Interview With Southeastern’s Josh Shores by Longleaf Partners

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We had the distinct pleasure of catching up with Josh Shores at the offices of Southeastern Asset Management in London in May. Josh is an integral member of Southeastern’s investment team, having been with the firm since 2007. He has twelve years of investment experience and holds a BA (Philosophy and Religious Studies) from the University of North Carolina. Southeastern, founded in 1975, is led by famed value investors Mason Hawkins and Staley Cates.

The Manual of Ideas: Such a pleasure to welcome Josh Shores, Southeastern Asset Management. Josh, thank you for hosting us here in your wonderful offices in London.

Josh Shores: Thank you, John. Good to have you today.

MOI: Very excited to speak with you about the investment approach at Southeastern. You’ve been at the firm a number of years. You are based in Europe now, and so perhaps just to get started you could tell us a little bit about your journey as an investor and your focus at Southeastern.

Josh Shores: Sure, I’d be happy to. I have somewhat of a typical value guy story where I became interested in the markets as a teenager and was in university, studying philosophy, and had a good friend who knew I was interested in investing. He invited me to an investment club, which led me to Roger Hagstrom, which then led to classic Graham and Buffett, reading Security Analysis and reading all of Buffett’s annual letters.

I would say it was a Damascus road type of experience. I knew I was interested in investing and finance, and the philosophy, the “big ideas” aspect of value investing appealed to me – understanding the idea of thinking and acting like an owner, buying with a margin of safety, the classic value tenets. These core truths really resonated with me and from that time it was a journey where I knew this was what I’m going to do. It’s as much a passion and a hobby as it is a livelihood. The intellectual discovery part of it and the excitement of it has continued to this day.

MOI: Obviously, Southeastern is a great place to practice that kind of an approach. I really put it in that small pantheon of firms that do invest and act like owners because of the size of the capital at your disposal and also the concentrated approach you take to these businesses. Tell us a little bit about that and how it may differ from firms that deploy capital more broadly across many different companies.

Josh Shores: Mason is definitely one of the greats. Before I was at Southeastern, I had started a company with some other people to put this stuff into practice, but I always knew there were a couple of places I would pull up and leave in a heartbeat to go work for, and Southeastern was one of them. I was reading Mason’s letters from Day 1, all the way back, and thought, “This is a company that does it right, that thinks correctly and the philosophy is spot on.” Mason is most well-known for his business, people, price paradigm, and for his focus on thinking and acting like an owner. It’s such a pervasive thing within Southeastern. We’re a 100% employee-owned, private company. We are the largest investors in our products, and we can’t own equities outside of our funds.

We’re 100% aligned with our clients and think and act like owners in everything we do. We apply that same paradigm to any company we’re looking at. Clearly you’ve got to have the good business aspect and the margin of safety from buying at a discount. That goes without saying. The focus on thinking and acting like an owner is a nuance that I think Southeastern puts into practice in a special way. Part of that comes into play with our concentration. A lot of our products have 20 names in them, which seems concentrated to a lot of people. To us, actually we would rather be more concentrated than 20, because if you’ve got a handful of your best four, five, six ideas, let’s own those, but for many clients you have to be a little more diversified.

Being an owner and acting like an owner means you concentrate on your best ideas, and you are engaged in your companies and have an active dialog with them, just as you would be if you were an owner of those companies on a private basis and had a long-term time horizon. Our average holding period is five years, but we’ve had things we’ve owned for 10, 15 years. If you can buy that great business, partner with great management, add a good margin of safety by investing at a discount, and have it grow and compound for years and years,
that’s the ideal. Mason’s seen it all over his 40 years in the business. He’s seen every cycle, ’73-’74, the bottom in ’82, the ’87 crash, the dotcom peak and crash and then the Global Financial Crisis. To be able to learn from a guy like that who applies value so purely has been one of the great opportunities in my life, and I’m very appreciative of it.

MOI: When you say ‘people’ being one of the three focus areas when evaluating a potential opportunity, just give us a little more context on what it is you look for and how you find these people that you want to partner with.

Josh Shores: Just as we, in running Southeastern, think and act like owners, we want to partner with people who think and act like owners, and ideally are big owners. As a rule, we see very different behavior from people who are owners and people who are agents. We’re trying to find a person that operates the business well, or a situation where there’s a partnership involving a great capital allocator and a great operator. That can be very powerful, operating the business like an owner, thinking about value creation and extending the moat of the business on a perpetual basis, but at the same time, allocating capital well, because the balance sheet and the cash coupon of a business over the five, ten years we’re going to own it are going to drive the outcome as much as the discount to the share price when we initially bought it.

Interview With Southeastern's Josh Shores

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