2018 ANNUAL INVESTOR DAY MEETING

PLAZA HOTEL, NEW YORK CITY

MAY 18, 2018
 Ruane, Cunniff & Goldfarb Annual Investor Day
Plaza Hotel, New York City – May 18, 2018

Remarks have been edited for clarity and relevance. We have omitted the names of most questioners to protect their privacy.

John Harris: prepared part of our program in 40 minutes. We

Welcome, thank you for taking the time to spend a have a little surprise for Bob that is going to take
few hours with us this morning. I am going to do about 10 minutes and then hopefully we are going to
some very quick introductions, and then we can get have plenty of time for Q&A. We are going to try to
on with what I think and hope is going to be a really wrap up around 12:30 because we have to clear the
informative morning. You are going to hear from ballroom by 1:00 PM. In terms of content as we
our entire Investment Committee which is up here always have we’re going to limit the discussion to
on the chairs at the front of the stage, and you are stocks that are either in the Sequoia Fund or that we
also hopefully going to hear from every member of have sold out of the fund over the last year. With
our Sequoia Fund analyst team, which is also up on that, I am going to get us started and turn it over to
the stage here this year. As you can see, we have a my partner, David Poppe.
little bit of a different configuration.
David Poppe:
Starting with the Investment Committee, along with Good morning everybody. I am David Poppe and it
me we have Arman Kline, Trevor Magyar, David is good to be with you today. My presentation will
Poppe, Chase Sheridan and Greg Alexander. On the be very brief, just four slides. The first question for
Sequoia Fund team we have Johnny Brandt, Dan many of you, naturally is how have we done since
Foussard, Eileen Jang, Eric Liu, Will Pan, Terence we underwent our leadership change two years ago.
Paré, Pat Pierce, and Greg Steinmetz. We also have The big picture is that since we moved to our
our Acacia Partners and Wishbone Partners teams up Investment Committee structure in the second
here, and they include Saatvik Agarwal, Nishant quarter of 2016, we have gone along with the
Aggarwal, Girish Bhakoo, Peter Bin, Salina Claps, market, a very strong market, up about 35%. To
Yi Gao, Jake Hennemuth, Duncan Horst, Richard perform roughly in line with the index in a robust
Hwang, Antonius Kufferath, Stephan van der environment is about normal for us over our 48 year
Mersch, Scott O’Connell, Inder Soni, Nicole history. The return for 2018 through last night is
Schwartzenruber, and Mark Wallach. We also have ahead of the market and while short term results
our business leaders, Wendy Goodrich, COO, don’t mean much, it would be also normal for us
Patrick Dennis, CFO, Jen Rusk, Head of IR and over our history to outperform in a negative or a
Michael Sloyer, General Counsel. choppy environment, which I think we would mostly
agree we have been in for the last few months. We
I also quickly want to introduce our Sequoia Fund don’t put too much stock in four and a half months
Directors starting with our Chairman, Eddie Lazarus, of performance results but our underlying businesses
Peter Atkins, Melissa Crandall, Roger Lowenstein, are performing well and we’re quite pleased with the
Tim Medley, and—I am very sorry to say—for the start to the year.
last time, Bob Swiggett. Bob has served on the Fund
Board since day one—for 48 years. I am really sad My second slide is a reminder that we have matched
to report that today will be his final investor day and the market over the past two years while holding
Sequoia Fund board meeting. We have a little some cash. We are currently about 8% in cash and
surprise cooked up for Bob later in the program, but we’re comfortable keeping some dry powder in the
for now I hope you don’t mind if I just ask everyone current environment given the opportunity set we
to stand up for a second and give a hand to one of see. The point on my third slide is that since 2011,
our firm’s greatest friends. Bob, I just want to say the S&P 500 Index has been very strong, up about
you have devoted almost a half of a century to 113% but the index returns have come more from
supporting us through thick and through thin, and we expansion of the PE multiple than from earnings
are not going to forget it, and we are really going to growth. In fact, from 2011 through the end of 2017,
miss you. Thank you. the index more than doubled to about 2,700 but
underlying S&P earnings only grew 29%. The great
We are going to do our best to get through the majority of the return from the index over the past
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six years has been PE multiple expansion. into businesses that have much longer growth
runways. We have trimmed our exposure also over
Now, one could argue that the market may have the past two years in Berkshire Hathaway and TJ
accurately forecast the benefits of tax reform Maxx, two terrific businesses and very long term
because S&P earnings should grow in excess of 20% holdings in Sequoia Fund. We continue to hold these
this year but the market multiple on 2018 consensus two businesses but we feel better about holding them
earnings estimates remains close to 17.5x which is in the current sizes.
historically on the high side. Our belief is that over
longer periods, stock market returns are going to be I am going to close by repeating that we feel that the
driven by earnings growth, not the multiple. We feel current portfolio is characterized by high returns on
that our portfolio today consists of market leading capital, low levels of debt, strong competitive
companies characterized by high returns on capital, positions, and the potential for long duration
faster growth than the market overall, and they’re earnings growth that should be superior to the S&P
growing their earnings and sales at robust rates. If 500 overall. With that I will turn it over to my
Sequoia’s growth from here is driven by earnings colleague Chase Sheridan who is going to go into a
growth, we think all of us in the room will be pretty little bit of a deeper dive on the portfolio. Thank
satisfied. you.

My fourth slide is a snapshot of our top 10 holdings Chase Sheridan:

through yesterday with their weightings and the Thank you, David. Good morning everyone, I am
holding period in years. I want to make the point that Chase Sheridan. This morning I will update you on
we continue to be very long term owners of how the portfolio has developed over the past couple
businesses. In addition, we expect most of our more of years.
recent purchases to be in the portfolio for some time.
Over the past two years, we have added four new My first slide gives you a broad sense of the level of
positions that appear in our top 10 holdings: concentration of the Sequoia Fund portfolio at
Amazon, CarMax, Charles Schwab, and very different points in time. The first row shows the
recently Naspers which is a holding company whose composition of the portfolio on June 30, 2016. The
primary asset is a 31% stake in the Chinese company last row shows the composition as of last night’s
Tencent Holdings. We have also added significantly close. As you can see, we have pared the number of
over the past two years to our holding in Alphabet, stocks in the portfolio from 29 to 21. Many of the
the fund’s largest holding. Amazon and Schwab positions we eliminated were small investments that
have doubled from our initial purchases. CarMax has while attractive, were not so attractive that we
generated good returns from our initial purchases wanted to scale them up. With just 21 stocks now in
and has also performed as we would have expected the portfolio, we can put a great deal of research into
from a business development perspective. Naspers is each investment. This provides us with a foundation
a bit below our original purchase price which was for better investment decisions, which hopefully will
just in January. Most of the incremental Alphabet translate into superior performance. We now have
went into Sequoia Fund at about $925 dollars per more investment analysts employed at Ruane
share last fall about seven months ago. Cunniff than we have stocks in the Sequoia Fund
portfolio. I find that remarkable. Now, not every
Over the past two years we’ve exited some long held analyst spends 100% of her time on Sequoia Fund.
and very successful positions including Fastenal and About a dozen of us do spend all of our time on
O’Reilly. They are great companies but their growth Sequoia Fund and we have two new analysts joining
rates had slowed over time as they had gotten much us in June. So it is clear we like a deep bench in
larger and like the market, their PE multiples in research. Each position in our portfolio gets plenty
recent years had expanded. We think Sequoia Fund of attention, while still leaving our analysts with
shareholders are going to benefit from the changes enough time to find the next promising investment.
we have made to the portfolio over the past two
years; essentially a rotation from outstanding but While eliminating undersized positions allowed us
maturing companies that were growing a bit slower to focus our attention on the investments that matter,

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it hasn’t materially changed Sequoia Fund’s level of that means we aggregated the sales growth of the
concentration. We’ve always invested in a companies we own today in the weights we own
concentrated manner and we continue to do so them. I have also included the sales growth of the
today. Our top five positions still account for about S&P 500 Index for comparison. As you can see, the
40% of our assets while our top ten still account for companies in our portfolio are growing quickly.
about 60% of our assets. Those figures have been According to Wall Street consensus estimates, our
pretty consistent since our team assumed companies are expected to grow more than twice as
responsibility for the management of the portfolio. fast as the index for the next couple of years. We
expect them to grow considerably faster than the
So, where have we actually been investing your index for a long time thereafter. Our internet
money? The overriding theme is that we have shifted investments deserve much of the credit for this.
a significant portion of our investments out of Booking is expected to grow sales 15% this year.
companies facing technological disruption and Alphabet, 22%. Amazon, 33%. Facebook, 39%.
redirected the capital into the disrupters. Two years Tencent, which we own indirectly through Naspers,
ago, the only internet-focused company we owned more than 40%. Nearly all of this growth is organic
was Alphabet, also known as Google. We also rather than acquired. Meanwhile, the consensus sales
owned the software company Constellation, which is growth for the S&P 500 in 2018 is slightly less than
really a portfolio of software companies acquired 6%. Sales are an easy metric to use for apples to
and operated by a brilliant investor and CEO by the apples comparisons, but for the record, we expect
name of Mark Leonard. the aggregate earnings of our portfolio to outpace
sales growth over the next few years.
Today, we also own Amazon, Facebook, Booking
Holdings, which used to be known as Priceline, and Whatever financial metric you choose it is clear that
Naspers, whose value is largely driven by its stake in the intrinsic value of our portfolio is growing faster
Tencent Holdings, China’s dominant gaming and than the intrinsic value of the index. We believe this
social media company. Now it is important to note, makes time the friend of the Sequoia investor. So
we did not set out two years ago with a we’ve positioned the portfolio for superior growth,
determination to increase our internet exposure. We but did we pay something extra for it? We estimate
simply followed our long standing investment that our portfolio currently trades for about 20x its
process wherever it led us. We came upon these earnings power for calendar 2018. For reference, the
opportunities one at a time, with each idea sourced S&P trades at about 17x consensus earnings
and vetted by a different analyst. It just so happens estimates. Now I want to make it clear, this
that in our judgement, the internet sector offers some comparison is not apples-to-apples. Sequoia’s
of the most compelling investment opportunities in estimated earnings are internally generated, while
today’s environment. These companies share many the S&P 500’s estimated earnings are generated by
of the characteristics of a classic Sequoia Fund Wall Street consensus. We can’t estimate internal
investment. Each one of them is the very best in the estimates for the entire S&P 500, and even if we did,
world at what they do. Each one has a dominant and I don’t think we would necessarily match consensus.
growing share of its market. All but Booking are still But the point of this slide is that we believe Sequoia
controlled by young, brilliant founders who are Funds trades at a modest premium to the index,
likely to remain in place for a long time and who when measured by intrinsic earnings power and that
remain among the largest shareholders of their premium is shrinking fairly quickly as time passes.
businesses which helps to align their interests with
ours. All of the companies have good cash flow So we think we got a bargain. Now, it is something
characteristics and massive competitive advantages of a hidden bargain, because estimating the true
which we expect to persist for many years. earnings power of many of our businesses takes a
fair amount of work. The internet giants in particular
We believe that these investments have dramatically make a practice of sacrificing current earnings in the
enhanced Sequoia Fund’s prospects for future service of enhancing long term value. This makes
growth. This next slide details the sales growth of the companies look expensive when you measure
the portfolio as it is currently composed. To be clear their value using generally accepted accounting

