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You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice, so please do your own research.
Peter Higgins 00:17
Hello, and welcome to the Investing Matters podcast. My name is Peter Higgins. And today I have the great privilege of speaking with Todd Wenning author, blogger, presenter, and currently the Senior Investment Analyst at Ensemble Capital, HQ in San Francisco, America. Welcome Todd.
Todd Wenning 00:36
Joy to be here. Thanks Peter.
Peter Higgins 00:37
Thank you very much for joining us today. I know it's early in the morning for you. So I'm going to try and be as gentle as I can with you as possible with this interview. Now, Todd, you've got nearly 20 years in the investment industry and experienced you’ve been published or quoted in the Financial Times, Barron's, Morningstar, Investors Chronicle, Motley Fool, and financial analysts, journalists and numerous other media outlets.
So you're well known and highly regarded. And some of the things we're going to talk about later in this interview has actually gone viral, because you've shared such investment nuggets. Now, I want to start if I may, with you telling us about the first sort of interests you had in the in the investment industry. And what sparked that interest, if I may?
Todd Wenning 01:27
Wow. Thanks for very nice introduction. So I was a history major in college. And I intended to be either a teacher or a lawyer. And, you know, I got to my senior year and still didn't know what I wanted to do. And after I graduated, I took the LSAT, which is the American Law School acceptance exam, didn't study enough for it didn't do very well. So that made me rethink what I wanted to do with my life. And I applied for a paralegal job. I went to school in the Philadelphia area, and at St. Joseph's University, and decided that I'd also apply for a job at the Vanguard Group.
I hadn't really even heard of the Vanguard Group, but they were about 10 miles away from my college and decided I might as well give it a try. And they took a good chance on me and saw my undergraduate study performance. And I think they really liked the fact that I had run the admissions offices, outbound call centre, when I was in school, so I had phone skills. And I think that's, that was the key thing for them. And so they decided they would train me, licenced me, get me on the phones and talk with clients. And that really got me interested in the industry in the first place. And I thought, well, even if I don't like this, I'll do it for two years, learn how to manage my retirement accounts. And, you know, go be a lawyer or do something else.
But once I got into this industry, you know, anyone who's been into it understands it's a liberal art. And there's a great book, in fact, called The Last Liberal Art. And it's a great way to pull in all different disciplines into your daily life. And from there, I just got hooked. And I continued to study investing, and I ended up where I am here.
Peter Higgins 03:16
Not a bad place to start though Vanguard, given the size of it, though, what do you think?
Todd Wenning 03:20
I got very fortunate and very lucky. I remember getting my licencing book, they sent it to me before I started. This was for the series six exam. And I had to look up what a stock was, I had zero idea. And I knew from experience from talking with people that Vanguard with very highly regarded, and with hindsight, there wasn't a better place to start my career. Every employer that I interviewed with since was just very impressed with my starting out of Vanguard, and, more importantly than anything in Vanguard stands for trust and integrity in the industry. And that's a great way to get started. I mean, I was being taught the lessons of Jack Bogle when I was 22/23 years old, and it just it just stuck with me and I have such high regard for Jack Bogle.
Peter Higgins 04:05
Brilliant. Yeah. So Vanguard, what preceded after that? Other jobs, careers, movements? Take us all the way up to December 2017 joining Ensemble please?
Todd Wenning 04:19
Sure. So my girlfriend at the time current wife lived in the DC area, and I decided to move down to the DC area, didn't have a job. I just wanted to move get closer to her and ended up finding a job at SunTrust Bank, which is currently Truist.
It's currently recently merged and changed his name but SunTrust Bank at the time and I was assisting some portfolio managers with high net worth client accounts, helping analyse their portfolio placing trades, developing presentations, very kind of grunt work, I guess you could say and not all that enjoyable, but I had a great mentor there and him Eric Sheldon who knew I had an interest in analysing stocks. And so he would pass me little reports here and there and asked me what I thought about them. And it was a great, great way to get started in the sort of individual stock selection. And then another piece of luck, as you might say, was that I lived three miles from the Motley Fool headquarters, and Alexandria, Virginia. And I was getting tired of commuting from our home in Alexandria, Virginia into DC every day. And it had been, I thought, it'd be great if I could help write articles for the Motley Fool.
They were only two miles from my house, and I wouldn't have to go into the city every day. And so I ended up getting a job there. And I was there for, I believe, six years and total, most of it was spent at Fool US helping write articles, write newsletters, I eventually got put on one of their newsletters.
