Copper Rock Senior Portfolio Manager Denise Selden has been in the investment game for nearly 60 years, starting as a teenager for her uncle on Wall Street. Having just announced her retirement, she speaks to MarketFox columnist Daniel Grioli about her career and her passion: growth equities. But she also reflects on what it was like to work as one of the few women on Wall Street, at a time when women weren’t even allowed to eat in the Wall Street lunchroom.
Daniel Grioli: Welcome to another edition of the i3 Investment podcast. This is Daniel Grioli, otherwise known as the Market Fox columnist for i3 and with me today is Denise Selden. Denise is a portfolio manager with Copper Rock Capital, a growth equity manager based in Boston in the United States. Denise has recently announced her retirement 12 months from now. We’re talking a little bit about growth equities, about Denise’s career and what’s happened over that time. It’s a very interesting conversation and with that, we’d like to introduce Denise.
Denise Selden: Oh, thank you, Daniel and thank you for the opportunity to chat both about my career, and more importantly, about growth equities, which is what I’m really looking forward to talking about. But just to put some context on it, I’ll briefly … Well, it’s hard to briefly run through a career that is close to 60 years in the investments business and I’ll tell you how it got to be so long. That beginning portion is a bit of an interesting story.
Denise Selden: I had an uncle who owned a seat on the New York Stock Exchange and in those days, in those post-war days, the owners of seats were used both to execute orders for clients but also to produce liquidity on the floor of the New York Stock Exchange, much like the concept of Lloyd’s Syndicate that you both do pricing but also be a capital reserve for putting up the money. My uncle had had an interesting progression from being a bookkeeper to accountant to broker to then owner of seat and trader for his own account and the most efficient way to do that was through this role as a floor broker.
Denise Selden: Now, this uncle had been around always at the family Thanksgiving and other family festivities, but he was always the quiet person who sat in the corner of the room and I’m not sure anyone really understood much of what he did. Totally out of the blue one year, literally after Thanksgiving dinner, he came to me and asked if I would like to work for him for the following summer. That was Thanksgiving which is of course in the fall, I was 13, and so that next summer I was going to be, 14 and he announced that he thought that it would be a time for me to start working.
Denise Selden: Again, based on his history of starting as a bookkeeper at a very young age and have totally self-developed his career, this was logical. I think everyone else was a little surprised, but I was really intrigued by it and said, “I thought that would be wonderful.” It involved of course living in Manhattan for the summer with my uncle and my aunt, taking the subway downtown every morning into Wall Street, into the very heart of Wall Street at his office at 120 Broadway. The jobs that he gave me to do were actually quite immersive. It’s really pretty amazing in this day and age when, at least here in the states, kids are maintained as kids for a lot longer. Summers are spent with all kinds of lessons or deliberately having alternating downtime at the beach. The idea that the best thing for a 14-year-old girl would be to work on Wall Street for the summer wouldn’t be as common an association these days.
Denise Selden: So, we had two desks in an area … or I should back up and say the rules had changed from the time that providing capital was the primary rule for floor brokers and the New York Stock Exchange regulations had broken up these two functions so that you could no longer originate orders on the floor of the New York Stock Exchange because they felt there was too much risk of inside trading. So, the floor brokers had a choice. They could either do execution only for outside orders or they could continue to trade their own accounts with all the preferential rates of owning a seat, but it had to be done as an upstairs owner. So, my uncle became an upstairs owner, meaning he just sat at a desk, faced the New York Stock Exchange and the American Stock Exchange sticker tapes going across the top, and he would write orders trading for his own account.
Denise Selden: The day that I arrived, we were set up in two desks one behind the other, sort of like a toboggan setup. He had arranged for me to be the order clerk. He would sit watching the tape conceive orders, quickly write them down on a piece of paper, slap that piece of paper behind him onto my desk. I had a stopwatch around my neck and I would grab piece of paper, run to the trading desk, hit the stopwatch and if they didn’t give me a size and market from the floor of the New York Stock Exchange in 90 seconds, we didn’t pay for the trade. In many ways, it was a wonderful role. I was right in the heart of the action immediately but I really wasn’t doing any thinking. I was purely an operator in this process. But I think about those first days a lot because I’m sure it’s what got me hooked. That I wasn’t told to read something. I wasn’t told to just sit and watch. I had an action role. There was something else that really impressed me that very first day.
Denise Selden: When it was time for lunch, my uncle, who’s a man of few words, as I said we were all quite surprised when out of the blue he had even suggested this summer job, but he turned around to me and said, “Now it’s time for lunch.” The first words he’d spoken to me since he gave me the stopwatch and explained the system. We went through a back alley and went to the lunch room at the New York Stock Exchange where he was quietly taken aside. I saw the maître d’ whispered something and he came back and very matter-of-factly informed me that we wouldn’t be eating there because women were not allowed on the floor of the stock exchange, or in the dining room. I too took it as a very matter-of-fact. Again, this was 1961, so it was just a fact of life and I stood silent. Went down another set of alleys. We bought a set of sandwiches and went back to our desks.
