It’s been a busy start to the year with markets remaining volatile. We have also been out visiting a number of current and prospective investments across the U.S. Midwest, Switzerland, and Germany. It is always refreshing to get out of the office and meet the management teams on home soil. You can quickly get a sense of a company’s mindset by visiting its headquarters and hearing management talk about its business.
A few common themes seen across many of the companies we visited included long-term focus, conservatism, and the desire to be niche market leaders. These are attributes that we like to see and are common traits of many industrial companies in these parts of the world. One of the companies we own even skipped the expense of having a receptionist – you were greeted by a computer where you entered your name and the person you have an appointment with.
What are some lessons we can learn from these very successful companies?
Most profitable companies know what their critical success factors are and work very hard to succeed in these areas. As investors, we live in a world where it is easy to be overwhelmed by the sheer volume of information and one of our success factors is being able to properly focus our time and attention on what matters. This is only possible if we cut down on non-value add activities and distractions. In our case, this often means passing on an opportunity because it is simply not a good fit for our style – even if it has a better than average probability of generating a profit.
Coming into 2015, I’ve made it a personal goal to further cut down on e-mails that can quickly fill an inbox. It’s staggering how much time we all spend checking e-mails and messages, much of which adds low to no value. Have you ever wondered why it’s so hard to step away from the computer and focus?
Take a longer term view
This industry has become notoriously short term oriented. Not only is this a more stressful way to operate, but it also creates unnecessary activity (i.e. cost). Staying true to our long term focus and philosophy isn’t always easy, but our investors – including us – hold our funds for this reason.
During our recent travels, we met with a large holding of ours which has been undergoing positive management change and is in the early stages of a well-thought-out turnaround strategy. The plan will take three to five years to play out in earnest and, while this is far too long for many shareholders today, this gets us excited because it can be a core part of the portfolio for a long period of time. We would much rather own a large position in a business that can be held for many years, assuming the valuation remains attractive, than have to find a number of smaller (and lower conviction) ideas that have to be constantly replaced. I don’t think it’s because we’re lazy, it’s because we believe owning fewer but higher conviction names provides better risk-adjusted returns over the long run.
Think like an owner
We remain focused on owning companies where management thinks like an owner – usually because they are. In a recent meeting with Glencore CEO Ivan Glasenberg, he made a comment very uncharacteristic of CEO’s in the mining industry. When asked about allocating capital to existing mines, which are naturally depleting assets, he said he was happy to not reinvest and let the mine deplete if the overall returns on that capital (not marginal) did not exceed its return thresholds. As a significant owner in Glencore, this makes sense. However, this is an industry where 1) capital was historically plentiful, 2) there was an aversion to running a company that was not growing, and 3) the “when you’re a hammer everything looks like a nail” syndrome is pervasive (i.e. a miner naturally wants to build another mine, period). The result was billions being invested into what has turned out to be very low or negative return projects. We want to own companies that exist to create value for shareholders, not get bigger for the sake of size. We have extended this philosophy to our team through fund ownership, so our incentives aligned with our investors.