Face to Face
Morningstar founder Joe Mansueto on the business benefits of hero worship
It's one thing to say that you admire Warren Buffett. What's not to admire? The man has amassed a personal fortune of more than $15 billion, is the largest single shareholder in Coca-Cola Co., and in the process has built his company, Berkshire Hathaway, into one of the best-known business successes of our time.
But Joe Mansueto has taken his admiration a step beyond conventional respect. Mansueto has made Buffett his mentor, albeit by proxy. He's met the man only once. For 15 minutes. Nonetheless, Mansueto says that Buffett has provided him with the information and inspiration for creating a successful business of his own. "The single most profound effect on my business thinking over the past 20 years has been the investment philosophy of Warren Buffett," he says. That's a pretty broad statement from a man who has built Morningstar Inc. into a $44-million business.
But Mansueto says he can trace innumerable aspects of his company back to Buffett's business philosophy, from the way he conducts business to the way he treats employees. Inc. senior staff writer Christopher Caggiano spoke with Mansueto about the profound influence that Buffett has had on nearly every facet of Mansueto's business.
Inc.: Do you remember when you first came across Warren Buffett?
Mansueto: My introduction to Buffett was in the book The Money Masters (Harper & Row, 1980), by John Train. I had just graduated from business school at the University of Chicago. While I had studied securities analysis and investing there, it hadn't lit a fire under me. All the academic theory seemed so removed from the companies that it was hard to get excited about it. But when I read the chapter on Buffett in Train's book, it was like an epiphany for me. I found an approach to investing that made enormous sense to me: rigorously analyzing a company's fundamentals, understanding exactly how it makes money, developing a view on the business's future prospects, and deciding if it's a good business. You might think, well, that's so logical. Doesn't everybody do that? But part of Buffett's genius is simplifying business.
Inc.: How much of an influence was Buffett on your decision to start Morningstar?
Mansueto: First, Buffett got me excited about securities analysis. I wrote away to smart mutual-fund managers to get their annual reports, to see what stocks they were buying and what they were thinking--people like John Templeton, Ralph Wagner, and the people at Source Capital. That was my first exposure to the mutual-fund business. And I had all these reports on my kitchen table, and I thought, "Wouldn't it be great to compile all these reports into one compendium?" I thought it would make a very interesting product, certainly one that I would want to buy. So in a way I was creating a product for myself.
Inc.: And that's when you started Morningstar?
Mansueto: Actually, I didn't start Morningstar until two years after I had the idea. That's something else I got from Buffett. He doesn't invest often, but when he does, he prefers to do it in a really big way. He says you want to pick and choose the right opportunity. Then, once you spot opportunity and you're convinced your reasoning is correct, you move boldly. So after I had the Morningstar idea, I went to work as a stock analyst for an investment firm in Chicago. I wanted to watch the fund industry and look at the competition more closely. And once I was convinced that this was a great opportunity, I quit my job and put everything I had into building Morningstar.
Buffett says investors would be better off if they could invest only a limited number of times, as if you had only 10 tickets that permitted investments in your whole life. Buffett gives the example of a baseball batter just patiently waiting as the pitches sail by him. You wait for the perfect pitch--and then you hit it out of the park.
Inc.: What made you sure Morningstar was the perfect pitch?
Mansueto: It had all the elements of what Buffett calls a great business. Buffett looks for companies that have a "moat" that shields them from competition and allows them to earn high rates of return. The moat is something that creates high barriers to entry for would-be competition.
I thought a company that provides mutual-fund information could be a great business, because you could construct an effective moat by building large financial databases and customer lists and a strong brand name. Once you create a loyal customer base, it's tough for a competitor to take that away. Once you're with the Wall Street Journal, odds are, you don't drop it for Investor's Business Daily.
Inc. : But another aspect of your moat in starting Morningstar was that the timing was right.
Mansueto: Oh, sure. The fact that the mutual-fund industry was growing and that there were few competing publications were additional attractions to this business. The information that did exist went only to the institutions that were running and marketing funds. Fund investors had no affordable sources of information. I was sure that funds had a future and the number of people investing in funds was going to grow. Those people would then need more sophisticated and in-depth information to help them make better investment decisions. So it seemed as if we'd be swimming with a rising tide.
