 Why are you doing this? What motivates you? Just simple question. It's powerful if you ask that. It unlocks a lot because we have to understand. The why. And I also think just we're in a privileged position where we're not activists.

13:21 We are long term shareholders. We are their partners. So one figuring out what matters, two Setting the tone, having a little fun. And then three I don't know, there are lots of good ways to get at what matters, but there are also lots of good ways to get it.

13:36 Person. I can't say who it was, but there was a CEO who was running a company and she'd been very successful in like a bunch of other companies. But she was in the situation where it was like kind of a turnaround. And you can just tell. But it was a big job.

13:49 Yeah, I'm sure I know who it is based on the description. I just could feel her energy of tightness. And it was just so different. But I just like Are you Sure, you're the right person for this job. You're so talented.

14:04 You've had so many incredible accomplishments, but You put yourself in a totally different position. There are four time CEOs. You kinda need the right person for the right time. I didn't say that, but I said When you look at yourself in the mirror in the morning, what do you think? Highest and best use or wrong fit?

14:21 And she was just stone silent. And she's like, It's a really good question. I'm contemplating. We don't like making people uncomfortable, but there's a loving way to Wanna see people. I'm obsessed with this David Brooks book. He just wrote

14:36 The art of being seen and seen deeply. Others, and I just think that there's so much of an unlock, but like you can only do that if you have trust. And Our institution has trust.

14:48 And we have these long relationships. I tell the analysts too, look, also these meetings are like dinner parties. There's the dinner party when your like in-laws are over with your parents. That's one thing. There's the dinner party with like college friends. That's another thing. There's different music, there's different seating charts, there's different topics for discussion, there's a different vibe, and there's a different time frame, and there's a different amount of Alcohol sir.

15:11 But you have to understand so if your objective As an analyst, you're in a meeting with a PM and I remember doing this with My holdings, I was like, all right, I get everybody into it, but you're like, okay, now they need to hear it from the horse's mouth. You just ask the three things that matter. You already know the answer. You've done all the work, you've had all the discussions, the PMs need to hear it, they need to ask their questions. That's one meeting.

15:33 Then there's the meeting where like something's going wrong. And in that case, maybe you Plant somebody to ask a tough question. If you as an analyst feel like, Oh, it's too much, can you ask the question about Why did they do that deal?

15:46 When are they gonna cut the cord? So there are even these little strategies, a thousand little details that go into what makes something. Great. At the end of the day, what matters having a little fun. And unlocking the human condition because life's too short not to

16:03 Respect that, appreciate it, acknowledge it. I mean we spend so much time working. gosh, I don't wanna do this if I don't feel like I'm able to connect and Make something Better.

16:15 You're such an interesting almost perfect person. to apply some of these ideas to the current crop of companies that's dominating They're all growth companies, classically. Lots of nicknames. Used to be called Fang, now they're called Magnificent Seven or whatever. As I think about the stuff happening, AI, et cetera.

16:33 If you use the classic definitions, it seems so much like a sustaining innovation, not a disruptive one, because so far It's like Microsoft, NVIDIA, Google and meta are like the four dominant companies that have benefited from AI. In terms of market cap, in terms of what they put out into the world.

16:52 I'm sort of counting open AI as quasi Microsoft. Maybe you could just open ended riff on The nature of these companies, their dominant position, how you think about them from an investing perspective, like they're obviously consensus great companies. And usually consensus is it's hard to earn a great return in.

17:09 at least historically, just riff on this category'cause I'm sure it's like center of the bullseye for the kinds of companies that you care about and might invest in. My simple framework. Very simple. Who's spending money and who's gonna get the money. There's this big wave of spending happening, and there's this one guy who's got all the goods.

17:27 Nvidia's got the goods, the other guys have the demand. And they have the balance sheets and they have the cash flow to buy and they have use cases to get our ROI. Sounds great. For the next couple of years.

17:39 If they're gonna be buying, I know who they're buying from. In video. I don't know if they're gonna get a return. One of our colleagues funny words on state.

17:47 asked this provocative question two years ago and he's like could AI be Asbastos for Microsoft. Wow, that's a provocative question. We don't know how to Microsoft.

17:57 Logically on paper. It sounds good, but I've been in a situation logically on paper where Like we said, they're consensus songs, and sometimes the consensus is right. But what I think is more interesting. What's great is we can own those, but just even on like Google and Meta, I go, hmm.

18:15 Those are advertising businesses. In the offline world Advertising It's a little multiple Cyclical business. Maybe that won't be the case here. And then what's Amazon gonna do now? Amazon's saying.

