The Business of Access

Some of the greatest businesses in history were not built by inventing something entirely new. They were built by taking something desirable, useful or aspirational that already existed and putting it within reach of millions of people who had previously been excluded.

Sometimes the barrier was price. Sometimes knowledge, complexity, distribution or convention. Often it was simply that the incumbent industry had decided certain people weren’t worth serving.

The great democratisers saw things differently.

Democratisation Is Not Cheapening

Ingvar Kamprad described IKEA as part of a “gigantic project of democratisation.” The company’s purpose was not merely to sell cheaper furniture, but to make the kind of quality products once affordable only to the rich available to everybody else.

Giorgio Armani arrived at much the same idea from the opposite end of the market. He spoke explicitly about the “democratisation” of fashion. After establishing one of the world’s great luxury houses, he deliberately turned towards young people and those who loved fashion but couldn’t afford his main line. The launch of Emporio Armani in 1981 shocked people around him. Casual clothes, denim, lower prices. Critics feared he was diluting the brand, perhaps even destroying the exclusivity that made Armani desirable in the first place.

Armani saw no contradiction.

“I am well aware that style and elegance are everywhere, not only in the upper social classes,” he later wrote.

Lew Frankfort came to a similar conclusion at Coach. Having studied Louis Vuitton, he told his executives he wanted Coach to become a “democratized version of European luxury in America.” Vuitton might appeal to the top one percent of households; Coach could reach the top twenty. Frankfort’s insight was that luxury didn’t have to mean prohibitively expensive.

Frankfort eventually preferred the phrase accessible luxury. It is a useful distinction. Democratisation is not the same thing as cheapening a product. Often the real trick is preserving what makes something desirable while removing the obstacle that keeps most people from enjoying it.

Frankfort was, without necessarily knowing it, describing exactly what Rolex had already built.

Business historian Pierre-Yves Donzé identifies this as one of Rolex’s core competitive advantages: the identification of an entirely new market, what he calls “accessible luxury” — a segment that kept the social signalling of classic luxury while closing the distance that price had always placed between that world and the middle class.

The watches remained expensive. But they were never out of reach: a dream product an ordinary consumer could hope to acquire one day, at a time when Patek Philippe and Vacheron & Constantin were still building small-batch pieces by hand for the “happy few.”

Tadashi Yanai describes Uniqlo’s mission as the “democratisation of clothing.” “We want to sell good clothing to all people, not just the few,” he has said. The objective wasn’t simply cheap clothing, but high-quality clothing at prices almost anyone could afford. IKEA approached furniture much the same way. It kept design and function but changed sourcing, packaging, transport, store format and even who assembled the furniture.

That pattern turns up remarkably often in business history.

The Flywheel of Lower Costs

Almost 200 years ago, Cornelius Vanderbilt became America’s richest man not by serving the richest Americans, but by dramatically lowering the cost of transportation for everyone else. His competitors in the steamboat business largely assumed there was a natural number of passengers travelling between two cities. Cut fares and all you did was fight more aggressively for the same pool of travellers. Vanderbilt believed the pool itself could grow. Make travel cheaper and people who previously stayed home would start travelling.

That sounds obvious now. It wasn’t then.

Vanderbilt could pursue the strategy because he was obsessed with efficiency. “If I could not run a steamship alongside another man and do it as well as he for twenty percent less than it cost him,” he said, “I would leave the ship.”

Lower costs allowed lower fares. Lower fares brought more passengers. More passengers created scale, and scale helped lower costs again. A flywheel, long before anyone called it one.

John D. Rockefeller would eventually build an even greater fortune on much the same principle. Standard Oil’s relentless attack on refining, transportation and distribution costs helped send the price of kerosene dramatically lower, bringing reliable illumination within reach of more households. The attraction was not simply that Rockefeller could produce more cheaply than competitors. It was that he understood the enormous demand that could emerge when a useful product became affordable to ordinary people.

Henry Ford was even more explicit.

“Every time you reduce the price of the car without reducing the quality,” he said, “you increase the possible number of purchasers.”

Ford once calculated that cutting the price of a car from $440 to $360 could expand annual demand from roughly 500,000 buyers to perhaps 800,000. Less profit on each car, perhaps, but more cars, more workers, more scale and ultimately more profit.

The automobile industry at the time was still largely organised around wealthy customers. Ford’s ambition was to build a car “for the great multitude.” He understood that the absence of middle-class car buyers did not prove middle-class people didn’t want cars. It proved that cars were too expensive.

“We took what was a luxury and turned it into a necessity,” he later said.

Ford Car Prices & Production 1909 - 1921 [Source: ‘My Life and Work,’ Henry Ford, 1922.]

Seeing Customers Before They Exist

That may be one of the defining characteristics of a great democratiser: they see customers before the customers exist.

A.P. Giannini saw them in banking.

The traditional San Francisco banks largely catered to established businesses and wealthy customers. Giannini’s Bank of Italy - which later became Bank of America - went after immigrants, labourers, shopkeepers and farmers — people who were often intimidated by banks, kept cash at home and sometimes relied on loan sharks. Where established bankers saw deposits too small to matter and loans too small to justify the paperwork, Giannini saw relationships that might last a lifetime.

“The little fellow is the best customer that a bank can have,” he told his people.

It is an extraordinary sentence because the prevailing banking model suggested precisely the opposite. The little fellow looked uneconomic. Giannini changed the economics.

Branching brought the bank closer to customers. Longer hours made it more convenient. Small loans brought people into the financial system who had previously been excluded. The incumbent saw a $25 loan; Giannini saw millions of potential customers.

This pattern repeats. The customers ignored by the incumbent can become the market of the disruptor.

The Humbling of Products

Milton Hershey found them in chocolate. Before Hershey, chocolate remained largely a luxury product. By applying mass-production techniques, he helped turn it into something ordinary families could buy regularly. Frank Woolworth did the same with consumer goods. His stores became famous for offering “articles which were once luxuries” for five and ten cents.

Sears was built on much the same idea. Its history describes the process as the “humbling of products” — the efficient distribution of previously unattainable things to what it wonderfully called the “huge pools of human desire called markets.” The automatic washing machine, once owned only by the rich, was democratised by Sears in 1942: $37.95, with three dollars down and four dollars a month thereafter.

Neither lesson was simply “sell things cheaply.” Woolworth understood that low price without quality was a dead end; the company’s history records his view that it would be fatal to sacrifice quality for price.

When the Barrier Isn’t Price

Home Depot took the idea a step further. Bernie Marcus and Arthur Blank realised that price wasn’t the only thing preventing people from improving their homes. Knowledge was a barrier too. The professional tradesman knew what to buy and how to use it; the ordinary homeowner often didn’t.

“We gave customers the knowledge to do it themselves at the right price,” Blank wrote. He pointed to a striking example: a customer could install a Mills Pride kitchen for $3,000 that twenty years earlier might have cost $25,000 and required a professional.

Home Depot wasn’t simply taking sales from existing hardware stores. By combining lower prices, enormous product choice and knowledgeable staff who taught customers how to do the work themselves, it expanded the population capable of undertaking home-improvement projects in the first place.

That is another form of democratisation: sometimes the barrier isn’t what something costs, but whether the customer has the knowledge or confidence to participate at all.

Reinvest in Lower Prices

IKEA’s Kamprad then did something many businesses find psychologically difficult: he gave much of the efficiencies back. Former IKEA CEO Anders Dahlvig noted that purchasing savings were repeatedly reinvested in lower customer prices rather than simply harvested as higher margins. The objective was to grow the customer base, even when doing so meant sacrificing some short-term profit.

Charlie Munger admired this broader instinct in Costco and GEICO. He said both companies seemed to feel a “holy duty” to provide a wonderful product at a very low price. Plenty of companies claim to offer value; far fewer build the desire to continually push price down and quality up into the “body and soul” of the organisation.

Buffett saw the same thing at Nebraska Furniture Mart. Mrs. B and her family bought brilliantly, operated at expense ratios competitors couldn’t match, and passed much of the saving back to customers. Buffett called it an ideal business: exceptional customer value producing exceptional economics for the owners.

There is a counterintuitive lesson here. If you possess a cost advantage, the obvious temptation is to keep it. Raise the margin. Report the earnings. Enjoy the spread.

The great democratisers often do something else. They reinvest the advantage in the customer.

Lower prices bring more people into the market. More customers increase scale. Scale creates purchasing power, operating efficiencies, brand awareness and distribution density, which can fund another round of lower prices or better service. The margin sacrificed today can become the moat tomorrow.

Liberating the Market

Juan Trippe understood the same principle in aviation. Pan Am became synonymous with glamorous international travel, but Trippe’s ambition was much larger than carrying the wealthy across the Atlantic. He pushed continually for lower fares and greater aircraft capacity because he believed international flying could become a mass-market activity. The Boeing 707 and, later, the enormous 747 were not simply technological achievements; they changed the economics of a seat crossing an ocean.

The same logic Vanderbilt had applied to a steamboat now operated six miles above the earth.

Herb Kelleher later watched it play out at Southwest Airlines. He recalled entering city-pair markets where perhaps 125,000 people flew each year and watching traffic grow towards a million once Southwest introduced low fares, frequent service and convenience. Kelleher didn’t describe this as taking market share. He said Southwest had “liberated” people, allowing them to fly for business and personal reasons far more often than before.

That word is revealing. Liberated. It is the language of removing a constraint.

Aspirational, Not Exclusive

Coach provides another variation. Unlike transportation, banking or household goods, luxury derives some of its appeal from exclusivity itself. Lew Frankfort's insight was that aspiration did not have to disappear simply because the product became more accessible. Coach could remain premium while reaching millions of consumers who could never contemplate traditional European luxury. Frankfort wrote that while traditional luxury was exclusive, Coach could be inviting. A Louis Vuitton handbag might signal that its owner had arrived; Coach could appeal to a woman who was still on her way.

That is democratisation at a subtler level. The challenge isn't simply widening access. It's widening access without destroying the aspiration that made the product desirable in the first place.

Armani did the same with Emporio Armani. Critics imagined luxury as a finite pool of exclusivity: if too many people gained access, prestige would disappear. Armani instead recognised that style was not confined to wealth. There was a vast population of younger consumers who cared deeply about fashion but were excluded by the economics of the traditional luxury house. He didn’t need to persuade them to care. They already cared. He simply needed to let them in.

From Products to Capital

The same idea eventually reached Wall Street. Charles Merrill believed investing should not remain the preserve of wealthy insiders. “We must bring Wall Street to Main Street,” he said, “and we must use the efficient, mass merchandising methods of the chain store to do it.”

Merrill Lynch opened branches across America, advertised aggressively and educated ordinary people about stocks. The objective was not merely cheaper brokerage; it was what Merrill's son later called “demystification” — making Wall Street intelligible and accessible to the small investor.

Charles Schwab would later push the same democratisation further through discount brokerage, while Satya Nadella has described Microsoft's original raison d'être as democratising computing.

Henry Kravis has used exactly the same language at KKR:

“We spend a lot of time on a new area that we all came up with, and that’s a democratized product, which means that we’re enabling a retail investor to invest in the KKR product just like an institutional investor has been able to do for years.”

Again, the underlying investment capability already existed. The innovation was widening access to it.

Sizing a Market That Doesn’t Exist Yet

And that brings us to something especially relevant for investors.

We spend a great deal of time estimating total addressable markets. We take the number of existing customers, multiply it by some price or penetration assumption and build a spreadsheet around the result.

But what if the existing market is only the market permitted by the existing business model?

Reid Hoffman makes the point directly: when estimating market size, investors need to consider how lower costs and product improvements can expand the market by attracting new customers, not simply taking share from existing ones. Aaron Levie put it even better: sizing a disruptive market from the incumbent market can be like sizing the automobile industry by counting the number of horses in 1910. The current market may tell you very little about the eventual one.

Every business in this essay was assessed twice: once by the incumbent, who saw a customer too poor, too uninformed or too small to bother with — and once by the founder, who saw the same person as the market.

The spread between those two assessments is where the return lived.

A $10,000 product may have one million customers. At $1,000 perhaps it has ten million. But price is only one constraint.

The most valuable customer may be the one who isn’t a customer yet.

That is why I find the democratisers so interesting. They tend to combine several characteristics we often look for separately: relentless efficiency, customer orientation, willingness to sacrifice some current margin, scale economies, intelligent distribution and an unusually expansive view of the market.

More than anything, they refuse to accept the industry’s definition of who the customer is. The great democratiser asks a different question:

Who would become a customer if we removed the thing keeping them out?

Business history understandably celebrates the inventor — the person who creates something the world has never seen before. But another kind of entrepreneur has created just as much value: the one who takes something already wonderful and asks why so few people get to enjoy it.

The breakthrough isn’t always invention. Sometimes the breakthrough is access.

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The Barnacles on the Hull

Richard Farmer had a favourite way of explaining costs at Cintas. He told his people to imagine a new ship entering the water.

“When a new ship is put into the water, it has a clean hull,” Farmer explained. “It moves fast and is highly manoeuvrable. Nothing is holding it back.”

Leave it in port for a year, though, and things change. “Barnacles accumulate on the hull. They slow the ship down, require more power to run, and reduce manoeuvrability because of the drag.”

“Whether we know it or not, we’ve got barnacles,” Farmer told his people. “Your job is to find those barnacles and scrape them off.” He would give examples: “buying things that you decided you needed 10 years ago and you don’t need them anymore. Or having somebody prepare a report that was very important to you five years ago, but now you no longer need it. But they’re still preparing it for you. That’s a barnacle. People we’ve outgrown or are occupying positions that are no longer needed—they’re barnacles too.”

None of these things is likely to sink the ship. That’s precisely the problem. They accumulate slowly. A report becomes a process, the process requires a person, the person eventually becomes a department, and the department creates meetings, budgets and reports of its own.

Before long, yesterday’s nimble company needs far more people, money and effort just to hold its speed.

Watching the Pennies

Warren Buffett once said that “a good manager must be a demon on costs.” Costco’s Jim Sinegal described the job as continual: “You have to continually find ways to reduce expense and to improve productivity.”

Some of the world’s great businesses have taken that idea to almost comical extremes.

François Michelin understood the signalling effect of small costs. Michelin famously turned envelopes inside out so they could be used again. “To save a million envelopes a year is important,” he insisted. But his real point was cultural: how could Michelin ask factory workers to save a gram of rubber per tyre if office workers weren’t also being asked to save a gram of paper?

That was why Michelin’s own frugality mattered. He reused defective road maps for internal memos and lived simply — wearing frayed suits, flying economy and taking the Paris Métro — “personifying the virtues he wished to apply to his managers and workers.”

Ingvar Kamprad took much the same approach at IKEA. Despite becoming a billionaire, he continued to travel standard class and lived with what biographer Bertil Torekull described as a “total lack of external finery” — no grand clothes, smart watches or luxury cars.

“Low price is written into our business idea as an essential condition for our success,” he wrote. Delivering low prices was impossible without low costs.

Hyundai founder Chung Ju-yung made frugality equally explicit. “Our company motto is ‘diligence, frugality, affection,’” he said. Like Michelin, Chung insisted employees use both sides of a sheet of paper, but his deeper concern was the example set at the top: “I’ve never come across a company that thrives under a luxury-loving, wasteful owner.”

Fastenal founder Bob Kierlin was similarly obsessive. He drove an Oldsmobile, furnished his office with used furniture, typed his own correspondence and had no personal secretary. Even his suits were second-hand. “Luckily, we’re the same size,” Kierlin told a reporter after buying six used suits from the manager of a clothing store for $60 apiece. “Either you do a good job of cost control in all aspects of your business, or you start losing it.” Eventually, Kierlin said, frugality became so ingrained that he didn’t even have to think about it. It became an attitude.

John D. Rockefeller carried the instinct throughout his life. “The world’s richest man never lost the thrifty boyhood habits that had made him the nonpareil of American business,” Ron Chernow wrote. Rockefeller could spend a ridiculous amount of time protesting bills both large and small, but his philosophy was captured in a much simpler instruction: “Save when you can and not when you have to.”

It’s easy to be frugal when circumstances leave no alternative. The more revealing test is whether the habit survives when the necessity disappears.

What Does the Customer Get?

The point of all this penny-pinching isn’t simply to accumulate more pennies.

J.C. Penney understood that from the beginning. “Our first customers were people who took the saving of so much as a penny seriously,” he recalled. “To save pennies for them I had to save them for myself.” He meant it literally: wrapping paper and string were reused, bent nails were straightened, and envelopes were opened carefully so their blank sides could serve as scratch paper.

But the savings weren’t intended simply to fatten the bottom line. “Savings — far from being used to line our own pockets — were passed on to our customers, in the real Golden Rule way.”

Don Keough found a broader version of the same test at Coca-Cola. To combat bureaucracy, he tried to reduce every expense, department and project to one basic question: “Will this help to create and serve customers?” If the answer wasn’t a ringing yes, whatever Coca-Cola was spending or undertaking had to go.

Keough’s explanation of what happened otherwise is even better: “Once you decide you have fifty things to do that are unrelated to your customer, soon you have fifty bureaucracies composed of individuals doing things extremely well that they shouldn’t have been doing because it didn’t serve the customers in any way.”

That’s the danger: the people may be talented, the department well run and the work performed exceptionally well. It just shouldn’t exist.

Buffett has made essentially the same point about Berkshire. Its managers don’t submit budgets to him, Berkshire doesn’t spend time producing consolidated monthly figures simply because large companies traditionally do, and Buffett’s explanation is wonderfully straightforward: “We don’t do unnecessary things around Berkshire. And a lot of stuff that’s done at big companies is unnecessary.”

Michael Moritz recalled Don Valentine applying a similarly brutal test to young companies. Valentine would clamp onto burn rates and circle G&A on the income statement in green. Moritz wrote that Valentine believed “anything not closely associated with either directly making, building, marketing or selling a product was a waste of money.” He would latch onto any function or person he thought impeded the rapid advance of the business and reserved particular scorn for bureaucracy and the people who created it.

Keough’s test forces the business back to first principles: Does it help create or serve a customer?

Never Add the Unneeded

People may be the most difficult barnacle of all, which is why the best companies seem particularly careful about adding them in the first place.

Buffett has long rejected the familiar corporate cycle of hiring enthusiastically when business is good, only to slash headcount when conditions turn. “We neither understand the adding of unneeded people or activities because profits are booming, nor the cutting of essential people or activities because profitability is shrinking.” Berkshire’s goal, he said, was simple: “Never to add the unneeded.”

Elsewhere he put it even more plainly: “I don’t think you can ever find a statement that Charlie and I have ever made, in terms of Berkshire’s companies or anybody else’s, where we said that there should be more people working than are needed in a company.”

Tom Murphy built much the same philosophy into Capital Cities: “In terms of culture, we told our employees that we hire the smartest people we can find and that we have no more of them around than necessary.” Sam Walton was blunter still: “We always ran a real tight organization. We had no excess people.”

Tom Peters and Robert Waterman captured part of the reason in In Search of Excellence: “As the number of people in a company goes up arithmetically, the number of possible interactions among them goes up geometrically.” More people bring more complexity. Beyond a surprisingly small size, they warned, “diseconomies of scale seem to set in with a vengeance.”

There’s a humane logic underneath the financial one. ServiceMaster’s Bill Pollard used to say the company would “rather buy a baby grand piano than hire or assign one unnecessary person.” If the piano was no longer needed, it could be chopped up. “But we cannot do that with people.”

The easiest time to accumulate unnecessary people is when profits are booming and nobody is particularly interested in questioning another salary.

Percy Barnevik had a wonderfully simple way of fighting this at ABB: don’t assume that someone leaving creates a vacancy that needs filling. “The replacement of employees who resign should always be examined closely, during financial boom times and recessions alike.” Each departure was an opportunity to ask whether the position would be created today if it didn’t already exist. If managers disagreed, Barnevik suggested leaving the job vacant for six months and seeing what happened.

If this position didn’t already exist, would we create it today?

Don’t add the unneeded in the first place.

Frugal Isn’t Cheap

But there’s another side to the argument. Some expenses deserve more money, not less.

Leonard Lauder was famously frugal. His wife liked telling stories about him complaining that she took taxis to visit Estée Lauder stores in Brooklyn. “Why can’t you take the subway?” he’d gripe. But the next part of Lauder’s explanation is what matters: “Because our overhead was so low, we could afford to use — in fact, we could insist on using — expensive ingredients.”

That’s the distinction. Cheap companies minimise expenditure. Great frugal companies spend as little as possible on things the customer doesn’t value so they can spend generously on the things they do.

Labour provides perhaps the most counterintuitive example. Bain & Company’s Fred Reichheld, creator of the Net Promoter System, observed,“It sounds like a good idea to minimise labour cost, but in order to maximise the potential for value creation, a business must find ways to pay its best people more than the competition.” He went further: “one of the best ways to cut costs (as a percentage of revenues) is very often to increase compensation opportunities, counterintuitive as that may sound.”

Phil Fisher had made much the same observation back in 1958. He suggested investors pay close attention to wage scales. A company earning above-average profits while paying above-average wages was likely to have good labour relations. But when “a significant part of earnings comes from paying below-standard wages,” Fisher warned, the investor “may in time have serious trouble on his hands.”

James Lincoln had demonstrated the economics decades earlier at Lincoln Electric. His workers earned enormous performance bonuses, yet because they were so much more productive, Lincoln Electric spent proportionally less on total labour than its major competitors — even after bonuses that could exceed 100 percent.

Aldi discovered much the same thing. Karl Albrecht relentlessly preached two things: control costs and hire the best people. A former Aldi UK CEO recalled Albrecht’s instruction to “turn the penny three times before you part with it.” There was “no cost too small not to concentrate on,” but that didn’t mean avoiding investment.

Aldi deliberately paid higher salaries because better people required less supervision, exercised greater autonomy and produced more. “Investing in really good people was not a way to save money; reducing the salaries of people was never a way to save money.” Despite paying some of the industry’s highest salaries, labour consumed roughly 3 percent of sales against 7 to 8 percent at a typical supermarket.

Source: ‘My Life and Work,’ Henry Ford 1922.

Joe Coulombe reduced the whole idea to a sentence at Trader Joe’s: “Good people pay by their extra productivity. You can’t afford to have cheap employees.”

Les Schwab reached the same conclusion when lower-priced competitors appeared. He considered cutting benefits and salaries and pulling the savings back to headquarters. “Sounds good, but it doesn’t work that way.”

Schwab went the other direction. “We increased wages, we changed and improved our medical, dental and insurance programs. We increased our cash bonus.” The result was better people, better service and greater productivity. “I don’t think our percentage wage cost was any higher than our competition because our people just plain ‘put out more.’”

The important number isn’t what an employee costs. It’s what the business gets in return.

Good Costs, Bad Costs

Accounting doesn’t make that distinction particularly well. An unnecessary corporate meeting is an expense, but so is employee training. A private jet is an expense, but so is research and development. Another management layer is an expense, but so is advertising that strengthens a brand for decades.

Buffett has pointed to Coca-Cola as an example. Some of the enormous sums it spends on marketing and advertising are treated as current expenses, but economically part of that spending is creating a long-term asset, much as capital expenditure creates a factory.

David Packard understood the same distinction at Hewlett-Packard. “One of our most important management tasks is maintaining the proper balance between short-term profit performance and investment for future strength and growth.” HP routinely spent 8 to 10 percent of sales on R&D, sometimes more, because “good new products are the lifeblood of technical companies such as ours.”

The opposite mistake can be equally damaging. Panera’s founder, Ron Shaich, has described what happens when restaurants facing falling sales try to protect the P&L by “ripping out labor hours and cutting food cost.” He calls those savings “a tax on the customer.”

“Longer waits, dirty tables, slower service, and more frazzled team members all add up to a negative customer experience that will undoubtedly undermine already falling sales and intensify a cycle of decline.”

Fred Reichheld makes the broader point: “Managers should be skeptical of any cost reduction scheme that doesn’t include a credible strategy for the enhancement of customer retention — which means a credible strategy for improving customer value.”

The income statement calls all these dollars expenses. The customer knows the difference.

The Expensive Trappings of Success

Frugality is easiest when there’s no money. The harder test comes after success.

Tom Murphy said Capital Cities developed its bare-bones culture because the company nearly went bankrupt twice in its early years. “We had to go back to the original stockholders twice for additional money. As a result, we always ran the operation with a very limited number of people. We never had any more people than we absolutely needed. I think we had fewer people than we really needed.”

The remarkable part was that when the financial pressure disappeared, the behaviour didn’t. “Over time, that barebones culture stayed with us.”

Barclay Simpson carried much the same instinct into Simpson Manufacturing. Like many of the generation that came of age during the Depression, Simpson had internalised what his biographer described as a “stern frugality.” The shabby plant and office facilities in San Leandro reflected “his deep and continuing preference for substance over show,” while his battered, dusty cars and refusal to allow himself special luxuries became a source of amusement — and respect — among employees.

But there was a principle underneath it. As one colleague put it, “Barclay hates to waste a nickel of shareholder money.” Simpson was the sort of man who would take the bus from JFK into downtown rather than pay for a cab, and “that applies to all aspects of his leadership style.”

