U.S. All Cap Opportunities Equity: Can you look broader but think deeper?

We can invest across the market cap spectrum and also across the style spectrum as opportunities arise in the market. So the primary benchmark is the Russell 3000, and our goal is to just try to consistently outperform that benchmark.

Pivoting zigging and zagging as opportunities shift, sometimes getting growthier, sometimes tilting more towards value, sometimes being a little bit more up cap, sometimes being a little more down cap.

The important thing to know about four pillars is that it's a framework I've been using to select stocks since around 2011.

I used it as an analyst. I've used it as a fund manager. So it's got well over a decade of history under its belt and I believe in it pretty strongly.

In terms of the way that the four pillars process works philosophically, I believe that stock prices over the short to medium term, call it 1 to 2 years, are a function of supply and demand. And and what that means, you know, a high quality stock doesn't go up because it's high quality, high quality stock goes up because somebody is buying it and somebody else who owns it doesn't want to sell it unless the price is a little bit higher.

And so each of the four pillars represents an incremental reason for somebody like me, somebody doing fundamental research on an equity to be interested in buying it.

And the goal is to stack together as many positive attributes, as many incremental reasons for somebody to want to buy a stock as you can, because the more things you have working in your favor, the greater your probability of success if you follow the process systematically.

A lot of people hear the four pillars framework and just think, this is an algorithm and I can just plug in the inputs into the algorithm and you know, replicate, replicate the model. And what I'd say is that it's actually in practice a lot harder to do that than you'd think.

Each of the pillars has significant judgment overlay to it and scores are changing in real time.

I'm updating them constantly, at least once a quarter for each stock I cover. And I think that the fact that it is so fluid and mercurial in a sense is what makes this hard to replicate.

I think the reason that this process is differentiated is because it’s not as easy to implement as it sounds. There’s a lot of nuance that goes into scoring each of the pillars.

All the pillars are equal, I don’t love any of the children more than the others—but the first pillar is quality. I’m looking for high-quality businesses. …  This is more of a judgment based on sitting through literally thousands of company meetings over the last 15, 16 years, learning different industries, getting to know management teams, seeing how industries change over time. What you’re looking for is probably not a surprise. You’re looking for companies that are on the right side of change, companies that are suppliers to winners, companies that have a defensible moat around their business so they have high margins and can sustain them, companies where you trust management, where you trust them to allocate capital.

The second pillar, I call expectations. Think about this as, we’re looking for stocks where there’s positive revisions on the metrics that drives the stock. So, some stocks trade on earnings, some trade on free cash flow, some trade on billings or bookings, subscriber growth. Whatever the metric is, you know, we want to understand if our internal, T. Rowe Price estimates are above or below published Wall Street estimates. How far ahead are we? How confident are we? Over what time frame are we ahead? This pillar is one I could not do without the help of the analyst platform.

The third pillar, getting better or worse. You could also call it acceleration. This is just a pillar where, in the numbers, do you see fundamentals moving in the direction you want them to be moving? Is revenue growth going from 5% to 10% to 15% on a year-over-year basis? Are margins expanding? The rate of margin expansion improving?

I’d say I’ve always been very attuned to valuation. It’s always been very important to me. I try to focus on more traditional metrics: earnings, free cash flow. I try to avoid loosy-goosy metrics that don’t really have anchoring in realty.  Focusing on valuation doesn’t just mean buying low-multiple stocks. It just means trying to find stocks that are undervalued relative to their potential.

So I joined T. Rowe in 2008 full time. I had been a career switcher coming out of the buy side from a consulting background, and so I really didn't know what I was doing. When I first got the role as an investor, T. Rowe took a little bit of a flier on me through the summer internship process, and so I had taken to heart Warren Buffett and Charlie Munger talk about mental models.

And so I was very systematic at the beginning of my analyst tenure to try to think about what is driving the stocks that I'm covering, what makes them go up, what makes them go down on days when they behave in ways I didn't understand. I'd go down the hallway, knock on doors of other PMS and say, Hey, you know, I don't need you to give me the answer, but just just I see this.

The market sees this. Help help me make sense of what I what my blind spots might be.

Over the course of the first two and a half years, I got a list of 30 or so mental models that I would just jot down in a Word document.

And the very first mental model I had because I joined right before Lehman failed, right?

My first mental model was the macro economy exhibits inertia. It's motion tends to persist until acted upon by an outside source like like the Fed. Right. And so in the fall of 2008, things were just getting progressively worse and it was feeding on itself. And it wasn't until the government started trying to step in that things began to stabilize.

I took these 30 mental models and realized that a lot of them had common elements, and I was able to distill them into what ultimately became the four pillars.

It was not this moment. It was more of a I want to find a way to communicate as an analyst to fund managers why I like stocks or why I don't like stocks.

And so in my notes I would go through and say I like the stock because it's a good business, because I see upside to consensus estimates, because fundamentals are improving, because the valuation makes sense over time, incorporating those types of comments into the notes.

It got more systematic and I started actually calling the framework for Pillars.

When I was in high school, somebody—an adult asked me, “Justin, what do you want to do after high school, after college? The normal answers might be start a business, or pick your answer. My answer was, I want to be a stock analyst. I want to go out and meet companies and understand their businesses and figure out if I should invest in them. It was kind of an unusual answer, and I don’t know why that was the answer, but it was. I always had this interest and that was the North Star I was shooting for.

I became aware of stocks at a very young age, probably four or five years old, because my dad was an avid stock trader and every morning, he would take out the newspaper and look up stock prices in the back pages, and he started explaining it to me. Owning a share of stock is owning a piece of a company. He actually bought me a utility stock called, Delmarva Power, which is long since gone, and I followed it every day.

The one thing that I like to tell people that I don’t hear as often from others as I would expect, is that when you’re trying to figure out who to learn from, try to learn from the people who are the clearest communicators. This is a very complex industry, where there’s a lot of jargon, a lot of people can sound smart. They can say things that you don’t understand, your default is to think, ‘Wow, this person must be way smarter than I am.’ But over the years, I realized that the really smart people are the ones you understand, because they can take that complex idea and distill it into plain English. The reason they can distill it into plain English is because they understand the topic so well, they know what to discard and what to keep.

My job is more about pattern recognition, it’s about seeing how the world fits together and making sense of it.

There are a number of fund managers who think that the way to win is to just work harder, until you get that extra data point that somebody else doesn’t have. And then, you’ll have some edge, and you can generate excess returns. My view is different. I think that the data points that matter are kind of out there in the public domain, and the people who win are the ones who can put together those data pieces, data points, thoughtfully in a consistent mental mosaic.

I think every day, of the 99 data points that cross your board that don’t matter, there’s one or two that do, and you get better at sort of sniffing out which ones matter and when. You don’t get it right every time, but I think having lived through this, the wisdom, the accumulated knowledge puts you in a position to filter out a lot of the noise, focus more on the signal, and just get to the heart of what matters.