An interview with Joe Mansueto, the founder of Morningstar. Mansueto describes how Warren Buffett, legendary investor and owner of Berkshire Hathaway, inspired him to start his own company.
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.
