Ruane, Cunniff & Goldfarb

David Poppe joined Ruane, Cunniff & Goldfarb in 1999 after a 12-year career in journalism. Mr. Poppe graduated with a BA from Columbia University in 1986. John Harris joined Ruane, Cunniff & Goldfarb in August 2003. Prior to joining the firm, he spent two years as an analyst at Kohlberg, Kravis, Roberts & Co. (KKR), a private equity firm based in New York and San Francisco. Before joining KKR, he served as an analyst in the investment banking division at Goldman, Sachs & Co. Mr. Harris graduated with an AB from Harvard College in 1999, Magna Cum Laude and Phi Beta Kappa.

Graham & Doddsville (G&D): Can you both tell us about your background and how you came to be at Ruane?

David Poppe (DP): I’ve been at Ruane for 18 years. I went to Columbia for college and went to work in the newspaper business afterwards and loved it. I was a financial journalist for 12 years, and as time went by, I really became convinced of the idea that you could have an informational advantage and could understand a company by understanding its people.

Ruane is a heavy due-diligence shop — we adopt a journalistic method of gathering “scuttlebutt” research, and we try to understand the culture of a company as well as its numbers. In 1999, they recruited me to join the firm. It was a perfect fit and I’ve been here ever since.

John Harris (JH): Investing is what I wanted to do ever since I can remember. It was the dinner-table conversation in our house growing up.

My grandfather and great-uncle had a consumer products business that made home permanents for women that they sold to Gillette in the 1940s. They were quirky entrepreneur types, and they didn’t like working for big companies, so they left Gillette. At the time, if you were a Graham and Dodd-style investor, the thing to do was to find bankrupt railroad and utility company shells that traded publicly, of which there were many. In the Roaring 20s, those were the original roll-up vehicles, the 1920s version of 1960s conglomerates. A lot of them went bankrupt, and when they did, many of them had big capital losses inside of them.

So if you were smart, you would buy one and then invest through it and use the capital losses to offset your taxes.

They bought the Pittsburgh Railroad, and turned it into a publicly traded investment company called Pittway. The way they thought about investing was the way we think about investing. They tried to find good businesses run by good people, pay reasonable prices for them, and work with them for a long time.

My dad ran the family business after my grandfather, so investing was all I heard about growing up — and it fascinated me. I knew this was what I wanted to do, but back in those days it was not very easy to get a job at a firm like ours right out of college, so I worked on Wall Street for a few years.

When I came to Ruane for an interview, I spent about four hours with Bob Goldfarb. I got a sense for the place pretty quickly, and the minute I got a feel for this place, I was hooked. If you like doing what we do — if you’re curious about businesses, understanding businesses and trying to unpack the unsolvable puzzle that is the stock market– this is paradise.

G&D: David, how have you ended up marrying your journalism background with investing?

DP: I really felt that you could have an informational advantage around understanding the culture of a business and the way that people make decisions. If you can align yourself with management teams who make good decisions, you’re going to have a better result over time. On top of that, you just have to be a bit of a cheapskate.

G&D: Was there a moment in your journalism career when you realized how an investment analyst could get that information edge?

DP: I came to appreciate investing partly by watching short sellers as a reporter for the Miami Herald in Florida. I saw that you could really identify bad actors and make good decisions if you just weeded those actors out from your pool of potential investment ideas. And as you start to weed out the bad actors, you also realize who the good actors are. I have found it true over 30 years that if you align yourself with people who consistently make good decisions, you would do well. As Warren Buffett says: If you had to leave a million dollars with somebody for five years, would you trust this person to be a fiduciary of your investment? That’s really the bigger question we are trying to answer in our diligence.

The numbers eventually play out from there. At Ruane, we’re trying to distinguish good people from really good people. A lot of times, capital allocation is the measuring stick. Are the decisions consistently good? And if they are, you’re generally going to, over time, end up with a good result.