18:27 Okay, we admit we can't make money in our core e commerce business. Totally a minute. We got this strategy, we're gonna want to monetize it across advertising. So these things go through when you say is digital advertising overcapitalized or undercapitalized? There's an argument it's growing the market, there's an argument there's high returns. Take share, but

18:44 I asked where are the cracks in the Armour? Three to five years from now. That seems less clean to me than backing Jensen, what he's been doing for thirty years.

18:56 And they're dominant position. So then I say, what are the less obvious answers? Which you said, these are already big and dominant uh stat over the last five years, only five percent of the active fleet managed growth. Funds be

19:11 Inducts. Of course,'cause you had to own. All of that. I try to just keep it really simple. Where I feel like I have a degree of

19:19 Just simple understanding. Shopify, you've done a bunch of work on that. I think that's fascinating. This is the time imaginative and have a vision. We want companies to do that as investors need to do that. And it's really fun. And okay, this is a crazy idea, but

19:35 If Shopify wants to be the global operating system for commerce. Are they Microsoft thirty years ago? Microsoft was the operating system for the PC and the enterprise. Mm-hmm.

19:47 How big? Could it be even better? Maybe. Microsoft had to hire the engineers. Shopify has their own and they also have a partner network, as you know.

19:56 that develops product. Microsoft had to ship out the software. It was expensive. Shop if I can update things and launch a product, no problem.

20:06 the global market for IT spending. Enterprise that he's spending is like five trillion dollars for commerce. It's six trillion. And there are plenty of billionaires that have made their money. And retail a luxury.

20:19 So We're just talking about this. Why wouldn't it be that? Shopify has seven billion dollars of sales and a billion dollars of operating profit and I think Microsoft is

20:30 Somewhere in the seventy billion dollars. So Free cash flow. Toby, super special. I mean talks in hundred year terms. It's almost

20:40 Uncomfortable. And then all of his principles. And he's just maniacally obsessed with the customer in this experience in a way that I am not sure. is happening at these other big Company.

20:53 I mean, he's maniacal. You want almost a religious fervor back to culture. He's not about his money. I want the ecosystem to make more money than we make. I don't really hear that from the big tech companies.

21:05 I'm interested in durable. Duration. There's some element of we're undercharging and overdelivering. In every single possible way. I was recently visiting Costco with our analyst to Chin.

21:18 And she goes back to remind me the culture. And so Richard Galante, the CFO, pulls up a video of Jim Sinegal talking about Lori Vanderbilt jeans they got. Nineteen eighty. Their markup's ten percent. So he's like we're gonna sell the Gloria Vanderbilt jeans, you here the price is$29.99, even though they were selling for like 80 bucks at other discounters.

21:37 And it wasn't even a question, but you just mark it up 10%. That's that. That is what I want. I have to trust Is an investor that the management team is gonna do the right thing.

21:49 And not cheat. I watch too many retailers. you know, some large ones kind of just okay to make that we yeah, we deserve more margin. Walmart scores margins went from twenty to twenty five percent. over two thousand to two thousand and ten, even his grocery went from a small part of the business to most of the business.

22:06 Mm. How did that happen? Not okay with that. It just doesn't square. If I had more confidence and the focus on the customer and the

22:16 Willingness to restrain, I'd feel better about the duration. I own Netflix for a long period of time through Epsom Downs just because Basically, I got there with Reed Hastings. It's battle tested and I trusted him. But I have other situations where I know myself now, if I don't trust, I am selling at the bottom. I've done it many times. I have that little doubt, one little thing goes wrong, and I'm like, oh so when I have a little doubt, I'm okay. The great thing about capital.

22:43 Lots of other people have different opinions on these stocks. I'm okay letting others own it. And focusing In my area. We were talking about the last cycle in two thousand. Cisco was the darling.

22:55 I was looking at the two thousand sixco annual report letter. sounded like kind of the day. We're transforming Lands End as their customer. We digitize the call center and it's just really humbling. And who would have thought who created the cloud?

23:11 Not Cisco. Amazon because they were solving a need. And then Microsoft, the big incumbent. Yeah, power of the incumbency. Comes in and Is number two, who is the hardware form factor?

23:23 Apple. Not palm, not blackberry. So I respect that that's probably within those big companies. There are some winners.

23:34 I also think it's Right. Or Loser.

23:38 You have to be really careful. You mentioned retailers a few times, and I remember talking about this in an episode like this with Steve Mandel, who started his career Covering retailers. And it's interesting how many of the world's richest people

23:50 or retail entrepreneurs, it's kind of wild. Like it's very well represented. What do you think it is that is common in the DNA of the great retailing companies or great retailing founders. This is stealing from my colleague Alan Wilson. He said it perfectly and I covered it a long time, but when I was an analyst, we went to see we were women together.