They're called Motley Fool pro with Jeff Fisher, we had a million dollars of real money capital that was given to us to start investing in, I believe it was August 2008. So it was a very interesting time to be flush with cash. We could go long short, do options, ETFs. And so that that was a great experience for me at that time, during the financial crisis to be investing through that period. And Jeff's a great investor. Some of you may know who he is from the Motley Fool, but he's a great investor. And I learned so much from him, especially what to look for in great businesses. From there, I went to Motley Fool UK, which some of your listeners and viewers may know, I work for Motley Fool UK for a year came out to London, worked in the offices there, had a great time, established a newsletter there called Motley Fool Dividend Edge, and we were buying dividend paying UK stocks in our portfolio. And it was very helping people understand how to invest and do so in a reasonable and quality focused manner.
Talking about individuals often take large bets and speculative bets on various stocks and hope to get rich quick. And our intention was to buy and hold and, and grow slowly grow well. So I was there for a year. It didn't work out. I'll leave it at that, you know, we had a we had a plan. It didn't go as planned, a lot of blame was was on me for that. And I also was kind of in the back of my mind, wanting to get into the institutional side of the business. And its highly respected. Its Motley Fool is in the retail space. It's not as well known in the institutional space. And so I felt like I needed to make a move to a more institutional investor experience where I could really get into the nitty gritty and try to figure out what institutional investors were looking for in terms of the depth of research necessary. And I got fortunate in that Morningstar gave me an opportunity to come out to Chicago, and learn a lot about the institutional business on the sell side. So I worked for their sell side group where I covered the paper and packaging industry.
For a couple of years, one of the very fortunate moments of my career was being named the head of the equity stewardship methodology, when I was at Morningstar, and we were developing a way to analyse companies, and how their management teams allocate capital, and how that reinforces the moat or can destroy the moat. And being at Morningstar being around all those very, very intelligent people there.
I mean, probably the smartest people I've ever worked with, just had a great mind about thinking about business, thinking about moats, thinking about competitive positioning, thinking about how to value companies. So it was a great, great training place for me. I wrote while I was there, wrote about small cap investing in trying to find moats in the small cap space. And then, about 2014, we had our first child, and we were in Chicago, and we were thought, Okay, well, you know, do we want to stay in Chicago? Do we live in Chicago, and I'm from Cincinnati, Ohio originally. And I so we started looking for homes in the Cincinnati area, to raise our kids, it's a great place to live a great place to raise a family, and a lot more affordable than in Chicago are some of the other big cities. So I started looking for jobs in Cincinnati, I started working for a company called Johnson Investment Counsel, which is a large RIA, here in the United States they had when I was there, over 10 billion in assets. And I believe it's a lot more than that now.
So very big group. That was my first venture into the buy side. And then in late 2017 or so, I got a call from Ensemble to see if I was interested in working there. And that brings us to the present.
Peter Higgins 09:43
It's interesting that you've said you’ve had some luck, I don't think has anything to do with luck, I think has to do with the skill set that you actually brought to the table. And the quality of your writing historically has been absolutely phenomenal. Hence the reason in late 2017 You got the call. You didn't make the call. You didn't go chasing. They came to find you Tood. You know, that's absolutely awesome.
Todd Wenning 10:02
Yes, Sean-Stannard-Stockton who's the CIO and President of Ensemble, I had followed me on the blogs and on Twitter, and they were looking to expand their team to grow it to sort of become more complete, I guess you could say, to present to an institutional audience, mostly when institutions invest in your strategy, they want to see you have a good bench of talent on the team. And usually, if it's a one man operation, it's a little more of a struggle, because it becomes okay, well, who are you bouncing your ideas off of, and what happens if something happens to you who takes over so they want to ran out the team and bring a different perspective. And I give Sean, so much credit for being so forward thinking about not only hiring somebody in Ohio, when they're in San Francisco, to provide a different perspective, but you know, to let me work remotely full time, so I've been working remotely for five years, so well before the pandemic. And so this has been a very interesting experience for everyone. And so I give Sean a tonne of credit to you know, look to find me and welcome me, despite me being over 1,000 miles away.
Peter Higgins 11:10
Yeah, quality counts, I think definitely. So just prior to that, you wrote your book, Keeping Your Dividend Edge and you stated sound dividend investing is about buying well run businesses with good yields, and strong competitive positions at good prices, whilst being diligent and patient. Please, could you expand on that and why that's so important. Here are all the nuances of choosing the right companies with the dividend edge?
Todd Wenning 11:37
Yeah, so I wrote Divided Edge in 2016, it was published. You know, I mentioned earlier that the Motley Fool strategy, or the newsletter didn't go as long as I hope to, and I wanted to provide sort of a capstone to what I was trying to do there. And I knew I knew I had people from the UK and elsewhere around the world who were subscribers to my newsletter, who wanted perhaps to learn about a more complete picture of how I approached dividend investing. And so that's why I wrote it. And I felt like, I feel like for individual investors, a lot of times their best bet is to focus on cash flows, right to find companies that are paying out real cash flows right now, not 20 years in the future, but today, and you focus on the dividend growth, and that will account for a lot of your returns, right?
