To rewind seven or eight years, as a preface to our conversation today about primary research methods, when we first met, we got on the phone. You had just taken a job at a hedge fund, and you were also in the process of discussing and learning about negotiating for a role at the firm I was working at, at the time, Third Bridge.

You asked me, "What does the day-to-day look like?" I said, "You get to read for four or five hours a day, and you spend the rest of your time speaking to operators." I don't think you quite believed me at the time, but this whole notion of spending a lot of time in the field got you interested.

And an unlimited research budget as well, basically.

An unlimited fieldwork budget.

For whatever companies you want too, not having a portfolio manager telling you which companies to work on. You can choose what companies to work on. 

So, freedom over your time and an unlimited fieldwork budget. Something in you obviously sensed that there was something worth investigating and rolling the dice on. When did you realize the power of spending a lot of time in the field with operators? When did that understanding sink in for you?

I'm not sure exactly when, but I've always been fascinated with how the world works. What better way to learn about it than through those actually building or doing things? It didn't necessarily have to be business; it could be in sports, going straight to the primary source of those playing or executing the sport. I've always been interested in learning about how the world works through business. It's an interesting combination of psychology, sociology, mathematics, and understanding human nature.

I've always been interested in reading autobiographies and learning about people actually doing things. When I first started doing research in my early twenties, I focused on reading 10-Ks and investment materials. But I never fully understood the power of primary research until I started professionalizing how I speak to operators. Everyone knows that if you listen to a great CEO or someone who's built something for 30 years, it's impressive. There's a big difference between speaking to current executives and former operators.

When I speak about primary research, I'm mainly talking about the art of conversation with former operators and professionalizing that process. Everyone can talk to management and get excited. I have a couple of stories of when the penny dropped. At Third Bridge, we would interview former executives live. Some companies like Third Bridge and Guidepoint still do that. Hedge funds and private equity funds, PMs, and directors would dial in and listen if they had a big position in the equity or debt.

One of the first interviews was on the Amazon Fulfillment Network. I can't remember who it was with, but it was simple. I wanted to know how this worked back in 2016 when they started spending capex and building it out. I learned about how the fulfillment network was built, how a unit flowed through it, and what that meant for cost, speed, and competitive advantages. We had over 100 attendees for that call, and I was shocked, thinking, "Don't you guys already know this?"

That was an example of how powerful the work could be if done simply from first principles. You have to get the right executive and ask the right questions. Another example was New Look, a UK mid-market fashion retailer. Private equity had flipped it many times, and it was overleveraged. The bonds were trading in the eighties, and the guys that owned the debt were worried. We got on a call with a former CFO and discussed the cash flow dynamics, working capital profile, and challenges with inventory management.

After the live call, we received emails from private equity guys who owned the debt, slamming us because we were impacting bond prices. Those two examples stick out in my mind as showing how powerful this work can be if done properly. We can discuss the layers involved in choosing the right executive, structuring questions, and listening. You probably remember more than me about those New Look and Amazon calls.

I remember the conversations with Alastair Miller and Nadia Shourabura. I noticed your enthusiasm after that chat with Alastair Miller. It was actually the first interview you conducted when you joined Third Bridge, within your first week there.

Yes, it was like jumping straight into the deep end.

Exactly. We arranged it so that there would be an audience on the call, given the topic and the nature of the executive. It was about selecting someone truly appropriate. Your style and approach to work greatly influenced me and changed my own working style.

Your willingness to examine a system, read everything you could about it, and develop working hypotheses on how the system functioned, including its structure, business model, and unit economics, was impressive. You methodically asked simple questions early in the process. Later, you would delve into nuances with specific individuals and angles.

The surprising power of methodically working step by step with operators to understand how a system works is something we both find remarkable. It's astonishing how often this process is overlooked by people who make assumptions or simply accept a management team's perspective, which is often well-intentioned. However, senior management frequently operates at multiple layers of abstraction from the actual process.

That's why I mentioned earlier that interviewing a current management team or having a meeting with them is very different from speaking with a former executive. The narrative, framework, psychology, bias, body language, and tone are all completely different. Appreciating and navigating these biases is an art in itself, which we can discuss another time.