Denise Selden: That night, the next set of words he said to me was, “All right, same plan. We meet at the same time. We’ll come on the subway,” he said, “But I’ve arranged a different plan for lunch.” I said, “Fine.” The next day, we went to lunch in the dining room of the American Stock Exchange where he had, in the interim, arranged to commit to also having a seat on the American Stock Exchange. He could also use it for his own trading purposes and seats in those days weren’t terribly, terribly expensive, but it was a very interesting set of immediate lessons and culture. One part I’d say around being able to eat someplace is not able to eat others very matter-of-factly communicating it to me, that’s part of the Wall Street mantra of it is what it is and you can’t change the whole system immediately, and so you find workarounds. That was the routine for the rest of the summer. We would eat quickly, silently at the American Stock Exchange lunch room and then come back and go back to trading.
Denise Selden: So, that was my initiation. As I said, that was 1961. Those were good investment years. They weren’t quite yet the go-go years. We were building to that. But my uncle’s primary style of trading was that he was a short trader because again, remembering that capital provision function on the floor of the New York Stock Exchange, that’s what you needed from your floor traders. You needed capital to buy positions when there were sellers, but you also needed capital willing to short positions when they were buyers. He was equally comfortable on both side of the trade and it’s fascinating to me today to think back on the number of the names that I traded short in those days like Xerox that subsequently collapsed and came back from the ashes. Boeing, Lockheed Martin, Chrysler, all actual or near bankruptcies that were restructured and rose from the ashes to still be an important part of the industrial complex in the U.S. then a lot of really early tech stocks like a Memorex, the largest vendor of magnetic tape, totally already eclipsed and gone. A name almost no one remembers.
Denise Selden: So, those were wonderful times. I’ve worked for him for three summers, continued to work for him then both vacations from college, summers during college. Took a year off from college to work full-time. Moved from working for my uncle to working for his firm, Josethal and Company, which was a major … They owned 26 seats on the New York Stock Exchange. They were a major execution house. So, I had a great early foundation that I had already worked seven years in the business before I could even get registered when I turned 21.
Daniel Grioli: So, you were a veteran before you graduated from college.
Denise Selden: Yeah. Yes, that’s true, but through the quirk of this family relationship and starting it out on the trading side, I was a veteran of the internal mechanics both trading, lots of interface with the back office. When I went to work for the firm itself, which was in order to work in Boston rather than New York, went to college in Boston and wanted to work for this local firm, my next step wasn’t into stock selection nor research or even customer contact. It was all back office, so I became the margin clerk. The margin clerk in those days was still incredibly manual. The office looked Dickensian, and we sat on high stools, and there were racks of metal trays that would pull out one by one, each tray being a major trader and it had little flip-up forms that you turn over, and pencil and calculator would do the individual allocations of how much margin firm was willing to extend for each stock position. Incredibly manual. We’re talking about the early ’70s still.
Denise Selden: By now, we had gotten into the go-go years and there was another wonderful circumstance for me, which is that same firm, my uncle’s firm, I was down in the financial district in Boston and the closest firm of any kind to us was right across the fire escape across the back alley into the trading room at Fidelity so that we had a second floor all set up in the way you always see them in the movies, running across the news tape in the back, traders lining the back of the room, and the major portfolio managers from Fidelity would come across the fire escape with a lunch bag and sit in our boardroom and watch the tape. I had that next phase of trading and training was I think the best possible. It was deeply immersed already in an institutional environment.
Denise Selden: Then I’ll say, if it doesn’t sound too cinematic, one extraordinary final event, which was once I turned 21, I immediately took the exams to get registered as a broker but in those days, only registered representatives who had dealings with the public, which at that time of course was defined as what we think of more as retail, had to be registered. If you were a trader or a broker dealing only with institutions, then you were an employee of the firm and the registration restrictions didn’t apply to you. But I wanted to get registered. I wanted to legitimise what had already been the seven years of working in the industry.
Denise Selden: The head of the local Boston trading desk, which was really more an order relay, it wasn’t a capital committing function, had a heart attack in the middle of the day and the registration restrictions had just been extended to internal employees taking orders. I was the only person who didn’t have a retail book of business who was there in the two floors of the firm who was legally fully registered. As I say, it was so cinematic I almost hate to tell the story because it feels so Hollywood, but someone came upstairs, I’m busy calculating margin requirements, and said, “Billy’s gone to the hospital. We need someone to run the desk.” I walked down the stairs, sat on the desk. That was a major turning point for me, of course, because it was the beginning of a truly institutional, large scale-oriented world of trading and investing.
