Letter #302: Steve Mandel, Paul Buser, and Rick Buhrman (2025)
Lone Pine Founder and Sator Grove Co-Founders & Co-CEOs | Lessons from Steve Mandel
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Stephen Mandel is the Founder of Lone Pine Capital. Prior to founding Lone Pine, Stephen was a Managing Director and consumer analyst at Tiger Management. Before Tiger, Stephen was a mass-market retailing analyst at Goldman Sachs and a consultant at Mars & Co.
Paul Buser and Rick Buhrman are the Co-Founders and Co-CEOs of Sator Grove Holdings, a permanent capital investor helping the world’s top entrepreneurs, operators, and investors attain the extraordinary. They are also Notre Dame Professors and the co-hosts of the PodClass Joys of Compounding, where they share intimate conversations with lifelong compounders such as Todd Combs (Berkshire Hathaway), Mitch Rales (Danaher), and Jacqueline Morby (TA Associates). Prior to founding Sator Grove, Paul and Rick worked together at the University of Notre Dame Investment Office for over a decade, covering everything from public equities to hedge funds to fixed income. Prior to joining Notre Dame’s endowment, Paul was a management consultant at BCG and Rick was an Equity Associate at Fidelity.
In this wide ranging conversation, Rick introduces Steve and Lone Pine before jumping into the conversation, where Steve discusses his formative experiences, Lone Pine’s early days, the power of duration, building edge through culture, how talent thrives, succession and the Co-CIO model, surviving the platform and passive revolutions, how AI is shaping portfolio construction, valuation frameworks and non-linear thinking, his best life advice, and much more!
I hope you enjoy this conversation as much as I did!
*If you’d prefer to listen to this conversation, you can do so here:
Related Resources
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Tiger Management
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Transcript
Introduction
Rick
For Paul and I, every one of these conversations we're a part of is met with a feeling of immense gratitude to have the opportunity to both share the story of a person we admire and to mine their experiences for something more precious than silver or gold. What the philosopher Baltasar Gracián called worldly wisdom: knowledge, skills and insights that can help us to lead more impactful, more fulfilling lives.
Our teacher today is Steve Mandel, founder of Lone Pine Capital, one of the defining investment firms of our time. And for all you Swifties out there, for the two of us, this one just hits different. For starters, Steve is without question among the most important leaders in the investment management industry. Period.
Consider that Seth Klarman once called him "the best industry analyst I've ever met, who became the best long-short hedge fund manager of his generation." The late, great Julian Robertson, founder of Tiger Management, went maybe even a step further and called Steve "the greatest analyst of all time."
More personally, I first had the privilege of meeting Steve in 2006, and I've been studying Lone Pine ever since. When Paul and I first began writing case studies on investor compounders almost 15 years ago, the very first firm I chose to research was Lone Pine. Incidentally, Paul's first case was Tiger, and during that year we had the unbelievable opportunity to spend meaningful time with both Steve and Julian, as well as countless others in the Lone Pine and Tiger ecosystems.
Now this conversation is largely about the evolution and future of Lone Pine. In my opinion, the magic of Lone Pine resides in the principles that form its foundation and the people that animate its culture. If I had to sum it up with one word, it would be quality. That hard-to-define, but you know it when you see it characteristic that we would suggest is the single most important trait to sustaining excellence in investing and probably anything else.
But to understand the organization, you really do need to first understand its master builder: a man of unusual integrity whose reputation across every dimension of his life and at every chapter of his life is so consistent and compelling. When it comes to investing, Steve has an infectious Buffett-like love for the craft, and he's someone who seems more rooted in an orientation of service than maybe any investor I've ever met.
And I'm going to give you my hot take up front, even though I usually don't do this and you may not necessarily be asking for it. I think the investing world needs more Lone Pines. And what I don't mean by that is that we need more fundamental long-short equity managers or anything. I mean we need more organizations that are purpose-built for excellence, forged out of first principles and not just following market conventions, designed to endure and thrive for the long haul in service to others.
And to have more Lone Pines, well, we're going to need more Steve Mandels. Founders who are willing to be iconoclastic, borrowing bits and pieces from others they've learned from along the way, to be sure, but then architecting something so personal that they are literally the only one that can possibly bring it to life—an act of self-expression more than anything else.
Founders who see themselves as stewards of their creation, protecting and perpetuating a firm's ethos, its very soul, who from day one are practicing something like what the Greeks called kenosis: the creative act of self-emptying. And one of the great paradoxes to this story, I think, is that from day one, Steve deliberately architected Lone Pine so that it would always be about more than just him. And yet the firm's DNA, its very essence, the qualities that make it so singular, are, I think, the same defining characteristics of the man who founded it nearly 30 years ago.
Now, beyond Lone Pine, we also discuss a number of other topics, including the value of having heroes and mentors, and more generally, how relationships can enrich an education and a career. We talk about the art of doing great research and how it's evolved over time. And finally, what is important when investing in periods of accelerated change and specifically in relation to the current rise of artificial intelligence.
I'm so grateful to so many who have helped us prepare for this conversation, including Didier Payne, Kevin G., and many from the Lone Pine team, especially to Celia, Carrie, Dave, Rahul, Molly, Pat and Melissa. And of course to Steve as well for trusting us to have a part in this rare discussion.
John Gardner once said that there are men and women who make the world better just by being the kind of people they are. And it's truly an honor to bring this conversation to you with one of those kinds of people. With that, I hope you enjoy class with the one and only Steve Mandel.
Formative Experiences
Rick
Wordsworth said that the child is father to the man. So if we go back a bit, help us to understand just a little bit about where you're from. And in particular, both of your parents were very active in the community. Your mom was actually the first selectwoman of Darien, which in effect is the mayor. Say more about them and the ways in which they shaped you.
Steve
So I had a very—I would call it pretty sheltered suburban childhood—but my parents were both very... My mom's still alive actually, and she's very active still. But my parents were both very civic-minded and had a lot of leadership roles in various civic organizations.And my mom actually was on the Board of Education, the board of finance, and then she was also a Democratic mayor elected with about 70% of the vote in a town that is 3 to 1 Republican. So that says... wow. Anyway, that was just in the water and around the kitchen table. It was just sort of a normal thing that you took leadership roles in local civic organizations like the ambulance corps, the library, this type of thing. So I just absorbed that and it's just always been a normal thing to do.
Rick
And your dad was a businessman?
Steve
He was a small businessman. He ran a firm called International Welding Products, which basically bought consumable welding products from the large manufacturers of them—Alcoa, Alcan, et cetera—and sold them basically around the world. Was a small firm. He had about four or five employees and traveled pretty extensively around the world to sell the products.
Paul
What about Dartmouth? Rick and I were talking about this. We have this affiliation with our alma mater, Notre Dame, going back a couple generations. I think for you it goes back even further. And you named your firm in homage of a mythical tree on campus. But explain how this experience at Dartmouth, or how the university in general is just so meaningful to you.
Steve
Well, it's partially because it's been in our family for a long time. That's part of it. I grew up with that too. But I would say two things. Many, many, if not most of my lifelong friendships came from there. And also it allowed me to grow in a lot of ways that I think have been beneficial over time, just organizing things while I was there.I had a lot of varied experiences, most of them frankly, outside the classroom. And that allowed me to just get experience in knowing how to motivate people, knowing how to communicate. There were just a lot of different experiences that I had that were largely non-academic, frankly.
Paul
You studied government. We've been teaching for 15 years a class on investing, but the secret is it's not really about investing. We tend to take a more multidisciplinary approach to it and we attract a lot of students who are government majors, classics majors, theology majors, and the whole gamut. Where did that passion for liberal arts study come from? And it's just fascinating to think that your career has been spent in the business world, and particularly in finance for most of it. How do you think that grounding of government studies helped your career path after?
