Stephen Mandel of Lone Pine Capital, a Tiger Cub Hedge Fund, on Investing and Philanthropy

So, I'd say there are a number of things, of course. But as one goes longer and longer in this business, I spend more and more time thinking about people. You know, companies' competitive positioning, what their financials look like, what kind of sustainable moat they have around the business. But more and more, we spend a lot of time really trying to understand the people: how they think, what kind of culture they've created, how they motivate their people, what kind of people work there. It's just become more and more over time spending on people. So that's the kind of thing that's hard to do when you're picking up a company for the first time.

We have two or three people who are, they don't work exclusively for us, but they almost do. And they're not employed by us, they're third parties, and we pay them as such, but they do a really, really good job.

Well, I would say one thing we try to do, and hopefully we're more successful than not, is be a resource for them, sort of as an intellectual peer in effect. That's really, really helpful, and that changes the nature of the dialogue with management considerably.

We try to hold things for a long time. When we enter an investment, we think we're going to hold it in general. Sometimes, this is a gross oversimplification, but we have businesses that we expect to compound value for a long time and we expect to hold them for a long time. Sometimes we make a mistake and we don't hold them for a long time, or sometimes there's a catalyst for driving value where there may not be a long-term compounding of value but there's a closer realization of value.

Well, in general, we would probably need to find some type of catalyst for the realization of that value. And yes, I mean, if something is abjectly cheap relative to its intrinsic value, yes, we would absolutely look at it. We would go through a process though of trying to understand it and with management about if we don't think they're doing everything they should to run the business right or realize value, we'll engage in a dialogue with them about that. But we don't go public with that or wage proxy fights or do that kind of thing.

Sam Walton at Walmart, who just had an incredible facility with people like I've never seen anyone before or since. Every year they would have the Walmart annual meeting. Initially it was in their little cafeteria or whatever, and then the audience got too big and they actually built a new field house at the University of Arkansas to hold it. Because they had it in the field house and it was not air conditioned, the meeting was in July, it got pretty oppressive in there, so Sam's brother Bud built a new field house for them so they can play basketball games but also at the annual meeting. Anyway, he would be in there in Fayetteville, Arkansas. He would literally at five in the morning get there and he'd be up on a stage like this and all these associates would be down there, and he'd be just, 'Oh, Betty Lou, I was in your crafts department in Ocala and you had this great display.' You just sit there and watch this and just go, this is just unbelievable. So them, and Jim Senegal and Jeff Brotman at Costco were two people also that I just thought the world of in terms of the kind of culture they built at the company. This is a company that, I can mention these names because we're not involved in either, but at the top scale, they offer the best health care benefits of anybody in the retail business at the same time as offering the lowest prices for their consumers. They had built in, if you go into Costco and you just look at people's badges, it always says their name but it also says when they started. I was just in there the other day and the two people I was dealing with, one was 1999 and the other was 2003. They're very proud of the fact that a two-cashier household can lead a middle class life.

Yeah, well, I mean, yes, they were disappointing us in terms of how they were doing. They both had terrific businesses but they were mismanaging them, and then we bailed because we just sort of couldn't take it with management anymore. And then eventually management got replaced and they started realizing the intrinsic value of the business.

We're in a low interest rate environment, which creates a lot of economic distortion frankly, and is beneficial to people like us and often hurts people who do not have capital to deploy. But we're also in, and this is one of the most exciting things about being in the business that we're in, the level of innovation and the level of progress coming largely from new technology is just like we've never seen really in the history of the world. So the areas that we find most interesting: one is digital payments. Various forms of digital payments, but this is accelerating rapidly and is moving both across the world, moving not only to consumer payments but business to business payments as well, and is allowing many people who have been unbanked before and had difficulty dealing with the banking system to really enter the economy through Cash App and other forms of saving money or handling money, entering the economy in a digital way and not having to deal with cash as much. So that's one area, and there's kind of innovation happening there all over the world. A second area is enterprise software. Physical software that you're deploying to what are called SaaS models, software as a service models, where software is in the cloud. That has changed not only the economics of that business but the ability to innovate faster. That software is infusing every aspect of society. A third area will be the digital consumer. How we communicate, gaming, consumption of video. It's a broad phenomenon that's really changing how people not only consume products but also consume services, entertainment, etc. And then those are three large areas we invest in, and a fourth would be what's happening in biotech. That deals with targeted therapies, personalized medicine, and the merger of biology and data science, which is advancing dramatically.

