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.