Steve
Frankly, I don't think it specifically helped all that much. I appreciated what I got out of that. I wrote a thesis that was a good process to go through, but I think it was more just the rounded liberal... I had no idea what I was going to major in when I got to college. I had no idea what I was going to do after college. I had no idea. And I tried a lot of things.And frankly, in retrospect, I wish I had tried more things because it just gives you an opportunity to learn what you like, what you're good at, what you're not good at. But specifically what I learned as a government major, or PolSci, as many people call it, has pretty minimally to do with what I'm doing today or have done over the course of my career.
Rick
It's interesting to think about that in the context of your next stop at Harvard Business School. I think you went quite early, maybe just a few years out of undergrad. I was that way as well. I was just two years out when I went to HBS, your class of 1982, which there's a lot of great HBS classes. That's one that a lot of really interesting folks were in. I think Seth Klarman was in that same class. And Jeff Immelt, a woman named Susan who has become your wife. But maybe share a little bit about that chapter of your training because that of course is the bridge to the work that you've devoted your life to.
Steve
I had a two year deferred admit that was back in the day when that was, maybe a quarter of the class was admitted that way. You were basically told, you got to go out and work and do something for those two years. Tell us what it is. And I was one of the early M&A analysts on Wall Street and realized from that that that was not what I wanted to do for my career. But I learned some things there as well. Yeah, we were just really fortunate to have a great class. And I have many more friends from Dartmouth than I do from HBS. But I have a lot of very good friends from HBS and many of them have reached very prominent positions in the business world. So that's been interesting to watch. Both my wife and I are very close with a bunch of those people today.
Rick
Curious just whether it's drawing from your own formal education. We may talk about this more down the line, but education is a very important mission for you and your family. You also have mentored so many young people. When you think back to your formal education, what advice do you have for young people who are maybe at different stages of that part of their own formation to get the most out of the academic experience?
Steve
I would say the main thing is just try lots of things. Go outside your comfort zone. I know so many people who are either scared of math and science or scared of reading and writing, and they either gravitate to be totally math science people or totally English history people. And I think that's crazy. You need to expose yourself to all those things, and some of them you're not going to be very good at, but you'll still learn things. And you also may stumble onto things that you really love and you're good at that you never thought about before. So that would be my main piece of advice, is just take advantage of all that's offered academically and outside the classroom. I mean, there are just tons of learning experiences and try them.
Rick
Was there any experiences like that at HBS that led you to. I mean, we're going to talk more in the context of some of your early mentors, but Mars & Co. was your first stop on your way to Goldman Sachs. But looking back on those two years, were there nudges or sliding door moments that opened your eyes to the world of business and investing?
Steve
I became a retailing analyst, was my first thing at Goldman Sachs. And I had never really thought anything about retailing. But I decided second year to take a retailing class at HBS taught by a Japanese gentleman named Hirotaka Takeuchi. And he was a very dynamic professor, and it was a very interesting class. And that didn't say, oh boy, I want to be a retailing analyst after that. But it probably put something in the back of my brain saying, this is kind of an interesting thing to look at. And it had never crossed my mind before.
Paul
It's interesting thinking about. We always talk about surface area of luck, multidisciplinary approach. It's one thing to dive into these areas, but it's another thing to have these mentors like Rick is alluding to. How have they played a role for you? It could have been, particularly in jobs, but often could be the eminent dead that you read about. What are some of those mentors that come to mind or influences along the way?
Steve
Well, there are a lot of them. I was lucky in pretty much every job that I've had leading up to Lone Pine to have one or more people at those places teach me a lot. At Mars & Company, there were several, but the most prominent was a gentleman named Didier Pan who really taught me how to pull apart companies and understand them from the inside out. Then when I got to Goldman, there were a number of people, but most prominent was probably Joe Ellis, who was the lead retail analyst at Goldman and taught me a lot about that business and how it works and the people in it. And then frankly, I learned a lot from the people in the business.Some of my personal heroes were Sam Walton and Jim Sinegal at Costco. And I got to interact with them a lot. And I watched how they led, I watched how they motivated people, I watched what their ethics were like. And they were people that I wanted to model my behavior after. They had done very impressive things for society as a whole, but also for their employees and their customers. And they were great role models.
And then when I got to Tiger, Julian and others, frankly, there. But Julian obviously probably more than anyone else, taught me a lot about a lot of things. Probably most prominent of them were about investing, which I had never really done before. I had been sell-side analysts. But just a lot of the craft of investing, but also just the importance of understanding people. He pounded that into our heads and I try and pound that into our people's heads about these are living breathing organisms, companies that we are dealing with.
And the course of those companies, the future of those companies is determined by the decisions that people at the top make about capital allocation, about strategy, about the people they hire, et cetera. And understanding those people and what motivates them and what they're good at and what they're not good at is just really important understanding these businesses. And that really came from Julian.
Rick
I actually had a chance to connect with Didier. And I think the thing that surprises me the most is when you speak to somebody who where the relationship itself was maybe decades ago and the impact that hearing you talk about him, but also the ways in which he talks about you still. And in his example, I think he shared a lot of the same qualities that when you talk to anybody who knows you well, touches on the data-driven orientation, humble with the facts, just a certain base level of kindness to everybody that you encounter. I'm curious coming back to what you would say to young people who may not already have those kinds of mentorships in place. And we deal with this a lot with our own students is just the basic art of developing mentorships and that reciprocity where it's not just a one-way street that you're looking for things from this person because they're older than you and they've accomplished more already, but where there's true friendship that emerges. Any thoughts just around building mentorships?
Steve
I've always felt like the best way to develop people is working directly with them. I've always felt like in our job the best learning is when I would travel together with one or more of our analysts visiting a company or multiple companies or whatever. And because they not only see the type of questions you ask and the type of nature of your relationship with management, but you're also with them in an airplane, in a hotel. So there's just a lot of interaction and discussion and it's pretty much all going to be focused around what you were doing on that particular trip.And I just found when I was working directly and that was at both Mars & Co., at Goldman, at Tiger, I was working very directly with people senior to me, just absorbing almost by osmosis, because you just pick up hints about how people conduct themselves and the type of questions they ask and you absorb that. So to a young person, I would say just get yourself into a position where you're working directly with people you think are pretty great and where you have that learning opportunity.
Lone Pine's Early Days
Rick
You mentioned Jim Sinegal and Sam Walton. We're going to talk a little bit about the early days of Lone Pine and the formation. We had the privilege of being able to review the original business plan that I think you wrote in 1997 or thereabouts. And one of the things that struck me was if I was trying to figure out where the sources of inspiration came from, it wasn't obvious that they necessarily came so much from Tiger or from Goldman Sachs, but there's a lot of stuff in here that does relate to how to develop win-win outcomes and how to serve all the constituents that probably maybe come more from Sinegal and Sam Walton and developing an organization that's rooted in service.
So maybe we can come back to that. But one other hero that emerged in our research of yours is Abraham Lincoln. And just curious if you would share just a little bit about how he has inspired you and if that's in any way kind of informed aspects of your career.
Steve
I'm not sure it's forming aspects of my career, but obviously there have been a number of people throughout the history of this country who've had an incredible positive impact. But here's a person who literally did save the country, but also did it in a way that required such amazing personal courage and had a background that was extremely unlikely. If you look at the earlier leaders of our country, they generally came from more privileged backgrounds. They were better educated.He was pretty much self-made the whole way. And it's just to me an amazing thing that he accomplished and did it in a way that just required such a level of personal courage. I'm not sure I would ever have that level of personal courage but anyway.
