Back Columbia Business School interviews Paul Moroz CIO

Columbia Business School interviews Mawer CIO

October 23, 2019 Print

This interview has been reprinted with permission and originally appeared in Issue 37 of Columbia Business School’s Fall 2019 Graham & Doddsville newsletter. Related Art of Boring links have been added.

GRAHAM & DODDSVILLE: Could you tell us how you got into investing?

PAUL MOROZ: I became a businessperson before I was an investor. It started in junior high school trying to find ways to make money, so I sold chewing tobacco brought back from the U.S. In high school, I started a business with my friend cutting grass and doing spring cleanup, before expanding into landscaping.

That was a fantastic experience, because we learned so much about all the aspects of running a business. We wrote a business plan, got a loan, and bought a truck. In fact, the organization that lent us money forced us to create a partnership, so we learned about the legal aspect. We were also doing our own marketing. We hand-delivered flyers, hundreds of them. We also had to figure out how to collect the money and deal with receivables, invest capital, and manage the few employees we had. We later sold the business, so I also had to understand what it was worth to a buyer.

You learn so much about investing from a business perspective. For example, we used to have a contract to cut people's grass, and that was great because it was recurring. I knew how much money we were going to make over the course of the summer. That was very different than landscaping projects, because those were one and done. It was a lot more cyclical. Those concepts were important for a businessperson as well as for an investor.

I also started speculating around that time, which is on the opposite end of the investing spectrum. For example, in high school, I raised $1,000 to invest in the Bulgarian lev, which had depreciated like 1,000 times against the U.S. dollar. I thought maybe currencies would mean revert, and if you invested $1,000 and this thing snaps back, well that's your first million. I remember walking down to the local bank in a town just outside of Calgary, Canada, and trying to buy $1,000 worth of Bulgarian levs. Of course, the bank didn’t have Bulgarian levs, and they were perplexed. I didn't understand the full economic picture at the time and how the economy produced that result. Still, it was a huge learning occasion.

In university, I incorporated an investment company. That was neat, because it was a real-time experiment, like a little hedge fund. We weren't dealing with a lot of money, maybe $50,000 in total at its peak, but we turned the portfolio 20 times a year, and we used some leverage. I got to make so many mistakes in my career early on. The lessons were massive. What was so neat about that experience was I had incorporated the company myself. I read through the Alberta Corporations Act, bought share certificates, and held shareholder meetings. It was like this crash course in thinking about the governance, the company, and what it really was. These experiences of speculating, running a business, and thinking about governance all proved a tremendous accidental education to becoming an investor.

I had an extremely clear idea that I wanted a career in investment management, but even beyond that: I just did it. I skipped class to trade stocks on the library computer. In one year, I worked at a local brokerage firm, which was another great experience. It was an entry-level position, entering trade tickets into the system. Still, I had to skip a few classes to take that job and get that experience. In my co-op term, I worked for Merrill Lynch in research.

Sometimes there are things in life which can create a little bit more motivation. The University of Calgary had an investment program with real money that you could run, and I applied for that. I'll always remember the interview. This was right at the end of 1999 and I was talking about Nortel Networks, how I thought it was really a silly investment. The valuation didn't make sense. At one point, the person interviewing me asked: "How can you want to short this stock when there's so much collective intelligence and people that believe in it." I had a probably inappropriate response to that, something like “I don't need to follow the crowd.” Needless to say, I didn't get the job. But I had the mild pleasure of watching Nortel melt down, and knowing that independence was worth something.

When I got out of school, an opportunity came up in the investment arm of the Alberta government. Today, they look after around CA$100 billion. That was a rotational program, where I got to see how a large institution managed money.

GRAHAM & DODDSVILLE: What was your role at the investment arm of the Alberta government early in your career?

PAUL MOROZ: I spent some time in different groups, which was beneficial. I spent a little bit of time in the asset allocation group and gained a different perspective. I remember learning about the concept of portable alpha, which I thought was funny at the time—separating the value that you can add, versus what the general stock market is going to do—and bucketing those into two different groups. That's a pretty powerful mental model to have early on.