If future dividend yield plus your dividend growth, plus any changes in the price to earnings ratio over the time of your holding that gives you approximately what your total return will be. So that comes back to the fundamentals right, a company that's paying cash flows today that can grow the dividend over the next 5-10,15-20 years, which is not a foregone conclusion, as we've seen a lot of companies have cut their payouts, they stopped growing it. And that becomes an issue.
So my focus is really on trying to find those companies helping investors find those companies that can grow their payouts over time. And that's not an easy task to do. It sounds simple. But it's very hard to do in practice. And I hope that with the book, I provided some guidelines on how people can do that. And we actually do something similar at Ensemble, even though we are more growth oriented, and we are not dividend focused, that it all comes back to the same principles. It's trying to find companies that are instead paying out to shareholders that are looking to reinvest and grow their business at a higher rate.
Peter Higgins 13:33
Absolutely. And that takes me seamlessly to your Venn Diagram, which went viral, Todd, and just to explain the nuances of that Venn Diagram, I know it's almost been adopted as a investment philosophy within Ensemble as well. So can you expand on that for me, please?
Todd Wenning 13:49
Sure. So before I joined Ensemble, I created my own investment philosophies and or Venn Diagram. And it was moat management and price were the three circles, and then they all combined together into a common point. So you kind of have to insist on finding a great management team with a business as a competitive moat. And you can buy it at a good price. And we did a slight change on that when I joined Ensemble, we kind of adapted that that framework and substituted price for forecast ability.
That's not to say that valuation doesn't matter to us. But we felt that forecast ability for us and for our philosophy was something that we absolutely had to have as part of that group. So we have moat management and forecast stability. And when all three of those factors are present, you become very interested in the company. And from there, we do a lot of valuation work to determine whether or not we want to buy. I think, for me, it wasn't intentionally this way, but one of the most interesting parts about the Venn Diagram was the traps, right? So these are parts of the diagram that have two of the circles but not all three of the circles.
So If you have a management team with a forecastle business, but if the moat isn't there, you can't run a great business with a business that's just not very strong on a unit economic basis. So you have to find a very strong business for management to run. If one of those things isn't there, it's just not enough. And there's sort of traps you can fall into. And we've all made them, I've made them. And so it's a good reminder for me to try to avoid those traps and look for situations where there might be a moat and management, but it's very unforecastable business. And I think that's the trap that investors often get themselves into, is they think they found a great management team.
I think they found a moat. But the business is super complex, and they have their their spreadsheets and you know, the annual reports are 400 pages long. And if you can’t explain it to the child, right, if you can't explain the business of the child, you shouldn't be investing in it. And I think there's certain lore that investors have to over complex businesses, one of my sort of PET frameworks that I use is, if the annual report is less than 100 pages, that's it, that's a very strong sign to me that this is a very good business. And if you look at a lot of the strong returns over the past 10-15 years, and you go back and look at their annual reports of the businesses are usually very, very simple. And simply put, and very understandable.
It's when you get into 400-500 page annual reports, you have to start wondering, is there something here that I just don't understand. And a lot of times, it could be regulation, it could be risks, it could be other things that just the average investor can't get their head around. And those are ideas that you should probably walk away from.
Peter Higgins 16:36
Brilliant, now I can expand that just a little bit on this understanding a company's durable competitive advantages, which talks about economic moats that how will this company continue to generate high returns on invested capital over the decades really hard to find those gems that you can just buy and hold almost go down to the Buffettology sort of way, you know, Buffett's way of investing? So how, as an ordinary investor, which we both are, as well as being, you know, your professional, filter all the way down to those? That you, you guys at Ensemble and yourself are looking for that top one 2% of the companies in the world?
Todd Wenning 17:12
Yeah, I think the key question you always have to ask, and it doesn't require a CFA to understand the answer to the question. But if this company disappears tomorrow, who's going to miss it? Right?
There's a lot of companies out there where if they go away, everybody just kind of moves on. But is there a pain point there? Like, who is just beside themselves upset about this company being gone? Is it the customers, I mean, the employees obviously, because they get a paycheck, but the customers, the suppliers, the community, where’s the loss? I think that's a key question, you can ask yourself without having to do any sort of macro or micro economic analysis. That's a great way for individual investors to start. And Morningstar has a great framework for evaluating economic moats. And we have a very similar process at Ensemble, which is intangible assets are one source.