Paul
One last thing before we get into Lone Pine. We mentioned Julian. That was the last stop for you before forming Lone Pine. He was a larger than life character and we had the privilege over the years to interact with so many people who were in that organization. I know obviously you have as well. Do you have any favorite stories from there or ideas that you have taken forward? Maybe things to do or not to do from that amazing period when that seven years you were at Tiger?
Steve
There were a lot of lessons and I would say I took a lot of those lessons with me to Lone Pine. And basically when you refer to that business plan, a lot of the things that I thought about when crafting that business plan were a lot of the great things I saw at Goldman and Tiger and some of the things that I would do differently. So the great things were, I think both organizations put a huge premium on hiring really high quality people.And I was just always proud to work at both places, both because of the ethics of the place, but also just the quality of the people who work there I thought were tremendous. A lot of my lifelong friends today I'm very in touch with a lot of people from both those places, specifically on Tiger. A lot of the investing lessons, both the type of companies to invest in, how to analyze them, but also how to organize and manage a hedge fund balance sheet.
But then there were things that I felt differently about. One of the things I took from Goldman and from Tiger, frankly, was the broad sharing of ownership and profits. Felt that was a really important thing to do. One of the things I thought was a little wrong at Goldman was when they went public how the limited partners were treated relative to the current partners, they were treated not as well.
And I always felt like if we ever, which I don't think will happen, but there's conflicts with it happening. But if part of our business were ever monetized, the people who were there at the beginning should share in that, and we've structured it so they would. I think it's unlikely that that will happen. But anyway, from Tiger, there were a bunch of lessons about asset liability mismatches and the use of leverage that I felt we should do differently.
I did not believe in the macro investing that Tiger was doing, albeit successful, for a lot of the period of time. But it did, I think, increase the risk significantly of the business and all that. There were asset liability mismatches that were maybe unintentional, but were problematic. So monthly liquidity for investors and a whole bunch of illiquid investments in the fund. That's not a good asset liability mismatch. Those are a bunch of things I tried to correct or avoid in our starting our business.
Rick
It was actually over a decade that Paul and I had the good fortune of writing case studies on Lone Pine and Tiger, respectively. And I was the primary author of the Lone Pine case and Paul Tiger. And one of the great gifts was the level of access that we got during those experiments and others, but in particular, spending time with Julian before he passed, he said a couple things about you.
When I went back to my notes on the case that I had written, one of the things he said was that he said Steve was driven by a desire to change the world. He went so far as to warn me when I hired him that he had many other dreams that did not relate to Tiger, which in itself is fascinating.
The other component that really stands out is I remember when we were asking him about how his investment philosophy developed, and he was very quick to say that his philosophy had been quite fluid. I think this will surprise many people that he had started cigar butt, Graham and Dodd value investor, and that it was really that he allowed himself to be shaped by so many of the young people that were coming through Tiger and counted you in that group.
But it leaves the question in my mind, just how did you figure out your own investment philosophy through this? And maybe some of this might be. I have this vision of what Tiger management may have looked like in the '90s, and you just thunderdome of investors. And of course, now so many great investing leaders have come out of that lineage. But maybe just say more about how the pieces came together for you, because when we come to the business plan, you had a very strong sense of exactly what you wanted to do and real clarity.
Steve
We're all shaped by our own experiences. And my investing experience up to the point when I joined Tiger had all to do with analyzing retailing companies. That was what I did. And there were a number of enormously successful retailing companies that grew, that compounded value by growing. The way they drove value was not so much by repurchasing shares or using a lot of leverage or other techniques for driving value.They pretty much reinvested in their business and grew. Walmart at the top of the list, but Costco, Home Depot, lots of others. And that's what I saw. And I saw them trampling on the, quote, value side of retailing. They were trampling on Kmart and on Sears and JCPenney and so forth and so on, who were companies trading at far lower multiples than Walmart, whatever.
And that shaped my experience. I watched that and I was like, boy, if you can find things that can compound value by reinvesting in their business and do that for a long period of time, that is a great way to make money. It's not the only way to make money, but it's a great way to make money. So that's what I knew.
So when I came to Tiger, that's what I did. I was not really fluent in the notion that there are other ways that people can drive value through how they allocate capital. That was what I knew and that state. Now, I've seen lots of things over the last 20-whatever years that I have a much more flexible approach now to. And I wasn't inflexible, but that was what I knew then. Now I see lots of other ways that people have driven value beyond just reinvesting in their own business and growing fairly rapidly.
Paul
Rick mentioned the business plan you created.
Rick
Got it right here if you want to look at it.
Paul
This is a rare copy right here. How did your early life prepare you to be a founder? When we read it, I mean, it was extremely thoughtful, very short. I think Bezos would be proud. It's about the length that all the Amazon memos are six or seven pages and yet it laid out a profound multi-decade vision, a perpetual vision too. So you just talk about that founding moment, what prepared you for that and what was the plan?
Steve
I don't know. I go back to some of the things in college and even high school where I had to organize things. And so that became something I felt fairly confident in doing. I also felt at the time, and I think the business has gotten much more sophisticated over the last decades, but at the time, a lot of hedge fund startups were basically two people and a dog. And they would go to Furman Selz (or BofA) or whatever who basically had a way to do all the non-investing things. And they would start up and see how it would go.There was very little thought given to how to structure the business. There was an opportunity: oh, if I can do this and get a couple hundred million dollars under management and have a few really good years, I can make a bunch of money for myself. And this is the great thing. So I wanted it to be much more than that. I wanted it to last for a long time. I wanted to put a lot of thought, and I also felt if I did that, put together a cogent business plan, it would resonate.
People would think, oh, this guy doesn't want to just go out and manage money and hopefully make some money. But he's actually thinking about how to run a business, and this is something we can feel a little more confident. This is a startup, he's not done this before. We, being the potential investors, can feel a lot more confident that there's a lot of thought being put into this. This is going to be more than two people and a dog.
That was the reason I did it. And basically I just literally wrote that business plan the first day after I left Tiger and mailed it out. This was back in the days of no email, et cetera, mailed it out physically to, I don't know, 300 people or something. Potential accountants, potential prime brokers, potential lawyers, potential employees, potential investors, people I'd run into over time just saying, here's what we're doing. If you're interested, there's a cover letter that went, here's what we're doing. If you're interested, let me know.
The Power of Duration
Rick
Gosh, there's so many features of the plan itself that I think in today's world might not necessarily seem novel. Part of that is because there's been a lot of replication across the industry of some of these characteristics. But things like transparency, that is still something that you don't hear a lot about. Certainly in investing broadly, but specifically in the hedge fund industry, the word service shows up a lot. And you can tell that it's really a critical part of the culture that you want to build.
But I want to ask you about three things that I think when we look at Lone Pine today that I have to think continue to be sort of not only timeless, but also just very powerful sources of reinforcement of what Lone Pine is about. And the first one is duration. I mean, you mentioned the asset-liability mismatch. I think the vast majority of hedge funds up to that time offered monthly liquidity was probably the long-term money at the time.
And here you are as a startup, you build this menu of fee structures, by the way, all of which are better than market, but that favor duration from the very beginning and try to incentivize LPs to give up some of the duration in exchange for lower fees and higher net returns. But maybe just say something about the role of duration and the way that you invest then and today.
Steve
Well, I've always felt we wanted to invest on a multi-year thought process in terms of we want to own this company. Twenty years is a long time, but we can think in three-to-five-year type of increments in terms of where this company is going to be, how that creates a differentiated point of view. And in order to realize that, you have to stay invested. And if the rug gets pulled out from under you during that period of time and people withdraw a lot of money because in the interim you have poor performance or whatever, that doesn't allow you to realize the plan that you basically laid out for any individual investment.And I saw many instances where funds either closed or had to do things that were not good for their investors and not good for the organization itself because of an asset-liability mismatch. So we didn't have the luxury, nor do we still have the luxury of basically offering true lockups. I don't think people would go for that in the public markets. I don't think that's really available.
