From China to Elephants & Snapchat: Rom Wilson (ACM Capital Management) on building an investment firm

Rom Wilson of ACM Capital Management has a very interesting investing journey. He learned to invest in China before starting a global developed market-focused fund. Here we discussed his firm and his investment approach.

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Introduction

[00:00:00] Tilman Versch: Hello, audience. It’s great to have you back. Today it’s great to have Rom on. Hi, Rom!

[00:00:06] Rom Wilson (ACM Capital Management): Hey, Tilman. Thank you for having me on as well.

Investing in China in the 2000s

[00:00:09] Tilman Versch: It’s great that you’re joining me from Boston today. We have the chance to discuss ACM Capital, which is your firm. I want to start our conversation with a question. You have happy land investing in China, but looking at your portfolio, from what I know, it’s mostly US-based. Why is that so?

[00:00:31] Rom Wilson (ACM Capital Management): Yeah. Well, I think that’s a good question. In terms of my links to China, you know, basically, when I was in China, I was looking at infrastructure assets up and down the coast and about two to three hours in land.

I think it was a very interesting education at a very interesting time. It was sort of in the mid-2000s, where China infrastructure growth was a huge topic and a huge consideration in thinking about the development of the country.

However, I think the way that my investing style evolved is, you know, I’m coming out of business school, I then went into investment banking before joining the buy-side. Most of my investment experience has been, I guess, what you would sort of term as OECD economies. So, US, Europe, Japan, Australia, and just have a more intimate sense of the companies there, the business environment there, the regulatory environment there.

I think China is amazing, and it’s an amazing economy. I oftentimes joke about how it’s still considered developing, even though it’s the second-largest economy in the world. But that’s part of the reason why our portfolio is comprised the way it is that our ability to move with conviction and build a concentrated portfolio is more solidly grounded in the OECD economies that we know quite well.

Rom’s path in investing

[00:01:50] Tilman Versch: You already named a bit of the stations you had as an investor. And as we did the pre-talk, it sounded a bit like you were playing bill yet to finally end up at ACM from the stations you described. Can you maybe map it out a bit more than the viewers can get an idea?

[00:02:06] Rom Wilson (ACM Capital Management): Sure. Sure. I often remark in the irony of like, let’s say, for example, with my nieces and nephews, you see them after three or six months, and it’s like, “Oh, you’re so different and you’ve gotten so much bigger, and that sort of thing.”

From my perspective, I feel like I’ve constantly been evolving as an investor but there’s no doubt that there’s certainly a more established, more linear path that most people take in this industry. You come out, you do investment banking, you might do consulting, you draw on the buy side, and it all looks very linear and neat.

I think my path was slightly different. I would say from the beginning, maybe one of the influences is, you know, my dad’s a contractor, and my mom is an administrator. There weren’t many investors, lawyers, doctors, people in professional services in my family.

I think having gone to some good schools, it was a process of discovery of trying to figure out what it is that I wanted to do. I think by the time I got to business school around the age of 24, I started gravitating towards an investor mindset and trying to learn more about what was involved in the profession.

And then, I basically went through what I would consider a fairly traditional path after that, which is, I did investment banking for three years, I did consulting for a year and a half prior to joining the buy-side. But I would say the things about my experience that looked more nonlinear, like the time in China or the type of consulting that I did, or the interests that I’ve had along the way, I think are very powerful strengths that kind of informed my investment thought process and my open-mindedness to different ideas.

Learnings from the early days

[00:03:50] Tilman Versch: Are there any key learnings you’ve taken away from the different stations you want to share with us that made you the investor you are today?

[00:03:59] Rom Wilson (ACM Capital Management): Sure. Absolutely. As I mentioned, there was a little bit of figuring out which direction I would actually go professionally coming out of college. And quite frankly, I think, like most people around my vintage, I graduated from Stanford in 2001. I graduated right into a recession.

Maybe the other thing that I should have mentioned is that I think that, without getting too political about it, I think women and people of color are typically not given comparable opportunities, particularly during times of economic stress.

So, one of my first jobs which I’m incredibly proud of, I actually ended up working for a nonprofit organization. We can go into the details of it if you’d like. But I would say, at a nonprofit, you have to wear several hats. They’re not super well-funded organizations.

In my experience in that first year and a half, I worked on marketing, I worked on fundraising for the nonprofit, I worked With the CFO doing accounts receivable and accounts payable and delivering monies and cash to the bank. I basically got involved in almost everything that I could.

Let’s say if you’re a chef, that gave me competency in several different cuisines, if you will, so that by the time I got to business school, or even as I examine companies today, I can put myself more in the mind of a marketer or someone who’s running the company’s cash management capabilities.

One thing that I love about infrastructure is that it’s a very tangible physical thing. You can draw a direct line between a bridge or a port being built in a particular city, and that city’s economic development for several decades. Whereas, there are a lot of businesses these days where things are built quite intangibly. They are still brilliant businesses.

I think that the spatial reasoning of how a port then leads to economic development in terms of the businesses that spring up, the people who then get jobs, both directly and indirectly. Now, the ability to think a few levels deeper into an economic event or advents, I think is something that I took away from that.

In my investment banking experience, one thing I liked about it is I worked for a smaller firm that had capabilities in both M&A as well as restructuring. I was able to see what happens when businesses are doing extremely well, and everyone wants to own them and buy them, but also what happens when businesses fail, either through their individual decisions or industries or secular decline, and how that works itself out in the capital structure, what type of businesses are then able to pivot and reinvent themselves, what types of business go into restructuring or foreclosure. I think that that has been a very tangible, powerful thing to bring to the way we invest here as well.

[00:07:07] Tilman Versch: You have some books behind you. These books stand for interesting concepts, or if their biography is interesting investors or business people. Do you want to share three of these concepts of people that have moved you as an investor, or changed you as an investor?

[00:07:27] Rom Wilson (ACM Capital Management): Yeah. Well, I did put aside some books in case I was asked this question. I’ll answer the question in any way you would like, but I basically put aside three books that I thought were just good for life learning, but then also three books that were good for finances. So, that’s six books that might be too many.

I mean, I think in terms of investors who have influenced me, which is sort of like a separate question, I would certainly say that my pathway to investing went through the value school, of course.

I think my first influence was really reading Seth Klarman’s Margin of Safety *, which I think many people know about. And if you haven’t read it, and you’re interested in investing, you probably should. And then from there, I found my way to Buffett, and like the Buffett letters. Howard Marks has been a great professor at large for me.

I think a lot of times folks compare our letters a little bit. Some of the letters to some of the things that he may write or just in terms of their depth and openness. So, I think those are investors. And then of course, if you go all the way back to the grandfather of it all, Ben Graham. I think those are the investors that really built the scaffolding of my investment approach, which I think is slightly different from their traditional writings.

But in terms of books that you would like me to share to the extent that folks out there, particularly younger folks would like to learn a little bit more about the profession and the skills needed to be successful in it, I would go back and certainly recommend, as I did up front, Security Analysis by Ben Graham *.

I think this is a little bit more of advanced reading but I’ve actually read this several times, all the way from being a novice to being a little bit more advanced. I think if you’re a novice, you’re probably going to understand 30 to 50% of it, but then it instructs you on what you where you need to go fill the knowledge gaps that you have. And then when you come back in more advanced stages, it’s like watching a really rich movie over and over again you’ll find something new.

