Capital Ideas^TM

Intro to podcast interview

Will McKenna (WBM)

This week on Capital Ideas, we’ve got a fascinating conversation with portfolio manager Greg Wendt about the lessons he’s learned from 35 years of investing in stocks.

I’m your host, Will McKenna. Let’s get into it.

Interview transcript

SPEAKERS: Michael Utley (MJU), Greg Wendt (GWW)

Michael Utley: Well, we are sitting here with Greg Wendt. We're going to talk about a number of market related subjects. Greg, welcome to the Capital Ideas Podcast.

Greg Wendt: It's always great to be back. And really nice to spend some time with you today.

Michael Utley: So the last time you and I had a sit down interview like this was 2018. Which is not that long ago, but it feels like we live in a different world.

Greg Wendt: Five years.

Michael Utley: It's only been five years, but we've had the pandemic shut down the whole global economy. We've had the war in Ukraine. We've had this horrible bear market. How do you manage money when there's so much unpredictability and so much volatility?

Greg Wendt: The very start of it is, that's what we're paid to do, right? So if this were easy, people would do it on their own. But what I've learned through the years is, most stuff is noise. And most stuff doesn't affect the fundamentals of companies in a significant way. You know, they might miss a couple of percent on sales. But in the grand scheme of things. I'll never forget the first time I bought a stock in a moment when the stock was cratering in panic. And this goes back to 1990, something like that. And it's when there was an attempted coup in Russia. And Yeltsin was at the Russian White House, and there were tanks outside it, and the market was cratering. And I went and bought Mattel. And I bought Mattel because I knew how strong the U.S. domestic market was, what their product, the traction their new products were getting. And I went, ‘I don't think this is going to affect Barbie.’ But I mean, it was the first time I ever went, ‘Maybe I know something the market doesn't today.’ And you just have to come in with the attitude of, I have selected a portfolio of companies that are durable, that are well managed, and I understand what the risks are. And then you overlay whatever today's events are with the profile of that company and go, ‘I think my company is going to be fine.’

Michael Utley: That's the way to do it. All right, very good. That's a great assessment of investing during difficult times. So let's take a step back for a minute here. I always like to begin with some big-picture questions, stories that are, you know, very much in the news. So there's a lot of talk, obviously, right now about the market. We had a terrible 2022. This year so far, year to date, it's been pretty decent. So there's a lot of debate, as you know, over whether the bear market is officially over, and we can put that in the history books. And have we started a new bull market? I guess, if you look at, if you use the 20% rule, maybe we're in a new bull market. What do you think?

Greg Wendt: I do think a fair question is, have we put in the lows for this market? Were the September 2022 lows, the low for this cycle? My best guess is that they are. It doesn't mean we're off to the races. But I think that may have been the period of maximum pessimism. And not to digress. But as both a student of history, and I try to be a student in the markets, I always go back to 1942. Where the market bottomed before there was a single Allied victory in the world. And the market knew in 1942 that the Allies were going to triumph over the Axis. And it didn't wait for the Battle of Midway. I think we hit a period of maximum pessimism. And I suspect, not 100%, but I suspect that the market has figured out that the recession that probably is still ahead of us is not a deep one, and that some of the financial excesses have already been dealt with. And so I'm constructive, not optimistic, but constructive. And I think the September 2022 lows were the low for the market.

Michael Utley: All right. Makes sense. Well, a minute ago, you mentioned the R word, which is another topic that's been on everyone's minds for quite a while now. Recession, whether that's going to happen or not. And I know you spent a lot of your career as a retail analyst, still cover retail. Do you think the consumer can save us from a recession?

Greg Wendt: If you sit down and look at the math, kind of the trajectory and the comparisons, I think it's highly likely that the fourth quarter of this year is going to be negative. And I think there's a reasonable chance that a quarter on either side will be negative. So when I say recession, I'm talking about back-to-back negative quarters. Having said that, one of the great things about this business, and what I do for a living is you keep learning and every time it's different. And we've never seen a full employment recession before. And so that's why I think the recession will be a reasonably shallow one. So I expect a recession. I think the math drives you there. But I don't think it's going to be a recession where we are all up late at night trying to figure out how we're going to get through it.

Michael Utley: Right. Well, related question. You know, as always, we look through your research reports before we sit down for these interviews, and you mentioned in a recent one that you like to buy consumer discretionary companies amid recession worries. So I'm just wondering if you could explain the rationale for that, and maybe give us some examples of how that approach has worked for you.