24:10 is after a couple years after the IPO. And we get back and he's great at analogies. He's a creative thinker. He's so fun to talk to. I would pay to listen to him. Talk about stocks and companies.

24:22 comes out of the meeting and he goes Huh, I get it. And the best retailers are cults. This is a cult. And I was like

24:29 It's kinda true. Okay, so Costco. Is Costco a cult? And I mean it in the Best sense of the word. It is because

24:38 All their management started at the store. They don't recruit from the outside. Yeah, corporate. They don't even question the 10% markup. No one does. It's like religion. You go visit that company. It's all stuck.

24:52 E commerce. Maybe someday. They're still way behind. They're killing it anyway. They believe in simplicity. They say, no, we're not going to do that.

25:00 Complexity is cost. We're not doing that, okay? And then I went to see them in Mexico. We went on a sub management there. So I'm actually UK. They all dress the same. They're like in a uniform. They all look the same. They're in like a blue Kirkland button down.

25:15 Even though they don't have a uniform. They all speak the same, they all speak in the same language. There are these rituals. Cults have rituals. They all fly to Seattle once a month. They all been doing this forever and ever. I mean, not much has changed there. But there's just they won't mark up. Gosh darn it, the hot dog's gonna be a buck fifty no matter what. So I think there's this element of cult, even with Home Depot.

25:36 They all have some sort of obsession about the customer. Experience. What they do and why it matters. The way I got interested You know

25:44 tell you the story because this is like another why the cult thing matters. is somebody introduced me to Ken Langone when I picked up the large cap retailers. This is like in two thousand eight, Frank Blake had just come in. I was sort of dismissive. He drove me around. For an entire day.

25:58 To look at stores. And he explained. History. One of the things that happened why Frank Blake was so powerful and he said

26:05 Look. the whole catalyst like we thought we hired Nardelli because we thought we had to fix systems and process, which we did. But the cure was worse than the disease because he added all this complexity and reports. He didn't go to the issue and he didn't understand the culture and the cult. So you stop no more store parties with kegs.

26:24 The lawyers got involved. This was a company that basically hired Ground up like Costco. Employees got stock options. made the average American rich.

26:34 He's like, this is what we do. It's our purpose. It's our customer. It's our employee. We want to give these people opportunity. That's America. Ken's from an immigrant family. It's America. We have to give opportunity. And He said Nardelli Was abusing this, and he said, Bernie Marcus had this bad experience with a dishwasher delivery at one point. He was getting upset. And he basically called and said

26:56 He's abusing my child. We always stand by our product. He doesn't get what we're doing. It's got to stop. He's got to go. So Fred Blake comes in and he recognizes he knows nothing about retail in a stack of a hundred resumes. You've never pick him for the job. He was hired by Nardelli. He was like a lawyer GE. Doing MA bad deals for Mardelli. And he said

27:17 First thing we're gonna do is have Bernie come back and talk to us. Second thing we're gonna do is throw the stores at Keg party. What sort of freedom do we want to allow, even though some maybe some bad stuff had been happening with that? And then the third thing we're gonna do is we're gonna start bleeding orange again. Bleed orange, they have a motto.

27:32 He had something to tap into. It was latent. Was waiting for Superman, it was just there, it just needed a leader. Can come back in and say I get the magic. Or Delhi did not. And he was able to address all those problems.

27:46 through simplifying, through focusing on a couple of the right things, through unleashing the culture. But I think retail An industry where you have a clear customer. You can see them. And you have these store employees, so you have to mobilize them to care about the customer.

28:01 In a corporate, if you can buy properly and like be disciplined on the values. When you do that, there's just such loyalty and persistence. There's a habit in going back. And then you earn the right, you have trust to sell the other things. So can compound. And retail is the classic flywheel. Comps one year.

28:21 for money to invest in the value proposition, which means widen your get the value gap of the next year. Your dominance just grows. So it's a classic compounding. But you have to stay true to the discipline. And the people are really important, you know, you and I had a discussion about like the people versus the culture, but the leadership sets the tone whether you can unlock the culture or use squelch it. Then just open up stores kind of grow. There's a habit element and we met with um

28:48 Mark Casey covered my colleague was he did the internet company, so he covered Amazon and I did the retailers. And like during this time, we're figuring out, okay, wait, Amazon might be. poison to retail and there might be really something big here. We were visiting the companies together and We had this meeting with Jeff Bezos that I'll never forget and this was in Two thousand and

29:08 Ten. Mark said, I don't mean to be ungrateful, but I understand given how great this is. Why your retail business isn't growing faster. In these new categories. And Basis said to him, Let me tell you something.

29:21 Habits are really powerful. They take a long time to change, but when they change They're very Hard. To disrupt.

