Project Description

Will Danoff Podcast Interview Notes

  • Will Danaff has managed Fidelity’s Contrafund for 30 years (started in 1990).
  • Contrafund has $139BN in assets under management.
  • Performance:
    • Beaten large cap growth by ~400bps per year. Average large cap growth fund has generated ~9%.
    • Beaten the S&P 500 by ~300bps per year. Contrafund has generated ~13% per year. S&P 500 has generated ~10%.
  • Performance is amazing. What is secret to success??
    • North star: important of analyzing a lot of companies, working really hard, and staying flexible, and having a great team.
    • And maybe just bringing it back to the earnings per share of the underlying companies. And trying to think about what this company could earn looking out five or seven years. Will this company be bigger and better? Once you determine what you think the company might earn looking out to the extent that you can look out. And you have to be honest if you don’t know. In the world of technology, you have to be really careful about extrapolating growth rates. But then ideally, you are trying to pay the best price you can for a well positioned growth company, with a good brand and great mgmt and strong cash flow.
    • Earnings per share becomes the north star for a growth investor. If Home Depot is opening 15% new stores per year and their old stores were generating 5 or 10% growth. And the margins were going up and the ROI on the new stores was high, you start projecting 30% growth or whatever that works out to. Doubling of earnings in three years with the potential for many many more stores. That was a great insight for Danoff.
    • Cast a wide net. And continue to monitor what your investments are doing. And how your mgmt teams are doing.
    • Danoff is an advocate of the poker game approach.  It’s hard to say that company XYZ is a buy and hold for 10 years and this is the greatest thing since sliced bread and therefore we are all in.
    • Over 30 years, you make a lot of mistakes, you learn from your mistakes, but one idea Danoff has is that you are playing poker, Danoff has an Ace, you are showing a 3. Donoff thinks this is starting out to be a good hand for him. So he’s going to bet some. And start to build another position and then if he’s served another Ace, meaning the company says its going to expand into California or expand into India or introduce a new product. And the results show that those efforts are going really well, then you bet more.
    • For Danoff, it’s a little more incremental as oppossed to “aha, the lightbulb went off”.
    • Index is hard to beat. There is survivorship bias. The successful companies become a bigger part of the index. The less successful companies exit the index.
    • To summarize:
      • Work really hard.
      • Know yourself.
      • Know your companies.
      • Continue to monitor your companies and try to upgrade on weakness.
      • Try to be patient and long term.
  • Where can value investors get a little confused?
    • Need to be aware of where the market is going and what products are the future.
    • Classic value trap. Really cheap stock but it’s not going anywhere.
  • Fidelity started in 1986. Started as an analyst?
    • Applied for a summer job in 1985 and was rejected at Fidelity. One must always persevere!
    • Luckily, was accepted for a full time job as an analyst in 1986.
    • Fidelity was and still is a research oriented active manager.
    • All great fund managers started as an analyst (Peter Lynch, etc.).
    • Jeff Vinik. Unbelievably talented investor. Started in the spring.
    • Was assigned retail stocks. Large group of stores. Had all sorts of different stocks. Membership warehouse clubs were the new shiny concepts. Department store were slower growing, but high free cash flow. Relatively understandable. Didn’t have to understand technology.
  •  One key lessons learned over career?
    • “I should have bought more of these great growth stocks like the Home Depot.”
    • “I was there when Howard Shultz (Starbucks) went public in 1992”
      • Shutlz had a 140 cafes. They were all in Seattle or Portland. On the roadshow lunch, someone said, “you know it might work in the Pacific Northwest, but they are tree huggers there and they like to sit around in a coffee shop, but it’s not going to work in New York or San Francisco.” But the data showed it was working. They had opened a couple stores in San Francisco and they were all exceeding expectations. And the ROIs on the new stores were through the roof. Way back then it cost $250,000 to open a store (they were leased). In year two, stores were doing $650,000 of revenue. ~20% cash margin. So for $250,000, you were getting ($130,000) of cash in year two. Which meant you could finance rapid growth. And same store sales were growing double digit. It was the perfect story.
      • Lesson: the stock popped on day one. It was always expensive for what it was. It was 30x forward earnings. But the company continued to grow and grow and its stayed expensive for ~15 years. Sometimes an expensive stock that executes really well can be a great story. They added Frappuccino’s and expanded into China. Competitive threats were there. Peet’s tried to compete and McDonalds was going to try to compete. But sometimes when you have a great franchise, with a great business model and a great management team, you can have a great stock even if its expensive.
    • Companies like Amazon where you couldn’t imagine life without it. Or Costco which customers have loved for years. You wish you owned more of the great companies.
    • For many years, was running around trying to find small companies that nobody had heard of. And looking for cheap and getting better. Looking for turnarounds. Turnarounds sometimes work and they can be really awesome stocks when they do. But the degree of difficulty is higher than just saying “Wow Google is unbelieveable. How did we live without Google or how did we live without Amazon?”
  • Ever think would be running same fund for 30 years?
    • No. Fidelity is a great place to work.
    • Always tons of companies coming in that he wants to meet with.
    • Also, meet mgmt teams that help you.
