Andy Cross: I'm Motley Fool chief investment officer, Andy Cross. At our recent member event
in Denver, Colorado, Motley Fool CEO Tom Gardner interviewed author and investor
Michael Shearn. Michael has racked up an impressive track record
thanks to his deep focus on culture and leadership.
Tom Gardner: Michael is one of my favorite investors to follow. I first met him in at
Conscious Capitalism. He has an incredible focus on leadership principles and culture
and has done a lot of original research in how to evaluate whether you have an authentic
team that's trying to solve an important problem that has long-term prospects that matter vs.
something that might be a little bit more superficial of an effort. I've learned a lot
from Michael, and I look forward to getting to share some of his insights with you today.
The first question I have, Michael, is, could you share a little bit of your journey in
becoming an investor? When did you start? When did it take hold with you? And when did
you really get to feeling that you're in the zone of mastery? I know you're so humble that
you won't suggest that you're there, but, a little bit about the journey?
Michael Shearn: I started to read about Warren Buffett when I was 17. That first spurred it.
And I liked process-oriented things, so I've been doing it for 20-plus years now.
I started off investing in discounts, bankruptcies and special situations. Slowly, I started
seeing this pattern that leadership is actually what I should be looking for. I would say that
I've evolved a lot. I used to look for bankruptcies and have a completely different mentality.
Today, I'm purely looking at leaders. That's how it's evolved.
Gardner: And why did that happen? Was there an "Aha!" moment that you weren't getting
the returns you wanted from distressed equities or deep turnarounds? That can be a very profitable
way to invest. What unlocked focusing on leadership? Shearn: I'd say, I like to invest in chefs now.
I was investing in a lot of cooks. And what happened is that I'd have a lot of multi-bagger wins,
but I'd also have a lot of losses. Over time, you're breaking even. Something about
losses is, in 2008, I was down 40%. The following year, I was up 82%. And everybody thought
I was a genius. And I was like, if you do the math, I just broke even for two years.
I've always liked a certain type of leader. I felt icky with a lot of different kinds
of other leaders. But I gravitated to one, it just took me a long time to get rid of
my old value investing roots. Gardner: Awesome. We'll talk a little bit
more about that. I want to hear the icky qualities that you identify. But before we do,
because you manage money, I know we have a disclaimer page that must be shown. Or, did it --
it was already shown, OK. You were all able to read that insect print, very rapidly assess it?
Good, awesome! You have a really interesting portfolio structure today.
You own, I believe, four or five companies. A very concentrated portfolio.
And you're maybe around 30% in cash. Can you talk through
how you made the decisions to run such a concentrated
portfolio and have so much cash on the sidelines as a money manager? And then, what those companies
are that you're invested in? Shearn: I'm concentrated because there's
just not that many great ideas. I've always followed the concentrated approach. The cash
is just a function of actually, we have a lot of cash on the sidelines. The way we run it,
it's 30% of the portfolio, but we have a lot of cash. It's just dependent on how
the opportunity set is. I'd love to buy a lot of these companies, but they're just not
hitting my target price. I own Shopify, Arista, which I actually got the idea for from Motley Fool,
Appian is in there, and Brookfield Asset Management has been a long-term holding
for me. I'm looking for compounding machines. The name of the fund is Compound Money Fund.
That's companies that can reinvest and grow, that you can own for super long periods of time.
Gardner: I know in 2017, you earned
more than 40%. How much were you in cash during that year to have generated those returns? Ballpark?
Shearn: Over 25% or something like that.
I'd like to be fully invested. I'm overthinking that this cash position was from my fear of 2008,
and not having any optionality. I was fully invested in 2007, and when it hit,
I had to make two decisions -- what to sell so I could buy something else. So, I'm rethinking this decision.
Gardner: I want to talk about each of those
companies a little bit, then really spend our time talking about how you evaluate leadership
and culture. It'll be embedded in your answers, I'm sure, as well. Let's start with Brookfield
Asset Management. Why? Shearn: It was Bruce Flatt. One of my criteria
-- I have a very simple acronym I use, it's IP. One of them is, it's somebody that's intrinsically motivated.
That means that they're process-oriented. Bruce is super disciplined. When I'd read
articles about Bruce Flatt -- and that's how we do a lot our research. We get historical articles.