Then I spent a little bit of time in the analytical group. Even though the work wasn't terribly exciting, setting up a systematic process for benchmarking and measuring performance, it still led me to realize that if you're going to get better at the sport of investing, you must keep scores properly. You have to be intellectually honest and evaluate your mistakes in order to be able to improve. Finally, I had an experience in the Canadian Investments Group. I got to see how an institution manages money and the pressure of thinking about things on a relative versus an absolute basis. I remember a decision was made to buy Nortel on the way down. It was still an important component of the Canadian stock market after the tech bubble had been washed out, and the decision was meant to reduce risk by moving the position closer to its benchmark weight. I will always remember thinking to myself that was such a backwards way of looking at risk.

As an investor you really have to think about the consequences of the ideology that you take. Looking at risk on an absolute or a relative basis is a huge philosophical decision that practically impacts your investment decisions. I'm not saying either side is right or wrong, but it's important to understand yourself, and where you stand on those issues.

GRAHAM & DODDSVILLE: Do you use a benchmark?

PAUL MOROZ:Well, it's a unique situation, because today we manage close to CA$60 billion for our clients. Over 70% of our business is institutional. To my earlier point about the need to have a proper measurement and keeping score properly, we have proper benchmarks for each of our investment strategies.

From a client's perspective, you have to add value over a cycle or there's not much point in paying fees. So there's a relative component there. But what's unique about our firm is that when we started in 1974, we were focusing on managing money for high net worth individuals. One of their goals is preserving capital. Risk is looked at in an absolute sense. It's Warren Buffett's comment: "Rule number one, don't lose your client's money. Rule number two, don't forget rule number one."

This gave us a unique perspective that has shaped how we think about risk as a firm. I'm not so concerned about volatility, but what I don't want to do is impair clients' capital. Still, we have to add value as an investment management firm, so there's still a relative component.

GRAHAM & DODDSVILLE: Do you use portable alpha to filter out the noise of the market?

PAUL MOROZ: I think the concept is much more interesting in theory than in practice. You can have all sorts of strange things—even with the best laid-out plans—go wrong. Imagine if we took our existing philosophy and process to create a portfolio, and then short a given asset to net out the difference. While I think that tends to work over a long period of time, you can get short-term challenges that could last several years. My approach is to never put yourself in a position where even if you're fundamentally right, the markets can dictate your results.

When I was younger, I learned it the hard way shorting stocks that got called and taken away. Even if you're fundamentally right, you don’t have the capacity to stay solvent. That's the main issue I see with portable alpha. I know you can create all sorts of interesting products with derivatives, but I think as you increase counterparty exposure and financial leverage, it gets complicated fast, and it's not a place where I see much practical application for clients.

GRAHAM & DODDSVILLE: Were there any inflection points or mentors that influenced your investment strategy today?

PAUL MOROZ: I went through a real exploratory phase. The very first book I ever read on investing was on chart analysis, explaining the Dow theory and the different ideas around how much information the market has. Later on, a big part of my investment philosophy came from my original business experience: is the growth of a company from recurring business?; can it access capital to finance its operations?; even simple concepts like barriers to entry. I remember putting  our fliers for the landscaping business right on top of someone else's flier; there were really no barriers to entering that business. I joke that I started out with the best education because it was also the worst business to be in.

Many people refer to competitive advantage as a moat, based on Warren Buffett's letters. I think something else is just as important yet hasn't gotten as much airtime: functional advantage, which is the very nature of the business. The person who started me on this is Thomas Caldwell. At some point, he was investing in stock exchanges. He made the point that these are really good businesses by the very function of what they do. A stock exchange naturally tends to have a network affect, not require a lot of capital, and grow with the market. For all these reasons, a stock exchange is a pretty good business. When I started running our small cap portfolio at Mawer, thinking about functional advantage became a real theme when sorting out good businesses from the bad on a first principle’s basis, before getting to competitive advantage or management.