That’s an important way of thinking about corporate frugality. The money being spent isn’t really management’s money. It belongs to the owners of the business, and treating a corporate expense account differently from your own wallet is itself a small agency problem.

Kamprad understood the signalling problem too. He attacked luxurious company cars, first-class flights, separate executive dining rooms and other privileges not because eliminating them would transform IKEA’s economics, but because management couldn’t credibly preach cost consciousness while exempting itself. “No, this is a question of our credibility.”

Success normally works in the opposite direction. Profits rise, headquarters expands, travel improves, assistants acquire assistants and things previously considered luxuries slowly become necessities. The business hasn’t necessarily become badly managed; it has simply accumulated barnacles.

There is a deeper force at work here. Max DePree, the longtime head of Herman Miller, once described one of management’s hardest jobs as “the interception of entropy.” By entropy, he meant simply that “everything has a tendency to deteriorate.”

David Cote saw the same force at Honeywell: “Over time all organised systems evolve towards chaos. Unless you pursue change relentlessly, your efforts will eventually wither away.”

Farmer’s barnacles were another way of describing the same phenomenon. Left alone, organisations don’t naturally become simpler. They accumulate.

A Permanent Revolution

The worst time to develop a cost culture is when you suddenly need one.

Buffett put it beautifully: “Whenever I read about some company undertaking a cost-cutting program, I know it’s not a company that really knows what costs are all about. Spurts don’t work in this area. The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’ any more than he wakes up and decides to practice breathing.”

David Cote made the same point at Honeywell. His goal was not periodic cost cutting, but to keep fixed costs under control as the company grew. “Constant, sustained process improvement is vital for any company seeking to win today and tomorrow,” he wrote. The gains rarely came from one dramatic action. “It’s the habit of process change — the undertaking of numerous, sustained changes over time — that counts.”

Cote understood the compounding involved. A business improving productivity by 3 percent a year rather than 1 percent may not look dramatically different after twelve months, but over a decade the gap becomes enormous. At Honeywell, that meant hundreds of small changes to processes, repeated year after year, allowing more revenue to pass through an increasingly efficient cost base.

Costs compound quietly. So do improvements.

Marathon Asset Management expressed much the same idea: “Almost every firm engages in bouts of cost cutting. Exceptional firms, however are involved in a permanent revolution against unnecessary expenses.”

When cost cutting becomes urgent, the danger is that management cuts what can be cut rather than what should be cut — people, training, maintenance, R&D, customer service or marketing. Things that looked expensive on yesterday’s income statement but may have been creating tomorrow’s revenue.

Charles Schwab’s observation is worth remembering: “You can’t cut a company to greatness.”

The objective isn’t to periodically slash expenditure. It’s to prevent unnecessary expenditure becoming part of the organisation in the first place.

Necessity, the Mother of Invention

There is another benefit to keeping a business lean: constraints can make it better.

“Starting when you don’t have a lot of breathing room can breed a great culture of discipline,” Chris Davis observed. Sam Walton saw exactly that at Walmart. “Many of our best opportunities were created out of necessity,” he wrote. “The things that we were forced to learn and do because we started out under financed and undercapitalized in these remote, small communities.”

Dame Stephanie Shirley reached much the same conclusion building her software company. “Our lack of financial muscle was, on the whole, an advantage.” With little access to capital and next to no fixed assets, the company couldn’t afford to get ahead of itself. “We grew only when our market grew. I hired people only as I needed them.”

What looks like a disadvantage can impose a useful discipline. Abundant capital allows a company to hire ahead of demand, subsidise uneconomic products, add layers of management or solve problems by throwing money at them. Scarcity forces a different question: is there a better way?

Jeff Bezos has argued that this is precisely why frugality can drive innovation: “One of the only ways to get out of a tight box is to invent your way out.” Or, as William Walsh put it more simply in The Great A&P, “Necessity has always been the mother of invention.”

The objective isn’t deprivation for its own sake. A business starved of necessary investment eventually damages itself, just as one flooded with capital can lose its discipline. The advantage lies in having enough constraint that people are forced to think before they spend.

Sometimes the tight box produces the better answer.

The Investor’s Takeaway

Frugality doesn’t show up neatly in a discounted cash flow model. Margins offer clues, but sometimes the most frugal company deliberately passes its savings to customers. Headcount ratios help, but businesses differ. Corporate overhead can be compared, yet even that captures only part of the story.

The evidence is often qualitative. What does headquarters look like? How does management travel? Does headcount automatically rise with revenue? Does the company pay highly productive people more or simply search for cheaper people? Does management talk about costs only when earnings disappoint, or is cost consciousness simply part of how the place operates?

Most revealingly, what happens to the money saved?

At J.C. Penney, saving pennies inside the business meant saving pennies for customers. At Estée Lauder, low overhead paid for better ingredients. At Aldi, thrift elsewhere helped pay for better people. At Hewlett-Packard, today’s expense funded tomorrow’s products. And at Simpson Manufacturing, the nickel not wasted was understood to belong to the shareholder in the first place.

These companies weren’t simply minimising costs. They were trying to distinguish between expenditure that strengthened the business and expenditure that merely made the organisation larger, more comfortable or more complicated.

Which brings us back to Farmer’s ship.

Barnacles don’t arrive all at once. No captain wakes one morning to discover that a clean hull has suddenly become covered in them. They accumulate slowly beneath the waterline while the ship keeps moving. At first nobody notices the drag.

Businesses are much the same. Success creates resources, resources create comfort, comfort creates complexity, and complexity quietly attaches itself to the organisation until yesterday’s nimble company requires steadily more people, money and effort to keep moving at the same pace.

Farmer understood that the answer wasn’t an occasional voyage into dry dock. DePree understood it as the interception of entropy. Rockefeller understood it when he said to save when you can rather than when you have to.

The best businesses keep asking whether the people, projects, expenses and processes accumulated along the journey are still helping the ship get where it needs to go.

You don’t scrape the hull just once.

The Dolphin and the Anchor

In 80 CE, the Roman emperor Titus minted a coin with a strange little emblem on the reverse: a dolphin coiled around an anchor. It was already an old visual pun for balancing speed and restraint — one Augustus, a century earlier, had prized so highly he'd made festina lente, "hasten slowly," his personal motto, warning his generals that nothing wrecked a campaign faster than an impatient commander. The dolphin was speed. The anchor was what kept that speed in check.

It's an odd thing to put on money, until you realise money is exactly where the lesson gets ignored most often. Growth is the dolphin — fast, visible, the thing everyone wants more of. Discipline is the anchor — unglamorous, easy to resent, and the counterweight that keeps speed from becoming recklessness. Business history is largely a record of companies that struck the balance and companies that cut the anchor loose.

Why Growth Matters

Start with the case for the dolphin, because it’s real. Warren Buffett has made the point plainly: assemble a portfolio of businesses whose earnings march upward year after year, and the portfolio’s market value will follow. Phil Fisher said much the same in 1958 — the companies worth a long-term investor’s attention are the ones that keep growing. Chuck Akre puts a number on it: compounding an owner’s capital at 20% a year simply requires a hefty level of growth underneath it. Even Benjamin Graham, the field’s most famously conservative voice, conceded that a growing company’s stock, bought at a fair price, is obviously preferable to the alternative. Buffett himself has drawn the line more bluntly still: “If you really think a business is declining, most of the time you should avoid it. The real money is going to be made by being in growing businesses, and that’s where the focus should be.”

The reason is almost mathematical. Compounding is one of the most powerful forces available to an investor, and it’s inseparable from growth: without earnings that are actually expanding, there’s nothing to compound. Buffett has stated the ceiling on that relationship bluntly: “the inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.”

Words Chosen Carefully

Charles Schwab has never been shy about the objective.

“I believe it is incumbent on every leader of a company that the number one thing on their mind is growth. You don’t prosper without it.”

He’s right. Growth matters. Businesses that stop growing eventually run out of opportunities to reinvest, attract talented people and create value for their owners. But the best operators almost never stop at the word growth. They qualify it.

Publix calls it “controlled growth.” Howard Jenkins framed it as the direct result of pleasing customers, never a target chased for its own sake. Brunello Cucinelli calls it “gracious growth” — 8 to 10 percent, by design, with investors warned off before they’d even bought a share if they wanted more. Discount Tire’s mandate is to “grow responsibly” — eighty to a hundred stores a year are within reach, but only forty to fifty are actually opened, the gap maintained deliberately. Lynsi Snyder describes In-N-Out as growing “at a calculated pace” — no restaurant opens until the leaders needed to run it properly already exist.

None of these operators are arguing against growth. They’re arguing against the version of the word that arrives without an adjective attached to it.

A company can grow by buying revenue, slashing prices or stretching its balance sheet. It can also grow by delighting customers, reinvesting at high rates of return and expanding only when its culture and people are ready. The headline number may be identical. The longer-term outcome rarely is.

That’s the difference between the dolphin and the anchor. The dolphin provides the speed. The anchor ensures that speed is taking the business somewhere worth going.

Tailwinds: The First Test

The best growth doesn’t fight the market it’s in — it finds the one already moving, and lets the wind do the work.

It rides a genuine tailwind. Even Warren Buffett took decades to fully absorb this one. Writing to shareholders in 1977, he admitted that one of the lessons his own management had learned — and, in his words, "unfortunately, sometimes re-learned" — was the importance of being in businesses where tailwinds prevail rather than headwinds.

Dan Davidowitz at Polen has noted that the firm's biggest winners all had decades-long opportunities in front of them — the job was never to time the wave, just to judge how long it would keep rolling. Lone Pine'sDavid Craver ties the moat and the tailwind together into a single test: a business worth owning needs a moat around it and a secular tailwind behind it.

And sometimes tailwind alone isn't enough — the market still has to be big enough to matter. Netflix founder, Reed Hastings applies his own test here: go after the smallest market that can still hold five to ten years of growth ambition. Too narrow — his example is the left-handed scissors market — and there's no runway at all, however strong the trend. Disney’s Bob Iger got the same warning early in his career, scrawled on a note from a colleague: avoid the business of manufacturing trombone oil. You could become the greatest manufacturer in the world, the note read, and it still wouldn't matter — the world only consumes a few quarts of it a year. Iger kept the note in his desk for decades, pulling it out whenever a team at Disney pitched a project that was more craft than opportunity.

Peter Keefe of Rockbridge Capital treats it as a rule with no exceptions in his own experience: every mega compounder he's owned had a long secular tailwind behind it. Paul Black of WCM Investment Management frames the acknowledgment itself as a matter of honesty — wanting a tailwind is simply how life works, and anyone who pretends otherwise about its importance to success isn't being straight with themselves. Chris Begg of East Coast Asset Management puts the alternative in blunt, practical terms: a business facing secular headwinds becomes what he calls a three-decision company — you have to get the buy right, the sell right, and then work out where to redeploy the capital — and he'd rather not sign up for the extra decisions.

Ian Cassel has a physical image for why this matters so much. A tailwind, he points out, behaves like the jet stream for a commercial flight — a westerly wind above 30,000 feet, sometimes over 100 mph, that can turn a six-hour crossing into four and a half without the aircraft working any harder or burning any more fuel. Investing without a tailwind is possible, in the same way flying without one is possible. It's just a great deal more effort for the same destination.

The Anchor: What Restrains Healthy Growth

Pride in the Wrong Thing.

Jeff Bezos put it as plainly as anyone has: he didn't want Amazon taking pride in being big — he wanted it taking pride in servicing customers, on the logic that doing that well is what drives the growth in the first place.

That instinct runs against a deep current in the psychology of the job. William Thorndike has noted the pull working against every CEO: bigger companies draw more press, their executives earn more, and they're more likely to be invited onto prestigious boards. Bigness feeds the ego in ways that discipline never does — which is exactly why a company proactively choosing to stay smaller than it could be is so rare.

Peter Kiewit made this the founding rule of his own contracting firm decades earlier: the aim was to be the best, he told his people in 1961, "but not necessarily the biggest." Dinosaurs, he liked to point out, were the biggest land animals that ever lived, and being biggest didn't save them — smaller, more effective competitors outlasted them by tens of millions of years.

Sol Price, who founded Price Club, the direct precursor to Costco, put the same instinct more bluntly: "Bigness is a serious danger. Pretty soon one is trying to control the animal instead of keeping the stores exciting."

Chasing size directly tends to produce sprawl. Pursuing quality and discipline, with a real tailwind behind you, tends to produce size as a by-product.

When the Dolphin Runs Without the Anchor

Cut the anchor loose and the pattern is depressingly consistent, across completely unrelated industries. Jim Collins' research into companies that fell from greatness found the same root cause again and again. Almost none of them failed from complacency, he concluded — they failed from overreaching, "the undisciplined pursuit of more." Success bred a kind of hunger: now we just need to have more, and we need to be bigger.

In his later work on 10x companies, Collins found the same pattern in reverse — the winners routinely "left growth on the table, always assuming that something bad lurked just around the corner," while their less successful peers pressed for maximum growth in good times and got caught overextended the moment conditions turned.

Starbucks is the textbook case. From 425 stores in 1994 to a new opening every ninety minutes by 2007, same-store sales collapsed under the weight of its own expansion. Six hundred stores closed. Twelve thousand jobs went with them. Howard Schultz's own verdict, written to his team afterward, was unambiguous: "growth, we now know all too well, is not a strategy. It is a tactic. And when undisciplined growth became a strategy, we lost our way."

Patagonia found itself in a milder version of the same trap. Yvon Chouinard admitted his company had "exceeded its resources and limitations," becoming dependent — like the broader economy it operated in — "on growth we could not sustain."

Financial companies show the failure mode in a more dangerous form. Charlie Munger put the paradox bluntly: financial institutions tend to make Berkshire nervous precisely when they're trying to do well — which sounds backwards until you watch it happen. As the RBA's Chris Kent has put it, wherever something is growing fast is one of the first places to look for financial stability risk.

Behind the Balance Sheet has observed that the fastest growers in finance are frequently the ones whose sudden stumble later reveals a fraud or a collapse in underwriting standards. The reason is almost mechanical: Buffett has pointed out that National Indemnity could write a billion dollars of business in a single month whenever it wanted — all it would take is offering silly prices, and brokers would find the company in the middle of the ocean at four in the morning.

Chris Davis, whose own fund is built entirely around financials, names the payoff of that trick plainly: underprice risk and "money will find you," letting you produce almost any growth rate you like for a while — a strategy that "typically leads to disaster."

GEICO lived that disaster in the 1970s: underwriting standards deteriorated as the company chased policy count, and losses eventually reached $124 million, nearly sinking it. J.P. Morgan’s Jamie Dimon puts the same mechanism in plainer terms — growth "can force you to take on bad customers/clients, excess risk, or excess leverage."

Dunkin' Donuts ran a version of the same play with real estate instead of underwriting. Robert Rosenberg later admitted the pressure to open stores pulled the company away from its discipline of building the brand market by market — "it was pure numbers, pure growth. Quality suffered." Tom Monaghan's account of building Domino's is more candid still: the company forced rapid growth deliberately, he said, "so we could impress the financial community" ahead of taking it public.

Enterprise Rent-A-Car offers a third example of the same failure: service quality quietly breaking under the weight of speed. Andy Taylor has been direct about the mechanism: expanding too fast damages customer satisfaction, and that damage "spreads everywhere and causes reputation problems." He's admitted the company lived this firsthand in the early 1980s, when confidence tipped into overreach — revenues grew more than 30 percent a year, and the company, in his own words, "got a little ahead of" itself, putting people into roles they weren't ready for and opening branches in the wrong places.

The trap deepens once growth stops being a by-product and becomes the operation itself. Rick Vanzura, formerly of Panera, has warned that growth should be the by-product of delivering great products and services that drive demand — and when growth for its own sake becomes the primary focus, that's a red flag. The machine has to be fed: the store roll-out has to hit its numbers, the loan book has to keep expanding, the next acquisition has to close, all to keep Wall Street satisfied.

David Rolfe of Wedgewood Partners has pointed out that growth by acquisition is often the most common route companies take to hit those numbers — and, not coincidentally, the one most fraught with abuse, citing Enron, Tyco, and WorldCom as the cautionary extremes. What started as a business built on real fundamentals ends up run for the sake of the growth rate itself, with the fundamentals an afterthought.

Growth outpaces Culture.

The businesses that resist this trap tend to share one instinct: they let people, not ambition, set the pace. Truett Cathy built Chick-fil-A by deliberately capping how many new stores opened each year, refusing to let strong financials override his insistence on developing operators who actually shared his values first. Lynsi Snyder at In-N-Out describes the same discipline as growing "only as fast as we can develop quality leaders" — expansion as a byproduct of people, never the goal itself.

Bernard Arnault runs one of the largest luxury conglomerates on earth at a growth rate most public-company boards would consider modest — 8 to 10 percent a year — and has said plainly that the goal was never growth for its own sake, but desirability. Costco'sJim Sinegal put the constraint in almost identical terms: the company built every one of its warehouse managers internally over a decade or more, and simply refused to open faster than that bench could support.

David Packard, co-founder of Hewlett-Packard, had a rule that holds up remarkably well: no company can grow revenue faster, over the long run, than it can grow its bench of good managers. Percy Barnevik said almost the same thing about running ABB's factories across fifteen countries — talent, not markets or capital, was always the real constraint.

Reid Hoffman has a sharper way of naming what happens when this discipline slips: medicine has a word for growth that outruns its own structure. It's called cancer.

When Growth Is the Right Bet

None of this is an argument against growth — quite the opposite.

The distinction the best investors draw isn't growth versus no growth — it's earned growth versus manufactured growth. Baillie Gifford's own research across nearly three decades of global markets found a persistent pattern: companies in the top quintile for earnings growth outperformed the broader market by a wider margin than every quintile below them, in a fairly clean, monotonic relationship.

What Investors Should Look For

Is growth outrunning the culture and the infrastructure behind it? Does management ever say no to growth? Do they seed new locations with veterans, or throw newly hired outsiders at the problem? Is the bench of leaders growing at least as fast as the store count, the branch count, the loan book?

How is the growth being funded? Internally, through disciplined reinvestment of cash the business already earns — or externally, by stretching the balance sheet, loosening underwriting, or issuing stock to paper over the gap?

Is management chasing size, or letting size follow? The best operators talk about market share, store count, or assets under management as a result, not a target. The moment "biggest" becomes the stated ambition — rather than "best," or "most trusted," or "highest quality" — is usually the moment the anchor gets cut loose.

Growth should be the by-product of doing the right things well — never a target imposed from outside, and never something to chase merely because the market rewards the dolphin and rarely asks about the anchor.

Two thousand years later, investors still celebrate the dolphin and overlook the anchor. Markets reward speed quarter by quarter; compounding rewards discipline decade by decade. Titus put both on the same coin because neither was meant to exist without the other. The great businesses understood that too. They hastened slowly.

Waiter or Owner

Picture two people standing in the same restaurant, watching the same rival open across the street.

In the first version, you own the place. A competitor selling the same food has just set up shop across the road, and it feels personal — a threat to your money, your reputation, your family's future. You notice whether its tables are full. You study its menu. You watch its prices. You wonder what it's doing better, because your livelihood is tied to what happens inside your restaurant.

In the second version, you're the waiter working the same tables. The new restaurant barely registers. If anything, it's good news: one more employer bidding for your time.

An executive at AB InBev once used that contrast to explain how the company thinks about management, as recounted in Ian Cassel's Intelligent Fanatics Project: "Many companies inadvertently create waiters," he said. "We work tirelessly to create restaurant owners."

It's a simple story, but it captures something real about the businesses that keep outperforming for decades rather than years. Most companies say they want employees to think like owners — to care about waste, protect the brand, serve customers well, control costs, work together and make decisions for the long term. Then they pay them like hired hands, withhold the information owners would receive and deny them the authority to change anything.

The best companies see that contradiction and refuse to live with it. They don't merely tell people to act like owners. They give them a piece of the economics, a clear view of how the business works and enough authority to influence the result.

They create owners.

A Piece of the Action

The idea is not new.

In 1927, UPS founder Jim Casey offered shares in the company to key employees. At the time, employee ownership was unusual. Many large businesses were still run through rigid hierarchies, with capital at the top and labour at the bottom.

Casey saw something different.

"There is no bigger incentive than for someone to work for himself," he said when presenting the shares.

Employee ownership became one of the defining features of UPS. Drivers, managers and executives accumulated stakes in the company. The shares encouraged frugality, loyalty and attention to detail because each improvement belonged, at least partly, to the people making it.

Casey later described employee ownership as the principle that had contributed more than any other to building UPS. By the time the company prepared to go public in 1999, employees and retirees still owned roughly two-thirds of its outstanding shares. Every executive officer had more than twenty-five years of service and had accumulated a meaningful ownership position.

The ownership and the tenure reinforced each other. People stayed because they shared in the value being created. The longer they stayed, the more knowledge and ownership they accumulated. That knowledge helped create more value, which made staying more attractive still.

Publix developed a similar model. George Jenkins opened his first Florida grocery store in 1930 and built it into the largest employee-owned company in America — today more than 1,400 supermarkets and roughly 250,000 staff, with no public market in the stock. Jenkins wanted the people running the stores to participate in the profits they generated and in the value of the wider company. Full-time store employees share directly in the profits of their location, and Publix contributes a substantial portion of company profits to a retirement trust for eligible associates.

The arrangement did more than supplement wages. It gave employees a direct interest in whether shelves were stocked, customers returned, waste was controlled and the store prospered. As former Publix CEO Ed Crenshaw put it:

"When people have ownership of something, they do what it takes to improve the value of that ownership."

Publix doesn't call the people who work there employees. It calls them associates — or, as the company puts it, co-owners. That mindset sharpens under pressure. Crenshaw described what happens when a competitor opens nearby: sales take a hit, and because associates share directly in store profits, they feel that hit as well — which is exactly why they work harder to keep the customer in front of them.

Every thirteen weeks, Publix also pays out a fifth of each store's profits in cash directly to the people who work there, on top of the company-wide retirement trust. The incentive reaches all the way to the register, not just the boardroom. The result shows up in a number most retailers never get close to: Publix's annual voluntary turnover runs around 5 per cent, against an industry average nearer 65 per cent.

The pattern appears repeatedly across many of the world's best businesses. O'Reilly Automotive makes every employee a shareholder after six months. Wawa, Brown & Brown and Kiewit have each built their own versions of the same philosophy.

At Walmart, Sam Walton gave employees a financial stake in the company. By the time he wrote his autobiography, more than 80 per cent of Walmart associates owned shares directly or through profit sharing. Walton called it "the single smartest move we ever made." Not a new store format, not a distribution centre, not a purchasing system, but sharing the economics.

When the Factory Worker Becomes a Millionaire

One of the clearest modern examples is HEICO. For decades, the Mendelson family has used company stock in HEICO's retirement plan to spread ownership throughout the organisation. The opportunity is not confined to senior executives. It reaches factory workers, shipping clerks, technicians and administrative employees.

Laurans Mendelson spoke proudly about employees who became millionaires — and in some cases multimillionaires — because of the HEICO shares they accumulated. That result matters for reasons beyond personal wealth.

A factory worker who owns meaningful stock does not experience a quality problem in quite the same way as someone collecting only an hourly wage. A shipping clerk who participates in the company's long-term success has another reason to care whether an order arrives correctly and on time.

"They take a personal pride in being a HEICO team member," Mendelson explained.

The ownership tells employees something important: you are not merely a cost appearing in someone else's income statement. You helped create this value, and you deserve to participate in it.

Howard Schultz made the same point at Starbucks. Giving employees shares, he said, demonstrated that the company respected its people enough to share its success with them. That may be the deepest effect of broad ownership. It changes not only incentives but relationships. There is a difference between being told that people are the company's most important asset and being invited to share in the wealth they help create.

Share the Profits

Ownership does not always require publicly traded shares or a formal employee stock ownership plan. Sometimes the most powerful incentive is a direct share of the profits employees can personally influence.

Enterprise Rent-A-Car was built around that principle. Founder Jack Taylor believed managers should participate directly in the economics of the branch they operated. The logic was straightforward. Suppose an employee creates $100,000 of additional value and receives ten per cent, or $10,000. Suppose instead that the employee creates $1 million and receives $100,000. Which outcome should the owner prefer? Obviously the second.

"The more you make, the more the business makes," Taylor explained. "Why wouldn't I want that to happen?"

Yet many companies resist precisely that outcome. They worry about employees earning too much rather than asking how much value had to be created for those earnings to become possible. Taylor understood that a large employee bonus can be excellent news for shareholders when the underlying incentive is designed properly.

Barclay Simpson used a similar system at Simpson Manufacturing. Salaries were relatively ordinary, but employees could earn substantial bonuses when their branch performed well.

"If they have a really good quarter, they can get a ton of money," Simpson said.

He regarded that as a feature, not a problem. Employees became highly focused on branch profitability because their own compensation moved with it. The company also discovered that the arrangement created loyalty. Even when the financial crisis reduced sales and profits, most of Simpson's people stayed.

Les Schwab approached profit sharing with characteristic simplicity: "My thinking has always been, if I give away half the profits, I still have half left," he wrote. "If I share $10 million with people, I still have $10 million left." The point was not charity. Schwab believed sharing profits helped produce the profits available to be shared.