But you can create structures where they indeed have liquidity should they really need it. But they're highly incented to just, if they get nervous or whatever, there's small penalties for getting out and in return they're getting lower fees for sticking around. And then over time, we couldn't do this at the outset, but I started realizing also that the high water mark as traditionally structured was poisonous to both investors and employees. And we came up with a structure that allowed us basically to earn half fees if we were down, or in the case of the long only were underperforming, but offered the investor a better overall return if they stuck around, because the overall fees were lower if they stuck around.
And I think what's happened in the markets, and this is I think doubly reinforced now when you think about what's happened in the markets over the last 20, whatever years, it's been 27, 28 years, two things have grown a lot. Passive investing, which was growing even before, but continues to grow as a percentage of the market. And then the platforms, the Millenniums and the Citadels, et cetera, et cetera, those two things really have two things in common.
They are not really doing anything about actual business value. The passives are just buying an index. And the platforms are trying to figure out over a very short period of time which security is going to outperform another one. But there's no notion about what the value three to five years from now is going to be for any of those securities for either passive investors or the platforms.
Which leads us to believe that to double down on the notion of duration, where if the market has fewer and fewer people doing real true price discovery about what a business should be worth, that that should play to the advantage of those people who are trying to. And that requires duration to be able to do that. And one of the benefits we have over having been in business now for a long time is we've built up a pretty large amount of internal capital, employee capital, that is a great anchor for us to be able to invest on a longer-term basis.
Rick
Another, I would say somewhat iconoclastic feature of the plan was the flexibility that you were asking for. And just to put a fine point on it, in an age where I think at least our study of the institutional world was that the LPs over time were more and more asking for specialization, asking for siloed. They wanted their growth managers and their small cap managers and their value managers. And you specifically say that we will have a flexible and adaptable approach to investing.
And specifically that doesn't really completely always line up with growth and value. And having lived in the institutional investing world for 15 plus years and then now building our own investment firm, this is just such a powerful point for us, at least in terms of what it takes to be resilient and to always be able to endure and to adapt, which of course is in the water at Lone Pine. But maybe just say a little bit about flexibility and what that affords you and where that desire to not be boxed in as a Tiger cub that only did this one or two things.
Steve
The longer I do this, the more I see that there are both multiple ways to successfully invest and that businesses that you thought were tremendous businesses and had great futures and all that, things change, particularly technology changes, regulatory things change, people change. And you can name one thing after another that you thought were. I mean, if you go back to Buffett owning newspapers as the thing owning the Buffalo Evening News, et cetera, that has radically changed. I mean, they're just example after example after example where businesses have been completely turned upside down by either technological change or regulatory change.And one has to be very flexible in their approach to investing. So, I mean, I talk about duration, investing for the long term, and we're very much believers in that and having companies that can compound value over a long time. But you can't be married to a company or an industry because things change and they change rapidly.
And we always have to ask ourselves: is this new thing disrupting this former thing? That was great, and maybe it's not so great anymore. We're having those discussions right now about lots of different sectors of the economy that have been great places to compound value over time. And with AI now, maybe they're not quite as great places to compound value.
Building Edge Through Culture
Rick
When you think about the plan, but in the broader context of just the early days of Lone Pine and the culture that you wanted to reinforce, the broad ownership that you offered, which was, again, highly unique and I think remains highly unique. When you look at Lone Pine today, there is all this change, and there is the need to adapt. What hasn't changed? In fact, what is part of the edge because it's still so firmly part of Lone Pine?
Steve
Well, I think let's talk about both investing and then the business itself. On the investing side, there's a bunch of things that haven't changed at all. Doing what I call fundamental analysis, which is understanding how a business makes its money, how it competes, who runs it. Those things are timeless. We have many different tools now at our disposal to help understand those things, but those are just basic to what we do, and that has not changed.The tools available have changed a lot, largely through technology. On the business side, the only things that really have changed are the competitive environment that we live in is very, very different today than the competitive environment we lived in when we started. When we started, hedge funds were really still fairly nascent. Tiger and Soros and I don't know if Steinhardt was still around, but when I joined Tiger, there were three big hedge funds.
And big was like a billion dollars. So that's radically changed. And so the level of competition for all kinds of things, for talent, for borrow on the short side is radically different today. I'm talking about the business itself. There are all kinds of different types of hedge funds that didn't exist when we started. And the business has just grown a ton.
Paul
It's interesting to think about, to your point Rick, with all the change, looking at what hasn't changed is vital. And we were, as investors in Lone Pine over so many years, just marveled at the consistency of the team that was both the duration. I think the management committee now is closing in on 25 years average tenure. There were always new analysts, but they all seemed to meld right into the culture. We had a chance to talk to Celia, your first hire, and she shared this story that I think really struck us that typified the initial culture, that initial moment. Your first office was just down the street and despite raising, I think half a billion dollars or that was in the plan, you decided to get a windowless office for a little bit that only had two chairs. And yet there was you, Celia, and then Carrie came aboard and they mentioned that you actually sat on your briefcase and gave them the chairs.
Rick
Actually, Celia's earliest memory of Lone Pine was coming into the office quite early. The office was a closet. It was before you got permanent offices. You were probably in the midst of raising capital, walking into that closet office, and there you were already putting her computer together. And there was only a single desk, which you insisted was hers because she had way more important things to do. And you used your briefcase as your workspace for the first number of weeks at least. But it is such a fascinating starting point and of course the reflections that everybody has is that this is kind of largely how it still is at Lone Pine. But maybe just talk a little bit about that, your earliest memories.
Paul
Well, yeah, and it's not about you. It's about the team, the organization and the long term vision. And just starting out that way, it's super unique.
Steve
It tells you a little bit about the nature of real estate markets at the time. Our current office building would be generally regarded as the prime office buildings in Greenwich because they're right at the train and the best location. At the time there was a WeWork type space in the building because the head of the company that owns the building has been a friend of mine since I was, I don't know, 16 or 18 or something like that. Through tennis, actually, we were on the same tennis team.
Rick
Don't draw me back into tennis.
Steve
We were on the same tennis team playing in the club league around here. And anyway, I wanted to be in that building, so I called him up and I said, "Can we be in this?" And he said, "Well, there's nothing right now, but it looks like Bank of Ireland might be moving out of their space." And they had this little 3,000 square foot space, so we signed a lease on that. But we couldn't occupy till I think maybe September or October.So we went in this little WeWork type space, which was literally a room literally this size, 8 by 12 feet and with no windows and a push-button (touch-tone) phone that we had to use through the WeWork organization, which they marked up. And I literally went to Staples and bought a folding table and put it in and put a computer and a printer on the top of it. That was it. Celia was there literally the first day, the second day.
So that was July 1st, the second day, I think July 2nd. I had scheduled to go up to Boston to meet with Cambridge Associates, and I had no idea. But I didn't really even know what Cambridge Associates really did. I just knew they didn't like Tiger. They didn't like Tiger because Tiger was opaque and Tiger did macro. They didn't like that.
And I was like, I don't want them to not like me. I didn't know anybody there or anything. But I marched up there with my business plan, which she had typed literally that prior day. They put you in a room and they video you and talk to you and tell them. And they were then very helpful. They liked what they saw and they introduced me to some people and that was a propitious thing to do. But I did it simply because I knew that they were anti-Tiger, not for reasons of anything else other than they don't like somebody being opaque, basically. And I was like, we're not going to be opaque.
