Introduction

Patrick: [00:01:21] My guest this week is Joe Mansueto, the founder, longtime CEO and current executive chairman of Morningstar. Almost everyone listening will have used Morningstar at some point, as I have often, so it was incredibly fun to hear about the company's simple beginnings. Joe is an entrepreneur at heart. We discuss his early business exploits and how he and his colleagues built Morningstar into the global business it is today. Along the way, we discuss investing, what to look for when interviewing people, philanthropy, and a lot more.

After we finished our conversation, Joe was kind enough to walk me around Morningstar's incredible offices which ooze with energy and feel much more like a Silicon Valley tech company than a Wall Street mainstay. You can tell that Joe has injected his entrepreneurial spirit into the entire company, and it's a great sight to behold. A huge thank you to Joe for being so generous with his time and for sharing so many wonderful lessons on business and life. Please enjoy my conversation with Morningstar founder Joe Mansueto.

The Story Behind Morningstar

Thank you, Joe, so much for joining me today. This is really going to be a blast. There is a ton to cover because of your unique history and the seat you sit in kind of looking across the entire industry, but also having kind of grown up in it, so I think there's going to be a lot of fun lessons to learn today.

I would love, and I feel like a fool for not having known this until yesterday, for you to tell me about how Morningstar got its name.

Joe: [00:02:48] So the name Morningstar comes from the book Walden by Thoreau. It's the last line of that book. "The sun is but a morning star." And it was one of the first books I read as a first-year student in college, at the university of Chicago. And to me that book is all about independence, about thrift, self-reliance, and so when I was looking to name the company, I thought those were all good qualities for a company to embrace, embody, and so the name hearkens back to that last line, "The sun is but a morning star."

And I often tell the story where I remember being a first-year student at the U of C, and if you've read Walden, the conclusion is very powerful. And I'm wondering, "How is Thoreau going to end this book?" And so I get through the conclusion, I get to that last line, "The sun is but a morning star," and I still remember very vividly I put the book down on my lap, I look out over the quads, I'm on the fourth floor of Regenstein library, the snow is falling, and I read that line, "The sun is but a morning star," and I think to myself, "What the hell does that mean?" And it kind of stuck with me and I had to think about it. And to me it meant something that's been around as long as the sun is still in its infancy. It's just getting started. And it's a very optimistic statement that no matter where you are in life, you're still a rising sun. And I just liked the word Morningstar. It had a very positive ring in my ear. And so but it's all about Thoreau and his independence, and Morningstar's all about independence, and that's where the name derives.

Patrick: [00:04:23] I'm curious if, like me, you've returned to Thoreau throughout life. Have you gone back and read Walden since?

Joe: [00:04:30] I read it all the time. Not the whole thing, but I'll pick it up and kind of read parts of the conclusion. And I think a lot of what's in Walden is just timeless. One of the things going through my head right now is his line, "Simplify, simplify, simplify," really trying to simplify your life. And I've made some changes in my career recently, and one of the things I'm trying to do is simplify things. Whether it's how I run my investments, how I spend my time, and there's a tendency in this day and era of just complicating things. You add in more things, you try and do more things, information is always coming at you, and it's really hard to kind of simplify, get some free time. And so that message of simplification that comes from Thoreau I think is really great advice.

But no, I'm always picking it up, kind of looking through various passages, and so it's a book that's really stayed with me. Actually, everybody at Morningstar after their three-year anniversary, we give them a copy of Walden, and it's part of our culture here.

Patrick: [00:05:34] If you had to give a book, and it can be Walden, to every 22-year old graduating college, would that be the one?

Joe: [00:05:42] I think it would be. It's the one that had the most impact on me, and it's a very self-affirming book. It kind of gives you confidence to think for yourself, make your own decisions. And I think the lessons - beware of any new enterprise that requires new clothes - there's just so much good advice. And that if you hear a drummer, a different drumbeat, follow that even if other people are doing other things. And so, I think there's a nice lesson to kind of be yourself, have confidence in yourself, you don't have to do what other people are doing. It's very reassuring. And giving you confidence to dream, build your castles in the sky and then put the foundations under them. And that you'll find some success in life if you kind of focus on that. And these are all great messages for a 22-year old.

Patrick: [00:06:34] I would add his essay Walking, which is shorter and equally powerful and something that really impacted my life. I'm curious, so going from the time you were reading the book on the quad, and then you graduate school, and the period before Morningstar, which I believe started in the early '80s - you founded it in the early '80s?

Joe: [00:06:54] '84.

Patrick: [00:06:55] '84. So I would love to hear a bit about that period. We'll call it an incubation period. And kind of how you, in the spirit of Walden and Thoreau, kind of finding your own way, how you conducted yourself. So what was your way of operating to explore the world, to try to figure out what you were interested in, kind of what were your guidelines in the early part of your life?

Joe: [00:07:17] I think I tried to expose myself to various things and kind of a bit of trial and error like a lot of young people. But I went to undergrad at Chicago. I also went to business school there right after undergrad. And I went to business school with the idea of becoming an entrepreneur. I'd done a few little side businesses, if you call them that, selling Christmas trees from a lot, selling soda from my dorm room, so I got a taste of business, and it seemed like a very creative thing. I'd read the biography of Ray Kroc, how he started McDonald's, and I thought, "It's pretty cool to be able to start a business." And this is a time, remember, when Steve Jobs was starting Apple as a young guy; Bill Gates, a young guy, starting companies, and so it wasn't crazy to think of an early 20-something kid starting a business.

I didn't have much business experience, and so right out of business school my college and roommate and I, we actually started a business doing research for radio stations of all things. And this was really one of my best friends today. His passion is radio. And so I wanted to see what starting a business was like. And so he and I started this business, and after we graduated, we took the weekend off and Monday started the business. And I spent a year doing that, really to see what putting a business together was all about, not that I wanted to be in the radio business. Again, that was his passion. I did that for a year, helped him get that going. He still does that today.

And then I left after a year, and really what I discovered during this time through reading is that I got really interested in investing. And even though I studied investing at business school at Chicago, I learned about efficient markets and the message was fire your stock analyst - you can't beat the market. That didn't resonate with me. I understood it, learned it, but fortunately, I came across Warren Buffett. I read The Money Masters by John Train, which is an awesome book if you want to read a great book on investing. And there's a chapter on Buffett in that. Got me really excited about investing. Went back, got all the Berkshire Hathaway annual reports, read them all. Got all the stock reports, the insurance filings of the Berkshire Hathaway companies, saw what he was buying and selling. So I got really interested in investing.

And really that's when the idea for Morningstar came to me. As I would write away to really smart money managers who I admired, people like John Templeton, Michael Price at Mutual Shares, I would get their reports and I'd look to see what they were buying and selling to teach myself why is Templeton buying HSBC? What does he see in that? And I'd go look at HSBC.