I don't know that Buffett says this overtly, but he also looks for companies where customers are helping to fund the business. You see this in his many investments in the insurance business, where people prepay their premiums and the insurance company enjoys the use of that "float." Well, in the publishing business there's a deferred subscription liability, which is created when subscribers send you the money first and over the course of the year you send them the periodical. When you start a business that gives you customers' money up front, it sharply reduces your ongoing capital needs to grow the business. Since I didn't have much capital when I started, the publishing business seemed perfect.
Also, Buffett says not to focus on strict GAAP [generally accepted accounting principles] but instead on building intrinsic value. For the first 10 years, Morningstar was never profitable on a GAAP basis, but we were cash-flow positive and building intrinsic value at a very high rate. The lesson for entrepreneurs is that GAAP can be misleading. What you really have to understand is how to invest to build real value and how to measure that. Sure, you need to understand conventional accounting, but it shouldn't be your sole measuring stick. Concentrate on building intrinsic value and building your brand.
Inc.: In terms of Morningstar, what did that entail?
Mansueto: We've concentrated on brand building all along. It's the best way we know to run a business, but it was Buffett who pointed the way. From early on, I was cognizant of trying to build the brand as our single most valuable asset--even more than the databases or any physical asset. It started with the company name. "Morningstar" seemed like a friendly, accessible name. It comes from the last line of Thoreau's Walden, "The sun is but a morning star." I thought a name like "Financial Information Research Services" would end up as an acronym and be off-putting. We were targeting individual investors, and we wanted something they could relate to.
We also tried very hard to build a ubiquitous presence for Morningstar so that wherever investors turn, Morningstar is there. This is one key way that we've built our brand, not in spending hard dollars on marketing, but more through piggybacking on the growth of financial journalism in general.
Inc.: Now that Standard & Poor's and others are competing with you, is your moat disappearing?
Mansueto: I think there are really two trends at work here. First, the moat gets deeper every day. That's because we get better known, our subscriber list grows, and our financial databases get bigger. So it takes an even more well-heeled competitor to attack us today than it did several years ago. The second trend is the one you mention. Because the castle is a little richer, more competitors than ever are firing cannons at us. And it's not only Standard & Poor's. Perhaps more serious is the proliferation of brands the Internet has produced. Microsoft meant nothing in financial information five years ago, and today it's out there with a very good Web site. The same for Yahoo and Charles Schwab. Changing technology makes it easier for people to enter our field, and that weakens our moat.
But remember that our brand is the key component of our moat. And they'll have a tough time replicating that. Since mutual-fund information is becoming a commodity--something Buffett says to stay away from--we're also trying to enhance our competitive advantage by differentiating our information. We continue to innovate and create proprietary measures, like our star rating or investment-style box. Those are tools that give investors unique ways to interpret investment data and move our information beyond a simple commodity state. These innovations deepen our moat.
Inc.: Beyond your start-up criteria and your brand emphasis, how else has Buffett influenced the way you run Morningstar?
Mansueto: Buffett is a revered figure throughout the halls of Morningstar today. I can't overemphasize the effect he's had on our business. Buffett writes about the importance of understanding the actual business underlying a company's stock price. This same type of rigorous, fundamental, bottom-up analysis that Buffett applies to stocks we try to apply to mutual funds. We get under the hood of a fund, look at its portfolio to see what's driving the performance, measure the performance and the risks, look at costs, see who is running the fund, and so on. We don't settle for an easy performance-level analysis, just as Buffett wouldn't settle for an easy stock-chart type of analysis of a company.
Also, Buffett makes business enjoyable. His writings are intelligent but with a good amount of humor thrown in. Buffett says he likes his work so much he practically tap-dances to work, and you believe him. I want to have fun at Morningstar, so the environment is casual, with casual dress and free soda, Starbucks coffee, and fish tanks. We have progressive employment policies, like fully paid health care, but no explicit vacation or sick-day policies. We say, if you're sick, stay home and get well, but we don't really count the days. We want to create a trusting environment where people can produce their best work. I also learned it's best to hire people you admire and want to be around. Buffett says to avoid people with great rÉsumÉs who, as people, turn your stomach. He says it's like marrying for money: it's a bad idea under most circumstances but absolute insanity if you're already rich. One last thing you can learn from Buffett is the importance of honesty and integrity in running your business. When Buffett writes his annual letter to shareholders (see "Some Annual Reports Are Worth Reading," below), he is candid, telling his partners both the good and the bad. That develops trust. At Morningstar we share information widely throughout the company in a way that is rare for private companies. By sharing information and communicating honestly, we develop an unusual degree of trust that's an important part of the Morningstar culture.