So these are brands, patents, know how I would put corporate culture in that group. There are companies out there that may not have obvious competitive advantages from like, from a structural standpoint, but they're mission driven, they're purpose driven. And there's even if you were starting the business today, with plentiful capital, you couldn't replicate that business for 5-10-15 years, because they've just developed a way of doing things that just that's hard to do for someone starting fresh. And so intangible assets would be one, network effects are, which the classic example is eBay, the more buyers, the more sellers, the stronger the network effect becomes, probably the most common that we have in our portfolio is switching costs.
So these are businesses where once you are a customer, it is very difficult to switch out of them. And a lot of times this could be due to the fact that it's a very small part of the overall cost structure. But it's absolutely critical for delivering the products or services value. There was just an article in the FT yesterday about Bloomberg, and how strong Bloomberg is from a competitive position standpoint. And I think that's a great article to read, to get a sense of what a real competitive moat looks like, you know, for financial professionals like myself, it is an indispensable tool.
You know, there are other tools out there that try to attack it from certain niches. But even though the the user interface is from the 1980s, and we just get used to it as financial professionals, and it's just an indispensable tool.
So, you know, the switching cost to us for getting out of Bloomberg, even though it's a very expensive piece of equipment every year, it far outweighs the cost to us. And so it becomes an automatic renewal for us. So that's just an example of a private business with a strong competitive moat. That due to switching costs, so ask yourself, how much does this product cost? And how critical is it to the business's daily activities. You know, it could be we own, for example, paychecks and our portfolio, which is a payroll processing software. And there's nothing particularly special about the software. But if you're a small business owner, the last thing you want to do is mess up payroll, right. And we don't do that. And so the overall cost to your to your structure is very low.
But it's just absolutely critical to your to your business to operate the way you want it to. So that's an example of switching costs. There's two other modes sources from Morningstar, that are also applicable or low cost competitive advantage.
So these are companies that the larger they get on a unit basis, the costs are just so small, that it's very difficult to compete with them. You could have if you're doing commodities, if you are on the low end of the cost curve.
If you're close, for example, to the source of the raw material that your competitors can't do, that's, that's a huge advantage, right to be able to produce at a much lower cost, you can withstand much lower prices in the commodity market, and still make a profit, whereas someone who's on the other end of the cost curve is panicking and trying to get volume through their system just to make some money. And then the final note source is efficient scale.
This is a debatable one. But it basically is a rational oligopoly. It's saying that if the cost of someone entering the market, where two companies sort of dominate, and they're generating returns on invested capital, they're just above the cost of capital.
If another entrant comes in everybody else's, returns on invested capital dropped below the threshold of their cost of capital, and nobody makes money. So it's just this sort of idea that there's a there's a natural resistance to letting new entrants into the market, there's no economic value for the new competitor coming though.
Peter Higgins 21:58
Brilliant. I mean, we've seen lots of competition coming up towards Visa and MasterCard over the last 5-10 years, and they seem to just go like that, and then that growth just seems to stagnate and they just stay up at the top, they're just going yeah we’re alright. But maybe that duopoly will, will be smashed at some stage. Now, Todd, can you tell us a little bit about the firm you work for Ensemble Capital, their philosophy, their strategies that are embedded within the company, and your role within the company place?
Todd Wenning 22:26
Sure. So Ensemble Capital is a wealth management firm, we're based in San Francisco, California, as of the end of the quarter, I believe our firm assets under management was about 1.2-1.3 billion, our equity strategy was just a touch under a billion at the end of June quarter. And so we have about 20 to 25 companies in the portfolio. They're all US traded. So we own some international companies, we own Ferrari and Nintendo, for example, but they both trade on the US exchanges. And so we're focused on 20-25 companies that we consider to be in the top one to 2% of the overall quality group.
I mean, that was one thing that Sean really taught me was when I came in, you know, I was used to maybe coming from the newsletter space or coming from Johnson investment Counsel ,our work before, where we had 70 companies in the portfolio, he really drilled it into my head that we have to own one to 2% of the best, we can't have the top 10%.
We need the top 1 to 2%. And that's a challenge because I like coming up with new ideas and buying new companies, but it has such a high hurdle. You know, we have to find just the cream of the crop the top one to 2%. And that makes it a really strong motivator to really dig into businesses and try to find what we call the hook. Like what's different about this business that the market doesn't understand. Because I mean, if a company is top 1 to 2%, people already know it's a great company.
It's not like they're coming out of nowhere. And so if you're gonna make money in those types of stocks, you have to find something that the market doesn't yet fully appreciate about the business. And you know, for example, Chipotle is a company that is a Mexican restaurant chain, mostly in the US, but they're growing some international the hook for us there was it's a fresh food supply chain advantage.