In terms of the skepticism required to be a good investor, as well as to be on guard for some things that might negatively affect your portfolio, I’ve always enjoyed this book, Quality of Earnings by Thornton L. O’Glove *. I mean, this is really kind of a skeptical take on some of the tricks that management teams or accounting practices can take to hide the health or lack thereof of business.

Again, on the investing front, I’ve always enjoyed this book as well, which is Distressed Debt Analysis. So, we do mostly equity on our front, but this is what I was speaking to you about before of understanding what happens when businesses are challenged and need to correct and what happens after such a thing occurs.

Maybe just one or two more on just general life learnings that have nothing to do with finance. I’ll make it very quick. It’s funny. There’s a film in the 90s or 2000s that became very popular called Ghost Dog, where it’s about like an African American guy who’s very captured by Japanese Samurai philosophy. I was reading some of these things prior to the film.

One book that I always found instructive was a book called, the Hagakure. I mean, it’s really kind of an instructional of how to be a samurai, but also a good retainer. And there’s like some very practical life lessons in it. Clearly, being an investor isn’t as intense as being a samurai. It’s basically a set of short quotes that kind of teach you how to give advice to others. Like, how to build your resolve, how to approach very hard and complex challenges.

The second book I’d recommend that was recommended to me by a very good friend is a book called Empires of the Word. I think I probably read this about a decade ago. The book basically traces the linguistic history of the planet. It says which languages survive and which languages thrive and then become the lingua franca of their particular age.

It’s very interesting because he chooses a very specific lens, which is language, but you get into many complexities about culture, and of course conflict between nations and commerce. And so, it’s just an interesting sort of bigger think read that certainly expanded my mind.

[00:12:17] Tilman Versch: Great. And maybe if you have the third as well.

[00:12:25] Rom Wilson (ACM Capital Management): In our family we’ve got nieces and nephews that are out from four to eight. You can sort of see them go through the same fascination that maybe you had. I mean, I certainly went through a phase where I was very fascinated by mythology from around the world. I think if there was a mythological tradition, I’ve read it. And so, my nieces and nephews are going through that now. I think the next step for them kind of brought me back around to like the Iliad by Homer.

This is the Spanish version. I was using it as a way to try to learn Spanish while I was living in Spain. It’s an amazing tale. It’s got everything you need. It’s got heroes and villains. It’s got grand arcs. It’s got huge battles. It’s got very human stories, like the story of Hector versus Achilles. And so, I would say that this is one I’ve picked up again recently, and I recommend anyone who hasn’t read it to read it, and anyone who read it many, many years ago to revisit it.

The ACM elephant and the meaning behind it

[00:13:25] Tilman Versch: Maybe after the books, let’s address the elephant in the room. There’s one elephant behind you. It not only has a decorative meaning, it also stands for ACM, your firm. The elephant is a symbol for ACM. Why that?

[00:13:43] Rom Wilson (ACM Capital Management): Yeah, no, definitely. Definitely. I mean, I think the elephant has several different meanings. I would say that when you start something new like a firm, it’s very difficult. But there’s also very interesting and cool ways to be collaborative about it.

My oldest friend is actually an artist. This is someone I’ve known since I was about nine or 10 years old. We’ve collaborated on a few things through the years. It’s a gentleman named, Ari. And so, when I was starting a firm, I wanted like, at least for me, I know several firms just sort of use the letters and their sort of standards in the industry. I wanted a symbol that would like help us to remember our origin story and kind of focus us when times were more difficult.

We kind of settled on the elephants because, you know, I also grew up in a multicultural household. I’m in one now. My mother is Indian, my father is black, my wife is Chinese, my nieces and nephews are mixed. One of their parents is Caucasian.

Basically, I would never burden the next generation with saying, “You have to do what I did.” Or in the advent that we have kids of our own. But I wanted something that could be multigenerational.

Growing up, I always loved elephants because they’re amazing creatures. They’re very smart. They do complex problem solving, which I think is very important in this industry. They go on very long journeys and inclement weather conditions, which I think is a good parable for value investing.

I was always fascinated that you can find them in both Africa and India, where both of my parents were from. And so, we kind of took that concept and we combined them with the Chinese concept of chi, which if you go to some of the most famous Chinese architectural works, you will see these figurines that are symmetrical. One will have a symmetrical ball under their paw that represents the globe, and the other will have a cub that represents the generations to come.

Ari and I sat down and talked about this and came up with this concept of combining, basically three of the cultures in our household into what I think is a great logo. Certainly, again, when things are inclement, either in terms of challenges, or returns or whatever, I sometimes look at the logo and it reminds me of what we’re doing and what we’re trying to build. It’s been a very powerful symbol for us.

[00:16:19] Tilman Versch: Now, I want to really watch a documentary about elephants. For the viewers, only after you finish the video. Let’s follow up with the next question.

[00:16:29] Rom Wilson (ACM Capital Management): Sure.

[00:16:31] Tilman Versch: You described ACM as a global concentrated value fund.

[00:16:34] Rom Wilson (ACM Capital Management): Yeah.

ACM, the “global” fund

[00:16:35] Tilman Versch: Please help me understand the global, the concentrated, and the value in the description. What is global in this sense for you?

[00:16:46] Rom Wilson (ACM Capital Management): Absolutely. We’ll take it one by one. So, global, I mentioned a little bit before, which is, you know, in my work, particularly in M&A Consulting, I always wanted to work on the international deals, whether it be in France, Japan, or prospectively Australia because I think my experiences in China kind of showed me quite clearly that globalization was a very important and big part of business. I think it will continue to be a very important and big part of business.

So, I think by the time I launched ACM, as I mentioned, that acquired this competency, for example, and how the German healthcare system works, or the European healthcare system works, or how industrials work in Japan. And so, that’s really the global part of it.

But of course, I forget the exact country count but maybe there’s over 170 countries. Don’t kill me if I’m wrong on that. So, of course, we can’t cover every country, which is why we kind of stay in our circle of competence in the geographies we understand.

ACM, the “concentrated” fund

The concentrated part of it is, I mean, I’ve always believed in doing deeper work on a smaller number of companies. I mean, for two reasons, because number one, I do think that there are diminishing returns to diversification. I’ve met certain people who might manage two to 300 company portfolios. I think that that’s great. That’s another way of making money in this business.

It’s not really my style. So, for me, I think a concentration was a back solve for the amount of research and diligence that I wanted to do on each name. And for many years, ACM was just me and myself. So, I thought, you know, I think that I can probably keep up with 10 to 20 core thesis that are multi-year thesis. So, that’s the concentrated part.

ACM, the “value-oriented” fund

And the value part, I certainly think has been evolving. To be honest, I never thought about value as just the traditional, you know, whatever people think it is. Low PE, or net-nets, or discount to hard asset value. I think when you find those positions, they’re great.

We find them every once in a while. We know that framework and concept. We take it and apply it in the same way that Graham did, or Buffett and Munger did, or Howard Marks does. But I think for me, the way I would describe value is having enough knowledge and conviction to know whether something is undervalued.

So, I think sort of an example I’ve given one of our letters is, you know, in 2015, when I was job searching and not launching ACM, actually, one of the theses that I was using in my job search process was Amazon. I think the company was around $255 or so.

The thesis was rather simple. I’d had a very successful investment in Equinix, which is a data center and colocation company. In my diligence and multi-year investment in that company, one thing that I knew for a fact was that at AWS was growing like a weed, and was becoming a very, very important part in terms of the way the new economy was being constructed, as well as the IT stacks of the traditional economy.