Daniel Grioli: That’s a great story. I’m just thinking back to your earlier story about the lunch room. Was it strange when you sat down and you’re now the boss of the desk?
Denise Selden: Well, I’m the boss of the desk. There were five employees. They were all men of 40 and above. They’ve had a lot of experience as clerks on order desks but really had had no education in investments. Orders in those days … and again we just forget how much technology has changed things, megabox, T1 communication, satellites have totally changed this. In those days, brokerage houses all communicated between their desks and to the floor of the exchanges by teletype. This was technology from the railroad spreading across America a hundred years earlier.
Denise Selden: So, the personnel on these desks tended to be old railroad telegraphers. We had two brothers who had retired and in those days, of course you had very early retirements from the railroad because they mimic the military structures. One brother was on the end of the telegraph key in New York, the other in Boston. When there were slow times during the day, you would tell dirty jokes on the key and you could tell by them sniggering and blushing. It was a minor entertainment for everyone to watch the brothers chat with each other all day.
Denise Selden: But the specific question about lunch and women is actually even more interesting when you get to Boston. Boston had a very legalised and public system of discrimination against women. In lunch rooms, it was I’m sure some old set of what we call blue laws, puritanical laws perhaps to keep professional or to keep other types of women professionals out of bars. So, there were three licences that a bar could have in Boston. There was a tavern licence, there was a bar licence, and a lounge licence.
Denise Selden: In a tavern licence, women were not allowed at the bar. There was literally not only a rail that you’d stand next to but there was a bar that was about waist height that defined the area that was considered the bar and women could not go past that area. But also, to have a tavern licence, which was considered fairly desirable, because you could serve men very quickly particularly down in the Financial district, which is adjacent to the Wharf district down here, you had to serve food. So, when you think of it, it’s really ironic. The favoured places for quick and actually pretty good food were the taverns where people who worked in the industry would also drink. Those were the places that women literally, legally couldn’t go.
Denise Selden: In a bar, women could be served alcohol. You were allowed to serve or not serve food, but everyone had to be seated. So again, think through it. You’re a clerk, you want a quick lunch, a beer. Where do you want to go? You want to go stand at the bar. Again, the nomenclature is confusing, but that’s why taverns were so popular, bars were after-work places, and a lounge was a place where if they paid the price for that money, again women could not stand at the bar but women could sit at tables and be served alcohol and food.
Denise Selden: It was all built into the public system and it was in this time by then, early ’70s, there was a revolt, a sit-in. Everyone was much more focused on, of course, the segregation in the south and far more important things, but the women of the Boston financial community actually had a sit-in at one of the major taverns, it’s called Pete’s. Still exists downtown and there’s a little bronze plaque that’s been relegated into a dark corner, but you can see the whole history of the integration of the taverns, bars, and lounges. The city council finally changed all of this legislation. But when you think of it, it really isn’t that long ago.
Daniel Grioli: What year when sit-in have been and how long did it last before they got the city council to change the rules?
Denise Selden: It was the early ’70s and I don’t think it went on very long because I think the restaurant owners were act thrilled to have a new set of customers.
Daniel Grioli: I’m sure they would have been, yeah.
Denise Selden: The least bit of pressure and no resistance from the owners and everyone threw up their hands and said, “Well, this is ridiculous,” and it changed. But it is interesting that it had to come as grassroots change as opposed to restaurant owners. You think in the capitalist way they would have said, “Well, we’ve noticed all these other people around downtown. Let’s change this.” It didn’t happen that way.
Daniel Grioli: Okay. Were there a few disgruntled men around, unhappy that things were changing?
Denise Selden: I actually don’t remember that. I think it was everyone shrugged and there was a little bit of sheepish: ‘Well, that’s Boston,’ and in those times, there were a lot of other blue laws as well. No liquor sales on Sundays. No liquor sales in supermarkets. We had lots and lots of liquor specific laws particularly in Massachusetts among all of the states of the U.S., so I think everyone didn’t view it quite as sociologically or just really viewed oh, it’s a little bit of history, but I remember those some important changes.
Daniel Grioli: I know this is going to be a big dose of hindsight in this question, but when you’re meeting people like Peter Lynch in those very early days before Peter Lynch, did you get a sense that he was really something special or was he just another P.M.?
Denise Selden: No. I will say, and it is with a lot of hindsight I guess, but he was special and for some really interesting reasons. There were many portfolio managers who were in those days as well-known as Peter and I’d say I might have thought the same legendary status might come to some of them. I continued to have Peter Lynch contact for a long time and I remember this actually more later from my Lehman days when I would be bringing companies to visit with Peter. I learned an immense amount from him about talking to company managements because as you see in this books, this true-trust-in-the-intuitive-and-common-sense-and-put-yourself-in-the-shoes-of-the-other-person type thinking, Peter would exude that as opposed to young analyst then and today who were being pushed to find an individual insight or a detail that everyone else got wrong. Peter was very happy to think through the big picture and think where is the mainstream flow.