So at Chipotle, there are no freezers, no microwaves, no canned foods, everything is prepared fresh. And some of your listeners may know that in 2014-2015, they had a massive foodborne illness scare. And that was because as they grew, their supply chain hadn't really caught up with their growth. And so mistakes were made. And that created a whole E. coli and stomach flu issues. And so that really damaged their brand, but they've bounced back considerably. And one of the reasons we think so is they've, they've controlled and proved their fresh food supply chain so people might look at it. And one of the knocks we often hear is that it's just a really expensive burrito shop.
But that's not really what It is it's freshly prepared food with Central American flavourings. That's it. Right? It's not, they're not just selling burritos, they're selling bowls, they're selling other items that can be customised to your order. But the key thing is that they have the scale so they can offer you freshly prepared food at a very reasonable price. And that's really hard to do. And when we were researching Chipotle, what we found was that most restaurants in the United States struggled to get out of their home region. So they might have a very successful chain in, say, Tallahassee, Florida, or in Kansas. But to get outside of that region, you have to have word of mouth enthusiasm, because if you take the business from Kansas and go to California, well, no one in California has ever heard of it.
So you have to have this word of mouth to kind of break out of the local dominance. And Chipotle was one of two companies really, that has done that has scaled to a national level over the past 10 years, the other one being Panera. And so they've really broken free of that, that classic ceiling for a great restaurant chain, which is kind of regional dominance. And so it's just a remarkable business. Their rebound has been great, great management team. And that's an example of kind of the hook that we're looking for when we're finding these great businesses and why they might be still underappreciated by the market.
Peter Higgins 26:26
Brilliant I really love that, obviously, lots of people remember that the hiccups that happened at Chipotle, but this seemed to be sorting all that out. Now. Now, I want to talk about being at the 22 Berkshire Hathaway Annual Meeting in Omaha, you presented for Ensemble Capital, a thesis on Masimo at the Best Ideas Conference, which I think it's absolutely awesome that you're able to do that. Please do tell us a little bit about that company, but also a little about the experience of going onstage, I'm going to present it the it's such a huge event?
Todd Wenning 26:59
Yeah, that was that was such an honour to be asked by John and Tyler at MOI to come speak at the moment. You know, I, my first Berkshire meeting, this was probably my fifth or sixth meeting. And this was the first time I've ever done anything like that. The first time I went, I drove out from Chicago, when I was with Morningstar, about six hour drive, I drove out with a colleague, we had no place to stay, I didn't know anybody. And so it was a pretty, pretty awesome moment for me to be able to get to the point where I was presenting at during the Berkshire meeting.
So that that was that was a real treat for me. So the company, Masimo is a medical device company, that if you go into the ICU, or the emergency room, you know, they put those little kind of bandages on your finger with a light, and they read your pulse oximetry levels. And they basically dominated the emergency ICU NICU market, because their sensors are extremely accurate, especially in moments of motion and low perfusion, which is kind of low activity at the extremities of your body.
So prior to Masimo's technology, the alternatives for a doctor if they they would have to draw from your from your veins by syringe, and other patients in motion. That's not easy to do. And it's not fun for anyone, the patient, the doctor, or anybody. The alternative at the time was some other sensors, but they weren't very accurate.
So as a doctor, it was hard to make decisions based on what you perceive to be faulty data. And what Masimo figured out was how to do those readings in extremely accurate manner. And so that business was very much they still is, in some ways, a razor and blade business model. So they sell the hardware, which goes into the monitors, or the boxes that they call that sit next to the patient's bedside, and they plug into the sensor on the finger and they take readings from that and then the sensors are replaced for every patient. So that's the razor or the blade side of it, right. So it's a razor blade model. And for a long time, it just kind of coasted up into the right, you know, 8 to 9% annual sales growth, very predictable business, still had a lot of market share left to take. And what happened was in February of this year, they announced that they were going to acquire a consumer audio business called Sound united. And that really scared investors and we think two things really happened.
First is it was just a failure of communication on Masimo's part. On the first they had not had to make such a large acquisition in the past most of their acquisitions were 50-60 million dollars. This was a billion dollar acquisition. And so they didn't have a separate analyst meeting to discuss the acquisition they kind of merged it with their earnings call. And so investors didn't inquire about the great quarter that the core business had.
They were all focused on this on this business. And they and the other part of that communication was they didn't want to tell you what they were planning because they weren't ready yet. And the deal hadn't closed. And, you know, they didn't want to tip off Apple to what they were trying to do with the consumer audio business. And so investors just sold first and as well as ask questions later, I guess, right. And so we had followed the company for a very long time, had very good sense of what that core razor and blade business was worth, on its own. And when the stock price fell, as far as it did, we thought, whatever happens with the consumer business, we are generally favourable about their opportunity there. But whatever happens with that the core business is still undervalued. And so that's what I want to present at Masimo was that, you know, despite the market, strong reaction to the acquisition, the other part being that, we felt that, with hindsight, February, was still kind of early in the market, panic for 2022. And it was almost a canary in the coal mine, so to say, for investor temperament at the time that hadn't yet manifested in the broad market, but investors were a little nervous about owning high multiple companies. And then when Masimo made this acquisition, they just panicked.