29:29 We're working on changing habits, but when they do, they're gonna stick with us. So Be patient. There's a habit in these retailers and Costco.

29:39 And they have earned the trust of their customer. Pay to shop in a warehouse. With a limited selection. They can do anything almost. They're just so disciplined. So when you earn the trust, you just kinda keep

29:51 Getting more and more of the pie. And The bigger you get. The easier it is to Bro.

29:58 In some cases. Can you tell me a little bit about what you've observed Obviously such a tech. Dominant. couple decades in markets.

30:07 comparing the dynamics of the tech market and the growth tech market to that of healthcare, which is seems to me like the other big Behemoth on the Cum, also some just huge companies there already. If you had to compare and contrast those two sectors, what have you learned? So well what's interesting about healthcare, I'll give you the kind of the healthcare narrative.

30:26 Having watched it for fifteen years and our analyst Rich Wolf and Chris Lee and Songding, and we have this really amazing healthcare team that has like this long history. covering the industry. So Anytime I got my

30:39 Expertise zonum. copying from others of capital. But what's fascinating to me about healthcare is you have payers and you have regulators. or regulation that basically they can be inhibitors to or accelerants of change. Unlike tech, you just need a new product.

30:56 Go. adoption happens. That's Something to respect. But it's fascinating because what you've seen and I'm gonna go back through the history because

31:05 I think it helps us understand where we are today and the potential opportunities is when the HMOs came to like Place B for service because healthcare costs were out of control. The payers had the power. And the government sort of accelerated that with Obamacare by

31:20 Medicare advantage all these HMOs basically control Who got access to what and may keep the spread. So First place they go. Hospitals are the biggest chunk of healthcare. It's forty percent of healthcare spending. And that was egregious. The first place they go is they just cut the hospitals, the volumes, the price, go to outpatients, like whack that.

31:40 And that heard the hospitals, suppliers, the med tech companies. hospital started employing doctors and consolidating and so the Med Tech companies their pricing was pressured, their volume was pressured, and so a lot of just like needless activity was coming out. But it really Crushed.

31:55 The hospital industry and the med tech industry. A couple companies within that emerged and got stronger, HCA. Is hospital. That stocks like Been a twenty five percent compounder for a decade. Hospital.

32:08 Because they dominate these local markets. And then a mental. Boston scientific, the industry structures improved. There's fewer and they have more power and they're innovating and they're solving problems. So now pharma, where's pharma? It's 10% of healthcare spending. And they take a lot of risk.

32:23 We have twenty percent of sales is R and D. We have all these pipeline cliffs. And the government's like always pressuring them on price on me too products, but pharma's also consolidated. And now innovating, which is really interesting because Eli Lily.

32:37 with the GLP ones. Obesity, other diseases. Alzheimer's. I mean it's pretty fascinating and unlike other drugs in the past. There's a moat for generics, which is

32:49 the manufacturing. It just makes no sense for a generic company to try to they can't invest or copy. And even Vertex and their cystic fibrosis business, they've got a process that you know lots of generics have tried to copy the drug and can't. So they've held on to that cashless stream after. the patent window expires and then they're investing and they're creating new things like pains. So What I think is interesting about that is Pharma is such a tiny part of the pie.

33:14 And they're actually now Preventing Up front. There are these drugs that are emerging that Can solve lots of problems.

33:22 Up front. And they have the long, a sure tail of a patent. Without generics. And possibly Addiction.

33:31 Alzheimer's or other applications. So Eli Lilly, I know you've talked with my colleague Carl Quadge about it. He was the first person to tell me about any of this stuff when it was just emerging. Yeah. His superpowers products. He's walking around the office right now with the Apple Vision Pro. So he just picture it.

33:49 Yeah. What I think is interesting is I just wonder in healthcare. If some of the dynamics that played out in tech. Fewer, bigger, stronger. And these dominant platforms aren't emerging. Eli Lilly has Lily Direct. We just saw them like a month ago. That's fascinating.

34:06 It's so fascinating to me. Why does United get to decide who gets the drug? Government can do whatever they want. They can contract with Lily. United built optimum health so they could like hedge their HMO business and leverage that. I don't know.

34:19 What are they gonna do with all this capital? It's crazy. I mean And they've been working at this for a decade. A decade, you know, a decade ago, they were at twelve times earnings and Pfizer was at twelve times earnings. They've grown a ton, the multiples higher, Pfizer hasn't grown multiples lower. It's just a reminder of within a sector what's mattering.

34:38 over long periods of time there can be these divergences. So what I say is I just wonder if there's a pocket within healthcare, it's like firm is now striking back. Scale might matter. It wasn't a biotech. Back to the power of the incumbents. You'd invest these biotech companies, it's sort of like well, we hope it hits, we hope it passed this trial, that trial, that trial, that trial.