Denise Selden: There were two areas of stocks that Peter was particularly interested in early days and continued on through. One, of course, were small scale financials. Much of his long record was made in fact from his extraordinary bet on the SNL industry as it was essentially bought into the public and publicly traded era from being … In the U.S., we have this long history of Jacksonian democracy and banking, so we pretty much give a banking licence to any group of people that puts up some capital and in a lot of countries, that’s not trusted because the thought is that the bankers will rip you off. Here, the thought has always been if you have enough bankers, they’re all ripping one another off, so who cares? We can neutralise it by having 15,000 banks.
Denise Selden: When the SNL industry began to change their charters and become more public institutions, that was an area of specialty for Peter. The other area, less remembered I think, was he was very interested in basic materials and of course, post-war industrialised America, all of this capacity that had been miraculously turned on for the war effort and then continued to do more war efforts, Korean and Vietnam. We still had a lot of manufacturing capacity – steel, railroads – all of these cyclicals were very important to him. Whenever I would see him with a management that came for more of that cyclical side, he would always ask a question that just fascinates me to this day and I’d try to imitate it. He’d say, “Oh boy, you’ve really done an amazing job with all of these ups and downs and handling sit … but do you ever think about how much money could you make if everything went right and what you would be trying to do?”
Denise Selden: I remember this particularly with Commercial Metals, which was one of the early steel companies that use scrap for input rather than slag. Of course, the management would just, you know, their eyes would glisten. This is amazing that a big investor is asking me not what can go wrong but what can go right. They’d say, “Well, we have X tonnes of capacity and even if we assumed a 3% price increase, there’s always a nine month … ” and they would reveal that actually, they’d been thinking of course because everyone sits down every now and then and figures out what’s my net worth, figures out how could it go if it all goes right. They would reveal that capacity upside, which of course isn’t what want to invest on alone, but hearing how a management thinks about their true capacity and about the leverage in their business is very, very valuable. That’s something I remember about Peter particularly from the base metals and materials side.
Denise Selden: On the financial services side, he was always much more interested in the people than the balance sheet. He had a fabulous research assistant who’s been known better, continues on in the industry. Peter certainly was aware of the balance sheet but he was interested in the managements of these things because these were I’d say small clusters of small town people who were suddenly making it into the big time. The privatisation process allowed those original owners and often the employers to get stock and there was a perverse incentive. They actually wanted the stock to go public at a low price rather than a high price because that was going to be their income, their input price where their options were struck. So, it was more how long have you worked for the bank, were you a lending officer, what do you think are the most attractive industries or you wanted to feel for the aggression and risk-seeking level of the people?
Daniel Grioli: That’s very, very interesting. You’re making me remember a couple of stories, one of which was a similar comment that I heard Bill Gross had given an interview that early in his career he was much more interested in the assets backing various fixed income instruments, but he learned the hard way because he went on one research trip where he went to a particular industrial company and decided that that was a better bond than Walmart and he realised afterwards had he paid more attention to the people, he would have picked the better security because the industrial company, even though it had a lot of asset banking, it went bankrupt.
Denise Selden: Interesting.
Daniel Grioli: Yeah, interesting stories. Interesting to hear that perspective on Peter Lynch. I’m just curious because you mentioned also a name Gerry Tsai, which maybe a lot of listeners in Australia don’t know who he was. He was one of the most famous momentum managers, I guess. He buys and sells stocks in the same day and he took that track record to set up his own fund, the Manhattan Fund, and he sold that on pretty much at the peak, didn’t he?
Denise Selden: Yes.
Daniel Grioli: I just think back and again, there’s probably a bit of hindsight in this, but were people concerned about a fund manager buying and selling stocks, essentially day trading? If you were to pitch that to somebody today, I’m a day trading mutual fund manager, I think you would struggle to raise assets, but how was the world different?
Denise Selden: It was quite different because mutual funds were being pitched and bought as you don’t have the time or knowledge to choose stocks and do portfolio construction, so let the experts do it for you. If you believed that pitch and bought mutual funds for that reason, then you might be even more inclined to you don’t have the knowledge or the time to be a successful day trader, so hire a successful professional to do it for you. It was a not bad pitch and especially in an era of course of ever more rapid turnover on the stock exchanges and more volatility, it was gee, how do I get a piece of this? I don’t have time or skills to do it myself, but it’s really exciting. I can do it through a Gerry Tsai and aren’t I lucky? Remember also, the price to pay in those days was unbelievably had upfront load charges at its worst, at its most abusive, as high as eight and a half percent.