I mean, the worst day that Masimo had had in its trading history from 2007 to 2022, was a down day of 14%. They were down 37% that day, so it was a huge shake up in the stock price. And, you know, we were certainly upset at the decision at first and like everybody else, but because we had that valuation discipline to understand what the core business was worth, it gave us the ability to be patient and think through, okay, what's actually happening here? And can we see the silver lining in this acquisition?
Peter Higgins 31:56
Brilliant, I'll be having a look at that myself. Possibly, when I get chance to.
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Peter Higgins 32:17
Now, I want to stick with Buffett and the Berkshire Hathaway annual event is just investors around the world just celebrated with him is 92nd birthday. What is it for you, Todd and so many other investors like myself, that actually gets us as go towards what you're saying, we've got our own little strategies over here. But we always have a bit of the Buffettology sort of strategy as well, going into our portfolios. What is it? What is he and Charlie Munger done that just so resonates with so many investors globally?
Todd Wenning 32:45
You know, I think we all know, situations in our industry where trust was broken, integrity flaws, there's a sense for investors that, you know, you can't trust anyone in the financial industry, right, there's always a risk that something will happen. And, you know, I think anyone who's been to Omaha, or the Berkshire meeting, I would think, would agree that it's almost, it's almost a religious experience going and I don't I say that just lightly, but you're coming in your gathering with other people who are like minded, who are focused on the integrity of the industry, upholding the trust.
I mean, if someone said to me, I can leave my bag, on the chair, at the meeting, and leave with my computer and my laptop, whatever. And I trust that the people around me aren’t going to take it, because they've come here to kind of absorb this, I guess, vibr, for lack of a better term that Charlie and Warren have established, which is, you know, to act with great integrity. And so I think that's so so important to part of their brand so to say that gets overlooked so often people talk about the business decisions, the acquisitions, whatever it might be, but they don't talk a lot about just the values that Charlie and Warren had put out.
And every time I've gone, I've come out just feeling re energised and ready to attack my research and my contribution to Ensemble with just a lot more energy than I had before. So what they've created is very special.
Peter Higgins 34:25
Yeah, I completely agree with you now, but it stay on the theme of the integrity and trust here, Todd, I'm going to ask you to share with us how you go about identifying the intrinsic and extrinsic motivation of management?
Todd Wenning 34:37
Yeah, I think a lot of it comes down to spending time with them to the extent possible, so that can be through former employees that can be through current employees that can be with talking with them directly. I mean, look, anytime you speak with a CEO of a public company they have they have mastered the art of marketing and sales. So you always have to be on guard right about that as an investor, so you have to triangulate your information, and try to figure out what is real and what isn't. And I think what resonates with us so much is we have a focus on stakeholder value, which goes beyond shareholder value. It talks about how do they treat their customers?
How do they treat their suppliers, we got some great examples of that during COVID, when things shut down, companies taking care of their suppliers, giving them some credit, giving them some cash. Those are the types of businesses that that we want to own because they are part of an ecosystem, right, and no company is an island, they have to operate within an ecosystem. And they have to be a part of that they have to be able to willing to give up a little in the short term for the long term benefit. And so that's how we really focused on thinking about how management might be extremely motivated. Are they do they come to work motivated, not just by the paycheck. One of the frameworks that I like to use is, is this a mercenary CEO? Or is this an owner CEO, because there's a lot of hired managers out there who were there for a couple of years to get the stock price up and head somewhere else.
I want to find someone who's passionate about the business, the mission of the business, and they have extrinsic motivation to grow the business for themselves through their employees for a society and the community at large.
Peter Higgins 36:21
Brilliant I love that response Todd. Thank you very much. So now you're based in America, as we've clearly stated here. And so you've seen first-hand, Gartner's hype cycle being played out regarding SPACs. With many now looking to return the cash to investors, they can't find suitable or viable entities to purchase. Most notably, Bill Ackman is looking to return 4 billion to investors. Todd, what in your view went wrong with the whole SPAC sort of playbook?
Todd Wenning 36:49
Well, at a high level, I think it's people wanting to get rich quick, right. That's what it comes down to trying to generate a lot of enthusiasm. And we saw so much of that in the past two years, you know, trying to generate hype around whether it be a cryptocurrency or something and without any substance underneath it. And I don't have a strong opinion on crypto.