But I just had all these mutual fund reports on my table, first of all I thought, "It would be great if somebody compiled all this great information. All these letters that these smart managers are writing, all their holdings. There's a lot of good content. Somebody ought to put these together into a compendium. I would buy that." I'm in my early 20s and I just... And then I got to look at mutual funds. I thought, "These are great vehicles for most people to invest in." Here I can hire the very best money managers in the world at pennies on the dollar, and it's a very democratic notion. Previously, only the Rockefellers could hire great money managers to manage their wealth. Now with funds, Joe Sixpack can go and hire John Templeton, and I just thought it was a cool idea.

But it was a good idea, but I thought, "I'm in my early 20s. What do I know? I better go get some work experience." And so I worked briefly at a venture capital firm to see what that was about. I decided... I learned a lot there, but I was up until 5:00 in the mornings sometimes working hard, and I saw what being a venture capitalist was like, and I really wanted to get to more security analysis. And so I left and I went to Harris Associates here in town which practiced, and still practices, a Warren Buffett style of investing, a very value-oriented philosophy.

And I went there because I'd look at some of the holdings I was interested in, and I'd always see Harris Associates as kind of a major owner. So I called them up, got an interview. They hired me. And I had a great experience there. I got to cover Berkshire Hathaway. We were the largest institutional owner of Berkshire and I got to cover it. And I still have my Berkshire Hathaway analyst reports, which I actually... I think I sent those to Warren Buffett at one point. At least I didn't say sell. I said hold. Berkshire at the time was $1,200 a share and these were the A shares. Today it's $240,000. Great people, I had a great experience there, but at the same time this idea for Morningstar is in the back of my head.

And now I'm on the inside of a fund complex. We had the Acorn mutual fund. So I'm seeing what the institutional side of a mutual fund organization is like. And I really wanted this concept validated. So I thought there were two paths I could go with my career. I could go work as an analyst, portfolio manager, and that might be a fine way to proceed. Or, I had this entrepreneurial idea, let's see if it stands the test of time.

And so the longer I worked, the more I could see the fund assets were growing in the industry, and I thought, "This is a really good idea, that to bring this together." Really people buying funds at the time didn't have good sources of information to make an investment decision. I saw they were making bad decisions, they were buying funds based on total return really not understanding the manager's philosophy, not understanding what was in the portfolio, what the holdings were, and I thought I could really tell that complete story and help people make smarter decisions around what funds to buy.

Patrick: [00:12:54] Can we go back a couple paces to the business selling soda out of your dorm room. Can you describe what that was, what the business itself was, what you did?

Joe: [00:13:04] Sure. It was the Room 607 Soda Service. So my roommate and I, we just cleared out our living room. We had a two-bedroom unit in the dorm, and we got rid of our beds and filled them with refrigerators. Called up the Coke and Pepsi distributor, and they would come every week and unload cases and cases of Coca-Cola and munchies, and then we'd put signs in the lobby, the Room 607 Soda Service: open 24 hours. And basically, if our dorm room door was open, you could come in and buy soda. And then it was just the honor system. We had a couple refrigerators there, and you would go in, you'd pick out your soda, you'd pay - there'd be a change jar there. You'd pay yourself, and we'd be there studying at our desk. People would come in and out, so it was great. We got to meet everybody in the dorm. Super social activity. And at the end of the day, we'd stack all the empty bottles and it didn't really take much time, but we'd each make like 500 bucks a quarter and it was just fun. But it was fulfilling a need. You got to meet people. I enjoyed that interaction with people. And it was just a lot of fun.

Patrick: [00:14:17] One of the little heuristics I use when thinking about business is the idea of transaction costs, which can be money, time, effort, and that probably the cleanest way to set up a good business is to reduce other people's transaction costs - just to make things easier for them. And that's like a classic, incredibly simple example of reducing people's time and the effort to just grab a soda.

Joe: [00:14:37] Yeah, we're right down the hall. We're up a floor, down a floor.

Morningstar's First Product

Patrick: [00:14:40] So it strikes me that Morningstar, and I'd like to hear what the actual initial product looked like. But effectively is that same idea, right, that it's a pain in the you know what to get prospectuses or get information on a wide variety of funds. You've got to go to all these different places, so why not create a central hub for that information? So what was the first product itself?

Joe: [00:15:02] The first product was called the mutual fund sourcebook. It was a quarterly, and it covered all of the equity funds in the country. And so I just simply wrote away to every equity fund in the country, asked them to send me all their material: prospectus, shareholder reports, and price dividend histories, all of that, and databased it. I bought a bunch of PCs. I knew enough about technology and programming, created the database, hired a few people to punch in all the data, and basically I wrote a long computer program to output from the database. You know, this was before desktop printing, so if you remember dot matrix printers. I printed these big, oversized pages in dot matrix with a dot matrix printer, and it had the performance history, it had the investment philosophy, and then it had all the holdings of each mutual fund.

So Peter Lynch was running the Magellan Fund at that time. He had over 1,000 holdings. So his listing was probably about 10 pages in this book. But you could see, and it was rank ordered by largest to smallest holding. And then I had the printer shoot it down to 8.5 x 11. So I printed out these big, oversized pages. It must have been three feet by two feet, and then to make the little dots go away, I had the printer shoot it down to 8.5 x 11. And I had a 400-page book called the mutual fund sourcebook. I took out an ad in Barron's in their mutual fund quarterly with a long-copy ad announcing a new tool for the smart investor. And you could buy one copy for $32.50, subscribe for a year, four copies for $110. And so I took out an ad, and even before I had to pay the printer to print this book, even before I had to pay Barron's for the ad, money was coming in. So I took out the ad...

You could buy one copy for $32.50, subscribe for a year, four copies for $110. And so I took out an ad, and even before I had to pay the printer to print this book, even before I had to pay Barron's for the ad, money was coming in.

Patrick: [00:16:58] Float.

Joe: [00:16:58] Yeah, and I had that float. And that's really what funded the growth of Morningstar for all these years. People paid us in advance for publication services to be rendered in the future.

Patrick: [00:17:09] I'm amazed by how often you find the best business stories relying on float as a source of their success. There's a fantastic presentation that I'll link to, a professor named Sanjay Bakshi I think is how you pronounce his name. About Warren Buffett's career that he titled Moats and Floats. And that there was sort of a switch that went on, maybe Munger had a lot of to do with it, in Buffett's head where all of a sudden he realized the power of float. And it's fascinating that that was such an important part of the early Morningstar product.