I think a number of things. I think it will be, I don't know the exact time frame, but I think personalized medicine will be standard, meaning that everybody will have a genetic profile, and that genetic profile will be with your doctor. Off of that, there may be preemptive things. If you're predisposed to have a certain type of cancer, for example, there may be genetic engineering that will change that predisposition. There could be... I think it will be standard, but it will be a longer time before you get away from that.

That's a really hard question because even in the world where you have national health care through European countries, Japan, etc., they're inflating too. Their costs are lower than ours, but they're also inflated. That's a really tough one because there are things we can do to slow that down. There are certain aspects of managed care that are very good at that, and the way that works best in this country is if the entire system is integrated. It will take time for us to get to that point. But there are drivers. If you look at pharmaceuticals, for example, which has increased a fair amount, it's up to close to 20% of healthcare spend now, which has probably doubled over the last 15 or 20 years. All of that is through innovation. 90% of the drugs prescribed in the United States today are generic, low-cost, in terms of number of scripts. But every day that goes by, there's a new innovation, often for rare diseases. If you're going to support the research and the clinical trials and all that go into that, the drugs have to be priced at $200,000 a year. It's very hard for the FDA to say no. So even though 90% of the scripts are generic and low cost, that 10% are really expensive, but they are often the difference between life and death for people, or between a very compromised life and a more normal life.

I had certain, I think the principles that we had at the, if you looked at our original business plan, they're the same. And that's been sort of a bedrock of what we've done. But if you look at other things we said, kind of the maximum amount of money we can see managing is a couple billion dollars. Now it's 30. We were just a long-short hedge fund at the time, and now we are, I mean we still have that, but the larger amount of capital is in long only. I felt we could run with a team of, we had 17 people at the start, I felt like there's not going to be a need for any more. We'd have 95 people. I was like, I don't want to have all this, I want to keep it very lean and we're not going to need a lot of people. The firm has a reputation for being a great place to work, very sort of humane, good culture. And I'm assuming from what you've just said that that was sort of part of the plan.

Well, I was just talking to our CO today. We just gone through reviews last week, and I was just so proud and so thrilled because many of the people, I have sat on every single person's review for 22 years, never missed one. And it's always, but now you know, when we had 17 people, I knew basically what everybody did. Now I know what everybody does, but I don't know the details. The stuff that we've done over the last eight months was just, and seeing not only the commitment but the new things that people have done, implementation of all kinds of new technologies within our firm just in the last eight months that probably we should have been doing before or were doing before but not to the same extent. Trello and Slack. And that, and hopefully this doesn't come by accident, meaning we set the place up so we have 95 people and we have a culture that is very inclusive. About diversity, equity, and inclusion, when we started out, that term didn't even exist, but we sort of always have run the place that way. We have by far the highest female leadership and ownership of any firm like ours. We've always had an inclusive philosophy both in terms of ownership but also, many firms like ours sort of run like two classes of citizens, the investors are one and everybody else is the other, and we haven't done that. We have more owners in the non-investing people than we do in the investing people. And all those things, so good window into how you think about the business and a good transition to philanthropy.