It'd be articles about him passing on a company when the rival bid $0.50 more.
He had this track record of this extreme discipline, and not being emotionally involved.
What I like about him is, Bruce has $250 billion under management, in a way, and he treats
everyone the same. This is a pattern I find with great leaders. He doesn't differentiate, like,
"This person's important, therefore I'm going to include them." It doesn't matter
who you are, he's going to treat you the same. That makes him very accessible. That's one
of the beauties I liked about Bruce. Gardner: How about Arista?
Shearn: Reading about Andy Bechtolsheim, and how he took his own money to develop a product.
That story is what turned me on. Basically, he funded it with his own money
for years before he actually started bringing outside money in. I think that says a lot.
He really wanted to get a good product before he brought in other stakeholders.
Gardner: I think they were offline for four years before launching their first solution.
What about Appian? Shearn: The other pattern is,
most of these CEOs I'm invested in are introverts in a way.
They think in terms of patterns. They create environments.
When I was reading about Matt Calkins, he's trying to create an environment
where his employees are highly engaged. Kind of the same story, he self-funded it,
bootstrapped it. The one article that, I said, "This is our person," is when he walked away from his
large option package when he was like 23 years old. That told me that he's not motivated
by money. That's what got me really interested to look into him more.
Gardner: We know that story of Jeff Bezos walking away from his big bonus at D.E. Shaw.
He just had to wait a few more months, and he would have had a seven-figure bonus.
And he decided, "Listen, that's not the priority for me." For Jeff, it's the regret minimization
framework, as I'm sure you know. His view is to simulate lying on his deathbed and to
ask himself whenever he's facing an important decision, what will I be proud that I chose to do,
in that moment when my life is towards its end? And he said, "It won't be that
I waited around for four months for a bonus when e-commerce was growing at 1,000% a month
or something extreme in the very early period." He's like, "I don't want to miss those four months,
so I'm going to go." So, you have Matt Calkins at MicroStrategy with a big bonus
of equity, sitting out there and saying, "Nope, I'm going to leave and start my business."
What about Shopify? Shearn: This is one of my favorites.
The reason is because I like CEOs I can learn from.
That's another pattern. And every time I hear Tobit speak,
it changes my way of thinking about how businesses should be run. With Tobi,
I think what got me is that his higher purpose is that he wants to lower the barriers to entrepreneurship.
This is not about a product, this is about making it easy for people to
compete with an Amazon, and being able to do it on equal terms, and also taking away
all the problems that entrepreneurs face that actually causes them to fail. Like the payments,
starting from there. That's a huge problem. He wants all entrepreneurs to be able to focus
on their product, which is going to give them a bigger chance for success. That's very much
his purpose, is lowering this barrier for entrepreneurship. I just think that's a really cool thing.
I do own Alibaba, too. That's one I forgot.
Gardner: Of course, Jack Ma.
Shearn: Yeah. Gardner: What happens for you when Jack Ma decides --
Shearn: I sell. It's just a discipline thing. Yeah, I sell. It's like a chef and a cook.
Daniel Zhang is kind of a cook. He's not the chef. Same thing with Cook at Apple. The thing
about a chef is, it looks like they're not doing much, but if you watch a chef in the kitchen,
it's just those little details that really make the company better. And they have
a different mentality than the cooks.
Gardner: Tim Cook at Apple has been an incredible performer.
He's certainly delivered. But what is it about that that caused you to say,
"Still, my discipline would, even looking back, suggest that I not buy that stock?"
Shearn: I think Apple's gone from being highly innovative to efficiency-oriented. That's
one of my filters. If you look at Apple products today, there really hasn't been insane innovation.
They've kind of made things better or added a couple of features, but there's nothing like
what you saw under Jobs. Not to criticize him, he's just got a different mentality than Jobs.
At Apple, his role was always efficiency, how to make things more efficient.
So, that's what he's doing now as CEO, vs. Jobs, who was, "Let's get great products out there."
Gardner: So, of course, you're not suggesting that someone
couldn't succeed as an efficiency-focused investor.
But why do you focus on the chef and innovation vs. a series of awesome cooks
and great efficiency? Shearn: I think you just have lower risk.