I also read Ben Graham, who is key for understanding the concept of intrinsic value, and separating the company from its stock. A point on which I differed immediately was the importance of book ratios. It was based on my experience of selling that landscaping company. I think we had $700 of equipment, and sold it for $1,500. Beyond what’s marked in the books, the success of the business is what really mattered: are those contracts going to be kept?; will landscaping work be done under that brand?; can you manage your employees and operate profitably? What mattered was the cash flow stream and its longevity. There have been investors who are too focused on Ben Graham's philosophy, focusing on book value instead of recognizing that it’s just a heuristic for the cash flow that can be produced by those assets.

The way the world has evolved, there are a lot more knowledge-based businesses where the competitive advantage isn't based on the assets. You have to make a judgment on the people and the culture. Phil Fisher is another big influence. I still refer to “able and honest” management teams; those are his words.

On another level, I'm also a fan of George Soros. Beyond the currency and speculation, I think The Alchemy of Finance is such a great book in which he talks about the concept of reflexivity and the separation between what makes a hard science and what makes a social science. The market has this unique characteristic that you can really influence the outcome. That complicates things both to the upside and to the downside. This has influenced not only the way I think about investing, but also the way I think about managing a business. Just by injecting energy and leadership into an organization, you can change the dynamics of that business, which then results in a different economic outcome. 

The universe is very reflexive.

GRAHAM & DODDSVILLE: What’s your investment process?

PAUL MOROZ: I came to Mawer in 2004. At that point, I had read so much that I was able to clearly differentiate between what I believed in and what I didn't believe in, based on what I saw in the market and the errors I made. Our investment philosophy is very simple. We invest in wealth-creating companies—the ones able to earn a high return on their capital by virtue of their competitive advantage—and able and honest management teams allocating capital to build a resilient business. Our last tenet is don't pay too much. You can shortcut our investment philosophy to Quality at a Reasonable Price, as opposed to value or growth. It's not going to be different from how a lot of other investors look at the market. It's the process and the culture, along with the modes of thinking and incentives, that have enabled us to take that simple investment philosophy and execute it very well. There's nothing secret or proprietary about our philosophy. These are all other people's ideas that we've stitched together.

There are a number of factors we look at when assessing management. I still feel like we're in the dark ages in terms of management evaluation, but one of the benefits that we get out of going back and reading public documents over time is that you can understand what management teams have said they are going to do and what is their actual track record of doing so. If a management team is consistent in thought, deed, and word, that's our definition of integrity. We want to allocate capital toward people with greater integrity, which really comes down to trust and execution. There's a better chance that management is going to do what they say they will do, if they have established that track record in the past.

On capital allocation, it's not just business models that create wealth, managers can make decisions to use capital more effectively or not. There is just a wild range as you start to interview management teams. When you go out to their offices, you can see the decisions. It's the little things—whether they spent money on art in the board room, how much they are willing to pay people, or whether they have a process for thinking about acquisitions. All this relates to capital allocation. There's the immediate thought about what a stock is worth, but as you move out in time, as T tends to infinity, those choices of capital allocation become a prime driver of stock returns.

Like many people, we believe the value of a company lies in its discounted cash flows. A differentiating aspect of our philosophy at Mawer lies in our probabilistic approach. I actually wrote in my cover letter, "This intrinsic value thing is great, but have you ever thought about looking at intrinsic value in statistical terms, rather than just as an absolute number?" It stemmed from my observation and experience looking at oil and gas companies, where I thought "You don't know what the price of oil is going to be." One of the best ways to deal with that uncertainty is to conduct a Monte Carlo analysis. If you were to just estimate the intrinsic value and compare that to the stock price, given the volatility around your assumptions, your discount to intrinsic value may not be statistically significant. Intellectually, I was already heading down the path of "Wait a minute, the world is random." That's exactly the path Mawer was heading down, which I didn't know at the time. They were implementing these Monte Carlo models that would be the big difference in how to look at the world.