Joe: [00:17:38] I knew enough as an analyst to know that that was one of the reasons I could get into this business was float. That I didn't have a lot of capital. I started in my apartment but because of the float, it would make it economically possible. In fact, when I talk to entrepreneurs today or would-be entrepreneurs, I go through the same concept of float and talk about how important it is to understand a cashflow cycle. Because most businesses, you lay out the money first. Maybe it's a retail store. You've got to build inventory. And you get paid as you sell it. And so that's a very negative cashflow dynamic.

When I talk to entrepreneurs today or would-be entrepreneurs, I go through the same concept of float and talk about how important it is to understand a cashflow cycle. Because most businesses, you lay out the money first.

But with Morningstar, it was very positive, and I cite many other entrepreneurs who have used float. There's a guy here in town, a friend of mine, Michael Polsky built up a big energy company that he runs today. But he got started... He's an engineer, knows how to build power plants. Immigrant from the Ukraine. But was working for a big company building power plants. But he lined up utilities who needed power, and then he convinced General Electric to finance hundreds of millions of dollars of turbines because he could create the power plant to sell. He had lined up the customers. And so he didn't have to put up any money. GE financed this whole thing because they wanted to sell the turbines. He lined up the power, and so he understood this, that somebody else could finance this without him. And then he sold this for many hundreds of millions of dollars, this company. But it's a way, again, it's just one example that understanding this float, making sure that you're not laying out a ton of money and then getting paid later, it's a powerful concept. Buffett uses it obviously with insurance companies.

Patrick: [00:19:23] That reminds me of a little story I was reading yesterday on the flight here to Chicago, a novel called The Financier, which is a fascinating book. And in it, there's a young boy at the time who becomes the financier who is wandering around, and there's an auction for all sorts of kind of random house goods, and one of them is soap. Big, like wholesale block of a bunch of bars of soap. And it's selling for $30 or whatever it is. And the kid is doing the math in his head and he's realizing an arbitrage opportunity here. And he runs very fast to a local neighborhood grocery - he knows the lady that runs it - and he looks on the shelves and he finds the soap bars, that they're exactly the same ones and they're selling for 16 cents.

And he does the math again and he realizes that the value, the retail value of this kind of auction block is about twice what it's going for. And he runs to the store clerk, the woman who owns it, and says, "If I deliver this later today, will you pay me 16 cents a bar for this?" And she says, "Well, yeah. Sure. I think I would." And so he runs back, and he has no money, and so he runs back and says, "I'll take it at 32 bucks." He bids 32 bucks. And then doesn't have money himself, has to go to his dad and secure the money, but ultimately makes in a day this kind of 100% profit.

I'm really curious to hear your opinion on this because some of your stories already seem to me that you've got an eye for business or arbitrage. Like you seem to have an innate sense of opportunities like that. I'm curious to what degree you think that is innate or can be cultivated?

Joe: [00:20:58] I think it's a little of both. It's funny you mentioned arbitrage because my mom would often tell the story when I was a little kid. I was probably about 11 years old and at the time was interested in ham radio, amateur radio. And we'd go to these, called Hamfests, where people would sell used equipment. And I was with a friend of mine and his parents and this guy was selling this Drake 2B receiver and he wanted to get out of the ham radio business. And I knew that this thing was worth 250 bucks at least, and he just wanted to get out of the business, was selling it for 100 bucks.

So I convinced my friend's parents to lend me the 100 bucks.

Patrick: [00:21:35] Oh my God.

Joe: [00:21:36] Bought the thing, and then took out an ad, and then my parents paid him back when we got home. But I took out an ad and easily sold it for 250. It was probably worth 3. It was worth a lot... I could tell it was priced totally wrong. And I made a couple hundred dollars as a little kid, and to me it was like a million dollars. But I just kind of had that sense that, "Hey, I know from reading all these publications that this is worth X, and you're saying you want to get out."

And so part of it, I don't know, I think I'm fairly good in math, and so maybe part of it is a mathematical ability, and then just a confidence in yourself. Arbitrage is really not that hard. It's the difference between A and B. But I think it could be cultivated, but I think there is kind of a business sense, a common sense that maybe is a bit more innate.

Building & Maintaining A Moat and Brand

Patrick: [00:22:27] Coming back then to Morningstar's early years and the progression from the first product to where we are today, maybe we can make a couple stops along the way. Morningstar is so synonymous with the information on funds, on ETFs, on stocks now even that frankly I know I am personally aware of the competitors because I'm in this business, but my sense is there is such a moat around this business, whether it's brand or services, and I really would love to explore the evolution of that moat. It's kind of an interesting origin story for how we came to be sitting together. I was actually asking people if they could recommend anyone to talk to about brand, how to build a brand, the power of brand, and Jeff Ptak who's the director of manager research here at Morningstar suggested you. And that's kind of was the genesis of this conversation.

So through the lens of brand and moat, how did you think about that as you were building Morningstar from its first early days into the next couple of decades? What were the principles that you used to maintain and build a moat and brand?

Joe: [00:23:28] Certainly building a brand, building a reputation was pretty paramount in our thinking throughout the history of the company. And I think it got more structured and formalized later, is how we think about it. But in the beginning, we just tried to create a really authentic product. And a lot of our brand derives from being a very trusted source for independent, unbiased research and advice. And we built that I think in a large way because we built up an analyst team. And the analyst team was never told, "Just say good things about a fund." It's "Give your true unvarnished opinion about a security." And because you're willing to criticize as well as praise, you develop an unusual degree of trust among your readers.

The competitors that we have typically serve institutions. They don't want to offend the institution. They're primarily giving data. To the extent that they give commentary, it's only positive. So we're I think pretty unique in the industry in being critical. And that willingness, that confidence to criticize creates a very strong authenticity and trust that I think is at the heart of our brand.

I think pretty unique in the industry in being critical. And that willingness, that confidence to criticize creates a very strong authenticity and trust that I think is at the heart of our brand.

So we've always tried to be ubiquitous in the industry. Wherever investors are, we want to be there in terms of building the brand. And so we've always had an open architecture philosophy. So Bloomberg, for example, is a very closed architecture. You want Bloomberg, the only place you get it is at that terminal. We've had the opposite. We're here, we're very mission driven, we want to help investors no matter where they are. If they use our products, fantastic. If they use somebody else's, let's at least be part of that.

So we've had an open architecture, help all comers approach. So consequently, you'll find our data, our research on Google, MSN, Yahoo!, as well as in our clients; T. Rowe Price, Charles Schwab, Fidelity. You go to those sites, they all have Morningstar data, research, star ratings. So we've tried to be ubiquitous. Wherever investors are, we want to be there, either as a little part of it, or if they want to come to us, we'll have a more complete experience. But I think that's been a big part of building that brand, building that presence.

Patrick: [00:25:52] It's an amazing truth, right? You really do see it everywhere. I never thought about it in those terms before, but it's obviously a powerful, powerful way to gain mindshare in what is like... We're so starved for attention these days, it's hard to gain mindshare anywhere, and obviously having been ubiquitous for so long is a key part of that.