G&D: When you conduct your due diligence, is there a way you quantify your findings? For instance, how would your assessment of management enable you to decide whether to pay 15x earnings for the business rather than 20x?

JH: The quantitative side of what we do is easy, to be honest with you. You don’t have to have much more than a sixth-grade mathematics education to spot a potentially interesting investment proposition. The real trick is, is it as good as it looks? That’s the hard part. My experience is that the closer you look, the more risks come into focus. It’s very rare that the deeper you dig into a business, the better you like it. It’s usually the other way around. So I would say the qualitative side of what we do consumes 95% of our time because that’s the hard part.

Predicting the future is difficult. You have to look into this opaque haze and form a point of view about what’s going to happen. And I would say most of the mistakes that are made in our business are when people look at numbers and naively extrapolate the past into the future. Inflection points happen. If you aren’t able to peer around those corners every once in a while, typically you won’t bat at a high enough average to make it work in this business.

G&D: How do you think about multiples and discount rates?

JH: In the absolute simplest terms, over a long span of history, stocks in the U.S. have returned about 9% per year nominal, give or take. So that’s our cost of capital, and we want to beat it by a significant margin. We try to take a guess, and it’s nothing more than a guess. We don’t try to be precise about it and build eight-page models, because I think there’s a false precision in that. We just try to make a rough guess at what we think the cash flows of the business will be from now until Kingdom Come, and then discount that back to the present. We try to adjust for the fact that it’s an inherently uncertain exercise.

G&D: What are the heuristics that you’ve developed to help you predict the future?

JH: I think rules of thumb can be helpful when they help you allocate your time more efficiently and focus your thinking. But they can also be dangerous, so we try to avoid making judgments based on simple heuristics, because usually the world is more nuanced than that. It gets back to the same concept we were talking about before, where you can get in trouble just blindly assuming the future will look like the past.

DP: I would say that this is as disruptive a period in the U.S. economy as most of us have ever seen, so rules of thumb are probably less valuable today than they were 30 years ago. Warren Buffett has said, “I’m not going to invest in technology because it’s too hard to look out five years and know what’s going to happen.” But now technology is disrupting so many other industries that you have to understand it. You’ve got to think about owning businesses based on an Internet model, for instance. I don’t think it’s an effective rule of thumb any longer to say “I’ll just be an investor who doesn’t focus on technology and disruption,” because disruption has come to every corner of the economy.

G&D: A lot of these new Internet businesses are asset- light. Does that make a traditional value-investing heuristic such as return on invested capital less meaningful, because these asset-light businesses don’t require as much invested capital?

JH: I don’t think it’s one way or another. I think there are asset-light businesses that are tough to figure out, and there are asset-light businesses that are easier to figure out. All else equal, we would always rather own a business that doesn’t have to put any money in to get the money out. That’s a wonderful proposition. But that’s not to say that the fewer the assets a business employs, the better it is. Sometimes it’s good to have to spend a lot to make a lot, because that means it’s hard to copy. So, I don’t know that we necessarily prefer one or the other.

What we prefer is the wide moat over the narrow moat. Sometimes asset-light businesses have really wide moats and sometimes they don’t. Google, economically, is a far superior business to Amazon, just in terms of its economic efficiency. But that doesn’t mean the moat is any wider, because to recreate the infrastructure that Jeff Bezos has built over the last 15 years would require an astronomical sum of money. That’s a very hard business to copy. Google is also a very hard business to copy, not so much because it would cost you a lot, but for other reasons.

G&D: How have Ruane and the Sequoia Fund evolved over the years?