I have a tremendous amount of respect for the intelligence of the market and I think that the goal in investing is often to avoid making behavioral errors. While the concept of intrinsic value is fantastic, one of the errors you can make is to get locked into thinking your opinion of value is the correct one. To the contrary, we build the models ourselves and understand the key drivers of these businesses. We then think about the world probabilistically through scenarios and Monte Carlo analysis in order to understand if, from a statistical standpoint, we actually have much of a discount at all. You start to realize that it's not about getting a top stock pick and being correct. What we get with our Monte Carlo analysis is a fair value range—a framework that imposes a level of humility in our decision-making. As a security trades further down in its fair value range, it doesn't mean it's necessarily undervalued, but it gives us a little bit more statistical understanding of how we should be reflecting these odds. When stocks trade to either the lower or higher end of the fair value range, we adjust. We are very probabilistic as a research department and that can be very different from many stock pickers out there.

It has served us well, because another area where some investors got caught out is on where discount rates have gone. Imagine if you said, "I will only buy stocks that trade below 10x earnings over the last decade." You would have most probably been left with a portfolio solely comprised of companies facing problems. To the contrary, when it comes to valuation, what we do is we randomize and iterate our discount rates, which are log normally distributed after building our weighted average cost of capital up from spot bond yield curves, corporate bond premiums, and equity risk premiums. That allows for some flexibility and evolution in how we look at valuation.

I would say we're practicing relative absolutism estimating discount rates. The problem is, if you have an absolute number, how did you come up with that number? The most that you can say from first principles basis is "Your return should be above your perceived risk-free rate." It's probably not going to be so high or there will be competition that drives it down. So, in a way, it's relative. It's based on inflation. It's relative to your risk-free rate. It's relative to competition. It's relative to how much capital there is. It has to be relative.

What we require for companies to earn over a business cycle is always dynamic. We recognize we don't know true value. When analysts start building models, they have more of an absolute idea on making decisions, and we'll often say: "If you moved your discount rate half a percentage point left, that's a 10% move,” and that's a major change. We have to be aware of that and be flexible in how we look at the world, or else we can make mistakes. So much of this process aims at mitigating behavioral errors overconfidence, as we think we know what will happen.

GRAHAM & DODDSVILLE: Do you use the Monte Carlo simulation to screen ideas or to generate the valuation? Do you seek out investments where the range of outcomes displays a floored downside and a right skew?

PAUL MOROZ: It's mostly after we are into the intensive analysis process. We have some prototypes of automated discount cash flow models that build out ranges, but what we need first is to do the work required to understand the quality of a company.

One of the benefits of our process is we can shift our investment selection based on themes, trends, or options that might relate to that skew. I'll give you an example relating to the shape of a distribution. We have been working on oil and gas companies, particularly in Canada, where a big issue is getting the oil and gas out to the U.S.—we just don't have the pipeline capacity. In reviewing valuations, among many risks are the environmental ones. A company like Canadian Natural Resources might be close to a CA$35 billion market cap, but its tailing pond liabilities could be anywhere from CA$2 billion to CA$9 billion or more. It presents a more negative skew.

On the contrary, one of our European companies is a testing, inspection, and certification company called Intertek. They test and certify all sorts of things to make sure they meet certain criteria and standards. They also have an assurance business to make sure the standards are in place at companies. It's a unique company, and they just announced today they would be developing a sustainability assurance service—enabling companies to understand how sustainable their products are. If you have noticed the rising concern for the environment, it seems that Intertek would be extremely well-positioned to benefit from that.

As a portfolio manager, I would be adding incrementally to Intertek and trimming incrementally Canadian Natural Resources. It's not black and white; it’s about leaning to the right or the left.     

GRAHAM & DODDSVILLE: Could you discuss how you source ideas?

PAUL MOROZ: That's the part of the process we've left the most open and creative. We are a process-focused firm. If you were asking about due diligence, there are a number of specific steps. But there are many ways ideas can come together, and we want that, because creativity's important.

The most creative ideas come about when we just get out there and talk to people. Being in Calgary, Canada, there are not a lot of companies that come to us. We often go to companies in road trips or research trips. We screen all the companies in a country and then get out and talk to those we are interested in.

You might say, “There are an awful lot of companies. How can you parachute into India and figure out which 40 companies to talk to over 2 weeks?" Well, it's relatively easy because we define what we are interested in and what we're not. My estimate is there are only about a third of all companies that really create wealth. You can narrow your investment universe down in fairly short order.