Daniel Grioli: Really?
Denise Selden: Yes. The SEC stepped in and there were two major I’d say columns of abuses. One were the upfront charges. There were no trails in those days, but we partly got trails as the way of squeezing down upfront charges. That was one whole set of abuses of locking people in. They’re being forced to pay very large upfront fees. But the other was the commission schedule was absolutely set and there were no volume discounts. So, you know, if the charge was $30 to trade a hundred shares of U.S. deal, then it was $300 to trade a thousand shares and so on up.
Denise Selden: So, the institutional brokerage business just soared until again another infamous episode but what’s called May Day and on May Day, that was when the SEC stepped in, forced the stock exchanges to produce volume discounts, and there was an immediate implosion of about 80% in terms of the brokerage fees being paid by the institutions. So, it wasn’t abusive. It certainly was an abusive, and unregulated, and in those areas not sufficiently regulated because this was all new. You see, they’re either been people trading for their own accounts previously or high net worth into the jewels of somewhat knew what they were doing but also they were trading in lower volumes than institutions. Once mutual funds took off, the institutional world was formed and a new set of regulation came in but in steps.
Daniel Grioli: Okay. At this stage, when May Day took place, were you still on the broking side or had you moved to asset management?
Denise Selden: May Day was 1973 and I had moved over to work for what was then State Street Bank. Again, we’re back on the second floor at 19 Congress Street with the fire escape connected to Fidelity and we had lots of people from this institutional world flowing through my little world as the head trader and one of them worked at State Street and said, “You seem to know a lot for someone so young. We need someone like you. We’re becoming more of a trading organisation. Wouldn’t you like to come and learn institutional investing from the side of representing large pools of money,” which was a bit of grandiose promised because State Street Bank in those days did not have large pools of money, but they were aspiring to it and they were tiptoeing in to seeing this change, the combination of being a custodian bank, which they were because they were primarily a trustee bank, and they saw that taking their custodian base and using that as a way to expand in this new institutional world could help them.
Denise Selden: So, by the time May Day struck, I was very conscious of what was happening in the industry because I’d come from the trading side but I was a fledgling new institutional analyst. I was assigned to cover the utilities industry that was considered good, sound, fundamental investing and I was in the research department at the State Street Bank.
Daniel Grioli: Compared to when you started out, obviously, a recurrent theme through our conversation has been the big changes in technology and how that’s driven access to information, cost, and all these things. If you had to contrast the way you did equity research when you started out covering utilities to compare it to how you do it now, for example, what do you think have been some of the biggest changes that have been brought about by access to information and technology? Do you think that’s impacted your ability to find opportunities in the market?
Denise Selden: Great questions because you know, at the time things are happening, your base of comparison is tending to be what are my other choices right now? You don’t tend to look on a historic timeline because, you know, I’m not going to decide on my information choices based on what was available to me in 1959. This is 1974. It’s the new modern world, so I’m going to just look across my horizontal current life. Again, I was fortunate to be in the midst of crisis. Young person for my age, I’ve had a lot of experience with markets already that I was very fortunate to have because of my family background and in being given in the utilities industry to look at, I was suddenly deeply immersed in balance sheets and going to regulatory hearings, walking up to Beacon Hill to the Department of Public Utilities to hear Boston-Edison testify. That was my new world was doing in … because you really didn’t have a sell side brokerage function that was doing it for you and a lot of it really was going around the companies, knocking on doors, writing up reports.
Daniel Grioli: It sounds almost like investigative journalism in a way.
Denise Selden: In a way, yeah.
Daniel Grioli: Chasing leads and a lot of leg work
Denise Selden: Yeah, and also dealing with an extraordinary breadth of … The other thing, because this was State Street Bank and it was an old line custody bank with a lot of family accounts that had been there for a hundred years, every analyst in the department also had to cover a number of private companies and I remember being as much fascinated by these as anything else I had dealt with. Here I’d gone from short selling Memorex for my uncle as his clerk and now it’s 10 years later and I’m driving the car two hours to a little factory in Massachusetts that made boot tacks. I remember having read the filings the day before. I wasn’t exactly sure literally looking at my own boots and yeah, they really are. It’s boot tacks. Of course, what it turned out, the key issue there was that the boot tack factory, still owned by the [Whiton 00:40:07] family, was located on 200 Acres that was now adjacent to the Mass Pike and to an interchange. So this was really real estate valuation exercise in addition to looking at the current market for boot tacks, which certainly had been dwindling each year.
