Investing in Strategy With Pie Funds
As Chief Investment Officer of a company that handles thousands of clients and is responsible for over $1 billion of their money, Pie Funds’ Mark Devcich is a voice worth hearing when it comes to investing. We talked to him about the strategies that go into investing, the challenges and opportunities brought on by COVID, the difference between speculation and investment and what Tesla is.
Can you talk about what it is that you’re in charge of at Pie Funds?
My role as a portfolio manager involves making decisions on the funds that I run for that particular portfolio.
I am also the Chief Investment Officer, which involves making sure the investment strategy is followed and the funds are being run in a consistent manner with our overall strategy.
What is that strategy and how do you keep a handle on it?
The strategy predominantly is investing in growth companies. We try to find companies that are relatively smaller, maybe off the radar to other investors and are growing quickly, and then we invest in them early on. As they grow, we hope they become larger companies and their market capitalisations increase. Other investors then look at those companies and they come on the radar of many more investors and that generally increases their valuation.
That’s typically the strategy since inception and in the last five years, we’ve morphed our strategy a little bit to invest in global companies. Historically, we’ve just been investing in Australia and New Zealand and in the last five or so years, we’ve done more global investing and investing in more large companies. That’s a slightly different strategy where you’re not investing in the smaller companies that are growing extremely quickly.
You’re investing in more global leaders, like Microsoft, Facebook, Google, Salesforce; the type of companies that are probably not going to grow 30 or 40% a year. Maybe they’re just growing 10 to 20% a year, but they’re more dominant, they’re less likely to have issues and they’ve got more entrenched positions.
That’s our strategy and that’s how it’s morphed over time. As we’ve taken on more funds and more money under management, that’s necessitated us to morph our strategy.
That morphing and that shift into, say, larger companies who might have more security, does that indicate a slightly more conservative approach?
Yeah, it does. You’re likely to have less volatility and less ups and downs, but more consistent results. But also, you’re not likely to see these companies go up five or 10 times because they’re already large companies.
You wouldn’t see Amazon, suddenly in a year, be five times larger. It’s just impossible because it’s already over a trillion dollars in market cap, so it’s just impossible. Whereas if you’re investing in a $200 million company, it is possible for a company to go up two or three or five times over a period of a couple of years.
You’ve spoken about the potential of that volatility to really work well, particularly if you’re an active manager. Would you miss that if you do leave more of that volatility behind?
You still get the volatility in the large stocks, it’s just a little bit less. You’re right, the volatility is welcome to us because, as long as you can keep your cool and maintain a consistent approach and you’ve got confidence in the company, then the share price going down in a market sell-off should be treated as an opportunity to buy more. You just have to separate that from when the share price could be going down because there’s a fundamental problem with the company.
Generally, when the whole market is selling off and it’s widespread, that’s just volatility due to human emotions. That’s seen as a buying opportunity from our perspective and those larger companies are less likely to have company-specific issues, compared to a smaller company that may not be as diversified.
You were able to take a fairly calculated approach with it, but is there this reptilian part of your brain that’s freaking out about this total global calamity?
Yeah, if we look back to Covid, in particular, it’s difficult because you look back to history to try and find similar events and a playbook as to how it should work this time. I looked back to what happened with SARS, but looking back in hindsight, it was completely different than SARS.
SARS was only really a six-month pandemic in the end and it burnt out over the Northern Hemisphere summer. Whereas, I was thinking the same thing would happen with Covid, and it died away a little bit, but then as they went into winter again, it reared its head.
It is hard to maintain perspective, especially when everyone’s acting in the same way. When everyone’s panicking because of Covid and selling shares and the market’s falling every day, you feel compelled to do the same thing, but to some extent you’ve got to be contrarian. That’s where the opportunities lie. But there’s no point being a contrarian and being wrong. You have to be a contrarian and be right.
It’s hard going against the grain, but that’s where you get the huge outperformance. You just have to have the conviction that you’re right as well. It’s a difficult thing to do, otherwise everyone would be doing it.
It’s cool to look at things at a macro level, but you also do an incredible amount of analysis on each of the companies that you’re investing in. Does that help with that conviction?
Yes, in the industry they call it top down and bottom up analysis. Top down is a macro focus and then bottom up is actually looking at the individual business. We spend most of our time looking at the businesses themselves and not so much looking at the macro, because with macro there’s so many different factors at play.
Macro trends like interest rates are a very, very difficult thing to try to predict. Whereas at the business level, there’s less factors to consider. We do a lot of calls with management teams and talk to competitors and customers and industry analysts to understand those companies very well. So, when we go back to those situations where the share prices are, for example, falling, we have enough conviction to act if we think it’s a good time to do so.
You mentioned looking for those growth companies before they’re on the radar. With things like GameStop, or Elon Musk talking about buying cryptocurrency, with that radar and the level of influence, does that really start to shift dynamics as well?
Yeah, I think what’s happened is some people are saying the investing world is being democratised and that’s a term that’s been thrown around a lot these days. The barriers to entry are definitely being reduced with apps like Sharesies in NZ, and Robinhood in the US, so it is far easier to invest in the stock market.
Social media, like Reddit or Twitter, is full of investors and many of them are new investors, sharing ideas or research on the company. It can be a treasure trove, and I use it as well. There’s a lot more investors coming into the market. You just have to be cautious because it’s a competitive game and everyone in the market is doing various levels of due diligence and homework on the companies.
