The Legend Michael Mauboussin on Acquired!

1. BGBen Gilbert0:00

   Yeah, dude, we should see if, uh, any listeners wanna create some cool, like, animation for the intro music for the YouTube channel.

2. DRDavid Rosenthal0:09

   Oh, are we gonna open source it to the fans?

3. BGBen Gilbert0:12

   [laughing] We gotta do it.

4. SPSpeaker0:14

   Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

5. BGBen Gilbert0:31

   Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

6. DRDavid Rosenthal0:45

   And I'm David Rosenthal, and I am an angel investor based in San Francisco.

7. BGBen Gilbert0:50

   And we are your hosts. Well, today, we interview one of our heroes, Michael Mauboussin. We've referenced his work on many episodes before. He's given talks that have been my carve-outs on previous episodes, and as many of you know, Michael is the head of Consilient Research at Counterpoint Global, which is part of Morgan Stanley Investment Management. At, uh, mid-year 2021, earlier this year, Counterpoint Global had assets under management of approximately $180 billion. And for those who don't know Michael's work, boy, are you in for a treat. Uh, [chuckles] David, I think it's fair to say he's your favorite investor's favorite investor.

8. DRDavid Rosenthal1:33

   [laughing] I love that. I love that. He might also... I mean, at this point, we'll have to- somebody have to tally up. He might be, uh, he's certainly in the top five of number of carve-outs, uh, all time in Acquired.

9. BGBen Gilbert1:47

   For sure. Yeah, he's done, like, mind-expanding research on a ton of topics that we'll cover today on the show, and today's show, uh, of course, has a lens on how to interpret all of Michael's work over the years in the context of today's unprecedented macroeconomic environment.

10. DRDavid Rosenthal2:02

    I li- I like that, unprecedented.

11. BGBen Gilbert2:03

    [laughing]

12. DRDavid Rosenthal2:04

    Good, good phrasing.

13. BGBen Gilbert2:06

    Yeah. Well, for the presenting sponsorship on this episode, we have the SoftBank Latin America Fund back again. As many of you know from previous specials, SoftBank LatAm is deploying capital into the Latin America startup ecosystem, and it's absolutely fascinating. They, they just announced they have another $3 billion to invest in addition to their initial $5 billion, so clearly it is working. And when we asked Paulo and Xu, two of the partners in the fund, if we could grab some voices from the founders themselves, they were like, "Of course." So today, we are joined by Gabriel Braga, the co-founder and CEO of QuintoAndar, the $5 billion real estate tech company founded in 2012 in Brazil. Can you explain how the platform works and, and what your journey to start and grow the company has been like?

14. SPSpeaker2:55

    Definitely. Uh, we enable seamless housing experience from, from searching for a home towards the transaction, and after the transaction, during the leaving, as long as you live in that property. So we started, uh, back in 2012, focused on long-term rentals, and we chose that segment because it was the, the most neglected part of the market. Was particularly painful in Brazil, and in addition to all the ineffici- inefficiencies in, in finding a home, I mean, duplicate listings, poor photos, incomplete info online, tenants were required in Brazil to provide a very cumbersome and expensive rent guarantee, while the landlords were afraid of not receiving the rent on time and having headaches with delinquent tenants and, and evictions. And we fixed the transaction by eliminating the need of those rent guarantees from the tenant side, but guaranteeing the rent on time for the landlord, no matter what happened.

15. BGBen Gilbert3:55

    Mm.

16. SPSpeaker3:56

    So right now, we are about 10 times, uh, bigger than our closest competitor. We are the largest platform in Brazil, one of the largest in the world. We have more than 120,000 ongoing rentals that we manage on a monthly basis, but just like we did in rentals, where we kind of reinvented the transaction itself, how it's done, we, we intend to do this in, in, in the home buying segment. Um, and in a bit more than a year of operation, we have more than 10,000 for-sale transactions, uh, rent rate right now.

17. BGBen Gilbert4:28

    Wow, just so impressive. I mean, uh, one thing I've sort of been wondering as we've learned more and more about the LatAm ecosystem, can you give us a sense of how it's evolved since you started the company?

18. SPSpeaker4:39

    We launched QuintoAndar in 2013, and it was hard to attract talent to work in a small company. There weren't many companies trying... You know, tech companies, startups that had scaled. So fast-forward, we've experienced a major shift, uh, since 2018, 2019, especially, uh, since La- uh, SoftBank launched the LatAm Fund. They basically invested in many of this earlier cohort of startup, um, some of them became, uh, unicorns, so investors coming and looking for new opportunities, you know, founders coming from all over the world and, and trying to address problems here. So I think SoftBank specifically was, was pivotal in, in this- in this process, uh, because they were very deliberate in, in investing these companies and showing the confidence in the region.

19. BGBen Gilbert5:32

    Well, our thanks to the SoftBank Latin America Fund and to Gabriel and QuintoAndar. If you wanna get in touch with SoftBank, you can do so at latinamericafund.com or click the link in the show notes. And if you're interested in working at QuintoAndar, there's a link in the show notes for that, too. As always, this is not investment advice, although-

20. DRDavid Rosenthal5:49

    [chuckles] It, it is advi- it's advice about investing, but not any specific, uh-

21. BGBen Gilbert5:55

    Yes

22. DRDavid Rosenthal5:55

    ... uh, investment.