But I think that behaviour was indeed present, trying to generate enthusiasm where there was nothing underneath it or nothing substantial underneath of it. And so that was just kind of theme of the time, right? It was get rich quick. And going back to Buffett and Munger, you know, everybody wants to get rich, but nobody wants to get rich slowly. And I think that's what we're trying to do at Ensemble.
We're trying to focus on owning great businesses that have tremendous economic machines underneath them that are generating strong returns on invested capital every single year that are producing tremendous shareholder value. And no matter what happens to the market price in the short term, we continue to believe that our companies are generating strong fundamental growth.
I can't think of a company that we've covered, even though the stock prices had been down in many cases, where we thought, oh, man, the fundamentals are just completely messed up. Something just hasn't worked. We all have our companies to one extent or another. Some are a little bit weaker than others. Some are stronger than others. But none of them have been thesis breaking business decisions, right?
Peter Higgins 38:13
Yeah, no, I agree with you now. Now sticking with Gartner, the technology powerhouse. They said by 2026, 25% of people will spend at least one hour a day in the metaverse for work, shopping, education, social and or entertainment. What are your views and thoughts on the huge sums that are in invested in that space at a particular this particular time?
Todd Wenning 38:35
Well, I think in some ways, we're already in the metaverse, I mean, you and I right now are are speaking virtually right. So I think I think we're already in it in some ways. And I think to the extent, you know, being interested in in video games, I've been a video game player my whole life and, you know, Nintendo in the portfolio, there's certainly an opportunity to have a digital experience become more a part of your, of your daily routine.
You know, I think it the whole virtual reality side of things might take a little bit longer than thought, you know, I have an Oculus 2. I've used it, but it's not part of my daily routine. Yeah, there's not a killer app, so to say, with the Oculus 2 to yet that really draws you in to that world. And it is an incredibly immersive experience. And I think having a remote employee, I can sympathise with the draw to that kind of virtual community where maybe my colleagues in San Francisco and I can converse on the metaverse right and have more of a presence versus just a two dimensional view of each other over Zoom.
So that could be a bigger part of it. People could do more retail more shopping. Companies can perhaps not invest as much in their brick and mortar. They can create some experiences that are unique in the metaverse. But I think that's going to be more of a challenge. I am more confident and more of a slow transition to that than any sort of quick jump into In the virtual world, I mean it took the Internet to web 2.0 to really become a part of our daily lives. And I think something similar will happen with the metaverse.
Peter Higgins 40:10
Brilliant. Thank you. Now the huge theme that's going about at the moment, and with lots of money being thrown at it as well, is that a sustainability and ESG investing, and more and more investors want access to that, please share your thoughts on ESG investing, and its themes and that in relation to the circular economy?
Todd Wenning 40:30
Yeah, I think it goes back to the stakeholder comments I made earlier, we’re not from a strict ESG approach. But what we want to avoid are companies that are trying to do unsustainable things sustainably, we want to avoid off balance, sheet liabilities. And those are situations that may not qualify for ESG, or maybe included in ESG indexes.
But we want to avoid companies that are trying to do something that's just not working, but they're trying to do it anyway. And one example of this is sort of the low wage, fast food jobs that we see that have been in the United States for decades, right, you have fast food chains that have been able to pay people below poverty wages for a long time. And now it's working against them, right, all of a sudden, labourers decided that we want to get paid more. And that was an off balance sheet liability that was not present or wasn't obvious to investors before. But now these companies are struggling, and now they have to make a decision to we have to ramp up and robotics we have to do. And that's a real change from their previous business model. I mean, the classic example is, you know, all the banks before the financial crisis, and you Chuck Prince had that great quote about, you know, when the music playing, you got to keep dancing.
Well, that's just not what you want to see as an investor. And so that's what we try to avoid getting involved with from an whether it's environmental, if the company's doing something bad to the environment, that may not be a big deal to most people, but we see it as a risk, we don't want to be a part of that. Governance. Same thing. Same thing with social aspects. I mean, we don't want to be investing in companies that we believe at present are creating off balance sheet liabilities for themselves.
Peter Higgins 42:18
Brilliant. Now, I'm going to ask you that almost a similar sort of question, but in your personal investing accounts, what's your investing style, then what really matters to you regarding your strategies, and the companies that you invest in? Is it similar sort of approach?
Todd Wenning 42:30
It is a similar approach, you know, I am focused on on high integrity management teams, great businesses, I don't usually trade the top of my personal portfolio. There's the Ensemble strategy is the largest individual investment that I have. But the other equities that I own, all kind of follow the same theme of great cash flow generating businesses, management of high integrity, economic moat, usually paying dividends.
Peter Higgins 42:58
Brilliant, on the same sort of thread, could you share with us your greatest investing success that you've had in your own book?