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principles (GAAP). But focusing on the long term This is a really important point. If I leave you with
has undoubtedly been the right strategy and it has one thought, this is it. Again, pretax investment
benefited shareholders immensely giving rise to performance is the primary driver of your long term
valuable businesses like Waymo, Alphabet’s self- after tax return.
driving car effort, Amazon Web Services, whose
value could one day rival that of Amazon’s retail Okay, I’d like to also state up front that Sequoia
business and WeChat, Tencent’s “super app” which Fund remains one of the lowest turnover, most
has a dominant position in the digital lives of highly tax efficient vehicles in the active fund
Chinese citizens. We believe that once you properly management industry. I will share with you some
account for the extraordinary investments these data demonstrating this later on.
companies are making to grow their businesses,
valuations look compelling. The complexity This claim that pre-tax investment returns are what
involved in analyzing these businesses plays to our matter most, I would like to refine it in two respects.
strengths as a research institution and the willingness First, we have to acknowledge that it generally pays
of these management teams to sacrifice current to hold a profitable investment for at least one year
results in favor of future gains plays to our long term and a day in order to avoid realizing short term
investment horizon. capital gains which get taxed at ordinary income
rates. This is an instance in which it often makes
We have put quite a bit of capital to work in these sense to let the tax tail wag the investment dog, just
investments and while it is still too soon to judge the a bit. The second refinement is more subtle, but no
wisdom of that decision, the early returns have been less important. Let’s start with the premise that the
excellent. More importantly, these investments have only logical reason to turn over the portfolio is to
positioned Sequoia Fund to grow its look-through improve its prospective pre-tax performance. The
earnings power at a faster pace than the index for a issue of course is that the gains you realize when you
long time. turn over the portfolio are a sure thing whereas the
improvement in the portfolio’s prospective pre-tax
With that I would like to introduce my colleague, performance is not. The sensible thing to do given
Trevor Magyar, who is prepared to dazzle you with this reality is just to make sure you are getting well
an electrifying presentation on taxes! compensated for the risk you are taking. That is
exactly what we do. To the extent we sell one stock
Trevor Magyar: and purchase another, it is because we think the one
Thank you, Chase and thank you everyone for we’re purchasing is going to deliver significantly
joining us here this morning. For those of you whom better returns in the years to come.
I haven’t met, I am Trevor Magyar and as Chase
mentioned, I am going to spend a few minutes Now that we covered how we think about tax
talking about tax. I am not sure about the dazzling efficiency, let’s put some numbers to it. This slide is
part, but I will do my best. going to get a little more crowded but I promise it is
not that complicated, so just bear with me. I am
Tax is a topic we’ve addressed in recent shareholder going to populate this chart with three bars. Each bar
and client communications. But it is an important will show you the 10 year compounded after tax
one, and so it does bear some repeating. I am going return assuming a 7% underlying market return and
to flip to this first slide here. Before we delve into different levels of turnover and taxation. We’ll walk
the math of tax efficiency, we ought to be clear as to through each of the scenarios.
why exactly and how exactly tax matters. It is sort of
obvious that all else equal, less tax is better than So first bar, here we go. Here we have a high
more tax. But it is not quite that simple, and the turnover strategy, 100% turnover in fact. Further we
reason it is not quite that simple is that our objective are assuming that none of the gains are taxed at long
is not to minimize the taxes you pay. Rather, it is to term rates which, in case it is not clear, means all of
maximize your long term after tax return. The the gains are taxed at short term rates. And finally
simple fact is that pre-tax investment performance is we’re assuming no outperformance relative to the
the primary driver of your long term after tax return. market. The punchline here is that a high turnover

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portfolio produces an awful lot of tax leakage. significantly outperform the market at the cost of
Again, we are assuming the market delivers 7% some modest turnover, we should absolutely do that.
annualized, whereas this hypothetical portfolio only Let’s now look at how Sequoia Fund has actually
returns 4.6% after tax. done from a tax efficiency perspective. The pie chart
on the left shows how Sequoia Fund’s realized
You can think of this second bar as an index fund capital gains over the past 20 years break down
scenario – zero turnover, with all gains getting taxed between short term shown in red, and long term
at long term rates, and once again no shown in green. As you can see, almost all of
outperformance relative to the market. Actually this Sequoia Fund’s gains over the past 20 years were
is probably a little bit better than an index fund long term. By the way, this was also true in 2016
because an index fund has some turnover and some and in 2017. Moving to the pie chart on the right, we
modest fees but for our purposes it is close enough. can see that about 25% of the capital gains realized
The punchline here is that a low turnover portfolio and distributed by the typical actively managed fund
produces much less tax leakage than a high turnover in our Morningstar category were short term. As we
portfolio. That is because a low turnover portfolio already discussed, avoiding short term capital gains
minimizes short term gains and maximizes deferred is by far the single most important ingredient in a tax
gains. Significantly, of these two factors, avoidance efficient portfolio, and Sequoia Fund does about as
of short term gains is the much more important one. good a job as you can of avoiding them.
This graphical overlay I am adding now is an
attempt to illustrate this point. What it shows is that Next up is the deferral of gains, which, as we
simply avoiding short term gains accounts for 100 discussed, is helpful but not overwhelmingly so.
basis points of the total 130 basis point improvement This chart shows the holding period for 10 securities
in the after tax return from bar one versus bar two. that drove over 85% of Sequoia Fund’s net realized
Deferring all gains for this full 10 year period only gains since our leadership transitioned in 2016. As
adds 30 basis points to the after tax return. To be you can see, these were securities that we generally
clear, this is not to say that the benefits of tax held for a very long time. Berkshire is a bit of an
deferral aren’t valuable. They are, and our strategy outlier at 30+ years, but we held all of these
lends itself nicely to tax deferral. But the different securities for five years and the vast majority of
components of tax efficiency ought to be kept in them for over 10 years. It might not have felt good
proper perspective. when these securities were sold and you had to pay
tax on what by then had become sizeable gains but
Here we have our third and final bar. This is a the fact is money that was earmarked for Uncle Sam
successful low turnover active strategy. It assumes had been working on your behalf for a long, long
18% turnover, which is what Sequoia Fund time. If all of Sequoia Fund’s future gains are
happened to do last year. It assumes 98% of gains deferred to the same extent we’re all going to be
are long term, which happens to be what you’ve seen quite pleased.
from Sequoia Fund over the past 20 years. Finally, it
assumes 265 basis points of annualized Let’s now look more directly at turnover which is of
outperformance relative to the market, which course the key driver of capital gain realizations.
happens to be what Sequoia Fund has done since This chart depicts Sequoia Fund’s annual turnover
inception. To be clear, this bar is not a promise of over the past 20 years as measured by the
future results. This is just for illustrative purposes. independent research firm Morningstar. As you can
As you can see, this third bar is the tallest bar on the see, Sequoia’s turnover, though up from near zero
page, by a lot. This scenario is the one that delivers levels a handful of years ago, is still within its long
by far the best long term, after-tax return. Someone term historical range. As you can also see, Sequoia’s
might say, well, of course it delivers the best return. turnover has long been, for lack of a better term,
It assumes 265 basis points of outperformance lumpy. The capital gains produced by this turnover
relative to the market. That is exactly the point. As I have therefore also been lumpy. We expect this to
emphasized up front, it is long term pre-tax continue.
investment outcomes that are the primary driver of
your long term after-tax return. If we can My last slide shows, once again, Sequoia Fund’s

5
annual turnover over the past 20 years. However, it finance, investor relations and operations teams over
also shows, in gray, annualized turnover for the the past year. Importantly, we now have all four of
category average. As you can see, there is a yawning our functional business heads in place with our head
gap between Sequoia Fund and the category average. of Investor Relations and Business Development Jen
For instance, last year as I already mentioned, Rusk Talia and CFO Pat Dennis joining us over the
Sequoia Fund’s turnover came to approximately past 12 months. Together with our COO Wendy
18%. For large cap growth mutual funds as a whole, Goodrich and General Counsel Michael Sloyer, they
it was approximately 60%. Sequoia Fund remains lead the non-investing parts of our business. We said
much lower turnover than the industry. in our year-end letter but it bears repeating here
again, we are astounded by the talent and quality of
We have established that Sequoia Fund remains low this group. We would put them up against any of our
turnover, but as I stressed at the beginning, what industry peers and are thankful to call them our
matters more to your long term after-tax return than colleagues and friends. They also lead an
the exact level of turnover is the long term pre-tax exceptional group of professionals, whether it is our
investment performance. We firmly believe that the account administrators who make sure our clients’
reshaping of the portfolio over the past couple of accounts are always in order or our tireless
years has significantly improved the fund’s technology and operations teams that have spent
prospective pre-tax returns. The early data are much of the past year upgrading our systems, or our
encouraging but the fact is only time will tell. Our compliance and finance teams who make sure that
strategy is long term and it is over the long term that everything is properly executed. They are all
we intend to prove it out. dedicated to you, our clients.