And so basically, when we did the sum of the parts, just comparing retail to AWS, we thought that there was something very interesting there and the stock could double and go to 500. Now, I think people who are very hung up on the word value in the very traditional sense kind of laugh out of the room with that thesis and that pitch, but it actually ended up being clearly a very compelling investment from that point forward.

I think there are things in our portfolio that will look very traditionally, like the value framework that you will find in the Books of Ur. And then, there are things in our portfolio that are really like, we know enough about these types of companies and this situation, and this company specifically, to say, we think that it’s discounted versus its longer-term intrinsic value.

Owning Amazon & Google

[00:21:05] Tilman Versch: Coming back to Amazon, are you still holding the company? What is your general holding period?

[00:21:14] Rom Wilson (ACM Capital Management): Yeah. So, we are still holding the company. It’s funny. We have both Amazon and Google in our portfolio, which I think many people do. But I think the way that we got to them were very different. Well, maybe not super different. There might be some people who have the same thesis as us. There are millions of people doing this job around the globe.

I think the way that we got to them, in addition to what I just shared about Amazon, is that I think that there was a point several years ago, where it was very clear to me that if these companies broke up, they would be worth more. And if they didn’t break up due to regulatory inaction, then they would also be worth more because it would just be a continuation of competitive advantages that they’ve viewed out for themselves.

So, we continue to hold them, because I think they’ve kind of moved from that more special situation with regulatory inaction backstop to steady compounders that have benefited even more from the pandemic and have carved out even more advantages.

And quite frankly, I would be happy to see, I’m not pushing for them in any way, shape, or form but if they broke up, I would be happy to own more of them on any perspective dip or leading into it as well.

In terms of typical hold period, we typically underwrite our positions to three-to-five-year time horizons. I think if there’s something that we think could take longer, but again, we know enough about the industry and how these companies evolve, and whether the challenges the company faces are solvable, then maybe we’ll stretch our imagination to say like, okay, we’re happy to hold this for seven years.

The long game and the example of ADP

That actually might not just be for a growth thesis. Are you familiar with this company, Airport to Paris?

[00:23:11] Tilman Versch: No.

[00:23:12] Rom Wilson (ACM Capital Management): We have an investment in Airport to Paris. We’ve made some money on it. It hasn’t been a huge winner for us but they basically own the major airports in the Paris Metro area. They own and operate those major airports, as well as some other airports globally that have a higher growth profile.

Number one, we like those mixes between you have airports in Paris, which is where a traditional Western developed, but you also have airports in India and Kazakhstan and Chile, which may provide higher growth regions in the future.

But for example, when we underwrote that thesis in the depth of the pandemic, we basically said, “Look, we don’t know if they return to comparable traffic in three years, or five years, or seven years, but we do think that there is a return to comparable traffic.” And if it’s seven years, it’ll probably be sort of a steady middling compounder for us. If it’s three years, it’ll be a great outperformer for us.

So, that is an instance where we might stretch our imagination to consider the seven-year thesis even. But in general, when we’re building our models upfront, we’re looking at the three-to-five-year time horizon. But willing to hold for much longer if it continues to compound.

Ecosystems

[00:24:32] Tilman Versch: When I was reading through your letters, I think two concepts came up to me that are quite interesting. Ecosystems and controversy. How are you using them for your investment approach?

[00:24:48] Rom Wilson (ACM Capital Management): Ecosystems basically goes back to what I mentioned about the back solve for concentration. I try to approach life and everything in this job, quite frankly, with a sense of humility.

I remember the first investing conference that I went to. I came back home and my wife, then fiancé, asked me what I thought about it. And I said, there are a lot of people there who are very confident in almost everything they’re saying, but there’s no score above our heads who are saying who is a good investor and who’s not.

So, there’s a lot of projection of confidence, but I try to approach it with a little bit more humility. I would say, the first investment that I put on the buy side of meaningful scale that was not just in my personal portfolio was an investment in a company called CVS.

You may not be familiar with them, but they historically have run drug stores in the US. Basically, to understand that company, I thought you needed to understand who their competitors were, who the other drug stores were, which was basically Walgreens and Rite Aid here. You also have grocery stores that had pharmacy businesses. You needed to understand that.

CVS had acquired in the last year or two company called Caremark that was a pharmacy benefit manager that was more of a service, mail order pharmacy business. And so, to understand that you need to understand other players like Express Scripts and Medco and Catamaran.

And then, maybe this is something that I took from my M&A days, because in my M&A days, I dealt a lot with companies that have products where, if you have a product, commodity prices will affect your profitability and how you can bring things to market, which are being clearly exemplified by the pandemic right now.

And then, you have customers on the other end. And then, you have customers with customers, and you have suppliers of suppliers. I just sort of saw it as this sort of great grid or mesh, where if you pull one circle, the entire thing sort of shifts and changes a little bit.

So, to understand the implications of those shifts and changes, you often have to know at least, I’m going to say 10 to 20 companies with a certain level of competence. And so, that’s where the concept of ecosystems comes from, which is basically just knowing the partners and the stakeholders around the company. But the more important part is to figure out where the fulcrum points are.

If this is pulled in this direction, is it favorable or unfavorable for the investment? And it moves very three dimensionally. And then over time you consider the regulatory environment and things like that. So that’s really the concept of ecosystem.

I think the benefit of it is the ability to build and scale concentrated investments. But also, the other benefit to it is because you’re accruing knowledge in these different companies, I’ve generally found the dislocates when a company is extremely undervalued, unless it’s like in some sort of secular decline or something like the opioid crisis, for example.

It tends to be short, right? You might have a few weeks to maybe a month or two to make a decision. So, the ecosystem sort of gets you to 50 to 75% of the research already on other companies so that when they stumble, you can move quite quickly.

Controversy

I think your other question was about controversy. I mean, I think for controversy, I’ll sort of hugely use like a martial arts analogy. So, when I was younger, I took a lot more martial art than I do today. I had a very great Sensei, who was an amazing teacher in his own right.

I find in the beginning, particularly when you’re sparring, your mind is just very loud. It’s active. There’s punches and kicks coming at you. There’s a lot of self-doubt. And so, the analogy for controversy is that, like, I think martial arts and just sort of doing this job for a while, just sort of train me to not have an emotional reaction to a controversy.

For example, if the oil and gas complex is falling apart, or if the market is going down five to 7% every day, or if a thesis is moving against us. It’s not like I’m completely emotionally zeroed. I’m a human as well, right? But I think my inclination is to move beyond it very quickly, and to run towards the controversy, and see what can be solved and what needs to be cauterized per se to fix it.

And so, I’ve oftentimes found in investing, you find some of your best thesis, so the one that I just described in CVS. The major controversy is that people thought that it was an idiotic acquisition. Like, if you go back and read the analysts’ reports and the general investor segment of the time, they thought that it was a really bad acquisition.

It was one of the reasons that led to the CEO retiring. But actually, when I looked at it just from a calm outside perspective, I thought the acquisition was quite brilliant because when you look at the curves, mail order delivery of prescriptions was increasing, and people going into the store was flattening. And basically, by making the acquisition, they’d made themselves agnostic.

So, I think the ability to run towards controversies, consider them calmly, and to decide if you have a differentiated point of view, is a very powerful part of finding interesting investment thesis.

[00:30:30] Tilman Versch: Did you do any work to find out the extra return you get from this controversy perspective? Or how does it help you?