34:57 It's really hard. So If anything My view is This of course could be wrong, but just to answer your tech question.

35:08 There were dynamics that let the big get bigger. Like in social media with Facebook and Google, you needed scale. The bigger you were. that enhanced the social media experience, the search experience and investment like it

35:21 Think it might be happening in pharma. It's really interesting. But I don't know. I'm out of my league. What's interesting too in healthcare like tech, you know, everybody worries about regulation.

35:32 Oh God, you would government cannot let them do this, or they cannot do that. And healthcare is like the government's united's customer. The government can decide here's what we want to do. And We've seen that happen.

35:45 United was an incredible investment for a long period of time because they had multiple waves of growth and the government was supporting it. Big farm is more interesting than Just as a broad statement to me. Than big tech. And this is back to the imagination.

36:01 You know, what's what's Lily gonna look like? If I were running Lily, I would Definitely be figuring out how to invest my winnings. Into having more control and power.

36:13 How much do you think about power in investing Especially versus other things that you've talked about like culture. I know you're a huge believer in great cultures and people driving long term outcomes. And that's definitely true. How do you stack something like that up against the source of power for a business?

36:30 Visa has incredible power. I've never heard a word about Visa's culture like They may not have one. It's like business perfected. And so you don't need a good culture.

36:40 So what trumps what? How do you think about the role of power in your investing? Well, I think it's yes and I'd say I think the power dynamic matters a lot. in an industry.

36:51 I mean, look what we saw in tech, you know, Apple decides They change the rules. Any FA and all of a sudden like Facebook. and snap after we figure out how they're gonna target their customers. Have you understand that simple point of who has the power?

37:05 I personally underestimated. The power. that that ecosystem and that hands that head on. It's the mall, it's the device, they have the power. They can say yes, they can say no. I think it's an and.

37:16 The thing that's interesting to me about Visa And why after the crash, the growth stocks went up, they went down. And then I said, okay, what have we learned the last decade? To your point on this, really made me appreciate power. We've had a hundred meetings with visa.

37:31 Nothing's been particularly like Wow. Inspiring or Magical. But what we have seen is we've seen payments attacked.

37:41 from multiple different angles. I mean every angle you can imagine. And what happens to Visa? Absolutely nothing. They're still relevant, they still grow. In that case, that's enough for me. I've learned and it's a little as

37:54 Yeah. become a little softer about rigidity around things and flecked a little and I've done a lot of that as a PM over the last couple of years and One thing I do feel like I underappreciate and what I'm paying more attention to.

38:09 Is the past is a predictor of the future. They've been battle tested. That's worth so much. A lot of people look at the future say, Well, how fast is it growing? Well, these debates. I say I don't care if X is growing slower than Y.

38:24 I'm gonna pay more for the history. I've seen that company battle test it three times, emerge stronger every time. Into it. synopsis, cadence, like those companies were all born in the eighties. Microsoft tried to kill into it tons of times.

38:37 They're still thriving. There's something There. Yeah. Suggest.

38:43 Power. And I do appreciate when the power dynamics are changing. I think back to the healthcare thing. That just matters. Have you read that book, Seven Powers? You have to sort of

38:54 Respect it, watch for it. Look for it. The luxury goods companies I don't know about The culture, yes, it's like all magical or whatever, but

39:03 These brands have been around since the eighteen hundreds. And you can't disrupt. As long as they're managing the scarcity and the desire. Nike versus Hermes. That question.

39:15 terms of duration. So that brand power is really rare. Costco has power. Over their supplier,'cause they have two SKUs. You know, I love it. And they advocate they use The force for the gut.

39:27 They can't coke out for a while'cause they have Kirkland. They have private brands. They have their own factories. They have their own chicken pack. I mean it's just crazy. But they wield it for the customer.

39:38 I mean, I can't say I think Visa wields their power for the customer. Yeah, it's just an incredibly elegant business model and they just let it be. You've never heard of a Visa alumni. Like you're never like oh he used to work at Visa, now he's starting this company. I mean No, that's right. It's like not a thing. No, it's totally true.

39:55 But back to simplicity, I do think That's a story that's just never changed. Around the edges. For a while I was like, Oh, let's own MasterCard. That MasterCard was more interesting because the management team and it

40:07 Actually, it's the same thing. Don't overcomplicate it. What do you think are the biggest categories of mistakes? made by analysts versus portfolio managers. Well I think the analyst

40:22 Get attached. to their ideas. One of the beautiful things about our system is It's an inverted pyramid, really the analysts are like the intellectual capital. they're kind of the kings and queens because they see the industry, they kind of can see the future, they come up with ideas.