I appreciate your patience, and I would now like to You will hear in the coming minutes about how we
introduce my partner Arman Kline, who is going to have upgraded and automated certain functions. But
share with you an organizational update. Thank you. we want to emphasize that automation and systems
enhancements will never change our commitment to
Arman Kline: the direct and special relationship we have with you.
Thank you everybody for coming. As Trevor said, I
am Arman Kline and I am going to give you a brief As I mentioned, our IT and operations teams have
organizational update. had a busy year upgrading several key systems.
Much of the work they did was behind the scenes,
Ruane Cunniff currently manages about $20 billion such as introducing new systems for trading,
in assets. We have 67 team members, up from 62 at research management, CRM, and cyber security. But
this time last year as we have continued to invest in not all of their projects were imperceptible. One of
all of our functions. We have 28 investment the team’s more public endeavors was the launching
professionals which you see behind me here with the of our new websites. Last summer, we launched our
investment team growing over the last couple of redesigned Sequoia Fund website which you see
years. Eric Liu and Pat Pierce joined us over the past behind me here, and our first ever Ruane Cunniff &
18 months and, as Chase mentioned, two more Goldfarb website. We hope both websites do a better
analysts will be joining us over the summer. I should job of facilitating our communications with you and
add that we continue to be extremely pleased and better relaying who we are and how we think.
grateful with the caliber of people we are attracting
to our firm. Importantly, most of the team that you The new websites, along with the systems upgrades I
see here has been researching companies and mentioned earlier have prepared us for two
debating investments together for many years. The important client facing account enhancements,
Investment Committee has over 100 years combined online account access and improved reporting.
at the firm and we have all been working together Starting with online account access, our new portal
for over a decade. will allow interested clients the ability to access their
account information online. Importantly the portal
We have 39 professionals on the operational side of utilizes our new cyber security program and will
our business with additions to our compliance, feature two-factor authentication. We are currently

6
beta testing the portal with select users and hope to
launch it by year-end. If you are interested in David talked about performance, and I think the high
utilizing the portal, please let your account level message is: so far so good, with one caveat,
administrator know, and they will be in touch as we which is that we’ve only been at this a couple of
approach roll-out. years now, and the unfortunate reality in our
business is that over a couple of years, the result that
Behind me is a quick peek at what the online portal’s you get can have as much to do with luck as skill.
landing page will look like. You can see here that Now over five, seven, ten years, as the business
you’ll initially be able to access firm and fund results and the investment decisions add up, it’s a
communications as well as some new reports we are very different story. So we’re not there yet and we
creating. Notably we hope to add new reports and have a lot to prove, but we’re absolutely on our way.
functionality to the portal over time, this is simply The reason I think we are all so confident that we are
version one. on our way is if you think of the S&P index as the
average business, as Chase and David explained, we
Speaking of reports, we know the statements and think the businesses we own are just a heck of a lot
reports we have historically sent you have had room better and grow a heck of a lot faster than the index
for improvement and we have been hard at work does. We also think we bought them for good prices,
developing more informative and easier to and that is a really important and powerful
understand reports. Separately managed account and combination that is worth dwelling on for a second.
Sequoia Fund clients will each get slightly different If you remember that slide that Chase put up, our
reports designed to best communicate the most companies are growing their sales 6, 7, 8, 9, 10
relevant information for each investor group. percent a year faster than the index and the average
business. The difference in earnings growth should
Behind me you can see a couple of samples of be even bigger than that, because as Chase said, if
reports we are creating that you’ll be able to access we had to bet on our businesses growing their profit
through our portal. margins faster than the market, we would bet on our
businesses any day of the week. So if our sales are
Finally, we have heard from many of you that you growing 6, 7, 8, 9, 10 percent faster than the market
would like us to be more accessible and to improve every year, our earnings might be growing 7, 8, 9,
your experience when dealing directly with the 10, 11, 12 percent a year, or faster.
Fund. For those of you who deal directly with
Sequoia through our transfer agent, we will be Now over any given year, that doesn’t necessarily
moving the fund to DST’s new technology platform make a difference, and during an environment like
called Digital Investor. The new platform will offer the last seven years, when you have a very strong
greater flexibility, is tablet and smart phone friendly, market where the return from the market is
and offers upgraded security. We believe this overwhelmingly driven by a change in the PE ratio
upgrade will noticeably improve your experience. rather than the earnings growth of the underlying
We are also making the Fund more accessible companies, then the growth of a portfolio like ours
through intermediaries. Sequoia Fund is now does not necessarily shine through on a relative basis
available for trading on multiple broker platforms, the way it would in a different environment. As
including Charles Schwab, Fidelity, Pershing, Wells David explained, the world may be very different
Fargo, TD Ameritrade, and Vanguard. We also have from this point forward and it’s much more likely
a hold and transfer agreement in place with UBS. that the return that you earn on the stock market is
much more heavily driven by growth in corporate
With that, let me turn it back over to John for some earnings than it has been in the past. And we’re also
concluding remarks. starting from a point where our companies, even
though they are growing so much faster than the
John Harris: index, are not really trading for an appreciably
I have the easy part. I get to say what everybody else different PE than the index is. So it is very likely
said all over again. I’m just going to hit the high that the big advantage in earnings growth that we
points and wrap up so that we can get to Q&A. talked about for our portfolio should shine through

7
in our relative results to a much greater degree than it and feel it.
it has in the past. That should be a big advantage for
our portfolio. Then there is the part that you cannot really see and
feel, and I spent a lot of time talking about this last
So we like what we own, and not only do we like it, year and I don’t want to say all the same things over
but we like it a lot better than what we owned 18 again, but I do want to spend a few minutes talking
months ago. And as David said, we are happy and about culture and mindset, because in so many ways,
encouraged by the fact that we have been able to this is really where the rubber meets the road, both
evolve the portfolio in what I think is a really for us and for you.
positive way while keeping up with what has been a
very hot stock market. For those of you who have If you think about it, we are investors in companies
been with us a long time, which is most of you, you and you are investors in investors, but we are doing
know that we tend to look our best in tougher the same thing in that we are trying to find people
markets and our worst in stronger markets, and so and organizations who have an edge; an advantage
again, so far so good. over their competition. And not just an advantage,
but an advantage that is sustainable across long
Now, obviously evolving the portfolio involved periods of time, across different generations of
turnover, and turnover creates taxes, but as Trevor leadership, across the ups and downs of the economy
explained, the overwhelming majority of the taxes and the stock market.
that we have paid over the last couple of years had
been deferred for 10 and 15 years and in some cases I cannot emphasize this point enough: if you want to
longer. More important than that—and this is just a get a result that is different and better than the next
critical point—if by paying the taxes we can person’s, you have to be doing something that is
meaningfully increase the potential return of the different than what everybody else is doing. If you
portfolio going forward, then even though I know it do the same thing everybody else does, you are
doesn’t feel that way, paying the taxes is a good going to get the same result that they get. So as an
thing and not a bad thing. That gets back to a really investor in our firm, the question you should always
important point that Trevor made that I hope be asking is: what is different about what these
everybody comes away understanding today, which people do? If there’s nothing different, then we
is that if you are a taxable investor, the name of the should all just go home and buy index funds. There
game is to earn the highest possible return you can has to be something different.
earn after taxes and not to pay the least taxes.
So what makes Ruane Cunniff different? I hate to
Arman covered operations, and as he said the news say this, because I have enormous respect for our
there is just that we really have made enormous team and I am so proud of our team, but it is not
progress over the last couple of years. We have a because we have smart people and it is not because
very large operations team that deserves an we do great research and it is not because we watch
enormous amount of credit for an enormous amount what we pay and we’re disciplined about buying the
of hard work to make that happen. We are in the best stocks that we buy. All of that is important. All of
shape organizationally we have ever been in, and I that should not be minimized. But all of that is stuff
think we are all committed at this point to this idea that other firms do. Other firms do research. Other
that excellence does not just mean excellent firms have smart people. I hate to say it, I wish it
investing. It means being excellent in everything we wasn’t true, but it just is, and that’s a fact.
do. So we are going to continue to spend whatever
we have to spend to be best in class, whether it’s So what is different about what we do? To me, to us,
compliance, investor reporting, systems, technology, what is different here is the mindset, the way of
you name it. We’re not quite there yet, but again, we thinking and the culture. Yes, we do research, but
have made enormous progress and we are absolutely it’s not just that we do research. It’s that at Ruane
on our way. I think you are going to see more Cunniff, research is and always should be its own
progress over the next year, and as it happens, that reward. We don’t care if you put an idea in the Fund
should be tangible to you. You should be able to see this year. We don’t care how your picks did last

8
year. what you kill and make the most money possible,
then this is not the place for you. This is a place
Now, don’t get me wrong, we’re as ambitious and where everything about the environment is geared
competitive as anybody, and we think we hold our towards attracting and exciting people who love to
team to an incredibly high standard. But it is our learn, people who are fascinated by the challenge of
standard, and I think it is a very different standard, understanding businesses and their prospects, and
and as we hold people to that standard, we do not do people whose goal in life is not to make the most
it in the context of a pressure cooker. We are humble money but to generate the best investment
enough—and this is interesting, because I was performance. We try to stand toe to toe with the
sitting next to a really astute client last night, and she absolute best in the world at what we do, whether
said to me, “People who are really humble don’t talk they are at mutual funds, hedge funds, family offices
about how they are humble,” so I say this with the or wherever they are…and to hopefully play a little
utmost humility!—but I think we are humble enough role in helping to sustain one of the best investing
to understand that even with all the effort we put into records in the history of our industry. That is the
it, making good decisions and good judgements is kind of person that comes here and stays here and
just so difficult. I cannot emphasize that enough. thrives here, and I can tell you that is why I came
People who are incredibly talented get it wrong here.
almost as often as they get it right. Predicting the
future is not easy, and when you are having a good Now, all of this may sound really simple, but I can
run of it, you are not as smart as you think you are, just tell you, it is incredibly hard to build and sustain
and when you are struggling with it, you are a culture that nurtures this incredibly important idea
typically not as dumb as you look. The person over that what I learned this year may actually be more
here who put the really great stock in the Fund last important than what I earned this year. Building that
year may not find another good idea for two years, takes work. It takes intention. It takes time. And
and the person over there who has not put a stock in frankly it takes a little bit of luck. But that is what
the Fund for two years may be the person who finds we have here, and that is not a mindset that is
us the next MasterCard, TJ Maxx or Idexx. prevalent at other firms. That is a sustainable
advantage.
And then this is really interesting: what about the
person who does incredibly great research on an That is also why we changed the set-up on the stage
incredibly creative idea that goes up 10x over the this year, because if we just had the Investment
next five years, but we never bought it because the Committee up here, it would sort of be false
stock ran up a little too high while the great work advertising. You are not investing with me, or with
was being done? Should that person earn less respect David or with Arman or with Chase. You are
or compensation than the other person who found investing in a culture and a mindset and a way of
the one that we did buy? I think at a lot of firms the thinking and a Firm, and this up here is our Firm.
answer to that question would be yes. At our firm, Yes, the people down here on the Committee make
the answer is very different because we do not eat the investment decisions, but we are going to come
what we kill. Our mindset is just the complete and go just like the people before us. I have to be
opposite of that. Our mindset is to focus on the honest with you: we are not particularly special
process rather than the outcome. We believe that if people. This is a special place, and our job is to keep
you execute the process well enough for long it that way.
enough, the outcomes take care of themselves. That
is an unusual mindset. This makes for a great transition to the next part of
our program, because I cannot think of anybody who
Our mindset is also that the client comes first, and represents our values and our culture better than Bob
that is why we have always limited the size of our Swiggett. Bob, I said it before and I am going to say
asset base to maximize the odds that we get the best it again: there is really no way we can adequately
investment results we can get, because how you do thank you for everything you have done for Ruane
matters more than how we do. If you have a Cunniff and Sequoia Fund over what is now almost
mercenary mindset, and if your goal in life is to eat half a century. But we wanted to at least give it our