[00:30:39] Rom Wilson (ACM Capital Management):Oh, absolutely. Absolutely. I think in investment banking, I think one of the great parts of doing that job is that, well, it teaches you a basic vocabulary. It certainly teaches you to work very long hours. It kind of gives you an insight into how business is conducted, whether you’re on the equity capital market, debt capital market, or M&A side. But I think it also gives you a great modelling skill set, right.

The model is really kind of the ability to pencil. For example, if I look out my window here, I might see an empty lot or an existing home or whatnot. And if someone wants to use that lot or demolish this home and sort of build the house, you got a contract that will come out and they’ll say, “Well, we need to do this. We need to get the permits. We need to dig the basement for the foundation. We need to order wood and sheet rock and all these different materials. This is how much it’s going to cost you.”

Well, the thing about that is I think everyone knows that that is an inexact science, right? For example, I have some people in my network who are building properties now and they find the cost of wood might be way up, or the cost of plastics and resins might be. So, these things are estimates.

I think for us the financial model is basically that initial evaluation of like, if we can build a home here and sell it for Y, what does that imply about how much we should be paying for the land and the materials X? Right? I mean, I don’t remember my exact model. It was so long ago, but I think in general, that one was, you know, I thought that the stock could double in the best case and probably produce a high teen or more return and the base case. Maybe produce like a mid to high single digit negative compounded return over three years, in the case of the market was right about that being a bad transaction.

So, we do use that to inform our thinking. But in general, I find all of that to basically just be directional and an establishment of the odds, right? I’m not a big gambler but let’s say you and I were playing a dice game and I said, “Hey, Tilman. If you roll a two or above, like this $50 is yours, versus if you roll a five or above.” It’s more appealing if the odds are in your favor for that great return. But of course, even with two or above, you still have the prospect that you might roll a one and owe me $50. So, it’s basically using the model to inform what the prospective returns are.

But in general, I think the older I get, I find it more important to get the directional thinking about the ecosystem and whether this company has a sustainable competitive advantage and can outlast some of the shots on its bow that it might take. I find that to be the more important part of choosing great investments. Whereas when I was younger, I was definitely more model-focused about this being a great investment or not.

Building a firm

[00:33:57] Tilman Versch: Let’s swap it out and take a look back at the history of ACM. My question is, what advice has helped you build your firm, and where would you have loved to have great advice looking backwards? Like, what were the pain points where you’ve loved to have great advice?

[00:34:17] Rom Wilson (ACM Capital Management): Yeah. That’s a great question, Tilman. I would say building a firm is challenging. Right? I forgot what I’ve shared about the history of ACM, but ACM launched with like, about a million dollars. I love what I do. I’m grateful that I did it. But I oftentimes joke that it’s one of the dumbest decisions I’ve ever made in my life.

I mean, I think today we’re closer to about 60 or so which still makes us a very small minnow in the grand scheme of the investment management industry. But we started from very humble beginnings. And I take research as a approach to almost everything that I do in my life.

I would say that despite those challenges, and some of the challenges we face along the way, I am grateful to some people, particularly other firm founders, who I thank in person all the time, but I will exclude their names here because I’d like to preserve their privacy, but some very great investors spent some time with me talking about their own experiences.

Advice on getting started

I really respect all investors, but a lot of the investors are really established, for example, the way I think about investing. They all told me the same thing. They all told me to focus on returns, keep expenses low so that you can survive the vagaries of the number of years it might take to gain traction, and really just to stay very true to our investment philosophy and cultivating our swing.

On the other hand, I think there were much, much more people who are like, “Well, Ron, what you need to do is to do like a very splashy launch and get the best office and like, you know, the glass tower, and so it’s really interesting.

[00:36:15] Tilman Versch: Like the glass tower we see in the frame.

[00:36:20] Rom Wilson (ACM Capital Management): Well, it’s actually very interesting. Actually, I took the advice of the folks who were like, okay. Well, they built the sort of fun that I would want to build. I kind of view myself as being closer to their investment tradition. And I think that that was very sage advice, because it’s taken us five or six years to kind of get to the point where we have some meaningful scale. And I think if we have done the glass tower and the splashier launch, we would not have had the longevity.

Another great piece of advice that I got from firm founder was like, “Look, anyone who’s going to invest in you now already knows you.” And so, we kind of took that to heart in terms of, we spent our time speaking to people where we had a great direct relationship, or people where those direct relationships would call or write a strong recommendation on our behalf. And that’s really the way we’ve sort of built our business.

I think that those were two great pieces of advice that I received along the way. I mean, I would say as it concerns returns, right? I mean, in some ways this is kind of like an athletic sport, right? You can sit with the best surfer in the world and they can walk you through hours of their footage and telling you exactly what they’re doing to surf that big wave. But you’re not going to be able to surf that big wave until you’re out there on your own surfing and taking the skills you need to take and learning on your own.

So, I think in terms of investing returns, we can certainly learn from the books that we’ve read, and the letters we’ve read, and the conversations we’ve had, but a lot of, I think being great at this job, is developing and cultivating your own judgement and putting that to the test in a measured way.

And then, in terms of you asked the second part of the question, advice that we wish we’d had. I think that you go from an analyst to a PM to a firm founder, but none of that skill set, you observe the other functions tangentially, but none of that skill set is actually really managing a firm. Right? I think, for example, I’ve had to learn the legal side of the business, the compliance side of the business, the small amount of marketing that we do, you know, that side of the business.

We’ve been very blessed in terms of our vendors and our vendor teams we worked with. We have a good analyst right now that we really enjoy working with. And thankfully, it didn’t go the other way, in terms of making a hiring decision that proved to be problematic. But I think some of these other parts of it, I think I certainly could have used a lot of great advice on. But with that said, a lot of the people who were giving me advice, were already 30 or 40 years beyond those challenges. So, maybe they’d forgotten some of the tactical aspects of building that up by the time I got to them, but but that’s where I wish I’d gotten a little bit more advice.

Hacks & the marshmallow test

[00:39:27] Tilman Versch: Are there any hacks you can share for people who want to also start investing business?

[00:39:34] Rom Wilson (ACM Capital Management): Sure. I mean, I think there’s some things I could share along those lines, but it’s going to be very difficult to take the advice. It’s like the marshmallow test. I don’t know if you’ve ever heard of the marshmallow test. It’s this experiments they did. Do you know it? It’s where you put a marshmallow in front of like a three- or four-year-old and can they resist the marshmallow?

I think one hack and advice I would give to people is number one, if you think that this is something that you might want to do from whatever seat you’re in, like whether you’re a banker or a younger person on the buy side or a consultant, start doing your research now. There’s no reason you can’t do your consulting job, but also speak with people who founded firms or speak with allocators and try to have some of these conversations prior to launch that you will end up having after launch. So, that’s one hack to save on the time.

I think the other hack is I really would reiterate the advice of really not marketing that much, probably for your first few years, just focusing on your returns and your infrastructure, and building your investment process. And if you’re blessed enough to have financial resources, the type of team you want to build and team members you might have join you.

Another piece of advice I got in the beginning from a firm founder, who’s quite successful is, he said, “Look, most allocators won’t say no. A lot of people will take the meeting with you.” A lot of folks want to have had those meetings with you to the extent that you become one of the great funds of the future so maybe they can allocate quicker but I definitely don’t think it’s a good use of time to be spending, I would say anything more than maybe five to 10% of your time, marketing in the earlier years. That’s one hack I would give.