I'm curious how, in the early days, you thought about the evaluation of fund managers. So when you're hiring analysts... And I'm curious to know if you were doing it yourself as well, you had the background in securities analysis covering Buffett, basically a fund manager of sorts. How did you train, or think about, or set principles for what was good and what was bad in a fund manager or a portfolio in the early days?

Joe: [00:26:35] I did a little bit in the early days. I did some of the early interviews with people like Ralph Wanger at the Acorn Fund, Don Yacktman. But pretty quickly I realized, "This is a big job. I can't be running the company and doing this." So my first hire was a great hire, Don Phillips. I hired Don as the first fund analyst. And he really deserves a ton of credit for building up the analyst team here, building up that editorial and that analyst voice. And with Don, it was just, I think I just gave him the Berkshire Hathaway materials and said, "Read this." But he was already a fun guy coming in, he already admired Templeton, he had the right instincts coming in. It's not as if I had to change direction with him. So he had the right instincts, but he got inculcated with Warren Buffett, that style of thinking.

And the industry was very different back in the early '80s. It was full of boutiques. People largely with their name on the door. It wasn't big business getting into the fund business. And so it was much more people with a defined philosophy. And I think the quality percentage was much higher back then. You got people who were really passionate about investing, and it really wasn't business types running fund complexes. It was people who were really good at investing.

Patrick: [00:27:57] What's your opinion on the major trends, let's say obviously the big one being from active management to passive management? But another one might be from more boutique style, hands on, name on the door investors, to more of a mutual fund complex type company. I'd be curious to hear your pros and cons or concerns about some of these major trends. What do you think about it from the perspective of an end investor obviously who this all is meant to serve?

Joe: [00:28:24] I think those two trends are related. As I mentioned, when I started in the industry in the early '80s, it was full of boutiques. As it grew, it's a very profitable industry, big business entered the picture. So all of a sudden, product managers are hired, Harvard MBAs, trying to standardize, productize the industry. We need an offering for every square in the style box and we need consistency.

And so what happened is the rise of the closet indexers, is how I think of it. People wanted really the unattainable, they wanted consistently good high performance, and they didn't want to get fired. And so you had managers looking very closely at their benchmarks, trying to mimic those benchmarks, maybe tweak it a little bit, but basically they were closet indexers, index funds charging active fees.

So if you look at the industry today, I think of this bell curve. There are the poor managers, then this mushy middle, this big part of the normal distribution where there's a lot of average managers charging active fees. And then on the right, you've got true active management, people who are really outperforming, doing well, deserve active fees. And I think what's happening now - this trend of passive - is this middle is getting washed out. And it deserves to be washed out. If you're going to deliver index-like performance, you better have a low fee. You don't deserve an active fee.

And so this middle is getting compressed. And these bad active managers are going away. And so my hope is the industry is going to revert more back to how it was when I started where you have people who are true professionals, people really doing the leg work, doing active management. The rewards for active management are as great as they've ever been, but you just need to do the research. The average manager, the average manager tends to lag a bit because of fees, but the better managers still deliver outsized returns. And so, will passive take over the industry? I don't think so. Will it continue to grow a little bit and continue to wash out this middle? I think that's probably right. It might grow by market share 100 basis points a year, some years a little more, some years a little less. I think that trend will certainly continue but I still think there's a strong case to be made for active management.

Patrick: [00:30:57] Can you tell me about the origin of the Morningstar style box?

Joe: [00:31:00] Yeah. That was Don. Don Phillips came up that. And I think Don tells the story of writing it on a napkin at a conference. And just trying to better describe how managers invest. At the time when we first classified funds, it was the prospectus objective. So the prospectus would say, "Okay, this is a growth and income fund, an equity income fund, growth fund, whatever." And pretty quickly what we found is what they said in the prospectus and what was in the holdings might be two different stories. So we said, "This doesn't make sense. Let's classify funds based on, not what they say in the prospectus, but what they're buying."

So we took the holdings and we classified the funds based on what they were actually doing. And that led to the style box with its axes of investment style, PE or growth, and then market cap as the other axis. But looking, again, at the holdings, more of holdings-bases than a prospectus objective. But Don really deserves a lot of credit for coming up with that, and that really changed how funds were classified in the industry.

Patrick: [00:32:10] It's amazing how much today still it affects how people allocate assets. From the biggest institutions down to the smallest financial advisors, it's incredible when you give someone a simple, elegant, and hopefully effective framework, how much that then shapes not only how people buy, but how fund complexes and managers launch their own products. That there are holes to fill so to speak. You basically created the holes that then get filled. I find that a fascinating, from a business standpoint, that if you can create a hole that people then know is there, and then provide the tools to fill it is a pretty - kind of like the arbitrage idea - a pretty neat way to structure a business.

Joe: [00:32:52] I think you have to be careful how you use it. It's meant to be a descriptive tool. It's a framework as you put it, describing how a manager's invested. It doesn't mean to be prescriptive that you have to fill in every hole. It's perfectly fine to have a hole. We're not saying you have to fill in every corner. But it's a nice shorthand way to understand how a manager's invested. To look at a style box, you'll get a quick sense of the portfolio. It certainly beats looking at all the holdings trying to plot that out yourself. But it's really not meant to be a portfolio construction philosophy that you need to fill in every little square of the style box.

Patrick: [00:33:27] It's interesting I think, unfortunately some people do do that...

Joe: [00:33:29] Yeah, that's right.

Patrick: [00:33:31] ... and managers build portfolios to meet those needs.

Joe: [00:33:34] Yeah, then you might as well buy an index fund, right.

Patrick: [00:33:36] Right.

Joe: [00:33:36] ... if you're going to have a massively diversified portfolio covering every square of the style box, I'm not sure you need active management.

Patrick: [00:33:43] Given what you've told me so far, my guess is that you lean value versus growth. But I'm curious if that's true in terms of your personal investment philosophy whether you believe in one over the other, or believe that there's just some kind of cyclical rotation between the two styles?

Joe: [00:33:56] Yeah, I'm definitely more in the value camp. I like to try and buy right, but I also like to try and buy great companies and hang onto them for a long period of time. I think there's a lot to be learned from private business ownership and how that creates wealth. I look at my personal situation and the best investment I ever made has been Morningstar stock. So it's the biggest source of my wealth. And I've held Morningstar stock for 32 years, and holding something that long... Any period, any point along the way to sell it would have been a mistake. So to have said, "Oh, in '87 looks like there's going to be a crash. I better sell some of my Morningstar," would have been a bad decision, very short-term.

But to me, it's very instructive that for my publicly held stocks that you don't want to kind of jump in, jump out. You really want to hold good companies for a long period of time and participate in the wealth creation as opposed to jumping around and trying to own based on who the president is, what the economic cycle you think is going to be, what the dollar is, et cetera.