Denise Selden: But investigative journalism, has you say, it had all those aspects and it’s tremendously exciting because of it, although I can truly say, I don’t want to be melodramatic about it, but Tim and I went to Milford Tuesday afternoon. We went to Waters Corp, which is the world’s leading company in chromatography and spectrometry for the pharmaceuticals industry and has been a core Massachusetts based company for 30 years with dominant market shares around the world. It was the same sense of excitement of wow, they’ve managed to keep it all together. Reasonable balance sheet, growth in the high teams, self-financing.
Denise Selden: So, technology did come into play. The growth of the sell side came into play more in those late ’70s years. Again, improvements in telecommunications. We all forget when did Quotrons appear. The equivalent of a desktop but it wasn’t connected to the internet. Again, it was connected now by a telecom cable, megabox, connected to the floor of the New York Stock Exchange, a separate big pipe that went into the American and that’s how you’d get quotes. That’s how you’d know what was good. But it was all numbers. You weren’t getting news tapes. News came on a separate, that was Thomson, Thomson Reuters. That was a news service. That came out of the newspaper business. Putting the two together into Bloomberg was actually still, you know, that’s an ’80s phenomenon.
Denise Selden: So, the evolution of where we got our information in, and how clever, and how energetic were you about patching all this information together, that still had value and value to the firm. When I started at State Street, State Street had also just started the first global fund but it was all ADRs. So, it was global only in the sense that it was large companies, mostly UK, Swiss, Nestlink, of course that registered into the U.S. information system by having ADRs to trade.
Denise Selden: I remember being also totally thrilled with that assignment because having first trained on public utilities, I survived the first Arab oil embargo. You think you own something that’s an 8% dividend pay or high interest period forever and all of a sudden, Con Ed has totally flattened. But having trained in a quite domestic and local business and suddenly being told you’re assigned to the global fund and that opened up the whole world of doing business outside the U.S. and that set of information sources was again not at all established and that was reading what companies would tell you. The primary source was through L’Oréal and Nestle, British Petroleum.
Daniel Grioli: So, now that we do have all of this information and it’s only a click away, where do you think analysts and portfolio managers can find their edge?
Denise Selden: Well, I’ve been increasingly concerned about not saying it shouldn’t exist but thinking about how to coexist and prosper side by side with quantitative trading because quantitative trading has rules that are quite different from fundamental trading. Take a really simplistic example, but if the rule is sell anything that’s gone up 19%, absolutely regardless of its cash flows or why or maybe the rule is sell by half, sell 50% of anything that’s gone up 10% and 100%. So, you get a lot of activity in the market where you have to double down and have even greater conviction in a long-term scenario and yet, how do you keep yourself from being shaken out?
Denise Selden: I have just been thinking about that endlessly because especially in the world of small caps, we’re getting overall market vics is down in the last several years, but individual stock volatility, as defined by standard deviation in small cap world is up dramatically. So, how to not get shaken out and it’s I think not more information out of the financial statements, it’s more because price feeds and financial statements are the two pieces of information that are ubiquitous, that are just totally available to everyone. What are the things that are not available? It’s a knowledge and confidence again in individuals and managements.
Denise Selden: Back to your comments about some of the differences between the industrial bond or Walmart, I often would do the business school recruiting for us when I was at Lehman and people would be struggling between that did they want to go into fixed income or did they want to go to equities. I would try to point out that in the fixed income world, you’re looking at a series of cash flows and your conviction has to focus on will the expected cash flow be realised or not? Because it could be terrible company. It could be an industrial that’s very cyclical, but you could still absolutely make the expected cash flows and make the expected return on the investment.
Denise Selden: For an equity, you’re looking at a future series not of cash flows but a future series of management decisions. It’s absolutely open-ended. Totally open-ended. I mean, there’s not even really the sell side and company guidance. They make artificial midpoints to this, but conceptually, it’s a series of management decisions so you could argue well, it would be macro. Yes, there will be macro pressures on it. But really, you’re buying management in one case and you’re buying expected cash flows in another.
Denise Selden: I’ve tried to focus more on feeling that I really know what management wants. Do they want steady, evergreen growth? Do they want to plant a flag and control the future 15 years from now by planting a flag and the only [inaudible 00:48:41] puts the resources today, you think of an [inaudible 00:48:43] as an example of that? It’s not a bad strategy, it’s just a different strategy. So, that’s been one whole area that I think about and find very difficult. The other is to try and find competitive dynamics and to make a first cut around is this an attractive area? Is there underlying unit growth? Is there enough demand growth that pricing is relatively protected? From there, use a litmus a test that is not needing prior estimates or forecast but has more to do with competitive dynamics. Did my people gain share or not?
Daniel Grioli: That’s very interesting. I was very interested to hear you say that you look at company management as a flow of decisions because that’s actually quite similar to how I look at fund managers. Most people in the industry rely on various quantitative tools to break down the risk factor exposures or the attribution. I always took the approach and looking at a portfolio as a portfolio of decisions.
