Investing in Businesses that Create and Build Value with Sean Stannard-Stockton, President and CIO of Ensemble Capital
Aug 16, 2023
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Sean Stannard-Stockton, President and CIO of Ensemble Capital, discusses the firm's competitive advantage framework, the benefits of having a wealth management arm, and the rationale behind their content creation. They explore the concept of compounders, the unique business of Perimeter Solutions, and lessons learned from MasterCard. They also talk about Ensemble Capital's vision for the future and the significance of making forecasts when investing.
Having a shared purpose and strong company culture is crucial for creating a harmonious work environment at Ensemble Capital.
Ensemble Capital places a strong emphasis on investing in companies with durable competitive advantages to compound value over time.
Ensemble Capital maintains a disciplined approach to portfolio management, incorporating conviction and position sizing strategies.
Deep dives
The Importance of Building Harmony and Shared Purpose
At Ensemble Capital, creating a harmonious work environment is crucial. The company believes in having a shared purpose among its team members, which leads to a greater sense of commitment and motivation. This shared purpose enables the team to work towards accomplishing their goals together. The company emphasizes the importance of understanding the reasons behind their work and fostering a passion for their mission. Additionally, Ensemble Capital is a certified B Corp, which highlights its commitment to creating value for all stakeholders, not just shareholders. This shared purpose and focus on stakeholder value allows the company to build a strong and dedicated team.
The Significance of Competitive Advantages for Long-Term Investing
Ensemble Capital places a strong emphasis on investing in companies with durable competitive advantages. Such companies have a higher degree of control over their destiny compared to their competitors. This approach evolved from experiencing difficult market environments, like the financial crisis, where companies with strong competitive advantages demonstrated resilience. Ensemble Capital has developed a rigorous process to evaluate competitive advantages when constructing its portfolio, focusing on finding businesses that can compound value over time. This strategy enables the company to identify businesses with long-term growth potential and invest in them with conviction.
The Role of Culture in Business Success
Ensemble Capital recognizes the importance of strong company culture in achieving exceptional results. Companies with exceptional cultures often outperform expectations and surprise investors with their long-term success. Culture becomes the backbone of such companies, driving their ability to consistently compound value. Fastenal is an example of a company that has surprised investors with its continuous growth at rates significantly higher than the market. Fastenal's exceptional culture and management practices have allowed it to identify and capitalize on industry changes, maintaining its position at the forefront of the market. Ensemble Capital acknowledges that strong company culture and a motivated management team are key factors in identifying companies with long-term growth potential.
The Importance of Discipline in Portfolio Management
Ensemble Capital maintains a disciplined approach to portfolio management, incorporating both conviction and position sizing strategies. As a stock appreciates and reaches its fair value, the company trims its position in order to maintain proper portfolio diversification. Ensemble Capital has a systematic approach based on quantifiable parameters that determine position sizes. However, the company also acknowledges the need for judgment and examination when the quantitative output does not align with the qualitative analysis. The decision-making process involves assessing the stock's appreciation, conviction ratings, and potential upside, leading to informed decisions on position sizing and portfolio adjustments. By adhering to a disciplined approach, Ensemble Capital ensures that its portfolio remains focused on high-conviction investments with growth potential.
Learning through Writing and Teaching
The speaker emphasizes the importance of the writing process in promoting learning and critical thinking. By articulating and sharing their beliefs and research through writing, it forces them to thoroughly examine and validate their ideas. The act of writing serves as a tool for personal growth and development. Additionally, the speaker believes that explaining complex concepts in an accessible way to a wider audience is a testament to truly understanding those concepts.
The Value of Understanding Competitive Advantage
The speaker highlights the importance of understanding a company's competitive advantage and the industry in which it operates. They provide the example of Google and its exploration of AI. While not having proprietary information, the speaker focuses on analyzing the nature of Google's competitive advantage and how AI can enhance its offerings. By considering how AI may change information engagement in the future, the speaker underscores the significance of anticipating industry shifts and the potential impact on a company's long-term performance.
My guest on the show today is Sean Stannard-Stockton, the President and CIO of Ensemble Capital, an investment and wealth management firm that has built up quite a following on social media as a result of its consistent output of thoughtful content. Sean and his team of analysts manage over a billion dollars in equities, consisting of a concentrated portfolio of super high-quality businesses. The team has developed a rigorous competitive advantage assessment process that is designed to identify only those companies with durable moats.
In this wide-ranging conversation, Sean and I discuss:
How Ensemble employs its competitive advantage framework when construction a portfolio;
The benefits of having a wealth management arm alongside an investment management business;
The rationale for creating and sharing so much thoughtful content on Twitter and the firm’s blog;
His personal definition of a compounder; and
What harmony and disharmony look like within an investment process
All opinions expressed by your hosts and the podcast guests are solely their own opinions and do not reflect the opinion of SNN or its affiliates. This podcast is for informational purposes only, it is not investment advice, and should not be relied upon for any investment decisions. We are not recommending the purchase or sale of any securities. The hosts and guests may be beneficial owners of the securities discussed. You should not assume that the securities discussed are or will be profitable.
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