DP: First, I think philosophically the ideas underpinning the fund are the same as they were 40 years ago. I don’t think we’ve deviated far, but I think there’s been some evolution. The fund was smaller in the 1980s, and Bill Ruane was very comfortable with a 10-stock portfolio. Nowadays, we think a 20-stock portfolio is more realistic for us. But we still want to be concentrated in our best ideas. Insights are very hard to come by in our business, and when we have an actionable insight we want to own the stock in a big way. So we’re very comfortable with the top eight or 10 positions being 50 or 60% of our assets under management. I think that’s been consistent for almost 50 years now. I think we have always been thought of as value investors, but if you go back and read our letters from previous decades, our analysts were always looking for companies that can grow. I think that’s the same today too. We are always looking for healthy businesses that are in an early stage of their lifespan and have good growth in front of them, because that’s really where you can make a big return. I think a lot of value investors, not just us, have evolved over the last 50 years to a little bit more like Phil Fisher or Charlie Munger, who focus on the highest-quality businesses that you can buy for a reasonable price as opposed to strictly looking for cheap stocks. I think we’ve been consistent over time, but clearly there’s been a bit of an evolution. There was a time in the late 1990s when we were 30% Berkshire Hathaway, 20% Progressive, and probably 10 or 12% Fifth Third Bank. At our size today that level of concentration doesn’t make sense, but three stocks could be 30% of the portfolio.

G&D: As value investors who’ve made the transition to paying for quality or growth, how exactly do you define a “reasonable” price? Can you put a cap on how much you’re willing to pay?

DP: I’ll use a straightforward example, CarMax, which we bought in 2016. CarMax has a very unique business model. Four or five different quality companies have tried to copy this model of selling used cars with a more transparent buying experience, and they really haven’t been able to pull it off. So first off, it’s a model that seemed unique and interesting. Second, it’s only halfway built out across the U.S., so there’s an opportunity to maybe double the store base over a period of time. Third, it appears that the stores are profitable in every market that they’re in. It is a replicable, scalable model. Fourth, when we bought in, CarMax was trading at 15 times earnings at a time when the U.S. market was trading at 17 or 18 times.

So the math isn’t that hard. You’ve got a chance to double the store base. You’ve got a business that’s growing — same store sales are growing at healthy rates — mostly with middle-class and upper-middle class good quality credit buyers. And no one else has been able to copy the model. And then you layer over that the incredible diligence that one of our analysts conducted, we ended up feeling very confident in the management team, very confident in their ability to harness technology in case the business does move to more of an Internet sales model. And so we hold that company at a 5% weight, which is a pretty good weight for an initial position at a fund the size of Sequoia.

JH: I also dislike the idea that there’s a fundamental distinction between value investing, growth investing, and growth-at-a-reasonable-price investing. It’s all the same mathematical equation, right? Every business is worth something. And ideally you’d like to buy for some discount to intrinsic value. I think one reason you can make money with businesses that grow rapidly is that the future value of those businesses tends to be a little harder to estimate, because more of the value is far into the future than businesses with a small P/E that are earning a large percentage of their market cap in the here and now. And, I think for psychological reasons, the market typically tends to underestimate the rate and duration of growth for businesses that can grow rapidly. So typically, the errors in estimating intrinsic value tend to be toward the downside in those cases. That is, you end up in situations where you thought you were buying it for half of what it was worth, but really you bought it for 10% of what it was worth. And that’s when you really do well. The distribution of potential outcomes tends to be narrower for a more mature, slower-growing business where more of the cash flow is coming in now. That’s not to say that there’s anything wrong with owning those types of businesses, and we own them. I think one of the unique features of our portfolios over time has been that they’re eclectic. One of our partners likes to say that we have two hands. We don’t just play with one hand. But I think the reason you can do better with businesses that grow is because the right side of the distribution is wider and more interesting.

G&D: The leadership at Ruane has changed. Can you talk about that?

DP: Well, we’ve made a lot of changes over the last two years. Our CEO Bob Goldfarb retired, and we were fortunate that we had a bench in place that was ready to take on more responsibility. I’m biased, but I think over the past 20 years we have built maybe the deepest and the best research team around. We have a really strong bench. We had a bunch of people whom we hired in their mid- 20s and now they’re 40 years old and absolutely ready for more responsibility. We approached the leadership change as an opportunity to make Ruane more of a true partnership, with a structure that’s a little flatter, with a little bit more democracy around decision-making. And I realize people don’t like the word “committee,” but we really had a core of very strong analysts, very good decision- makers, and we don’t need to make that many decisions in a year. Having these people on our Investment Committee in the room when we make the final decision struck us as a very good idea.

