Insights, News / January 7, 2022

Market Scout – Mourning the Loss of Sam Stewart

Samuel S. Stewart, Jr. founded Wasatch Advisors in 1975. He served as our longtime Chairman and CEO. In 2018, he ventured out to co-found Seven Canyons Advisors with his sons Josh and Spence. To be sure, Sam was the quintessential entrepreneur. But to many of us, he was simply our mentor, our teacher and our friend.

For many years, Wasatch’s firmwide commentary was our Message From the Chairmanpenned without fail by our founder Dr. Sam Stewart. When Sam left Wasatch in 2018, none of us felt we could fill his shoes. So the Message From the Chairman became the Market Scout, to be written on a rotating basis by various portfolio managers and research analysts.

I feel a deep sense of honorand sadnessthat this Market Scout falls on me to write. At Wasatch, we’re all mourning the loss of Sam, who passed away at home on November 23 after recent heart surgery. He was 79 years old. The world is a bit darker without Sam’s light in it.

Prior to founding Wasatch, Sam was a professor of Finance at Columbia University’s Graduate School of Business and at the University of Utah. He received a Master of Business Administration in 1969 and a Doctorate in Finance in 1970 from Stanford University, where he held the Alfred P. Sloan, Jr. Fellowship. Earlier, he attended Northwestern University as an Austin Scholar and graduated with a Bachelor of Science in Business Administration in 1966. Sam was also a CFA charterholder and a past president of the Salt Lake City Society of Financial Analysts.


In his final Message From the Chairman on April 9, 2018, Sam wrote, “When I started Wasatch, one of my first tasks was to select an appropriate name. I wanted a name that would symbolize a firm built to outlast mehence, Wasatch Advisors and not Stewart Advisors. I wanted to build not just a firm but also a culture that would endure irrespective of me. Together with the rest of the team at Wasatch, I’m proud that we’ve done just that. To be part of this outstanding placeand this outstanding group of peoplehas been the honor of a lifetime.”

As his final Message makes clear, one of the tenets Sam instilled in us was a spirit of gratitude for each other and for our clients. Sam was fully aware that there’s no shortage of options when it comes to investing, and he always encouraged us to put clients’ interests ahead of our own. With this same spirit, on behalf of all of us at Wasatch, I can’t emphasize enough how grateful we are for Samour mentor, our teacher and our friend. The principles Sam embodied still guide us today.


In order to deliver the best performance for clients, Sam thought a willingness to be different from the crowd was critical. Moreover, in order to develop unique perspectives, Wasatch needed to invest in peopleany one of whom could make an exponential improvement to the firm.

Whenever Wasatch hired someone, no matter how senior or junior, Sam’s default attitude was, “I’m in the trenches with you. Together, I think we can do amazing work. Therefore, I’ll support and encourage you. But I’ll also push and challenge you. I’m interested in what you have to say because I believe in you.” In fact, we’d often remark that Sam wasn’t a collector of thingshe was a collector of people.

Because Wasatch’s early success was due to thinking differently, Sam recognized the importance of the firm staying independentin other words, staying 100% employeeowned. Otherwise, if Wasatch were owned by a larger organization, investment decisions might start to follow Wall Street’s herd mentality.

Staying independent meant Sam and his early partners had to make a sacrifice. To understand that sacrifice, consider the way many entrepreneurial businesses evolve from an ownership perspective. Let’s say a business is started by a small group of partners. Oftentimes, those partners are reluctant to give up control and ownership to a newer generation of employees.

The partners might figure that they took the risk, so they should keep most of the rewards. The problem, however, is that when the partners retire, the business may have to be sold to new owners. Unfortunately, the new owners may run the business and compensate employees in ways contrary to the original intentions.

At Wasatch, by comparison, Sam planned for future generations of employees to keep the business going with a consistent investment philosophy and process. In fact, he wrote the following in a 1999 memo: “The key responsibility for the next generation inevitably lies with the current generation, with help as needed from older generations.”

With great forethought, Sam and the early partners came up with an equity ownership and recycling program one that we still use today. The program is predicated on maintaining a longterm perspective and the willingness to sacrifice current personal gain for the longterm benefit of the firm and our clients. It has worked well for us, and ownership is now broadly distributed among our employee partners. We’re one of the few firms that can say we’ve successfully recycled over 100% of our equity over the past 20 years to second– and thirdgeneration owners, without ever needing to bring on an outside partner or to take on debt, and we’ve done so in a way that’s maintained great relationships and friendships with our exiting partners. Just as important, we’ve maintained our longterm track record of outstanding performance.