Rick
And what do they say?
Steve
All right, we're in. No, they didn't do that. But maybe things are different now. They didn't control anybody's money, but they were able to introduce me to some of their clients.
How Talent Thrives
Rick
Paul mentioned just the continuity of talent, and we mentioned Carrie and Celia. But Dave Craver, who overlapped some with you at Tiger, also joined. I think within that first year, sort of there's two pillars of this: one is attracting really great talent that you want to keep. And then the other one, which I think has been more evasive to more firms, is how do you actually keep talent for a very long time and create the space and the culture for them to thrive for, in many cases, several decades.
Steve
Well, I'm not sure we've been, I mean, maybe better than others, I don't know. But there's a lot of talented people that we have basically had the conversation with over years. "Hey, we love you, you're doing great here. But there's no room at the end for you to be a portfolio manager. So if you really want to do that, we're not kicking you out the door, but if you really want to do that, you're going to have to do it someplace else." So there have been a lot of talented people that I would have loved to make room for.But we're not Capital Group or T. Rowe Price or whatever, where we have 42 different funds and somebody can slot into one of those. That's been unfortunate, but just a reality of our business. But then again, we have been able to retain people for a long period of time. And I think there are three things that go along with that.
One is just liking the work. Basically, don't like the work, you're not going to get into it. Two, we really do strive to have a pleasant work environment in lots of ways, mostly the people that are there, but also just how we structure the office, the amenities we offer, and all those kind of things that make it a pleasant place to work. And then finally, hopefully they think that there's still good economic opportunity for them. But we're very conscious about that. Dave and Kelly are the CIOs. They've been doing a great job.
They're in their early to mid-50s. We're cultivating the next group. I remember saying to them—and this was both when Marco Tablada and Mala Gaonkar were with us and in senior roles. This is probably 10 years ago or 8 years ago or something. And I said to them, if we're all sitting here and it's the same group ten years from now, we've done something wrong because that will not allow others to rise. And somebody in this group, their life circumstance is going to change or they just have a different desire or whatever. So you have to keep building.
I think Kerry Tyler has been probably the most vocal in our group about just continuing to—in all aspects of the business, not just on the investing side, but throughout the—our legal teams and our IT teams and our accounting teams. And so continuing to develop people. And if something happens to somebody, having somebody being able to step in and we're conscious of that. We can't always get it right, but you're conscious of that.
Rick
You mentioned the co-CIO model that's evolved and just looking back over the 27, 28 or so years, but it seems like there's three epochs of portfolio management. Maybe those first couple years where it was really you were playing that role and then you moved actually extremely early, I think it was around 2000 or early 2000s to a multi-portfolio manager model and then evolved further a number of years back to the co-CIO.
Steve
The first iteration was with Sarah Gordon who was our healthcare person. And her orientation was primarily in the biotech world. And I know nothing about that. My knowledge is very limited. In effect, she would explain to me why she wanted to do something and generally I would do it. I was thinking, this is probably not a great use of all of our time. We had very loose boundaries about the position sizes, et cetera, that she could do. But that just made sense to me. She's much better at making those decisions.One of the problems with that, as I learned though, was she had an idea that should be a 5% position in the fund. She was never going to make it a 5% position because that might be half of the total capital that she had in the fund. We track obviously how everybody's stocks are doing, et cetera, but we're not paying people directly off of their individual P&Ls. But that showed to me that that was a flaw. If you did that, you would under-maximize potential return because someone was never willing to take what they thought was such amount relative to their capital versus 5% position is a significant position in the fund.
But if we're wrong and we lose 2%, that's not great. That's not good at all. But it's not a disaster. Whereas if you lose 40%, then that's a disaster. But then as people evolved, which were Marco and Mala and Dave—and I forget the exact dates and times and when people got responsibility—that's what we did. And it was sort of a loose arrangement. In other words, we would discuss things first, but they were driving the decisions. We didn't have here's the amount of capital for you and you're going to run that amount of capital. It was all obviously part of meetings where we would debate ideas against each other. And so it wasn't these sleeve concepts. That was never part of what we did.
Paul
Yeah. It's interesting thinking about our good friend Molly McDonnell, Notre Dame grad. We've known her forever and seen the evolution for her on the business side, moving across different roles now leading so much of the finance organization. I think we've always been struck about how powerful letting that path be free and not naming it could be for a firm that wants to last for decades.
Steve
Yeah, she's a great example actually. And Kerry has been really good about this, about cross-pollinating people and figuring out ways for people to grow and develop that might not have been obvious at the outset. Molly was at our outside auditor. I remember I would sometimes ride the train back to New York with her if I was going to a meeting or dinner or something. And she was at E&Y and probably 23 or 24 or whatever, I don't know, young. Then she came on and then has grown and taken on various roles and now basically runs—yeah, as you said, she's our CFO. She runs all the finance functions of the firm and has ultimately a bunch of people directly or indirectly reporting to her.
Succession & the Co-CIO Model
Paul
There's one other role that's evolved at the firm and that's Steve's the perma-analyst. Somehow you demoted yourself when you elevated some co-CIOs.
Rick
One of my favorite annual pilgrimages was to the Lone Pine meeting. Man, I really missed those meetings. Maybe we can get an invitation back someday. The most striking aspect of those meetings were the way in which you positioned your role largely alongside the other analysts. Presenting an idea, the puts and takes of how you were thinking about things and I think giving a little bit of an evaluation of the idea you pitched the prior year. And hearing you talk about the evolution of the PM, part of me is thinking, well, some of this that Steve always loved the work of the analyst, the consumer, the retail, and almost looking for an outlet to maintain focus.
The other aspect, which I think we just only gently touched on was your intent from the very beginning was to build something that went way beyond you. In fact, Kerry brought this up, a conversation that maybe was around when she joined, right at the very beginning. You telling her, Kerry, if Lone Pine's not around once we are gone, we have failed. But maybe just, yeah, say a little bit about how you thought about what you wanted your role to be and then how you built around that to provide opportunities for these other extremely talented folks and allow for that evolution which has been so important.
Steve
Well, it's just evolved over time. I always felt as a portfolio manager, if you were not in touch in an analytical-type way—not necessarily being the analyst, but in an analytical-type way—with the companies that are in your portfolio, you're not doing the job right. I think that's not common now. I think the PM views—yes, companies come. If we're some big money manager, companies come to our office. I'm going to sit in. But the PM is not traveling around the world and meeting companies. I always felt that was the most intellectually—I still feel that's the most—that's the part I miss now more than anything is that's the most intellectually stimulating part of the job.You meet really interesting people, you run into really interesting businesses, you understand how they work. And I always felt that was the thing I most about the job. But also I thought was important to being a successful portfolio manager. We've kept that all along. Kelly and Dave are meeting companies and meeting managements and traveling and doing those things all the time.
But things have evolved. We had no data team or role till the last, I don't know, it's been five, six, seven—stuff just evolved. We didn't have a long-only business when we started. We were just a hedge fund. A long-only business is a lot bigger than the hedge fund now. That required initially I was the PM for the long-only business and then over time others became part of that.
Those were just decisions along the way that I thought were the right way to do it. If I was the PM in the long-only business, there'd be some competitive tension. If I overweighted a position or left a position out that was in the hedge funds, that would spark conversation, et cetera. And we tracked how did those stocks do relative to—that created a little internal competition. But then I realized, well, if we have people in the hedge funds and all Marco does is financials and all Dave does is business services and industrials and all Kelly does is consumer stuff, that's not developing them to be able to run the whole thing. So then we started getting them involved on a rotating basis initially with looking across the whole portfolio and that's how we tried to develop them to be able to be then the CIOs that they are today.