Lincoln Electric has applied the same philosophy for generations. A large portion of pretax earnings is placed into a bonus pool for employees. The system has survived recessions, industrial disruption and technological change because the reward is tied to productivity and long-term company performance. At Johnson Wax, S.C. Johnson reached the same conclusion: "I truly believe we are a high-performing company because of profit sharing. Our earnings are better because of it."

Keep the Incentive Close to the Work

Not every ownership plan works. A tiny amount of stock buried in a distant retirement account may have little influence on the decision an employee makes this afternoon. A company-wide bonus can feel equally remote when an individual has no idea how their work affects the final result. The strongest systems create a clear line between action and outcome.

Expeditors International does this through district-level incentives. Employees are rewarded according to the success or failure of the local district in which they work.

That proximity changes behaviour. Every shipment matters. Every customer interaction matters. Every unnecessary expense matters. Employees know their actions can influence the result and that the result can influence their compensation.

"How are we different?" former CEO Jeffrey Musser asked. "The employees of Expeditors treat the business as if it were their own."

The district structure makes ownership understandable. People are not being asked to improve the abstract earnings per share of a global corporation. They are being asked to improve a business they can see, serving customers they know, alongside colleagues whose work affects the same pool.

The old J.C. Penney partnership model worked in much the same way. Penney would first place a potential manager in a trial store. If the person demonstrated the ability and character to operate it successfully, they could become a partner with a one-third ownership interest. Before being permitted to finance an interest in another store, however, the manager had to train someone capable of replacing them. The system combined ownership, accountability and people development.

A manager could prosper, but only by building a store that prospered and developing another person capable of carrying it forward. The reward sat close to the result.

Ownership Without Shares

Literal equity is powerful, but some companies create an owner mentality even where employees do not own significant stock.

Vicki Tenhaken found the same pattern studying companies that had survived for a century or more. In Lessons from the Century Club Companies, she put it plainly: "Many of the Century Club companies engage in some type of profit-sharing, employee ownership, or participatory management practices. Even without any type of formal ownership, employees in these companies develop an ownership attitude – it's their company."

At Walgreens, Charles Walgreen encouraged store managers to think of themselves as independent retailers supported by a large organisation — not employees controlled by one. Store managers were close to customers, knew their local markets and had room to exercise judgment. The result was an unusually strong sense of ownership and remarkably low turnover among managers.

In-N-Out asks store managers to run each restaurant as though it were their own. Home Depot historically encouraged store leaders to tailor parts of the product range to local conditions. TopBuild tells field leaders to "Be the Owner." Amazon has made ownership one of its foundational leadership principles. Andy Jassy describes an owner as someone who asks: What would I do if this were my own money?

That behaviour cannot be produced by equity alone. It comes from authority — being trusted with real decisions — which managers tend to repay with the same pride, care and accountability an owner brings to something that is genuinely theirs.

A Stock Certificate Is Not Enough

Herman Miller understood that ownership had to be supported by something deeper. The company described three values attached to ownership: business literacy, equity and spirit.

Business literacy meant employees had both a responsibility and a right to understand the company. They needed access to the real situation — not vague encouragement or carefully managed corporate messaging. Equity meant sharing the positive and negative consequences of collective performance. Spirit meant commitment to the company, its goals and one another.

Herman Miller summarised the model in six words: "Innovation and excellence through participative ownership." The important word is participative. Ownership without information leaves people guessing. Ownership without authority creates frustration. Ownership without a meaningful economic stake becomes symbolic. Ownership without shared purpose can become individual greed.

Jack Stack discovered the same thing at SRC Holdings. After helping employees acquire an ownership stake, Stack taught them how the business actually worked. Workers learned to read financial statements, understand cash flow and see how inventory, pricing, productivity and collections affected the value of the company. The shares were only part of the system. People also needed to understand how that wealth was created.

"A company of owners will outperform a company of employees any day of the week," Stack said. Not because owners possess a certificate. Because ownership changes the way people notice, decide and act.

The Responsibility of Ownership

Ownership is often described as a reward, but it also creates responsibility. Max DePree of Herman Miller argued that owners cannot simply walk away from problems. Ownership increases accountability and demands maturity. It requires people to become more informed about the whole business rather than only their small part of it. That distinction matters.

Poorly designed incentives can produce the opposite of ownership. A sales commission may encourage someone to book a bad customer. A branch bonus may encourage underinvestment. Stock options can reward a rising market rather than genuine value creation. A distant company-wide target may encourage employees to assume someone else will carry the load.

The best systems balance reward with responsibility. They give people enough authority to act, enough information to judge and enough exposure to consequences to care. This is why employee ownership appears so frequently beside decentralisation, internal promotion and long tenure. The mechanisms reinforce one another.

A company promotes someone who understands the operation. It gives them responsibility for a branch, store or division. It lets them participate in the profits they create. The employee stays, develops judgment and accumulates ownership. Eventually, they teach the next person to do the same. The organisation compounds human capability alongside financial capital.

Ownership Polices Itself

There is a further benefit that rarely shows up on an income statement, though it quietly shapes one.

Brian Chesky has argued that the stronger a company's culture, the less corporate process it needs, because a strong culture means you can trust people to do the right thing without a rulebook standing over them. Herb Kelleher made the same point about Southwest Airlines: create an environment where people genuinely participate, and control becomes unnecessary, because they already know what needs to be done. The more people commit willingly, the fewer hierarchies and control mechanisms the business requires.

The effect is not only top-down trust. It is lateral pressure. Writing in the 1970s, the investor Phil Fisher observed that the pressure a peer group places on a tardy or lazy colleague dwarfs anything a manager could impose from above. John Mackey built Whole Foods around small, self-managing teams for the same reason: when every person's contribution is visible and everyone shares in the outcome, there is nowhere for a free rider to hide, because the team polices itself. Les Schwab saw it on his own shop floor — when pay was tied to shared results, a man dragging his feet heard about it from his own colleagues long before a manager had to step in.

Fred Reichheld described this as the underlying mechanics of partnership: a system in which everyone is motivated to create value together tends toward self-governance and self-correction. Partners do not need to be told what to do, because protecting the pool of value they all share is already their job.

For a public company, this shows up as leaner overhead — fewer layers of supervision, less need for process, lower cost of running the business — not because standards slip, but because the workforce is already keeping itself honest.

Private Equity Discovers the Same Thing

It is one thing to see this pattern in family businesses and founder-led companies that have practised it for a century. It is another to see a private equity firm — an industry not historically associated with generosity toward the workforce — arrive at the identical conclusion through hard data.

I've long admired Pete Stavros, Co-Head of Global Private Equity at KKR, for founding Ownership Works, a nonprofit dedicated to broadening equity ownership among employees and equipping them with the tools, data and transparency needed to understand and drive business success.

"Sharing stock ownership with workers and building 'ownership cultures' has proven time and again to be a win-win initiative," Stavros has said. "Ownership cultures work. Happier, more engaged employees lead to stronger businesses with more cohesive cultures and better returns."

KKR now has more than fifty portfolio companies applying the Ownership Works model. The early results are striking. KKR has reported roughly 4x returns in companies that adopted the model, compared with roughly 2.5x for its typical investments. Equity ownership is not a zero-sum game. Private equity earned its reputation in the 1980s through leverage and in the 1990s through roll-ups and conglomeration. Today, one of the most overlooked sources of value creation may simply be giving the people doing the work a meaningful stake in the value they create.

The Investor's Takeaway

For investors, the question is not simply whether executives own shares. That information is easy to find and already widely studied.

The more revealing questions sit further down the organisation. Do store managers participate in store performance? Do branch leaders understand the capital employed in their operation? Do frontline employees share in the wealth they help create? Is ownership broad or confined to the executive suite? Can employees see how their decisions affect customers, costs and cash? Are they trusted with enough authority to make those decisions matter? And when management says it wants people to act like owners, has it given them any reason to do so?

The answers may help explain why some companies retain exceptional people, control costs without bureaucracy, serve customers with unusual care and continue improving long after a charismatic founder has left.

Once again, none of this fits neatly into a discounted cash flow model. Employee ownership can create dilution. Profit sharing appears as an expense. Decentralised authority can look untidy. Paying an employee an unexpectedly large bonus may even trouble investors focused on next quarter's margin. But the best owners understand the trade. They are willing to divide the value more broadly when doing so enlarges the value available to divide. They know the difference between giving wealth away and sharing wealth with the people who helped create it.

Most companies already have plenty of employees. The exceptional ones build something more powerful.

A company of owners, not waiters.

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The Floor to the Boardroom

Ron Vachris started at Costco forty years ago as a forklift driver. He unloaded pallets, worked the floor, learned the business one job at a time — merchandising, operations, real estate — for four decades, before eventually becoming the company's CEO. There was no shortcut through the middle. He walked the whole path.

It's tempting to read that as a nice story about one particular warehouse, one particular career. It isn't. Pull on that thread and you find the same walk — floor to office to boardroom — repeating itself in company after company, industry after industry, country after country, decade after decade. Not as an inspirational exception. As a well-worn path that the world's best-run businesses seem to build on purpose.

Not One Factory. A Pattern.

Collect enough examples and a remarkable pattern emerges. The companies are different, the industries unrelated, the decades far apart—but the same leadership path keeps appearing. It shows up in American retail (Costco, Publix, Wegmans), in industrial manufacturing (Illinois Tool Works, Sherwin-Williams, Simpson Manufacturing, US Steel under Elbert Gary), in logistics spanning three continents (FedEx and UPS in the US, DHL International out of Hong Kong, Mainfreight out of New Zealand), in Scandinavian and German manufacturing (IKEA, Hästens, and Würth), in Australian finance (Macquarie Bank), and in businesses a century apart in age — from Henry Ford's early auto plants and Endicott Johnson's shoe factories in the 1910s, to modern compounders like Constellation Software, Danaher, and O’Reilly Automotive today.

USAA, Lincoln Electric, Kiewit, Fastenal, Enterprise Rent-A-Car, Discount Tire, Les Schwab, Bloomberg, Wawa, QuikTrip, Mars, Patagonia, Tractor Supply, Old Dominion, Marriott, Four Seasons, Stew Leonard's, Procter & Gamble, Panda Express, In-N-Out, ALDI, Texas Roadhouse, Svenska Handelsbanken, A.J. Gallagher, Greggs, ABC Supply, Toyota, Jack Henry & Associates — and, as I found sitting down with its leadership recently, Cintas.

Even Berkshire Hathaway fits the pattern. Robert Miles, in The Warren Buffett CEOs, found that all but one of Berkshire's subsidiary CEOs had been promoted from inside the business.

That's not a random assortment of "nice culture" companies loosely sharing a value statement. It's a genuine cross-section of some of the best long-term compounders in business history, and the thing they keep independently arriving at is this: the walk from the floor to the top isn't incidental to how they got great. It may be the mechanism itself.

Why it Works

1. It preserves what actually makes the company good.

Phil Fisher made this case as far back as 1958, in Common Stocks and Uncommon Profits, writing that "the company with real investment merit is the company that usually promotes from within." He returned to the idea nearly two decades later in Conservative Investors Sleep Well (1975): companies of the highest investment order develop policies and ways of doing things peculiar to their own needs, and if those ways are truly worthwhile, it is "always difficult and frequently impossible" to retrain someone long accustomed to doing things differently. The higher up the newcomer sits, he noted, the more costly that indoctrination becomes — which is why, in his observation, "a surprising number of executives brought in close to the top tend to disappear after a few years." He went further: bringing in outsiders near the top is frequently a "damning sign" that something is already broken, no matter how clean the recent earnings look.

Jim Collins found the same pattern empirically in Built to Last and Good to Great: across seventeen hundred combined years of company history in his visionary companies, he found only a handful of instances of hiring a CEO from outside. Comparison companies went external roughly six times more often — and underperformed accordingly.

2. It's the ultimate incentive system.

Nearly every operator quoted here says some version of the same thing: people stay, work harder, and take more ownership when they can see a real path to who they could become. It's one thing to be told the company values you. It's another to watch the person running the warehouse today, knowing they once pushed the same cart you're pushing now — that's proof, not a promise. Chester Cadieux of QuikTrip framed it sharply — you can train competence, but you can't train commitment, which is exactly why promotion from within matters more than raw skill.

Discount Tire is now one of America's largest independent tire retailers, with well over a thousand stores, and it built that scale on a single unbroken rule: nobody, at any level, gets the keys to a store without starting out busting tires. Founder Bruce Halle held himself to the same standard. "If I were to bring someone in at a high level without having worked in the stores," he said, "I may as well get in my car, drive around to the stores, and slap every one of the guys in the face."

Les Schwab Tire ran the same experiment for thirty-four straight years and never once broke the rule: not a single manager or assistant manager was hired from outside. Every one of its 250-plus managers earned the job the same way — starting at the bottom, changing tires.

Fastenal put it plainly in a 2022 company statement: "More than 95 percent of our current branch General Managers have been promoted from within, and that trend continues all the way to the top. In fact, nearly all of our senior leaders worked their way up from entry-level positions." Founder Robert Kierlin has said it's the thing he's proudest of building at the company — the opportunity it gives ordinary people to excel, most of them starting with little expertise in the product line before working their way up.

3. It compounds knowledge and culture

Every new outside hire at a senior level is, in effect, a double write-off — years of institutional knowledge walking out the door, replaced by someone who has to relearn not just the business but the culture, often imperfectly. O'Reilly Automotive is perhaps the starkest example of this (more on that below). Jim Sinegal made the same point about Costco: every warehouse manager running the company's stores had spent ten, twelve, fifteen years inside the business before getting there. The pattern held all the way to the top — Craig Jelinek started as a Costco warehouse manager in 1984 and rose through operations for two decades before becoming CEO, and his successor, Ron Vachris, began as a forklift driver forty years before taking the job, working through nearly every operating role in between. It's the same logic as compounding capital, just applied to people instead of dollars.

Patagonia founder Yvon Chouinard captured the logic in a single sentence: "As much as possible we hire from within, to keep the company culture strong." The point isn't simply to retain talented employees; it's to preserve the habits, judgement and standards that have compounded inside the business for decades.

4. It develops better operators.

Danaher's internal data (via an HBR case study) found roughly three of every four senior promotions were filled internally, with about a fifth of senior managers promoted every year — a deliberate, almost mechanical pipeline rather than a policy applied occasionally. Vicki Tenhaken's research into "Century Club" companies — firms that have survived over a hundred years — found the same thing: leadership development from within wasn't incidental to their longevity, it was one of the core mechanisms behind it.

Henry Ford described his own leadership team in the same spirit, and it reads almost like a roll call from the factory floor: the head of the whole operation started as a machinist, the man running the giant River Rouge plant began as a patternmaker, another senior department head started as a sweeper. "There is not a single man anywhere in the factory who did not simply come in off the street," Ford said. National Cash Register's early history offers the cautionary flip side — founder John Patterson tried repeatedly to hire star talent from outside, and by the company's own account, every one of those hires failed. The people who actually built the business were the ones who came up through the ranks.

Tom Peters found essentially the same pattern decades later studying America's top-performing companies for In Search of Excellence: "value-infused top-performing companies are led by those who grew up with the core of the business — electrical engineering at HP or Maytag, mechanical engineering at Fluor or Bechtel. The star performers are seldom led by accountants or lawyers."

George F. Johnson, of Endicott Johnson, framed the logic almost as a matter of dignity: "Why should I hire a manager of a plant who is a stranger to the workers — a man who comes from outside to take a job at the top and talk down to them from a height?" It's worth noting what that philosophy actually built: under Johnson, Endicott-Johnson grew into the largest shoe manufacturer in the world during the 1910s and into the early twentieth century, run top to bottom by people who'd worked the bench and the vats themselves.

Po Chung, who built DHL International, made essentially the same point with a sharper edge — the operational staff were always hired from within, he said, because "have you ever heard of an army anywhere on the planet that hired a general from another country?" David Ogilvy went further still, framing outside hiring almost as a failure of leadership: "We detest having to go outside to fill important jobs, and I look forward to the day when that will never be necessary."

5. It puts leaders in the shoes they used to fill.

A manager who has never done the job is guessing at what it feels like. A manager who has done the job knows. Lynsi Snyder at In-N-Out makes this the center of the company's operating philosophy: "every operations leader has done the exact jobs as the associates they're leading. They understand each one of those tasks, hands on, all the way up the line. They earned their way into their roles." It changes what gets asked of frontline employees, what gets forgiven, and what gets fixed — because the person making those calls has personally stood where the complaint is coming from.

6. It treats building people as the job itself.

Everything above describes what promotion from within produces — the incentive, the compounding knowledge, the empathy. But talk to the leaders who actually run these companies, and a different explanation surfaces: they don't describe developing people as a means to an end. They describe it as the actual job.

Les Schwab put this in capital letters in his own writing, as if the emphasis mattered. Asked what his company should do to keep succeeding, "the answer is, as it has always been … BUILD PEOPLE." Andy Taylor at Enterprise Rent-A-Car drew the distinction against competitors explicitly: "their business is cars and ours is people. They focus on building their fleet of cars; we focus on building our employees' careers." Howard Stoeckel said something similar about Wawa — the products and service matter, but "even more, it's about building people with the ability and drive to make their dreams come true."

Lynsi Snyder frames it as a genuinely long-run bet at In-N-Out: "We want to build success into every person who works for our company … We want them to learn how to make good or even extraordinary decisions right from the start, then stay with our company for the long-term."

The Cintas Case in Miniature

I got to see a live version of this recently, sitting down with Cintas CEO Todd Schneider and COO Jim Rozarkis. Cintas turned a uniform-and-workplace-supply business into a roughly 750-bagger, and it's tempting to hunt for some hidden breakthrough behind a number like that. There isn't one.

Both Schneider and Rozarkis started at the bottom of the business and worked their way through every layer of it. It shows. When I asked what new hires notice first, the answer was blunt: "You people are crazy." Cintas is intensely competitive, and everything gets measured, which shakes plenty of people out early. That's why it recruits straight out of college and builds leaders internally—shaping them before anywhere else gets the chance. The people who thrive in that environment tend to stay, rise through the ranks, and eventually lead the company.

O'Reilly: The Case for the Whole Thesis

If any company treats promotion from within as the entire explanation for its success rather than one factor among several, it's O'Reilly Automotive. CEO Brad Beckham doesn't hedge on this: "At the heart of our culture is promote from within." He didn't go to college. He grew up in the company's stores, ran districts and regions, and now runs the whole thing — and he's explicit that this wasn't an unusual path at O'Reilly, it was the standard one. "I immediately knew that I had a career path with our 'promote from within' philosophy," he's said of his own early days there.

The scale of it is what makes O'Reilly's case so striking. Beckham points to Doug Bragg, the company's EVP of stores and professional sales, who's on his thirty-first year at O'Reilly — starting out loading trucks in a distribution center before working through stores, districts, and regions. Beckham's three regional SVPs of store operations average, by his count, roughly twenty-two years each, either at O'Reilly directly or at a company O'Reilly acquired. He connects that tenure directly to how well the company understands its own customers: "that's incredibly important to us when it comes to really understanding what our installers, what our professional shops are going through every day." And it isn't just the top of the org chart: O'Reilly runs thirteen divisions across the US, and every single divisional vice president ran an O'Reilly store first, then a district, then a region, before taking responsibility for groups of five hundred to seven hundred stores.

The company's own filings back up the anecdotes. As of December 31, 2025, O'Reilly's 264 senior managers averaged 20 years of service, its 377 corporate managers averaged 13 years, and its 649 district managers averaged 14 years — a leadership bench built almost entirely through internal tenure rather than external hiring. It's a case that goes further than most of the companies here: O'Reilly doesn't present promotion from within as one input into its culture. It presents it as the culture, full stop.

A Few More Scenes From the Shop Floor

The pattern shows up in some genuinely vivid places if you go looking. At Wegmans, half of all store managers started working for the company as teenagers — meaning a meaningful share of the leadership team spent their formative working years, not just their careers, inside the same stores they now run. Barclay Simpson at Simpson Manufacturing put the whole philosophy in a single line that's hard to forget: "when people join our company, they don't come for a bus stop; this is a career."

And that brings the story back to where it started. Endicott Johnson's own company history, describing the same walk from the floor to the boardroom that built the world's largest shoe manufacturer, likened the effect to an old line about Napoleon's soldiers — each one supposedly marching with a field marshal's baton tucked in his knapsack. The point was never that every soldier would use it. It was that every soldier knew there was a real pathway to the top, and that knowledge alone was enough to change his effort, his discipline, his sense of what he was fighting for.

When Going Outside Makes Sense

This isn't a blanket rule, and the best practitioners are explicit about the exceptions. Phil Fisher himself noted that a company growing very fast, or one that needs a genuinely rare specialized skill — a particular legal specialty, a scientific discipline far outside the core business — may have no choice but to hire outside, and that doing so occasionally can even inject useful fresh thinking. Isadore Sharp at Four Seasons put it simply: promotion comes from within, "except when we need talent we don't yet have."

The companies on this list mostly reserve external hiring for specialist roles — legal, some technical functions, occasionally finance — while treating the operating core, and especially the CEO seat, as something earned from the inside. Macquarie Bank hasn't hired a CEO from outside its own ranks in over fifty years. O'Reilly hasn't hired outside the company for field leadership in decades. It's policy, defended deliberately, year after year — not an accident of history.

The Investor's Takeaway

None of this shows up cleanly in a discounted cash flow model. But it shows up everywhere else: in employee tenure numbers, in the near-total absence of the “new CEO reset” that so often destroys value, in the depth of a leadership bench that can survive a downturn without a costly external search, and in a workforce that believes — correctly — that the person running the warehouse today could be running the division in fifteen years.

It’s a quiet variable. It’s also, across a remarkable number of the best long-term compounders, a remarkably consistent one. The path from the forklift to the boardroom does more than reward loyalty. In many of the world's best businesses, it's how knowledge, trust and culture compound — and how the company ensures that the person making decisions at the top still remembers what the work felt like at the bottom.

The best companies do not merely build products, stores or factories. They build people capable of carrying the business forward.

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The Secret of Weak Competition

Warren Buffett once said, half-joking, that the secret of life is weak competition. It's a strange thing for the world's most famous investor to admit — we're taught that competition is healthy, that rivalry sharpens products and disciplines prices. Buffett has spent sixty years looking for businesses that face as little competition as possible.

He's not alone. Charlie Munger put it more bluntly — he'd seen a single competitor be enough to ruin a business. Sam Zell argued there's no substitute for limited competition: you can be a genius, but if the field is crowded, genius won't save you. Peter Thiel turned it into a slogan: competition is for losers.

Chris Hohn makes the investor's case for why, stripped of the aphorisms. Moats aren't static, he argues — they're something you have to keep re-underwriting. "We used to love consumer staples, but they became richly priced and offered low returns. We used to like media content companies, but streaming severely weakened their moats. Disruption can happen — you've just got to stay alert to it." His fund's response is to spend almost all its time on barriers to entry precisely because most investors underestimate how quickly they erode.

The purest version of the ideal is the business with no competitors at all. Howard Stoeckel of Wawa liked to say the company didn't want to be McDonald's fighting Burger King — it wanted to be Cirque du Soleil, competing against no one, occupying a category so distinct that rivalry simply doesn't apply.

It's a beautiful position to be in. It's also rare, and it comes with a hidden risk. Chung Ju-yung, who built Hyundai, made the opposite case: a company without rivals eventually turns stagnant, the way state-run monopolies do — running alone in a marathon feels comfortable right up until the day it isn't. Markets move. Technology changes. A regulator shifts the rules, or a new entrant arrives with a better way of doing things. Comfort breeds blindness, and the business that has never had to look over its shoulder is often the last to notice the ground shifting beneath it.

And yet, set against Buffett’s crowd is an equally impressive group of builders who argue that competition made their businesses better, not worse. That is the paradox. The ideal business faces weak competition but behaves as though a formidable rival is always approaching.

Avoiding Competition

Some of the best operators didn't wait for weak competition — they engineered it, by staying invisible for as long as possible. Jeff Bezos has been explicit about this with AWS: "we got about two years of runway before competitors copy your idea," and in AWS's case, the head start ran to seven. Sam Walton said much the same about Walmart's early years, admitting the misconception that Walmart was a fly-by-night outfit "worked to our advantage," letting the company grow largely unnoticed until it was too far along to catch. Ingvar Kamprad built the same invisibility into IKEA's structure without ever naming it as strategy: stores went up out of town rather than in furniture retailers' traditional turf, tables were made by door manufacturers instead of furniture factories, and customers assembled the products themselves. None of it looked like competition to the incumbents — until IKEA was one of the most recognized furniture brands in the world.

The pattern shows up again and again in a company's choice of ground. Truett Cathy built Chick-fil-A inside shopping malls, a category fast food had ignored, and had it largely to himself for a decade. Enterprise Rent-A-Car avoided airports entirely, setting up next to Laundromats and strip malls while the majors fought over business travellers. Michael Dell built a direct-sales computer business that IBM and Compaq dismissed as "just a mail-order company" — until it wasn't. In each case, the competition wasn't absent by luck. It simply hadn't noticed yet.