9
best shot, so we have put together a little video for is very promising technology and Waymo is the
you, and here we go… world leader in the technology. They are the best and
Question: have been at it the longest. I think you’ll see China
You mentioned in passing the self-driving car, do be the first place you’ll see this at some level of
you think that is not necessarily in my lifetime, but scale because the environment there is more
going to happen? conducive to this. Our regulatory environment
moves more slowly. However, Waymo is going to
John Harris: be launching a commercial service in Chandler,
Gosh, we wish we knew. Chase, do you want to talk Arizona near Phoenix in the very near future. That
about that? will be geofenced; there will be human remote
backup drivers in case the cars run into situations
Chase Sheridan: that they can't handle.
I think when you ask the question, when will self-
driving cars arrive; I think it has to be asked in the We have put a lot of thought into this because
following manner: when and where will self-driving automated driving threatens some of the businesses
cars arrive? So we’ve looked into this issue in some that we have investments in and that we thought
depth because Waymo, Google’s self-driving car well, is this a five year threat or a 10 year threat? It
effort is the world leader in this technology, and is probably quite a bit longer than that before it
there are analysts out there who ascribe very high actually threatens traditional businesses like auto
values to Waymo already even though it is really parts, or GEICO at Berkshire. You’re looking at
just a prototype effort at this point. We have found 2030, maybe 2040 before this is widespread. So
that the hype around self-driving cars is wildly when and where is really the question. You will see
overblown at this point, there are well over 200 self-driving cars that have Level 4 capability in very
companies pursuing this. Most of them really limited areas next year but you won’t see this on a
haven’t gotten very far. The issue is you can't get widespread basis for a couple of decades probably.
90% of the way there, you have to get 100% of the
way there, and the last 10%, in fact the last 1% is Question:
harder than the entire 99% that comes before it. It My question relates to Charles Schwab. There are
requires enormous investment, not just in road miles plenty of people in the financial services space that
but in simulation technology. Waymo has over a compete with Schwab. So why was Schwab added to
billion miles of simulated driving already and they the portfolio, what are the distinguishing features
have created an entire center for testing their cars. that Schwab has versus its competitors, thank you?

So when and where? There are a lot of companies Trevor Magyar:

promising to have Level 4 technology which is the Thank you for the question. Schwab began its
critical point. Level 4 is where you don’t have to pay corporate life as a pure discount broker, back in the
attention anymore as a driver. Level 5 would be, if 1970s. Since then, it has evolved into a full service
you don’t have to pay attention and your car can go investment platform. The company is best known for
anywhere whereas Level 4 would be geo-fenced servicing self-directed investors, but the reality is the
within a specific area that has been very carefully company will provide whatever level of service its
3D mapped. Level 4 is going to roll out slowly in clients desire.
very specific parts of the country like Chandler,
Arizona and perhaps Mountain View, California. You’re right that what Schwab offers isn’t unique in
There is a company testing in a four square mile the strictest sense of the word. In terms of the direct
stretch of downtown Manhattan. But you are not competition, you have TD Ameritrade, Fidelity and
going to see Level 5 self-driving cars for decades. Vanguard, just to name a few. Each of these players
has certain strengths and weaknesses relative to
I think a lot of the time scales that companies have Schwab. Now, Schwab is amongst of this group,
been proposing to get to Level 4 technology have which is why they’re able to lead on price. The
been driven by their need to obtain financing, so company wants to make sure that it’s the lowest cost
they’re pipe dreams for the most part. However, this option with respect to most of its products and

10
services. their major asset which is WeChat, it is probably
trading at a multiple closer to the mid-20s. This is a
But the big point is that Schwab is one of the largest company that is growing 20-30% and you are paying
players among a group of players that are all taking a mid-20s PE, and then on top of that you are buying
money from the wire houses. I’m talking about the it at a pretty substantial discount to through Naspers.
The Merrill Lynches of the world, with their much We think it is pretty attractive.
higher high commissions. Schwab and its peers have
sucked an enormous amount of money from the wire Question:
houses over the years, and our belief is that they’re With respect to Credit Acceptance, CarMax and
going to continue to do that for years to come. I Mohawk, how do you expect these businesses to do
don’t have the figures in front of me, but I believe in rising interest rate environments and in a possible
there is still about $10 trillion dollars of invested economic downturn?
wealth at the wire houses.
Greg Steinmetz:
Greg Alexander: CarMax can charge more on their loans. Depending
It is a fair question. But everything we own has on how much rates go up, it shouldn’t have that big
competition. Everything we look at has competition. of an impact on it. Credit Acceptance is different
It’s our job to make these judgments. because they are already charging very high rates
and they probably can't raise them a whole lot more,
Question: so their spread could be impacted. It wouldn’t be
One of your new positions this year is Naspers; good if rates go up a lot there, would you agree with
presumably you bought that because of Tencent. I that Chase?
was wondering if you could speak to the tax facts
regarding that type of investment. And why it’s a Chase Sheridan:
compelling investment despite the apparent high Yes, we have talked to them about it. Credit
multiple? Acceptance is a subprime auto lender, so the rates
are in the 20%+ range and they cap out under state
Eric Liu: usury laws whereby you can only charge your
Naspers, for those who don’t know, owns a $160 customer so much. They are usually near that cap so
billion dollar stake in Tencent and I believe the as interest rates come up, their cost of financing goes
question was about how we think about the taxes. up but what they can charge the customer does not
There is actually a South African law that says any necessarily go up. However, when you talk to them
ownership stake of more than 10% of a foreign about it, they earn a much wider interest spread than
entity has no capital gains, so they are in a very their competitors, so as this happens, they believe it
envious position because they actually don’t have to will hurt their competitors much more than it will
pay any taxes when they sell their Tencent stake hurt them and potentially give them an opportunity
down. The only implication is when they distribute to go on the offense and take some market share
to shareholders and how they do it. If they buy back from their competitors. It is not perfectly clear; I
shares there is actually zero tax implication and if would expect it to be negative for their margins and
they dividend it, there is about a 20% dividend may help them gain some revenue share but that
withholding tax. Our assumption is the taxes would remains to be seen.
probably be somewhere between zero and 20%. And
I apologize, I forgot the second question? Ah, the Terence Paré:
high multiple, right. For context, Tencent does have With Mohawk, rising interest rates are obviously not
a pretty high multiple, it trades around 40x. Like a good thing but I think there was a headline in the
most internet companies, it is investing in its paper today that talked about the era of ultra-low
business and you see capex coming through the P&L mortgage rates passing. Mortgage rates are still
rather than the cash flow statement. Our take is that below 5%, which are pretty good rates for mortgages
if you adjust for the investment it is actually in terms of the historical record and very favorable
probably trading for more like 30x. And then if you for Mohawk in particular. The second thing to
think about the fact that they are not monetizing remember is that most of Mohawk’s business is

11
driven by remodeling rather than new construction and not a person who is holding a share of stock.
and the general economic conditions are still very
favorable for the company. More important than the I think that is really our value-add. It has some
short term prospects for mortgages is the demand for benefits when you go sit down with management
homes that is on the come, so to speak. If you look because it becomes pretty clear pretty quickly that
at demographics, we have a huge wave of young we know what we are talking about, and maybe a
people moving into the home buying years and this I little more than the average bear. But I don’t know
think is probably much more important in terms of that we miss a lot necessarily by not talking to
driving demand for Mohawk’s products than an management. There are some people who do what
interest rate environment where mortgages are still we do—people for whom we have a lot of respect—
below 5%. So I think the long term prospects for who make a point of never talking to management
Mohawk are very, very good. because they think they are just going to hear a
biased perspective. We like to do both, but I
Question: definitely don’t think the fact that we don’t have the
Hi, so you have added a number of internet related access in those cases that we might in others
companies significantly in the last couple of years. necessarily makes a difference.
So historically one of your great value adds since
you have great relationships with managements of Trevor Magyar:
companies that you have owned, how would you say Yes, meeting management is typically one of the last
you get access to management with Google and things we do on a project. It’s very rarely the first. In
Amazon? And then the second question I have really the case of Amazon, I’ve heard reports that Jeff
is on Amazon, well, it is a statement really. Last Bezos spends exactly one hour a year on investor
year, in 2017, operating income was $4.1 billion relations and related activities.
dollars. And AWS represented $4.3 billion of that, so
obviously AWS is a great driver of that company and Question:
finances the rest of their businesses. How do you Who gets that meeting?
monitor what is going in AWS, and also what would
you say at this point is going on with Google Trevor Magyar:
Compute which could be a significant competitor to I don’t know who gets that meeting. We certain
them. don’t get that meeting.

John Harris: AWS is an interesting one. We’ve researched it quite

I will make one quick comment and then let Trevor thoroughly. It’s a new way of running technology,
talk about Amazon. What you say is true: we don’t for enterprises both big and small. The reality is
have the access to management at any of these there are a lot of enterprises in the world, and so
gigantic companies that we would at a Credit there is no single user you can go to in order to get a
Acceptance or something like that, or even a definitive assessment of public cloud. So we just
CarMax. But I don’t know that I would necessarily talked to lots and lots of people from lots and lots of
agree with the notion that access to management has different enterprises. We concluded that the public
been a big value-add for us over time. I actually cloud and AWS in particular have real potential and,
think the reason why when we do talk to most importantly, that this is not a commodity
management teams that we have productive product.
conversations and develop strong relationships is
because we do so much other work and talk to so As for Google Compute specifically, looking at it
many other people, whether it is people who used to from the Amazon perspective, my inclination is to
work at the company, people who distribute for the assume conservatively that Google finds its way into
company, customers, suppliers, you name it. When the public cloud business. They are in it already, but
we get to know a business we try to talk to they haven’t yet established themselves as a strong
everybody we can find who lives and breathes that number three to Amazon and Microsoft. Everybody
business and that industry and we really try to get says they have great technology. In fact they may
into the mindset of a business person in that industry have the best technology. But again, the really