Rick
One of the things you talked about a number of years back when you were on Invest Like the Best with Patrick was there's the people orientation, the people analysis and then the business model analysis and you're very people-centric.
Just curious to flip that on Lone Pine for somebody who doesn't know the firm extremely well. Tell us a little bit about Dave and Kelly and their temperament. What makes them unique? How they work together in this co-CIO framework?
Steve
I think they have different and complementary skills. Kelly is very good at two things. I think she has a very good understanding of people. I think Dave does too, but Kelly has a very good understanding of people and is very good at building relationships with those people. But I also think she understands very quickly when a new thing has come along and grasps both the business and the potential of it and pushes us to be involved in ways sometimes that are not obvious at the beginning.Dave has a skill that I don't have, and I always have not only pooh-poohed it, but it's never really interested me, which is really understanding the macro things and how it influences individual stocks and portfolio positioning and all that. And he also has a very wide—and Kelly has really developed this in recent years, too—a very broad ability to look across all elements of the economy and understand businesses. He's intuitive on that and interested in that, where some people... there are a lot of very talented people that I've run across over time who just are very good at looking at financial services companies or looking at consumer companies, whatever, and they're just not that interested in learning about industrial companies or whatever.
Dave and Kelly are both very interested in learning broadly across. And I'd say Dave has been the person over a long period of time who's probably had the greatest breadth of knowledge and understanding of the entire portfolio.
Surviving the Platform & Passive Revolutions
Paul
Stepping outside of Lone Pine—27 years, it's been an amazing run for the firm. There's a lot that's been happening in the economy, but particularly in investing, the institutional investing world, the hedge fund world. What are the big aspects that you see that have evolved the most? What are the implications for, let's say, the next couple decades for Lone Pine? How are you changing the firm and the trajectory from here based on what's been going on around you?
Steve
I think we touched on this before, where the two big changes—more than two, but the two changes I alluded to before—the rise of passive and the rise of the platforms. And then I would say the third thing is just the influence of technology both on the tools we have at our disposal and what it means for the economy broadly. I would say when I look at our business, the three things I cite—and you have to look at what you think you're good at too—the thing I think we're good at is understanding businesses, understanding how they create value and being able to look out three and five years and understand where a business is going and create a differentiated point of view about that business and its prospects.That's what I think we're good at. So we're largely doubling down on that in terms of thinking about both product and our existing product and how we invest, looking at duration, looking at differentiated point of view. And that's where we have no interest in—and I don't think we would be horrible at, and I have great admiration for—and we invest in a number of the large, generally in their origin, private equity firms that are now very broad in terms of how they invest.
We have great admiration for them and they've built incredible businesses. We would be terrible at that, and I personally have no interest in that. I don't think we'd be good at it, and I don't think we start getting into private credit or other ways to manage money. So we are basically doubling down on what we think we're good at.
Paul
What does that mean specifically? I'm thinking back to the original business plan. In '97, '98, you had 1, 3, 5 year classes, you had the hedge fund, it was a group of hedge funds. And then you brought in long only. What does that look like for the firm in terms of product extension or what would you need to do both internally for the team to make sure they're thinking long term, but also for the LPs, a structure that aligns with that?
Steve
So hedge funds are—at least the way we are structured, et cetera—have limits to growth which relate to the shorts. Shorts don't scale particularly well in today's world. It's probably even more difficult: the squirrely type shorts, the demand for them, the borrow cost, the availability, et cetera, is far more difficult today than it was in 1998, '99, 2000, et cetera.So that pushes us to—and I think you will see from us—small variations of what we do on the long-only side that are aligned with what I just talked about. So it's going to be, I think, a business that grows on the long-only side, hopefully with existing product, but probably with twists on what we do today.
Rick
It's interesting just thinking about... we talked about the stickiness of talent, the advantages of an incumbent as you've seen it in retail and other parts of the consumer. But now turning that back to Lone Pine, just curious to get your take on what's different about from those early years of being the small, scrappy newcomer to being an incumbent, to having a leadership advantage, to having all of these people that know what the firm is seeking to be about. How do you think about that as it relates to the next 10 years, looking through the windshield?
Steve
Well, I think a difficulty, frankly, is convincing... I think there's a fairly widely held notion, at least in the institutional market—not necessarily in the family office or individual market—that the only way to generate alpha in public investing is through niche strategies, somebody who's really, really deep in biotech or whatever. And it involves small amounts of capital generally, not large amounts of capital. And so that's a difficult thing for us to—we can point to a track record and we can say, we've been doing this for a long time and here's how much over the MSCI we've done.But that's against the general belief in the institutional market. So it's a little bit on us to figure out ways to explain that better, and it probably means going outside of our traditional market. We've started exploring this really for the first time in the last couple of years.
We've had individual investors and we've had family offices—that's been an important part of our business. But the main part of our business has been the foundations and endowments and all that, and frankly, there's less interest in that world now. They have gravitated some to other things. And so for us, part of it is exploring other avenues where the money is, and also just probably doing a better job of articulating what we do because we essentially told people, "Hey, we're smart people, we have a pretty good track record, you should invest with us." That's generally not the kind of thing that resonates that well in the marketplace. People want to hear, "We've got this specialized AI fund" or "We've got this..." you know, whatever.
Paul
The other unique piece is, you have the vast majority of your net worth and all the partners do. That's not that normal.
Steve
That is an important thing, and I think ultimately if I'm sitting on the other side of the table and I'm an investor, to me that's the most important thing—that I'm investing my capital alongside them and they don't want to torch it, they want to have it compound.
Rick
Just hearing you reflect on that, we've touched on how the institutional investing world has become so specialized and maybe why that is. I think there's another layer of this just having sat in both the LP and now GP seat where there's—in the institutional side, because you made the distinction between individuals, family offices and institutions—institutions, the institutional side. If you look at how most of the incentives are created, I think we would argue there's massive over-indexing on sourcing new ideas.
What it does is obviously if you have a capped amount of capital, which we've especially seen in the last four years with institutions—a lot of institutions got overly illiquid and whatnot, so there's not as much capital to play with. But it creates the need to come up with excuses to churn the portfolio so that you have new room for these new bright, shiny niche opportunities.
And yet I think about for us all the lessons of, remember when the research came out of Arizona State, the Bessembinder document that showed that the power law that everybody thought was only alive and well in venture world is actually present in the public markets, that only a couple percent of stocks over the last 100 plus years has basically driven all the outcomes.
Then you look at the last 10, 15 years and the rise of these incredible incumbent platform technology companies and how they just keep on winning and everybody's looking for the new young disruptor. But there are so many structural advantages. And so it doesn't surprise me at all that there would be a completely different perspective, at least from the family office investor that doesn't necessarily have that incentive to keep looking for things if something's working and they generally like the people, it's kind of like okay, great, keep doing that.
Steve
In the institutional world, there's churn in their staffs too much more so that obviously somebody's new, they want to make a mark. And the only way they can really make a mark is in things where they actually can change, which is a lot of the private stuff. They can't change it because it's 12 year life and whatever and they've been in it for whatever. So this is, you know, in the institutional market we definitely battle that.I would say in the family office market or the individuals market, however you want to look at that, yeah, it's those principles are making the decision. They're just much more, I'm betting on that person or that firm. And unless something seriously goes awry, that's what I'm betting on.
How AI is Shaping Portfolio Construction
Paul
There's a bit of fallacy around the simplicity and the low fees of passive. Again, this is from our experience where you're taking three to five year views on companies. Some of them are the very big companies, Rick, you're alluding to, but others are not. And to withstand market volatility and to do the research every quarter, every year to continue that three to five year view out, that's not happening in a market weighted index. And when that moves around, institutional investors can get, I mean there might be emotions involved, there might be other factors that don't allow them to stick with it versus the trusted hands, the incumbent that you guys.