Patrick: [00:35:07] How much of your confidence to do that is rooted in the fact that you founded the business? I'm always searching for sources of discipline and confidence, thinking that obviously those are important for long-term investment results, discipline especially. But I'm sure Morningstar, as with any great stock, over the long-term there are countless times of if not panic, concern, reasons to sell. I'm just curious how portable that is for investors in companies that didn't found those companies.

Joe: [00:35:33] No, certainly, being on the inside and being in a controlling position gave me more confidence to hang on and be content with that as a big portion of my net worth. So yeah, that's certainly true. But still, if you look a lot of the great private businesses, again, trying to buy in or out of Mars or whatever the company is, even if you're not on the inside, you can just see that these have been built over a long period of time - limiting transaction costs, taxes. If you find the right businesses that continue to grow and the right management teams to get on that up escalator and just stay there, I think there's just a lot of merit to that.

And I look back even on the stocks that I've owned over time, I tend to buy well, but the mistakes I've made have been selling too early. I look back at some of the stocks I sold in the '90s or early 2000.

Patrick: [00:36:29] Do you have an example?

Joe: [00:36:30] I've owned Apple at times, and Dell, some of the more techy names that have gone on and... Just a lot of names. I might damage my ego if I go through too many of them, but no, just a lot of names that are now many multiples of where they are when I sold them.

Allocating Capital

Patrick: [00:36:50] So 32 years is obviously a long, we've mentioned the word growth a lot, a long trajectory of growth. And one of the things that I am most interested in qualitatively, but also quantitatively, is the role of CEO as capital allocator. And what an incredibly unsung and hard job that is relative to the more glamorous product or service creation. And so I'm curious to know the history of your views and actions as a capital allocator, whether that be some mix of organic growth where you're kind of growing the products and services yourself versus acquisition, return of capital to shareholders. Walk me through if you could the history of your thinking as a capital allocator.

Joe: [00:37:34] Well, I come at it with the mindset of trying to drive long-term value. So I want to build long-term value, and what's the best way to do that. And so you've got a number of choices. Obviously the most near and dear is organic growth. And so looking at all of the opportunities we have internally. And typically, there's a long list. When we sit down with our teams, there's a long list of investment possibilities. And so to me that's the best source of long-term value creation is organic growth. Businesses that can grow on their own without having to resort to say acquisitions, just a much healthier growth. There are no integration issues. And so if you can get organic growth, I think that's by far the best.

Of course, it depends what the project is, what the projected returns are going to be. But we typically have plenty of opportunities because we just stay focused on investors and try and find other adjacent needs to satisfy, and there are a lot of needs we can satisfy. So we're always looking at organic growth opportunities. But typically, given where we are today, it doesn't really take cash from our balance sheet to fund those because we have 30% EBITDA margins. And so when we invest in a new opportunity, it's not going to take money from our balance sheet. It's going to mean our EBITDA margin is 200 basis points lower. And so it's, where do you want your profitability to be? And so we can fund all of our organic growth just by calibrating our margin a bit.

With the money on our balance sheet, then we can look at things like acquisitions, dividend, share repurchase. If we can find an acquisition where it furthers our strategic direction, and typically it's a build or buy decision. We know how to build databases, we know how to create software, but if somebody's already built something that we're going to need on our roadmap and it can get us there quicker and we like the people, we'll consider an acquisition.

We did a pretty significant one at the end of the year last year, PitchBook, a private equity venture capital database. Wonderful company. So we'll take a look at those. And then any money left over, dividend, share repurchase, my preference is repurchase over dividend if the price is reasonable. And so we do a valuation of our stock just like we do other stocks, and if it's at fair market value or below, then we can buy back shares. And to me that's better because then shareholders can time when they want to have a taxable event. If I pay a dividend to shareholders, Uncle Sam is going to take a third of that or whatever percentage, and the shareholder has no choice. If I give it back to the shareholder in a repurchase, they can choose not to make that a taxable event and let it ride. And so I think it's a little bit more shareholder friendly, if your stock is selling at fair value or below to do a repurchase.

Patrick: [00:40:33] Can you talk me through that repurchase part? This is an area where I've done a lot of research and found some pretty fascinating results. The high level is companies that have what I call high conviction buyback programs in place, 5% or higher of shares outstanding in a one-year period, so pretty big chunk...

Joe: [00:40:49] That's pretty big.

Patrick: [00:40:50] ... have delivered pretty exceptional long-term returns, 3-4% annualized above the broader market, say the S&P 500. I'm curious how systematic that process is, of the amount that you're buying back as it results to the discount to intrinsic value that the stock price is trading at. Like how much of a relationship is there between the lumpiness or the timing of share repurchases and the discount that you're observing?

Joe: [00:41:19] With our buyback program, given that Morningstar stock is not super liquid, there is not a tremendous amount of float out there, we don't have the luxury of trying to time our purchases that finely because liquidity is just not there. Some years we've bought over 100 million. This is on a... We're about a $3 billion market cap. 100 million of stock. And again, if the float is not big, we can't really kind of move in and buy aggressively. And so, I view it more as dollar cost averaging as long as that share price is going to be below fair market value. We do temper it a bit. If it's greater, the bigger the discount, the more aggressive we're going to get, but we can't... I try not to be too clever about trying to time this too finely because the liquidity is just not there. We're not IBM. We're not one of these large float companies.

Patrick: [00:42:17] Why do you think that dividends are still so prevalent and common given everything you said. It's pretty easy to create your own dividend at the time you need it and not have to be taxed on a constant quarterly stream of dividends. Why do you think that's still such a... Why isn't it all buybacks?

Joe: [00:42:34] I think it's inertia, it's legacy, it's people not really understanding kind of how all this works. A lot of people running companies are experts in their field, but they might not understand investing. I think managements who have more of an investing bent or understanding would favor that. You look at Berkshire Hathaway, it doesn't pay a dividend. And even there, he rarely does buybacks. But I think managers who have more of a conviction in their own capital allocation abilities and what makes sense for shareholders... But it's a good question. I do think buybacks make sense, or they may view it that their stock is not cheap enough and they're waiting for lower prices and they can't buy it back, and they've got excess cash.

A lot of theory links it to option programs and trying to boost the stock, but I think buybacks have gotten a bum rap lately when people have tied it to this is managers trying to line their own pocket, when I think buybacks are just super shareholder friendly and a great use of capital as long as the stock is not overvalued.

Buybacks have gotten a bum rap lately when people have tied it to this is managers trying to line their own pocket, when I think buybacks are just super shareholder friendly and a great use of capital as long as the stock is not overvalued.