Once you have a conversation with management, if you're not focused on next quarter’s earnings but on how they think, how they build their business, and why they make certain decisions, then the information becomes very rich. Brute force screening is the best way to do it. It's tough, because it takes a lot of time. But if it's tough to do, there's also a better shot that there will be an inefficiency.

We have also institutionalized a lot of things. We have a database with over 8,000 companies and over 300,000 entries, including everything from management interview notes to independent sources of information, such as conversations with suppliers, customers, or competitors, as well as public documents, releases, sell-side research—everything that we've been collecting for over 20 years. This is a platform that helps us organize the world to focus on those companies that, at this time, meet our investment criteria, and where we think we can add a little more value by investigating more. Even when we’re looking at something for the first time, we already know a lot about it, and that helps tremendously. It’s more of a resource allocation problem than a screening one.

GRAHAM & DODDSVILLE: Are there investments you’re excited about?

PAUL MOROZ: We have a slogan, "Be boring. Make money.TM" I think people would be surprised but, over a long period of time, if you're going to be a successful investor, it's not about the one bang stock pick. Having a few of those helps, but it's more about not losing and staying on process, especially in large caps. I have colleagues who could talk all day long about unique, special small cap stocks, but I don't think this illustrates what we're trying to do in terms of consistently tilting the odds in our clients' favor and making value-added decisions for them on a repeatable basis.

A great example is a company called Wolters Kluwer. It’s based in Europe, and I think Peter Lynch would say, "It's a terribly boring name for a terribly boring company." They have a number of businesses that are just the most boring in the world: legal and regulatory, tax and accounting, finance and compliance, and health. The company was originally a publisher. A lot of the products they sell are reference materials and books sold to legal practitioners. All that used to be print, but now the business has been transitioning to digital.

One element of the thesis was that print was struggling in terms of pricing growth, but this was mitigated as the company transitioned to a digital, subscription-based business model. Today, print accounts for less than 10% of the business, and you're only left with these wonderful niches where 80% of the revenue is recurring. Of that 80%, their retention rate stands between 90% and 100%. This goes back to my history of first thinking about businesses and the functional advantages they hold. The combination of nondiscretionary services representing a small cost related to clients’ overall operations is extremely attractive from a business model perspective.

Furthermore, the company has good market share positions. In tax and accounting, it holds the #1 or #2 position across Europe, with a 25% to 35% market share. In their health division, they are #2. If you go into your doctor’s office for a checkup, and your doctor is on the computer, they are not just searching Wikipedia, they’re most likely looking at Wolters Kluwer’s reference materials online. This information is vetted, and we think these businesses are all going to be around for a very long time. They are now at the point where the print business has been declining for a while and revenue growth rate has gone back up from 1% to 3-4%. That's helped drive a little more interest in the security. At this point, it trades at 23x earnings. We consider it in the middle of its fair value range, between high €40s and €80 a share. The internal rate of return stands only at 5% to 7%. This is not something super attractive. Still, we recognize its unique characteristics as we approach the end of the economic cycle.

This is where it helps to be index agnostic. It's categorized as an industrial stock, but the business model doesn't present the same level of industrial cyclicality as most industrials. The doctors aren't cancelling their subscriptions in a down cycle. It's a nice recurring business and it might even have greater pricing integrity and stability during a downturn than many consumer staple stocks, whose barriers to entry have declined with the increasing ease to advertise and distribute. That’s how it fits into the portfolio.

Management capital allocation has also been pretty steady. What they have implemented is a target return on invested capital of over 9%, and it has reached just a little bit over 10% over the last five years, translating into an ROE of almost 25%. It's not home run capital allocation, but they have acted with a lot of integrity not only on a return basis, but also in terms of moving capital towards segments that are more recurring in nature and more defensive.

In terms of risks, they do have some debt, but at 1.8x debt-to-EBITDA I think that's not a significant concern given the quality of the business. A maybe more significant risk would be academic journals. This segment has been facing some pressure, because the industry’s been moving towards open-source journals.