G&D: What are some of your favorite stock ideas right now? John, you mentioned Google (GOOG) and its asset-light model earlier.

JH: We’ve owned Google since maybe 2010. And we recently bought more, and it’s now maybe 10% of Sequoia Fund. That’s because we like to compare businesses we own with each other. And we owned a couple of other businesses that we sold this year that are relatively mature that grow organically in line with the economy and trade for maybe 23–24 times earnings in a market that seems to value stability, business quality and liquidity. We felt that we could sell those businesses and buy Google instead — a better business growing at a much more rapid rate, with superior economics, for a P/E that probably isn’t all that different from the ones that we were selling. Google is one of the best businesses the world has ever created. It’s a phenomenal franchise. It’s a little bit difficult with Google to peer into the future and have a great handle on what the rate of growth will be going forward. That’s partly because they don’t have total control over their pricing since at the end of the day, it’s an auction mechanism that prices the product. Also it’s difficult to have a handle on what the pattern of usage will be in the future. There are many variables that factor into that. Right now, Google is growing 20% a year, and we have been surprised about the durability of the growth rate, especially at that size. It’s remarkable that not only is it growing that fast in absolute terms, but in a lot of cases, it’s accelerating even in relatively mature geographies where you wouldn’t expect it to. We don’t think that things will continue the way they’re going now. The nice thing is that the business could slow down dramatically and it would still grow over the next five years at a significantly faster rate than the companies we sold to fund the purchase.

G&D: How do you think about securing an informational advantage with a company as large and well- known as Google?

JH: Informational advantage can mean a lot of different things. Fifteen or 20 years ago, we were relatively unique in our commitment to “scuttlebutt” research. And I do think there were cases where we just knew more about a business than other people did. There were other people that did the kind of work we did — that sort of “feet on the street” research — but not anywhere near as many as there are now. And as you guys know, there are lots of independent services that have grown up over the last decade that will allow you to outsource that function. With something like Google, and I would say most of the companies in the portfolio, we don’t necessarily know any more than the next guy. But that doesn’t mean there’s not an advantage in doing your own work and doing incredibly intensive primary research. There is an advantage to gathering your own information and making decisions based on facts that you have gathered yourself. Investing is more of an emotional than intellectual exercise, and it becomes very hard to stay on an even keel and to make rational, unbiased judgments if you’re making them based on someone else’s information.So if my buddy at hedge fund XYZ tells me that such and such company is a great investment, or if you go to any of these conferences where someone really smart comes up and makes a bold case on whatever company, it may seem compelling at first. So you think, “Maybe I’ll go out and buy it.” Then the stock goes down 40% and you get nervous. How much time did that really smart guy who made the original pitch spend thinking about this issue that is pressuring the stock? You don’t know, because you didn’t do your own work.When you’re lost in the fog, you tend to make bad decisions because you’re scared. That’s why to me, you don’t necessarily have to know more than the next guy to have an informational advantage. But you are most certainly at an informational disadvantage if you haven’t made the effort to gather enough information to make an informed decision.

G&D: Do you think Google could be the Standard Oil of the 21st century? Its size and reach are already inviting lots of regulatory scrutiny.

JH: Yes, that’s probably the biggest risk that you face as a Google investor. Standard Oil, AT&T, take your pick for the analogy. AT&T was one of the world’s great companies, and there are obvious similarities between the AT&T of a few generations ago and Google today.

DP: AT&T was a great company, because it charged me a dollar a minute to call my parents when I was in college. Thirty years ago, it was crushing the consumer.

G&D: That’s an ominous parallel. Like AT&T’s forced breakup, what if 10 years later Congress decrees YouTube has to be a separate company from the search engine, and so on?