Looking back, it seemed intuitive to me. I didn't know exactly what I was doing back then, but it was how I liked to approach it. Over the years, I've thought about professionalizing it. It's not too complicated, but it's difficult to execute. At a high level, everyone does primary research to understand and build knowledge, eventually leading to an investment or decision. However, the approach differs greatly among investors, and fieldwork varies depending on the opportunity and thesis.

My approach is simple but can be hard to execute. The first step is to learn from first principles, a methodical approach that requires humility. It's about understanding the fundamentals, going down to the unit level, and grasping the operating rhythm, culture, sales process, and people involved in a business or industry. Once you have that framework, you move on to seeking disconfirming evidence and building conviction through it.

A significant part of my work is still exploratory and involves continuous learning. For example, I did a call in 2016 on the Amazon fulfillment network, which is completely different today. I keep updating and learning. After years, when you have a deep understanding of a space like TransDigm, Amazon, or Constellation, you can focus on niche areas or seek disconfirming evidence of very specific topics, such as analyzing pricing strategies when a short report comes out.

We can discuss the incentive structure in the investment community and why it makes working in a certain way challenging later on. But if I look back on the process, it's really about two things; it's learning from first principles and then building conviction/seeking disconfirming evidence.

I want to discuss the purpose of fieldwork and how we've come to think about it. Many people talk about confirming assumptions and validating a thesis. It's a common approach to use primary research services to facilitate conversations. You've mentioned former executives, but we also have suppliers, distributors, and a wide variety of customers to consider. Let's delve into the purpose of this work. How do we, at InPractise, define the purpose of our work?

As I mentioned, we're in a unique position right now. For us, it's really about learning how the industry operates from first principles, which involves a significant amount of work. Many challenges arise from the structure of a fund, the nature of markets, or investor psychology, which can lead people to think short-term. This skews the research process towards quickly confirming certain ideas or opinions without doing the necessary upfront work to understand how a business or industry truly functions.

For us, it's about learning from first principles and using this as a gateway to genuinely understand the mechanics of an industry, the drivers of unit economics of a product or business. We aim to let conviction and insights emerge naturally and organically, rather than forcing our ideas or opinions through the process, which is where potential mistakes can occur.

For many years, we encountered and dealt with the temptation to rely on the idea of an executive who could help us achieve the most in the least amount of time. Early in our careers, we had a bias towards speaking with reasonably senior people who could provide a bird's-eye view of various aspects of the system.

However, we quickly realized the significant limitations of working with senior people early on. Instead, if you follow a first principles methodology, it's more effective to have very specific conversations about particular aspects of a business with the person directly responsible for the process. This is preferable to speaking with someone two levels above, who might be eloquent and willing to share their thoughts but are not directly involved in the process.

There's an appeal to senior profiles due to their titles and perceived authority, but the real value lies in finding the person responsible for the work. Spending time with them, as you mentioned, is crucial. These calls might take half an hour to an hour on a specific process, and you might not come out with a groundbreaking insight immediately.

Interestingly, through this process, you can get closer to more durable insights, although they are unpredictable. This shift in thinking involves being willing to work with very specific people on very specific questions, reducing the ambition of the call's scope. Could you elaborate more on that?

Well, I think it comes back to the philosophy of the research process. If you're truly trying to understand from first principles, take bioprocessing, for example. Everyone knows it's mission-critical, sticky, and gets spec'd in. But what does that actually mean? Are you willing to delve into the manufacturing process? It involves upstream and downstream equipment, reagents, and different forms of equipment. Danaher owns various products across that process.

You can look at the market share and economics to see that it's sticky and profitable. But how far are you willing to go back to truly understand that process? Many people might think it doesn't matter because it’s sticky and they're going to own it through this cycle. Everyone's talking about destocking that's going to turn, and maybe that's what they care about. That's what the companies are discussing.

My approach is to understand exactly what these products are, how customers use them, and what the FDA approval process is for chromatography, for example, which is a core part of Danaher's portfolio. Trying to really understand the durability of chromatography resins and filtration equipment and consumables. This helps me build conviction in any thesis.   

