Hello and welcome, my name is Simon Gregory and I'm joined in conversation by Habib Subjally, who's Head of Global Equities at RBC and his colleague, Jeremy Richardson, Senior Portfolio Manager. I wanted to spend a little time talking about team culture, I think it's often overlooked, but, what we're doing in portfolio management is a team endeavor. And one of the things that I know is very important to you Habib, is that you have a team that focuses on continuous improvement. And just somewhat interesting to you, you came up with a stat in one of your LinkedIn posts, a few days ago about driving. And of the polled drivers that were surveyed, 68% of drivers claimed they were above average, which is remarkable statistic, because it's... impossible. But what it tells us is you have to be judicious in your understanding of the data and what can you do with it? You have huge amounts of data that your team produces to help you get better overtime, ultimately, clearly for the benefit of your investor clients.
Yeah, hi, Simon, you know, that survey on driving was really interesting and we obviously know, all of us know lots of people who drive cars and, you know, roughly half of them will be below average. And, even when you talk to the ones who constantly have scrapes and bumps, and go into minor accidents, even with them, it's always someone else's fault, right? And it's really interesting, I think that same survey said less than 1% of drivers claimed to be below average, so there's a real bias here about how people view themselves. But I think that that post also mentioned golfers, I haven't played golf for many a year now, but, when I talked to my friends who are golfers, I can't remember a single one who said that they were above average.
In fact, they'll tell you how far below average they are, using their handicap and not only that they're below average, they'll tell you why they're below average, because they'll tell you that, you know, their short game is terrible or you know, they always slice the ball with the wedge, or whatever, they'll go into huge amounts of detail.
Unusual for golfers, right?
Exactly... And the difference is, the difference between people who drive cars and play golf is that golfers record detail. Every aspect of their game. They record it, they record it in these special apps, in these databases, they analyze it, they see where they came where, where they're dropping shots, where they can improve. They change their training routines and they get coaching to help improve, that doesn't happen when you drive a car. So, it's all about the bad data. So, in the same way. We, as a team, we've been together now, oh, eleven and a half years, almost 12 years. And, over that period, pretty much every single decision we've made we recorded in a database. So, even if we have looked at a stock and decided to pass on it because we didn't like the management or the business model or whatever, even that gets recorded in a database.
So, we can now go back and we do this regularly, you know, at least a couple of times a year, look at the data that accumulated in that database, and look to see where we can improve. We spend a lot of time... well, we spend a little bit of time on our successes, because that's what we want to replicate, but we spend the vast majority of time on the mistakes, because that's where you can improve the most. And that has the biggest impact. But in order to learn from your mistakes, there's one other vital component that you need apart from having the data, you also need a culture where it's safe to admit to making mistakes. It's fine to actually be honest and say: "I made an error of judgement here." Because, essentially that's what our mistakes are all about, they are errors of judgement.
What we do is, we are making forecasts about the future. About where businesses are going to be in five years time, ten years time, three years time, based on incomplete information, we don't have a full dataset to make those judgements. And because these are long-term judgements, fear and greed and other emotions set in and you can overestimate or underestimate the potential of a business, that's why we make errors. So, it's important for people to be honest with themselves as to why they got too optimistic or too pessimistic, and then share that with the team, with the other 10-11 people in the room. And that then enables us to either design a control to make sure that we don't make that mistake again, or at least, that we develop a realization to embed that mistake into the collective memory of the team...
So that when a similar situation arises, you know, sort of lightbulbs go off amongst a few team members at least, to say: "Hold on a minute, don't you remember when we did x, y, z?" And I think that's really powerful.
Yeah. In that respect, Jeremy, I'm going to put you on the spot, ever so slightly. You've been covering consumer names for many many years now. Could you share with us perhaps some examples where you're learned either from successes or from things that perhaps haven't quite worked so well, and how you've put that into practice to make sure that these things perhaps don't reoccur.
Sure, sure. So, in the spirit of sharing and... openness, yeah, so, I should... to go back to the point about the data actually, so, one of the things that data really does is that it can really illuminate biases that we may have, and actually these biases, to the extent that they're characterized by an investment philosophy can be really helpful, but if they fall outside of investment philosophy, they can lead you astray, and cause problems. So, by recording all the data that we... all the decisions that we've made, we're able to identify our own biases, and in fact, looking at that data, this is going back several years, in terms of my own judgements, actually I could see that I was... I had a bias in favor of turnarounds.
I mean they were beguiling, if you get a turnaround and it really really works for you, then you can make several times your money, like 2x here, or multiples of that, 4-5x if you're fortunate. And so, actually, there's a lot of potential gain to be had by getting a turnaround that really really works for you. But actually, if you look at the data, if you look at the data, it's quite apparent that most turnarounds, they fail, they don't work. They're incredibly risky, very risky in comparison to other businesses that sort of, perhaps study accumulators of shareholder value. Does that mean that you shouldn't do turnarounds? Not necessarily, no, because, actually, you know, some of them will work, but actually, when you're approaching a turnaround, you're usually super super careful, and almost apply almost a high duty of care to what you're doing, because the chances of failure are so much more elevated.