Eventually, though, every successful business gets discovered. Then the question changes from how to avoid competition to how to use it.

Compete, Don't Retreat

In 1963, a Coca-Cola executive was asked what he thought of Pepsi. Robert Goizueta's answer became one of the more famous lines in American business: if Pepsi-Cola didn't exist, he said, he would try to invent it. It kept Coke — and Pepsi — lean, and on their toes. It's an odd thing to say about the company trying hardest to put you out of business. But wander through enough founders' letters and biographies, and you find the same instinct again and again: the best operators don't just tolerate their rivals. They study them, chase them, and sometimes seem almost grateful for them.

There's a cost to never facing a real rival, too. "Lack of competition is the equivalent of no peer review process," Michael Bloomberg argued — when a better competitor eventually shows up, an organization with no prior need to improve has usually grown too lazy to react in time. Charles Koch reached a similar conclusion from the builder's side of the equation: competition isn't something to survive, it's something to accelerate, and he's blunt about the tempting alternative — businesses that try to protect themselves through tariffs, permitting and subsidies end up trading away the very progress competition was supposed to produce.

The sharpest version of this idea belongs to A.P. Giannini, who built the Bank of America from a single branch into the largest bank in America. "If my opponents hadn't forced me time after time," he said, "there would have been no driving, sustained effort to top the field." Toward the end of his life, he went further, framing the debt as gratitude rather than grudging respect: "For whatever success I have attained, I give the bulk of the credit to my enemies. They stimulated me. They kept me going. I am thankful to them." It's the same instinct Ovid captured two thousand years earlier — a horse never runs so fast as when it has other horses to catch up to and outpace.

Your Competitor Is a Free Consultant

If the first instinct is to face competition rather than avoid it, the second is to actually learn from it. Nobody made the case better than Terry Leahy, who ran Tesco through two decades of brutal UK grocery competition:

"Years spent in the hurly-burly of retailing made me realise that competitors — and the act of competition itself — are great teachers. I don't like waiting for my competitors to come over the horizon. I prefer to seek them out. Nor am I interested in looking for their faults or spotting their weaknesses — that is not only easy to do, but a sign of complacency. I want to know about them so that I can learn from them. My strongest competitors are the best management consultants there are: I look at their operations, their products or simply visit their website to find out about their thinking, research and planning — for free."

Leahy named Aldi and Walmart as the two toughest competitors he faced at Tesco. When Walmart entered the UK, Tesco was genuinely worried — Walmart's buying power was formidable, and Tesco's non-food operation was still in its infancy. So Tesco studied them closely: "We crawled all over their business." What emerged was that Tesco's lean supply-chain expertise, built for fresh food, could offset the higher prices it paid manufacturers due to lower purchasing volumes. Tesco responded by increasing store size, launching new formats, broadening its product range, adding services and cutting prices. It also sourced more strategically, concentrating purchases with selected suppliers to recreate some of the scale advantages Walmart enjoyed through its enormous global buying power. The business didn't just survive the onslaught: Tesco grew market share and profits more in the five years after Walmart entered the UK than in the five years before. As Leahy put it, "Walmart drew the best out of us."

Henry Ford approached competition from the opposite direction. Whenever a new car appeared, he bought one, tore it down, and studied every improvement he could find. "Scattered about Dearborn," he said, "there is probably one of nearly every make of car on earth." Xerox, under David Kearns, benchmarked L.L. Bean's warehouse picking speed, American Hospital Supply's small-item logistics, and American Express's call resolution rate, pushing its own first-call resolution from near zero to 85 percent.

Sitting in the Car

Some of the best learning didn't come from formal benchmarking teams at all — it came from simply watching.

Tom Monaghan would sometimes drive to a competitor's pizza store and sit in the car for hours, estimating how much business they were doing and thinking through what might make them more successful — and, by extension, what might make Domino's more successful. He did the same outside his own stores. "The numbers weren't the important thing," he said. "What was important was the intellectual exercise." Over the course of building Domino's, he visited roughly three hundred pizzerias, purely to look for methods worth stealing.

Carl Sewell ran the reverse experiment on his chain of auto-dealerships, hiring mystery shoppers to buy cars from his own dealerships twice a year, so he could see his business the way a customer — or a competitor — would see it.

The Competitor You Don't Know You Have

The harder problem isn't the rival you can see. It's the one you can't.

Leahy borrowed an insight from the Cold War strategist Sir Michael Quinlan: expected threats are usually the ones everyone prepares for. The danger comes from what nobody thought to expect. Applied to business, Leahy's conclusion was that the more conventionally you define competition — the way analysts and industry experts define it — the less likely you are to spot the hidden competitor. "This is the greatest threat of all: the competition you don't know you have." Finding it requires ditching the analyst's frame and thinking like a consumer instead — someone with a need, a wish, a demand — and following instinct rather than convention.

Leahy learned this the hard way inside Tesco. The company built a non-food home-delivery service — washing machines, bikes — explicitly to beat Argos, a catalogue retailer. It eventually struck him that the assumption was entirely wrong. The real competitor wasn't Argos. It was Amazon, then mostly known for books, music and film, but clearly capable of expanding into new categories. Once he saw it, Tesco had to overhaul its processes, build new categories, and invest heavily in online capability and logistics to confront a competitor it hadn't originally been watching at all.

His broader observation was that the unexpected threat rarely comes from a competitor's deliberate move. It comes from a new piece of technology creating an entirely new sector that didn't exist when the original competitive map was drawn.

Cable had a version of the same blind spot, playing out on a much bigger stage. For decades the industry's competitive map was drawn against other cable operators and satellite. Netflix skipped that fight entirely — selling video straight to the consumer and delivering it over the very pipes cable had spent hundreds of billions of dollars building, without paying for the privilege. Within a few years it was consuming roughly a third of all North American internet traffic at peak hours, largely on content the cable networks had licensed to it themselves. Media veteran John Malone's verdict was blunt: the industry had funded its own demise. Cable had beaten every competitor it was watching for — it simply wasn't watching for this one.

Creative Destruction

Joseph Schumpeter gave this idea its theoretical name back in 1942, describing what he called creative destruction. His sharper point, echoed almost exactly by Leahy seventy years later, was about where the real danger comes from: "It is not... competition which counts, but competition from the new commodity, the new technology, the new source of supply [and distribution], the new type of organization... which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives."

Charles Koch built this thinking directly into how he runs his business. Creative destruction, he argues, is always with us — cars and trains replacing horses and buggies, smartphones and the internet replacing older forms of communication — and however good a business may be, "at some point, probably sooner than later, it will no longer be good enough." His stated aim is to "drive it faster than our best competitor" — treating the four sources of disruptive innovation Schumpeter identified (new products and services, new technologies, new sources of supply and distribution, new types of organization) as a menu to pursue rather than a threat to defend against.

The Dodo Problem

There's a reason facing no real competitor at all is more dangerous than it looks.

Aoris Investment Management made the point using the dodo. The bird evolved on Mauritius, an island with no natural predators. With nothing to compete against, it lost the ability to fly and lost its fear instinct. It thrived for millions of years — right up until Dutch sailors arrived in 1598 with rats, pigs and monkeys that had been sharpened by real competition on the mainland. The dodo had no defences left, because it had never needed any.

Businesses that go unchallenged for long enough tend to lose the same instincts. Taxi companies are the more recent version of the same story. For decades, the incumbents faced limited competitive pressure and had correspondingly little incentive to invest in the product itself. Uber changed the category not by operating a better taxi fleet, but by introducing a technology layer the incumbents had never been forced to build: visibility, accountability and frictionless payment. It was Schumpeter’s warning made literal — a threat aimed not at the margins of the existing model, but at its foundations.

What Investors Should Look For

Most competitive-advantage analysis asks how far a business stands from its rivals: its scale, brand, switching costs, network effects or cost advantage. It is worth asking the opposite question too. How closely does management study its competitors? Does it know which competitor actually matters? And has it retained the instincts of a business that could still be challenged?

Weak competition is a wonderful economic advantage. But as Buffett put it just this month, "if you have a wonderful business, you are going to be subject to attacks. So it's not a question of whether it was wonderful yesterday — the question is, how long is it going to be wonderful?" Moats erode, technologies shift and competitors emerge from outside the categories analysts have learned to watch.

For investors, the tell is often in how management talks about its rivals. Is competition merely a risk-factor paragraph in the annual report, or does management understand how competitors operate, where they are improving and why customers might choose them instead? Has the definition of “competitor” been revisited recently, or is it frozen in the shape of the industry as it existed a decade ago?

The ideal business faces little competition but studies it relentlessly. It enjoys the economics of a monopoly without developing the instincts of one. Goizueta said he would invent Pepsi if it did not exist. Giannini simply thanked his enemies by name.

The secret may be weak competition. The trick is never believing it will stay that way.

Further Reading:
‘Iron Sharpens Iron: The Underappreciated Upside of Competition,’ Matthew Berry, Aoris Asset Management, March 2026.

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The Chalk on the Floor

There’s a story from the early days of Charles Schwab — the steel man, not the brokerage founder — that tells you almost everything you need to know about internal competition.

Schwab, running a mill for Andrew Carnegie, walked into one of his worst-performing plants and asked the day shift foreman a simple question: how many “heats” — furnace runs — had they completed that day. Six, came the answer. Schwab didn’t lecture anyone. He took a piece of chalk, wrote a giant “6” on the floor, and walked out without another word.

The night shift came in, saw the number, and asked what it meant. When they found out the boss himself had chalked up their production count, they didn’t need to be told what to do. They rubbed out the six and wrote a seven. The next morning, the day shift saw the seven and erased it for a ten. Back and forth it went, chalk mark by chalk mark, until — in Schwab’s own words —

“this mill, formerly the poorest producer, was turning out more than any other mill in the plant.”

No bonus was announced. No memo went out. Just a number on a floor and two shifts who refused to be shown up by each other.

People Aren’t Just Motivated by Money

Schwab understood something that a lot of management theory still underrates: make a number visible and people will move heaven and earth to change it — often for reasons that have nothing to do with a paycheck. As Schwab himself explained it, he’d come to believe there was an innate competitiveness in most people that could be stirred to remarkable output, given the right kind of challenge.

Jack Stack, who spent decades running Springfield Remanufacturing Corp. on exactly this principle, gets at the root of it. Work, he argues, is boring — but people love the idea of playing a game or competing, and that instinct is one of the most powerful tools a manager has. People only get beyond the baseline of work when the motivation is coming from inside them. You can set any goal you like — building the best company, hitting a production record — but if people don’t want it for themselves, it isn’t going to happen. Real management, in his view, is about instilling the desire to win —

“Instilling self-esteem and pride, that special glow you get when you know you’re a winner. Nobody has to tell you. You just feel it. You know it.”

It’s an old truth, not a new one. Napoleon Bonaparte, of all people, understood it as well as anyone. Aboard the ship carrying him into exile after Waterloo, he told his British captor as much — that a soldier will fight long and hard not for money, but for —

“a bit of colored ribbon.”

It’s why he’d created the Legion of Honor over a decade earlier: a system of medals and recognition costing the state almost nothing, yet capable of driving men to risk everything. The same principle runs through nearly every story in this piece — the reward isn’t the point. Being seen to win is.

Carl Sewell built an entire philosophy of auto-dealership management on the same instinct. He liked to point out that people are naturally competitive — they’ll try to beat whatever target is put in front of them whether or not there’s extra money attached. His go-to comparison was racquetball: nobody’s paying you to play, but you’re still diving across the court trying to win. Sewell’s practical application was to post results everywhere — delivery times, receivables, customer satisfaction scores — all personalized, so “everybody understands how the game is played and who’s doing the best.”

The Research Backs It Up

This isn’t just a collection of good anecdotes. When Tom Peters and Bob Waterman researched In Search of Excellence over four decades ago, they found the same pattern surfacing again and again in America’s best-run companies. As they put it, “there is little place in the rationalist world for internal competition” — a company isn’t supposed to compete with itself. And yet, they wrote, “throughout the excellent companies research, we saw example after example of that phenomenon.”

The mechanism, in their words, was “the use of social comparison” — “regular peer reviews,” performance data “made widely available,” and internal rivalry “purposefully induced” rather than accidentally tolerated. The costs are real — duplication, cannibalization, wasted development spend. But the payoff, harder to put a number on, shows up in commitment, innovation, and a relentless focus on the top line.

You Can’t Compete Without Data — And You Can’t Have Data Without Transparency

None of this works without one non-negotiable ingredient: the numbers have to be visible. Schwab’s chalk mark was the entire intervention — it wasn’t a threat, it wasn’t a target handed down from above, it was information, made public.

Jack Stack built his entire management philosophy — open-book management — around this idea, and he came to it the hard way. Early in his career, he decided that secrecy was, in his words, baloney — and resolved that from then on he would give his people everything he had. That decision eventually grew into a whole system for teaching employees how a business actually makes money. His broader principle was this —

“The more people know about a company, the better that company will perform. This is an iron-clad rule.”

Stack also made the case for why you measure things in the first place — not simply to rank people, but because nothing matters more than an environment where people feel they’re making a difference. You can’t feel good about your work, he argued, unless you can see the difference it makes — which means measurement isn’t a control mechanism. It’s what lets people see themselves winning.

You see the same logic at ABB under Percy Barnevik, who ran roughly twenty power transformer factories across fifteen countries and compared their monthly performance data against each other, naming a winner every time. No factory, Barnevik found, wanted to end up at the bottom — and every factory got better because of it.

Even John D. Rockefeller, running the closest thing to a true monopoly American business has seen, understood the danger of getting too comfortable. Standard Oil’s committee system circulated performance figures deliberately to stir up rivalry between its partially-owned subsidiaries, with top units competing for records and prizes. The logic, as one biographer put it, mattered enormously —

“monopolies, spared the rod of competition, can easily lapse into sluggish giants.”

John Patterson, founder of National Cash Register, was doing the same thing on an even grander scale before the turn of the last century. He put the sales results of every one of his agents into a company bulletin, The N.C.R., along with whatever they were willing to share of their own methods — turning individual technique into shared company knowledge. A salesman who put up a good number got his photograph printed alongside an account of what he’d done, which Patterson candidly admitted served two purposes —

“partly to reward the man and partly to challenge all the other men to go and do likewise.”

Anyone who hit their full quota became a member of what Patterson called the Hundred Point Club — an honor that came with an invitation to the annual convention in Dayton. The club even had its own hierarchy, with the first people to hit quota assigned honorary leadership positions. The entire mechanism was recognition, rank, and public comparison — and by Patterson’s own account, the club’s conventions only grew more prestigious with each passing year.

Engineering the Instinct

You’ll find it deliberately built into some of the world’s most successful companies — because it’s one more way they get the best out of their people.

Brown & Brown, the insurance brokerage, calls it a “survival of the fittest” culture by design. As J. Hyatt Brown put it, the company’s success can be traced directly to its internal competitive posture — profit center managers are given real autonomy and full responsibility for their results, then measured both against each other and against their own past performance. Andrew Watts doesn’t dress it up —

“We are a performance based culture. It is very competitive. There are leaderboards everywhere. If you like being ranked you will like it here.”

Ken Kirk frames it in athletic terms — even the company’s highest-performing profit centers keep improving because of the rivalry, not despite it, sharing information as they chase the same goals. Just as athletes lift their game with stronger competition, he argues, Brown & Brown’s teams do the same, vying for top positions rather than settling once they’re already ahead of the pack.

Enterprise Rent-A-Car takes the transparency piece further than almost anyone. Frederick Reichheld noted that Enterprise openly shares financial results and customer satisfaction scores for every branch and every region, so employees can see for themselves which offices have stumbled onto a winning practice — a van driver handing out free soft drinks in the summer heat, an assistant manager who started letting customers return cars after hours. Because branch and assistant-branch manager pay is tied directly to branch profit, managers have every incentive to study what their peers are doing and steal it. The rivalry stays friendly — Reichheld describes competing branches wagering a dinner on whose monthly profits come out ahead — but it keeps everyone hunting for small, real ways to build customer loyalty.

David Cote at Honeywell went further still, publicizing internally the top ten and bottom ten performing teams on a key operational metric. Leaders loved landing in the top ten. They hated the bottom ten so much that Cote found the tactic accelerated improvement faster than almost anything else he tried — and he recommends it as a go-to lever whenever you’re trying to change an organization’s behavior.

Perhaps the most literal example comes from 3G Capital’s ownership of the Brazilian railway América Latina Logística. Drivers, it turned out, varied enormously in how efficiently they braked, accelerated, and routed trains — and diesel was the company’s single biggest cost. So the company built onboard computers that tracked every trip and ranked every driver on fuel efficiency and safety. They called it the Diesel Cup. Top performers got badges for their uniforms and had prizes handed to them by famous soccer players. The result: fuel consumption fell 30%, and the railway became the safest in Brazil. The idea, notably, wasn’t invented in-house — it came from an executive who’d spent weeks studying how Anheuser-Busch ran its own internal sales competitions.

The Common Thread

Strip away the industries and the decades, and the pattern is always the same three moves: make the number visible, let people compare themselves to each other, and trust that most people would rather win than be paid to lose quietly. In the best examples, the rivalry stays friendly — a chalk mark, a leaderboard, a wagered dinner, a badge on a uniform. Nobody’s threatened. They’re just being watched, and given the chance to be the one who comes out ahead.

What Investors Should Look For

As investors, we spend a lot of time hunting for competitive advantages — brands, network effects, switching costs, scale. Internal competition rarely makes that list, but it should. It’s one of the few advantages a management team can build using information the company already possesses.

What separates the companies in this piece isn’t the tactic itself — a scoreboard, a bulletin, a badge — it’s the discipline behind it. Branch results, factory output, driver efficiency, sales per store: posted, compared, and left for people to react to on their own. It costs almost nothing, and it’s remarkably hard for a competitor to copy, because it isn’t a system so much as a culture of transparency that has to be built, often over years.

For investors, the tell is usually in how a company talks about its own units. Does management know — and share — which branch, plant, or team is outperforming, and why? Do employees have the data to compare themselves to their peers, or only to a budget set from above? A business that can answer these questions in detail has quietly built its own internal market — capturing the benefits of competition without needing an outside rival to provide them.

Schwab needed no elaborate incentive scheme. He needed a piece of chalk, a floor, and two groups of people who could see the score.​​

Further Reading:
‘The Great Game of Business - The Only Sensible Way to Run a Company’, Jack Stack, 2012

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Eight Days Searching for the Same Answer

A couple of months ago I spent eight days crossing America — Indianapolis to Cincinnati, Boston, New York, and finally Omaha for the Berkshire Hathaway annual meeting — visiting businesses, investors, ballparks, bookstores and art galleries.

On the surface, the itinerary made little sense. Fire safety equipment, diesel engines, uniform rental, furniture stores, hedge funds, modern art and baseball do not naturally belong together.

But that's part of why I keep doing these trips. The best ideas rarely stay confined to one discipline. A manufacturer can teach you about culture. An artist can teach you originality. A ballplayer can teach you patience. A retailer can teach you customer obsession. A great investor can teach you temperament.

One question ran underneath almost every conversation:

What allows certain people, businesses and organisations to compound for decades?

Indianapolis — fire safety and taking the long view

The first few meetings could hardly have looked more different. MSA Safety first came onto my radar the way some of the best ideas in investing do — not through a screen, but through another investor’s work. Sequoia flagged the business in its 2025 letter. We caught up with the company and management at the world’s largest firefighting conference, held in Indianapolis.

MSA built its position protecting firefighters and industrial workers through a genuine customer obsession — designing alongside the people who actually use the equipment, not just for them. That trust has compounded over decades into the number one or two market share in category after category. The same long-term mindset is evident in the numbers: MSA has increased its dividend for 56 consecutive years. Now the company is using technology to widen that moat further, connecting equipment to central systems that give responders better information in real time and help save more lives.

Spending time with CEO Steve Blanco was genuinely comforting. While the analyst community obsesses over next quarter's earnings, Steve is investing for the decade ahead — new product platforms. It's a reminder that some of the best management teams are quietly ignoring the very audience that's watching them most closely. Meeting not just Steve but several divisional managers, the same pride and passion for the mission showed up at every level — a good sign for a business whose edge depends on genuinely caring about the people who use its equipment, not just selling to them.

Cincinnati / Columbus — Cintas, and a century-old diesel company's town

Cintas is the uniform and workplace supply company that turned into a 750-bagger. It’s tempting to look for a hidden secret behind a number like that — a breakthrough product, a stroke of genius.

Sitting with CEO Todd Schneider and COO Jim Rozarkis, the real answer was far less exciting: culture, execution, measurement, internal competition, and a customer obsession that shows up in the small things — route reliability, uniform improvements and responsiveness — repeated for decades. Both men started at the bottom of the business and worked their way through it, and it shows — the culture emanates out of two people who lived every layer of it themselves.

I asked what people notice most when they join. The answer — "you people are crazy." Cintas is intensely competitive, everything is measured, and the intensity shakes plenty of people out early. It's part of why they like hiring straight out of college and promoting from within — training people into the culture before they've been shaped by anywhere else. For the ones who like being measured and like competing, it becomes the kind of place they stay for good.

What struck me most, though, was how much runway is still ahead of it. The market remains underpenetrated, with plenty of whitespace and a genuine value-add proposition for customers who haven’t yet switched. It’s also highly fragmented — and growth comes as much through courtship as through competition, with M&A built on relationships developed over decades.

Cummins offered a different version of the same idea. Forty six years of 15.5% annual compounded returns through every kind of adversity — oil shocks, emissions regulation, entire technology cycles — but the legacy isn't only in the numbers.

J. Irwin Miller led the diesel engine company for some 40 years and understood that businesses could shape communities, not just serve them. He commissioned some of the twentieth century’s greatest architects to remake Columbus, Indiana — a town of just over 50,000 people that the American Institute of Architects ranks the sixth most architecturally significant city in America, behind only Chicago, New York, Boston, San Francisco and Washington, D.C.

America has a tradition of towns shaped by the companies that built them — Hershey and its chocolate factory, Dayton and National Cash Register, Endicott Johnson and its shoe towns in upstate New York. Each grew out of a founder who genuinely believed the company’s obligations extended past the factory gate — Hershey built schools and a free amusement park; Endicott Johnson’s ‘Square Deal’ offered free healthcare and profit-sharing decades before either was standard. Columbus belongs in that same tradition of care, but Miller’s version was more civic than paternal: rather than provide for workers directly, he invested in architecture and design excellence that made Columbus a place talented people would choose to live, independent of the company itself.

An entire town built on the idea that buildings shape people. The evidence of a truly great company sits not just in its financial statements, but in the streets around it.​​​​​​​​​​​​​​​​

Boston — museums, Fenway, and the limits of theatre

RH Design, the luxury furniture retailer, was its own kind of lesson, and one better learned in person than from a spreadsheet. Walking through their galleries — first at the DeHaan Estate in Indianapolis, then again across four floors of the old Museum of Natural History in Boston — it's impossible not to be impressed: manicured, château-like grounds, restaurant service. This is closer to theatre than retail. But that differentiation comes with a burden competitors don't carry — fit-out and upkeep at that standard, in every gallery, indefinitely. And once you look past the staging, the heritage, quality and differentiation feel a long way from an Hermès or even a Louis Vuitton — brands that pair the theatre with generations of craft underneath it. Beautiful businesses still have to earn their keep.

The Museum of Fine Arts, the Isabella Stewart Gardner, and later MoMA and the Joslyn, all taught some version of the same thing about originality — none of the artists whose work hangs there succeeded by copying consensus, and the crowd rarely recognises that kind of originality on time.

In the last few years I've gone down a rabbit hole reading about some of the greatest artists and art dealers, trying to understand where creativity actually comes from — and why it so often takes the market a long time to recognise genius. Van Gogh, de Kooning, Robert Henri, Pollock, Edward Hopper, among others: standing in front of their paintings with that history front of mind adds an entirely different layer to experiencing the work. De Kooning recoiled from any external demand, as Stevens and Swan describe in their biography of him — no woman, no institution, no club, no philosophy was ever going to give him his marching orders. Hopper put it best on originality itself: "Originality is neither a matter of inventiveness nor method in particular a fashionable method. It is far deeper than that, and it is the essence of personality."

Great businesses and great investors seem to share the same streak of independence. They're willing to challenge conventional wisdom, and they bring something close to a fanatical approach to their craft. Perhaps Hopper's real gift was seeing the simplicity sitting inside the complexity — stripping a scene down until only the essential thing remained. The best investors do something similar with a business. The method looks different. The temperament underneath it doesn't.

At Fenway Park, the 114-year-old home of the Boston Red Sox and the oldest active ballpark in Major League Baseball, the story was Ted Williams — the longest home run ever hit there, 502 feet, in 1946, a record that still stands. Buffett took the lessons of one of America's greatest sportsmen and applied them to investing: he keeps Williams's photo on his office wall, and wrote in 1997 that great investing needs exactly this kind of discipline — waiting for the fat pitch, swinging only at the best of it. Activity feels productive. Selectivity is the actual edge.

Boston / New York — patient capital, and the ideas business

The investors mostly circled back to one theme: temperament and time are the edge, far more often than analysis.