Well, I kind of learned it and we've modified it some, but when I was at Tiger, we had a foundation that we started that was Julian's idea. Initially we were a very small group, there were 15 people when I joined. So we started and it wasn't everybody contributed, it was children, families, social service type stuff, not totally unlike what Family Centers does in the New York area where we work. So when I started Lone Pine, I wanted to do something similar and we modified it some in a number of ways. So the way it works is everybody who's an employee is a board member, so everybody who's an employee has a vote. We encourage, we just got 100% participation this year. We encourage everybody to give because when we give to organizations, one of our asks and requirements in fact is that the board of those organizations are 100% contributors. So we operate in New York and Fairfield County, and then we have a small office in San Francisco. We used to have an office in London where we still do, people there moving back here. And then every employee has the option to serve on what we call a return on investment group, which is a small group of people analyzing each one of the potential investees we look at. The small staff of four also work with those groups, but they also work with the employees individually on their own personal philanthropy. We also have a fund to help them not just give them money but convene them together, provide professional development for their people, do all kinds of things to help them beyond just writing them a check.

I think there's one aspect that's pretty much totally the same, and that's the leadership. And maybe even in some ways more important than the non-profit because it is even in many ways even more reliant on the leader. We do try and get to know the leadership of these organizations well and back people who are real leaders. The other part, the scorecard part, is much harder. Outcomes in the business world are very tangible. They are measured in dollars, they're measured in physical outcomes that you can track and judge. So there's a scorecard that is very frequent and has many components to it. In the nonprofit world, that's much harder. On organizations that are trying to foster system change where you're interacting with the political system, etc., and it's a long game, oftentimes much tougher to judge.

Yes. When I was at Dartmouth, it was probably... At TFA, well, it really has to do more with the maturation of the organization. The big idea behind TFA is you get highly talented leaders, generally right out of college, but increasingly a number of people coming into it who had other professional experiences before they join. The idea is they make a two-year commitment to teaching in the classroom, generally always in low-income schools both in urban and rural settings around the country. The idea is that it's not the kid's fault, this is a solvable problem. You personally saw Johnny or Sally advance two grades by your own personal efforts, and it affects them for the rest of their lives. The idea is that a healthy portion of them go on to be teachers for the rest of their lives, but we want a large portion of them to become leaders outside the classroom: principals, superintendents, elected to public office, business leaders, lawyers doing pro bono work in the community, doctors, etc. So the alumni network is ultimately where the action is. A lot of their students have now become TFA teachers, which is one of the coolest things that happens. We now have 3,000 school principals across the country, 300 school system leaders, and about 400 people now elected to public office, including a person in Congress. So that's happening, and that's where the action is. The increasing focus has gone there. It's still important to get people into the front end, and the next pivot is to try and hold the organization accountable for what happens broadly in the communities that we serve, which is a trickier thing to get yourself accountable for and measure. But that's kind of the next pivot. We've had programs all along to get people to be school principals and school superintendents and elected to public office and in public policy positions.

TFA supports those new teachers and supports its alums really in a way like a college might support its alums, connecting them with each other and helping them find jobs. But the actual work of the public office, public policy stuff, there's an organization called Leadership for Educational Equity that was part of TFA years ago, got spun off about almost eight years now, separate 501(c)(3), separate governance. TFA supports it financially but at a declining rate, and it is a minority of the financial support now. Its entire being is helping TFA alums get into public policy and public office. So that's what that organization does. It's a separate 501(c)(3). The New Teacher Project got spun off from TFA, and there are other organizations like Relay, New Leaders for New Schools, that have either loose or tighter affiliations with TFA that perform those other functions.

Well, I hope the charter networks around the country have been quite innovative in terms of their approaches, and that I still find very exciting. I hope that, and I was just talking about this today with somebody else as a funder in this area, that there actually can be for-profit entities that spin up in the K-12 space that are supplemental to what districts are doing and where there's an economic model that can support them. So in China, there are huge companies that provide supplemental education to students from very young up through 12th grade. This is test prep, learning English, but it's also basic math, science, etc. There's one-on-one tutoring and then there are huge online classes. These are large companies. The aggregate market caps of these companies, public and private, is probably in the range of $100 billion in China. There's huge demand for their services, largely because the Chinese system is so exam-oriented. My ultimate hope would be we can figure out how to get our system better, but that's a big lift and there's a lot of entrenched interest not wanting to change that. So some of the solutions like charters and what I'll call supplemental education can be workarounds. I'm hopeful somehow that we can get this going here in the U.S., that there's an economic mechanism for districts to buy into this kind of thing. It's a vague idea at this point in time, but it exists in other places in the world.