Todd Wenning 43:06
I have my own book, probably owning Costco I've owned Costco for over a decade now. And I think that's another business with great integrity and privacy as well. And yeah, they've been able to, you know, Nick sleep from the UK is no longer running money, but has some great letters about what Costco’s core advantages really are. And that's one another one, those examples that have a hook that the market just didn't understand.
So Nick Sleep talked about scaled economy shared. So as Costco grew, they could have kept a lot of that profit margin for themselves. But they reinvested it into keeping prices low, which then drove more members to their warehouses, which allowed them to expand, which allowed them to create more value for their customers. And it just created this tremendously positive feedback loop where customers for employees in the street didn't understand it. If you look back at some of the sell side reports from 2003-2005, they're saying Costco is paying their employees way too much. If they scaled back and paid them market wages, their margins would be this and they'd be trading at that. But that wasn't caused was planning again, they wanted to grow rich, slowly, they wanted to create wealth, slowly, they were playing the long game. And that's exactly the type of business that you want to be behind. And sometimes the market will panic.
I think one of my happiest investments decisions when Amazon bought Whole Foods, Costco stock price fell very sharply because there was a worry that oh, well, everyone is just going to buy their groceries online now. And I went home to my wife and said, you know, is Costco done for you? And now that Amazon owns Whole Foods, she said, no, these are two shopping experiences, completely different. And so I thought, Okay, well, you know, she's the one that goes through a lot more than I do. And so I'll trust her and continue to invest in Costco and that ended up being a very good decision for me.
Peter Higgins 45:04
Brilliant. Always trust the boss always trust the wife mate, I’ve learned the hard way. Now we can't have this conversation in this interview with you Todd without talking about one of your greatest passions, sports. I'm not going to say the name or the club. Do you tell us all about your love of sports?
Todd Wenning 45:21
Yeah, so I, you know, I grew up playing sports, I was a high level baseball player my day I didn't play at a minor league or professional level. But I loved playing baseball when I was in high school, and played basketball for a little while too. And so I just, I've always grown up with it in the Midwest, you know, when you're six years old, they hand you a football, right? And you learn how to play. And so that's been a big part of my life. And when I moved to the UK, I was deciding on which football team to support and that was when Clint Dempsey, fellow American, was at Fulham and I decided to become a Fulham supporter. And it's been a bumpy road here for the past couple of years. But they've been in great form this year. So happy to see it.
Peter Higgins 46:03
Good, good, good. Good to hear that. Now, the other aspects of your and the reason why we're having this conversation as well is that you also did quite a lot of work for charities in there around the community. So please would you share some of that as well?
Todd Wenning 46:16
Yeah. So probably the charity that we do the most supporting of is Ronald McDonald Charity Houses. And, in fact, we were first exposed to Ronald McDonald charities. When we were in London, my wife would go to volunteer at a Ronald McDonald House, I believe it's in Lambeth, I could be wrong, but it's in south of the river. And so she had a great experience there. And so what Ronald McDonald charities do is they provide temporary housing for families who have kids who are in the hospital for long stays and don't have a local residents. And we move back to the States, we continue to support the charity, when we were in Cincinnati, Cincinnati is blessed with one of the top three or four, however you want to scale it, children's hospitals in the US. And it's like Philadelphia, Dallas, Boston, and Cincinnati are the top four. And even though Cincinnati is maybe the 35th largest metropolitan area in the US, so we're very blessed to have that that hospital here. And particularly us because my daughter got sick a couple years ago, it was in the hospital for 19 days. And we were fortunate to live 20 minutes away.
But there are so many families that come in from all over the country in the world to go to Cincinnati Children's Hospital. And so we do a lot of support for the Children's Hospital. In Cincinnati, we bring food we donate financially, we support every way we can. So it's a great charity, great cause, you know, when you're a parent, and your child's in the hospital, you know, the last thing you want to worry about is where you're going to stay. And so it's a great, great way for families to have a little piece of home when they're not home. So we very much encourage any listeners to check out.
Peter Higgins 48:08
Yeah, I'll make sure I’ll add that link when I'll get it from you later on. Todd, we've covered all my questions. I've thoroughly enjoyed that we've covered the whole yardage of investing. I think next time I'll probably try and get a bit more into the moat side of things. But it's been an absolute pleasure to speak to you again, wish you all the success you can get working with the team at Ensemble Capital. So that was Todd Wenning, author, blogger presenter and also presenting at the Omaha events going forward. Fantastic. Senior Investment Analyst Ensemble Capital. Thank you ever so much for joining us today from America.
Todd Wenning 48:48
Thanks Peter.
Peter Higgins 48:49
Take care God bless.
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