Jolon Page is an MBA student at Ivey with a focus on value investing, entrepreneurship, and technology. He shares his insights from the Ben Graham Centre’s 2016 Value Investing Conference in Toronto.
On my way to the Fairmont Royal York Hotel for the Ben Graham Centre’s Value Investing Conference, I began to contemplate what insights I might glean from the panel of distinguished speakers. While mentally reviewing the fundamental concepts I learned during Professor George Athanassakos’ value investing course, it dawned on me. I wanted to uncover insights into assessing concepts that I personally find nebulous. This includes assessing the quality and sustainability of a firm’s culture and management as it relates to competitive advantage, as well as the impact of these factors on a valuation. How much emphasis do practitioners place on these considerations? Is there a consensus on the importance of either? As you may expect from a panel of intelligent, educated, and experienced professionals, opinions were mixed.
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The morning session included presentations from value investing practitioners, split into two sections, a keynote speaker followed by a panel. While explaining why investors should buy quality as opposed to value, Richard Rooney, President and CIO of Burgundy Asset Management Ltd., referenced a management-related quote from Warren Buffett: “Buy a business any fool can run, because eventually one will.” Buffett uses this belief as a barometer for the quality of potential investments. Any fool can run a monopoly, therefore by buying one, risk of permanent capital loss due to incompetent management is limited. Rooney also discussed the value-diluting impact of an excessive use of stock-based compensation. Here’s my take on it: If a company is truly of the highest ilk, remaining competitive does not necessitate giving the business away internally. The lesson here is, in comparing similar businesses, the firm that achieves comparable results with proportionately lower stock-based compensation is of higher quality and therefore lower risk.
Irwin Rotenberg, President of Lissom Investment Management Inc., cited a past holding in Sysco as an example. At the time, Sysco’s management team was investing heavily in long-term projects causing all of the traditional capital return metrics (and, as a result, the stock price) to drop significantly. In speaking to Sysco’s management about the investments, Rotenberg’s team saw the long-term vision and potential for significant future value. He invested on that basis and was later handsomely rewarded. To me, the lesson here is simple: “The Street” can suffer from informational indigestion. To quote Buffett’s right-hand man, Charlie Munger, “There are times when even a company as big as Coca-Cola is too cheaply priced by the market considering what it’s going to do for the shareholder. The times when we can figure that out, we go in heavily.” From this, I learned that having the competence and foresight to recognize a management team with the ability to execute on a misunderstood but robust plan holds with it considerable opportunity for future returns.
Charles (Chuck) Akre, CEO of Akre Capital Management, put it another way. He said he’d even buy a drunk at three times earnings.
“Everything has a price,” he said, receiving a rousing response.
Akre said, in his view, culture is far more important than management. Reading between the lines, this statement appears to echo the sentiments of both Buffett and Rooney. A change to corporate culture is far more arduous a task than a change in management. When investing long term, the difference is of fundamental importance.
Such comments reinforced that, in the hierarchy of investing considerations, culture outranks management in importance. It was also evident that both culture and management should be assessed for different reasons. What forms the basis of a strong culture? And how does one gain an understanding of corporate culture in order to assess it?
(L-R) Value investor panel participants Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers; Paul J. Lountzis, President, Lountzis Asset Management, LLC; Irwin Rotenberg, President, Lissom Investment Management Inc.; and Chuck Akre, Chief Executive Officer and Chief Investment Officer, Akre Capital Management.
Peter Kaufman, CEO of Glenair, Inc., provided words of wisdom from a business operator’s perspective.
“The single most important thing in an operating business is culture. It is what provides a competitive moat,” he said.
Kaufman used props to help his audience remember key points. He first brought out a clicker and spoke about Daniel Kisch, professor, echolocation specialist, and president of World Access for the Blind. Kisch had tried to teach echolocation (the use of sound waves and echoes to determine where objects are in space) to both the visually impaired and those with sight, but was only ever successful with blind students. He attributed this success to the fact that, unlike the blind, sighted students were not “all in.” Kaufman said the only way a firm can experience lasting success is if its employees are “all in.”
His next prop, a stuffed puppy, symbolized a family raising a new puppy. He compared that process to a company onboarding a new employee. He outlined how a puppy becomes an engaged and contributing new member of a household.
“You need to create a secure, calm, reassuring and safe environment; communicate in soft soothing tones; and you need to share your food and water. Most importantly, and this is critical, there must be no intermittency in these actions, you have to be 100-per-cent consistent. The dog will eventually come around and be willing to die for its family. It goes all in,” he said.
In assessing culture, Kaufman said you need to find an organization capable of achieving the “all in” mentality with humans. If employees in an organization are “all in,” it is synergistic to the point of alchemy. To gain an accurate perspective of a company’s culture as an outsider, he suggested you go to a trade show and speak with employees. Kaufman cited Costco, Trader Joe’s, and Fastenal for having admirable corporate cultures.
As a first time attendee, I found the conference highly insightful. This was true both from the perspective of firm valuation and value fund management. The speakers delivered many important insights to my burning question. They addressed everything from the importance of identifying firms with an “all in” culture to using your circle of competence in assessing the merits of management’s long-term strategic investments.
It’s now time to brainstorm what morsels of wisdom I can hope to take away from next year’s conference. And to put this year’s advice into practice.