I’m not as concerned about relative risk. There's risk that interest rates or discount rates go up and the stock de-rates. By the same token, there's that same risk the other way. Right now, we have $16 trillion of negative yielding debt in Europe, so you get an odd consequence in the event of a recession. The 10-year yield bond in North America could be negative 1% and your discount rate could be lower. A stock like this could be worth 30x or 40x earnings. It's a possibility.

If the world doesn't fall apart, it'll still be okay. If the world falls apart, we think it will act more like a consumer staple. It has some resilient qualities to it in the portfolio.

GRAHAM & DODDSVILLE: It seems the “valuation at a discount” element is not so important here?

PAUL MOROZ: There are very few times when all the stars align with this philosophy and everything's just perfect. There are inherent trade-offs, and what we hope is that across the portfolio we arbitrage out those facts and trade-offs to be consistently ahead. That's why long-term investing is not what you think it is, in terms of each individual stock producing all this wonderful alpha. In fact, you don't even know whether a particular scenario that would lead to that wonderful alpha will even occur. To us, it's about shifting the odds and grinding forward.

GRAHAM & DODDSVILLE: Similar to Wolters Kluwer, you also hold a 3% position in Google. Incidentally, they trade at similar multiples but have different growth profile. How would you describe your investment in Google?

PAUL MOROZ: That's interesting to approach Google from a valuation perspective. Historically, Google has grown at a much higher rate, and if you were to compare those stocks on some basic multiple principles, they might be fairly similar. There's an argument that you can have a lot higher weight in Google. The highest weight that we allow ourselves to have is 6%.

One of the reasons our position in Google has come down is because they are facing headwinds in the advertising market, along with Facebook and Amazon. Sure, they built an amazing system around search, own the Android platform, and display some pretty good optionality with their bets segment. But think about the competition that could be unleashed if Netflix decided to monetize their business through advertising and drop their subscription prices to compete with Apple's or Disney’s content. This would be a huge threat to what Google can charge. That's one of the risks that we see evolving. It's very clear they're going through an antitrust phase in their business, similar to what Microsoft went through. There’s a reason to recognize that this could be split apart. We think the base case is that there'll be minor restrictions, but that’s still good reason for basic diversification.

Also, let's just separate stock from company for a moment. We've had so much passive share gain in the U.S. and interest in technology firms. This also calls for basic diversification, for not getting too far ahead of ourselves, because if everyone runs for the exit in the American stock market, and the tech companies really get beat up, is it possible that Google could trade at a much lower price?

If you look at Baidu, the equivalent of Google in China, it hasn't been doing that well. Of course, Tencent and their WeChat platform has been wildly successful, and Alibaba is pretty big. Yet the way the Chinese market has developed is that search has lost relevance. I don't know the way the world's going to turn out, but maybe people will be doing their searches directly on Amazon or Facebook. Those are all risks. It's not that we don't like Google, but there's been some heightened risk more recently and that's what that weighting reflects.

GRAHAM & DODDSVILLE: Could you discuss your investment in Constellation Software, and where you stand on the company now?

PAUL MOROZ: Constellation Software is in the business of buying niche software companies. It's been a very attractive company. The question always is, do people know about Constellation Software now? Some of the price reflects that. Believe it or not, we bought it in our small cap fund, off the IPO. I was involved in the original analytical work on that. It's amazing. I've gone back and looked at the investment reports, and I don't think anyone recognized how significant the opportunity was.

Constellation Software is a great example of how people focus on different things. There were many investors who said, "Yeah, I think this is a good company, but it's too volatile and illiquid." They didn't have the time horizon to hold the position. When we met with Mark Leonard, who was the architect of the whole company, he outlined why these niche software companies in these small verticals had strong competitive advantages. He went through Porter's five forces to establish this and said that there was an opportunity in acquiring these. This was around 2005, and we were still suffering in the market from the tech bubble blow-up. Many people didn't want to touch tech at all. That was part of the psychological opportunity, too. You have to be willing to understand things on a first-principles basis, rather than just saying: "I'm not going to do tech." At the time, you had to be thinking long-term to be able to manage the volatility and take the position.

