The Warren Buffett Advice That Fidelity’s Will Danoff Didn’t Take

Amy Arnott: Hi, I’m Amy Arnott, portfolio strategist with Morningstar. We’re here with another excerpt from our interview with Will Danoff, manager of Fidelity Contrafund FCNTX, from this year’s Morningstar Investment Conference in June. In this excerpt, we’ll talk about why he didn’t take Warren Buffett’s advice not to talk to company management teams before investing.

How Reg FD Changed Active Management

Christine Benz: I wanted to ask about meeting with management. I know it’s always been a big part of your process. You were just doing it today. We talked to Charley Ellis [founder of investment consultant Greenwich Associates] within the past year, and he referenced Regulation FD [Fair Disclosure] as a game changer for active management, just saying that everything changed when fund managers didn’t have that access that they once did. Can you reflect on that? Was that a pivotal event for you and your process?

Will Danoff: That’s a very good question. Reg FD has changed the communications for companies. I feel, Christine, that the information we want is just to understand the business. We’re not interested in anything that’s certainly material and nonpublic, but even we just want to know what the company is sharing and how they view their own business. So, it’s changed a little bit. It’s probably changed some of these short-term investors, but at Fidelity, we’re interested in long-term investing. And Peter used to always say the big money is really made in years 4 and 5. So, get to know management, understand the ROI of their business, and why they are so profitable, why they’re generating a lot of shareholder love, and what the value proposition really is. Most stories come down to three or four bullet points. It’s not anything that management can’t talk about because of Reg FD.

I mean, when I first met Warren Buffett, he said, “If I were you, I wouldn’t talk to any CEOs.” I was like, “That’s what I do.” And he had a good point. He said, “Everything’s in the Ks and the Qs.” And it is funny after I go to a meeting and I’m sort of saying, “I got to dig in a little bit here, and I look at the last presentation or the 10-K, and it is all there.”

But he also made the good point, which is, and this is probably a pre-Reg FD, but it’s still applicable to all investors. Any good CEO is going to tell you exactly what they think you want to hear. And so, you have to be very careful. Management’s coming around. Are they trying to goose their stock so they can do an acquisition? Are they goosing their stocks so that they can sell some stocks? And so, what you want to do is take what the market gives you. And Reg FD probably has given us less information, but it’s still out there. And in many ways, it arguably could play to Fidelity’s strengths and the other big firms’ strengths because we do have industry expertise, and we can hopefully use our mosaic of going to industry conferences, going to talk to customers, talking to distributors, talking to other industry players and government officials, and this sort of thing and piece it together.

But I’d say to Charley, I don’t know Charley, but I’d tell him he should work harder. Hard work can solve a lot of problems, but I don’t want to have any information I shouldn’t have. That can restrict us. But management, as I said earlier, it’s remarkable what they do. And so, I think one of my value-adds is to look back, like Terry Duffy’s been running CME for 20 years. I mean, it’s just remarkable what he’s done. And he actually has been an outstanding capital allocator. He bought Nymex, and he bought in, I think, the CBTs.

Anyway, Jensen Huang, when Jensen reached a trillion market cap, we happened to be doing a tech trip, and we were out there, and I had the insight: We can’t just show up and say, “Thanks, Jensen, you built a trillion-dollar company.” So, I had one of the junior analysts use the early AI applications to make some AI art for him. And it was like Jensen as an astronaut and Colette [Kress], who’s the CFO, was the co-pilot, and it was the rocket ship Nvidia. But 24% compounded growth for 25 years, you just don’t see that. That’s upper echelon. I mean, it’s remarkable.