Steve
Well, I also think there's value in being able to move from one security to another, one sector to another, as things change, rather than being just stuck in a box. And I just think there's value in that. And I've seen that. I look at the things, if you looked at what were our major investments in the first few years, the portfolio has entirely changed. Wireless was our biggest thing in our first few years because we thought all the incumbent legacy people were going to have to basically get into the wireless business and they're going to have to get in by buying all these wireless firms, which is what happened.But once that happened, it became not a very interesting place to invest anymore. So we haven't invested a single thing in wireless in probably 20 years. Google didn't exist, Amazon didn't exist. All these companies that we've spent a lot of time in, Visa and MasterCard, weren't public. I mean, you know, they're just things change and you need to be able to move and adapt to that. And if you're stuck in a box, you can't move and adapt.
Paul
What are the implications given that in this age of AI? What lessons are you bringing forward from say the Tiger days and the rise of the Internet bubble? And then of course, you mentioned, mobile, software, cloud, all kinds of different industries, what's it feeling like for the investment? But also I'm curious just internally how you're using AI.
Steve
So, yeah, there's two things we'll talk about internally. Everybody's using ChatGPT latest version, not just the analysts, everybody using it just regularly. We have a data team that is aggressively using AI and what they are bringing to bring to the fore to the analysts. We've developed basically a template for any company. So you're wanting to look at Nikon in Japan and we haven't looked at it in a long time, this will just scour everything and bring it all to the fore. So if you're going into a meeting, you can just pull everything together. It's right there.
Paul
And that's internal and external.
Steve
Yeah, internal and external stuff summarized for you. So we're using it quite aggressively internally. I mean, I use it just for basic queries all the time. Investing side, it's very important for us. We have basically invested, we'll call the picks and shovels aspect of it. So we know that running all these data centers, et cetera, and producing the chips requires a huge amount of energy. So we've basically invested in everything from energy itself to producers of energy to all the way up to through the hyperscalers and basically the whole value chain in between that are enabling basically what's going on in AI. It's a healthy portion of our portfolio.
Rick
I don't know when this exactly happened, but over the last several years, there was the initial ChatGPT moment and that was maybe two and a half years ago or so. I feel, just curious what you say to the team that the younger folks who haven't lived in these periods of accelerated change. I mean, change has been always part of your approach to investing and it's always been critical. But then you get into these epochs of just things are moving really quickly. What's most important in those periods?
Steve
Well, I would say we've had our own foibles here where you get issues of FOMO and getting overly excited about things. I would say that is the most important thing that we keep valuation matters. In a lot of cases, we have no idea who the winners are going to be. Let's keep a sane head in terms of what we're paying for things and where things look exciting, but we don't know where it's going to come out. We don't have to play.And so that's, I would say, the two things we try and keep in front of people's minds. Because there's a lot of crazy speculative activity going on in the market today and not just related to AI, but you look at crypto and there's a whole bunch of stuff. You look at valuation, you shake your head. There are a bunch of companies out there that are excellent companies that have either recently gone public or been public for a while that are just trading at valuations, that even if the wildest great things happen, the returns will be mediocre, 100 times revenue, 50 times revenue type of thing.
And companies may do great. One of the lessons from the whole Internet bubble was the fact that a lot of capital got destroyed actually was not such a bad thing because it enabled the creation of some amazing companies. So 90 whatever percent of the companies failed, but the 5% or whatever that didn't became Amazon and booking.com and companies that have changed the world. They've been not only terrific investments, but have done major things for consumers and have been great things for society as a whole. And I think that's the same thing we're going to be going through here. There's going to be a lot of capital wasted. But there'll be amazing companies that will come out of this.
Valuation Frameworks and Non-Linear Thinking
Rick
Does anything change about how you value companies? One of the great treasures we discovered, this was dated 12-21-1995, was an internal memo that you wrote alongside actually our mutual friend Thomas Lerman, who was an analyst at Tiger at the time on valuation. And again, it's kind of got that Amazonian six, seven page memo. This is how you do it and really revolved a lot around economic value added. Deciphering return on capital versus cost of capital and then how you properly discount cash flows. Has that changed much?
Steve
We generally use more shorthand versions of that to say, I mean, I don't think anybody's building in our firm a 20, 30 year dividend discount or discounting cash flows model. But we spend a lot of time thinking about free cash flow yield and what free cash flow yield looks like, looking out and how that compares to 10 year rates. And that can help inform a downside. Look at things. If you're buying a company, oh, these guys are a bit struggling now, but we think there's potential. And if they get this right, da da da da.And if they're trading at a 6, 7% free cash flow yield today and you see that as relatively secure, you're like, I don't think in the context of 4% 10 year that you're going to get significant impairment from that level. So we use all kinds of techniques. But I would say free cash flow yield is probably the. And you have to be careful with that. I mean I always had these arguments. I remember back at Tiger with a certain analyst at Home Depot where the free cash flow yield was zero. They were just plowing it all back in. But I'm like, okay, they open that store and they get a 25% return on that capital. I want them doing that all day long rather than not building that store and having a higher free cash flow yield.
You have to look at each business. I think that's one of the real difficulties I've always had analyzing businesses that were in a large cash use phase earlier in their life. Because what do the ultimate economics look like? When does this stop? And particularly if that is capital markets dependent. That always made it difficult for me. The capital markets dry up, then they can't get from here to there because they're not generating. So we're generally focused on businesses that are generating free cash flow and are not in that J-curve part.
Paul
How important is getting to know management and assessing maybe that in particular? But more broadly, I know Rick and I had a chance to talk to one of your senior analysts, Rahul, and he mentioned how amazing your mentorship and mentorship from so many others has been in crafting him. I think he's been at Lone Pine for eight or nine years now. But the one piece of advice that he pointed out, one of his reviews that you mentioned to him was try to get on the radar screen of the best management teams. When they respect you for your opinions, your long-term opinions and that relationship, then you've made it to the next level. How does that matter in the age of AI, as there's more data, that interaction with management teams, understanding not only their vision but also how they're going to reinvest cash flows, for instance, if they have them?
Steve
I think it's just critical. So we spend a ton of time on that. Obviously spending time with management is part of that and making our own judgments. But we also use third party people who are better at it than we are to interview former colleagues, not current colleagues because can't do that, but former colleagues and get their assessments of how they are as a manager, how they are in allocating capital, what are their ethics like.We try and build a fairly decent size file on people and we will tell people, particularly at new company, we don't hide this. We will say, look, you may hear from somebody who said they were interviewed, we're just trying to understand the company better, et cetera. I mean, and we're not going through people's garbage or anything like that, but we're just trying to understand the people.
Well, obviously management access is different at different companies. So some of the largest companies. I remember when we were earlier investors in Amazon, I was thrilled to be able to spend an hour with Jeff Bezos at Sun Valley because I can't just. And I would have email exchange with him about certain ideas I had or whatever to try and get on his radar screen that I was thoughtful person about his business. But there are corporate leaders that it's very difficult to just call up and say, I'd love to take you out to lunch or whatever. That's not going to work necessarily for us, but we try in every way we can to do that. And most companies accept the very largest ones, you called up the CEO or CFO and they'd say so and so at Lone Pine, yeah, I know them and they're smart and we have a good dialogue with them and blah, blah, blah. Yeah.
Rick
One of the other features I've heard you talk about in terms of its importance for analysts is having that non-linearity in thinking. I think actually it was in your podcast with Patrick in reference to capturing these rare moments of inflection, whether it was Amazon and going prime or a Netflix going to streaming. And just how disorienting these periods of change can be to folks. Is that stuff that you can coach, that you can train, or is that just one of those things that people either have it or they don't?