At Abrams Capital, Raja Bobbili described their advantage as behavioural rather than purely analytical — patient capital lets you support management through hard periods and go on the offensive when others are retreating — adding conviction while the market panics, and staying focused on business value instead of the daily price. It's a concentrated approach run by a four-person investment team. Their involvement in the new ContextLogic, built around the old US Salt business, is a structure worth watching — framed on the model of the Swedish compounders, giving management genuine long-term exposure rather than a typical private-equity exit path, and designed to attract the kind of management teams who want long-term partners, not short-term owners.

Seth Klarman made a related point at Baupost: as the market grows more short-term, it may be growing more inefficient for anyone still willing to hold a longer view. A nice paradox — the more impatient the world gets, the more valuable patience becomes.

At Oaktree, Howard Marks talked about building a firm around principles rather than personalities — intelligence, independent thinking, team culture — the same ingredients that let a business, not just a fund, survive beyond its founders. He was emphatic that culture comes first: no matter how successful someone is, if they don't live up to the standards integral to the business, they don't belong at Oaktree.

New York offered its own lesson, at the ballpark rather than the boardroom. The Knicks playoff game at Madison Square Garden was pure electricity — a city that takes its basketball seriously. A night later at Citi Field, the contrast was stark: a Nationals grand slam helped the Mets to their heaviest defeat of the season, and the stands were half empty. Same city, same week, two very different atmospheres. Winning teams fill stadiums.

At Sequoia Fund, Arman and Trevor described their work simply as the ideas business. Research into one company leads to its suppliers, its competitors, its customers, and often the more interesting idea sitting one step away from the one you started with. A company that isn't interesting today might be interesting tomorrow — there's a real cost to closing your mind too early. They were candid about the market's winner bias too: a small number of positions usually drive the bulk of long-run returns. Finding them is hard. Holding them, they said, is harder — this is ultimately a behavioural business.

Michael Baron made the same point from a different angle. Baron Capital's seven-to-eight year average holding period isn't an accident; it's a structure built to give a good business enough time to surprise you. He's understood the idea since he was a kid at the dinner table with his father, Ron: it's the fundamentals, not the macro, that matter — and you still need balance across a portfolio, because being all-in on one position is how you get burnt.

Munib Islam at Saraza Management framed it in the sharpest terms of the trip. He sorts every business into three buckets: great companies that stay great, great companies quietly slipping to good, and good companies becoming great.

It's the middle category that does the damage — a business can look wonderful in the rear-view mirror while its future is already eroding, which is why he treats quality as something that's never stationary, scoring it fresh rather than assuming it holds.

His favourite question for management says most of what needs saying: "What are you doing right now to make your moat wider?" — often revealing simply in how hard it is to answer.

And on the two traits that actually separate investors, he was blunt: temperament — most pod shops have none for volatility — and duration, the willingness to sit through real discomfort. "We don't have to be early," he said. "We just have to be there for the ride."

Omaha — the last lesson

Breakfast with Chris Begg of East Coast Asset Management was a highlight of Omaha. I’ve enjoyed his writing for almost two decades — he’s one of the most thoughtful investors around, and one of the few who genuinely embodies the multidisciplinary thinking Munger used to talk about. He’s now leveraging AI to sharpen his investment process, folding new tools into a mind that’s spent years pulling ideas from philosophy, architecture, and history as readily as from financial statements.

For seven years I've listened to Ron Blumkin and the team at Nebraska Furniture Mart trace the business back to the lessons of Mrs B: sell cheap, tell the truth, look after the customer. Nearly ninety years later, none of it has changed. "We are a learning machine," Ron told us. "I really mean that." Here's a family that built one of America's great retailers, sold it to Berkshire, and still keeps travelling to Harvard for leadership courses — 26 times and counting. Success never convinced them they had the answers. It convinced them to keep looking for better ones.

They remain just as obsessed with the customer end of the business — happy to be comparison shopped, because they believe they'll win, and unwilling to give away the low end of the market the way Sears once did. Sears forgot that lesson. Walmart didn't.

Then came the Berkshire meeting itself — the last lesson of the trip. Buffett sat in the front row this year, watching his own masterpiece from a distance he’d never had to before. A jersey went up to the rafters marking sixty years as CEO. Then he spoke — brief, sharp, the same wit undimmed by age. “Greg is doing everything I did,” he said, “and then some.”

A master doesn’t just build the work — eventually it has to survive someone else’s hands. Greg Abel’s job isn’t to be Buffett. It is to keep Buffett’s creation compounding long after Buffett is no longer in the front row.

Eight days. Completely different industries, completely different people. And yet the same ideas kept resurfacing — in a diesel engine's hundred-year town, in a hedge fund's four-person investment team, in a 1946 home run that's never been beaten, in a family that still hasn't stopped learning after ninety years.

The advantage was rarely some complicated formula.

It was the willingness to keep learning, keep improving, and keep doing the right things for long enough.

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Failure as a Competitive Advantage

Spend enough time studying exceptional organisations and you begin to notice recurring patterns. They recruit differently. They decentralise decision making. They think about capital allocation differently. They stay unusually close to customers. They build cultures that seem to compound over decades.

Another pattern is less obvious, but it appears with remarkable consistency.

The world’s best organisations have an unusually high tolerance for failure.

At first glance, that sounds counterintuitive. Surely the best organisations make fewer mistakes than everyone else. Surely excellence is simply the result of consistently making better decisions.

But after reading hundreds of founder biographies, business histories and studies of successful organisations — from great companies to championship teams and military units — I have gradually come to a different conclusion. Great organisations are not distinguished because they avoid failure. They are distinguished because they have learnt how to convert it into learning.

That does not mean tolerating carelessness or poor execution. Quite the opposite — the best organisations are demanding, with exceptionally high standards. What they have recognised is that innovation requires a culture where people feel safe to experiment. If people become frightened of being wrong, they stop experimenting. Once experimentation stops, learning slows. And once learning slows, innovation rarely survives for long.

Elon Musk explained the mechanism plainly: punish failure too severely, and people respond accordingly — innovation becomes incremental, because nobody is willing to try anything bold. Henry Kravis reached the same conclusion from the other side of the table: a culture that does not admit failure is precarious.

Different leaders, different industries, the same finding — fear changes behaviour. People become cautious, defensive, less willing to challenge accepted thinking. Organisations that once adapted quickly can become prisoners of their own success.

Tom Peters Saw It Forty Years Ago

Tom Peters and Robert Waterman identified this pattern more than forty years ago in In Search of Excellence. One defining characteristic of excellent companies, they observed, was a high tolerance for failure — not for mediocrity, but for experimentation. The best companies, they found, experiment more, encourage more tries, and permit small failures.

As organisations grow, they can become insulated from reality. Planning increases. Analysis expands. Approval processes multiply. Meanwhile, customers change, competitors move, technology advances and the operating environment evolves. What looks like discipline can become disconnection. Small experiments are what keep a business learning.

The Palchinsky Principle

I read Tim Harford’s Adapt more than ten years ago, and one idea from it has stayed with me since. Harford describes the Palchinsky Principle, drawn from the work of Peter Palchinsky, a Russian engineer who studied why grand industrial projects so often failed.

His method was simple: seek out new ideas, test them on a scale where failure is survivable, gather feedback from the people closest to the work, and learn before committing significant resources.

It is a powerful model because it explains how great organisations actually operate. They are not reckless, and they do not celebrate failure for its own sake. They build systems that allow trial and error within sensible limits — testing before they scale, learning before they commit, and taking risk without ever making survival dependent on being right.

Eli Broad captured the risk-management side of this well: never bet the farm, or even half the farm. He believed the entrepreneur’s most common trap was the illusion of invincibility — optimism was essential, but so was a clear-eyed view of the downside. He always wanted to understand the worst case before committing to the best one.

Jim Collins made the same point more simply: the only mistakes you can learn from are the ones you survive. Failure is useful only if it is survivable.

That single idea explains a host of philosophies that otherwise look unrelated. Henry Ford was saying much the same thing more than a century ago: try everything in a little way first. Bruce Flatt, Thomas Bloch, John Malone and Barry Diller — operating decades later, in entirely different industries — arrived independently at the same rule: never risk the whole business on one deal. Halma applies the same logic to its acquisitions, entering unfamiliar markets cautiously through small, reversible bets rather than large ones.

What’s notable isn’t that these leaders knew each other. It’s that they didn’t need to. Progress requires experimentation, but the experiments have to be designed so that being wrong never threatens the survival of the business.

The Acquisition Trap

This is particularly relevant to acquisitions.

I have seen plenty of deals that looked wonderful on paper. The earnings were accretive, the synergies obvious, the strategic narrative compelling. Then reality arrived. The seller knew more than the buyer. The business had been dressed for sale. The customers were not as loyal as they appeared. The promised synergies never materialised, the cultures clashed, the systems didn’t integrate, and the people who made the business special walked out the door once the cheque cleared.

A spreadsheet can make almost any acquisition look sensible. But acquisitions aren’t completed in spreadsheets — they’re completed in factories, branches, sales teams, incentive systems and cultures. That is where the assumptions meet reality.

The best businesses understand this and rarely bet the farm. They prefer bolt-ons and adjacent opportunities over grand transformational deals, and they preserve the ability to change their mind. The danger is magnified when a deal requires issuing a lot of equity, gearing the balance sheet, and relying on a debt paydown plan that assumes the future resembles the model. Often it doesn’t.

The better question is not simply whether a deal adds to earnings. It’s whether the company can digest the loss if the thesis is wrong. In capital allocation, brilliance matters. Survival matters more.

Small Experiments Produce Big Advantages

One of the most consistent traits of outstanding companies is that they rarely rely on one enormous bet. Instead, they build systems that allow hundreds of relatively inexpensive experiments every year.

Tom Peters called this “cheap learning” and quoted 3M’s philosophy approvingly: their people make hundreds of little bets. The same thinking shows up everywhere you look. Aldi runs a three-store test before any wider rollout. Costco trials new products in a handful of warehouses before committing to larger purchases. Chick-fil-A tested menu items across dozens of stores before going national. Raymond James deliberately let managers make mistakes while they were still cheap.

The purpose of these experiments is never to prove management right. It’s to learn something while the cost of being wrong is still modest. Most will never transform the company, but collectively they replace uncertainty with knowledge before meaningful capital is committed.

Jeff Bezos has made the inverse argument at Amazon: if the scale of a company’s failures isn’t increasing as it grows, it probably isn’t inventing at a scale capable of producing real breakthroughs.

Businesses as Organic Systems

Po Chung, co-founder of DHL International, saw DHL as an organic system rather than a machine. The distinction matters. A machine operates in a fixed way. An organic system is constantly adjusting to its environment — and as Chung put it, anything that is constantly adjusting is constantly making mistakes. Mistakes are a byproduct of evolution, not a departure from it.

Jim Collins pushed this further in Built to Last. He argued that visionary companies make some of their best moves through trial and error, opportunism, and — quite literally — accident, and that they “mimic the biological evolution of species.” The comparison is worth sitting with rather than passing over.

In evolution, variation comes first. Organisms try slightly different things, mostly by accident. Selection comes second, deciding which variations survive contact with the environment. Companies that operate the same way generate many small variations — new products, new formats, new approaches — expose them to the real test of customers and competitors, and let the market do the selecting. What looks like brilliant foresight in hindsight is often just this process running for long enough.

A company that tries to remove every mistake can easily remove the variation that allows it to adapt. The goal isn’t to eliminate error — it’s to make errors visible, survivable and useful. The companies that endure aren’t necessarily the ones that make the fewest mistakes. They’re the ones that learn fastest, discard what doesn’t work, and keep moving toward what does.

A Culture Without Blame

Running experiments is only half the challenge. People also have to feel safe admitting when those experiments haven’t worked.

This may be the least appreciated trait of outstanding organisations. Many companies claim to encourage innovation, then respond to failed initiatives by searching for someone to blame — and employees quickly learn to conceal mistakes rather than discuss them.

Captain Michael Abrashoff built the opposite culture aboard the USS Benfold. His focus was never on finding someone to blame, but on making sure the accident never happened again. He also made the sharper point: show him someone who has never made a mistake, and he’ll show you someone who isn’t doing anything to improve the organisation — because organisations too often promote only the people who’ve never been wrong.

The pattern repeats wherever you look for it. Larry Culp describes Danaher’s philosophy as attacking the problem, not the person. Akio Morita wanted Sony to understand what caused a mistake rather than identify who made it. Garry Ridge removed the word “failure” from WD-40’s vocabulary entirely, replacing it with “learning moments,” because he wanted unsuccessful experiments shared rather than hidden.

Frank Perdue ran the same playbook at Perdue Farms — people were free to try something new, and if it didn’t work, the organisation learned from it and moved on. Some ideas were hare-brained. Some paid off wonderfully. That’s the trade-off: a culture that eliminates every bad idea usually eliminates the good ones too.

Marc Rowan makes the point most directly at Apollo. His view isn’t that poor decisions are acceptable — it’s that organisations learn almost nothing when people spend their energy protecting themselves instead of confronting reality. A wrong decision can usually be corrected. A mistake that’s denied or concealed becomes far more expensive. Michael Dell distills the whole idea into one sentence: you want to make mistakes, you just want to make them small, iterate, and fix them quickly.

The common thread isn’t a celebration of failure. It’s a determination to learn from it before it becomes expensive — and that requires honesty, humility, and an environment where people can speak openly about what’s gone wrong.

Make the Mistake Once

The best cultures are permissive, not indulgent.

Vitec’s philosophy was that it’s fine to make a mistake once. Po Chung described the same standard at DHL: anyone could make a mistake, so long as they didn’t repeat it — and the knowledge was then shared with others.

That is the line between tolerance and weakness. A hidden mistake is wasted. A repeated mistake is expensive. A mistake that is analysed, shared and embedded into the system becomes an asset. This is where failure becomes a competitive advantage — not because the company fails more often, but because it learns faster from the failures it has, and the lesson stops being trapped inside one person’s experience and becomes part of the organisation’s memory.

What Investors Should Look For

As investors, we spend enormous amounts of time looking for competitive advantages — brands, network effects, switching costs, economies of scale, reinvestment runways, capital allocation. Yet one of the most durable advantages is cultural.

The companies that keep adapting over decades have built cultures where people feel safe experimenting without threatening the survival of the business. They run small tests, listen closely to customers, remove blame from the learning process, and reallocate quickly away from what doesn’t work.

For investors, the question is never whether a company has made mistakes. Every company has. The better question is what it does with them. Does it hide them, deny them and repeat them — or surface them, learn from them, and adjust? Over long periods, that difference compounds.

In practice, this means being wary of companies that bet the farm on transformational acquisitions. It means listening for whether management talks openly about mistakes or only celebrates success. It means favouring businesses that test, learn and iterate before committing serious capital. An organisation’s error-handling system may matter as much as its strategy.

None of this shows up neatly in a screen or a set of accounts. Philip Fisher called this kind of work “scuttlebutt” — going directly to customers, competitors and former employees rather than relying on what management publishes. It remains one of the few qualitative edges that cannot be automated away, because whether an organisation learns from mistakes is usually revealed in behaviour long before it appears in the numbers.

Failure as an Edge

No organisation has eliminated failure. The ones that compound for decades have simply built a better relationship with it — one where mistakes are made small on purpose, surfaced rather than buried, and converted into something the whole organisation gets to keep.

That conversion, repeated across thousands of small decisions, is what a culture of experimentation actually buys a business: faster innovation, faster adaptation, less bureaucracy and more empowered people. People are more likely to stay because they are trusted. Products get better in small steps rather than rare leaps. Customers feel it before anyone reports it.

The companies that last are not the ones that fail less. They are the ones that evolve faster.

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The Answers Are Already In The Building

There's a consulting industry worth hundreds of billions of dollars built on a surprisingly simple arbitrage: companies pay outsiders enormous fees to tell them what their own employees already know.

It's one of the great ironies of organisational life. The person in the corner office, armed with an MBA, a strategic framework and a PowerPoint deck, spends months searching for answers that the warehouse supervisor, the customer service rep, or the factory floor worker could have provided in an afternoon - if only someone had thought to ask.

The People Closest To The Work Know Best

Joe Coulombe, who built Trader Joe's into one of the most successful retail concepts in history, put it simply: in any troubled company, the people at lower levels know what ought to be done. Lloyd Blankfein at Goldman Sachs noticed the same thing from the opposite end of the power structure - people knew the right answer, knew the system was broken, knew what needed fixing. They just hadn't been given permission to say so, let alone act on it. His solution was blunt: ask people what should be done, then tell them to do it.

Sam Walton was equally direct. The people on the front lines - the ones who actually talk to customers - are the ones who really know what's going on. The job of leadership, in his view, was to figure out ways to get them talking, and then actually listen. John H. Patterson at National Cash Register understood it in almost mathematical terms a century ago - why rely on one superintendent's brain scanning for problems when you could harness four thousand brains and eight thousand eyes, all simultaneously alert to mistakes and improvements?

IBM's Thomas Watson Jr ran a suggestion program that attracted more than 100,000 entries a year. Toyota built an entire production philosophy around the principle that only those at the front line can understand problems fast enough to react to them quickly. Henry Kravis at KKR tells anyone who will listen, from analysts to partners, to wake up each morning asking whether something could be done better. The source of the idea is irrelevant. What matters is that it surfaces.

Get Out of the Ivory Tower

The insight extends beyond internal operations to customers - and critically, to the customers who leave. Frederick Reichheld was unequivocal: there is simply no substitute for having senior executives learn directly from defectors why the company's value proposition is inadequate.

Terry Leahy, who built Tesco from Britain's third-largest grocer into one of the world's most successful retailers, made this viscerally real. He gave himself a challenge - one week every year working as a general assistant in a Tesco store. Checkouts, shelf-filling, back room, pricing, customer queries. Then he asked his three thousand top managers to do the same. Their combined firsthand experience, he noted, amounted to roughly sixty years on the shop floor in a single year. He learnt more in that one week than any other week that year - not from reports or dashboards, but from actually doing the work.

A consistent theme amongst many of the world’s most successful companies is getting management into the field. At Chick-fil-A, every headquarters employee works in a store at least one day each year. ServiceMaster introduced a ‘We Serve’ day, during which every leader participates directly in serving the customer - keeping management in touch with reality. The entire management of the Würth Group, right up to the group directors, is obliged to spend at least one whole day each quarter in the marketplace - in sales, visiting customers.

The best operators make field presence non-negotiable. Ed Stack built Dick's Sporting Goods into a dominant retailer by spending two days a week, three weeks a month, out in the field - walking stores, listening to managers, detecting shifts in customer demand long before anyone at a desk in Pittsburgh could. David O'Reilly at O'Reilly Auto Parts was blunt: you're either plugged in all the way or you're not.

There's no substitute for exposing yourself to your customers, your team members, and your vendors - and far too many executives simply don't do it. Brian Chesky at Airbnb spent six months living in his own company's rentals and found the core problem with his business hiding in plain sight - variability that no report had ever surfaced. Elon Musk slept on the factory floor during Tesla's most critical production crises, reasoning simply: if the team thinks their leader is off somewhere having a good time, it's demoralising. The more senior you are, the more visible your presence must be.

Two Harvard Business School professors who studied how CEOs actually spend their time found that on average, just 6% goes to frontline teams and 3% to customers. They spend 72% in meetings. The gap between those numbers is where organisational blindness is quietly manufactured.

J.W. Marriott said it plainly: companies that get into trouble are ones where the CEO never budges from the executive suite and makes decisions without knowing what's really going on. You can't rely solely on reports or secondhand information. You have to get out there and find out for yourself.

The Paradox of Expertise

Here's the uncomfortable corollary. The more senior and experienced a leader becomes, the more likely they are to stop doing the thing that made them effective in the first place.

Expertise is great, but it has a bad side effect - it tends to create an inability to accept new ideas. William Taylor calls it the paradox of expertise: the more deeply immersed you are in a market or technology, the harder it becomes to open your mind to new models that might reshape it. The people with the most experience, knowledge and resources in a field are often the last to see and seize the opportunities for something dramatically new.

This is why fresh eyes matter. Henry Ford observed that some of his best results came from letting fools rush in where angels fear to tread. The person who doesn't know something is impossible has a structural advantage over the expert who knows exactly why it can't be done.

Chester Cadieux at QuikTrip spent at least two months every year in direct communication with any employee willing to participate - and made a point of reviewing even comments raised by a single person just once, because without fail, each year he learned something important from exactly that source.

Why Most Organisations Don't Actually Do This

So why don't more organisations embrace something so obviously valuable? A few reasons, none of them flattering.

The first is ego. Leaders are selected, promoted and compensated in ways that reinforce the belief that their value lies in having answers. Admitting the answers might exist two levels below them feels like an admission of redundancy.

The second is structure - most organisations are not designed to surface information upward. Suggestion boxes and town halls are often theatrical exercises that give the appearance of listening without the substance of it.

The third is pure inertia - things remain as they are not because anyone thinks they're optimal, but because changing them requires someone to actually decide to change them.

Bill Walsh at the San Francisco 49ers put it starkly: if you're uncomfortable walking around your team's workplace, awkward and out of place, you are a disconnected leader. His coaching staff ate lunch in the locker room with players at least once a week. Tuna sandwiches and Pepsi. Barriers came down. Information flowed.

The Simplest Competitive Advantage Available

David Cote transformed Honeywell's sustainability performance not by importing expensive external expertise, but by asking the people already inside the building where energy was being wasted. Because employees developed the solutions themselves, they were personally invested in seeing them through. Joe Scarlett at Tractor Supply credits the overwhelming majority of the company's best product ideas to decades of continuous conversation with store managers and salespeople. Dick Wood at Wawa said it plainly: company intelligence is in the front line, not in the executive suite.

The answers to most of the problems an organisation faces are already inside it. They live in the person who processes the returns and knows exactly why customers send things back. In the technician who has quietly developed a workaround for the broken process that management doesn't know is broken. In the driver who has figured out a faster route that nobody ever thought to ask about.

As an investor, this is one of the most reliable signals available to you. Steve Mandel of Lone Pine Capital put it simply: you always learn more when you're outside the office than when you're in - body language, how offices are structured, little things that add up. Kelly Granat goes further: arrive early, sit in the lobby, watch who's coming in and whether they're happy to be there. Then go upstairs and notice whether the CEO talks over everyone in the room or creates space for others. All of it tells you something about how decisions are actually made.

We saw this firsthand at HEICO. Walking the floor, it was clear management's interactions with employees weren't a staged performance for visitors. They knew people by name, engaged in genuine dialogue, and asked thoughtful questions about projects and progress. It was a small detail, but a revealing one.

That culture - the one visible in the lobby at 8am, not the one described in the annual report - is ultimately what you're investing in. Companies where information flows freely from the bottom up, where leadership is genuinely curious, consistently present, and humble enough to listen, tend to improve continuously, adapt quickly, and compound reliably over time. Companies where the executive suite is insulated from operational reality tend to be slow, self-deceiving, and eventually blindsided.

The question was never whether the answers exist inside these businesses. The question - the one worth asking before you invest - is whether anyone in a position of authority cares enough to go looking for them.

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The Family Feeling

There is a word that appears, unbidden, in the writing and speeches of the founders of some of the greatest businesses ever built. It shows up in the memoirs of Ray Kroc, in the annual reports of Old Dominion Freight, in the founding philosophy of IKEA. The word is not "strategy." It is not "execution" or "competitive advantage" or "return on invested capital."

The word is family.

A pattern too consistent to ignore

When a pattern appears once, it's anecdote. When it appears across a hundred companies, spanning a dozen industries, over more than a century, it deserves serious attention.

Researcher Vicki Tenhaken spent years studying what she called the Century Club - companies that had survived and thrived for a hundred years or more. Her conclusion was striking: many of the Century Club companies' employees become lifelong, loyal members of the organisation and often compare their relationship with the company to being part of a family.

This wasn't sentimentality. These were businesses that had survived a century of disruption and competitive onslaughts. The family feeling wasn't incidental to their longevity. It may have been central to it.

Arie de Geus, the former head of strategic planning at Shell who spent decades studying long-lived companies, put it plainly: the feeling of belonging to an organisation and identifying with its achievements is often dismissed as soft. But case histories repeatedly show that a sense of community is essential for long-term survival.

Soft, it turns out, is one of the hardest things to build. John Wooden - the preeminent basketball coach of his era, winner of ten NCAA championships in twelve years including seven consecutive titles and an 88-game winning streak, and a man Charlie Munger held in the highest admiration - compressed the whole idea into a single sentence: "Teams with a sense of family have uncommon strength and resiliency."

He wasn't speaking as a sentimentalist. He was speaking as someone who had proved it, repeatedly, against the best competition in the world.

Tom Peters, whose landmark 1982 study of America's highest-performing companies - In Search of Excellence - remains one of the most influential business books ever written, identified family culture as a defining characteristic of exceptional organisations decades before it became fashionable to say so. What Peters found was not a coincidence of personality or geography. It was a pattern, repeated across industries, embedded in the operating philosophy of the companies that consistently outperformed their peers.

More recently, Daniel Coyle spent years studying some of the world's most cohesive and high-performing groups - among them Google, Pixar, the US Navy SEALs, and the San Antonio Spurs. What he found echoed the same pattern, but from the inside out.