40:36 PMs just What do I know about? this new technology, but I have pattern recognition about people, about business models, about growth cycle phases. So I think where the analysts can go wrong is we get led to an idea.

40:48 You go out there, you have to say to the PMs, We're doing X, and there's just this human aversion to being wrong. Especially publicly. Seventy some odd people in our group. You decide you're selling something Program was a mistake I made a long time ago when I was an analyst, you come in and you're like

41:02 Guys, I know the idea is to buy low and sell hi. Here we are. We bought high and we were gonna be selling what's gonna be look like low, but you have to come in and admit you're wrong and people don't wanna do that. And because it's just really, really just psychologically hard. back to like the culture that we try to create and the space that we try to create for you know mistakes. So I think that one just The mistake is even when you know you're wrong.

41:26 The cycle time to admitting that, you need like multiple data points. It's sort of death by a thousand cuts, and then it occupies your brain power. And I think often it's web For me. Went to a person. And it was like no, but that person's so great. I can't be wrong. That person

41:42 I think the analysts are slower to recognize change. That is bad. for the thesis. It's just the nature of it. But it's okay because there's friction back to this concept of friction, there's friction to buy an idea.

41:55 And there's friction to sell an idea because when you buy it, you have to come in and say, bang, this is what we're doing. And when you sell it, you have to come in and admit your To a lot of people, it's not just Patrick Anory Capital Management. It's a big thing.

42:07 So I think that that's hard. And I think also that's number one. And number two. Not seeing something for what it is. Miscategorizing it something. But what it is. I've seen it in multiple cases. I was very guilty of this.

42:22 The off pricers. One of the PMs is like, Oh, these are great businesses. I said no, the math does not work. The spreadsheet map. Because you missed The vision what's happening. department stores are this big they buy their goods from the department stores that they don't want and they resell it.

42:36 For the stocks to work, they have to be as big, if not bigger, than the department stores. What I was missing is they were becoming the department stores because they were getting their own goods. They were upgrading their stores. I didn't see it for what it was. And so I had a stale voice over. Things change, companies change, positions change. Sometimes it's just lack.

42:55 Of imagination. pushing yourself in as a PM. So many mistakes you make. Misunderstanding early just kind of rising tide lifts all boats. to

43:05 There's something special happening. getting caught up in the fray. I think also PMs I've definitely sold at the wrong time because I've given up. on something and I don't understand it as an analyst, PM, you're going through a middleman, which is really powerful. And then there's no friction. 'Cause you can just sell something and move on. You don't need to publicly admit your Mistakes.

43:26 And I think PM's Yeah. Bases. I have not owned Google because I'm just

43:32 Advertising saying the same thing. Advertising is a low multiple cyclical business. It's just like missing a point. And also being afraid, sometimes distinguishing this is the other thing on valuation with PMs. This is my view on valuation. It's a price quote. It's telling you what you need to get right. If it's ten times earning and saying there's something wrong with the quality.

43:52 The duration, the rate. You're really paying thirty times and if it's 50 times earnings. So often there's something that's really it's either gonna earn a lot more, just the rate and duration is longer and the quality is. greater. And so I think PMs have these shorthands to like We don't know. So we're like okay, I'll not look at that. I'll not look at that. I'll not look at that too expensive.

44:13 Interesting cheap. So I think Using Valuation as an excuse to own or not own something at extremes. It's brought with error.

44:24 Can you do the same thing you did for retail for restaurants? Well, what's interesting is The restaurants are different from retail because they're very hard to scale. Why is that? It's because the labor and the customer experiences happens at the unit level versus corporate. Corporate, you're buying inventory. You're allocating it to stores.

44:44 a lot of the big decisions happen. Yes, you have to keep the stores clean. From on high. getting that right and then adding a service, but you're making the food, you're delivering the food, you're greeting the customer. Restaurants would run into a problem. Actually, my first boss was a restaurant analyst. Did all this primary research for him, but

45:03 You know, we said this is the number where they can't grow beyond because you can't hire that many good managers with twenty percent turnover. grow the units. Retail there are no such constraints. That is something that just naturally can't scale. at a company level. That's why the big ones are franchisees, like McDonald's. You got like a collection of people that have skin in the game own eight units and corporates taking fee for rent and sales.

45:28 They care. It's just hard to get people to care. And so if it's dirty and it's not nice and well lit, the experience bad and the food's cold. It's hard to scale. That is why when Chipotle came along. Oh my gosh, it was really special because you're like, this is the one company operated chain. that's going to be able to scale because you have a founder who's obsessed with this with integrity, it's fast.