Sam believed Wasatch’s culture is at least as importantand maybe more importantthan our investment philosophy and process. This is because even a perfect philosophy and process won’t be of much value unless they’re implemented properly. And culture is the most vital factor in our ability to successfully implement initiatives.

From the very beginning, our culture has been based on integrity, collaboration, hard work, continual learning and a longterm perspective. These elements are also prevalent in academia, which is where Sam spent his early career. Moreover, just like an academic institution, Wasatch depends on human capitalwhich isn’t necessarily constrained by experience. In other words, some of our best ideas come from the newest members of our team. So our most productive investments for the future are in attracting, developing and retaining our human capital.

Another important point about culture is that Sam fostered a spirit of optimism. While all financial markets experience periodic downturns, Sam reminded us that economies and investment opportunities tend to expand over time. In addition, he believed we could always find companies taking market share and growing their revenues and earnings at attractive rates.


To Sam, integrity was achieved through the regular sharing of honest feedback between and among employees. An interesting anecdote from early in Wasatch’s history illustrates the importance of honest feedback. Back then, Sam and two of the firm’s other partners had invested in Commodore International, which at one time was the maker of the world’s bestselling personal computer (PC).

Despite being wellpositioned at the beginning of the PC revolution, Commodore stumbled badlypartially due to poor treatment of dealers and customers. In addition, Commodore’s computers were derided as “game machines” even though their advanced graphics, sound and video would eventually become highly valued by all types of customers.

Along with the downward trajectory of Commodore’s business went the value of Wasatch’s investment in the stock. After the Wasatch investment team had capitulated and sold its Commodore stake at a significant loss, Sam and the other two partners who had made the original investment decision went for a walk and lamented their mistake. During their walk, one of the partners complained, “I never did like that company.” Flabbergasted, Sam responded, “Well, why didn’t you say something?”

That incident was a pivotal point in Wasatch’s history. Honest feedback might have prevented a big investment mistake. From then on, Wasatch has made a concerted effort to foster respectful disagreement when an employeeno matter his or her senioritybelieves the facts support a contrary point of view. We call this “disagreeing without being disagreeable.” Moreover, we try to ensure that employees’ opinions aren’t squelched by company politics, peer pressure, pay concerns or fears about making a mistake.

Many years after the Commodore incident, a young and inexperienced Wasatch analyst detailed her significant concerns regarding one of Sam’s largest investments. Rather than being offended or “pulling rank,” Sam reevaluated his research and used the analyst’s criticism as an example of the type of polite debate he wanted to encourage. Moreover, he nominated the analyst as “Employee of the Weeka recognition we still use today.


In addition to being an incredible teacher, Sam always considered himself to be a student as well. If the market or an individual stock performed in a way that differed substantially from his expectations, Sam was usually willing to have the courage of his convictions but he nevertheless continually asked himself, “What might I be missing? What do other investors know that I don’t?”

Sam was also selfdeprecating. He wasn’t driven by ego. He was the first to acknowledge his mistakes and to learn from them. For example, in the early 2000s, Sam invested in several fastgrowing specialty finance companies. While the companies looked inexpensive, their business structures were excessively complex and the companies were in too much debt. Similarly, a few years later, Sam became overly enthusiastic about certain yielddriven investments because he thought growthoriented companies might struggle in a pricey market with a relatively stagnant economy. Instead, declining interest rates drove price/earnings multiple expansion among growth companies.

These mistakes caused Sam and all of us at Wasatch to ask better questions, to temper our enthusiasm for large positions, to place greater emphasis on strong balance sheets and to focus more on the longterm viability of business models.


Sam gleaned another insight from the Commodore incident and similar experiences: the importance of collaboration. When we focus “multiple eyes” on a situation and share information in an unbiased way, the team is likely to make a better decision than any one individual working alone. In other words, the team as a whole is much greater than the sum of its members.

For this reason, Sam insisted that Wasatch’s portfolio managers and other research professionals work in a nonhierarchical, opendoor environment. To this day, they generally attend meetings, conferences and company visits with at least one other colleagueand often with several colleagues. Additional research is also done by individuals on their own. But before an investment decision is made, this individual research is generally discussed with the team in the context of the different perspectives from the meetings, conferences and company visits.

By instituting a multipleeyes approach, Sam knew that Wasatch would foster continual learning as team members share facts and opinionswhich are then subject to scrutiny and honest feedback. Jeff Cardon, Sam’s first protégé who preceded me as CEO, recently remarked, “The worst thing you could do was not express your opinion, and the secondworst was assume someone else’s opinion was invalid without a fair hearing. That came from Sam’s incredible curiosity and passion for investing.”