Coyle also noticed something else: many of the most successful organisations had created their own family-esque identifiers. People who work at Pixar are Pixarians. People who work at Google are Googlers. You might add Resmedians, Ikeans, Apaches, Hormelites and Nordies - each a small linguistic signal of something larger, a declaration that working here is not a transaction but a belonging. The name is the symptom. The culture is the cause.

What ‘family’ actually means in business

Before dismissing this as corporate speak - the kind of hollow language that fills employee handbooks nobody reads - it's worth being precise about what the best operators actually mean when they invoke the family metaphor.

They don't mean unconditional love. They don't mean the absence of accountability. Peter Schutz, who ran Porsche through one of its most successful periods, offered one of the clearest definitions: a family consists of a group of people who have made a commitment to each other and to a set of shared values. When there is a problem in a family, no one individual ever has a problem. The family has a problem and will deal with it together.

Commitment that doesn't evaporate when things get hard. That is what separates companies that invoke family as a marketing slogan from those that actually live it.

The family metaphor, when genuine, also extends outward - beyond employees to the full value chain. Peters documented this vividly in his study of Caterpillar. "We have a tremendous regard for our dealers," said the company's former president and chairman. "We will not bypass or undercut them. Some of our competitors do and their dealers quit. Caterpillar dealers don't quit; they die rich." Caterpillar dealers, Peters noted, were treated like members of the family - not as a turn of phrase, but as an operating principle that shaped every commercial relationship the company held.

Jim McLamore, who co-founded Burger King, described the same logic with his franchisees: "We became a very successful company because we were able to help our franchisees do well. [We] viewed their success as our own success. They were a part of our family and we regarded them as such."

Howard Hawkins of Hawkins Chemical took it furthest of all, extending the circle to encompass everyone the company touched - employees, customers, suppliers and the community around them. Family, in his hands, became a way of thinking about the entire business system.

John Deere understood this distinction clearly. A family isn't unconditional - you don't support a crazy uncle who isn't behaving. Standards matter. Accountability matters. The family metaphor works precisely because it combines warmth with expectation.

Paul Ricard, who built one of France's great spirits empires, captured the reciprocal logic at its simplest: he felt clearly that it was important to treat his employees as part of a family. If he took care of their best interests, they would take care of his. There is no more compressed statement of what this philosophy actually is - not paternalism, but a recognition that the relationship between an organisation and its people is, at its best, genuinely mutual.

The science beneath the sentiment

Robert Cialdini, the psychologist who has spent a career studying influence and social behaviour, offers a framework for why this works at a neurological level. When people act in unitary ways, they become unitised. The resultant feeling of group solidarity serves society's interests well, producing degrees of loyalty and self-sacrifice associated usually with much smaller family units.

The neuroscience runs deeper still. Mark Bertolini, who led Aetna through a remarkable period of transformation, drew on research that connects the act of trust-giving to something measurable in the body:

"A neurologist discovered that when individuals were either given trust or they extended trust to others, their pituitary glands released a feel-good hormone called oxytocin. This created a biological virtuous cycle. When you trust someone their brain responds by making more oxytocin, which allows them to trust you in return. Reciprocity - doing unto others as they do unto you - seems to be a biological function; trust begets trust. I believe that to be true, and it's shaped my leadership of Aetna." Mark Bertolini, former CEO of Aetna

This is what Ricard intuited and Bertolini measured: the mutual relationship isn't just good philosophy, it is good biology. The virtuous cycle of trust is not merely a metaphor. It is part of the machinery of human cooperation.

For most of human history, survival depended on small groups that knew, trusted and sacrificed for one another. The family was the original organisation. Great companies do not fight that instinct. They build with it.

The companies that tap into this aren't being naive. They are being, in the deepest sense, strategic. They are building with the grain of human nature, not against it.

The founders who built it in

What's remarkable is how consistently this philosophy was baked in at the founding - not bolted on later as a PR exercise.

Ray Kroc at McDonald's. Howard Schultz at Starbucks. Ingvar Kamprad at IKEA. Yvon Chouinard at Patagonia. S. Truett Cathy at Chick-fil-A. Les Schwab at Les Schwab Tires. Les Schwab put it as plainly as anyone: "Our company is a large family." Seven words that contained an entire management philosophy.

Each built their company culture from the first day around a set of beliefs that prioritised belonging. Each understood, often instinctively, that people who feel ownership - emotional, not just financial - behave differently than those who merely show up for a pay cheque.

Tom Peters saw this pattern clearly among the founders he studied. Watson, Kroc, Marriott and their peers were pathbreakers in treating people as adults - inducing practical innovation and contributions from tens of thousands, providing training and development opportunities for all, and treating everyone as a member of the family. What united them was not industry or era but a shared conviction that the relationship between a company and its people was the thing worth building first.

As Keith Davies wrote of Don Plested and the early days of Mainfreight: Plested set out to make the company a family, a team, in which everyone would have a share in the riches. Join Mainfreight, and you joined a family.

The Snyder family at In-N-Out Burger carried the same conviction. In many ways In-N-Out was an employee-driven company - the Snyders displayed an uncommon respect for their workers, never looking at them as just employees but seeing them as part of their own growing, extended family. In an industry notorious for churn and indifference, that distinction showed up everywhere: in wages well above competitors, in promotion from within, and in a loyalty from staff that customers could feel the moment they walked through the door.

At Patagonia, Yvon Chouinard took it a step further — the family feeling was not merely cultural but literal. "Not only was the company like an extended family," he wrote, "but for many it was family, because we always hired friends, friends of friends, and their relatives." What began as a climbing gear startup built around a tight-knit community never lost that texture, even as it grew into a global brand. The culture didn't have to be constructed. It was simply preserved.

The Hartford brothers at A&P ran the largest retailer in America for decades on a similar premise: the Hartfords treated the company as their family, almost never dismissing employees, creating one of the first company pension plans, and shortening working hours simply because they could afford to do so.

This is the key distinction. Family culture isn't just a philosophy about how you treat people. It's a philosophy about what the company is for. The Hartfords shortened working hours not because consultants told them to. Because they could. Because their workers were family, and family shares in success.

The scaling problem — and how the best solve it

The obvious objection is that family culture doesn't scale. A founding team of ten can feel like a family. A company of ten thousand cannot. Can it?

The evidence suggests otherwise - if you're deliberate about it.

Ralph Roberts, who built Comcast from a small cable franchise into one of the largest media companies in the world, articulated the solution simply: how do you maintain that same culture? You do it by being warm and friendly. And instead of one big family, we have a lot of little families.

This is precisely the insight that explains why decentralised businesses with branch-level autonomy so consistently outperform their centralised competitors. Not just for operational reasons - though those matter - but for cultural ones. When a branch manager has genuine authority and genuine accountability, they can build a genuine family within their team. The thirty people in that branch can know each other, trust each other, cover for each other. They cannot do that if every decision flows up to a regional manager who reports to a national director who reports to a VP who has never visited the branch.

Po Chung, who built DHL into one of the world's great logistics networks, understood this as well as anyone. "Both internal and remote networks become like working with parents, siblings, cousins, uncles, and aunts. As DHL was built and organised like a large, extended family, this provided a model we could keep scaling and growing. In fact, it was the ideal model for building a global service network composed of a competent and caring team of high character." Family culture, in Chung's telling, wasn't the soft alternative to building a great business. It was the mechanism.

Wawa, the extraordinary convenience store chain, has lived this for decades. CEO Howard Stoeckel put it plainly: we're the Cheers of convenience stores, a place where you're known by name, and where the customers and associates all treat each other like family.

Carol Meyrowitz, who ran TJX Companies through years of remarkable performance, traced the company's ability to retain great people directly to its family culture: one reason TJX holds on to its best people is its culture - very family-friendly, encouraging people to balance work and home life. As a result, people tend to stay. Many of them for more than thirty years.

Retention is not a soft metric. It is the compound interest of organisational knowledge. Every person who stays another year carries with them another year of customer relationships, product knowledge, institutional memory. Every person who leaves takes that with them. As Joe Coulombe, founder of Trader Joe's, put it with characteristic directness: "Productivity in part is a product of tenure. That's why I believe that turnover is the most expensive form of labor expense."

When family culture meets financial discipline

The most sophisticated version of this idea recognises that family culture and financial rigour are not in tension. They are, in the best companies, mutually reinforcing.

Henry Kravis at KKR - not an organisation typically associated with warmth - has spoken about it in exactly these terms: it's important to remember that KKR is our family business. We did go public and change our shareholder base in doing so, but George and I remain the largest shareholders to this day and our culture still has that family business mentality.

Marc Rowan, who built Apollo into one of the world's great alternative asset managers, goes further - and gets more specific about what living this philosophy actually requires at scale:

"The business ultimately runs on experience. That only lasts if your partners stay with you for their entire career. If they're going to stay with you for their entire career, we have to recognise they're going to have, outside their careers, a bunch of happy things that happen to them and a bunch of sad things. How we deal with people in these moments that matter — at 4,000 people, 6,000 people — it's really important. It's actually almost more important than anything else we do."— Marc Rowan, CEO of Apollo Global Management

This is the mechanism Bertolini's research describes playing out across a career. Every act of showing up - for a bereavement, an illness, a celebration - deposits a little more trust, extends the relationship a little further. At scale, across thousands of people over decades, that compounding is the business.

Bill Ackman at Pershing Square makes the connection between culture and outcomes explicit: the firm's unique family-oriented culture, the powerful economics of the business, and its widely dispersed economic ownership make it a special place to spend a career. A small scale and long-tenured employee base also reduce risks - particularly important in a regulatorily sensitive industry.

Long tenure. Reduced risk. Powerful economics. These are not accidents. They are the downstream consequences of culture built on belonging.

When the family includes the town

Sometimes the family feeling shows up not in words but in brick and mortar.

J. Irwin Miller ran Cummins Engine in Columbus, Indiana for four decades and used the company's profits to fund architect fees for public buildings - commissioning Eero Saarinen, I.M. Pei, Richard Meier to design schools, churches and civic buildings in a small Midwestern town. A town of 50,000 people with one of the most extraordinary collections of modernist architecture in the world. Not because it was good marketing. Because Miller believed that a company's family extended to the community around it, and that a family takes care of its home.

Implications for investors

So what does this mean for those of us trying to identify businesses worth owning for a decade or more?

Family culture is a moat. Not in the conventional sense of patents or network effects or switching costs. It is a moat because it is genuinely difficult to replicate and, once lost, extraordinarily hard to rebuild. You cannot hire a consulting firm to install it. You cannot acquire it. You cannot mandate it from a head office. It grows slowly, from the values of founders and the experiences of the people who live inside the business every day.

Look for low staff turnover. This is the most reliable observable signal of genuine family culture. Graco's average employee tenure of eleven years. TJX executives with thirty-plus year careers. Old Dominion drivers who retire with the company they joined as young men. These are not HR statistics. They are evidence of something real.

Look for founders or families still involved. The companies in this collection - Chick-fil-A, In-N-Out, Comcast, Wawa, Nebraska Furniture Mart, Cintas, LVMH, ABC Supply - are disproportionately founder-led or family-controlled.

This is not coincidence. Founders and families have a different relationship with the business. It is theirs in a way that a professional manager's company never quite is. They are willing to suffer short-term pain to protect something they intend to pass on.

As Katharine Graham observed, family ownership can also prevent the kind of disruptive takeovers that destroy what took decades to build. Quality, she argued, may be nourished most easily by families whose perspective extends beyond the immediate horizon.

Look also at how the best operators think about shareholders. Buffett's Owner's Manual asked investors to visualise their Berkshire stake the way they might think of a farm held "in partnership with members of your family" - not a piece of paper to be traded, but a permanent commitment. He didn't want a revolving door of shareholders any more than he wanted a revolving door of managers. Building an ownership base with the loyalty and permanence of a family is, it turns out, both a cultural achievement and a competitive one.

Be suspicious of rapid centralisation. When a company that built its strength through distributed, branch-level culture begins consolidating in the name of efficiency, the family feeling is usually the first casualty - and the financial results follow, often with a lag that deceives investors until it's too late. The culture breaks before the numbers do.

Listen to how leaders talk about their people. The language reveals the reality. Howard Stoeckel describing Wawa as the Cheers of convenience stores. Ralph Roberts of Comcast inviting employees to call him directly. David O'Reilly tracing O'Reilly Automotive's philosophy back to its founding family. Marc Rowan describing how showing up for his people in the moments that matter is almost more important than anything else he does. These are not PR statements. They are the visible surface of something much deeper.

Value what you cannot easily quantify. The discounted cash flow model will never capture the value of a culture that causes people to stay thirty years, to bring their children into the business, to feel genuine grief when a colleague leaves. But that culture is compounding, invisibly, every single day. And over a decade, over two decades, over a century - it shows up unmistakably in the numbers.

Paul Ricard's formulation stays with you for its simplicity: take care of their best interests, and they will take care of yours. Mark Bertolini confirmed it in the chemistry of the pituitary gland. It is not a management technique. It is a description of how trust actually works - slowing accumulated, easily destroyed, and worth more than any asset on the balance sheet.

The greatest businesses in history were not merely managed. They were loved. And the investors who recognised that love - not as sentiment, but as a durable economic asset - earned returns no spreadsheet could have predicted.

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In Search of Excellence

If you’ve ever wondered why some companies seem to compound advantage for decades while peers stall, In Search of Excellence - Lessons from America’s Best-Run Companies is still one of the cleanest lenses you can pick up. Tom Peters and Robert Waterman didn’t write a finance book; they wrote a field guide to the systems, habits, and culture that produce outsize performance. Warren Buffett once called it “a landmark book,” and generations of builders—from Domino’s Tom Monaghan to DHL’s Po Chung, Tractor Supply’s Joe Scarlett, Hästens’ Jan Ryde, Grocery store maverick Stew Leonard, Germany’s Reinhold Würth, and Canada’s Jimmy Pattison—credit it with reshaping how they lead.

And it’s worth remembering: Peters and Waterman didn’t invent excellence — they named it. Fully sixty years before the publication of In Search of Excellence, Konosuke Matsushita was already discovering and practising many of the same principles at Panasonic that would later be codified in 1982.

The reason: it shows that excellence is an emergent property—a tornado that forms only when lots of small, mundane air currents swirl in the same direction.

Peter Kaufman’s tornado metaphor and Safi Bahcall’s definition of “emergent properties” capture the heart of the book. Cultures aren’t engineered through a single lever; they emerge when dozens of small choices—tone at the top, customer closeness, decentralization, storytelling, tolerance for small failures—interlock. Charlie Munger calls this the Lollapalooza effect: really big outcomes usually come from the confluence of many smaller forces all acting in the same direction. That’s why the best business moats rarely show up in a single ratio; they hide in how a company behaves.

Peters and Waterman’s eight principles remain startlingly fresh: Bias for Action, Close to the Customer, Autonomy & Entrepreneurship, Productivity Through People, Hands-On Management, Stick to the Knitting, Simple Form/Lean Staff, and Simultaneous Loose-Tight Properties. Put less academically: do lots of small experiments, learn directly from users, push authority to the edge, treat people like adults, be explicit about values, stay within competence, keep HQ tiny, and be rigid on principles but flexible on tactics. Read those alongside Phil Fisher’s 1958 counsel—to watch how management treats rank-and-file, delegates authority, and seeks ideas from below—and you see the same pattern: people and process drive the numbers.

A few themes investors should underline:

• Customer obsession is the non-negotiable. The excellent firms over-invest in reliability, service, and user intimacy—even when spreadsheets say not to. Caterpillar’s 48-hour parts pledge, Maytag’s “ten years trouble-free,” and Frito-Lay’s “unreasonable” service levels look uneconomic quarter-to-quarter—and indispensable decade-to-decade. Pricing power often follows because the product is a tiny cost, massive consequence input (Raychem, Schlumberger).

• Small bets → fast learning → big wins. The book exalts doing over debating: prototypes with customers, skunkworks, “lots of tries,” tolerance for small failures, and internal competition that surfaces better approaches. It’s the same loop Amazon later codified and IKEA’s Kamprad preached: never two identical stores; keep moving. Würth built much the same cadence—empowering local branches, testing constantly, and competing internally in a spirit of relentless, practical improvement.

• Empowerment beats bureaucracy. Excellence lives where decisions sit with the people closest to the action. The best companies push autonomy far down, celebrate non-monetary recognition, run lean headquarters, and practice “management by wandering around.” People given control become owners—emotionally first, financially later. That’s Fisher again: if management can’t accept criticism from below, you won’t get the ideas that compound.

• Culture is a barrier to entry. The real moat is the 75-year investment in service habits at IBM or the quality reflex at P&G. Stories, slogans, myths, and rituals transmit those values more effectively than manuals. As Peters writes, the top performers are “hands-on, value-driven”; profit is a by-product of doing the important things unusually well and consistently. Jimmy Pattison embodied this philosophy—walking the floor daily, knowing employees by name, and treating customers as partners. His vast, decentralized group runs on the same human principles championed in In Search of Excellence.

• Stick to the knitting, act small as you get big. The stars keep adjacent moves close to core capability, contain risk with small steps, and—crucially—split before scale becomes sclerosis. Big and fast, yet organized as many small teams with clear scoreboards and friendly rivalry: that’s how you stay inventive without losing coherence.

For operators, the book is a permission slip to simplify and humanize: clarify a few priorities, walk the floor, praise publicly, test constantly, and tell stories that make values vivid. For investors, it’s a reminder to look past the spreadsheet. The signals of a long-term compounder are mostly qualitative: frontline empowerment, customer intimacy, lean HQ, experimentation cadence, leaders who model the culture, and a company that is rigid about principles, loose about methods. As Mark Urquhart notes, margins and returns are the cogwheels of valuation—but the torque comes from the DNA: culture, time horizon, willingness to experiment, and a sense of contribution.

If you manage people, In Search of Excellence will give you a playbook. If you allocate capital, it will give you pattern recognition—the fingerprints of firms that are “brilliant on the basics,” where success is “a collection of lots of little things.” First published in 1982, its lessons remain as relevant today as ever—timeless principles that have powered many of the best-performing companies for 40+ years. That’s why so many enduring companies—and the investors who back them—still keep this book within arm’s reach.

Source:
Tom Peters & Robert H. Waterman Jr., In Search of Excellence: Lessons from America’s Best-Run Companies (Harper & Row, 1982).

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U.S. Masters Tour [Investment Masters, that is]

Earlier this month, I had the privilege of spending two weeks traveling across the U.S. - a journey that blended markets, memories, and meetings with some of the most influential minds in investing. From New York to Miami to Omaha, we connected with legends like Bill Ackman, Leon Cooperman, Joel Greenblatt and Chuck Akre, visited iconic businesses like Heico and Nebraska Furniture Mart, and capped it all off at the Berkshire Hathaway Annual Meeting.

The journey took us through a wide-ranging conversation—economic outlooks, business models, market valuations, shifting investment approaches, and even the political leanings embedded in consumer brands. It was, in every sense, a Masters Tour.

What stood out across every stop? Optimism. Whether cautiously bullish or measured in their skepticism, every investor we met shared a conviction that the opportunity set ahead remains rich—for those willing to stay focused, flexible, and patient.

Miami, Day 1 – Heico Coporation

Our tour kicked off in Miami with a visit to Heico Corporation, the aerospace parts manufacturer. While Co-CEO Victor Mendelson may not be a traditional investor, his capital allocation instincts are world-class. Over the past 30 years, Heico has compounded at an astonishing 24% per annum—a 624x bagger!

Visiting Victor and Executive Vice President and CFO Carlos Macau on their home turf and touring the plant offered an invaluable look into the core drivers of Heico’s long-term success—culture, execution, humility, and a relentless focus on the long game. They walked us through what they look for in acquisitions and how Heico continues to sharpen its competitive edge. Victor was clear: “We don’t buy from serial entrepreneurs. We prefer business builders who may want to de-risk, take money off the table, and find a great home for their business. We honour that legacy.” He also emphasized a preference for high margins and stable, durable growth over volatility—even if the last two years have been especially strong.

The company’s in-house due diligence process is rooted in qualitative insights: staff turnover, innovation cadence, engineering capabilities, return and warranty logs, and—perhaps most telling—how management interacts with their people. “All due diligence is done by us,” Victor said. “You would farm it out if you don’t care about culture.” As he put it, Heico would rather buy excellent management in a good business than chase higher margins in a weak culture.

This isn’t a business you can understand by scanning a spreadsheet. From saving customers hundreds of millions, to building a 21,000+ part inventory, to turning a $5.5 million 401(k) employee plan into more than $3.5 billion, Heico’s advantage lies in deep operational discipline and cultural alignment. On the ground, we dug into the core questions that define its edge: Why can’t competitors replicate this model? Why don’t OEM suppliers cut prices to compete? How wide is Heico’s moat, and what is management doing to widen it? These aren’t theoretical questions—they go to the heart of how Heico sustains its lead and builds long-term value. Seeing it firsthand—and hearing directly from the people behind it—only strengthened my conviction that this is a truly differentiated business with a long runway for growth. Little wonder it’s turned up in Berkshire’s portfolio.

Miami, Day 2 – Polen Capital & Publix Super Markets

We began the day at Polen Capital with David Davidowitz. The firm manages over $50 billion in equities, grounded in a long-term, quality-growth philosophy established by the late founder David Polen. Their boardroom—decorated with images of a vintage stock ticker, Edison’s lightbulb, and Ford’s assembly line—reminded us that investing wisdom often starts with business history.

That wisdom has translated into results: since inception, Polen’s flagship Focus Growth strategy has delivered a gross annual return roughly 3.3% above the S&P 500 over more than 35 years. Compounded over decades, that edge is enormous—and it reflects Polen’s disciplined focus on durable, high-quality businesses with strong balance sheets and consistent earnings growth.

Miami - Heico Corporation, Polen Capital, Publix.

One of the most compelling takeaways from the meeting with Polen was their openness to evolving as investors. While the 2022 interest rate hikes prompted some reflection—particularly around the impact of higher rates on growth valuations—the more meaningful shift came from how they now handle company-specific setbacks.

Over more than three decades, Polen has held fewer than 140 stocks—a remarkably focused portfolio history that allowed them to study patterns in depth. What stood out most was the observation that the biggest drags on long-term performance came from companies facing setbacks lasting more than a year. These ranged from supply chain issues to ERP rollouts, management missteps, and regulatory friction.

Polen now buckets these challenges into two groups: short-term (resolvable within 12 months) and long-term (likely to persist). This framework has become central to their refined sell discipline. Long-term issues don’t just affect the troubled business—they put pressure on the rest of the portfolio to compensate and still hit their 15% earnings growth target.

By committing to exit businesses where setbacks are expected to extend beyond a year, Polen frees up capital for higher-conviction ideas. It’s a subtle but powerful shift—one that reflects both pattern recognition from decades of concentrated investing and a willingness to adapt when the evidence calls for it.

Still, exiting high-quality companies is never easy—especially when there's a real possibility they go on to become exceptional performers. To address this, Polen has added thoughtful mechanisms into their process. In some cases, they may retain a small position as a placeholder. In others, they define in advance the specific conditions that would need to be met for the fund to re-establish a position. These steps help sidestep the psychological hurdle of re-buying a business that’s been sold—ensuring the door stays open to great companies, even after a tough call.

On the topic of bias and decision-making, the team also highlighted the subtle but powerful role of unconscious influence. Occasionally, the team runs blind pitches—reviewing investment cases with company names removed—to isolate thesis quality from brand perception. In some cases, they realized they had passed on strong businesses due to unconscious bias. A thoughtful and practical process tweak that speaks volumes about their continuous improvement mindset.

Publix Super Markets, the country’s largest employee-owned business, offered another powerful example of culture in action. We visited several stores and spoke with frontline staff and managers. The sense of pride and ownership was unmistakable—many spoke about the opportunities they'd had to grow their careers within the company. That said, some noted that younger employees don’t always appreciate the long-term benefits of the employee share plan, particularly in an age of instant gratification.

New York , Day 1 - LTS One, Greenlight Capital & Pershing Square

New York kicked off with Munib Islam, former co-CIO of Third Point and now founder of LTS One. The firm was seeded by several family offices, including some of the 3G Capital partners—who famously teamed up with Warren Buffett in the acquisition of Heinz. Having previously invested across strategies ranging from activism to event-driven trades, Munib—like many great investors—has evolved to focus on high-quality businesses, a key learning he credits to his time with Dan Loeb.

For Munib, business quality always comes first. Only once that’s established is price even worth discussing. He highlighted the opportunity to buy similarly exceptional businesses overseas at meaningful discounts to their U.S. counterparts—some of which may even be joint venture partners. Munib also spoke about the importance of protecting his analysts from the daily noise of the markets—deep research, he believes, often requires tuning out the distractions of a Bloomberg terminal. Between leaving Third Point and launching LTS One, he took the time to distill his philosophy in writing.

New York - Munib Islam, David Einhorn, Bill Ackman.