Hmm. Everything's a finance book, right? Oh boy. I like to read lots of things. I don't have like a book that I would say really shaped my life, but I can tell you books that have made an impression on me. Biographies of people who've really overcome incredible odds to achieve what they've achieved are an inspiration to me. So I talked about Sam Walton. Abe Lincoln is a hero of mine. Even reading the Grant biography last year or the year before, you see a character that clearly had flaws but also just had an overwhelming drive to achieve. People, I've been sort of lucky in my life that I've not had to overcome incredible odds, but I find those stories very inspiring.

That is a great question. I think there are definitely elements of that. There's a lot of crazy stuff that has been going on, frankly some of which we've benefited from. Things going to valuations that I would have never expected they would have gone to. It's interesting, I've thought about the bubble. The bubble usually ends when the Federal Reserve takes the punch bowl away. If you look at the bubble in 1999-2000, Alan Greenspan, the speculator's pal, threw gasoline on the fire in September of 1998 and it ended in March of 2000. So that's about 27 months. This will burn out too. When the retail investor, exemplified now by the Robinhood investor, is heavily involved, I was just listening to Bloomberg Radio on the way over, and the volume of open options contracts right now is double what they were a year ago. 22 million open option contracts versus 11 million. So there's a difference. The companies, in general, there are a few that, I'm not sure all these electric vehicle companies are actually going to survive. There are a bunch of things out there that probably will end up being zeros. But by and large, most of the companies that are getting all this publicity and trading volume and very high valuations are real companies. They may not be worth necessarily what they're trading for, but they're real companies. In the 1999-2000-2001 era, many if not most of those companies should never have existed in the first place.

Oh gosh, the world has changed in so many ways. The actual economic world. I look at the areas that were the biggest areas of investment for us back, let's take it even more 20 years ago versus today, are areas that we basically almost don't invest in at all. We were pretty significant investors in retailing back then, land-based retailing. The whole wireless industry, it turned into, then it was a new thing, and all the big telcos had to get into the game and they were acquiring wireless companies, and it was a great thing for us. But now it's just a commodity. You see a zillion ads on TV and these guys are just beating each other's heads in. So a number of the things that were large areas of investment for us, we don't do anymore. And the things that are very large investment areas for us basically didn't even exist then, a lot of them five years ago. So that, to me, is the amazing thing about the US economy. We've had massive destruction of old industries, but we've had massive growth in other industries where we lead the world: technology, entertainment, healthcare. They have filled those gaps. It's tough on some, if you're a 50-year-old person who is working in a GM plant or whatever, it's hard to repurpose yourself. So it's incumbent on government to help bridge some of these gaps. But the economy is unbelievably dynamic, and that's one of the great strengths of the US. In the top 20 companies by market cap, it's all the US or China.

Always, yes. But again, they have to, often they're unloved for a reason. There are areas of the economy that are in secular decline. If you're a fossil fuels based energy company, you're in decline. If you're a land-based retailer without much of a web presence, you've got problems. I would not want to own a mall. There are a lot of businesses that are, we've seen this in the publishing business. I would not want to be a cable channel without a lot of original content that people really want to watch. Cord cutting is not putting you in a good place. So there are a lot of businesses that are unloved for a reason. But if you can find a catalyst somehow to change what they're doing, because many businesses that are unloved are unloved for a reason.

The former CEO is a very good friend of mine, and is a wonderful person and was a wonderful leader. I attribute their issues to two things. They still have some wonderful businesses by the way. Some bad luck happened to them. He took the job one day before 9/11. 9/11 happening was an airplane that we owned with engines that we made crashed into a building that we insured. We never thought anything was wrong, and that caused some cultural issues. There was stuff that was done back in that era that allowed them to make some quarterly earnings that came back to bite them literally 30 years later, that probably should have been identified along the way. There was a very large write-off of an insurance contract on a long-term care contract where their assumptions were wrong. People are living longer and healthcare costs more money, so your assumptions are wrong.