Denise Selden: Yes.
Daniel Grioli: It’s a group of buy, sell, hold position sizing decisions and the reason I did that was maybe it’s my background in psychology, but behaviours tend to persist. We are creatures of habit, so I always felt you got more reliable insight into what might happen in the future if you look at things that persist like behaviours. It’s interesting to see that you have a similar approach to understanding companies.
Denise Selden: One of the things I’ve learned and maybe more in later years that earlier years is even if I’m rushing into a company meeting and maybe I have been remiss in looking at the balance sheet, but I’ll always pound Bloomberg for that extra 60 seconds before I go into the meeting and look at the top three officers and really focus on how long they’d been at the firm, where they came from. The most interesting situations are often to focus on a recent change where you see a situation, you’re suddenly looking at and say, “Wow, all three of those top officers were put in place four years ago at the same time. Hmm, must have been a board revolt of some kind.”
Denise Selden: Then the first things I always want to ask them in the meeting is, “I’m sorry, I haven’t met you before, but I see that you all started together four years ago. What made that decision?” It’s rather than letting them focus on current operations where they’re all rehearsed for that, but it’s to get into the psychology of what will you put in place to do? Are you still doing that? Do you feel happy? Presumably, your masters, the people who put you there with the board, are they still happy?
Denise Selden: For example, Daniel, you and I went to an interesting but I didn’t find particularly investible meeting with a small pharmaceutical company yesterday and almost I think delaying in a way that was very frustrating to them, I really wanted to know about the backgrounds of each one of those people as to why had they come together to do this. It was fascinating to me that the lead guy who’d come out of Novartis, I’m sure it was a very fine and successful bench scientist, had really changed his life to leave the big mothership, go off, try to found an independent, higher growth, small pharmaceutical company, went down to different dead ends before he’d ended up with this product, which seems to have legs, but it actually has nothing to do with this scientific background.
Daniel Grioli: He was a neuro scientist working in dermatology.
Denise Selden: Exactly, and as we later figured out in listening to each of them, the whole reason he’d ended up in dermatology was that another specialty company in dermatology had failed because it was sold off to an Indian generics company. The sociology was a no fit. That whole team wanted to jump ship and go to a more hospitable environment. This guy had the structure of a small pharmaceuticals company, so he threw open the door and said, “Okay guys, come in here,” and they’re now raising more money by taking it to a new market at the U.S. So, I found that history, and sociology, and motivation of why these people were sitting in front of us trying to raise $30 million for a new approved product, infinitely more interesting that the prospects for the product. Secondarily, I think the prospects for the product were terribly narrow and couldn’t support the infrastructure that they’re building. But that was almost the second ground of analysis.
Daniel Grioli: Yeah, it’s very interesting to hear you say that and you mentioned that you spend a lot of time with smaller companies and Copper Capital is a small or mid account specialist. What would you say are the key differences between small and mid-size companies and larger companies? How would you compare them in terms of investment prospects and what you see? Did you think there’s more opportunity amongst the smaller, the larger, the mid-size?
Denise Selden: Wow. You know, obviously, it will rotate and change over time. At this point in time, clearly, some of the most exciting and open-ended growth characteristics are coming out of the very, very large because they’re creating massive, new infrastructures. I mean, what is Facebook about? Facebook is about a billboard, an open line that connects the world like everyone had a walkie talkie in his or her house. You wake up every morning, you come down, you have breakfast, you turn your walkie talkie on and you’re plugged into the world. You can talk into it, and broadcast to the world, and you can hear information back from the world. You can slice and dice it. That is an infrastructure that benefits itself by its scale. A competitor trying to set up a walkie talkie that connects the world that’s starting in just handling two cities is disadvantaged.
Denise Selden: So, we have a lot going on with mega entities, mega infrastructure development in the world today that is a very investible theme and again, Facebook is so easy to point to the cloud portions of Amazon more than even the shopping portions – 10 Cent, Alibaba, Universal Payment. I mean, there’s a lot going on in parts of large cap and yet, there are some other large cap organisations by sector that are suffering terribly from their mere size and the large pharma again because it’s a scenario that I know very well. Large energy that’s stuck with having to decide between what are viable long-term assets versus not viable long-term.
Denise Selden: So, some parts of large are tremendously exciting and I hear a lot of small cap managers who automatically turn their backs because the law of small numbers is so much better that you can always grow small. No, not necessarily. On the other hand, the ability to financially exploit single innovation and again, technology around these new insights in chemistry, new insights in molecular transfer on the semiconductor site, those have been better incubated and come to us in the public markets on the small cap side.