Munib Islam’s LTS One Insights Library captures a career’s worth of thinking across business quality, capital allocation, leadership, and investing principles. His philosophy centers on the power of compounding—whether through moats, culture, or reinvestment—paired with a deep understanding of intangible factors like trust, incentives, and leadership style. Drawing inspiration from legendary operators and investors like Buffett, Bezos, Mark Leonard, Jim Sinegal, and Henry Singleton, his long-term orientation was grounded in curiosity, humility, and a commitment to continuous learning. It was a fascinating and empowering conversation. I found myself deeply aligned with Munib’s philosophy—long-term, business-focused, and grounded in timeless principles.

The supposed demise of long-short hedge funds hasn’t quite captured David Einhorn’s Greenlight Capital. If you’ve followed David’s investor letters, you’d know his market outlook is far from bullish. Despite this cautious stance, he remains optimistic about opportunities likely to emerge and has adjusted his portfolio accordingly. Both gross and net exposures are well below historic averages.

Einhorn expects the Fed to cut rates more aggressively than the market currently anticipates. He is also running short positions in a basket of retailers. Contrary to the conventional wisdom that low rates support consumer spending, he believes this relationship will break down. This reminded me of a quote from Ray Dalio I’ve long admired:

“People think that a thing called correlation exists. That’s wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes.”

David recognizes that markets evolve and emphasizes the need for investors to adapt. Rather than complain about challenges like high-frequency trading or the difficulties of short-selling in a ‘meme’-driven market, he focuses on evolving his approach. One of the broader challenges he noted is the ongoing reduction in active investing, which means fewer participants are stepping in to close valuation gaps. I suggested that corporate buyers could play a bigger role in helping to bridge these gaps.

Nowadays, David is much more focused on portfolio management. While his stock-picking remains strong, his portfolio construction may have contributed to sub-optimal results in the past. He is locked and loaded, patiently biding his time for the next big opportunity.

We finished our day in the Hell's Kitchen neighborhood on Manhattan’s west side, near the Hudson River, meeting with Pershing Square’s Bill Ackman in the Gotham Room—an elegant space overlooking the river. Our conversation covered the evolution of Bill’s investment style, the move away from shorting, and his current approach to idea generation.

When it comes to macro opportunities, Bill noted that the short-term costs of implementing asymmetric trades—of the kind he’s become known for—have increased significantly with the recent rise in volatility. At the same time, changes in market structure—with stocks often trading at “any price”—have made shorting individual names far more hazardous. As a result, he has returned to the investing discipline he’s best known for: buying high-quality compounding machines. The goal is to build a portfolio of exceptional businesses, while maintaining flexibility to act when rare asymmetric opportunities do arise.

Like many of the investors we met on the tour, Bill didn’t appear particularly concerned about the potential fallout from tariffs or geopolitical tensions—certainly less so than the media or many offshore investors. That calm may reflect a confidence that, despite near-term noise, a sensible long-term outcome will ultimately prevail.

New York, Day 2 - KKR, Gotham Capital & Stewart Asset Management

I’ve long admired Pete Stavros, Co-Head of Global Private Equity at KKR, for his pioneering work in founding Ownership Works—a nonprofit dedicated to broadening equity ownership among employees and equipping them with the tools, data, and transparency needed to understand and drive business success. We were fortunate to spend time with Pete’s colleague, Kevin Murphy, who generously walked us through KKR’s involvement in the initiative and the compelling results they’ve seen across their portfolio companies.

Our first meeting of the day took place high above New York City, at the top of the Hudson Yards building, with panoramic views out to the Statue of Liberty—a fitting setting to discuss economic empowerment.

New York - Kevin Murphy, Joel Greenblatt, Thomas Valenzuela.

Empowering people, helping them understand their role in value creation, aligning them with a company’s mission, and recognizing their contributions are common threads I’ve seen in the most successful businesses—not just in the last few decades, but throughout history. I was particularly eager to learn how KKR is putting these principles into action within its private equity strategy.

KKR now has more than 50 portfolio companies adopting the Ownership Works model. This comes at a time when Gallup polls continue to show that a significant portion of the workforce is disengaged. When employees feel their work matters and that they’re part of something bigger, turnover drops, morale improves, and productivity rises.

While it’s still early days, the results are promising. KKR is seeing 4x returns in Ownership Works companies—well above the typical 2.5x in standard deals. But this is about more than just stronger investor outcomes; it’s also about narrowing the wealth gap and fueling broader economic growth. Lower-income employees tend to spend at 10 times the rate of top earners, meaning that sharing ownership not only lifts individuals but also stimulates the wider economy.

Equity ownership isn’t a zero-sum game. Providing equity and training drives cultural transformation, employee engagement, and ultimately maximizes investment returns. In the 1980s, private equity was known for junk bonds; in the 1990s, it was conglomerates. Today, ignoring the potential of human capital is one of the biggest inefficiencies in the economy. Tapping into it represents a rare opportunity—a win-win for all stakeholders.

Fresh from a conversation about aligning ownership and unlocking value at KKR, it was a treat to sit down with Joel Greenblatt—a legendary investor whose track record and writing have shaped the thinking of countless value investors, including me.

At Gotham Capital, Joel delivered an extraordinary 50% annual return from 1985 to 1995, cementing his reputation as someone worth studying closely. His first book, You Can Be a Stock Market Genius (1997), remains a cult classic. Despite its playful title, it’s a sharp, practical guide to special situation investing—focusing on spin-offs, restructurings, and mergers—designed for investors willing to do the hard work of digging into complex opportunities. It’s no surprise the book is recommended by the likes of Seth Klarman, Dan Loeb, and Bill Ackman.

I enjoyed sharing how much the book has influenced my own investing approach, including a current high-conviction position in our fund—a mispriced spin-off that we believed had all the hallmarks of Greenblatt’s framework. Less than a week after our meeting, the company was bid for by private equity.

Our conversation ranged widely—from the emotional challenges of managing outside capital, to preparing mentally for market drawdowns, to the sheer intensity required to run a highly concentrated, actively managed portfolio. Joel’s blend of humility, discipline, and intellectual rigor was as striking in person as it is on the page.

Our final meeting was with Thomas Valenzuela from Stewart Asset Management. The firm manages a concentrated portfolio of 15–20 high-growth, high-quality companies, and has outperformed the S&P 500 by nearly 2% per annum over the past decade.

Tom highlighted what sets Stewart Asset Management apart: applying Ben Graham’s principles to growth investing. As he explained, “As a company’s earnings grow, you’re effectively amortizing the P/E multiple. If you pay 20 times earnings for a business and it doubles its earnings over five years, it won’t be trading at 10 times earnings in five years.” While most investors focus on the current P/E, Stewart emphasizes the forward P/E—what the multiple will look like assuming the business delivers on its growth trajectory.

Their historical analysis shows that the market typically bottoms out around 11–12x forward earnings. During the April selloff, the market briefly dipped toward that level, and the firm used the opportunity to deploy more capital.

Tom’s long experience in markets was clear throughout the conversation. He left us with a timely reminder: “You have to be an optimist if you’re going to be an equity investor.”

New York, Day 3 - Leon Cooperman

To say I was looking forward to my final day in New York would be an understatement. Last year, I had the pleasure of bringing my three adult children to meet one of the kindest, most generous, and hardest-working investors you could ever encounter—Lee Cooperman. This time, I had the opportunity to spend the morning with him at his home, where he still runs his multi-billion-dollar portfolio.

Despite having faced serious health issues over the past year, Lee was as welcoming and engaged as ever—trading his portfolio like a market wizard.

While he remains cautious on the outlook for markets, Lee made it clear he’s navigated flat and down-trending environments before, and the key, in his view, is picking the right stocks. His portfolio is a highly eclectic mix, with few familiar names—an ‘active share’ so high it would send most fund managers into cardiac arrest.

“I don’t give a sh*t about the indices,” Lee told me bluntly.

New York - Leon Cooperman.

Even after more than three decades in markets, I found myself awed by the precision and intensity with which he manages risk. It had been a turbulent few days in the market, and Lee spent the morning trading futures, rolling option contracts, and adjusting positions with a fluency that left my head spinning.

When it comes to stock picking, Lee looks for low-multiple businesses with strong free cash flow, smart management teams who aren’t afraid of buying back stock, and companies that are leaders in meaningful industries.

What’s even more remarkable is that Lee has pledged to give away the vast majority of his wealth to charitable causes, already having donated hundreds of millions through the Cooperman Family Foundation. His philanthropy is as focused and heartfelt as his investing—driven by a deep sense of gratitude and purpose.

Spending time with Lee was a true highlight of the trip—a reminder of what deep conviction, discipline, and generosity of spirit can look like when fully lived out. It’s a message he shared with my son again this year: be a ‘Capitalist with a Heart.’

Our pilgrimage to Wall Street, catching a Knicks game, seeing Ricky Gervais live, lunching in Bryant Park, and dining at Smith & Wollensky—Warren Buffett’s favorite New York steakhouse—were just a few of the highlights that made our time in the city so memorable. We even managed to squeeze in a few pints at Old Mate’s, a newly opened Australian pub tucked down at the southern tip of Manhattan.

Having recently read up on some iconic American businesses, I also made a point to visit a White Castle restaurant and the historic Woolworth Building—the tallest U.S. skyscraper from 1913 to 1930, built entirely with cash by retail magnate F.W. Woolworth.

While the White Castle origin story is inspiring, the soggy burgers and sterile atmosphere fell well short of the brand’s legacy. Old black-and-white photos of diners from the '50s and '60s aren't enough to create atmosphere—you need more than nostalgia to make a lasting impression.

New York - Los Taco No.1, Radio City Hall, Madison Square Garden, White Castle.

In contrast, our repeated visits to Los Tacos No.1 made clear what great fast food looks like in the modern age. These authentic Mexican taquerias are everywhere in NYC, usually with lines snaking out the door. It’s not just a meal—it’s a performance. Efficient, flavorful, and full of life, Los Tacos No.1 is one to watch.

Ultimately, New York City is the ultimate complex adaptive system—a place where decision-making at the edge creates a thriving, efficient, sustainable, and ever-evolving metropolis. Walking its streets, the buzz was unmistakable—restaurants full, ideas flowing, energy everywhere. Its vitality comes not from top-down control, but from the constant experimentation and initiative of its people, businesses, and institutions.

Omaha, Day 1 - Akre Capital, Rockbridge Capital, Nebraska Furniture Mart

Spending a few hours with two investing legends—Chuck Akre and Peter Keefe—was the perfect way to kick off the Omaha leg of our tour. Both are students of the quality investing school, where management integrity and capability sit squarely at the top of the checklist.

A central theme from our conversation was the primacy of leadership in quality investing. Great businesses are ultimately built and steered by great people. Both emphasized that the "jockey matters more than the horse," highlighting the importance of character, vision, execution, and capital allocation. One practical test they use: Would I be proud to introduce this CEO to my clients or friends? As long-term investors, they view each investment as subcontracting capital to a management team—so choosing the right stewards is critical.

Omaha - Akre Capital, Rockbridge Capital, Nebraska Furniture Mart, Gorat’s.

They also acknowledged the ongoing challenge of valuation. Many missed opportunities came from passing on great businesses that appeared too expensive at the time. This raises a key tension: Should one ever compromise on quality to remain invested? Their answer leaned toward discipline—holding cash when necessary—while constantly remaining curious and open-minded. In an environment where exceptional businesses are rare and leadership drives outcomes, the cost of handing over capital to the wrong people can be far greater than the opportunity cost of waiting.

After breakfast with Chuck and Peter, we met Ron and Irv Blumpkin—grandsons of Rose “Mrs. B” Blumpkin—at Nebraska Furniture Mart (NFM), the only Berkshire Hathaway business that still reported directly to Warren Buffett.

Ron welcomed us by saying, “Ask anything—about NFM, Warren, or our relationship.” The conversation that followed offered a rare glimpse into a business driven by loyalty, frugality, and long-term values. NFM is approaching 89 years in business with zero layoffs, over 500 employees with 20+ years of service, and a company-wide policy of 40 paid volunteer hours annually. “It’s culture-building,” Ron said.

Mrs. B, a poor immigrant who couldn’t read or write English, built the business with a simple motto: “Sell cheap, tell the truth.” She reinvested every cent, worked seven days a week, and made her customers feel loved—even if it meant screaming at staff in front of them. “You can’t sell to walls,” she’d say. “If we ever find it cheaper, we’ll discount it. We’re never going to be undersold.”

That mindset still drives NFM. “We’re cheaper than 98% of retailers,” Ron said. Prices are updated daily. “Sometimes we lose money on a sale—we don’t set our margin; our purchase price does.” Their deep vendor relationships mean that when inventory backs up, NFM gets the first call—and passes those savings to customers.

On today’s environment, Ron and Irv were pragmatic. They don’t expect tariffs to stay high forever, and trust that as long as the playing field is level, NFM will remain the low-price leader. “We improve people’s lifestyles,” Ron added, “by being smarter buyers.”

Buffett is a trusted sounding board, not a micromanager. “Warren will never tell us what to do,” Irv said. “But he’ll suggest things—always through the lens of life education: protect your reputation, surround yourself with people you admire, and take the long view.” They haven’t had a formal board meeting in 30 years, “but if we need him, we’ll hear from him in two seconds.”

With a Net Promoter Score of 80–83, NFM sits in the top 1% of retail—above Costco. Growth is cautious and deliberate. “You don’t expand on a timeline,” Ron said. “You expand when it makes sense.” They’ve studied IKEA carefully, but chart their own course: friendlier layouts, deeper service, and a culture that prioritizes people.

“Any staff member can ask management anything,” Ron concluded. “We embrace entrepreneurship—but with guardrails.” A deep-dive into an exceptional business, run by real characters, grounded in values, and full of Warren Buffett wisdom.

The day ended perfectly—steaks, stories, and more Berkshire lore over dinner at Gorat’s, Buffett’s favorite Omaha steakhouse.

Omaha, Day 2 - Berkshire Meeting

Buffett was in great form. Even after reading every letter and transcript he's produced, I still walked away with a mountainful of insight—into business, psychology, and what it means to live a full life. His clarity, wit, and long-term thinking remain a powerful reminder of how rare true wisdom is, and how valuable it can be when applied with patience and discipline.

From his comments on opportunism—“we made most of our money out of about eight or nine ideas over 50 years”—to his reminder that trust is the greatest reward in business, the day was filled with timeless lessons. He talked about how much of investing comes down to temperament: resisting the need to act constantly, ignoring noise, and waiting for rare fat pitches. As always, his anecdotes had an easy charm that masked the depth of thought behind them.

Omaha - Berkshire Hathaway Meeting 2025.

One standout was his take on the emotional aspect of markets: if a 15% drop shakes you, you need a different philosophy. “The world is not going to adapt to you—you’re going to have to adapt to the world.” And yet for all his warnings, his faith in America, capitalism, and human ingenuity remains undimmed. “It’s always been changing. That’s what makes it interesting.” He sees chaos not as a flaw, but a feature of the game.

To have brought my adult children to past meetings, and to experience what may be the final chapter in person, has been an absolute privilege. It's hard to overstate the impact these gatherings have had on how I think about life, business, and what really matters.

Saturday night we reminisced about the years gone by and considered what Berkshire might look like without Buffett at the helm. The enduring nature of what he’s built—a culture grounded in trust, integrity, and extreme patience—gives me confidence it will remain special. Catching up with a few of my favorite investors, including Francois Rochon and J.P. from Giverny Capital, at their drinks was a great way to round out the evening. The Berkshire weekend is as much about the community it gathers as it is about the main event.

We now know Buffett has officially stepped down from the Berkshire stage. He won’t be up front next year—but he plans to be in the audience. The wisdom, the humility, the long-term lens—it’s all still there. What he’s built will echo long after the lights dim in Omaha.

Omaha, Day 3 - Home Depot, Floor & Decor, Lowe’s, O’Reilly Automotive, AutoZone, + Jackson Street Booksellers

We spent part of our final day in Omaha visiting Lowe’s, Home Depot, Floor & Decor, Walmart, O’Reilly, and AutoZone. We took the opportunity to chat with front-line staff—always a good way to get a feel for what’s happening on the ground.

While it’s just a single-store sample, Lowe’s, Floor & Decor, and Walmart all showed signs of recent capital investment—clean, well-organized, and clearly maintained with care. Home Depot felt more utilitarian and contractor-focused (perhaps intentionally, as part of its competitive edge), but still solid. In contrast, the O’Reilly and, to a lesser extent, AutoZone stores felt a bit dated—tired lighting, scuffed floors, and in need of a refresh.

Omaha - Jackson Street Booksellers, Lowe’s, Autozone, Walmart.

The real highlight of the day was Jackson Street Booksellers in the Old Market—a dusty, overflowing haven for book lovers and easily one of the best second-hand bookstores I’ve visited. I walked out with a stack of old classics, from Merchants of Grain and The Empire of Oil to company histories on VF Corporation and Standard Oil (Indiana), plus a vintage hardcover of one of my all-time favorites, McDonald’s: Behind the Arches. It’s reason enough to come back to Omaha next year.

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Learning from the S&P500

In his famous commencement speech at Kenyon College, David Foster Wallace shared a simple yet profound anecdote: Two young fish are swimming along when an older fish swims by and says, "Morning, boys. How’s the water?" The two young fish continue on, and eventually, one looks at the other and asks, "What the hell is water?" This story illustrates how the most pervasive and essential aspects of our environment can go unnoticed.

For investors, the S&P 500 serves as a similar backdrop. The S&P 500 is the world’s most widely followed and most liquid index; the 500 companies in the index account for approximately 80% of the entire U.S. equity market capitalization. Just as fish might be unaware of the water around them, many investors don't fully understand the composition and dynamics of the S&P 500, the very benchmark they strive to outperform.

Over the long term, research consistently shows that the large majority of active managers underperform this index. The latest ‘S&P Indices Versus Active’ (SPIVA) report highlights that 88% of active managers have failed to beat the S&P 500 over the last 15 years. If the S&P 500 were a fund manager, it would consistently rank in the top quintile of active managers. There’s something to learn in that consistency and reliability.

In this blog post, we will look under the hood of the S&P 500 to discern lessons we can take from the index and how it achieves such remarkable performance.

Source: S&P Dow Jones Indices

Betting on America

Over the past century, America’s stock market has been an extraordinary engine of wealth creation. This success can be attributed to America's abundance of natural resources, an empowered middle class, a global language, a welcoming society, and an indomitable entrepreneurial spirit. These factors have given rise to countless remarkable businesses. The very traits that define the world’s leading companies—decentralized decision-making, autonomy, acceptance of failure, uncapped potential, and relentless innovation—are also emblematic of America itself. These characteristics have provided the U.S. with a significant advantage over many other countries and remain as influential today as ever.

The insightful '2023 Credit Suisse Global Investment Year Book' highlights the long-term outperformance of the U.S. market, noting that it "reflects the superior performance of the US economy, the large volume of IPOs, and the substantial returns from US stocks. No other market can rival this long-term accomplishment." Over the last c120 years, c50 years, and c20 years, U.S. equities have delivered annualized real returns of 6.4%, 5.9%, and 7.1% respectively, outperforming world markets ex-US by 1.5% to 2.1% per annum.

While the S&P500 has experienced significant drawdowns, every single US stock market crisis prior to today had one common characteristic: they bottomed. Each went on to record highs.

Source: 2023 Credit Suisse Global Investment Year Book

Return on Capital

While stock prices and share markets can be highly volatile, the underlying returns on capital for US businesses have remained relatively stable. Warren Buffett observes, "Anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all." This return has been attractive, as Chuck Akre noted, "the real return on equity of American businesses averages in the low teens." Over the long term, both a company and the market will reflect the underlying earnings driven by these returns on capital. Sir John Templeton has noted, "In the long run, stock market indexes fluctuate around the long-term upward trend in earnings per share."

Retained Capital

Not only has the S&P500 outperformed most geographic equity markets over the long term, it has also outperformed every other asset class. There’s a good reason for this. Fundsmith’s Terry Smith explains, “Equities can compound in value in a way that investments in other asset classes, such as bonds and real estate, cannot. The reason for this is quite simple: companies retain a portion of the profits they generate to re-invest in the business.”

Source: Credit Suisse Global Investments Yearbook 2023

Return on Investments

One reason the S&P 500 has delivered strong returns is the disciplined approach companies take towards capital investment. Research by John R. Graham and Campbell R. Harvey supports this, showing that CFOs do not significantly adjust their required returns even when market interest rates decline. This capital discipline, combined with the robust economic and entrepreneurial environment in the US, allows many S&P 500 companies to sustain high returns on capital over time.

Loss Aversion

The S&P 500 is unemotional. Many investors, influenced by loss aversion, get spooked by geopolitical events, macro-economic concerns, or market declines, prompting them to sell at the lows or exit positions prematurely. Seeking the security of cash, they wait for calmer times to re-enter the market. It is no wonder that, according to renowned research firm Dalbar Inc., the average investor has underperformed the index by more than 2% annually over the last 30 years. As Chuck Akre reminds us, "Every basis point of return—let alone 100 basis points—has a staggering difference in outcomes in the long run." In contrast, the S&P 500 never gets shaken out of the market and never ‘sells the lows,’ avoiding the cardinal sin of investing.

Anchoring Bias

Companies are removed from the S&P 500 when they fail to meet minimum market capitalization thresholds or face financial difficulties. Once a company is removed from the S&P 500, it can be considered as a replacement candidate one year after its removal date. Should the company fulfil the index inclusion requirements, it can re-enter the index. Even the world’s greatest investors struggle to buy back stocks they’ve sold at lower prices. As Buffett has noted, "It’s a little hard when you looked at something at X and it sells at 10X to buy it. It shouldn’t be, but I can just tell you psychologically it’s harder... It’s cost people a lot of money."

Cutting Losses

Most turnarounds don’t turn. The index is unemotional when it comes to cutting losing positions - it’s systematic. There’s no commitment or confirmation bias or endowment effects. When a stock is out, it’s out; no changing the thesis to justify keeping the position. This differs from the behavior of many investors.

Portfolio Weightings

The index won’t sell stocks based on portfolio or sector weights. Most investors sell or re-weight their winners when they become too large a position in their portfolios. It’s challenging for a fund manager to attract capital when a single stock comprises, say, over 20% of a portfolio. A good example is Amazon.com since its IPO. A portfolio with a 4% position in Amazon in 1997, with the balance representing the S&P 500, would today consist of 89% Amazon and 11% in the S&P 500—an allocation no active fund manager would be willing to hold. The only investors who don’t sell tend to be the founders, some employees and of course the S&P500 index.

Complex Adaptive Systems

The stock market is a complex adaptive system; the whole is more than the sum of the parts, subject to non-linear outcomes and impossible to forecast. Exponential stock returns are a feature. Hendrik Bessembinder, a professor at Arizona State University, looked at 90 years of US stock market data. What that showed is that of the 26,000 companies you could have invested in over that period, all of the return came from just four percent of the companies. Oftentimes, these can be controversial and optically expensive companies, strongly polarising the views of market participants. If you don’t own these rare outliers - the multi-baggers - it can be hard to outperform the index.

Errors of Omission

Many fund managers reflect on missed opportunities as their most significant regrets. Once a company meets the S&P's eligibility criteria, it is typically included, regardless of fundamental analysis, valuation considerations, or price targets. Although a company's initial position in the index may be modest, the power law of returns and market capitalization-based weighting means it could become a significant contributor over time. While the initial investment size might be smaller compared to a typical active fund position size, it still secures a place in the S&P500 portfolio, illustrating why fund managers often struggle to beat the index.

Over-Confidence

Famed investor, Chris Browne, stresses the importance of ‘calibrated confidence’ in investing, acknowledging our limitations. Research reveals that overconfident investors tend to trade more, resulting in lower returns. In a study of 100,000 stock trades, sold stocks outperformed bought ones by 3.4% after a year. High portfolio turnover reflects misplaced confidence, while lower activity levels often lead to better returns. Notably, index turnover is minimal.

Sitting Still

An annual fund manager’s report stating, ‘we did nothing all year,’ is likely to attract significant scrutiny. Asset owners, consultants, and allocators expect their fund managers to be active. Nevertheless, the decision to do nothing is still a decision. Charlie Munger sums it up nicely: “For an ordinary person, can you imagine just sitting there for five years doing nothing? It’s so contrary to human nature. You don’t feel active. You don’t feel useful, so you do something stupid.” Frenetic investment activity often undermines long-term performance, providing another edge to the S&P500.

Valuation Concerns

High quality companies can become and remain optically expensive yet continue to deliver market beating long term returns. Many of the world’s greatest investors will tell you their most costly mistake has been what they’ve sold, not what they’ve bought. It’s psychologically hard to buy back a stock you sold at a lower price. Selling a stock that looked expensive, which goes on to compound 10-fold or 20-fold is not a problem the index will have.

Large Companies

The S&P500 comprises large companies requiring a minimum market capitalization over US$18 billion. These companies must be listed for at least one year and have a track record of profitability to meet certain inclusion criteria. In contrast, as Charlie Munger has noted, “It’s the nature of things that most small businesses will never be big businesses.”