12
interesting thing is that public cloud is not a the level of having the AI actually do the live
commodity. It’s probably best thought of as a transcription when the CEO is speaking. Google has
platform. And it’s not clear that enterprise customers to figure out the sales piece and we are going to
want some unlimited number of platforms out there. continue watching that.
It is just not efficient. So the question is whether
Google can weasel its way in before the competitive Greg Alexander:
window shuts. I will just add to John’s answer there which is, let’s
take the example of Berkshire Hathaway. It’s sort of
Will, do you have anything to add on AWS? like the “hostess with the mostest,” Berkshire was
our biggest position for the longest time, if I am not
Will Pan: wrong. We know and love Warren; in fact Jon
Yes, we just talk to a lot of people all the time. We Brandt next to me is famous within a very elite
try to talk to people at all levels of organizations group of Berkshire Hathaway Annual Meeting fans
from CIOs down to developers. We’ve attended the as one of the interviewers at the Annual Meeting.
conferences, Trevor and I have both been to Google But you know, I don’t think that we have learned
Cloud Next and also the AWS Reinvent conference any special information from Warren nor did we
in Las Vegas. We try to use the products a little bit give him any special insights which accounted for
to the limited extent that we can. the corporation’s success. Warren seems to have
done just fine and so did we without any of that.
AWS said they had a seven year head start and that’s
roughly what we believe too before anybody got Chase Sheridan:
really serious about it. They first started really trying Yes, I am just going to add one little thing and
to just win over developers but they found that you probably too many people are already addressing it.
can't build a big enterprise business just by attracting With a company that is not in the press, and maybe
developers and getting them to buy compute time. one that some are less willing to own like a Credit
At some point you run into a situation where you Acceptance, I think it is important to look the CEO
have to engage with IT organizations and people in the eye and judge what kind of character he is, or
higher up in organizations in order to develop a with a company like Constellation Software, when
serious enterprise relationship. They have come you meet Mark Leonard and you see how brilliant he
from zero there but they had a seven year head start is, it makes a difference. With the mega cap
and they are developing those relationships. technology companies you don’t get access but you
Microsoft has had those relationships so with their get absolutely fantastic media coverage. They are
Azure effort, they were really able to go in and covered by a legion of reporters, numerous articles a
provide an on ramp to their existing customers and day and you actually do get to know the character of
just bundle in the Azure cloud into their ELAs that management although it is from afar. We get lousy
they already have. The Google Cloud platform access, but everybody else also gets lousy access so
comes from a different place. They are coming from at least we are on a level playing field. We certainly
zero with enterprises; they have a little bit of a did not have an advantage over anybody else when
presence with the Google suite of apps, but a distant we invested in Google in 2010 but it has worked out
second to Microsoft. Our belief is that if you want to very well. We felt we had our arms around the way
win in the enterprise and sell technology to the management team operated from talking to
enterprises, it is really important to nail the sales former employees, and we understood the culture of
piece of it as well as the technology piece. Google the business from our reading.
has really good technology but I think they are still
figuring out the sales piece. Even Azure has taken Question:
some time to figure out their sales strategy and how Hi, and thanks for letting me ask the question. This
they want to sell cloud. We think Google has great is about Rolls Royce PLC, with the continual
technology; in particular their artificial intelligence management turmoil, the problems with the Trent
solutions are very impressive. You can see it in the 1000 engines. I understand the company is a
fact that they are willing to do live demos whereas duopoly, maybe there is three players if you include
Amazon is working on it, but they are not quite to Pratt & Whitney. But why, I guess? The stock has

13
not performed, if you purchased it two years ago, is focused on in 2020. There is going to be a
you have done well, but otherwise the stock has been significant amount of cash coming into the business
lousy, they have had distractions, they have gone because of that big increase in market share.
into unrelated businesses. Now it seems like a
company in turmoil, they are looking for a new On the point around the cost cutting, what I would
headquarters to save money and they are cutting say is that Rolls Royce was effectively a
back on travel. This really sounds like a company in nationalized business historically. They were saved
distress. So if you could explain your position, I’d by the British government when they went bankrupt
appreciate it. decades ago because of the RB 211. It was never the
most lean run business and we realize that. We
Arman Kline: always thought there was a cap to margins and with
Sure, thank you for the question. I’ll start and then ValueAct and the new CEO in there they are
maybe Antonius can step in as well. So let’s start tackling these costs. We were just with Warren a few
with the kind of fundamental reason why we weeks ago and he was talking about the move to the
invested in Rolls Royce in the first place many years new headquarters. I don’t even know what the rent
ago which is that it is going from a teens market for the old headquarters was, but it was too high,
share in wide body engines to over 50%. It’s going whatever it was. We’d say the cost cutting is positive
from a three-player market as you pointed out to a and we still think the market share story and the
two-player market. Pratt & Whitney has no position backlog is strong. We believe in the return that is
on any wide bodies that are going to be in going to come over time. It is now a 5% position
production going forward. The question was, it is after we bought some shares when it dipped.
great that you have market share, but do you actually
make money on these engines over their lifespan? John Harris:
We spent a lot of time on that question and we Finally we are moving in the right direction. We are
ultimately concluded the answer was yes. What’s not upset about the headquarters going away.
interesting in that business, and we’ve talked about
this before, is when you sell the engine, you sell it at Arman Kline:
a loss, a few hundred thousand pounds. Over the 20- Antonius, anything to add?
25 year life of the engine you get a high margin
aftermarket stream. When you are going from small Antonius Kufferath:
market share to big market share with a small Not very much, I think you covered it.
installed base, what ends up happening is that the
margins and cash flows of the business get pressured Question: Hi, I would like to get your updated thesis
because you are putting into the market money on Amazon, and I question the potentially high
losing engines which during that first year lose you multiple. Is there any debate amongst you, where
money but over 20 or 25 years make an attractive perhaps some feel it shouldn’t be owned? I would
return. I think a lot of people have looked at the last love to hear what Jonathan Brandt has to say on
couple of years, seen the profits coming down in the that. And I will also preface that with we know their
civil business and said that looks like an unhealthy retail competitor is Walmart, where they grow
business. We would disagree; that is exactly what around 30% e-commerce versus Amazon’s 40%. But
we want them doing. We want them selling every on the AWS side, I believe AWS is growing around
one of these engines because over their lifespan the 40%, where Microsoft Azure has been growing 90%
net present value is attractive. We think the market is plus for several years now?
actually starting to see that; the stock was up then it
went down for two years because of this factor John Harris:
coming through. It did very well last year because I I am also really eager to hear what Jonathan Brandt
think the market is starting to believe that that $1 has to say. What do you have to say?
billion free cash flow target in 2020 is coming. By
the way, if you look beyond $1 billion dollars we Jonathan Brandt:
think it’s going to go much higher over time. This is I honestly haven’t done enough work on Amazon to
not just going to stop at this $1 billion that everyone comment. I trust Trevor and the Investment

14
Committee and I understand the broad thesis and it disclosed the size of the Azure business which
sounds like a sound thesis to me. would be the direct competitor to AWS. They are
Trevor Magyar: growing off a smaller base and AWS has actually
I’ll step in here. As we mentioned in our prepared accelerated its growth rate. It was 49% the last
remarks, Amazon is up 100% from our initial quarter versus the quarter a year ago which was
purchase. I think it is fair to say that the intrinsic 43%. There is plenty of market left for both of these
value of Amazon is not up 100% since the initial companies to take. The potential size of the market
purchase, so your question about valuation is a fair is very large, the amount is a trillion dollars’ worth
one. Amazon’s valuation is something we as a group of IT spend. Today a lot of the spend is just new
watch closely. stuff, things that companies couldn’t really provision
the servers for because it was too spiky in terms of
In terms of valuation, it’s the retail side of Amazon’s loads, or they didn’t want to buy the servers and then
business that is the crux of things. That’s because, do the analytics project, and they weren’t sure what
unlike AWS, the retail business doesn’t produce to do with the servers after that. A lot of it is new
much in the way of reported profits. Our belief, work loads and so they are expanding the size of the
based on extensive primary work, is that there is market. The other thing I would say on Azure is that
substantial earnings power within Amazon’s retail it is going to have a place in the market, there is no
business. doubt about that, because Microsoft has such a big
installed base of people who understand the
On the growth rates being posted by Amazon’s platform, who know the platform and develop for
competitors in public cloud and in retail, one thing the platform. They are going to be a player in this
to keep in mind is the size of the base. Microsoft market but I don’t know that it necessarily takes
Azure is growing quite nicely. I assume Google away from AWS either because the two companies
Compute is growing quite nicely as well. But they’re run in their own lanes. Microsoft developers and
both growing off much smaller bases. AWS is just a people who use a lot of .NET, etc. tend to go with
much bigger business than either Azure or Google Azure for their needs and the people who do more
Compute. Similarly, Amazon’s retail business is open source work and are building more stuff from
just much bigger than Walmart e-commerce scratch, tend to go with AWS.
business. Also, Walmart recently acquire Jet.com,
which was boosted their e-commerce comp growth Question:
for a number of quarters. First off, I would like to thank you all for the hard
work that you do on a daily basis. You guys do a
To be clear, though, Walmart is the ecommerce great job. So my question is regarding Naspers, and
competitor to watch, at least in the US. The question I think a lot of people are familiar with the Tencent
is whether they can really take Amazon head-on in position and the massive discount that is there. But
e-commerce. For many years, Walmart has struggled can you also speak a little bit about all the other
in ecommerce. But the game is not over, and so we companies that Naspers owns, and number one, if
continue to watch Walmart closely. there are any companies there that you are excited
about? And number two, what value you would give
Question: to the remaining companies if you subtracted
AWS’s revenue is I think a $20 billion dollar run Naspers?
rate; are you saying that Azure is way behind that?
Jake Hennemuth:
Trevor Magyar: I will take that one. I have a little cheat sheet here.
They are significantly smaller. AWS is still by far Just for reference, the value of Naspers’ Tencent
the market leader in public cloud. And Google shares is roughly $155 billion dollars as of
Compute is a distant number three. yesterday. There was a Naspers Investor Day in
December in New York where the company put up a
Will Pan: couple of slides and said that consensus had roughly
Microsoft’s cloud revenue includes all the Office calculated the value of the Naspers stub, which you
365 products. I don’t think they have actually can think of as everything excluding Tencent, at