    • Danoff randomly sat in on an Ask Jeeves meeting in 2003, and discovered that Google was crushing everyone in search and innovating faster. Wanted to buy Google. Then Google went public in 2004. Google had doubled revenue in 2002, doubled revenue in 2003 and doubled their revenue in the first quarter of 2004. Operating margins were 25% and they had a billion of cash on their balance sheet before they went public.
  • Investment process. How do you look at a company?
    • If you want to invest wisely, you have to make a commitment. It’s a competitive field. Stay within your circle of competence (just as Warren Buffett advises).
    • Danoff is interested in companies that are going to be bigger and better in 3 to 5 to 7 years.
    • Interested in companies that are doing well or getting better right now. That was one of the great insights that Danoff gained from working with Peter Lynch. Especially small caps. If you have a billion in revenue, you should be growing faster than $100BN companies. Consumers should see it and want it.
    • What has this company done in the past five years? Has this company grown revenue? Have they improved their margins? Have they expanded into new markets? And then see what mgmt wants to do in the next five years and try to figure out the likelihood that they are successful.
  • Art vs. Science?
    • It’s competitive. You have to play to your strengths.
    • You are in the business of asking good question.
    • Treat management team well. Be prepared.
    • A little empathy as an investor goes a long way.
    • Questions for management:
      • Where do you see the bigger opportunities?
      • Where do you think you are doing well? 
      • Where do you think your vulnerabilities are?
      • You can learn a lot by asking some pretty basic questions can give you a pretty good sense of management.
        • Are they humble?
        • Are they honest?
        • Are they willing to be realistic?
      • Is the entire management team on the same page? Are they saying the same things?
      • Had a dinner with Sam Walton of Wal-mart and Walton was deferring to other people on his management team because they were all on the same page. You realized that he was a very effective leader with a strong culture
      • When Mark Zuckerberg came in to Fidelity’s office during the initial IPO roadshow, Danoff projected his facebook profile on the conference room wall. When Evan Spiegel from Snapchat came in, the analyst made a story and shared it with him. They loved it. You need to make an effort to connect with the management teams.
  • Running a fund as a single decision maker vs. by committee?
    • Ned Johnson believed in accountability. Liked the idea of single manage.
    • Have a great team of analysts that help identify good companies, but Danoff likes to have a call with the management team himself with the analyst on the phone to hear the story himself.
  • When you find a company like Starbucks and Home Depot, how long do you hang on?
    • About fifteen years ago, Danoff realized that by lowering his portfolio turnover, he would automatically increase his time horizon and force him to think longer term.
    •  If I’m going to own this company for ten years, I better make sure its a super high quality company and its going to be doing better in five or ten years.
    • When and doubt check the fundamentals. Look at the latest presentation to investors. Or call the company.
  • One great lesson over the past 30 years?
    • If a stock has doubled or tripled, you have not missed it.
    • Bill Gates or Michael Dell didn’t sell after their first double or triple.
    •  It’s an excellent idea to say, I would like to own these stocks for the next decade or two decades because I understand the niche that the company is fulfilling. I think they’re in a big market. I think the management team is going to continue to innovate and continue to grow.
  • What question did you ask Warren Buffett?
    • Buffett invited Fidelity out to Berkshire Hathaway for an MBA day and Danoff got to ask a question. He said, “Warren I manage $100BN, do you have any advice for me?”
    • Warren said: “When you find a good idea, bet big.”
    • Danoff was influenced by Peter Lynch who had ~1,000 stocks and Joel Tillinghast still owns many, many stocks.
    • At the time, Danoff owned 500 stocks. And he decided to look at the bottom 300 stocks and decide up or out (of the portfolio).
  • Thoughts on software industry?
    • Marc Andreeson said it best when he said, “software is eating the world.”
    • It’s growing quickly, its highly profitable, and many parts of the tech industry are not capital intensive.
    • Steve Jobs was a genius for getting Foxconn to build iPhone for Apple. Apple doesn’t have to spend a lot of money and gets to have high margins.
  • When will you retire?
    • Danoff feels like he can add value. Going to continue to manage money as long as he feels he can continue to add value.
  • What are you reading?
    • Just finished City of Thieves. About Leningrad during the World War II. Good book.
    • Currently reading single volume biography of Winston Churchill. Amazing story. He was ignored as a child, but he was exceptionally smart.
  • Advice for recent college grad that wants to get in asset mgmt?
    • Have to start by doing.
    • Start a paper portfolio.
    • Use your lawn mowing money to buy a couple stocks. You just have to get in there and do it.
    • When Danoff started, he had to write personal emails to companies that he was interested in to receive their annual report. It took him two weeks to get started. Today, it takes two seconds to get access to the same information.
    • Danoff says he was a mediocre analyst, but over time by doing, he’s learned what works for him. You have to learn your style and what works for you.
    • You have to be accepting. Mistakes are a big part of this business. You try to learn from your mistakes.
    • George Vanderheyden who was a great mentor of Danoff’s recommended keeping a little investment diary on an index card or as a digital version of an index card. Why am I buying this stock?
  • What do you wish you knew when you started your investment career?
    • Wishes he had invested more with superior managers when they were younger (earlier on).