Denise Selden: Just think of the extraordinary size of Intel, and Samsung, and the cash flows that come from being in every device in some way and some part of memory, but what was the last breakthrough technology that came out of even one of them? They’ve improved their own base technologies but they haven’t given us the new that has come from an arm or even from the crazy throw-money-at-everything mentality on the soft bank that just hoovers around the world looking for small new. So, I’m afraid I’m going to punt on that answer and say there are some great large companies and there are great ways to make money in small. I wouldn’t be biased by size.
Daniel Grioli: That’s interesting to hear you say that and to talk about the different kinds of opportunities that inhabit the different parts of the market. We started out talking about how different it was back when you got started. People today in financial services and a lot of industries are much more cognizant of the benefits of diversity, much more aware of it. But we were chatting before we started recording that there still seems to be a disconnect between the awareness and the implementation. Do you have any thoughts on what might be causing that disconnect and how we can change it?
Denise Selden: Yeah, and I mentioned when we were chatting earlier that there’s a wonderful organisation headquartered in New York called Catalyst that tends to focus on career cycles, not just compensation but availability career paths for women in various professions and Catalyst has written a great deal about and I’ve lived the fact that in the ’80s, we really did break down a lot of barriers, we pushed to have women hired into training programmes in the big sell side firms. For example, the idea that women weren’t getting a chance at the gold ring at Goldman because the selection criteria were so focused on high-energy, aggressive men who would be traders or sales people. Women weren’t suited to those tasks was the bias and therefore, that’s why the training programme is 75% men or 80% men.
Denise Selden: So, we changed that a lot and the big investment banks brought in a lot of women. Women did well. No big surprise, but they did well until they were in their mid-30s. So, they’d do well for 10 years and be right there shoulder to shoulder and then they’d disappear. Some of it was disappearing into child bearing years and not wanting the hours, but some of it was just personal of saying, “You know, I don’t feel like going in and killing my colleagues every day. I’m really tired of that. I’ve killed a few of them. I’ve gotten up to the next step and I don’t know, it’s not that I miss them, but it’s just not really satisfying.”
Denise Selden: They went off to smaller organisations to more flexible time schedules, but the big firms had to ask themselves, “Maybe it isn’t enough to just open the door and let women in. Maybe we have to acknowledge that women have different goals, different processes and that’s part of the benefit. It’s not just that we were missing out on half of the raw material for investment banking. We were actually missing out on some different ways of thinking.” So, I think in that way, the diversity movement has moved forward a lot in the last 20 years. The diversity movement has not moved forward a lot in terms of outcomes though. Women are still facing in and out of the workplace. We’re losing women in their ’40s and ’50s. They are in unstructured entrepreneurial environments. They’re not part of the armies that have to be part, some part of the financial services industry.
Denise Selden: I’d have to say we’re still working on it. The diversity movement is alive and well. There’s consciousness. To some extent, it’s been … I’m not sure. I want to choose the right verb here whether it’s been diverted or diluted. It’s a much broader philosophical conversation that global politics having become fragmented and polarised around a lot of what is known as identity politics. If you’re out there fighting for parity for filling the blank of all kinds of specialties of how people define themselves by tribe, it somewhat diverted some energy from we’ll call it the pure. How can we make the workplace attractive for people who have different skills who are willing to work in large organisations by contributing their specific skill? How do we get away from the cookie cutter? It’s very hard in a political world where people at this point in time have various motives to want to be cookie cutter when it’s I want to be a pro-family conservative person or I want to be a progressive, no-boarders person. There’s a lot of self-definition that isn’t part of being cohesive and diverse.
Daniel Grioli: It’s almost like trying to engineer outcomes and it’s very hard to engineer some of these outcomes. Well, thank you very much for your time, Denise. It’s been a pleasure to reflect with you about your career, and what’s changed, and the opportunities that you’re still seeing in the market, and I’m sure like most investors, you never really retire. Maybe come in a little bit less often in the office but I don’t think investors every really retire.
Denise Selden: Yes. Well, it’s a very bittersweet feeling. I’m going to miss it immensely and on the other hand, there are a lot of unknowns out there and at some point, you get to an age and a point of life where opportunity cost weighs more heavily even if you can’t define the opportunity, so I think that’s where I am. But thank you for the chance to talk about my past.
Daniel Grioli: Sure.
Denise Selden: Actually, I appreciate your interest.
Daniel Grioli: Well, I’m sure we’re all going to enjoy listening to it as well. Thank you very much, Denise.
Denise Selden: Bye-bye.
About the [i3] Podcast
The [i3] Podcast is a conversation with some of the leading institutional investors around the world, discussing their philosophy towards investing, in particular towards portfolio construction and investment strategy. The [i3] podcast is available on iTunes, Google Podcast, Spotify, Stitcher or your favourite podcast platform.