Greg Wendt: So retailers are certainly early in, in terms of, they reflect the decline in the market before many other industries do. Often they’re early out, but that's less consistent. But in the early in phase, in particular, the markets not very discriminating. Essentially, they take all the retailers and, and, and beat them mercilessly saying the consumer is dead, and your earnings are gonna get cut in half, and all the stocks go down a bunch. And that's when you kind of pause through and try to find really interesting companies. And really interesting companies are obviously: Good management team, strong balance sheet, good market positions. And, you know, I go back to 2008-09 where there was a lot of turmoil in that market. And Williams Sonoma got pummeled. This is a company with a pristine balance sheet, owns their brands, and has had terrific management for a very long time. And so you know, it's just these periods of maximum pessimism, where the markets just not discerning. And one of the reasons you follow companies over a long period of time, is not necessarily because you're going to own them over that long period of time. But if you're trying to get to know a company, as it’s spiral, spiraling down, and, and trying to get up to speed quickly, and trying to understand the history of 20 years, in 20 days, it just doesn't work. And so, I have followed Williams Sonoma, now for 35 years. And I just think, the recession, the early stages of a recession are a period where the market is particularly undiscerning. And takes a big chunk out of retail valuations just across the board.

Brief musical transition

Michael Utley: All right. So we've talked a bit about consumer discretionary. And I'm curious to know about just broadly whether it's consumer discretionary or elsewhere? Where are you finding growth opportunities today? What sort of investment themes are you finding interesting? And then I'll follow up with the opposite of that. What areas are you avoiding in this market?

Greg Wendt: So one of the things about the American economy very specifically, and it's true about other economies around the world, but nowhere more so than in the United States, is innovation. And, and so it's, innovation is always the pathway for new companies. And some of the things I've invested in recently are innovative companies, particularly in the medical device space and now in the consumer space. And then there's kind of companies with pent up demand come, still coming out of the pandemic, and travel would be part of that. Back to medical devices, there have been a lot of surgical procedures that have been delayed, and we are going to see multiple years of demand of catch up for things that did not happen. So there is always opportunity out there. Some of the opportunity comes from good old fashioned Thomas Edison innovation. Some of it comes from idiosyncratic characteristics of sectors or companies. But I, I am having no trouble finding companies I want to invest in.

Michael Utley: So yeah, let's talk about your investment approach. You as an investor. How do you describe your investment style? What type of investor are you? And could you also share some examples of companies you've invested in that sort of epitomize your approach?

Greg Wendt: So I am a research intensive investor. I believe, both in Capital’s research, and frankly, I've been an analyst here for 35 years, I believe in my ability to do research. And so you see lots of companies. And as you begin to screen out the companies, you're screening out for companies that have histories that don't make sense, where it's one mediocre management after another mediocre management, where the moat is shrinking, not growing, where there's nothing proprietary.

And particularly in small cap land, the harsh reality is, most small cap companies will always be small cap companies. And so what you're digging through, and that's why it's research intensive is, you're trying to find companies, that can be a lot more than a small cap company. And so when I, when I think about research intensity, you know, part of it is doing the desk work, and undoing the, understanding the financials, part of it is understanding the industry, but part of it is truly understanding each and every company, its history, and, and the person running it. And I'm a deep believer that management matters, particularly in smaller companies. And I judge a management not on, ‘Do I like them?’ I judge management based on their track record. What CEOs do next is often and mostly informed by what they did in the past. So you have to understand who they are, what their incentives are, and what they've done in their past career.

You know, on a previous one of these podcasts, I talked about Ken Taylor, at Texas Roadhouse, who has tragically passed away, but his ability to do every job in a restaurant, his passion about food quality, which is actually I've never seen anybody more passionate about food quality, I think I talked about the lettuce, and his passion for the fact that they don't stack the lettuce more than 12 inches high, because they don't want to crush the lettuce and mostly competitors use big bins. And he thinks that's a competitive advantage.

And, again, not to just stay in the restaurant industry, but it's an industry I covered for years. The the the visionary, who built Panera is a guy named Ron Shaich. And Ron went to Harvard Business School. And unlike everybody else who went to Harvard Business School, he didn't go into consulting or investment banking or investment management. He went and got a Mrs. Fields Cookie franchise, and that informed him about how you build a restaurant or a food service provider, which led to Au Bon Pain, which then led to Panera, which was a spun out of Au Bon Pain, which he sold at an all-time high at a valuation that I'm still dazzled by.

Brief musical transition

Michael Utley: Well, here's one of my favorite parts of the podcast, especially with a guest like you. You travel a lot, researching companies, as you mentioned. So I know, you've told us a number of your interesting stories from the road in the past. So I'm hoping maybe you can entertain us with one or two more for this podcast.