45:52 Please address simplicity. He's addressed all the problems in the system. Simple menu. You don't have twenty items on the menu, so Anybody can kind of do it. Inverted pyramid, store managers need more than the district managers. Why do you need a district manager? Because there's a problem with the store manager. So make them the entrepreneur and owner.

46:09 And just incredible unit economics. I mean these things are like ATM machines. The same. And you just like capitalize on the zeitgeist and build this cult like following. So Restaurants are different from retail because it's not as easy to scale. There aren't a bunch of large cap restaurant chains, unlike retail.

46:26 The franchise model's pretty powerful and what Chole has done is pretty powerful too. But the similarities are like real estate matters, store experience matters. But you know, in a tight labor market, it's tough. And what's interesting about McDonald's such an affection for that company. It works everywhere. They have one concept. I think it's sixty or seventy percent of their operating income is from rent.

46:48 They're a landlord, they control the real estate. The others didn't, so that's why they've endured. They had a big insight about like let's own the real estate so our franchisees don't get whipped around. With pricing and we can co invest with them in the experience and now Digital is the mobile ordering.

47:04 is enhancing the productivity and reducing, you know, even those kiosks that you know, need for labor and in a tight labor market. The big the little guys can't invest. They have some external dynamics now that are contributing to scale. But

47:18 It's really interesting. I mean, even with McDonald's, like if you look at all their good ideas, the franchisees have come up with almost like Shopify, how they have that partner ecosystem. They have franchisees this ecosystem and the franchisees are always addicted corporate, no matter how much money they're making. When I used to cover McDonald's, I'd go speak to the franchisees and I knew a bunch of them and they're killing it. And they're just so mad and it's not good enough, but that like tension. Of two owners. With the same kind of objective is unique.

47:48 And love that about it. 'Cause I feel like that's a hedge that they're gonna get to the right decision. 'Cause you have so many eyes on it, almost like our system. For something to rise to the top and the egg mutton to go everywhere. The nineteen seventies.

48:01 By the way, McDonald's is a big breakfast business. Breakfast is a habit. That's like an annuity. I love the time you described spending with analysts. If you had to assign the study of the history of three companies to every analyst that was totally new to the investing business.

48:17 What three companies pop to mind and why? Airmaz. It's a family business, they were disrupted or settles. Yeah. You could have painted a case at the time, they're in trouble. Caterpillar?

48:29 I just think the industrials are fascinating. those things aren't disruptive. I mean, many of those companies have been around. I mean, think about it, their histories, they're like a hundred years. Deer, I mean even carrier. Nineteen ten. I mean, these are enduring businesses that have gone through various iterations, conglomerate spin offs.

48:47 But if you and I wanted to create a Costco, we couldn't with all the money in the world. Real estate, loyalty. We just couldn't. And if we wanted to create a caterpillar, we couldn't. pretty dominant.

49:00 power business, big construction business, and they're kind of like the arms dealer to the Well infrastructure build out. And you've got Kamatsu, but they're sort of behind and it reminds me a little bit of Home Depot and that The analyst is like, look.

49:16 G part to see me. She said there's this tailwind. She's worked with our utility analyst, Dominic Phillips. There's a tailwind from the Inflation Reduction Act. So the market is underestimating the Gene. Plus plus group. They could happen. And at the same time under the current CEO

49:31 Thought since two thousand and fifteen. Yeah. has improved every aspect of their operation. He simplified their products. reduce the catalog of the products.

49:43 He's reduced working capital. reduced the number of factories and simplified every aspect of what they've done. He's simplified and streamlined. So incremental margins Last three years the top line's grown four percent, the free cash flow has grown twenty two percent. Has gone up.

50:00 So there's no disruption risk, you just have a cycle. There's no competition really. I mean, there's komatsu, but like they've got brand loyalty and you've got three big businesses. They have a big power business. I mean, all this AI stuff seeming it's gonna need power. And so there's like a big electricity. There's that redoing of the grid that's probably gonna happen. Rebuilding of war torn. Zones.

50:22 There's a lot reshoring, you know, there's lots of demand. And the companies just become stronger, and they basically've been in the demand desert for a decade. So I hope these companies It enables you to do tough things. Home Depot coming out of the crisis, it can accelerate change.

50:38 I'd just love to understand the history. Two very different kinds of enduring so far, Hermes and Caterpillar. The other one I think is really interesting is H C A. Local monopolies. Yeah. And also

50:51 I went down and saw them in Nashville at the analyst in a couple of PMs and I just think that's Fascinating like the Frist family ownership and involvement in the CEO is Wow.

51:03 He is something else. is a master class. I love these situations where it's like dark. And they invert it. The advantage is The disadvantage becomes the advantage.