You’ve got to be wary that whenever you’re buying something, there’s a seller on the other side and they’re selling it for a particular reason as well. There’s no free lunch here and I would just caution some newer investors that it is a competitive game and in the immediate short-term zero-sum.
It’s kind of necessary to try to pick those easy games. If you’re playing poker, if you’re playing against a group of professional poker players, it’s going to be difficult to win much money at the end of the night. Whereas if you are playing against a bunch of first timers, you’re probably likely to do much better.
We try to find those areas of the market that are less competitive and historically, that’s been in the smaller company space but it’s becoming more competitive. Today, maybe it’s investing in different overseas markets, whereas some markets, like the US, and even Australia, are becoming very, very competitive.
Do you think if there’s a whole lot of people that start to lose money, that we’ll have a whole lot of people being burnt and really turned off investing?
I think there is definitely a potential that will occur. I think you have to differentiate between investing and speculating. Investing is typically investing with a long-term horizon, so you invest in businesses. The fact that they’re traded on a stock market shouldn’t really matter.
Over the long term, you’ll get the results of what that business generates. Whereas with speculating, you’re hoping that the share price goes up, or if you’re shorting, hoping that it goes down. You don’t have any perspective on how the company’s performance is driving that share price and you’re much more short-term focused. If you think about the number of speculators in the market, some of them will make money, but most will lose money.
Looking at some of the analysis that you put into some of the businesses in Australia, right down to calling past clients, that’s an insane level of analysis. Is that a one-off or is that a pretty similar approach that you’ve taken to all of the portfolios and all of the areas that you invest in?
It depends on the company and how big a position it is in our fund. If it’s a larger position, we’ll do more homework on it. If there’s some key pieces of information that we want to find out, and we think those pieces of information are likely to come from ex- employees or customers we will endeavour to find that out.
There are services that help with that as well, where you can request a service provider to answer these particular questions and they’ll find the best people who will have answers to those questions, and then we interview those people. There are outfits out there that help us in that process.
You’ve spoken in the past about your love affair with the tech side of things and how data is really the new oil. Are you excited about any particular growth areas within that space?
There’s obviously the buzzwords of artificial intelligence, big data, and machine learning being thrown around. But I do think it’s just a natural progression of productivity and we’re collecting far more data now, however, a lot of it is not being used to increase productivity.
I think over time, it’s like a self-fulfilling cycle where the more data the machine has, the better the decisions that machine will make. The better the decisions the machine will make, will mean more people will use the service, so the more data it collects again, and the process just continually refines itself.
At a very basic level, it’s like when you’re filling in forms now or writing on Gmail, sometimes Gmail will finish off your email sentence for you. It’s just using machine learning to anticipate what you’re going to write next.
That’s at a very basic level, but you could apply this to nearly any industry, any use case around the world, to increase productivity, which would increase growth. I just think it’s another technological advancement that is beneficial.
With the spillover as well, from the tech industry and what you’re talking about with increases in productivity, do you think that would have influence over other sectors as well?
Yeah, I think these days every business is a tech business. Going back to our business, we’re trying to get an edge on everyone else. If you are a farmer, you’re trying to look for those incremental advantages compared to your neighbour or another farmer on the other side of the world.
You’re trying to become more productive, increase your yields, lower your cost of production. If that’s using an AI weather app that predicts when you should sow your crop to get the best yield, that could be an application.
I think everyone will be using technology more and more. It’s not new, it’s just the way the technology is being applied these days is more using data because now we have the data, we’ve just got to use it. In the past, that was probably using physical machines, and now it’s more using the data that we have collected from the machines.
Do you think that in cases where some people might argue that there seems to be a detachment from reality, for example with Tesla, that it’s still based on the potential of the Tesla technology and the software and we’ve just got to give it some space to develop?
I’m not an expert on Tesla, but what I do know is there are a lot of smart engineers there. There’s a lot of optionality in terms of, it’s not just a car company, it’s not just an electric vehicle company. You’ve obviously got battery storage, but there’s a lot of different areas they’re going to go into that we don’t even know about yet.
I was told they’re building the world’s fastest supercomputer and that’s going to help them progress their autonomous driving ambitions. You don’t want to underestimate a group of highly driven, super talented individuals that are probably working towards a cause that’s bigger than the company or bigger than the monetary rewards.
They’ve got bigger ambitions to ultimately go to space as well with SpaceX. So I wouldn’t write Elon Musk and the team of people he’s built around him off. It’s hard to value that and that’s where I think a lot of traditional valuation methodologies don’t adequately encapsulate the optionality that’s in that business that we don’t know about.
Apart from some of the basic metrics like potential revenue market, are there other things that you look for when you’re making assessments?
A business at the heart of it is just a collective of people really, so you want those people to be driven towards a common goal. That’s obviously encapsulating culture, which is hard to assess from the outside, but that’s why we talk to ex-employees. And then that common purpose that they’re driving towards hopefully is something which results in a customer love or a customer desire to use a product or service because ultimately, if you can do that, then it’s self fulfilling again, where customers will tell other customers about it.
You won’t need to spend lots of marketing to convince people to use a product because customers will be telling other customers about their great experience and how good the product is and then you’ll be able to spend more on R&D or making the new product, which is far more beneficial than trying to convince people to use your product.
With Tesla, for example, I’d say they’d spend a limited amount on marketing, compared to a typical car company, and spend far more on engineering and R&D. Jeff Bezos from Amazon used to say it’s better to create a great product, rather than just spending lots of money, shouting that you’ve got a great product.
To learn more about investing with Pie Funds, visit their website.