The other hack I would say was very important for us even though we started with a million and a very low budget, like I funded it from my personal savings to build the institutional infrastructure from the beginning. So, starting with like an accounting firm that you like and a third-party admin and starting with even an outsourced CFO because you don’t want to be scrambling to do that on the year two or three. It’s better to front run the next stage of development so it’s there and it’s built for when the crowds come, than to be trying to build it as you’re also scaling. So, I think that those are three pieces of advice that I would give to people looking to find firms.

Leadership

[00:42:20] Tilman Versch: You already have someone working for you. Coming out of this history, this question came up. How did you learn leadership?

[00:42:30] Rom Wilson (ACM Capital Management): Leadership. It’s funny. I look off to the side because when you say it I’m thinking about like the Braveheart speech, or, you know. I might mispronounce it. I don’t know if you’ve seen it. There was a recent Netflix series about the battle in the forests, the very famous German battle. I’ll share it after our interview. But I think about these very inspirational battle leaders.

Look, I think for me, the way that I’ve always tried to be in my life was just to be a genuine person. I mean, that’s not to say other people aren’t trying to be that but I’ve always tried to be a person where particularly in my friendships, my friends could can come to me and share whatever it is they wanted to share. Whether it was a thought that they were super comfortable with, like, I like vanilla ice cream or I love when it’s sunny. Or whether it’s something that they found really challenging to speak about. Like for example more recently grappling with social issues or issues of race or inequality. We can have that open forum for conversation.

And then beyond that, I think even in today’s technological world, I think a lot of the people in my life know that I will drop all the devices, I will drop the phone, and I will literally just look them in the eye and listen. At the end of that, I will try to give them the best advice that I can with producing good outcomes for them in mind. Right? So, I think there are different frameworks for leadership. There’s like the, “I’m the alpha guy and what I say goes.” You will follow me and there’s a clear hierarchy or whatever the case may be.

I think my framework for leadership is sort of demonstrating knowledge, demonstrating consideration, and listening, giving. Similarly with our portfolio, giving good advice more often than you give bad advice. And kind of exercising genuine care and consideration so people will take that advice and kind of look to you as a leader, if you will. but to be honest with you, it’s not very important to me to be perceived as a leader per se or someone who’s on top of the pyramid per se.

My goal with ACM should we become whatever we become, a 10-person firm, a 20-person firm, a five-person firm, or even larger, you know, never say never, is to create people who are actually smarter than me and better than me. I’ve told this to our current analyst. If they feel the need or the itch to start something of their own as well, to be supportive of that. Or if they prefer to stay here and help us to build this into something bigger and better, and be a part of that journey, and perhaps take over that mantle further down the line to do that as well. But my framework of leadership isn’t me at the top of the pyramid, and I’m always acknowledged as the best and the supreme leader, and that’s the way it should be.

Being a person of color founder in finance

[00:45:48] Tilman Versch: There’s one quote that’s also attached to leadership that got struck into my eyes reading from your materials. I hope I can spell it right because there’s some words I haven’t spelled before. “We also believe that minority and female lead films can meritoriously outperform when afforded equal access and resources, or face continued adversity when structurally staffed of them.” Why did you put this in your materials? What is your message with it?

[00:46:24] Rom Wilson (ACM Capital Management): It’s interesting. I’m trying to recall my thought process. If you recall, because I think that this was more of a global phenomenon, I’ve been to Berlin, have some friends out there. I think that’s where you are as well. I think I saw pictures of protests in Berlin even. Last year here in the US, we had this catalyzation of events with George Floyd. Some of the other things that flowed from that conversation. And quite frankly, within the three months surrounding that, and even to this day, there were a lot of inbound requests to me asking my thoughts on it and what my experiences were as a very, very rare black founder in the financial services of the buy side industry.

[00:47:14] Tilman Versch: How many black founders have you met in the industry?

[00:47:20] Rom Wilson (ACM Capital Management): I think that I’m in the flow. I travel and I do everything that everyone does but by no means is the number that I’m going to give you representative of the entire thing. I just want to put that disclaimer out there. But I’ve probably conservatively met less than 10, and maybe less than five. I’m talking about pure founders. What do I mean by pure founders? I mean, founder where you are the founder. You are the majority owner of the firm. You control the direction of the firm. You control the direction of the portfolio. But that doesn’t mean that they’re not multiples of that.

But by comparison, I’ve probably met hundreds. Some of them are quite good friends, like white male founders. So, there is a big discrepancy there. But anyway, I think a lot of people were kind of reaching out to me to have this conversation. And the reason I decided to put it in our materials is that I think that there’s a lot of silence around power dynamics, right. And we saw that for example, with like, the Me-Too Movement, where people felt that for decades, they couldn’t say certain things. They couldn’t speak up about certain things.

Silence have always found to be a little bit like a weight on your shoulders, right? It’s like a weight on your shoulders. I would like to step out and say something that I truly believe in or that I think might be happening here. But I constantly walk around the world suppressing what it is that I want to say, and that weighs on you in a different psychological way. Right?

One thing that I’ve talked about in founding ACM is our early days were a gauntlet. Right? You know, like starting with a million dollars not really having similar networks or similar access. Not really being seen as maybe someone who should be there, right. I don’t want to be melodramatic about it but there were certain, for example, there were certain parts of our experience where I would arrive 15 to 20 minutes early for a meeting because I like to be on time and I would stand on the lobby just checking my email. Security people would come over and ask me why I was in the lobby of this very fancy, you know, though I was wearing a full suit or things like that.

And so, I do think that there’s a concept of who’s expected to be where. That kind of goes up throughout the tower as well, right? Like, when you go in the elevator and go all the way up to the large allocator’s office or whatnot. And so, I think for me, I put that phrase in our deck because I think a lot of the performance gap is a resource gap, quite frankly. Right?

So, just to give you an example from our early founding, right? For years, we had virtually zero access to sell side research. And that’s fine, right? We’re not a very sell side research heavy shop. When you’re smaller, you also don’t have access to management teams as much. And that’s true, for example, if you have like a white male with a small firm as well. The difference, however, is there might be some network advantages that we don’t enjoy that allow you to get that meeting or the invite to the conference.

And certainly, there’s a lot of access to allocators as well, right? Because I love this industry. I think in general; it tries to be meritorious. This is the whole concept of, if you have great compounded returns, and you have a good process, and you’re bright, and you’re hard working, it’ll come. But actually, when friends of mine and people that I know speak honestly about the start of their firms, a lot of it does come down to “I knew this person from high school.” Or, “My aunt and uncle knew this person from the Country Club.” A lot of it does come down to those traditional pathways.

I think I put that in the slide deck because the downside is people are going to feel offended and they’re going to feel self-conscious. They’re going to feel like it’s aggressive. Maybe it’s an unfair way of looking at it but I sort of see that folks who might judge us on our face for having included that in our deck, most likely will not invest with us anyway.

That might be an oversimplification. Whereas, I think people who will acknowledge that we’re not only trying to do something very difficult, but we’re trying to do something very difficult without comparable access to resources or networks, right? And let’s have a conversation about both of those things, how you outperform, but also, what’s the handicap you face in building this and outperforming? I think those are the folks who tend to have the open mindedness and I dare say, the bravery to take the step of investing in a smaller manager in general, but also a manager that maybe is not expected to be there specifically.

And then, the last thing I’ll say about it is I can’t speak to the experience of being a Mexican man, or Middle Eastern woman, or a white woman or an Asian woman. But I wanted to make sure that I wasn’t just centering it around my experience because I think that there are many people, including, for example, white males, who may not be from the right school or the right social class that face these challenges and garnering comparable access. But I would hope that as we kind of mature as a society and a culture, we’ll move closer to more people having the shot to build a great investment firm.