Greg Wendt: You know, the value of being out on the road. If I were ever to write my autobiography, which I wouldn’t, and if I did, no one would buy it, I'd still title it, ‘Get on the Airplane.’ Because being out on the road is where you learn everything.

Well, very early in my career, I was fortunate enough to meet the CEO of Mattel, a guy named John Amerman, who ended up helping to teach me how to interview CEOs. He was just a really wonderful executive, and very helpful in my development as an investor. I'm still in contact with him today. So 36 years later, John Amerman is still a friend. But as I grew to know John, I asked him essentially the question, you know, how do you do what you do? What's your true north? How do you think as a CEO? And he talked about, you know, ‘There are just some basic values that I tried to stick to. In fact, I had them written down and put on a card, which I keep in my wallet.’ He pulled out a laminated card. And I forget what the eight values were. The last one I always remember is ‘Have fun.’ And John was a guy who loved the toy business and brought great energy to it. But I remember that and I said, ‘John, can I keep this or can I get a copy of it?’ He said, ‘Just keep it I've got I've got 10 of them.’ And so I kept it. And I kept it in my Mattel file. And John left the company, after a great run as CEO, retired. Along the way, three CEOs later I was sitting down with a new CEO of Mattel for the first time. And somebody who I thought brought great talent to the company. And so I sat down, and he knew that I knew the company very well, and we're having this conversation. And I said, by the way, here is John Amerman’s eight commandments. And I think these are as relevant to Mattel today as when John first gave me this card in 1987. And he said, ‘I'm having lunch with John Amerman tomorrow. I've never met him before. Can I have this card?’ And he sat down with John said, ‘You know, John, I'm thinking about making sure everybody in the company understands my values. And I'm thinking about writing them down and putting them on laminated card. What do you think of this?’ And he showed him the card and there was a good laugh. But it's just kind of an example of being part of the conversation about one company through a half dozen CEOs and multiple decades. There's nothing that I learned that wasn't public information. But you glean a lot of insights, when you understand the transition between the various CEOs, the priorities, and kind of the torch they're handed and what they do with it.

Michael Utley: Well, it's really amazing to have that kind of history with a company. And as we all know here, there’s not a lot of investment firms that do.

So Greg, how did you wind up at Capital Group?

Greg Wendt: My journey to Capital had a lot of luck involved. I was a department manager at what is now Macy's and got accepted to Harvard Business School. And I made a decision that I wanted to go into financial services. I spent my summer between first and second year working at a Wall Street firm as part of their trading training program. So trading fixed income instruments. And I thought that's what I was going to do. I received an offer, received a bunch of offers, because it was 1986. And I just had this moment of clarity and panic. When I went to my, when I went to think about which offer to accept, which was, I was doing it purely for the money, and that I had not really enjoyed what I did that summer. And so I marched down to career services. In those days, the interview signups were in notebooks. And for reasons that I can't even tell you, I pulled out the venture capital notebook, and signed up for every remaining venture capital interview. Capital Group Companies was in the wrong notebook. And so I signed up to interview with what I thought was a venture capital firm. The night before the interview, as I got the information back and looked at it, I went, ‘Hmm, I'm not interviewing with a venture capital firm. I’m interviewing with an investment manager.’ But I proceeded with the interview, and I interviewed the next day with somebody from Capital. And I was so intrigued and impressed that I decided to proceed through the process. What really surprised me is, at the end of the process, I did the absolute right, the right thing for the right reasons, which I haven't done all that often in my life. But Capital was the lowest paying of the offers I received that year. And I picked the lowest paying offer, because the people I'd met, seemed to enjoy their jobs, were intellectually the most curious people I'd met, and were the nicest people I'd met.

Michael Utley: Very good. Yeah, I think I may have chosen Capital for the same reason. The people were a huge part of the decision.

Greg Wendt: But the fact that I've spent 36 years someplace because Capital Group was in the wrong notebook is still stuck with me.

Michael Utley: That's incredible, great story.

Well, that note might be a good place to end the podcast. Thank you so much for joining us.

Greg Wendt: Thank you. 

Episode outro

Will McKenna

Okay, there you have it. Special thanks to Greg Wendt for coming on the show and sharing his memories. If you liked what you heard today, please follow us on your favorite podcast platform. Thanks again for listening and I look forward to joining you on the next episode of the Capital Ideas podcast.

Closing disclosure

We're always trying to get better, so if you have any feedback, including topics you'd like to see addressed in future episodes, send us an email at CapitalIdeasPodcastAustralia@capgroup.com.

For Capital Ideas, this is Matt Reynolds reminding you that the most valuable asset is a long-term perspective.

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