15
about $20 billion dollars USD. In a very rough, there who realized that they were in businesses that
bottom’s-up way, we got to about the same number were in their sunset years, but they were businesses
then. So a couple of observations there, one is that that generated a lot of cash, and so they came up
the stub is a fraction of the value of Tencent. So it is with the pretty intelligent idea of taking the cash that
only so worthwhile to talk about it or any of its the old economy businesses were generating and
ingredients. And two is we actually really like it, it is investing it in some promising new economy
a delicious portfolio. You saw that they, maybe a businesses. They made a bunch of different
month or two ago, sold a little bit of their Tencent investments. Some of them worked better than
stake. It brought home about $9 or $10 billion USD others, but the best one by far was, they took about
worth of value so the value of the Naspers stub is $30 million and bought a third of Tencent. That $30
about $30 billion dollars today compared to that million is now worth about $175 billion. I think that
$155 billion dollar value of Tencent. I am not sure if goes down as one of the two best venture capital
that answers your question. It is a pile of different investments in the history of the human race. I think
companies, we can get into individual ones within SoftBank buying Alibaba is probably a similar
there, but any given one is a rounding error on the return. Along the way, they bought a bunch of other
total value of Naspers. A quick breakdown of the stuff. They own online classified advertising
$30 billion dollars, I would say about $10 billion businesses in many different parts of the world, and
dollars of it is cash and about $5 billion dollars is relevant and in some cases I think controlling stakes
listed companies and we calculate a very rough $15 in some of the big online food delivery aggregator
billion dollars of value in privately held companies. platforms, like the GrubHub-type analogs in various
markets around the world. They also just sold out of
Trevor Magyar: a sizeable, multibillion-dollar stake in Flipkart, the
As we became interested in Naspers, we obviously big Amazon competitor in India. So they have done
focused on Tencent given the size of the stake a lot of smart things, but the problem is that one
relative to the market cap. We saw that there were investment they made was just so unbelievably
these other businesses inside Naspers that at least on successful that it grew to a point where today it just
the Sequoia side we didn’t know terribly well. But it dwarfs all the other stuff. So we pay attention to the
turns out that Jake has been flying around the world other businesses. A lot of them are businesses that
for the past decade following many of these exact we followed independently before Naspers got
businesses. When did you do your first Naspers involved with them. But really at the end of the day,
tour? your fortunes as a Naspers shareholder are going to
rise and fall with the fortunes of Tencent.
Jake Hennemuth:
I think we met the Naspers chairman for the first Chase Sheridan:
time in 2008 or so. So we have been following You have heard reference to a discount. What they
Naspers and the companies Naspers owned, or now are referring to is the Naspers stub is worth about
owns, or companies we look at that compete with $30 billion dollars and the Tencent stake is worth
Naspers for easily a decade. They are very $155 billion dollars. The market value of Naspers’
impressive. Tencent is an amazing company and publicly traded equity is $110 billion dollars and that
then outside of Tencent we find Naspers to be a very is what we purchased.
impressive company. It’s small compared to the
value of their Tencent stake, but it is $30 billion Question:
dollars’ worth of value. So the Naspers stub is a Good morning and thank you very much for some
pretty big company in its own right. excellent presentations. I have a question, I am
going to shift gears slightly, and I apologize. Can
John Harris: you enlighten us as to what the ownership
Just to make it clear for everybody, and for people characteristics of the Investment Committee and the
who are not as into the details here, Naspers is a Sequoia Fund are? What are the ownership
company in South Africa that was originally a media characteristics of the people who are on the
business. They had newspapers, TV stations and Investment Committee, re the Sequoia Fund itself? I
cable assets. There was some enlightened leadership would be very interested, thank you?

16
 spreading the responsibility for capital allocation.
This is unlike Berkshire where it is mostly Warren
John Harris: who makes the decisions on what to buy and handles
I believe that everybody on the Committee has more all the deals and the capital and therefore has to buy
than a million dollars invested in the Fund, and I bigger and bigger stuff.
think in several cases many millions of dollars
invested in the Fund, and so we are all heavily The company has been around since 1995 when
invested alongside you. Mark Leonard founded it with a small team and for
the first 10-11 years, he was really the guy who
Question: made all the investments. But for the last 10 or 11
I am curious to know, since Berkshire is still a big years or so, he has a group of six operating group
holding for Sequoia, are you comfortable that the CEOs and they have done the majority of the capital
next generation of leaders of Berkshire Hathaway allocation since then. Their record is also very good,
will be able to make the same transition that it’s their returns are in the 20s, and you have seen the
apparent you’ve made, and that the person running earnings grow and the stock grow in the mid-20s
Naspers has made to keep it as an above average percent range over that period of time as well. What
growing company? And then second, if you don’t they are trying to do now is spread decision making
mind, if you could just talk about the long term even lower; all six operating group CEOs have their
growth prospects of Constellation Software? own lieutenants who are now going out and buying
these small software companies. So far they have
Jonathan Brandt: been able to ramp up the amount of capital that they
I know the people who are going to be the next deploy. Today they are looking at generating about
generation of leaders at Berkshire—Ajit Jain, Greg $500 million dollars of cash a year so that is quite a
Abel, Todd Combs and Ted Weschler—and I think lot of capital to deploy. You need to make 100 or so
they are all excellent people and very smart. I think acquisitions but so far they have shown the ability to
they can deliver growth in excess of the S&P 500 ramp up the number of acquisitions that they can
but I think it is going to be challenging to do much make and the amount of capital that they can deploy.
above the S&P 500 given Berkshire’s size. I think In terms of the future growth rate it really depends
there is going to be more share repurchase as a on how much capital they can deploy at the high
percentage of the total capital deployed in the future. rates of return that they have been able to achieve
They all get what Berkshire is about and how it has over the last two decades and the early signs are
built its record. It speaks well to Warren and Charlie promising. Now we should bear in mind that the
that they have this formidable line-up of people vertical market software category is now kind of a
ready to take over in the future. I just think it is known quantity and people are copying their
going to be very challenging to compound at very approach by trying to buy these small niche software
high rates which is why I think you have seen the companies. One thing that Mark has talked about is
share of Berkshire’s assets in the Sequoia Fund maybe expanding and buying other things and he is
going down gradually over time. going to start small there. We’ll see what he comes
up with but that would be another potential leg of
Will Pan: growth for them going forward.
At Constellation Software most of the growth comes
from acquiring these niche vertical software Question:
companies. If you look at the last year, their growth Good morning, I wanted to get back to the auto loan
was 17% and 2% of that came from organic growth business a little. There has been a lot of discussion
of the existing portfolio of vertical market software that the next bubble is going to be the subprime auto
companies and then the other 15% was acquired. loans, and I am wondering how our investment is
They have been through a period where they weren’t protected against a crash in the subprime auto
able to put quite as much capital to work and now loans?
they are trying to stick with buying smaller things in
smaller markets where there isn’t as much Greg Steinmetz:
competition, and the way they are doing that is by Not to be glib about it, but bring it on! I say that

17
because in 2009 when the world was ending, Credit who pay by going back to the car dealer when they
Acceptance was able to double their profits. They get their paycheck. For those people, every day is a
did that because a lot of their competitors just recession and we don’t get meaningfully more into
washed away. Credit Acceptance makes loans to that cohort when things go bad. That is another
those who other finance companies don’t want to reason that makes us think a recession is probably in
touch. Right now because the economy is good and our interest in that segment.
there is a lot of money chasing subprime these
people, who in the past might have been Credit David Poppe:
Acceptance customers, are finding financing from I just had one thing, a sidebar issue. We have one
cheaper alternatives. When those alternatives other holding that would have some exposure to
disappear, which historically they do when the subprime and that is CarMax. For CarMax about 10-
market turns, Credit Acceptance because they are so 14% of the business is subprime so it is not a huge
strong will still be there for them and they are going portion of the total business. They farm all those
to get some more volume but also be able to charge loans out to third party lenders and don’t hold any of
in a way that allows them to make more money. them so CarMax is a little different. They have
chosen not to expose themselves to the subprime
Chase Sheridan: market directly. They would probably be hurt if
Credit Acceptance is differentiated from other there were a fall out in subprime because they
subprime auto lenders and it is a very significant wouldn’t have lenders willing to extend credit to that
point of differentiation in that 70% of their dollars customer but it is less than 15% of the business.
loaned go under their “portfolio program,” where There is some risk there but it is not the risk of
they don’t extend the entire balance of their loan to holding a basket of bad loans.
the dealer upfront. They hold a portion of the money
back, and if the collections start to fall short, the Greg Steinmetz:
dealer bears .80 cents out of every dollar of those CarMax is a lender for prime customers. They use
early losses. They are pretty much unique in the third parties for subprime and they have to pay those
market place for having that program. Nobody else lenders $1,000 dollars for every car they sell as their
has been able to replicate it, so when you run into commission. They could replace that revenue by
trouble in the subprime auto market place, and we selling maybe older model cars than they are selling
will inevitably run into trouble at some point, their right now. That could hurt volume but it is not going
competitors are likely to suffer drastically more than to hurt profits as much as it would hurt volume.
Credit Acceptance will. They have a level of
protection with that 70% segment of their loans that Question:
no other subprime auto dealer enjoys. They have a Hi, what is the arrangement you’ve made with
sizeable private competitor called Westlake in Fidelity and Wells Fargo and the other institutions
California that has emulated that system but not at shown on the slide and how much are people trading
the scale of Credit Acceptance. We believe that the fund in those institutions now, how much of your
when the subprime market runs into trouble, Credit buying and selling is through those, and is there any
Acceptance will be able to take share. They have effect on volatility or turnover?
proven to be countercyclical historically even though
they are viewed as a cyclical and there are a lot of David Poppe:
short theses out there saying that they will behave as I think we pay Schwab and Fidelity the standard
a cyclical company. Their earnings results have been rates that every mutual fund pays for distribution.
countercyclical in the past, and they are positioned We don’t pay extra to be on special platforms as
to be countercyclical in the future. some people do with Schwab One, for example. We
don’t do any trading through any of those
Greg Steinmetz: intermediaries so if I understood that question
One more thing I would like to add to that is when correctly there is no conflict for us. We have no side
we talk about a recession there is subprime and there deals as a business with them.
is deep subprime and then there is very deep
subprime, people who don’t have bank accounts, Question:

18
Is there any effect on the volatility of trading in some businesses that may be less popular. I think it
Sequoia? is a useful service and they are taking steps to
John Harris: preempt regulation, both of which will help. So
I think if we have more touchpoints for pure retail more regulation is likely over time but we don’t
investors, which I think is probably what you are think it will have very negative impacts on their
getting more often than not through some of the business.
platforms, it is possible that the person you are
bringing in there is going to be a little less loyal than John Harris:
our average client. Does that really have an impact The other part of the question is more generally, do
on the Fund or the way we manage the Fund or your we have a competence investing in technology-
investment? No, I don’t think we see that or would related businesses. The short answer is, I hope so,
foresee that. I am a big believer that you get the because…we have. I don’t mean to be glib. I think
clients you deserve over time, and so it is our job to we do. It is something that we have built up over
make sure that we get the clients and the partners time, slowly and carefully, and I think we have seen
that we deserve. this really across the entire firm in a bunch of
different contexts: actually our batting average, hit
Question: rate or whatever you want to call it with those types
I have two short questions, the first question is, what of businesses has been remarkably high over time. I
are the views if any you have on government don’t think it’s an accident. I think it’s because we
regulation as it relates to the monopolistic know we are expanding the circle of competence,
characteristics of some of the businesses we have an and as you do that, you have to do it with extreme
interest in, like Facebook, Amazon, and Alphabet? caution and with your antennae raised all the way up
And the second question is, so there are more to the sky.
technology oriented enterprises in the portfolio
today than there were 15 or 20 years ago, have you We have done some of the best work we have ever
guys developed a competency in judging a set of done analytically and in terms of our thought and
businesses in the technology sector, or are you still judgement process when it comes to these
looking at them as a combination of technology technology businesses. And so we are very confident
companies and traditional companies such as that we are not operating over the edge of the circle,
advertising and Facebook for example? but we’re expanding it. And again, you have to be
very cautious as you do that.
John Harris:
As to the question about the monopoly and But it’s incredibly important that we have done that
regulation, maybe the most relevant holding of all and we continue to do that, because the world does
right now would be Facebook. So maybe Pat you change and what we do is hard, and we are all really
can talk about that? big believers that if you want to continue to do what
we do at a high level over time, over long periods of
Pat Pierce: time as the world does change, you have to be
Yes, there are a number of new rules coming out adaptable. The history of our business is littered with
shortly in Europe, the GDPR and E-Privacy and cautionary tales of people who were successful in a
there is an investigation by the FTC into Facebook’s certain paradigm who had trouble adapting. We
practices which we think may result in an certainly are not perfect. Technology is something
amendment of the consent decree that the two parties we wish we had paid more attention to sooner than
agreed to earlier. Neither of those sets of regulation we did. But we have adapted and we will continue to
in the US or in Europe is likely to have a very adapt. It is absolutely critical that we do.
meaningful deleterious impact on Facebook’s
business. The broader question is what happens over Trevor Magyar:
the long run, and I think Facebook’s great advantage Yes, I am not really sure you choose to not adapt. I
in this respect is that they have a very popular am not sure you can just punt on these sectors and
product, it is very useful and it is free. I think they these companies. We spend a lot of time in
are working from a good position as opposed to Investment Committee, and around the firm more

19
generally, thinking and talking about these One of your holdings, Booking Holdings is one of
businesses, not just because we are looking at them the biggest or maybe the biggest customer of
as investment opportunities but also because we own another one of your holdings, Alphabet, and I am
other businesses that are directly or indirectly curious to see how you foresee their relationship
impacted by them. As the days, months, and years changing if at all going forward, especially given
pass, this is just part of the air that every company that Booking Holdings has basically said they want
out there is breathing, and you have to have some to do more brand building and less kind of call to
sort of view. action advertising?

Greg Alexander: Will Pan:

I actually don’t really agree with the question. I Booking.com is the biggest asset of Booking
don’t think we own technology investments in a Holdings, formerly known as Priceline, and one of
classical sense. I mean, we are not picking who is the ways Booking.com became the biggest online
making the hottest chip or what have you. I think we travel agency in the world was by being really good
said this in years past, but it is just old wine in new at Google Search ads. They are Google’s largest
bottles. I mean, 20 years ago, we owned banks, we client, they spend about $4 billion dollars a year
owned Progressive, we owned Viacom and cable TV with them and they are really good at winning the
programming. I mean if you have ever thought about top slot on Google and then converting that user into
a Frito Lay chip, that is kind of a technology. It is a customer. That relationship has worked very well
just a magazine or a phone book or an encyclopedia for them for a long period of time and as a result
that has gone onto the internet. Is that technology? I they have tried to spend as much money as possible
don’t know. We think we are looking at service with Google because they had this conversion
businesses run by excellent people, just like we advantage. They had the most inventory and they
always did. had the highest conversion rate of traffic into
bookings. They have kind of maxed out because
Question: once you reach the top slot on pretty much every
Do you have any requirements for a minimum hotel related Google search page; it is a second-price
percentage for personal accounts that is invested in auction, you pay what the second highest bidder
the Sequoia Fund for PMs as well as analysts? And does. With this new brand advertising push they are
if not, why? trying to find other ways of garnering customers.

John Harris: One thing that Trivago, a metasearch company, has

All I can tell you is that everyone sitting in these proven to the industry is that you can pair brand
chairs is stuffed to the brim with our own cooking advertising with search advertising. You may have
between our investments in the Fund and in the seen the Trivago ads – they are pretty ubiquitous,
Firm. I can tell you personally I have almost every they guide you through the product, and they say
dollar to my name invested in one way or another in “Hotel Trivago, Hotel Trivago, Hotel Trivago,” its
Ruane Cunniff and I think I am probably speaking direct marketing. It is like the old “HeadOn, apply
for almost everybody else sitting in these chairs. directly to forehead” approach. What they found is
that by instilling in people this awareness of Trivago
Question: they could more efficiently bid on Google because
And the analyst team as well? people will click on what is familiar to them.
Booking has a very-ROI focused culture; they are
John Harris: frugal and they only spend when they can get a
We have a lot of young folks up on the stage here, so return and they try to measure things very
I can't necessarily speak to their financial situations, obsessively. As such they did not do TV ads because
but suffice it to say, they are all-in on Ruane you can’t measure the effect, you can't calculate the
Cunniff. ROI. They try to measure ROI on everything,
including meetings at trade shows. Trivago has
shown that maybe you can pair the two together and
Question: open up your aperture a bit and that is what

20
Bookings is starting to do. They are starting to have such wonderful characteristics as a cash
experiment around the edges. I don’t know that it is generator but they don’t return all their cash to
necessarily going to hurt Alphabet at all because one shareholders like some of our businesses do. We
of the ways in which they are experimenting is by have gotten comfortable with the way they allocate
doing video ads on YouTube, because that is a more their cash because we see that it has created
measurable way of doing brand advertising. In a tremendous value. We give them some dispensation
way, we are kind of hedged between the two, right? for that and some credit that they will continue to do
If Google is able to do better in travel and turns the that in the future.
crank on how much they can get from Booking.com,
then we own a lot of Google and then if they find a Trevor Magyar:
way to bypass search or go more direct, then we own Yes, as I think I mentioned earlier, with Amazon,
Booking.com. it’s the retail side of things that requires some very
careful thinking. Again, our belief, based on
Question: extensive primary work, is that there is substantial
Hi, just going back to the point earlier about earnings power within Amazon’s retail business.
Facebook/Amazon and Google, those companies
have been very clearly juggernauts for years, and Now, I’m not sure this idea that there is earnings
going back to the skill versus research point, I am power within there is such a controversial one
wondering what you have learned in your research anymore. For a long time, the popular press and
about those companies and their earning potential even the popular business press referred to Amazon
that the common investor might not have seen. And as “the company that never made any money.” I
if there is in fact anything standing in their way? think most informed observers today do buy into the
Thank you. idea that there is earnings power within the retail
side of the business. But how much earnings power?
Chase Sheridan: And how sure are you of your estimates? There are
We got comfort, and it takes some time to get no easy answers here.
comfort, with the level of investment that they are
making that is depressing their reported earnings. In We tried to analyze it from a number of angles. We
Google’s case they have had an incredibly looked at the growth investments the company is
defensible business for a very long time and it has making in the retail business. There are a whole set
allowed them to be an aggressor in many different of identifiable growth investments, including
industries whether that is email, cloud computing, discreet ones as well as new verticals and new
mapping, all the way to autonomous driving, and geographies. The list goes on and on.
many other areas. If you look at how they have
allocated capital you have got to give them a lot of One big point I’d make about Amazon’s retail
credit because they acquired YouTube, Android, investments is that most of them go through the
DoubleClick, which runs their ad network business, P&L. This distinguishes Amazon from brick and
these are huge businesses that have transformed the mortar retailers. Interestingly, Walmart didn’t
company. produce any free cash flow until the late 1990s. All
the while, the company was building these very
Amazon presents an even more extreme example of profitable boxes all over the country. Walmart was
investing with a focus on future growth. I will let investing through the balance sheet, not the income
Trevor talk about Amazon, but I think you have to statement. With Amazon, it’s a slightly different
get comfortable with the fact that these companies, story. Most of its retail investments terms go through
will continue to sacrifice a portion of current the P&L. In our minds, though, there isn’t any great
earnings to invest in the future of their business. My economic distinction.
internal joke about Google’s quarterly earnings is
they will report whatever they feel like reporting. John Harris:
They have a cushion because they choose to spend At a more general level, I think what you were
much more than they need to just maintain their asking was, what do you see that is different than
business. They can dial that back any time. They what everybody else sees here? Everybody knows

21
these are great businesses, so what is your insight? the time. Anybody could have done what we did, but
it takes work to get conviction. Interestingly when
It’s a little bit what Greg said earlier about old wine Trevor did his tremendous work on Amazon, he
in new bottles and it is also a little bit of what David came to the Investment Committee and said
said in his presentation about the duration of growth. something similar, to the effect that it may have been
One of our strengths has a lot to do with duration. the most compelling business he had ever seen. I
We’re thinking over five and seven and ten-year don’t think we are necessarily seeing things that
time scales as opposed to this quarter, this year or other people aren’t seeing but we are generating a
next year. We have always had a healthy and level of conviction that maybe takes some time to
unusual appreciation for the power of long-duration generate.
growth, which was really the insight more than
anything else that led to profitable past investments John Harris:
like Idexx, Fastenal, Expeditors and Progressive. A lot of times the edge is how you think and not
Like Greg said, it’s the same wine, just a different what you know.
bottle. These are wonderful service businesses with
very, very long-duration growth potential, and some Question:
people in the market may be aware of it, but many I think it is fabulous that you’re as concentrated and
people in the market are not operating with the focused as you are in the portfolio. My question has
perspective of our time horizon. We look at and to do with a new position, have you decided that
approach and value those types of businesses a little when it comes to a new position, that it won’t be
differently because we value that duration maybe a below X percentage, and if so, what is that
little differently than other people do. percentage? I mean, is it a situation where you want
at least 2% to 3% in a new position and anything
Trevor Magyar: less you just won’t invest, or maybe you could
To bring it back to Amazon, it’s a fair point. There is elaborate on that a bit?
an inherent lack of precision when we are measuring
the current earnings power of the business. When we John Harris:
were sitting around the table talking about it, I don’t Our process is arduous and takes too much time and
think anyone asked, “Well, what do we think the effort to do all of that work to make it a 1% position.
earnings power is going to be next year down to the As I said earlier, making good decisions is really
decimal point, and what multiple down to the hard, so when you make them you want them to
decimal point is the stock going to trade at next matter. So yes, at least 2% and I would say really
year?” It was “How sure are we that the earnings 3% is where we like to be at a minimum.
power is going to be much higher in five years?” and
“Given what we are paying for it today, is that an Trevor Magyar:
attractive proposition?” Like John said, it’s easy to If we end up with a 1% position, it is because
see the logic of this sort of thinking, but a lot people something happened, the price ran away from us or
for various reasons have a hard time putting capital whatever. We then have to reassess whether or not it
behind that logic. makes sense to keep the 1%, which may be very
attractive, or just cut bait and redirect our resources.
Chase Sheridan:
I wouldn’t say we had an edge in Google when we Question:
invested in 2010. We studied it for two years before Thank you for organizing this event. I have two
we invested, and at the time I found it to be the questions. The first question is related to some of the
single best business I have ever seen in my life. It holdings that you have. They are pretty big in size.
may be the single best business model I had ever They are in the $500 billion range; some of them are
seen. Their core Adwords business is one of the best going to trillions. Is that something that you are
businesses on the planet. When we bought it; we concerned about, the sizes of these companies, how
probably didn’t have any special insight, but you long can they grow? I mean, what are you
could look at the financials and see it had an envisioning that the size of this company will grow?
enterprise value that was about 14x free cash flow at $1 trillion, $2 trillion? Comparing to a Fastenal,