How hurdles make for a unique angle

[00:53:14] Tilman Versch: Do you think that you get from this resource constraints and hurdles you just named a certain uniqueness or creativity in the way you do your job?

[00:53:25] Rom Wilson (ACM Capital Management):Oh, absolutely. Absolutely. One thing I’ve always loved about my dad and fascinated me about my dad and what he does for a living as a contractor, is that literally, you know, there’s probably 10 to 20 ways to do a certain job, right? And many of them aren’t super obvious. It’s almost like a chef, right? If you have a certain set of materials or ingredients, he can fix the window, or he can mount the television, or he can reconstruct the kitchen. And if he has a different set of materials, he can sort of get to the same place.

I mean, like most things in life, for example, if we’re going to use sports as an analogy, I’ve seen kids in less advantaged neighborhoods making a basketball court out of a milk crate with a cutout bottom. That’s the way they’ve trained themselves to do that shot.

So, I think for us, for example, like I said, I’ve never had a very heavy sell side research process, but going from some access to virtually zero really forced us to construct a process. It was always our preference to be with the primary documents, but to we don’t have the advanced power rifle here, right? We have sort of the old traditional Japanese uni like the traditional bow. But how do we get that shot on target? It certainly demands that we sort of crawl our way through the foliage to get a little bit closer and to take a different angle and to wait for certain sunlight or maybe time of year or period. And so, I think the resourcefulness of that is definitely a strength.

And then, I think that there’s also a certain pride in it as well. I won’t deny that. Let’s say we grow to a billion-dollar firm and we have all the access that we want. We know we’ve made it through this period, where we have fought through with much less. And there’s a certain level of independence and pride that accompanies that notion.

ACM in 5 years

[00:55:51] Tilman Versch: Where do you want to be with ACM in five or 10 years?

[00:55:58] Rom Wilson (ACM Capital Management): The way I’ve thought about this, and what I’ve communicated to some allocators, including current as well as perspective, is that I would really like to see what ACM can do when we get to what I would call our starting five lineup, to use an NBA analogy, which is, I’m fairly confident that we have a process and a thought process that works.

I personally have been investing on the buy side, I think it’s probably about 11 or 12 years now, which still makes me like a guppy. I do not have the judgement or the greatness of a Marks or Buffett, or Zinger, or any of those guys, but over that period, we’ve outperformed nine out of those 11. I mean, only six years on to the ACM banner, but nine out of those. so, I’m fairly confident that we have a process approach and a thought process that works.

I think that what I would like to see is when we have kind of a fuller analyst team, which, again, let’s call it like the starting five, maybe anywhere from two to four analysts, and we also have people filling out kind of the administrative and back office side of the business, you know, what we can actually do, because I know for a fact that there are great investment thesis out there that we missed because we don’t have enough coverage, we don’t have enough moving pieces so I can send someone out to survey the land over here while I look at something else, and the other analysts looks at something else. So, I definitely know for a fact that there’s that. And/or, as I mentioned before, the timing part of this, which is, when a gap opens up to purchase something that might produce a 20 to 30% IRR, you know, just getting there quicker. Because oftentimes, the early bird does catch the worm and being able to get their quicker leads to better return profiles.

That’s where I really like us to be in five to 10 years. I mean, in terms of culture, I’d like us to maintain the culture we have now, which is very collaborative, very open, very entrepreneurial. I see an important part of my job is developing our analysts so that they’re not only just processing stuff that I’m throwing to them. And this has been the way it’s been from the beginning with our current analysts, but like, cultivating them as a young professional so that they can ride the bike on their own, they can take something from beginning to end.

And then, to the extent that our story is, I’m not saying it is, that will be for others to judge, but to the extent that our story is somewhat inspirational, right. People talk about the importance of representation. I’ve always thought about ways in which to be a better part of the solution. Like, how do you mentor other young women or people of color. Doing things in the neighborhood that I think could contribute in a positive.

For example, I love playing tennis, and I’ve gotten our analysts into it. We kind of have our interoffice tournament. I think at some point, I’ve even thought about should we sponsor a local tennis tournament for kids from less advantaged backgrounds. Just things like that. I think we’d like to be good citizens and representatives of the benefits that can come from being more inclusive.

Partners

[00:59:48] Tilman Versch: What partners have you found in the last year that support you? And looking forward five to 10 years, what kind of partners would you wish will be supporting you over the next years?

[1:00:00] Rom Wilson (ACM Capital Management): Yeah, no, I think we have some amazing partners that we are very fond of, and, you know, I think go to bat for every day. Like I said, I think many of these partners have given us permission to kind of share their names and personal meetings and things of that type. But I’ll refrain from saying their names here, just to preserve their privacy. If they want to claim it, after seeing the video, they can say, “Yeah, Ron was talking about me there.”

Our initial partner was an amazing family. I was a Chinese-American family, a good friend of mine that I’ve known for decades. Mom and Dad are great entrepreneurs. But you know, one thing that we love about having them as our initial partners and continuing to invest for them, is they they made the decision as a family decision, right? So it was basically mom and dad, the kids, their partners. And they chose to be the first larger investors in ACM. We will always treasure them dearly.

I love the fact that the decision had a mix of genders as well because the types of questions that I received from one versus the other was very different, but I think it’s sort of captured holistically what ACM was trying to do from a return perspective, which is make great returns and help our partners compound their wealth, but also from the other perspective of creating more opportunity and inclusivity.

I think that we also have amazing individual partners along the way. Some of which are close friends. And we’re also very thankful and grateful to them. Some some of which kind of learned our story of we went along and have become friends and partners and wanted to support us in our vision.

Our biggest partner actually is an amazing outsourced CIO firm that, you know, invest on behalf of endowments and foundations. They’ve been a really great partner for us. One thing, I think, that differentiated them is from the beginning they actually looked at us closer to the meritocratic vision that this industry has of itself of like, ‘Is there a good process here? Can it produce great returns?’

Let’s forget the fact that at the time I think we were only $3 million and just focus on finding a good investor. And they made a multi-year commitment and they’ve been incredibly true to it. They have been amazing partners up until this point.

And so, yeah, I think we have a mix of these institutional investors including EMF investors and family offices and individuals. But I would say, the one sort of defining thing that I would sort of attribute to all of them is they probably would not be offended by the fact that I included that previous statements in our investor deck, and would have an open conversation about it.

And then, also, I think bravery. I say that in no small part. Personally, I view investing in ACM similarly to when we invest in a small cap company. I don’t think it requires an epic amount of bravery. I think it just requires good research at an investment perspective and a commitment that is measured. Whether it’s a smaller investment or however people want to control for the risk, but I realized that there is a lot of social pressure in this industry to invest in larger firms, to invest in individuals who have spun out from those larger firms, and basically to just be in the same positions as a group. Right?

So, I think all of our investors to really push against that pressure to do so. I realized that requires a lot of intellectual bravery and just courage in acting. And so, I would say that those characteristics that I just mentioned about the investors we have now are the same characteristics we’d love to have about our investors in the future because I also think that those are also characteristics of people or institutions who are willing to take a longer-term approach. Some years you’ll be up. Some years you’ll be down. Some years you’ll outperform. Some years you’ll underperform. Hopefully much fewer years underperforming.