Hiring & Managing People

Patrick: [00:43:44] You mentioned the word management a couple times there, and I'm curious if you could characterize your management style over the years, whether it's been the same from the early days or has morphed. And especially if it's morphed, why? What lessons have you learned about managing people over the last 30 years?

Joe: [00:44:00] I would say my management style is intact, it has not changed. It's hire great people, surround yourself with great people, really delegate to those people. I manage people as I want to be managed. I'm not a micromanager. I try and hire the best, check in with them a lot, understand what's going on, have a lot of dialog, but really give them autonomy to do what they've been hired to do. And I think I've been that way since the beginning. Frankly, I don't have the time. If I have 10 reports, I don't have time to be running around kind of second guessing everybody. And I just know that people get a lot more job satisfaction if they can make the decisions in their domain. So I think of it like chess. You give up the pawns but you fight for the kings and queens.

I just know that people get a lot more job satisfaction if they can make the decisions in their domain. So I think of it like chess. You give up the pawns but you fight for the kings and queens.

And so if you're designing a brochure and you like blue better than red and I like red, blue it is. I'm not going to fight you for that. But if there's something really majorly wrong on that brochure, the copy's terrible, I'm going to have a conversation. But in general, I'm going to let you do what you want to do.

That said, what I do as a leader has evolved tremendously. The style might not change, but in the beginning, I'm very hands on. I'm doing everything. I'm doing the programming, I'm interviewing managers, writing the ad copy, hiring people. Everything. But I quickly realized that my ambitions are built to build a major enterprise, and to do that, I've got to build a team. I've got to hire people like Don Phillips and others who are great at what they do and build a team. So step out of that, how do you do that? So kind of get that done.

But I've really enjoyed the evolution as a leader. Part of what I enjoy is learning. And so how do you do acquisitions? How does that work? Do you integrate? Do you leave them alone? How do you do business abroad? So travel to Europe, travel to Asia. How does that work? Do you leave them alone? Do you integrate? How do you go public? We went public 2005. How do you become a public company CEO? What's that about? And so learning all of these steps and growing as leader, I have just found fascinating.

So I try and be a student of business. At times I've gone on a board of a bigger company to learn. I was on the board of TransUnion, a consumer credit firm here in town that was owned by the Pritzkers. Now it's a publicly held entity. But I was on their board because they were a bigger data information company, to see how they were run. Learned a lot there. And so I've tried to kind of grow as a leader, expanding my skillset, but I think my basic style, as hiring great people and delegating, is pretty much been the same as day one.

Patrick: [00:46:40] Great people is so important and it's so much easier said than done. I'm curious if there are - that you've learned over the years - common traits that you look for in people that you hire regardless of what position, obviously they need skillset in the field, but if there is an undercurrent of traits that you're always looking for that you've found have led to great success when picking and hiring people?

Joe: [00:47:05] It's funny. Hiring is one of my passions in business. I really like the subject. The head of our HR will tell you I'm pretty involved in our HR programs here. And I tell my senior team, I think hiring is the single most important thing you do. A business decision will have some short-term impact, but the hiring decisions, bringing in superstars, are going to have a really long-lasting impact on the business. And so I'm still involved in interviewing people. My senior team is, and we try and grow talent from within. We have a Morningstar development program. We hired last year 150 kids right out of school, college, business school, put them through a two-year rotational program. It's a big part of the culture and how we run the organization.

So we spend a lot of time looking at what makes somebody successful here. And so I typically, I like to hire very bright people. I favor liberal arts grads, people who just like to learn because the world is constantly changing. We can teach them the investing side. If they have had it, if they've found it prior to coming here, that's fantastic, but they don't need it. So I've really looked for a bright mind, people who know how to reason, put together an argument, question, probe, analyze data. So I'm really looking for that.

And then I'm looking for some kind of demonstrated record of success. There's a lot of bright people who are idle, don't get a lot done. So I don't care what it's in. It can be in athletics, it can be in your newspaper, it can be grades in school, something where you've really shown that you've rolled up your sleeves and just engaged, embraced something, and had some success, some excitement, some passion, some fire.

But we do a lot of analytical things. One of the projects I'm having the HR team work on now is really, we get a lot of resumes in, but coding all the resumes and looking for these predictive factors. There's a great book that I like, Grit by Angela Duckworth is a really good book, and she talks a lot about persistence as a predictor of people who've gone on to success, and looked at the Navy SEALs, what predicts who will get through that training program, this rigorous training program, or how Harvard does it with their admissions. But typically, people who've stuck with something.

And so as we're kind of coding the resumes that come to us, maybe you've gone out for something, you get zero points, but if you've done it two years in a row, you get one point. And then if you've done it two years in a row and you've had a position, you've been editor or something, you get another point. And so kind of scoring the resumes that come in, looking for this persistence. And then we're also looking at GPA, quality of the school. And so now we're just starting to kind of mine this and see what is predictive. We've done some other work of people here and what's predictive. But those in general are some of the things that we look for.

Patrick: [00:50:03] Are there other, I'll call it negative screens where... A great one obviously is no history of some sort of persistence or doing. That's probably the best negative screen. But are there other things that you've learned, qualitative, quantitative, through this evaluation process that you want to avoid when you're hiring people?

Joe: [00:50:20] Well, the thing that always leaps out at me is job hoppers. I get a resume and the person has worked at seven firms, each for 18 months. And I'm thinking, "Why are you going to work here longer than 18 months?" And is that a lack of stick-to-itiveness? And everyone seems to have a good story. "Well, I left there and my boss there went to this company, so I went there, and then... " But I just wonder. I don't know. It's a red flag for me, so somebody who doesn't stick with something. And I like to see people who stick with things.

Books, Memories and Lessons

Patrick: [00:50:51] What are some, you mentioned learning, of your favorite recent books? Doesn't have to be books, topics that you've explored and learned a lot in the area?

Joe: [00:51:01] Let's see, what have I read recently? The last book I read was Shoe Dog by Phil Knight, which is a great, great story of Nike, and it's a very candid biography but it's a nice reminder of how precarious it is to start a business. He almost went bankrupt multiple times. I don't know if you've read it.

Patrick: [00:51:20] I have, yeah.

Joe: [00:51:20] ... but it's a wonderful book, and he talks a lot about life lessons, the death of his son is very touching, and so I think that's a wonderful book. I read a lot of biographies. I'm a big Ron Chernow fan. His biographies of the Warburg family, Rockefeller, are just wonderful.

Patrick: [00:51:41] Unbelievable.

Joe: [00:51:41] The drama that he's able to instill in these stories. And then just having seen Hamilton the musical, I'm going to read his Hamilton biography.

