Executive Managing Director
Director of Research
Portfolio Manager
Sr. Research Analyst
At Sands Capital we encourage our investment team to think in decades not quarters. Director of Research Michael Raab, CFA discusses how culture can support the visionary research needed to find businesses creating the future.
Transcript
Kevin Murphy: Hi, I’m Kevin Murphy, senior director of client relations at Sands Capital. And with me today is Michael Raab, CFA, newly promoted director of research, longtime analyst, and a co-portfolio manager on several strategies. Mike, at Sands Capital, as you know, we seek to own businesses that we expect will be much bigger in 10 years than they are today. So how do you encourage the investment team—you, personally—to think in terms of decades rather than quarters when researching the investments in these businesses?
Michael Raab: Well, it’s actually something that’s been drilled into our culture from the very beginning from our founder, Frank Sands Sr. It’s the key pillar of our investment philosophy, which is to own businesses that grow at sustainable, above-average growth rates over the long term. So it makes my job a lot easier.
We have a 30-year history of doing that. And for me, it’s been 17 years here. And any other way of investing really feels unnatural. And you can spot it if it creeps into the culture, and it just gets pushed out; we’re long term by nature, that’s really all we know how to do. And what that translates to is that our investment professionals believe they are business owners, not traders of stocks. And so that colors all of our discussions.
Now, our financial incentives are tied to long-term investment results, but I still believe that only goes so far. A lot of what we are asking our professionals to do is so counter to human nature, which is full of all kinds of behavioral biases and insecure egos, that you really need the support of an entire culture in order to achieve those long-term objectives.
Kevin Murphy: OK, excellent. So that’s the plan. But as Mike Tyson reminds us, everyone has a plan until they get punched in the mouth, and the market has punched many great investors in the mouth in the last couple of years. Volatility and downturns, as we know, can cause even the most seasoned investors to reevaluate their conviction in the long-term prospects of a company focused too much on the short term.
So how do you cultivate in your role as director of research? How do you cultivate the courage needed to maintain that conviction in difficult times?
Michael Raab: Yes, so this one, I think, is a combination of cultural and structural factors. First and foremost, we foster a culture that has a sense of belonging, personal safety, and trust that allows people to take risks, which is part of investing, and accepts that occasional failure is part of that process. Everyone will fail in investing, and you’ll also have successes, but you need to keep rinsing and repeating your process in order to get those long-term results.
Director of Research
We also spend a really good deal of time talking about the path up the stock might take versus the long-term potential that that business can have. That path is oftentimes for the businesses we invest in, you know, bumpy. It can be volatile. It can be difficult.
But what we spend most of our time focusing on is: What is that end state? What does that potential look like in order to drive those long-term results?
The other thing I think we do really well is have a deep focus on what really matters for a business. We talk about that all the time at Sands Capital. Our investment cases have those few key points of what matters for a business.
Now, when you’re faced with just an onslaught of news and information and noise and volatility, it’s getting harder and harder with technology. You can start to lose your focus. But we always come back to that: what matters.
Now, I do think there are some structural factors that we have going for us as well. The first is that we are employee-owned. We’re not subject to outside influence in downturns or to make short-term profit decisions at the expense of our business results or our investment results, which would help our clients. And we’re also a firm that’s run by investment professionals. So we understand what it takes to generate investment results. And that’s always front and center in the decision-making process.
Now, I’ve experienced, I would say, two to three severe downturns since joining Sands Capital in 2007, and I believe those have been some of our finest hours as a firm.
And we’ve made investments in our people and our capabilities. Again, you can have all the financial incentives and all the things drawn up on paper that you want in order to help navigate volatility, but the cultural norms and the pressures of the group are really what dominate. So you need to make sure you have, you know, all of those things aligned in order to work through, you know, the inevitable ups and downs in the investment process.
Kevin Murphy: Excellent. Thanks. That’s a great perspective, especially from your seat as the director of research.
If you’re interested in learning more about how Sands Capital thinks, I encourage you to visit our website and, in particular, take a look at the Perspectives newsletter on that website. And you’ll see a lot more of how we operate, how we think, and certainly a lot more about the culture here at Sands Capital.
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. Forward earnings projections are not predictors of stock price or investment performance, and do not represent past performance. References to companies provided for illustrative purposes only. The portfolio companies identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. GIPS Reports found here.