22
when you guys bought it, it was probably like $500 us about the outlook for oil and gas. And one thing
million dollars, and then it went up to $15 billion we realized after a period of time is they had no idea
dollars? So that is like, I don't know a 20X, 30X. what was going to happen to the price of oil.
Question number two is related to your circle of
competence. Oil prices have gone up from $25 Greg Alexander:
dollars to almost $80 dollars now. Is the oil and gas And they were smart!
industry something outside of your circle of
competence? Thank you very much. David Poppe:
Yes, they were the smartest people in the industry,
Arman Kline: they were super smart. I am not insulting them. They
On the size of the businesses question, it is a very just don’t know. It is very difficult and most oil and
good one and one that we discuss regularly. The gas stocks trade almost as derivatives to the oil price.
history of $500 and $800 billion market caps If Exxon can’t predict the oil price, and oil and gas
doubling or more in size, well we haven’t really seen stocks are very closely correlated to the price of oil,
that before. It’s new territory. So this is a very active what is your edge? It seems very difficult and we are
debate within this firm in thinking about the growth not geologists. Maybe you could have an edge if you
rates that you are seeing out of some of these mega- were but we put that in the “too hard” pile.
cap stocks and businesses and whether this can
really continue. The fact that we own them tells you Greg Alexander:
that we have ultimately concluded that we do think I would be careful of Wall Street research. When the
there is growth here. We think these are oil price was at $25, a lot of my emails seemed to be
differentiated businesses. Online businesses in broker’s reports talking about how it could be $15
particular have certain scale elements to them that dollars, and now that it is $80 dollars, I am getting a
might lend themselves to greater scale and higher lot of reports about how it could be $100 dollars.
profitability. I don’t know if anyone has anything to
add to that? Question:
Thanks for doing this and showcasing the team, this
Trevor Magyar: is first class. Two questions related to the indirect
We’d love to find another Fastenal, if you can help holding of Tencent. First, how do you think about
us? and get comfortable with the VIE structure, the
variable interest entity, you don’t really own a
Arman Kline: Chinese stock, you own a piece of paper that says
That too! you sort of have it. And then separately how do you
get, how do you think about and get comfortable
Greg Alexander: with the kind of social license to operate in that
We still look at mid-sized companies most of the Chinese market long term with that business model
time; it is just that the world has changed. It is sort of social media. It arguable does expose the business
of like people…if you can sing a song or kick a over time to regulatory risks in a regime that doesn’t
soccer ball, your audience is now global, and so your have some the checks and balances that most of your
income goes up. There are companies now that have portfolio of holdings has. Thanks.
a good search web page with one little search box on
it and you can now serve eight billion people. It is Eric Liu:
just a different situation. Yes, sure so the two questions are somewhat related
on the VIE structure as well as the involvement of
John Harris: the Chinese government. The VIE structure is pretty
Do you have anything insightful to say about oil and complicated; we have thought about it and our
gas? ultimate conclusion was that the Chinese
government is interested in attracting capital to its
David Poppe: capital markets and is unlikely to rock the boat there
I’ll say one thing on oil and gas. We had Exxon and do something unusual. We do acknowledge that
come in for years and every year they would talk to as a risk but one that we are willing to underwrite.

23
On the involvement of the Chinese government, it is
quite pervasive. It is amazing in terms of how
involved it can be. One of the interesting comments Jonathan Brandt:
Tencent made on the most recent earnings call was I think there’s a big mess to clean up there. I think
that they have two incredibly popular games based the people who are running the company right now
on this battle royale video game called Player are doing absolutely the right thing. There are going
Unknown’s Battlegrounds. It is Korean IP and to be continued discoveries and you don’t change a
therefore the speculation is that the Chinese problematic company-wide culture overnight but if
government has been stopping them from being able they find the slightest irregularity in their processes,
to monetize that intellectual property. The Chinese they are self-reporting it to the OCC or the Fed or
government is involved every day in every business whoever the relevant regulator is. The headlines
in China and there is no way you’re going to escape don’t represent the change in the culture that has
that. I think what we like about Tencent is the taken place. It’s like a runoff business when you
management team has been very savvy and very invest in a company that has one great business and
respectful of the government’s wishes and it has they are in another business that is reporting losses.
always aligned itself with it. I forget the exact stats These headlines are going to continue for months, a
but if you look at the most recent party meeting, year, two years. They are in fast growing states and
Tencent’s employees were there in force in terms of it is the cheapest bank out there if they get their
having representation in the Communist Party. That expenses down to where they should be. They have
is how we think about it, in the sense that they are had trouble controlling expenses recently. It is hard
aligned, but it is something that we think about to focus on that when every day they have to
every day. There was a recent case with Bytedance, respond to the latest media allegation. The stock is
a Chinese news platform, whereby the government quite cheap if they can achieve their expense goals
basically chastised it in public and it had to do an which are actually more conservative than what
about face on its business strategy. It is definitely some of the other banks are doing. Tim Sloan is
something that we are aware of and that we monitor doing what he can but with 265,000 employees, you
closely. just can’t change everything overnight. They are
trying to do the right thing and I support everything
Greg Alexander: they are trying to do.
It is an excellent question. It is not just a Chinese
problem. There are dozens and dozens of countries John Harris:
where the government, dictators, whomever are I think it suffices to say that they are not as bad as
controlling the internet or access to the internet they look but they are nowhere near as good as we
websites. My daughter had an assignment recently to thought they were.
read a dystopian novel, but frankly, everyone should
reread 1984. There is a lot of dystopian potential of Jonathan Brandt:
technology generally and I think it’s one of the Yes.
biggest problems we’ll face in the decades ahead, if
you ask me. Question:
Good morning, thanks so much for all being here to
Question: answer our questions. I am a two year shareholder,
You spoke earlier about the importance of culture and my question is a pretty simple one. Given how
within Ruane Cunniff. And I wonder whether the difficult prediction is and this has manifested with
seemingly weekly revelations out of Wells Fargo Exxon’s reliability in predicting oil. When you buy
have changed how you think about how you evaluate or add capital to a position, do you insist on a
the culture of the businesses that you invest in. margin of safety as the company exists that day
stripping out your predictions for future growth?
John Harris: Thank you.
Well, it certainly changed the way we evaluate that
culture. Johnny, do you want to talk about Wells John Harris:
Fargo? There is an incredibly intelligent and successful man

24
in Omaha who likes to say that the single most fund on today’s earnings and revenues, we wouldn’t
important words in investing are “margin of safety,” own a lot of the stocks that we own. But that doesn’t
and we agree. mean we are not investing with a margin of safety.

Jonathan Brandt: Chase Sheridan:

But wouldn’t you agree that growth is included in One of the things he was asking was, ex-growth, is
the margin of safety? there a margin of safety in the companies you are
investing in? I think the answer is, no, we are
John Harris: counting on some of these companies to grow.
Yes, the rate at which a company grows is a really
important factor in what the company is worth and If Amazon went ex-growth tomorrow, believe me,
we take it into account like every other factor, but you would not be happy with our investment.
the key always is you have to be giving less than you
are getting. The way to get what we think is a margin of safety is
to make sure that you have a high degree of
Arman Kline: confidence not only that they will grow next year but
Growth is in fact a margin of safety. If you have an for many years to come. With Google, with
organically rapidly growing business it allows you Amazon, with Constellation – we expect them to
more flexibility with valuation because within a year grow and we are paying something for that growth.
or two or three years, the earnings are changing However we are paying less than we think we are
quickly and the multiple is compressing. In contrast getting.
in a slow growing business you have to be much
more precise about exactly what you pay for that John Harris:
business. We are going to stop here. Thank you for coming,
thank you for spending time with us. We will see
Jonathan Brandt: you next year.
If we were to value many of the companies of the

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Disclosures
Please consider the investment objectives, risks and charges and expenses of Sequoia Fund Inc. (the
“Fund”) carefully before investing. The Fund's prospectus contains this and other information about the
Fund. You may obtain a copy of the prospectus at www.sequoiafund.com or by calling 1-800-686-6884.
Please read the prospectus carefully before investing. Shares of the Fund are offered through the Fund’s
distributor, Ruane, Cunniff & Goldfarb LLC. Ruane, Cunniff & Goldfarb LLC is an affiliate of Ruane,
Cunniff & Goldfarb LP and is a member of FINRA.
Sequoia Fund, Inc. – June 30, 2018
Top Ten Holdings*
Alphabet, Inc. 11.4%
Berkshire Hathaway, Inc. 8.3%
CarMax, Inc. 7.6%
MasterCard, Inc. 7.1%
Constellation Software, Inc. 5.9%
Rolls-Royce Holdings plc 5.1%
TJX Companies, Inc. 4.8%
Amazon, Inc. 4.3%
Liberty Media Corp. 4.0%
Charles Schwab Corp. 3.8%
* The Fund’s holdings are subject to change and are not recommendations to buy or sell any security.
The percentages are of total assets.

An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Shares of the Fund may be offered
only to persons in the United States and by way of a prospectus. Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment):
Management Fees 1.00%
Other Expenses 0.07%
Total Annual Fund Operating Expenses 1.07%**
** Does not reflect Ruane, Cunniff & Goldfarb LP’s (“Ruane, Cunniff & Goldfarb”) contractual
reimbursement of a portion of the Fund’s operating expenses. This reimbursement is a provision of
Ruane, Cunniff & Goldfarb’s investment advisory agreement with the Fund and the reimbursement will
be in effect only so long as that investment advisory agreement is in effect. For the year ended
December 31, 2017, the Fund’s annual operating expenses and investment advisory fee, net of such
reimbursement, were 1.00% and 0.93%, respectively.

The Fund is non-diversified, meaning that it invests its assets in a smaller number of companies than
many other funds. As a result, an investment in the Fund has the risk that changes in the value of a
single security may have a significant effect, either negative or positive, on the Fund’s net asset value
per share.
The S&P 500 Index is an unmanaged index of 500 stocks, which is representative of the U.S. stock

26
market in general. The Index does not incur expenses and is not available for investment.

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