When I invested in Jack Ma, I watched a documentary called Crocodile In The Yangtze. It's out there
on Amazon. This is beautiful, because they're filming Jack Ma when he was a young guy,
and he's talking to a group of 20 people, like, "Our purpose is to raise China,
the small businesses of China on a worldwide scale." Here's a guy being filmed -- he had no idea
who he'd become. It's just something about these purpose-driven people. Their decision-making
framework is way different. When every decision is framed, "how do we make life easier for
an entrepreneur to start a business" vs. "how do we create a product?"
One of the things I look at is, a lot of these efficiency people talk about, "How do we sell
more to a customer?" So, I was looking at looking at GoDaddy. In the conference call archive,
they're talking about selling more products to their existing customer base,
"How can we do that, and if we sell $2 more... " That's a whole different mentality than
Tobi, who comes at it like, "How do we solve the shipping problem for entrepreneurs on
their online business?" It's a whole different viewpoint.
Gardner: Could you give us a checklist by which we could evaluate a leader of
one of the companies that we're invested in? I know you wrote the book The Investment Checklist.
What would be some items for somebody who's sitting out there saying, "I really have no
idea how I would determine whether the CEO of Appian is amazing, decent, or going to
be a problem for that company?" What are a few items that we should focus on?
Shearn: I use the acronym IP. First, I want them to be intrinsically motivated. I have
an acquaintance named Mike Lombardi. He used to work with Bill Belichick. One of the stories
I love that he told me about Belichick was, he said, "If you watch him carefully in films,"
and I'm not a big football fan, but he said, "if you watch him in films, if they score
a touchdown and he didn't feel they did a good process, he would frown. And if the other
side scored a touchdown, but they did good, he would smile." And he always would convene
the coaches after a Super Bowl win to go over what they did right or wrong. He was motivated
by the process. Outcome-oriented is the opposite. These people
are the ones that are motivated by money, prestige. You could simply sometimes google their lifestyle.
It's out there. Gardner: Yacht. The word yacht next to your CEO.
Shearn: Yeah. Most of the CEOs I'm invested in,
some live well. Bruce Flatt is now a billionaire, he lives in the same apartment he's had in
Toronto and New York for 20 years. Hasn't changed his lifestyle. There is a pattern.
Tobi has changed a little. It's more like, if they're out doing the charity circuit,
or the art markets, those kinds of things tell me that they're more extrinsically-focused.
The coaches in football, they're out for a win. They're not going to convene their coaches
after a Super Bowl win and say, "Hey, what'd we do wrong and right?" They're going to go
drink champagne and get drunk. There's something to that.
Gardner: It's pretty interesting how you've traveled around and met with a variety of CEOs.
How do you get those meetings? And what is happening in those conversations? Are you
meeting with them in their office? How do you spend the time that you get with leaders?
Who are a few people you've met, and what impression did they make on you?
Shearn: Good people are accessible. Most people don't go to shareholder meetings.
I haven't gone to Amazon's, but I hear there's like 40 people that go. I have a friend that
goes every year. The thing is, if you find out that they're on a board, and there's another
company there that's presenting, they're not the star of the show, you could go.
They're accessible. Sometimes, I'll send ideas or write them.
Gardner: You'll write an idea to the CEO or investor relations?
Shearn: About what they're doing. Not their investor relations, never. I usually meet
them at the end. Good people are accessible. You can go to Brookfield's investor day.
It's open to anybody. They don't say, "You have to be a certain size." They just say, "Whoever
shows up, shows up." You can have some one-on-one time there. What's accessible.
Gardner: One of the findings of your work that I've shared at a couple of talks in
the past is what you discovered about the impact of parenting on some of the best chefs
in the public markets. What was it that you found? Do still believe that to be true today?
Shearn: I do. What happened is, my partner and I, we were studying the best of the best.
I've been around a lot of CEOs. Their intensity is insane. They're always on. They never chit-chat with you.
They just have this extreme level of intensity. So, we were like, "Why are they
different than others?" I was talking to another CEO, and we had a three-hour conversation,
and he was like, "Well, I had good parents." And it was like, "Yeah, but you're also retired
and enjoying life and traveling." Why is it that that person over there just keeps going and going?