But I try and read pretty widely, but I try and learn from others, and I love reading, and non-fiction I'm probably drawn to, but one of the things I want to do as I have more free time is read more of the classics. I think one of the... in the haste of running a large company and kind of the time crunch, somehow room to read fiction kind of gets crowded out. And so actually Don Phillips here has gone back to school studying the great books, he had a good line where he said, "You read the classics early in life at school when you don't have any experience. It's good after you've lived a life and you have some experience to go back and re-read the classics." And so one of the things on my to-do list is to go beyond kind of non-fiction and pick up more of the classics and read a lot of the books I read in college and come at them with a different perspective.

Patrick: [00:52:43] You mentioned Shoe Dog, which makes me think of The Everything Store which is about Amazon.

Joe: [00:52:48] That's a great book too.

Patrick: [00:52:48] ... and Let My People Go Surfing which is about Yvon Chouinard and Patagonia. And in all three cases, obviously these are tremendous, long-term success stories, these three companies. But what strikes me as fascinating is the number of times it appeared almost certain that the company was toast. And again, coming back to persistence and just grit and drive, I think in those three cases, those three guys have dragged those companies through those periods. I'm curious looking back on the 32 years at Morningstar, if you had to pick a time that you felt was sort of the darkest, or the future was the grimmest, what time that would be.

Joe: [00:53:27] There was never a kind of make-or-break moment in our history, thank goodness, where the company was on the precipice of disaster. That we have grown pretty strongly and tried to finance things pretty conservatively not to put us in that position. I think the hardest time for me personally though was we expanded into Europe in the early '90s. Set up shop in London. We were going to start publishing on funds there. And then we had to get regulated. And then the regulators were merging. We couldn't get approval. We had 30 people there. And it was just burning cash. And we didn't have the authority to publish. And in the meantime, we hit a downturn a bit in the US business. We launched a new publication that cannibalized one of our others, had a little crunch here. That's burning. So we had to pull back from Europe.

So I had to go to London, gather everybody in a conference room, and tell them we're shutting down. And people were angry. One guy got up, slammed the door, and it was just... You know, we've only had to lay off people twice in our history here and both of them were pretty unpalatable things from my perspective and made me never want to get near it again. But to have to pull back from London to set up shop there, go around, do all that work, actually have a draft of the publication. And then we ended up coming back probably a decade later and now we have a thriving business in the UK. But it pained my heart to have to pull back. All those people put in so much work, and to have to lay off some of the Londoners there was not a lot of fun.

Patrick: [00:55:03] You mentioned the idea of cannibalizing an existing product, and I'm fascinated by the idea of the innovator's dilemma and how large businesses especially that have a successful product line or many of them foster innovation. I'm curious how you do that. What have been the strategies you've used to make sure that you don't rest on your laurels, that you're constantly improving the core services that you offer to investors?

Joe: [00:55:29] I think we've got a culture of innovation here. We push that down. Innovation is not any one department's responsibility. A lot emanates from our analyst group who are analyzing funds, stocks, trying to find better ways to understand them. And they may come up with metrics, ESG ratings, and so we're always innovating from a research perspective, and then as well a product perspective. When we develop product, we use the agile method of development. We have many squads, and these squads develop independently, and they'll have what's called an innovation sprint. Well, they'll go off the roadmap. They'll come up with their own ideas and just test those out, things that they want to do. And they have the authority to build in some innovation sprints into their development work.

Patrick: [00:56:16] I'm curious about that process in a little bit more detail. So you've got let's say whatever it is, five groups working independently. How specific is the thing or the goal towards which they're working? Is it a pretty set outcome that you give them and say, "Figure out the best way to do it?" Or is it more generic kind of directional type projects that maybe allow for more discovery, but also may hinder progress?

Joe: [00:56:41] Well, it's a little of both. We have product managers who will set a roadmap over a couple years. These are the milestones that we want to accomplish. Then it's up to the squads to figure out how to get there. And so we have squads both for the common elements, so maybe graphs, various components of our software used throughout our lineup, and then more that are audience specific, things just for individuals, things for retirement clients. And so we have squads that are more audience focused and more general ones.

And so we have, I don't know, we may have 30, 40 squads that are cross-disciplinary. So they'll have product managers overseeing them, but they'll have engineers, designers, QA. So maybe 10, 15 people. And then we can release software every couple of weeks. And then they get up. They have showcases in front of the whole company. They show what they've been doing. And so it's a nice kind of process. And the software world has evolved this, what's called agile development, and away from a process that used to be called waterfall, where it'd be designed by product managers, designers, given to engineering, they'd work on it for a couple months, and then QA would test it. Then you have a big bang release every three months, six months. But now firms are releasing some every day. We release every couple of weeks.

Patrick: [00:58:02] This rings a bell in sort of the venture and startup world. It almost sounds like some of that culture has been ported inside of Morningstar where there's a kind of a lean mentality...

Joe: [00:58:12] Oh yeah.

Patrick: [00:58:13] ... the Toyota production almost mentality...

Joe: [00:58:15] We have that too.

Patrick: [00:58:17] ... that seems to be, maybe nothing's perfect, but one of the more reliable ways of fostering innovation to not have it be these huge projects that don't have quicker feedback loops baked into it.

Joe: [00:58:28] If you walk around the halls here, you'll see a lot of what we call huddles going on. And even if you're not in software development, you're going to be getting together with your team either daily or multiple times a week and looking at metrics. And there's a dashboard, and then there are new ideas leftover from last huddle. So there's a lot of kind of looking at metrics and this lean six sigma approach that's also pervasive throughout the company.

Patrick: [00:58:56] It really seems to work, and I can attest. It's only audio, but it's an incredibly cool work environment that seems to certainly jibe with everything you said. If you had to pick a single individual most memorable day in your time at Morningstar, what would it be?

Joe: [00:59:12] Well, keep in mind we've been in business 32 years. One day.

Patrick: [00:59:16] You've got a big shelf to choose from.

Joe: [00:59:18] I think what comes to mind is a time in the early 2000s when Eliot Spitzer was in his heyday and he fired off a subpoena to us. And it was at a time when just getting a subpoena from Spitzer almost implied you were guilty of something. And when I look back at the arrogance of that guy and their department, it was, you know, they send a subpoena and they say, "We know you're guilty. Let's cut to the chase and let's work out a deal right now because you know you're guilty." And it was a pure fishing expedition. And we had to spend millions of dollars to gather all these documents that they went through. And then you get this kind of shakedown right before he was going to leave office.

I guess the memorable day was, we were at a law firm and they said, "If you do not settle right now, right now, last chance, we are going to file suit at 9:00 AM tomorrow morning and you're going to have to defend that. Expensive. Your name's going to be in the press. We are filing suit unless you settle right now." And we said, "No, we're not guilty. It's not a matter of money." We could have settled it and just been done. But it was a matter of our reputation and our brand. We don't want to settle something where we weren't guilty. And so we said, "No." And we walked out of there. I remember walking out with Don Phillips. And we thought for sure the next morning we were going to get this lawsuit, and they were so convincing. So 9:00 AM the next morning nothing happens. It was pure bluff, and we never heard from them again.