JH: There are different layers to the risk here. One is monetary penalties. We don’t worry so much about that, because Google is an incredibly well-funded company. I think that they can afford to pay penalties. I think behavioral remedies are the bigger concern here. And the one that we watch the closest is how the Android OS comes pre-installed with Google products, or the gateways to those products. If that link were to break, it wouldn’t be a good thing. Although, it’s possible that Google has achieved escape velocity at this point and become so popular that even if it was forced to change its behavior, the change might have less impact today than it would have had a few years ago. Microsoft reached a similar point when they attracted legal and regulatory attention, and were forced to unbundle some of their products. However, if you look back, Internet Explorer — which was at the center of that scrutiny — has lost a lot of market share in the browser market not because Microsoft was forced to change its practices but because, I think, competitors just came up with a better version of that product.

G&D: In that vein, how do you think about competition from, say, Facebook or Amazon? Eric Schmidt has said that, after Google, Amazon is the next biggest search engine U.S. consumers use.

JH: Amazon is already there. It is a huge advertising and product discovery platform, and it wasn’t started yesterday. Facebook is already a gigantic advertising medium that attracts eyeballs for huge periods of time every day. And they weren’t created yesterday. Google is already living with this competition and still growing at remarkable rates. Also, by no means is our position predicated on the idea that Google is going to continue growing 20% a year for the next five years. I certainly would not want to take the over on that bet. Our guess is that the business is going to grow in the future, but the point is that we didn’t want to be forced to have an opinion about the rate of growth in the future, other than that we do think this is a business that ought to grow faster than the economy for a long period of time. So we paid a price that only assumes that Google grows at a GDP-type growth rate, maybe a little more. I think we paid a price that doesn’t require you to make bold predictions about the future of the business, just modest ones.

DP: The easiest way to figure out if something is really good and really works is whether its competitors can copy it. We owned an industrial distributor called Fastenal for 17 years — people tried to copy it and couldn’t. I think Google has similarly proven itself in the marketplace, precisely because there have been other search engines that haven’t stuck. The Google search engine works better. It’s better for the consumer. And at this point, it’s so powerful and so widely used globally, it would be very, very hard for somebody to disrupt it in a major way.

G&D: Any other favorite ideas in the portfolio?

DP: Credit Acceptance Corp. (CACC) is a classic Ruane kind of stock. It’s a quirky business, and not especially well understood. This company is the lender of last resort for people who want to buy cars but are having real difficulty with their credit. So a lot of the loans are going to be made on the buy-here-pay-here type of car lots — where the car dealer is also the financier — and not a typical dealership.The customer has a credit problem, and is buying a $6,000 or $8,000 car that they need to get to work, and they can’t otherwise get a loan. Credit Acceptance has a program where it will advance the dealer a portion of the sales price of the car — but not the whole — and then the dealer and CACC are both on the hook. So it’s a model based on alignment with the dealer. Both the dealer and CACC are very incentivized to collect the full balance of the loan, and to sell the car at the proper price where you have a chance to collect the loan instead of exploiting a customer who is poor. Meanwhile, consumers who couldn’t get a loan anywhere else get a chance to rebuild their credit record if they’re able to pay the loan off, even if they’re paying rich terms to access that credit. Around 60% of people end up paying the loan off. I think it is a benefit to the consumer. And for the 40% or so that ultimately end up defaulting on the loan, Credit Acceptance is very effective at repossessing the car and then reselling it.