And we kind of stumbled upon it. It's basically,
they've all had very bad childhoods, very traumatic. It's an extreme. All of us could
say we had, maybe, a bad parent or something. I'm talking very extreme. Warren Buffett's
mother would constantly belittle him. That came out, Warren Buffett said, "I have great parents,"
and then when the book Snowball came out, his sister openly said,
"No, she would belittle us, tell us we were worthless." If you look at history, I was just looking
at Pope Francis' background. His mother did not want him to be a priest. In fact,
she didn't even go to his seminary when he was in seminary school. To her dying days,
she did not want him to be a priest. She was disappointed in him constantly.
The other side is, they do have a mentor. It was his grandmother that gave him the positive reinforcement.
They're wired differently. You look at the siblings. Warren Buffett responded
one way, his sisters responded in a completely different way. We just found, if you start
paying attention, Leonardo da Vinci, you name it, you start seeing this pattern.
Gardner: That one of their parents pushed them or doubted them or treated them as incapable
in important ways relative to what it is they wanted to do?
Shearn: Not doubted. I think, there was something wrong with the parent, intrinsically wrong.
Like, they had psychological issues. There was something wrong with Warren Buffett's
mother that was psychological. You can't manufacture it. I can't raise my kids, and one will
become a drug addict and the other one successful. It's got to be sincere. Walt Disney, his father
would walk around the parks and go, "This just shows me how stupid people are,
that they go to this." And Walt put his dad's name in Los Angeles, and the dad was like, "I don't
want my name on this. This is insanity." Gardner: How do you evaluate that with your
five companies? Who are you talking to about that? Do you go directly to the CEO and ask them?
Do you give a phone call to their parents? Do you talk to people around them, their friends and family?
Shearn: I hate saying, unless it's public,
then I'll talk about it, but they all definitely have a function of this,
for sure. I'm partnered with a research librarian, and it's unbelievable what she's able to find.
Gardner: I wanted to talk about that. It's very interesting what Michael did in his money
management practices. Instead of hiring a financial analyst to work with him, who has
a background in studying businesses, you went and hired Anne. Her background, why did you
make that hire? What's the implication of that?
Shearn: The thing about librarians is they're into the fact business. Analysts want their
idea in the portfolio. But with Anne, she just stated matter-of-fact. It was more fact-based,
more rational. It wasn't about selling, it wasn't about a story. It was just, this is
what happened. I think, that different mentality, we can be a lot more rational. She's a great thinker.
I'm a black-and-white thinker. We complement each other quite well.
Gardner: How many companies do you look at a year?
Shearn: We've looked at every publicly traded, but, we have a pass list. We look at them quickly.
When I was reading about GoDaddy, it was on my list, I read a conference call archive,
and I said, "That's all I need to know." We have a very high bar. That's the beauty
of a concentrated portfolio. If you have really high comparisons, you're just
basically like -- and this is a term I stole from your brother -- a Mount Rushmore type CEO.
This is something I learned recently that brought all our research together in some ways.
Gardner: How many are familiar with David's Mount Rushmore idea? Good. Let's hear about it.
Shearn: David basically made the comment, they were asking him about Tesla, and he said,
"Well, he's a great CEO, but he's not on my Mount Rushmore list." And Anne and I were like,
"Wow, who's on our Mount Rushmore list here in our own portfolio?" And we ended up
selling two companies based on that alone. [audience laughs]
If you have better criteria -- I used to call it the perfect spouse theory. The better your spouse,
the less you're looking around. You've got it good. The grass is green on my side.
Same thing happens with portfolio companies. It's a form of comparison. Is this CEO like
Tobi? No? Gone. So, we're able to filter through a lot of ideas based on that comparison.
Gardner: I want to give you a minute just to advocate for Shopify. How many Shopify
shareholders are in the room? Great! Shopify makes up what percentage of your overall portfolio? Ballpark?
Shearn: I think it's 20% now, but that's
been through appreciation. We never sell them. I've learned that.
Gardner: Maybe a little bit about the company, but also maybe dig a little deeper about Tobi,
and some things that you've observed about him.
Shearn: I talk to a lot of the people that work at Shopify. Once we really get to know
a company, we talk to people internally. Little stories you hear about Tobi...