Sam liked to think of our multipleeyes approach as being similar to water finding its own level. When the approach is implemented properly, investment resources will flow to those areas where they’ll be most effective for our team and our clients.


Sam and a few key partners laid the groundwork for Wasatch in the late 1970s and throughout the 1980s. Even in those days, it was clear to the partners that in order to add value (a.k.a., “alpha”) for clients, the firm had to develop a unique investment philosophy and process.

Just before the firm’s launch, Sam was a University of Utah professor living and working in Salt Lake City. He had never managed money professionally. Those circumstances may have seemed problematic. After all, most of the established moneymanagement expertise was concentrated on the East and West Coasts and in larger cities.

In reality, however, those circumstances turned out to be tremendously advantageous in developing Wasatch’s unique philosophy and process, which were very different from the mainstream at the time. In essence, Sam sought to emulate the best attributes from academia: really smart people working together and sharing information objectivelybut from different perspectivesin an effort to get at the truth.

Some of Wasatch’s first employees were Sam’s former finance students at the University of Utah. By necessity, they came up with their own unified theory and approach for managing money. Partly because of their location, early members of the Wasatch investment team weren’t bombarded by standard Wall Street dogma. That situation allowed the team to focus on the fundamentals of individual companies without being unduly influenced by the recommendations of other investment professionals whose motives may have been selfserving.


Sam held a strong conviction that markets don’t price stocks “efficientlyparticularly in the micro– and smallcap areas. At the most basic level, he believed earnings growth drives stock prices over the long term. So he’d typically seek to invest in companies he thought could approximately double in size over the next five years and then double again over the following five years.

Sam’s investment philosophy still guides us today. In essence, we try to capture earnings growth at rational prices. If we do this well, we believe stock performance will take care of itself. Our process incorporates bottomup, fundamental analysis. We look for highquality, longduration growth companies. By high quality, we mean exceptional company management, sustainable competitive advantages, strong cash flows, selffinanced growth, significant returns on capital, low debt and healthy
balance sheets.

Today, company valuations are elevated. Inflation is rising. Prospects for economic growth are particularly uncertainexacerbated by supplychain disruptions and the Omicron variant of Covid19. To a large extent, mone­tary policy over the past several years had been forced to pick up the slack created by inadequate fiscal policy. And now, monetary stimulus is being tapered. These conditions present an especially challenging conundrum for investors.

So, what would Sam say about the current environment? I believe Sam would advise investors that they should pause to contemplate not what seems important today but what will likely be important over the next five to 10 years. He would suggest that investors should focus on companies with superior longterm business models and significant cash on hand. While such companies may face difficulties during a potential economic downturn, they’ll likely gain market share from weaker competitors and emerge from a downturn as even more dominant in their industries. For our part, we agreeand this investment focus is reflected in the Wasatch strategies and funds.


As I think about Sam, “do the right thing” is perhaps the best way to summarize a principle he cemented in our culture. He treated peopleregardless of their senioritywith the best of intentions. For example, when I came to interview with Wasatch as a young college graduate, Sam didn’t try to “sell” me on the job. He simply invited me to work with the team for a few days so we could all decide if the fit was right. And 25 years later, I’m still here.

Similarly, Sam always had respect for our peers in the financialservices industry. He believed the marketplace could accommodate friendly competition. And while Sam remained convinced that our way of investing was right for Wasatch, he fully acknowledged the success of different approaches.

As a twofisted drinker of icecold soda, Sam had another way of describing an attitude of selflessness. He called it “refilling the ice traysa reference to the days before freezers automatically dispensed ice cubes, and a cold drink depended on you or a courteous coworker always ensuring the ice trays were full.

While I can’t even remember the last time I saw actual ice trays in a freezer, all of us at Wasatch are still metaphorically “refilling the ice trays.” And we’re feeling the loss of Sam deeply. I’ll always miss his laugh, his penchant for playful debate, his passion for stocks, sports, farming, film and art, and his consistently positive outlook.

With sincere thanks for your continuing investment and for your trust,

JB Taylor



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Alpha is a riskadjusted measure of the socalled “excess return” on an investment. It is a common measure of assessing an active manager’s performance as it is the return in excess of a benchmark index or “riskfree” investment. The difference between the fair and actually expected rates of return on a stock is called the stock’s alpha.

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year.

The price/earnings (P/E) ratio, also known as the P/E multiple, is the price of a stock divided by its earnings per share.

Return on capital is a measure of how effectively a company uses the money, owned or borrowed, that has been invested in its operations.

Valuation is the process of determining the current worth of an asset or company.