It’s a niche product that you need for a particular consumer. On a buy-here-pay- here car lot, Credit Acceptance will account for 5% to 10% of the loans. And because CACC doesn’t advance the full price of the car, it doesn’t have the same leverage as a typical subprime lender who is advancing the full price of the car, and it doesn’t have the same risk profile. Over time, the returns on capital have been very high compared to any other subprime lenders, because the capital at risk is lower. It’s a terrific model. Four or five other reputable, smart companies have tried to copy it over time and haven’t been able to do it. On top of that, I still think Credit Acceptance has got a relatively low market share, even among the subprime or sub-subprime customer base. We also like that the management team is heavily invested in the company and owns a chunk of the stock. The CEO has been in place for 16 years and is only 51 years old. And the founder still owns a lot of the stock. CACC gets lumped in with the stocks of other subprime lenders, which have been beaten up recently for good reason as the value of used cars decline and as those lenders’ experience with loans worsens. But Credit Acceptance is actually a little bit counter-cyclical to the rest of the subprime industry. It does poorly when there’s a lot of capital flooding into the space. And it will do better in the next couple of years if money exits subprime and more people struggle to find credit.

Thanks to some of these misunderstandings, CACC was very cheap. We bought it at 10 times earnings, with a management team that’s very good and very aligned with the shareholders. It feels like a great investment to us.

G&D: Can you explain why the other five competitors who tried to replicate CACC’s model weren’t able to? It seems all you have to do is make sure the dealer has some skin in the game.

DP: How much you advance to the dealer is important.

One thing that’s really neat about Credit Acceptance is they have a ton of discipline. If they can’t get the right terms they’ll do only two loans to the dealer a year. They will walk away from business. Credit Acceptance over time has been very disciplined about what it will pay and about adhering to its economic model. In contrast, I think everybody else who gets into the business runs into problems. To get market share, they advance too much against the car, they take on more risk. Secondly, Credit Acceptance is very good at repossessing the car to get the collateral back. And other people haven’t been as good at that either.

JH: Loaning money is hard. Loaning money in a leveraged way is harder. Loaning money to people in economically challenged circumstances is even harder. And collecting money from CACC’s borrowers is very hard, because car loans are not really a secured lending business. There is collateral there, but repossession is not a major feature of the business model.

So CACC is a collections business. Collections businesses are tough. The more history and the more data you have on the borrower, the better. Lending against this office building is a relatively easy lending business. You’re lending to people who in a lot of cases don’t need the money, and you have a fantastic piece of collateral that’s readily saleable. And it’s easy to get your hands on this building. It’s not on wheels.

G&D: Why are dealers willing to work with CACC? They’d ideally prefer no skin in the game, and be advanced the full loan, no?

DP: Because the dealer can then service a broader customer base and do more business. So instead of turning a sub-subprime customer down, he can sell another car with the help of CACC. And dealers are in the business of selling more cars. And if the dealer does it right, he can make more money. And as John just said it perfectly, CACC has a tough business. You have to do things sometimes that are adversarial with customers. Yet one of the things that was so impressive to me is that this company has been on the 100 best places to work list for years. It has a good culture. It has a good employee environment.It’s easy to be in one of the 100 best places to work in America when you’re Google, and you’ve got an amazing business with smart people and a tremendous model. It’s not as easy to be one of the 100 best places to work in America when you’re dealing with people who are in distressed situations. I think they’ve built a really good culture in a really hard business. G&D: A quick glance at the financials shows that CACC now makes 30% ROE, but before the Great Recession they were usually making 20% ROE. Is it possible they’ve over-earned the last few years because of the Fed’s easy money, which has kept down their cost of capital and also boosted their loan volume?

DP: That’s a good observation. I think after the Great Recession, a lot of lenders fell out of subprime, and there was a period of probably two or three years where they had much less competition. So their returns boomed. Now, over the last couple of years, a lot of money has flooded back into subprime. So CACC has actually cut back on the amount of loans they do per dealer — because there’s much more capital available for these dealers — and they’ve tried to grow instead by being involved with more dealers. So I’m not sure we’re in an artificially inflated environment at this point.

G&D: Is there still a sizeable addressable market of new dealers they can be involved with, and hence grow?

DP: There are parts of the country, such as suburban Detroit and generally the Midwest, where they’ve got very good penetration. But there are other parts of the country where they’re not nearly as big as they could be — California, some of the Sun Belt states. I think there’s a lot of opportunity to grow.