Another part of the appeal of Mark's business plan was that he was very clear in terms of how he would allocate capital. He operated with a high degree of integrity. He really did that, and did that well. As we look back on the investments, what we didn't know at the time was how well they would be taking businesses that weren't really making that money and turning them around. The businesses themselves had barriers to entry, but others wouldn't have created the same results in managing the turnaround. The other thing was the culture. Mark had implemented a culture of measurement and was a thought leader in managing this business for the long-term. When you can do that and hold for so long, results are just outstanding.

Today, we are still invested in Constellation Software, but the risks are different. Despite the excellent capital allocation, it's gotten tougher. They're looking at larger acquisitions. They have lowered their hurdle rates for acquiring companies and use debt to help meet the hurdle rates. They've been pragmatic about it. Investors waiting for the perfect 20%, 25% unlevered IRR acquisition just haven’t done anything.

The other thing that's probably changed is…there are questions that remain around the legacy portfolio. How much technical debt is there across their portfolio companies? Has there been under-investment in the transition to cloud? The thing that investors really have to watch closely is understanding how that organic growth is trending across the portfolio.

Finally, Mark was much more intimately involved in making capital allocation decisions at the beginning of the journey with Constellation Software. Now there are other people that are more involved in that. Those capital allocation decisions have been pushed down throughout the organization, but there's only one Mark Leonard, like there's only one Warren Buffett.

GRAHAM & DODDSVILLE: Can you talk about your recent addition of Microsoft to the portfolio?

PAUL MOROZ: Microsoft has a number of really special characteristics. Of course, there’s the dominance of their operating system. Additionally, they've done a good job of transitioning to the cloud. When we did our work on understanding that opportunity, we looked at our cloud bill. That was so revealing, because it's broken down by line items as if you're buying auto parts or something. It will give you the quantity and the price. Often these things are really small when they are broken down, so psychologically, it would make it very difficult to negotiate down the price of cloud with Microsoft. More than being a recurring and non-discretionary service, the software is woven into the fabric of the company.

There is also extra code that's been written to port applications to the cloud. This makes it difficult to switch. It's a lot less of a commodity than we certainly envisioned it to be. It means you have a long runway of opportunity and optionality with respect to all these different devices that will be connected to the cloud. Microsoft has a really nice position for it.   

Another big thing was when Nadella took over. That transformation of culture will be used as a business case study for generations. They have created the culture necessary to win in this environment, and they have made a lot of tough decisions. The big one was being a lot more open than the company ever was during the Gates and Ballmer eras. They now look at other software companies and think about win-win partnerships, as opposed to a "we win, and you lose" type of mentality. For the cloud, that's a cultural and business strategy shift that has really opened up the potential of the market.

For sure, there'll still be some cyclicality in the business and in the stock, notably because of how the stock trades. It's in the technology basket. There's a lot of passive money that's invested there. It's the U.S. stock market, which is extremely dynamic. I still think the firm has a bright future.

GRAHAM & DODDSVILLE: Would you have any advice for current students pursuing a career in the investment management industry?

PAUL MOROZ: You have to read as much as possible. You can't blindly latch on to any sort of investment philosophy. As opposed to someone saying, "I read a couple of Warren Buffett’s letters, so I'm going to try to invest using his philosophy," I'd much rather focus on discovering and understanding why I’m making a decision, how I feel about each principle. It's not only a lot of fun, it will also lead to a much clearer understanding of where you stand, as opposed to getting lumped in with a particular brand without even having a core understanding of why you're there.

My second thought builds on Ben Franklin’s expression: "Tell me and I forget. Teach me and I learn. Involve me and I will remember." When it comes to investing, I believe people have to practice. It's not an academic exercise. Use your own money. Experiment with shorting stocks. Experiment with creating a process. Set up a system for real time experiments and coordinate it in such a way that you can make errors that won't ruin you, but from which you can learn. Even looking back on my experience, I was just so lucky falling into these experiments early on, which developed the way I think and the decisions I made when investing. I encourage people to actually do it. Don't wait. It doesn't matter if you're investing just $100 in the stock. Just do it.

GRAHAM & DODDSVILLE: Thank you so much for your time. 

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