How the demise of Kodak shaped the way this fundie invests

Through the 80’s Kodak was the second most valuable brand in the world. In 1986 Wayne Peters, aged 26, launched a network of Kodak Express stores on the East Coast. In 1989 Canon brought out the first digital camera, it would prove to be highly disruptive and terminal for Kodak. 

Peters is now Chief Investment Officer at Peters MacGregor, an Australian based global fund manager. In this interview we hear about one of the least conventional paths to professional funds management that we’ve encountered. Peters shares his early experience as an business owner, how this has shaped his approach to investing and the value he gets from having mentors.

Photo: Wayne Peters, Chief Investment Officer, Peters MacGregor Capital 

What’s the story behind Peters MacGregor? 

I didn’t take the most conventional path into funds management. I started my career in book retailing turning squash professional and moving to Germany for 4 years with the aim of going into retail. I had no idea what type of retail business I wanted to start until I returned to Australia. When I came back, ‘one-hour photo processing’ had come out and was revolutionising the photographic industry so I thought that sounded good. I really had no idea about the metrics or the economics of the business, but I got in, built a chain of stores and developed a good relationship with Kodak. By 1986, we had launched the Kodak Express brand, which became very successful. 

Throughout the 80’s, Kodak was the second most valuable brand in the world, but in 1989, Canon brought out the first digital camera. It was obviously a lot different to what we see today, but when that came out I thought, "This is not going to be good for my business.", so I sold the company, half to Rabbit Photo and half to Kodak. 

Why weren't you more sceptical about the arrival of a new technology? I could imagine there would have been a lot of people saying, "What are you doing?" 

In hindsight, new technology is always obvious, but at the time it's just not. When we're analysing companies today, understanding the competitive landscape and the advantages a business has is really important in determining what your returns are going to be. We are long term investors, so we're not trading on the next quarter's earnings report, we’re buying today and expecting to hold for at least 10 years before we garnish the returns.

In today’s environment, technology is changing quicker than ever, so having a feel for how much technology impacts economic models is really very important. 

I was 23 when I started the business and I had no insight as to how technology could change so quickly. In those days the technology was changing much slower than it is today, but as soon as I saw the first digital camera I thought, "there goes the silver halide technology business." Kodak didn't realise that, and what was interesting was in 1991, Bill Gates came out and said Kodak was toast. Of course my call was way too early, and there were other reasons why it was a good time to sell, but Kodak eventually filed for bankruptcy in the mid-2000s. When the iPhone came out and digital camera photography really took off, it just killed the silver halide business. 

So you sold your one hour printing businesses and was it then straight into funds management? 

No. I then took the pool of money I had and I started investing in a passive portfolio of international shares. Then through the 90s, friends came to me and I started managing their money in exactly the same way, through a concentrated portfolio.

Today we run portfolios between 20 and 30 positions, which in our view, provides adequate diversification.

Finding great businesses that are undervalued is always a big challenge, but when we do find those opportunities we want to put a meaningful part of our portfolio into those names. 

So that's what I did through the 90s, and as the number of clients grew, we decided to register as a funds management service provider, forming Peters MacGregor Capital Management in 1999. 

So at 19 you were a squash professional, at 23 you started your own business and by 1999 you were running your own investment company. It's a great story but where did you get the discipline about the numbers? Where did the confidence come from? 

All of my experience in those early days came from actually running businesses. The lessons I learnt with Kodak Express was instructive and important to how we view and analyse a business now. After selling the company, I went back to do my MBA and took on mentors that have really guided us through our whole approach. They were the investing legends, the Ben Grahams, the Phil Fishers, the Warren Buffets of the world. I made a conscious decision to spend time with people of that ilk, to understand how they selected businesses. 

Their whole approach resonated with the experience that I'd had. I was managing a passive portfolio of international shares, but I also got involved in a turnaround, the oldest horticultural company in Australia called Amgrow. I bought it out of receivership, turned it around and sold it on to CSR. I was also involved with a couple of public takeovers. Rabbit Photo was one, Freedom Furniture was another one. So I had hands-on business experience of analysing accounts and understanding what the competitive landscapes were. 

And frankly from my experience with the photo business, I always really revelled in understanding what the strategic landscape, competitive landscapes were of these businesses. I wasn't so good at actually managing people.

So I think if you gravitate or spend time in the areas where you're most passionate about, that's where you'll have the most success.

Managing people just wasn't my forte. I loved understanding the competitive landscapes and how businesses compete on a day-to-day basis. That’s what led me to the funds management business. 

Are there any lessons that you've picked up from investments that haven't worked? 

Well your big lessons are always learned from your mistakes. The first lesson I learned was investing in businesses that have a lot of technology that don't have a monopoly or some form of patent control. What happens is technology spreads very quickly and the middleman ends up holding a reduced margin. As their margin shrinks over time, the big winner is the end consumer. So it informed my view of where I wanted to invest my money. From that point on we invested in businesses with very little technology. That viewpoint has changed somewhat; we've invested in companies that are technology-based companies now. But only those that have very defined competitive advantages like scale and other strategic advantages that come from that scale like first move advantages.  

Can you tell me about the role of mentors and who you've learned from? 

It's a really good point. I think everyone would be well-advised to select early in life mentors. I mean our parents usually are our number one mentors because they're the adults that we have the most contact with when we're young. But if you can find the areas that you're passionate in and then find people that have been the leaders or successes in those areas, it has enormous value. 

We spoke earlier about mistakes and being the largest learning curve. I mean when you actually make the mistake and it costs you money you remember those mistakes and you dig into why you made those mistakes. As opposed to when you have successes, human nature is such that you tend to just ascribe that success to your own ability, when in fact luck plays a major role. 

When you make mistakes you're much more interested to understand what the hell went wrong. So if you can learn how to make the right decisions vicariously through other people, people who have led the industries that you're interested in, that's enormously valuable. 

And they don't have to be alive. I mean Ben Franklin was one of my early mentors, he was one of the four founding fathers of the U.S. And his life and lessons that he learned, and the way he approached life, and the discipline he brought to his daily life was just a tremendous lesson. I instilled that very early on in my two daughters. I had them recite the 13 daily rules to live by that Ben Franklin outlined and they can still recite those today. 

And of course when you do get into a situation where you've made mistakes or you have a difficult period in your business or your life, thinking about how your mentors would tackle that situation's' usually extremely helpful. And it gives you the confidence then to make smart decisions when you're under pressure. Everyone can make good decisions generally when things are going well, but it's when things go against you that it's much more telling and challenging. 

If you were to mentor yourself now back in your early days, purely from an investment perspective, what would be one or two of the key lessons or ideas that you would share? 

Well the number one thing we look to is timeframe. We think we have a major advantage thinking long-term because the market is inherently short-term in its thinking. That's quite an obvious subject and you hear about that a lot but it still surprises me how easily people get tied up into the miniature detail on a day-to-day basis and they just forget the long-term nature of it. 

One of the big lessons I learned from running my own business is that businesses don't go up in a straight line, businesses are dynamic, decisions you make today and tomorrow will impact the outcome. And as long as you can find businesses that have strong balance sheets with smart, rational managers, the chances of their success are greatly increased. So that timeframe arbitrage and that type of framework in how to think about businesses first, and then making investment decisions second, would be the number one lesson I'd try to pass on.

About Peters MacGregor

Peters MacGregor offers investors access to an undervalued portfolio of world class businesses with dominant market shares and bright prospects. Find out more