The market is very focused on 3-6-12. Eighteen months is considered longer term now, but I’m going to invest in an investor that thinks over three, five, longer time horizon. I think that it takes a lot of professional bravery and intellectual bravery.

Investing into Snap

[1:04:59] Tilman Versch: One of your investments that stood out to me is Snap. When did you start building conviction to invest there? How was your process for investing?

[1:05:12] Rom Wilson (ACM Capital Management): Yeah, no, that’s a great question. Thankfully, we’ve actually spoken about some of my other investments prior to speaking about this. Because, you know, the funny thing is that Snap has been such a successful investment of ours, and it’s certainly been the most successful investment of my career, but I wouldn’t want it to define us. It’s a great company. We’re thankful for everything the management team has accomplished for us. But I wouldn’t say that it’s like very much our typical thesis.

So, with that disclaimer, coming back to your question. I’ve always done well. We have a fairly high batting percentage when it comes to social networks. We’ve had very successful investment thesis, for example, on Facebook and its early days. We’ve done incredibly well in LinkedIn. And now, Snap.

So, all that to say that there’s a history there. There’s sort of the ecosystem knowledge of understanding what makes for a successful social network in terms of user growth, monetization, constructing feature sets, and evolving the platform. As well as demographic uptake.

I would say my experience with Snap goes all the way back to, I’m going to say the early 2010, when it was coming out of Stanford, or a sort of a startup social network, but also kind of leading up to the case where Facebook was trying to acquire it for, I think, about $3 billion or so.

We tracked the company since then, and continue to read about it. And then, of course, it IPO. It became a situation that typically we find compelling from a controversy perspective is when, you know, like an IPO becomes broken. Right? It starts at a certain price, and it trades down massively, right.

I think that that’s a worthwhile controversy to run towards. In Snap’s case, the company had IPO, it traded down massively. I think that there were a few celebrities that have kind of talked about its declining lack of relevancy. The market in general was very negative on its prospects. Right?

I think I didn’t really approach Snap from the perspective of, ‘Is this going to be some great, amazing investment for us?’ I actually approached it from the curiosity of, ‘Is there something here? Is there something about it that is a kernel of a social network, that means that I can maintain its usership and in fact, grow from there.

And so, I would say the first few months of our research, we’re extremely focused on determining that one thing, right? Like, was there something about Snap that would keep its users continuously using the platform, and hence, basically form like a core foundation of the business?

We did it a survey. The end wasn’t large enough. It was tens of people. Maybe approaching 100 and whatnot. But it wasn’t large enough that I would publish it in any sort of like publication as empirical study. And what we found is that most of the people who were using Snap we’re using it to communicate with their five to 10 very close friends from high school onward over an extended period of time. Some for almost a decade, which is a different use case from what they were using Facebook for, which was declining amongst younger populations, which is a different use case for what they use Instagram for, a different use case for what they use Tik Tok for.

And so, long story short, we’re like, “Okay. We think that there’s enough of the core there that they’ll be able to maintain these users for a multi-year period. And then, you know, I think in our thesis, we look for solvable problems, right? I think one of the things that Snap spoke about repeatedly through that period, was basically, the underperformance of their Android application, which was very important because when you move beyond the US and Western economies, they’re not iPhone dominant. They’re very much Android dominant in terms of devices.

So, then we focused sort of our next stage of research on that and saying, is this even a real talking point, or is the company just making excuses for its underperformance? And we found that it was actually a very real and genuine talking point, that there were people in emerging markets that would love to try the app or when they were trying the app, it was closing or crashing or the performance was so slow. There was an opportunity particularly for them to leverage their strength in younger cohorts like teenagers or young adults, who wants to be a part of what’s hip and what’s cool. Everyone globally wants the same thing. And so, I think that really kind of gave us confidence that they can then not only maintain users from the first part of our thesis, but grow their users from the second part of their thesis.

And then, we also went into Snaps’ back end as a prospective advertiser. Basically, we established the profile and just said, “Hey, if we were an advertiser, what can we do on this platform?” And we were able to see over a multi month period, basically, the evolution of the tools they we’re offering to advertisers, in terms of the different ad formats, the different targeting, the different ways of measuring ROI. And so, all of that came together. We established our position, between five and 10, and all of that came together. We were looking at it on three-to-five-year time horizon. We certainly think that this business can double in between user growth and basically, just the leverage you get from that two-sided marketplace of there being more users, as well as more advertisers who want to advertise to those users, as well as are competing, and bidding in the auction to get those ad loads.

And then, we saw the app’s technological development. Say for example, their strengths in augmented reality, and some of the other shots they had on goal, like Snap Maps, Snap Games, and now Spotlight. We actually really saw all of those other things as free options because we do think that they are a very innovative team, we do think that they’re a very creative team. And at the very least, if the company continued to fall apart, you would have this backstop in terms of acquiring it for its technological capability and/or its developers.

Right. So, that’s really how the thesis came about. Also, maybe as a final thing, I’d like to acknowledge our analysts. He’s a younger person. He helped us a lot with understanding the dynamics of being a 20-year-old and using this platform. Although I will say interestingly enough, that I think that they were probably a little bit more skeptical of the thesis than I was. And that was actually great, because I think a lot of constructing a good thesis isn’t really just finding supporting evidence to continually support your base in your bull cases, it’s to understand the bear case, and to say, “You know what, I’m comfortable with that risk.” And so, it was interesting that the old guy in the room was more of a believer, but the younger person was like, “I don’t know if this thing is going to be as great as you think it might be.”

Community exclusive: Constructing a portfolio

[1:13:05] Tilman Versch: At the end of 2020, Snap was 22% of your portfolio.

[1:13:12] Rom Wilson (ACM Capital Management): Yeah.

[1:13:13] Tilman Versch: How do you think about the size of the position? How does this such a big position come with your general idea of portfolio construction?

Hey, Tilman here. I’m sure you’re curious about the answer to this question. But this answer is exclusive to the members of my community, Good Investing Plus. Good Investing Plus is the place where we help each other to get better as investors day by day.

If you’re an ambitious, long term-oriented investor that likes to share, please apply for good investing plus. Just go to good-investing.net/plus. You can also find this link in the show notes. I’m waiting for your application.

And without further ado, let’s go back to the conversation.

Fair value of a company

[1:14:02] Tilman Versch: How do you think about fair value of a company over time? Maybe also on the example of Snap.

[1:14:08] Rom Wilson (ACM Capital Management): Yeah. I mean, Snap is a trickier one. Particularly for those who come at it more from a traditional value lens, which we still do come at investments from discount to intrinsic value lens. There is a portion of paying for what the company will become. Right? I mean, to a certain extent you’re always doing that with companies. Whether it’s CVS or Snap. I mean, the parts will not fluctuate as much, right? Like, you have 100 billion in sales. It’s going to go up three to 5%. You’ve got an operating cost structure. Maybe they can continue to squeeze additional marshalling out of it in terms of suppliers are getting leveraged from SGNA. Right?

Maybe there’s some financial engineering things that can be done in terms of swapping out higher cost debt for lower cost debt. It’s a straighter case. Whereas for example, let’s say a company like Snap. Snap can double its revenue over the next few years and still move into the realm of having a very high PE because maybe there’s enough opportunity in front of them. Let’s say if Spotlight becomes, I’m not saying it well, but just for purposes of discussion, let’s say spotlight becomes sort of an alternative YouTube for millennials and Gen Z, right? Then all of a sudden, they’re making a constant investment, and they’re making an investment in their technology stack. And, you know, that that will tend to drag on operating profits.