There are different reasons why this approach may be uncomfortable. Firstly, it's humbling and difficult to go back and understand the chemistry of these resins, how they manufacture monoclonal antibodies, and how they bind to certain proteins. The intellectual property creates barriers to entry, making it difficult for future competitors to take share from Danaher.

It's challenging because you're constantly reminded of how much you don't know, which can be uncomfortable. It's also easy to get lost in details that don't matter. Part of it is a philosophical question of how you approach research which is also a function of the duration of your capital and investment methodology.

If you're looking to own these businesses for one to two years, maybe focus on destocking. Most people are paid yearly or get bonuses annually, or they might raise more money after two to three years and switch out of Danaher. But if you're looking for an asset or industry to own for decades and compound over a long period, it's worthwhile to understand how these products are spec'd in and why they're durable at a deeper level.

That's the approach we take. However, as we've seen over the years, much of the industry focuses on shorter-term aspects and assumes chromatography resins are durable because they always have been. That may be a good rule of thumb, but it isn't always reliable.

There's something that strikes me more deeply over time, which is how fortunate we were early in our careers to have a research process that was structured in a purely open-ended way. At Third Bridge, when you joined the team, you weren't mandated to come back with a buy or sell recommendation or a conclusive view after a month, two months, or six months. You could just go out and learn, unleashing your curiosity. This fundamentally affected how we invest our own capital, creating a system rooted in learning. Sometimes there might be an insight, sometimes not, and an investment decision is made when something becomes an obvious opportunity. This research-first process feels really important.

Yes, but it also depends on your psychology. You can do research and still think you know the answers. The biggest risk in our business is authority bias. You might speak to one person and suddenly consider yourself an expert on bioprocessing, even if you've never sold or seen a resin. I've thought a lot about this, and maybe it's genetic, more nature than nurture. Can you be unemotional about this and not attached to your ideas?

Unemotional about how much you don't know, and not be embarrassed about it?

Yes, I think you're partly right. The environment we were in didn't require us to allocate capital, but it’s also partly nurture, partly nature. There's a genetic disposition to not being emotionally attached to your ideas, being willing to look uninformed to understand. The benefit was that we weren't in an environment where we had to allocate capital, so we didn't feel pressured to have answers or defend a $100 million investment. Early in our careers, this was helpful. But overall, it's probably genetic—being hardwired to learn, be objective, be willing to be wrong, and have an open mind. It's really difficult.

To be clear, I feel comfortable speaking for both of us when I say we want to know. However, the journey to understanding is more than just wanting to know. The process we've developed involves honoring an open-ended research approach. It's about discovering how something works and realizing that you can't force it. There is a lot of information you have to earn, similar to how an operator gains knowledge over decades of hard work. Insights don't just come from senior management. Occasionally, a management team might clearly explain how things work, but generally, you can't have the same level of conviction from just a high-level summary. So, while we desire to know, we must hold this desire lightly and remain humble.

It is a paradox, right, which makes it so challenging. You need humility to appreciate that certainty is elusive. Most people understand that nothing is ever 100% certain, especially in the scientific approach. Humility is essential to truly understand something from first principles. On the other hand, you need conviction to invest hundreds of millions or billions of dollars. This is where the paradox lies.

You need to have humility and an open mind to update your priors and keep learning and understanding an industry or a space. But you also need to have the conviction to make the investment. And not being attached to that is also quite difficult, because when you have the conviction, you want to tell your friends, you tell your investors why this company is the best thing since sliced bread and then pounding that into you whilst also keeping an open mind and keep learning, I think that's what's potentially genetic; strong opinions loosely held. It's difficult to do. And then we haven't talked about actually the process of that. Just doing an interview is not good enough. How do you structure the interview? How do you ask questions? How do you navigate that, to really have an open mind. It's an art form. It's very difficult.

For today, this serves as an introduction to our community, many of whom are already familiar with this approach. For those who aren't, it's an introduction to how we think about our work. In the next episode, we'll discuss the details of our work, how we structure projects, ask questions, and collaborate with our team at In Practise. We'll have some fun with that next time. Thanks for listening.