And so one of the things that we've learned and that I've learned, you know, personally, is to be patient when it comes to a turnaround. Don't rush in. You can afford to wait and to get some early signs of success, you can afford to wait and get validation, and actually by doing that, you might not get 4x your return, but you might get 2x, and actually from a risk adjusted return basis and the probability of success, that's a much better trade-off than being greedy and rushing in. And the data can do that, the data can do that.
So, do you think having a remote and collaborate team structure allows you to really push against any one individual's cognitive biases and will you have them?
Absolutely, we do. So, being aware of them, and let's face it, you know, we have a pretty diverse team, we have some optimists, we have some pessimists. We have some naturally happy people, we have some grumpy people and... (I won't ask who...) but, well, they know who they are... But, as a team, that's a really good balance, I mean, I... you know, when you have a really interesting idea that and someone's really optimistic about, you know, you want to run it past the pessimists on the team and if you can get it past them, then we know we're really on to something. And that is something about a team dynamic that develops overtime and where you have that trust, and that communication. And I think that the sense of purpose of the team is so important that you know the only thing that really matters is getting the right decision for the portfolios.
And do you think that naturally attracts a certain sort of individual? Or do you look for certain qualities in people?
I think that's undoubtably the case, you know, I'd be interested in Jeremy's thoughts on this too, but, you know, anyone who's a loner wants to do this on their own and in their own way. I don't think he's going to fit into the way we work, because I think we have to recognize that we are all somewhat limited, the amount of information that is out there cannot, no matter how bright you are, cannot be ingested and deployed by any one person. This has to work as a team.
I don't think it's that controversial you know, we operate in a very competitive industry, we know that any investor, any client has numerous choice opportunities to select managers with whom they can invest their money. And all of them may do a fairly decent job. So, it's an incredibly competitive industry, so there's... and we don't take it for granted that we're necessarily going to succeed. And so there's always this pressure to continue to improve what we're doing in order to be able to delight our clients with the investment returns that they're getting. So, if we can identify a way to make an improvement, to get better, then of course we're going to go for that.
And so I can think of the things, which, you know, overtime, yeah, these are not revolutionary, but these are just sort of incremental things that we've done along the way. So, for example, you know, sources of information. You know, going back 12 years ago, databases were not what they are today, and particular things around from... for example environmental, social, governance... I mean, the moniker itself didn't exist. But today there's a plethora of ESG information. A lot of which that we use, because we think that it helps us come up with more complete assessments of investments. And the other thing that we would... we've tried to do in a much more systematic way is, this question of management. We want to partner with management teams who can operate the business in a responsible way over the long-term.
And that actually requires often quite qualitative judgemental type of decisions and they're not easy, they're quite tricky. And anything that we can do in order to be able to make those types of decisions better, of course we're going to grasp that with both hands, and, one example of that would be to try and capture unspoken information, which might sound a little odd, I mean, how can you capture information that isn't there? But if I was to ask somebody for a reference and that person's reference came back and it didn't say anything about being trustworthy or honest, then actually I would think that's slightly strange. So, one of the things that we try to do is actually to, the words that we chose to describe the way the culture of an organization, the way the company is being managed...
What are the words that are not being used? What, why, what is it about choice that enable... that encourages us to describe a particular culture of a business in one way, but not another? And we're trying to be explicit about identifying those unspoken words, in a way that can illuminate what we'd really think on both a positive and on a negative side, about a management team. So, you know, these are all sort of slight things that we've done over the course of, you know, the last 11 to 12 years or so, which we hopefully have made it, you know, continued to hone what we'd like to think of as our competitive advantage and which have enabled us to continue to invest in ourselves and therefore the returns we are able to generate.
Do you have any sort of formal mechanism for assessing whether your continuous improvement works, or is it just sort of just ad hoc on the job, day in day out stuff?
We're very good at giving feedback to each other...
Yes, that's an important part of it... but we do have these formal off-sites a couple times a year, well they're not really off-sites, let's call them meetings cause we go off to our meeting room on a different floor in our building...
Not a trip to Hawaii...
No, sadly not, but these meetings are quite intense, there's a lot of preparation that goes into this. Analyzing a lot of data and looking at what happened and why it happened, why we thought what we did and, could we have anticipated things, and so on, and through event studies. But we examine all aspects of what we do, whether you know, our trading, not just our decision-making but judgements around trading and our trading strategies and so on... we collect all of this data and then having analyzed and drawn some conclusions, we get together to discuss it. And these are... and they're not like, most teams might go off on an off-site and maybe have a nice meal in, you know, a nice country club somewhere...
These are quite emotionally sort of taxing meetings, where you're actually going through your mistakes and seeing how you can learn, improve and changing the way you see things and what you believe to be... kind of what you thought that would work, the fact that it doesn't work and how you can improve, that's not... you know, that's not easy, it's not trivial. And, like I say, we do this a couple of times a year because we think it's really worth it. And when we look back at where we were 8-10 years ago, I think we are on a journey and the longer we stay together, the longer we do this, I think the stronger we become.
That's really interesting. Thank you. Thank you very much for that. And, I think I just have to say in conclusion, in the spirit of full disclosure, Habib doesn't actually own a car, so he's most definitely in that 68% of above average drivers. Thank you.
Thank you very much.
Thank you, Simon.
In the spirit of continuous improvement, we welcome all feedback, you can reach us with your thoughts at rbcgampodcasts, that's all one word, @rbc.com. Speak soon.