The Vertical Software Industry Is Appropriate for Consolidation

Since our first podcast in the spring of 2019, we’ve built a wonderful audience around the world, and now have a terrific collection of interviews with remarkable investors.

I have loved the opportunity to host these interviews myself but from the very beginning, I felt that you would benefit from having another voice to challenge the guests and bring a different point of view to the podcast. That time has finally come.

As we start this new season, I couldn’t think of a better person to join me as co-host than Michael Mauboussin, Head of Consilient Research at Counterpoint Global. Michael is a colleague, a friend, and someone I admire enormously for his passion and ability to match academic research with the practical considerations of investing.

On our first episode together we’re delighted to welcome Chase Sheridan and Will Pan of one of the great names in value investing, Ruane, Cunniff & Goldfarb. 

Chase Sheridan joined Ruane, Cunniff & Goldfarb in June 2006 upon his graduation from Columbia Business School. Prior to attending Columbia, Chase was a senior vice president at Citadel Investment Group, a hedge fund based in Chicago and a partner at Q.E.D. Capital, an arbitrage firm based in Chicago. After interning with the firm in 2009, Will Pan was set on a career path with Ruane, Cunniff & Goldfarb. He joined the firm in 2010 after graduating from Harvard College. 

On this episode, Chase, Will, Michael, and I discuss Ruane, Cunniff & Goldfarb’s history and connection to Warren Buffett, why the Hyperion found was started, the team dynamic between Chase and Will as co-managers of the fund, their approach to idea sourcing and portfolio construction, and so much more!

Key Topics:

• The history of Ruane, Cunniff & Goldfarb (RCG) (3:40)
• Chase’s unusual path to RCG (6:37)
• How Chase became interested in value investing (8:36)
• Will’s journey to RCG (10:18)
• The core of the RCG investment approach (13:52)
• Hyperion’s maniacal focus on the intrinsic earnings power of a business (15:59)
• The relationship between RCG and Hyperion (17:26)
• The main difference between Hyperion and Sequoia (18:15)
• Why the RCG team considers themselves analysts first (19:45)
• The founding of Hyperion (21:30)
• Chase and Will’s co-manager dynamic (23:18)
• Benefits of team management of a fund (25:30)
• Analyzing your trade ledger and thesis memos (26:52)
• RCG’s writing and research culture (28:25)
• Hyperion’s ideal investment characteristics (30:31)
• Idea sourcing at Hyperion (32:36)
• How Hyperion tackles due diligence (35:04)
• Focusing on intrinsic earnings power (38:56)
• The art of portfolio construction (41:46)
• Running scenarios on potential investments (44:05)
• The problem with portfolio managers emulating their idols (45:11)
• Understanding roll-ups (47:15)
• Why the vertical software industry is well-suited to consolidation (49:27)
• Where Constellation Software focuses on making their return (51:59)
• Constellation Software’s framework for defensive acquisitions (54:15)
• What you need to know about Constellation Software (56:49)
• Mark Leonard’s unique approach to acquisitions (58:53)
• An overview of Eurofins (1:01:17)
• Why consolidation makes sense for the testing industry (1:03:13)
• Gilles Martin’s playbook for acquisitions (1:04:15)
• Why Hyperion became interested in Eurofins (1:07:42)
• The advantages of Eurofins having a founder CEO (1:08:56)
• The importance of leverage to Eurofins’ growth (1:10:24)
• Will’s recommended reading (1:12:43)
• What noise means for investors (1:14:14)
• Chase’s recommended reading (1:15:15)
• And much more!

Mentioned in this Episode:

• Ruane, Cunniff & Goldfarb
• Constellation Software
• Eurofins Scientific
• Daniel Kahneman, Olivier Sibony & Cass R. Sunstein’s Book | Noise: A Flaw in Human Judgment
• Steve Brusatte’s Book | The Rise and Fall of the Dinosaurs: A New History of a Lost World
• Walter Isaacson’s Book | The Code Breaker: Jennifer Doudna, Gene Editing, and the Future of the Human Race
• Jeff Hawkins’ Book | A Thousand Brains: A New Theory of Intelligence
• Edgar Wachenheim’s Book | Common Stocks and Common Sense: The Strategies, Analyses, Decisions, and Emotions of a Particularly Successful Value Investor
• Jordan Ellenberg’s Book | How Not to Be Wrong: The Power of Mathematical Thinking
• Chip Heath & Dan Heath’s Book | Switch: How to Change Things When Change Is Hard
• Jeff Bezos’ Book | Invent and Wander: The Collected Writings of Jeff Bezos
• Mark Leonard’s President Letters
• David Sklansky’s Book | Getting the Best of It
• Bryce Carlson’s Book | Blackjack for Blood: The Card-Counters' Bible and Complete Winning Guide
• Ralph Vince’s Book | The Mathematics of Money Management: Risk Analysis Techniques for Traders

Thanks for Listening!

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