But it was just a lesson in sticking to your guns, being confident, and if you haven't done anything wrong, why settle and tarnish your reputation even with a settlement? And you just felt so abused where we went through this whole thing. And then of course once Spitzer gives you a subpoena, then the SEC jumps on because they don't know what it is, but "If Spitzer's doing it, we should do it too." So you end up spending millions of dollars, all this discovery, all these documents, all these law firms, and it was just such an unpleasant ordeal. And then to get this shakedown. But then I really felt good just saying, "We're confident. Go ahead. Do it. We're not going to settle." And then not having it play out with a lawsuit. I think we just felt vindicated.

Patrick: [01:01:48] So much psychology wrapped up in there. The SEC following on makes me think of this is why momentum investing works.

Joe: [01:01:55] It is right.

Patrick: [01:01:56] The psychology in hurting is incredible. You mentioned early in our conversation about this idea of simplification that comes when you read Thoreau. It sounds like you were trying to apply it even more to your own life. And I'm fascinated by the way that people operate on a daily basis, sort of daily practices or rituals, things that you've cultivated that you feel are essential to do each day. So if you're willing, I'd love to hear about your daily routine, things that are important to you every day.

Joe: [01:02:27] Sure. People who know me will tell you I'm a creature of routines. And I think Peter Lynch said it well when... He also like routines, and he says, "I don't want to think of what breakfast cereal to eat every morning because I've got other things to think about." And I'm the same way. And so my routine is, I get up early, I'm a morning person - 05:15. And I am also a runner. I love running. And running is a big part of who I am staying in somewhat decent shape. But I get up and I go run four miles. So I get up early, run four miles, get back, shower, and then my kids get up. I've got three kids. When they were younger, I used to make them breakfast. Now I don't think I meet their culinary standards, so they have other things that they get. But I spend time with them before they go off to school.

My habits are a little different now because I just made a transition on January 1. I'm now executive chairman. So prior to Jan 1 and for 32 years, I'd be getting in here 8:00-8:30, and working all day at Morningstar. I've made a transition now where I'm not coming in all day, and I've made that transition to get a little more flexibility and more time to read, to think, reflect. But I'm very much a creature of habit. As I mentioned, I tend to go to the same lunch spot, people who know me. There's a place here in town I go to practically every day.

Patrick: [01:03:48] Where?

Joe: [01:03:48] A place called Beatrix, 519 North Clark Street. It's a great place.

Patrick: [01:03:52] It is.

Joe: [01:03:53] And it's embarrassing. I go there and everybody, all the wait staff knows me and they tend to know my order, and I just like it. I don't have to think where to go and the food is good. People treat me well. And so, again, I tend to go to the same lunch spot. But the same routine. I get home around the same time, dinner with my family is important to me. Try and get to bed early. But a lot of the same habits, and that gives me pleasure and satisfaction.

Patrick: [01:04:19] Can you tell me about how you came to be a member of Warren Buffett's Giving Pledge?

Joe: [01:04:24] Warren called me up. I'd gotten to know Warren through the years. I sent Warren a letter a long time ago. As I mentioned, I covered his firm when I was an analyst. And so at one point I'd been going to so many of the Berkshire meetings, and I thought, "Yeah, I'll just write him a letter." So I wrote him a letter and he was kind enough to write me a nice response back. And that started a relationship. And he called me up once and said, "I have this thing," right when he was starting the Giving Pledge. "I have this thing. Would you want to sign on?" And I said, right on the phone, I said, "I have no problem doing that because I know I'm going to give away most of my assets. My kids will be well taken care of and I'll have excess assets, and I've known that for quite a time, but I may have to convince my wife." Not that she would question it. I think she would question more the being public about it. And that was more the battle with her. And he said, "Oh, I'm happy to talk to your wife. Give her my 800 number. I'll talk to her any time."

And Warren said it well. He said, "Hey, if you're going to do this anyway, you might as well be on the good side of the ledger in life, and why not do that if you're going to do it anyway?" And it was a no pressure kind of thing. So he just called me up and I said, "Sure, I'd be happy to do it," and that's how it happened.

Patrick: [01:05:45] How often are you saying no to things? Anyone that's had great success in life has a wealth of opportunity and you reach this tipping point where maybe you're driving, driving, driving to create opportunity, and then you sort of get over the mountain and all of a sudden there's excess demand for your time. And so saying no becomes I think an important skill for someone that has that long trajectory of growth and success. So what do you think about that idea of that being a talent that people can work on and maybe even apply earlier when they're still on the up slope?

Joe: [01:06:15] I think you are spot on, Patrick. I think people should learn that really quickly. And I try and tell that to my wife who gets invited to things, and to my kids. Learn to say no. Do the things you want to do. Your time is precious. And I think I learned it the hard way because I try and kind of help people out, and all of a sudden, you're going to get pulled in many directions, and then at some point you're wondering, "What the heck am I doing here?" and "This is not the best use of my time." And then you kind of get pretty good at it. It's not hard. People don't mind. Just say, "I've got a full plate. I like what you're doing, but I've got a full plate. I can't really work with you on that." And people get it. And then you've got your time.

And so I say no all the time, and speaking engagements, I get invited to a lot of those, and do you really want to travel halfway across the country? How much time that takes to prepare something, to travel there? I do some of those, but it's just, it's much better to say no. Somebody invites me to a board, be on a board of directors, it sounds prestigious, it sounds nice, interesting company, but you do the math, that's two weeks of your time a year. Do you really want to spend two weeks doing that? It's easier to say no and have your time. So I'm very protective of my time and I've gotten pretty good at that. And Warren Buffett's been a great example in that, how he says no. And I think his free calendar has been a big part of his success. And he keeps an open calendar, and he's in demand 100X of what I'm in demand. And I think I learn from watching him, and I think anybody at any stage in their career should learn to say no and don't try and satisfy all comers.

Patrick: [01:08:01] I just finished a book called The Systems Bible, which actually is, contrary to the way its title sounds, all about why you should keep away from systems as much as possible because new systems create new problems. And one of the major things that they do ,being in a system and everyone's in some set of systems in their lives, is kind of blind you to how much time you are spending within a system, whether that's on a board, which is itself a system, or part of the speaking circuit so to speak where all of a sudden you are an asset to the conferences and not the other way around. So this idea of simplify, simplify I think is so powerful. It's been a neat undercurrent of our conversation, and I'm very glad that you said yes to this time. This has been an absolute blast, and I really appreciate it.

Joe: [01:08:49] It has been a lot of fun, Patrick. I enjoyed it.

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