Idea Brunch with Alex Morris of TSOH Investment Research
Alex on evaluating management teams and finding great CEOs
Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Alex Morris!
Alex is a private investor and founder of the TSOH Investment Research service, a publication focused on investing in high-quality companies for the long term. Before launching the TSOH Investment Research service in April 2021, Alex was an equities analyst at The Fiduciary Group and a contributing author at Gurufocus. After a decade in the finance industry, Alex launched his research service with the goal of sharing deep dive equity analysis and complete portfolio transparency.
Alex, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch TSOH Investment Research?
Hi Edwin! I’m a big fan of Sunday’s Idea Brunch and appreciate the opportunity to tell my story.
My life as an investor began at the University of Florida in 2008 – 2009 when I stumbled across the Berkshire Hathaway shareholder letters. Warren Buffett’s ability to clearly communicate his investment approach struck a chord with me, and I’ve been obsessed with investing ever since. Around that time, as I was preparing to graduate from UF and begin my career, I started writing about stocks online as a way to bolster my resume. Even after landing an equities analyst position and adding some credentials (CFA, MBA), I kept writing online because it was a great way to “test” my ideas, build a network of like-minded investors, and generate some supplemental income. In early 2021, after seeing the success that people like Ben Thompson, David Kim, and yourself had achieved by taking your work directly to readers, I decided it was time to leave the industry and jump into research + writing as a full-time job.
April 2022 was the one-year anniversary of the service, and I can thankfully say that it has exceeded my expectations by a pretty wide margin. I’m incredibly thankful for the people who supported this service in its early days; it will be my primary focus for many years to come.
What do you look for when evaluating management teams? Who are some of your favorite operators?
I’m looking for honest and able operators who judge the success of their business on a time horizon that mirrors my own (the long-term). That seems like an obvious point – who wouldn’t want that – but I find that there are often misaligned incentives in the life of a public company CEO that can muddy the waters. I recently wrote about Jeff Bewkes’ inability to evolve Time Warner’s business in response to the rise of SVOD (and specifically Netflix), which is a perfect example of the misalignment that I’m referring to.
On the first point (honesty), the key test is consistent and transparent communication, which includes the disclosure of KPIs that are the required input for a thoughtful investment decision. I’m looking for managers that view me as their partner, which demands the ability to be open about the long-term risks and opportunities they’re presented with. I also think that it requires a willingness to listen, and potentially respond to, the concerns of investors, who provide cues when a management team has done an insufficient job of justifying a long-term decision (a recent example is Meta, with Zuck putting some guardrails around the Reality Labs spend).
In terms of ability, I’d define this as the skill of being able to communicate, and execute against, a thoughtful long-term vision. I’ve come to realize that the long-term success of a company can be greatly influenced by the alignment of interests between management and shareholders. Truly great managers have the ability to succinctly enunciate a reason for being, with every decision that they make from that point forward framed in that light (a good example is Satya Nadella’s first letter to Microsoft employees, where he shifted the company’s focus to a mobile-first and cloud-first world). I believe that identifying these one-of-a-kind leaders is key to long-term business success (which will ultimately be reflected in the outcome that shareholders receive).
Some examples that come to mind are Satya Nadella at Microsoft, Walt Bettinger at Charles Schwab, Doug McMillon at Walmart, Todd Vasos at Dollar General, former Progressive CEO Glenn Renwick, Mark Zuckerberg, and (of course) Warren Buffett. With each of these individuals, they’ve established a level of deserved trust with their investors that, for me, is paramount to the conviction required to invest with a long-term time horizon.
Are there any common red flags or bullish signs you look for in the companies you invest in?
On the red flags, I’m looking for anything that suggests the key decision-makers are not the kind of people that I want to partner with (as discussed above). Notable examples include frequent changes to segment reporting, ineffectual shareholder communication (like shareholder letters that don’t say anything useful), the removal of KPIs, an unwillingness to clearly address past mistakes (everybody makes mistakes), etc. These can be rare and hard to find, so when I see a red flag, I don’t take it lightly (as Buffett likes to say, “there’s never just one cockroach in the kitchen”). The people inside the company will always have better insight into the day-to-day operations and long-term trajectory of the business, so when they tip their hand, I listen.
In terms of bullish signs, it’s the opposite and the clear communication of a thoughtful long-term strategy/playbook with transparency and accountability are table stakes. When the results deviate from expectations, I’m looking for an honest answer about what just happened and why (sometimes this is a good thing – for example, Microsoft’s commentary in Q3 FY21 that short-term EBIT margins may be below expectations because they were investing even more aggressively to pursue a growing opportunity set). The holy grail is a situation where I can say, “This is a great business with a bright future run by somebody that I trust like a close friend,” which enables me to disregard short-term price volatility and to truly have conviction for the long run. Companies like Microsoft and Berkshire Hathaway, each of which I’ve owned for 10+ years, fit that description in my mind.
What are some interesting ideas on your radar now?
I run a concentrated portfolio, which currently consists of 12 holdings. Naturally, I have a lot of confidence in each of those ideas at today’s prices, otherwise, they wouldn’t be in the portfolio. At the same time, I also do my best to ensure that the attractiveness of any given idea is considered in the context of a portfolio; I think that’s an important frame of reference to consider before discussing individual ideas.
As mentioned above, Microsoft (NASDAQ: MSFT — $2.04 trillion) has been a top holding for 10+ years. The company’s long-term opportunity, most notably in the Cloud businesses, is massive. Last quarter, the business reported ~$94 billion in run-rate revenues with +35% constant currency revenue growth. While that growth rate will inevitably slow over time, I’m of the opinion that Microsoft is incredibly well-positioned to command a growing share of global end markets that are collectively measured in trillions of dollars. In addition, they have a demonstrated track record of using their significant FCF generation and fortress balance sheet to improve their position through opportunistic acquisitions (Mojang, LinkedIn, Nuance, ATVI, etc.). The net result, in my opinion, will be strong double-digit increases in per-share intrinsic value for many years to come. When viewed from that perspective, I think that today’s valuation appears quite reasonable.