JH: More generally, I don’t think we wanted to have a point of view on what exactly the sustainable ROE of this business is. We felt that the price we paid for it assumed that the business never grew again.

DP: At 10 times earnings, certainly. It’s not as if we paid a stretch multiple.

G&D: Hasn’t the chairman- founder sold down his stake?

DP: He has sold down his stake. The founder owns a large percentage of the company and sold some stock last year, interestingly not at a great price. He sold a big chunk last year, and that’s around the time we bought CACC actually.

The founder selling gave us a little bit of pause, because we have great respect for him. But he had an overwhelming portion of his net worth in the business, had owned it for many years, and is no longer involved in the day-to-day management. He made the decision to hold a little bit less.

The CEO who is there now is in his early 50s, also owns a lot of stock, and I think has an incentive plan that rewards him based on stock performance over 10 years, which is the kind of thing that aligns with us very well. So I still feel that we’ve got heavy ownership by the management. The board of directors also owns a lot of stock. There are a couple of good investors on the board.

G&D: What about the politics of subprime auto lending? The Obama administration was particularly aggressive against such lenders.

DP: There is regulatory risk there, and we’ve thought about it a lot. Government does tend to look at high interest-rate loans and the way subprime consumers are treated. The good news is CACC has a very serious compliance culture — and as I mentioned, it is often listed as one of the 100 best places to work. Keep in mind that this consumer would not have access to an automobile if not for a business like CACC. They perform a role in society. If they weren’t there, think of the number of consumers who wouldn’t be able to drive a car.

G&D: You assume that government will be rational.

DP: Yes. You assume the government will be rational and realize that this is a high- risk customer, therefore you need to have a high ROE model to serve that customer. And if CACC is not there, who would be there? In the case of Credit Acceptance, you could make an argument that 60% or so of the consumers do pay off the loans and rebuild their credit record. So there’s a benefit to a person who wouldn’t otherwise be able to drive a car.

G&D: What’s the interest rate on these loans?

DP: I’m sure that they’re pushing whatever state limits are on the interest rate. Perhaps 20% to 24%.

G&D: You’re referring to the usury limits states set. Though couldn’t a lender always get around the usury limits by inflating the price of the car?

DP: Again, I think they have a compliance-conscious culture. Part of the deal that they make with the dealers is that the dealer needs to have some alignment and some incentive to do the right thing. I think they do a good job obeying the law and caring about compliance.

G&D: That was fascinating,thanks. Do you have any advice for MBA students looking at a career in investment management?

JH: This is a learning business. Try to work with people who are good teachers in an environment where you can learn a lot. The fanciest name on the door is not always the right answer to that question. It’s the same in your career as it is with college. I talk to young people and they seem to constantly think that if they don’t go to any one of these five colleges, life is over. That they must get this credential or all the doors will be closed to them. The truth is that’s just not how the world works. You have the motor inside of you that you’ve got. It’s up to you to put the fuel into it and get the most out of it. Where you go to college, the name of the first firm you work at is not going to determine where you end up. You determine it. You determine how much you get out of whatever God gave you — and the way to get the most out of it is to work really hard and do what you love, because it’s hard to work really hard if you don’t do what you love. And then work with really good people in an environment where you can learn, that will help you get the most out of what you’ve got.

DP: The best advice I think I’ve ever heard anybody give is Charlie Munger’s bit about aligning yourself with people who are better than you are. Marry someone who’s better than you are. Work for somebody who you really respect and admire. If the day comes, hire people who are smarter and better than you. If you do that, your life is going to be so much more successful.And if you’re trying to break into stock-picking, the other cliché that’s true is the stock market can stay irrational longer than you can stay solvent. So you’ve got to be humble. It’s not an easy business. You can be right at everything you do, and the stock can still go 20% the other way. Humility takes you a long way.

G&D: Thank you for your time.