Steve
We often refer to the money making gene. That is a very difficult thing to assess when we're hiring people initially, even if they've been there for the summer intern or whatever. It's just very hard to assess. We learn as we go along. That is my point on linear thinkers. I think generally linear thinkers are bad at being good investors because you have to be able to see things not as they are necessarily, but what they can be.And we haven't gotten all those inflection points right by any stretch of the imagination. Some of them, yes. I can remember distinctly when Google came public and they reported their first quarter. Oh wow, this is you know.
Rick
By the way, I recently reread the letter that you pointed out following that quarter and where you said that 10 years from now this will likely be one of the most important companies in the world.
Steve
Right, right. So you got that one—
Paul
That sounds like some non-linear thinking.
Steve
Right? You know, like a light bulb went off. I remember one of our sons saying when House of Cards came out on Netflix and he just said this is changing everything. And that was completely right prior to that, you gotta tune in on Thursday night or whatever. And then obviously streaming, and streaming was before that. But yeah, there are these moments and if you get them right, there's enormous running room. I mean you get all those examples. Just the next ten years were huge.
Rick
Coming back to Rahul's point about you saying to him, if you can become a thought leader in the eyes of the best managements in an industry, it seems like that positions you to think with great agility and also be willing to think about what others aren't and where this might be going without just kind of regurgitating.
Steve
It also puts you in rooms that you're not going to be in otherwise. Rahul, to his credit, has done that in the energy production business. I mean, he gets in rooms that he otherwise would not be in. Conferences and things where he's a speaker. No, I can remember my old days in the retailing supermarket world. Invited to be a keynote speaker at the major conference because I'd written a paper on the supercenter(s) and what they were going to do to supermarkets.You're just looked at in a very different way, and you have very different types of conversations when you're in rooms like that. And you're viewed more as a peer or a thought leader than just somebody trying to figure out what the company's going to earn next year.
Rick
Steve, can you say a little bit more about this role of analyst coach? On one level, I'm sure you've been a mentor to analysts from the very beginning, but the sort of formalization, the meeting with a certain level of frequency with all the analysts, what are you trying to do? How are you trying to come alongside them and help them take steps forward?
Steve
Well, I think there are two aspects to it. Well, one is sort of a personal thing. It just helps me stay engaged with the analysts and the portfolio. I mean, I'm in our Monday morning meeting, et cetera. But a more tangible way, it keeps me engaged.Two things for the analysts. One is just helping them think through ideas and asking them questions that maybe they hadn't thought of. It's rounding out the research behind an idea. And the second, frankly, is if I get animated by the idea, I can help them push the idea. With Dave and Kelly, that's part of their role, too. And every so often that happens where this is a new idea and they haven't focused on it. And I'm like, you really should focus on this.
Steve's Best Life Advice
Paul
Yeah. I mean, as we think about just general life advice, you know, it sticks out to me, this idea of mentorship. We talked about how you, along the way were the beneficiary of that, how you're now mentoring. I love this idea that you're also the champion and cheerleader for them to elevate them.
Are there any other pieces of advice or habits that you've cultivated or you think some of the best operators have cultivated? Just advice for young folks in their careers as they get going.
Steve
I think it's one of the things we talked about before: just always seek out the people you think you can learn from. I'd say the other thing is just be organized and focused. I find one of the things, particularly in today's world, where there's just so many options of how you can spend your time both as an analyst or just in general. I mean, you can get sucked into the series. There's just so many things competing for your attention that being organized and disciplined about how you structure your time is, I think, critical.One of the things on the analyst side that we just keep preaching is go visit companies, just go spend time where they are. Conferences today are almost useless, I find. Almost useless. You're in a room with a million other people, you have a chance to maybe ask one question. Half the people in the room are just trying to figure out whether the next quarter is going to beat by a penny or miss by a penny or whatever.
Pretty useless. But when you're visiting a company, A, it shows the effort that you're there, and B, you just pick up all kinds of clues. You get to spend more time. You see body language, you see physical things, how the offices are structured. Do they have assigned parking places or not? Just little things. What are the offices like? You learn things. So we're just constantly pushing that. I always say you learn more when you're outside the office than you're in. It's always as an analyst.
Rick
As we come to a close, I've got two more Lone Pine questions, I guess, one's rearview mirror, one's windshield. The first, more rear view, is thinking about all that's happened these last 27 or so years: is there a memory and accomplishment, something about the firm that captures the essence for us? What we call the joys of compounding. But when you think about what you're most proud of as it relates to Lone Pine.
Steve
I would say the single thing I am most proud of, I keep coming back to this. I think it's still true. I don't even know who calculates this, but I saw this a few years ago and I was like, wow, we have the highest 401(k) balance per employee of any firm in the United States.
Rick
Do you have any openings?
Steve
So what makes me proud about that is that we have people who've been with us for a long time who may be not in the most senior positions, they may be in fairly quite junior positions who are going to be able to retire because of that makes me very proud.
Rick
Well, that truly is the Joys of Compounding.
Steve
I don't know if it's true anymore. I read about it two, three, four years ago. I assume it's true because the balances have gone up. But I don't know.
Rick
What about looking forward. One of the things that have always struck us, and I think it was the basis upon which we started writing these cases, was that we recognized, of course, you see it with companies of all types, the turnover of the S&P 500 every few decades, and so many companies that just don't stay on top. But certainly for us, as we were trying to find long-term winners in the investing world, there were just so few of them.
So we said, well, what if we just started taking firms that had been around for at least 15 years and had demonstrated a level of compounding for that time and then just try to study them and see what we can learn? So here we are. You've got the 30th birthday coming up here in the next couple of years, but if you were to almost do a pre-mortem on the next 25, 30 years, if Lone Pine succeeds, why?
Steve
I think there are two things. Obviously, first and foremost is investment performance. If we don't have that, we don't exist. So that has to be good. Hopefully it'll be excellent, but at least has to be good.And the second thing, which obviously goes along with the first, are the people. It has to be a place that people continue to want to work. It's an attractive place to work, attractive place to build a career. Those two things have to happen. If those two things happen, things should be good.
Rick
Well, Steve, this has been so much fun to spend this time with you and to reflect on the past, to think about all that's possible with the future. I think about it was Picasso who once said, the meaning of life is to find your gift and the purpose of life is to give it away. And I just think you capture the essence of that so very well. Thank you for the ways that you've inspired us.
I see you still have your Casio on. When I first met with you and I was new to the hedge fund world or the investing world, I noticed that watch and you'll be happy to know that I think it was too highbrow for Target at the time. I actually had to go to Walmart to get it.
Steve
This is the same F91W.
Rick
I still have it here. It still tells perfect time and it only cost me $10, probably 15 years.
Steve
This is one of the few pieces of technology, if you want to call it technology, that and the HP12C are basically the same product from 30 years ago or whatever. You can't almost think of another piece of technology that is the same.
Rick
It might seem like a silly thing, but I left that meeting very inspired in thinking that in my life, in my career as an investor, there was a certain way I wanted to go about things. And this is just one kind of small symbol of that. So thanks for the ways that you've inspired us, for all that you're doing out there. In the world. For what you've built at Lone Pine and everything else, you should be extremely proud. We've made a small donation to the Darien Library in your family's honor. It's not too small.
Steve
Thank you.
Rick
But it's just something to reflect our appreciation for.
Steve
My mother will be happy about that.
Rick
Thanks so much for your time today.
Paul
Yeah, thanks, Steve.
Steve
Thanks.
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Wrap-up
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