51:14 Compounded earnings that fifteen percent operating margins, consistent fifteen percent ROIs and they're a hospital. They have the power. United has lower margins in H CA's markets, lower medical margins. Why? And the specialists they have the facilities. You can't really building new hospitals or patients.

51:32 This being a power, I think they have power. But the history of the hospital industry and like how HCA became HCA, was it the family? Was it luck? How cool would it be? It's top of mind because we're Starting to do more writing.

51:47 in the media business. And I'm thinking a lot about compression. ratio so like this podcast takes whatever The same amount of time to create as it does to consume. But what if it took four hundred times as much to create as to consume? And you can do that in great writing. Imagine how cool it would be to have access to your

52:06 historical notes on a caterpillar going back. A hundred years. And then how amazing that report would be, like the case study report of Caterpillar. with first party accounts and data of the thing. You should do it. It'd be the coolest thing ever.

52:22 You're inspiring me, Patrick. This is like bringing it. Home the capital. We'll go out and say, Let's get expert X and to talk to us about Y or you know. No, no, no, no. The most interesting people are in

52:35 Side and in The room. It's all here. Yeah, three equity groups. There's three different investment management organizations and a fixed income manager. So you think about

52:45 How many people are looking at each sector in each company and then writing on it? For how long? It's mind blowing. I could sit and read, I could just study these companies. I feel very blessed. I don't have the background to go to business school. I started as somebody's secretary just because I

53:01 needed a job and wanted to work live in San Francisco and then I wanted to go to Montgomery Securities. That seemed like a fun place to work. And there've been a bunch of people along the way saw something in me and So Positive words.

53:14 into me about potential and saw you know a vision for me and I just feel So grateful to be here. Like I would pay to work here, you know. I want to say if I'd buy a lot of our meetings at auction, I'd pay for our research. And I Learn so much from everybody here and I

53:31 Love it. And I love getting older too'cause it's like you have more mistakes and scars and I love All these talented young analysts we hire are just paying it forward where you say, I see something in you. You're so amazing. And The system, the whole point of it is just to find out what you're great at. Put you in a spot to shine and believe in you and just belief is so powerful. You're not always right.

53:54 Just even the fact that I get to talk to you, it's not'cause of me, it's'cause of capital. Anywhere. I just feel very, very grateful and I feel like too also our industry active management serves such an important role. in the US economy and

54:08 We're a long term shareholder. That has I think too having like a vision for a company. Is this important. So

54:17 Us is sometimes To them. speaking belief and power into what's possible. And there are just all sorts of like lovely knock on effects too. So At the end of the day, I'm grateful. I get to do what I love.

54:29 You've set me up perfectly for my traditional closing question. I'll force you to zoom in on the category of gratitude. What is the kindest individual thing that anyone's ever done for you. Well, I'm gonna focus on Professional. Just given that's the tone.

54:44 Because if I had to go personal would be my husband, but I'll go to my Professional story. Which is My original boss, John Weiss, who was the restaurant analyst of Montgomery, who hired me as his assistant.

54:55 Saw something in me. And actually he and I just had dinner on Monday. We still stay in touch. thirty years ago, hired me as his assistant and I Made his travel arrangements and marked up old fashioned maps on how he should get to the different restaurants that he was gonna go see the restaurant analyst.

55:11 Go see. Anyway, he promoted me w twice, once to his research associate and I didn't even really want the job. And the second time when he retired, he gave me his job as a Cell sign analyst. And Not only did he do that, I said, I don't want to do this. I wanna go work in a nonprofit. Like I had traveled, I was like, this is not what I want to do. I'm not good at numbers.

55:30 I don't see it. He said. You're gonna be better than I ever was. You've got a lot ahead of you. You're gonna take my job. The answer is not no. Take you to be meet the clients, you know, and so

55:42 Jennyson and Fidelity and all of his friends. And he's like, and I'm gonna be there for you and you're gonna be great. Had he not done that, I had no interest in doing this. But I love what I do. She said, This is what you're great at. Stop focusing on the things you're not great at. You're gonna be great.

55:58 And that's why I'm here. And there were a series of people that have done that. Along the way, my friend Greg once saw something in me. But that was the original act. Of kindness. If I was consistent with my conversation with

56:11 Carl, your colleague, couple of them. If I was young person interested in investing, I would so encourage them to look at capital as a place to be. I mean it's just As an ecosystem of curious Voracious.

56:24 general investors. There's just really not other places quite like it. As I expected, it's been a total pleasure to talk to you and hear about your experience, your ideas, your theories, your curiosities. Thank you so much for your time. Thank you for giving me the opportunity to do this. I enjoy it, Patrick, and thanks for all you do. If you enjoyed this episode, check out Join Colossus.com.

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