Brad Slingerlend and Brinton Johns are the co-founders of NZS Capital, LLC, an investment firm that focuses on innovative businesses that demonstrate non-zero-sum (NZS) characteristics. If you’re wondering what non-zero-sum means in investing, you really have to listen to this episode! Brad and Brinton are veteran tech investors with a top tier performance track record. Together they oversaw the Janus Henderson Technology funds for nearly 10 years. Over that period, they honed and perfected their investment philosophy and principles, which they share in this episode.
If you’d like to learn more about Brad and Brinton’s investment philosophy, I highly encourage listeners to read their white paper titled Complexity Investing. The paper is great overview of how these guys think about investing in the technology space, and it also provides the background for some of the topics discussed during the interview. Those topics include Pace Layers and the potential for decelerating growth for the big internet platform companies, Huawei and the increasingly chilly tech cold war, the importance of semiconductor companies, and the not so unlikely odds that China might annex Taiwan.
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Participants
Brad Slingerlend, Investor and Co-Founder at NZS Capital, LLC
Brinton Johns, Investor and Co-Founder at NZS Capital, LLC
Nate Abercrombie, The Stock Podcast
Interview Transcript
Nate: Brad and Brinton, thank you very much for coming on to the program.
Brad: Yeah, thanks, we’re glad to do it.
Brinton: Thanks for having us on the show.
Nate: Yeah, my pleasure. So could we start out with your background.
Brinton: Yeah, the short version is I worked at Janus Capital, which is a large mutual fund company, for about 17 years. I actually started on the phones there and then became a research associate and eventually an analyst. Brad was one of my first bosses as an analyst and then eventually started to manage the tech team and then manage the portfolio. And Brad and I, somewhere along the line, became peers and really began to understand very quickly that we could think well together. We thought better together in some instances than we thought apart from each other. And out of that, over a long period of time and a lot of frustration, a lot of mistakes in investing came sort of a unified investing philosophy that made a lot of sense to us. So that’s my quick background.
Brad: Okay, this is Brad. I started at Janus Capital, which is now Janus Henderson, also in 1998 as a summer intern. I started there full time in 2000, so I got to experience the euphoria of the last couple years of the .com bubble followed by the pain and the crash. And then I started as a small cap generalist. I covered a bunch of sectors. Always a little bit of tech, but anything from entertainment to retail, a little bit of healthcare, true of anything under about $2B in market cap. And then started specializing in tech in 2003. So again, managing the analyst team of tech analysts which is about when and Brinton joined in, as well, a little bit after that. And then managing the global tech fund starting in 2011, working with Brinton. It’s been a lot of fun to learn about all the areas of the tech sector and sort of live and breathe disruption and innovation for 20 years now.
Nate: Do you guys talk a little about what you’re doing today after leaving Janus and starting your own fund, right?
Brad: Yeah. So we’re really excited. Earlier this year we formed NZS Capital. And I’ll take a minute to explain what the N, the Z, and the S stand for because it’s not obvious. But one of the pillars of our investment framework is really looking for companies that create win-win outcomes for not just their shareholders, but for their employees, customers, also the environment and society at large. And so NZS is an acronym for non zero sum. Non zero sum is an outcome in game theory. That’s kind of how we think about the world. And when you’re creating a non zero sum, a positive sum outcome, everybody’s winning. And often times, a company is creating more value for their customers than they are for themselves and that ends up making it a good company to invest in. And that philosophically aligns with what we want to accomplish with NZS Capital, is we want to create for value for our clients, for our employees, and society environment at large, which sounds like sort of a silly goal for an asset manager, but we think it’s just increasingly important. And so NZS Capital is based on our investing framework called complexity investing, which I’m sure we’ll get into. And it’s very similar to the way we’ve managed money for a long time. We’ll be focused on the tech sector, but also sectors that are being impacted by tech, which is pretty much the whole world now. So very much focused on innovation and growth.
Brad: So this idea of NZS … Actually, one of the first times I came across the concept besides learning about it in statistics and math for physics classes 20 years ago, was a book called Non Zero Sum by Robert Wright. It’s a really interesting book. If anybody wants to learn more about this, I recommend checking it out. I think it’s about ten years old now, but you should still be able to find it. And it goes through the history of basically human civilization and how we’ve grown and progressed and continued to progress as a society by creating these win-win interactions. And it seems to be a fundamental element of human interaction. It even applies to business, also. And so we wrote about NZS in a whitepaper that we finished back in 2014. And so it’s one of the characteristics of many that we look for in companies. And maybe, Brinton, if you want to talk about that whitepaper a little bit.
Brinton: Yeah. So the whitepaper was really sort of a product of us investing for a long time and making our fair share of mistakes. We realized that we had these heuristics in place for managing a portfolio, but they didn’t really materialize for us in the words until we began reading about complexity in science. And so complex systems is an area that we’re really fascinated about, but first what we sort of tackled on this topic was written by Eric Beinhocker, called The Origin of Wealth. And the following one was called Complexity by Mitch Waldrop, I believe. Both of the authors had spent a lot of time at the Santa Fe Institute. And so very quickly, we realized that the Santa Fe Institute was a special place that we wanted to get closer to.
Brinton: We attended a four-day seminar at Stanford, put on by the Santa Fe Institute and Complexity. And that’s where, really, we began to put legs onto this investing framework. I don’t really remember when we started writing it, probably 2013. And it sort of came a chapter at a time, slowly at first and then began building. And we realized, “Oh, wow. We actually managed the portfolio to these standards quite a bit, already,” but articulating them just made everything so much more crisp.
Brinton: And especially, we did change one big area where we manage portfolios. In the process, we figured out that we basically stranded a lot of capital in the portfolio, about a third of the capital, in names that we did not consider either what we call resilient or optional. These were names that were garpi. They were growth at a reasonable price or not too expensive, but really not optional, but kind of expensive, so really not resilient either. And what we figured out is, over eight years in those types of names, we had basically market performed. Those names that were highly optional, we were running at smaller positions in the tail and we did very well there. And then names that were highly resilient, we ran as larger, concentrated positions in the head of the portfolio. We did very well there. So we finished the paper up in 2014, sort of put it out there to the world because we realized that other people’s comment were just going to make us better. And we’ve learned a ton since then. But the heart of the investing philosophy remains the same.
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