I think with Snap, our original conception of the company was as a multiple of sales. It was a very high growth company. There was no way to figure out what its cost structure was going to be with any sort of accuracy. But I thought that we could basically develop a range of outcomes for how quickly the company could grow on the top line. So, that’s what we focused on.

Now, I think we’re still paying attention to Snap as multiple sales. But we look at other things, like what their EBIT and EBITDA can be in the future, what their perspective EPS can be in the future. And so, we do look at it from those lenses as well. But I still think that like, for example, with their Snap Maps business, with their Spotlight business, even with the advertising products they can release internationally or locally, there are a lot of moving parts that I couldn’t slam an estimate down on the table and say, “Tilman, I think, three to five years from now, they’re gonna have a dollar an EPS, right? Because their cost line can fluctuate in line with their opportunity

Investing mistakes: Omission vs Commission

[1:17:08] Tilman Versch: To come to the end of our interview, a bit of a challenging question. Looking at your past investments, which investing mistakes did you learn the most, and why?

[1:17:19] Rom Wilson (ACM Capital Management): Well, I think I’m going to use the tried-and-true framework of omission versus commission. In one of our letters, I wrote about why we have investments like Snap and Amazon in our portfolio. And investments that if you sort of put it up against the Ben Graham, old school Warren Buffett, because his investment style has evolved, like lens wouldn’t present as a classic value investment.

I think the example I gave was one that I spoke about earlier, which is having very, very high confidence in the growth of AWS and the value that that can generate for Amazon and shareholders, but not putting it in our portfolio, because, quite frankly, and I’m happy to be candid about our shortcomings. Like, we launched with a fund name, Global Concentrated Value, right. And even though I thought it would be a great investment, I was concerned that we would be perceived as deviating from style. And so, we didn’t put it in the ACM portfolio until later.

So, that I would consider like an error of omission. I would say for anyone who’s an investor, and a young person who wants to start a firm, read all of these different books that are recommended to you to learn how to swing to build your understanding of the sport, but you really have to develop your own personal playing style and how you choose investments and how you construct a portfolio because like sports, it’s constantly evolving. The same approaches aren’t going to work all the time. Athletes as well as mathletes need to evolve in how they play their respective sports. That’s admission.

Error of commission, right? I don’t really want to call out any specific company because, of course, very small chance that their management teams might watch and it’s a long-term thing, but I think that there are some companies that I would describe as traditional value investments, but not necessarily traditional value investments. Some companies where we look at them and they are so attractively valued, and the problems that they have to solve seem very doable, and the pathway back to getting beyond them, you could almost see it. So, you bring them in your portfolio.

I think I can generally say without identifying any one company. For example, we made an investment that part of the thesis was getting beyond some of the overhang associated with the opioid crisis or one crisis or another. The oil and gas crisis. We’ve made those investments. I think that those are errors of commission, in terms of, I’m not saying we’ll never make investments like those in the future. There will always be investments that don’t work the way you want them to, but I think I consider those errors of commission because we grossly underestimated the timeline to getting those problems solved.

And then the other thing we underestimate is like, sometimes, these problems kind of roll downhill like a snowball, right? They’re like, “Okay, here’s the problem. They can solve that.” Oh, well, there’s a secondary and a tertiary. There’s some investments we’ve made where it’s like, just two years of just seeing smaller problems emerge, but that just compound or extend the timeline to solving those problems. They don’t produce great outcomes in terms of compounded annual returns over a multi-year period. So, I think that those are the two types of errors we’ve made in the portfolio. And maybe the last type of error which every, I think, investment manager, particularly concentrated investment managers will always lament.

Honestly, I wish I bought more Snap. I wish I bought more Amazon. I wish I bought more CVS, right? I think we talked a little bit about my love for Formula One. It’s almost like when those guys just basically take turns at incredibly high speeds, right. If you can maintain your speed through the turn, you can produce a great race winning outcome. But of course, the thing we’re trying to avoid is if you do it too fast, you can crash and basically put yourself in a losing position. But yeah, that’s the third type of error which is not being bigger in the things that have clearly been great investment thesis.

Encouragement & extra advice

[1:22:03] Tilman Versch:  Last question before the end of our interview, do you have anything to add that we haven’t covered or we have covered and you have more idea to it?

[1:22:06] Rom Wilson (ACM Capital Management): Yeah, no. Thanks a lot, Tilman. Well, I think one thing I want to make sure that I do before we end and I probably should have done it at the beginning. If anyone who has made it to the end of the interview, thank you for listening to the whole thing. I wanted to thank you for spending time with us and taking the time to interview us. It’s the first time I’ve ever done something like this. It’s been interesting and exciting process.

I certainly want to thank the gentleman who introduced me to you. Again, I’ll be anonymous about it but they’ve been great supporters and sources of advice sort of being the big brothers of being slightly ahead of ACM’s developments and being able to help us with some advice here and there.

I certainly thank our investors as well. I think for me, great thesis will come and go and we write about them a fair amount in our year-end fundamental letters, which current and prospective investors can access. I guess the final thing I’d add is maybe just like a word of encouragement for any young people who are considering entering the industry. Regardless of race, color, creed. Which is to say, I think this industry like other industries certainly has its challenges. It’s kind of a bit of a pyramid the way it was described to me. There are fewer and fewer positions sort of the higher up in the ranks you go and that’s a bit of a gauntlet and like a combine as well. But I would say, if you have a genuine love for investing, and you have a general love for learning, and you’re willing to do that, I guess this is the whole sort of passion perspective.

One thing I joke about is for three years, while we were building ACM, I actually paid every month for the privilege of doing this, right. And that’s when you know you’re truly passionate about something, when you’re willing to do something like that. So, test your passion to know if you are truly passionate about investing. Because if you do want to build a firm of your own, it’s not going to be an easy journey. You are going to need to outlast different challenges and different points where maybe you’re questioning whether this is the thing you’ve done, so you need that intestinal emotional fortitude about it. But if you find that you do have that genuine challenge, then take the risk of trying doing it on your own in whatever way you can. Maybe it’s a smaller way with your own capital. Maybe with friends and family money.

I would say, don’t develop any investing idols in terms of these guys are the greatest investors ever, I’m going to try to replicate exactly what they’ve done or what they’re doing. I mean, maybe your specialty is in looking at very small companies, maybe it’s just retail companies, maybe it’s just Korean companies. Whatever the case may be.

I think that there are many wonderful ways to produce superior risk adjusted returns in this business. But I think it demands a good amount of bravery in starting a good amount of bravery and kind of bringing your own personal expression to investing and a good amount of bravery in terms of pushing against the grain because a lot of people are going to tell you no, they don’t want to invest with you, not at this time. Why you might even have a firm of your own, go to work for a larger firm. But at the end of the day, if you can build something great for your clients that’s expressive of your value system, and just as importantly, mentor the people you work with, whether it be vendors or employees you bring on board, I think that is incredibly fulfilling.

Goodbye

[1:26:15] Tilman Versch: Thank you very much for these wise words, your time, and the insights. Thank you to the audience, and to all of you. Bye, bye. Have a great day.

[1:26:23] Rom Wilson (ACM Capital Management): Thank you, Tilman.

Disclaimer

[1:26:27] Tilman Versch: Also, here is the disclaimer. The disclaimer says: Always do your own work. What we’re doing here is no recommendation and no advice. So, please always do your own work. Thank you very much.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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