Inc.: Have you met Buffett in person?
Mansueto: We met very briefly when I attended the Berkshire Hathaway annual meeting last year--along with 10,000 other people. It wasn't so much a meeting as a brief audience. The day before the big meeting, Buffett held a series of small interviews with select media, of which Morningstar was one. Four of us from Morningstar trooped in together, and we got to spend 15 minutes with Buffett and his partner, Charlie Munger.
Inc.: Was he what you expected?
Mansueto: Oh, yeah. It was definitely a confirmation of everything I had heard and read. Plus, I had been to the last several Berkshire meetings and had already seen Buffett in action. He and Charlie go up onstage for five hours and take questions from the audience. It's a wonderful opportunity to see Buffett and hear his views on a wide variety of subjects. In the short meeting we had, it was that same performance. He thoughtfully answered all our questions. It's extremely impressive to see how quickly and logically he thinks.
Christopher Caggiano is a senior staff writer at Inc.
Some annual reports are worth reading
Is there anything more dreadful to read than an annual report? Most are nothing but endless pages of meaningless numbers, hokey photos, and mindless marketing blather. Well, the Berkshire Hathaway annual report stands in sharp contrast to the norm, particularly in Warren Buffett's annual "Chairman's Letter." Not only is the writing clear and informative, but Buffett's folksy, disarming style makes it a downright entertaining read. The following are excerpts from the 1998 report and Buffett's Owner's Manual (both available on-line at www.berkshirehathaway.com), with Joe Mansueto's take on how specific policies and practices at Morningstar are attributable to Buffett's business philosophy.
ON SHARING THE RISK
"Most of our directors have a major portion of their net worth invested in the company. We eat our own cooking. [My partner] Charlie [Munger]'s family has 90% or more of its net worth in Berkshire shares....My wife, Susie, and I have more than 99%....Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in lockstep with ours...."
Mansueto: It shouldn't be a surprise that I have 99% of my net worth in Morningstar. But the way I get everyone else here to share in the risk is through stock options, which everyone is eligible for after two years. This promotes the idea that we're all on the same side of the table, that our motivations are the same.
"Remember Wagner, whose music has been described as better than it sounds? Well, Berkshire's progress in 1998...was not as good as it looks....Several of the public companies in which we have major investments experienced significant operating shortfalls....Consequently, our equity portfolio did not perform nearly as well as did the S&P 500...."
Mansueto: I see this as a model for communicating with your various business partners. It goes 360 degrees, from employees to shareholders to customers. We don't fiddle with our financials to make our business seem better than reality. We don't "manage" our earnings. We just portray our business performance as accurately as possible.
"In 1998...we wrote a $30-million check to the government to pay an SEC fee tied to the new shares created by [one acquisition]. We understand that this payment set an SEC record. Charlie and I are enormous admirers of what the Commission has accomplished for American investors. We would rather, however, have found another way to show our admiration."
Mansueto: Buffett here is so engaging. That's part of why people are really drawn to him. He tends to relax people. I'm not nearly as funny as Buffett, but one thing I am is casual. So the culture at Morningstar is an extension of my personality, and it's very relaxed.
ON BEING INCLUSIVE
"Charlie and I have two simple goals in reporting: 1) We want to give you the information that we would wish you to give us if our positions were reversed, and 2) we want to make Berkshire's information accessible to all of you simultaneously.... Today, many companies...favor Wall Street analysts and institutional investors in...ways that often skirt or cross the line of unfairness."
Mansueto: Morningstar is a very egalitarian place. My cube is the same size as the one where the guy who started yesterday sits. But, more meaningfully, we also publish all our financials on our intranet, from the P&L to the balance sheet. Hiding company information fosters resentment and creates two classes: us versus them.
- The Money Masters, by John Train, Harper & Row, 1980
- Buffett: The Making of an American Capitalist, by Roger Lowenstein, Main Street Books/Doubleday, 1996
- Berkshire Hathaway Annual Reports, on-line at www.berkshirehathaway.com
Joe Mansueto first touched on his admiration for Warren Buffett in "The Making of an Inc. 500 CEO."