One, Tobi's always trying to ruin his own company. There are these stories of, he goes out into the
server farms and pulls a server to crash the system. Tobi's always thinking about,
how can I destroy Shopify? And in a lot of ways, when you're partnered with somebody like that,
I think good things happen. That's actually how I got to meet him.
I said, "I'm a shareholder," and he walked away from me. Then I said, "Tobi, I actually know how
to destroy your company," and he turned around and started engaging. I had to come up with
something very quickly about culture and engagement. I was like, "Oh, uh, uh, I didn't think he'd turn."
But, he's constantly thinking through this. There was a recent interview that Tobi
did where he was talking about autonomy and what that means. What he was talking about is,
he wants people to bring themselves to work. He contrasted that to Alphabet. He said,
"I'd hate to be Google-y. I'd hate to be in a place where I'm Google-y." Like, on the
Google-y scale. I don't know if you know about Google, but they have this Google-y scale,
how Google-y are you. And Tobi's like, "I just want them to bring who they are."
He creates the environment for that. He has this thing called trust battery.
You've had interviews with him where he talks about it. Basically, when you get into Shopify,
you're at 50%, and your actions and your peers get you to 80% or 90%. And when you get there,
Tobi is like, "What do you want to run? What area do you want to run?" And there's something
very empowering about that. That's why that organization is able to scale so quickly,
grow so quickly, solve problems more quickly. Rather than having the structure, he creates
an environment. That's the beauty of Tobi. Gardner: I remember Tobi telling us that,
like pulling the plug out of the server farm, for example, that they have challenges -- for
the next two weeks, everyone must move the mouse to the other side of their computer.
He just wants to create discomfort, get you out of your seat. John Mackey, move around,
don't be sedentary. Tobi's constantly doing that to all of the people that work at Shopify
to get them to think and act differently than they're accustomed to, or their habits are formed.
My final question for you. You're 30% in cash.
Raise your hand if you're more than 10% in cash. Awesome! So, that's your tribe.
There's your tribe. Talk to your tribe about reallocating that capital. What are the triggers that will
cause you to reallocate it? Is it the finding of a next Mount Rushmore CEO? Or is it about
the market's valuation? What are one or two factors that cause you to say,
'I'm going to cut my cash position in half. I'm going to go from 30% to 15%." Or, out here, we're
going to go from 14% to 7%. Shearn: We prepare in advance, is our whole thing.
We know what we want to pay for a company. Atlassian, we'd like to pay a price that's
40% below, I don't know what it's trading at now, I haven't watched it in the last few days.
But, 40% below what it was when I came into this conference. We prepare in advance;
the decision has already been made. There's a lot of companies where we have these price
targets that we're just waiting for. And when it hits that price... we start at a 5% position,
so it really has to be at a price where we feel we can double our capital.
Gardner: So, you'll never have more than 10 or 12 companies in your portfolio?
Shearn: I'd like to. But it's just a function of, again, opportunities. But, sure,
I'd be happy to have that many opportunities of Mount Rushmore. There's just not that many of them.
Gardner: I recommend Michael's book, The Investment Checklist. It's published in 2011.
How much of that seven years later is current thinking of yours? What percentage of that book has
changed in how you think? Shearn: Yeah, I don't recommend it.
Gardner: That's so good! He does not recommend his book!
Shearn: If you really want to get bored. Gardner: I definitely recommend the idea
of an investor checklist. Why don't you recommend it?
Shearn: I wrote it for me when I was 21 years old, somebody entering the business.
From that standpoint. It's just looking at a business holistically. But I would say a lot has changed.
There were some patterns in there, but they weren't fully-formed beliefs. I think leadership
is the biggest -- leadership, to me, is the one thing that, if you study, you can predict.
It's the only thing that's predictable. The actions that the leaders take today is what
creates value two or three years from now. Tobi doing the shipping, it doesn't look like
a lot, but it's going to create a lot of value down the road once he solves this problem.
We're looking at leadership decisions today. That's where it's changed. It's all about
leaders for me, and less about studying the footnotes and these other things.
Gardner: Well, that book got you to where you are today, and it could help others get
to where you are today with great investment returns and a discipline that has us learning from you.
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