23. BGBen Gilbert5:57

    Yes. No doubt, it'll be, uh, educational, entertaining, um, and, and Michael's an absolute riot. So, um, you know, we may hold positions in things we talk about on this show. We may be running from the hills on some things we talk about on this show. Uh, without further ado, we'll get into it.

24. DRDavid Rosenthal6:14

    ... Well, Michael, we are so excited to have you on the pod. You've been so influential, uh, to me personally, to, I know to Ben, to the show, so many folks who listen. Um, when we all met at Capital Camp, uh, hosted by, by Patrick and, and Brent the other week, uh, we knew we needed to find some excuse to, to get you on the show and discuss all the big ideas, uh, that you've had over your career. Um, and we were- Ben and I were talking, we were like: Well, what could we... Well, how could we frame this? And we were like, "Actually, the current crazy market is the perfect frame," because, like [chuckles] you've written so much about how to think about markets, and, ah, the current environment is a little wild. So, um, we thought we would, we would kind of step through your ideas, you know, untangling skill and luck, measuring moats, decision-making, complexity theory. We, we wanna talk about the Santa Fe Institute, where you were chairman of the board for many years. Um, but we thought maybe the best place to start would, uh, for two reasons, would actually be Expectations Investing. Uh, one, because you and your co-author, Al Rappaport, just published a revised, uh, edition of the book. Um, but also, two, it's kind of, [chuckles] you know, think about expectations, uh, r- probably a good frame for, uh, the current market. Um, so let's, uh, uh, let's dive in on that. Um, could you maybe start, uh, by telling us who Al is? Uh, 'cause he's pretty cool, and how you got to know him.

25. MMMichael Mauboussin7:39

    Well, thank you, David, and, and thank you both, David and Ben. Great to see you guys. Um, you know, I- Al Rappaport's probably the most important person, one of the most important people in my life, and I can say that, um, he changed the complete direction of my life. So the story is, very quickly, is I was a liberal arts major in college. I went to Wall Street. I had no idea [chuckles] what was going on. I took no business classes. By the way, I, I... My father- I take, I take that back. My father made me take, um, accounting for non-business majors, and I got, like, a C [chuckles] in the class out of the generosity of the professor's heart. So I had no idea. So I come on, and, and part of it was remedial and so forth, but, but I was, uh... They're just, Wall Street, and I think even ven- the venture world and, and even the corporate world, filled with sort of rules of thumb and, and sort of, like, old wives' tales of how things work. And I was, I was sort of swimming in all this, and one of the guys in my training program handed me a copy of Al Rappaport's book called Creating Shareholder Value. That book came out in 1986, so I read it shortly after it came out, and for me, it was a professional epiphany. And, and I'll just say, almost everything I've done since then has been patterned on, on that work. There were three things he said that were, I, I think, remain the bedrock of everything I think about. One is, it's not about earnings that, uh, that matters, it's really about cash flow. So the ul- ultimate driver value of business is cash, not accounting earnings, and we can come back and, and deepen on that thought. The second is, and I also think really important, is that we tend to think about strategy, so what is our strategy and how do we position ourselves, and so forth, and we think about valuation as two separate things. And he made the point, I think, very, very correctly, that you have to combine these two things to understand a business and to do evaluation properly. So in other words, the litmus test of a strategy is that it creates value, and you really can't understand or value a business till you understand the competitive situation, the competitor set, the growth of the market, and so on and so forth. And then the third and final thing was in chapter seven, he had- it was called Stock Market Signals to Managers, and the argument was: Hey, executive, your stock price reflects a set of expectations about the future financial performance of your company, and it behooves you to understand what's priced in. And if you want to do really well from the point of view of the stock market, you have to not only meet but exceed those expectations. So that, to me, you know... And I, I, of course, hadn't met him. He was, like, some, some [chuckles] awesome big guy, and I had the opportunity- I started using his work in my work as an analyst, and then in 1991, May of 1991, I had the opportunity to meet with him, and it was absolutely phenomenal. So just, uh, for me, a, a real great experience as, as someone who was trying to learn from, from the master. We, uh, we maintained a relationship through the 1990s, and then toward the end of the '90s, 1998 or 1999, he said, "You know, it might be fun for us to write a book using the same principles, but in- aimed, aimed at investors." So that was the birth of Expectations Investing.

26. DRDavid Rosenthal10:30

    That former one was sort of aimed at executives, at, at CEOs?

27. MMMichael Mauboussin10:34

    Yeah, Ben, it was. And, and, um, and so... But, but the idea, that, that particular idea of expectations was clearly u- use- useful for everybody. And, um, [chuckles] so we write the book, and by the way, we signed it in the late 1990s, right? So the world's, you know, the world's ripping, and the stocks are doing great and everything, and then-

28. DRDavid Rosenthal10:50

    Oh, boy, that sounds, like, uh, familiar. [chuckles]

29. MMMichael Mauboussin10:53

    [chuckles] Exactly. And the book came out... Now, this, that, that may- you may have just jinxed me there, David. Uh, the book came out September 10th, 2001.

30. DRDavid Rosenthal11:02

    Oh!

Episode duration: 1:34:25