Recently I have been fortunate to have had a couple of remarkable and thought-provoking conversations. The first was with a friend from San Francisco who said that talent has more to do with a person's DNA than their training and education. Naturally a 225-pound 6'6" basketball center's skills are enhanced by strength and size, which is typically attributed to a DNA advantage. Consider, however, the artist, poet, mundane accountant, marketing professional, doctor or politician... how do we decipher their DNA to see the talent that might be obscured by environmental factors, their personality, social norms, training, education or experience? How do we categorize greatness? How do we even know how to identify greatness and separate it from luck?
The other conversation was one of those "bring it all together" chats that connected a lot of dots for me and brought me to an "a ha!" moment. The theme of the conversation was simply that, for entrepreneurs, status – and not money – is a motivator. As an investor I have always had a significant bias toward investing along with the owners of companies. In other words, I want to invest along with managers that have a painfully large part of their own net worth tied up in the company. In addition, I want them to have a feeling of responsibility to protect, grow and help their company strive ethically and sustainably, even if for the simple reason that their families' reputations would be sullied if they screwed up and enhanced if they succeeded.
Virtue
What brings this all to this newsletter is simply "virtue of wealth." In October, I was interviewed on a national talk show about my latest book, The Virtue of Wealth. We discussed some of the books I've read in my teens, Law of Success, Think and Grow Rich and The Richest Man in Babylon. My host had also read those books, and we discussed the idea that success is a choice. Now keep in mind that "rich" is a word full of baggage. For some, all about money; for others, it is less about the money and more about a happy, fulfilling, meaningful and virtuous life.
So that interview got me thinking. Even factoring in 2008's horrible performance, FIM Group has had a pretty good run over our 25 years. Was it luck or DNA? Naturally our new and prospective clients wrestle with that. What will the next 25 years bring? Thankfully, unlike the athlete who's athletic prowess decreases with age, investment management seems to get better with age – when it's done right. When I look at the sages in any industry they are never 29 or even 39 – they were graying before they were ripe enough to be considered sages. I am thinking of John Templeton, Warren Buffett, Charles Munger, Graham and Dodd, and others who just seemed to improve with age. They all seem to have a shared DNA that is characterized by success, passion, intellectual curiosity, intellectual honesty and a desire to see the truth of the situation. Most people, it seems, don't want the truth unless it suits their bias. And as we know in the investment business, the truth is very important, because of the sometimes unsavory characters this business attracts. One of my favorite quotes is, "Some minds remain open long enough for the truth not only to enter but to pass on through by way of a ready exit without pausing anywhere along the route." In other words, "Don't bother me with the facts, because I have already made up my mind." In business – especially investing – to ascribe to anything other than the truth is irresponsible.
There is much written as of late about mutual funds, ETFs (exchange-traded funds) and indexing that is frustrating and falsely represents investment management. The allegedly truth-seeking managers or academics seem to basically look at nothing that does not support their hypotheses, which are:
1) Markets are efficient
2) Indexing works
3) You can't beat the market
If their premises are true – that investment management is not worth the effort – then why are they in the investment business? Shouldn't they just leave and go sell shoes, and let us delusional investors keep being outliers as we "beat" the market (or not).
Talent and DNA
Does talent exist? Is the investment process worth the effort? Are there great managers? Is Steve Jobs a great leader, or is he just lucky? Of course the core of this argument comes back to reputation, capital, intellectual honesty and the DNA issue. If you believe greatness exists, if you believe that talent exists, if you would rather have Tiger Woods as your golf partner than me, then you most likely are in the DNA and talent camp. If you believe that it is hard to identify talent, that excellence is more about luck than talent, training, DNA, passion and virtue, then accepting mediocrity and going the passive investment route is probably more your style.
So how does this relate to investing? At FIM Group we look for companies managed by passionate, ethical and talented people who have skin in the game. We want companies whose managers and board members have a significant part of their net worth invested alongside their shareholders. Naturally we can't be fanatics, because there are many well-managed, successful companies without significant insider or family ownership. However, in Asia and Europe we look for significant family ownership. Keep in mind that just because a family's reputation is on the hook it doesn't guarantee success. Ford Motor Company is a good example. Ford looks to be rising from the ashes; however, with billions of dollars of debt, the current management team has its hands full. I wonder what Henry Ford would think of what has become of his company that once was flush with billions in cash and now is mired in debt.
Examples of attributes we like are those of Apple, run by Steve Jobs. His reputation is tied to the company, and his 5.5 million shares of this $200 stock make it more than apparent that he is motivated toward continued success. We don't currently purchase Apple (AAPL) for our portfolios, but if its price got to where we felt it better reflected the competitive environment, we would not hesitate to own the stock. Today AAPL is a cult stock, and its price to its sales is nearly six times greater than Nokia, another great, well-managed technology company. Today, for various reasons, including valuation and price, we would rather own telephone companies like AT&T and leverage off Apple's successful iPhone.
Optimists Win
I write a column for Spirituality and Health magazine, and my last column was about optimism. The column's catalyst was an issue of Business Week that discussed the power of optimism. (Business Week now has a website dedicated to optimism and the economic recovery.) We all know successful people; they are optimistic, they strive, they look at setbacks as opportunities, they play to their strengths and usually, humbly or not, they have a desire to overcome their weaknesses for success. So what I think brings success to a company or any organization is, of course, all of the attributes we discussed above. Talent, training, DNA and virtue are needed – but they need one additional element: optimism. The virtues discussed (and some not discussed, like "leadership") are all great, but to create anything lasting they need to be energized with an "I can/we can" optimism. Just reference Winston Churchill about the importance of optimism.