Costs

The S&P500 holds a distinct advantage for investors when it comes to costs. Unlike actively managed funds, which frequently engage in stock turnover, index funds minimize frictional expenses like brokerage fees and bid-ask spreads. Active managers' frequent buying and selling also tend to generate higher capital gains taxes for investors. Furthermore, these actively managed funds typically charge fees ranging from 20 to 200 basis points, sometimes even including performance fees. In contrast, S&P500 index funds offer significantly lower fees, allowing investors to retain more of their returns over the long term.

Summary

In the realm of investing, human psychology often proves to be a significant hurdle. It's often noted that the best-performing accounts of private clients are those belonging to individuals who are either deceased or have forgotten about their existence. This phenomenon underscores the emotional biases that can impede investors—biases that the S&P 500 largely sidesteps.

While individual investors grapple with loss aversion, anchoring bias, overconfidence, and the challenge of simply sitting still, the S&P 500 remains steadfast. Its systematic approach to managing portfolios is immune to the cognitive biases that often plague human decision-making. Many of the world's most revered investors, such as Warren Buffett, Charlie Munger, Charles Ellis, Howard Marks, Terry Smith, Peter Keefe, Lou Simpson and Nick Train, advocate for the S&P 500 as an ideal vehicle for capital deployment for the average investor.

For many, learning from the S&P 500 is akin to realizing the water you swim in. It's everywhere, yet often overlooked. Just as fish might finally grasp the concept of water, investors can glean valuable insights from the S&P 500, navigating the financial seas with a clearer understanding of their surroundings—and hopefully avoiding the occasional undertow of irrational decision-making.

Sources:
‘Credit Suisse Global Investment Returns Yearbook 2023,’ Elroy Dimson, Paul Marsh, Mike Staunton, Credit Suisse Research Institute.
‘SPIVA [S&P Indices Versus Active] Data,’ S&P Dow Jones Indices.
‘Dalbar QAIB 2024: Investors are Still Their Own Worst Enemies,’ Index Fund Advisors, 2024.
‘Do stocks outperform Treasury Bills?’ Hendrik Bessembinder, Journal of Financial Economics, 2018.
‘Corporate Finance and Reality,’ John R Graham, NBER, 2022.

Further Reading:
‘Betting Against America?’ Investment Masters Class, 2018

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Thinking About Margin of Safety

If anything, the past few years has reminded us that the future is unknown and events can take turns you would never expect. Businesses have set-backs, economies have downturns and even the best investors make mistakes. Because of this, leaving some room for error makes eminent sense. Almost a century ago, Ben Graham first proposed the concept of Margin of Safety in his seminal book, ‘Security Analysis.’ Ever since, the term has been indoctrinated into the investing lexicon of the world’s most successful investors.

Like most things investing however, there’s conjecture around what constitutes a ‘Margin of Safety.’ While most investors consider margin of safety in the context of a purchase discount relative to a company’s intrinsic value, others look towards low valuation ratios, avoiding high multiple stocks, seeking a high degree of business quality or a combination thereof.

If you subscribe to Buffett’s first rule of investing, ‘Don’t Lose Money,’ then, ‘Don’t buy without a Margin of Safety,’ would seem sensible advice. But how do you achieve it? Should a ‘Margin of Safety’ be applied to all investments? Or to the portfolio as whole? Is it acceptable to invest without a margin of safety?

Over the years, my views on Margin of Safety have evolved. Here are some thoughts.

Low Ratios

A common misconception is that low stock valuation multiples provide a margin of safety. This line of reasoning assumes bad news is already priced in, rendering share prices indifferent to negative developments.

Over two decades of experience in markets would have me believe otherwise. A stock purchased on a low multiple doesn’t imply a margin of safety. Screening for low multiple stocks is just as likely to get you caught in ‘value traps’; businesses whose best times are behind them.

"If anything, we are less likely to look at something that sells at a low relationship to book than something that sells at a high relationship to book, because the chances are we’re looking at a poor business in the first case and a good business in the second case.” Warren Buffett

“Starting with a rank-order valuation screen is more likely to lead you into less than-optimal businesses.” Brian Bares

When you own an inferior business, time is working against you - as the underlying value of the business deteriorates.

“The investor who spots a price discrepancy in an ordinary business hopes that the share price will promptly rise to the intrinsic value he has estimated. The more time passes, the longer they take to realise the forecast return, and the more exposed they are to uncontrollable risks.” IP Capital

If buying low PE stocks were the key to investment success, we’d all be rich. In recent times, limiting yourself to such stocks has meant forgoing many of the best investment opportunities. If you moved to a new city, would you ask the local agent for the names of the cheapest suburbs? Not likely. The same should apply to investing.

High Ratios

All things being equal, the lower the multiple paid for a business, the better; you’re paying less for the business and there’s less room for the multiple to fall should things not pan out as expected. It doesn’t follow however, that purchasing a stock on a high multiple provides no margin of safety. The first question to ask is, ‘is today’s multiple even relevant?’ and the follow up questions are, ‘what will the earnings be in three to five years time?’ and, ‘what will the multiple be in three to five years time?”

Some of the best investment opportunities arise when investors and analysts apply standard industry multiples to near term earnings which are completely anomalous to where a business might be in the future (completely undervaluing the company). In such cases, the near term multiple can be meaningless. Joel Greenblatt made this point in a recent interview:

“One of the big mistakes I made was looking at Walmart, seeing what a good business it was thirty years ago. Think about it this way, if you’re looking at the numbers to do with fifty stores but you can see they can have a thousand or two thousand stores, like any of these new internet businesses with an unlimited growth trajectory, the numbers you’re using at fifty stores aren’t very helpful. You might have a model that can expand, but putting a multiple on whatever you’re earning on fifty stores, if you could have 1000 or 2000, of course they’re meaningless. You really have to make some estimates about what the opportunity set is and what the competition will be over a long period of time. Traditionally these have been some of my biggest mistakes of omission. Missing huge opportunities.”

Stocks that look optically expensive today can actually be cheap on the basis of future earnings. Rather than disregard multiples altogether, it’s worth trying to establish whether the stock might be on a reasonable multiple in the future.

“In 2007, Apple traded at 30x EPS but only 3x 5 years out. The art of growth investing is realising a stock that appears expensive today can be dirt cheap 5-7 years later. Multi-baggers are the source of most outperformance and hide many mistakes.” Philipe Laffonte

"It isn’t a multiple of today’s earnings that is the primary determinate of things. We bought our Coca-Cola at a price of $11 a share. And it’ll earn $2.30-$2.40 this year. So, that’s under five times this year’s earnings, but it was a pretty good size multiple back when we bought it." Warren Buffett

Even businesses that don’t report profits can provide a Margin of Safety - it all comes down to understanding the specifics of the business; how is value defined? how it is created? what are the potential outcomes?

Bill Miller made this point at the 2019 Santa Fe Institute Symposium using Amazon and John Malone’s TCI as examples:

“Probably the best example of a misunderstanding of the valuation of anything has been Amazon over its entire history. It was constantly, you know, Baron’s saying, ‘Amazon.bomb,’ and everybody talking about how they don't make any money, they don't make any money, they don't make any money. CBC did a special on it, and one of the things they interviewed me about was Amazon's finances. They start off with, oh, how can you own this thing that doesn't make any money? And I have two answers to that.

Number one, John Malone, the great cable investor. I said, if you put one dollar in John's TCI when John became the CEO, and you kept it there for the twenty-five years that one dollar is 900 dollars. And he never reported a profit in twenty-five years. So, something else is going on besides profits and the report of profits.

With Amazon, I said, look, there’s a reason that they’re called ‘generally accepted accounting principles,’ and not ‘divinely inspired accounting principles’ or ‘immaculately conceived accounting principles.’ They’re a way to capture a certain type of information for particular kinds of companies that have a particular kind of economics.”

The confidence to underwrite the future requires an understanding of the primary drivers that will help ensure a business reaches the anticipated destination.

Due to the power of compounding, businesses that can sustain success over decades are often undervalued in spite of an ‘optically-high’ PE ratio. With regards to Walmart, Nick Sleep noted you could have paid 150 times the price in the early years and still earned a ten percent annual return. That’s 150 times the prevailing share price not 150 times earnings! Furthermore, ten years later you could have paid a 150X PE and earned ten percent returns. That really is the magic of compounding.

The world’s best investors often confess that selling great businesses because of a high near term multiple has been one of their biggest mistakes. If the destination is intact, stay the course.

Discount To Intrinsic Value

Generally, the most accepted definition of Margin of Safety relates to a company’s Intrinsic Value; the present value of a business’ future cashflows. Purchasing at a discount to one’s estimate of Intrinsic Value provides the Margin of Safety. While highly subjective, the more predictable a company’s earnings over the long term, the less divergent the estimates of intrinsic value will be, and the more reliable the calculation of a margin of safety.

"The concept of a margin of safety is that an investor should purchase a security at a price sufficiently below his estimate of its intrinsic value that he will have protection against permanent loss even if his estimate proves somewhat optimistic.” Ed Wachenheim

"We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin of safety principle, emphasised by Ben Graham, to be the cornerstone of investment success." Warren Buffett

The idea of buying at a discount to intrinsic value is never going to become obsolete. Provided you’ve got the ability to ride out any short term volatility, in time, you’ll be rewarded as the share price converges with intrinsic value.

Quality

‘Quality’ is another investing term that’s hard to define; a conservative balance sheet, aligned management, high returns on capital and a track record of success make a good foundation. As regards the future, it’s often the qualitative characteristics that determine performance; a business’ purpose, management, culture, adaptability, innovativeness and the company’s relationships within its ecosystem.

Margin of Safety is about ensuring survival, both now and in the future. History has shown high-quality companies tend to weather near-term volatility, crises, corporate mishaps and competitive threats better than lower quality businesses - and go on to prosper in time.

“Major capital losses occur mostly when the business suffers irreparable damage. Exceptional companies are, by definition, those best protected against competitors, disruptive technologies, poor governance, and other factors that can destroy value. A portfolio of exceptional companies can be both more concentrated and safer than a portfolio of ordinary companies.” IP Capital

“Bad companies are destroyed by crises; good companies survive them; great companies are improved by them.” Andy Grove, Intel

The best businesses do things differently, they tend to be the leaders in what they do, they thrive in different environments, they fulfil an important customer demand, they take a longer term view and do things right by their customers, employees, suppliers, community and shareholders. They develop new products, grow markets and have a level of control over their destiny. Investors who own them enjoy a Margin of Safety.

“The most important three words in investing, stated by Mr. Graham are: Margin of Safety. What that means to us, is that we are looking at investing in very, very high-quality companies that have great franchises and that have had these great franchises for many years.” David Polen

“The best long term margin of safety comes not from an investment’s price but from the value of a company’s sustained competitive advantage over very long periods of time. That’s what quality investing is all about.” Thomas Russo

“[Ben Graham] gave the world the concept of margin of safety. We utilise that very much and the margin of safety for us is the quality of each business that we are investing in." Jeff Mueller

“The margin of safety is not just in the price you pay, it's also in the quality of the business, it's in the balance sheet of the business and the accounting and also in terms of the quality of top management. When we bought shares of Constellation Software, I don't remember how much we paid but we paid a reasonable valuation, I think 18 or 19 times earnings. To us the real margin of safety was Mark Leonard.” Francois Rochon

“When people talk about margin of safety in investing, they usually talk about things that are financial in nature. They talk about asset value or they talk about sustainable return on equity or whatever. I'm much more focused on the nature of business franchise and the replicability of that, and the quality of the people running it.” Steve Mandel

"A good business model provides the ultimate margin of safety." Jake Rosser

Exceptional businesses compound their capital at high rates over time while inferior businesses tend to compound their disadvantages. Compounding machines are defined by high quality businesses, not cheap price.

Portfolio Margin of Safety

Where I once looked for a margin of safety in every investment, I now consider Margin of Safety in a portfolio context which allows me to relax the requirements for a small portion of the portfolio. I’m an advocate of the idea that markets are complex adaptive systems; they’re unpredictable, the whole is greater than the sum of the parts, and they’re subject to non-linear outcomes. Capturing some of that non-linearity may require you to venture into companies with less margin of safety; perhaps the business is yet to hit an inflection point, hasn’t been stress tested by economic cycles, offers a somewhat binomial outcome or the balance sheet isn’t as pristine as one would ordinarily prefer.

An investment with the potential to be a multi-bagger might be worth considering in a portfolio context despite a limited ‘Margin of Safety.’

“I confess to finding the Margin of Potential Upside more alluring than the classic Margin of Safety.” James Anderson

“If you can lose 100 percent on something, so say an option, that doesn’t mean you shouldn’t ever buy options. Sometimes they’re really interesting and if you can sometimes get to the point of view that even though you can lose 100 percent on a particular investment, it might be an interesting thing to do.” David Abrams

“I will invest in companies where the possibility the equity goes to zero has to be recognised as part of the equation – and my record on that front is not spotless. Charlie Munger has talked about how depending on the probabilities you assign to the up and down case, it may be a perfectly reasonable bet to accept the possibility of a zero if your upside is 5x or more. I agree.” Robert Robotti

“So a stock that can lose 40%, if you run a concentrated portfolio, you may never be able to put on a stock like that. But if you think you can make 3 or 4X your money, and you could size that risk appropriately, that is a very compelling opportunity.” Ricky Sandler

Even Messrs Buffett and Munger have recognised as much. Given the nature of their insurance business, this may come as little surprise.

“Charlie and I by nature are pretty risk-averse. But we are very willing to enter into transactions — if we knew it was an honest coin, and someone wanted to give us seven-to-five or something of the sort on one flip, how much of Berkshire’s net worth would we put on that flip? Well it would sound like a big number to you. It would not be a huge percentage of the net worth, but it would be a significant.” Warren Buffett

"Mostly, Berkshire, in its history, has bought common stocks that practically couldn’t fail. But occasionally, Berkshire just makes an intelligent gamble where there’s plenty of chance of failure, but there’s enough chance of success so the gamble is worth taking." Charlie Munger

A portfolio can provide a Margin of Safety despite a small component having elevated downside risk. An everyday example is index investing. The S&P500 has managed to compound at c.10%pa for the last hundred years in spite of many component companies losing significant value or becoming bankrupt.

Buffett has long analogised investing to baseball, but better. There are no strike-outs. Taking that analogy a step further, it’s been noted .. ‘‘Baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you get is four. In the wider world, every once in a while, when you step up to the plate, you can score 1,000 runs.” That’s certainly true of investing. Baillie Gifford’s James Anderson points to research by Professor Hendrik Bessembinder showing the entire gain in the US stock market since 1926 can be attributable to the best-performing four percent of listed companies (when stated in terms of lifetime dollar wealth creation).

One of the most insightful investment papers I’ve ever read is Charlie Munger’s 1996 discussion of Coca-Cola. Here, Munger presents a case study that asks rhetorically how one would go about producing a $2 trillion business from an initial $2m outlay - the focus is very much on the upside rather than the downside. The story encapsulates the incredible asymmetric opportunities that can exist in markets.

Searching for these outliers and sizing such positions appropriately can enhance portfolio performance while not exposing the portfolio to an undue level of risk.

'To have a few higher-multiple names is very different than having a weighted average price/sales ratio of 6x or even higher at the whole portfolio level. The air begins to get thin at those altitudes!' Rajiv Jain

Dual Margin of Safety

Many of the world’s most successful investors have adopted the concept of a ‘dual’ margin of safety - seeking high quality companies at attractive discounts to intrinsic value.

“We strive to avoid situations without our cherished dual margin of safety – the quality of business and the price. We need both to counter our inevitable mistakes and unforeseen events.” Christopher Bloomstran

“Margin of safety for us comes from the quality of the business and second from buying into it at a substantial discount to our estimate of intrinsic value. Neither is sufficient on its own for us to be interested.” Mark Curnin

"The margin of safety in our investment strategy is to identify fundamentally good businesses and adhere to strict valuation discipline." Jeffrey Ubben

Summary

While a Margin of Safety doesn’t pertain to purchasing low multiple stocks or avoiding high multiple stocks, it can be attained, over the longer term, by holding high quality businesses acquired below their intrinsic value.

Unfortunately, little in investing is clear cut and there are plenty of exceptions to the received dogma. Even investments with a low margin of safety can enhance portfolio results if they offer the prospect of highly asymmetric returns, provided the overall portfolio exhibits an appropriate margin of safety.

Participating in such highly skewed opportunities might require an evolution in thinking beyond the traditional mantra of value investing; applying the concept of margin of safety to the portfolio as a whole, while relaxing that constraint at the individual stock level.

A portfolio comprised primarily of companies exhibiting a dual margin of safety combined with some asymmetric opportunities, appropriately sized, might provide the best of all worlds.

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Learning from Honey Bees

The great investors never stop learning. Warren Buffett, Charlie Munger and John Templeton all continued to learn well past the age of most people’s retirement, and despite decades of investment success, they all had the humility to recognise there was so much more to learn. More recently, the eminently successful practitioners, Howard Marks and Dan Loeb have each acknowledged their continued evolution as investors.

And the information they absorb can come from a multitude of sources. At MastersInvest we have looked at what can be learned from a variety of areas, many of which upon first reflection you would consider to be only tenuously related to investing at best. Interestingly though, often the better learning is to be found in the most unlikely of places.

“Camel's nostrils are miracles of heat exchange and water recovery engineering. We are currently looking at cuttlebone and bird skulls to help design more efficient concrete structures for office buildings. The combustion chamber in the abdomen of a bombardier beetle mixes two high explosives from fuel tanks with valves that open and close 200 times a second—it is being studied in order to develop needle-free medical injections, more efficient fuel injection systems and more effective fire extinguishers.” Michael Pawlyn

This field is called biomimicry; a discipline that looks at nature's best ideas to inspire solutions to human problems. When it comes to continuous innovation and devising strategies for success, nature has a three billion year head start on us humans. While we’ve barely scratched the surface when it comes to understanding the world we live in, it’s no reason to be despondent. The world is just far too complex and ever changing. There’s much to learn and everyday those learnings can help in all facets of life.

A recent article in The Economist titled, ‘The nose knows - Flies, worms and bees could help detect illness’ provides an enlightening example. While everybody knows dogs have a much better sense of smell than us, few would realise they can smell things at concentrations of one part in a trillion. That’s equivalent to a single drop in a pond the size of 20 Olympic swimming pools! While trials have shown that dogs can detect human disease - cancer, diabetes, tuberculosis, and malaria - recent research shows bees have senses just as good. Imagine such an expendable resource providing an economical, easy and non-invasive way of detecting cancer.

“The imagination of nature is far, far greater than the imagination of man. No one who did not have some inkling of this through observations could ever have imagined such a marvel as nature is.” Richard Feynman

Many great investors have found lessons in life within nature itself. The learnings that she can offer us are many and varied, and so upon recommendation by both Michael Mauboussin and James Anderson, I recently delved into an interesting book called, ‘Honeybee Democracy.’

In this fascinating treatise, the world-renowned animal behaviourist Thomas Seeley delves into the life of a honey bee swarm. These tiny creatures face a life-or-death problem when choosing a new home, effectively ‘staking everything on a process that includes collective fact-finding, vigorous debate, and consensus building.’

It all starts with the honey bee colony’s reproduction process. In the late spring and early summer, as a bee colony becomes overcrowded, a third of the hive stays behind and rears a new queen, while a swarm of thousands departs with the old queen to produce a daughter colony. As part of this process, a small percentage [c2%] of the hive’s worker bees, referred to as scouts, will independently search for a new nest site.

Experimental studies have found these scout bees to have an innate sense of what comprises the ideal location; a small entrance, plentiful volume for honey storage to survive winter, a suitable height above the ground, etc. Each scout bee’s job is to independently search for new locations and report them back to the hive. This communication process is achieved through a form of ‘ritual dance’ which signals both the location of the sites and the scout bee’s relative keenness on it.

Upon witnessing the dances, other scout bees will then visit the advertised sites and make their own independent assessment of the location’s merits and once again communicate this to the colony. Over time, each scout gradually reduces their marketing efforts regardless of how suitable the site is. The most keenly marketed sites attract more scouts who then inspect and, if appropriate advertise the site, creating a positive feedback loop. In contrast, lower quality sites are abandoned. When a quorum of bees is reached at the optimum site, the swarm will depart and take up residence in its new home.

An intelligent decision making process emerges from a group of less sophisticated beings; the wisdom of the hive is greater than that of any individual bee. This decision making process, honed over millions of years, almost always leads to the optimal site selection. There is no central decision maker; the queen bee plays no role in the process.

There are lessons in this decision making process that can help improve group decision making. Thomas Seeley recommended four things:

1) make sure the group is sufficiently large for the challenges it faces
2) make sure the group consists of people with diverse backgrounds and perspective
3) foster independent exploratory work by the group’s members
4) create a social environment in which the group’s members feel comfortable about proposing solutions

Every bee in the hive starts with a common purpose. The individuals and the hive’s interests are aligned - to the point where it is a life or death decision. When it comes to human decision making, ensuring a group understands the entities goals, have alignment and are incentivised appropriately, is fundamental.

The scout bees possessed an innate sense of what constitutes an optimal nest site. Extrapolating this to an investment group requires agreement on the attributes of a ‘good investment.’ Defining qualities such as a businesses’ purpose, a good culture, enduring competitive advantages, high returns on capital, management alignment and capability are perhaps, pre-requisites to consider. Filtering out unsuitable opportunities is an important part of the process.

Just as each bee doesn’t compare and contrast every site, but investigates a diverse range of sites, investment analysts should search widely for potential opportunities. Each analyst however, must be discerning in their selection process before reporting back to the group. Other analysts can then independently investigate those companies and a debate can be held about the merits of each.

While it might sound like common sense, collective groups of people have a tendency to make poor decisions. It’s uncanny the extent to which Thomas Seeley’s findings and recommendations parallel with those that the renowned Yale psychologist, Irving Janus described in his famous book, ‘Groupthink.’

Summary

One recurring trait of the great investors is their dedication to continuous learning. And its astounding from how many diverse fields they can draw life’s lessons from. At Mastersinvest we’ve drawn on teachings from great Investors, Businesses, CEO’s, Navy Captains, Psychologists, Physicists, Artists - and now - Honey Bees!

As humans, we understand just a fraction of what there is to know, which should make one optimistic about the amazing things we will achieve in the future. I’ll leave you with one of my all time favourite quotes from Ray Dalio, it connects the concept of nature and humility far better than I ever could.

“While I spend the most time studying how the realities that affect me most work—i.e., those that drive the markets and the people I deal with — I also love to study nature to try to figure out how it works because, to me, nature is both beautiful and practical. Its perfection and brilliance staggers me. When I think about all the flying machines, swimming machines, and billions of other systems that nature created, from the microscopic level to the cosmic level, and how they interact with one another to make a workable whole that evolves through time and through multi-dimensions, my breath is taken away. It seems to me that, in relation to nature, man has the intelligence of a mould growing on an apple—man can’t even make a mosquito, let alone scratch the surface of understanding the universe.” Ray Dalio, Principles 2011.

Source:
‘Honeybee Democracy,' Thomas Seeley, 2010, Princeton University Press.

Further Reading:
‘Avoiding Groupthink,’ Investment Masters Class, 2016.

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The Good Life Podcast

I recently had the pleasure of chatting to Sean Murray from ‘The Good Life.’ We talked about all things investing including quality companies, powerful business models, developing a multi-disciplinary mindset and the common threads evident amongst the very best investors, CEOs and businesses.

I’m a big fan of Sean’s work, be sure to check out his other interviews with the likes of Robert Cialdini, Annie Duke, Michael Abrashoff, Morgan Housel and William Green.

I hope you enjoy the episode…

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Lights Out - Learning from GE

MastersInvest has spent a lot of time studying businesses and business leaders that have been successful, some remarkably so. Those companies that have forged not only stellar reputations in their fields, but also those who have succeeded in industries where success is not a common commodity. And whilst a solid working knowledge of these success stories is vital for any investor to know, its also incredibly valuable to look at the other side of the coin - those businesses that have failed.

Warren Buffett and Charlie Munger have long espoused the benefits of studying failure. Armed with the foresight of what not to do can help an investor avoid the key risk to any investment program - the permanent loss of capital. With this insight in mind, and having read a short synopsis in Bill Gates Summer Reading List, I looked forward to reading the book, ‘Lights Out - Pride, Delusion and the Fall of General Electric’ by Ted Mann and Thomas Gryta. An easy read, the book details the multitude of problems which beset GE coupled with a cornucopia of red flags to look out for in your own investments.

“I like to study failure… we want to see what has caused businesses to go bad." Warren Buffett

Once a storied industrial leader, the last few decades have been nothing short of brutal for GE. While a toxic culture of ‘making the numbers’ seemed ingrained at the time Jack Welch handed the reigns to Jeff Immelt, Immelt’s sixteen year term atop GE earned him a scathing review. Characterised with an incessant focus on the share price, always coveting Wall Street’s admiration, ignorant of tail risks, obstructive to feedback, turning a blind eye to questionable accounting and an absence of humility were the hallmarks of a failed leadership tenure. If the expression, ‘an institution is the lengthened shadow of one man’ rings true, this isn’t a book for Immelt’s trophy cabinet.

Gates Notes - ‘5 Ideas for Summer Reading’ 2021

Perhaps unsurprisingly, the company’s travails were strikingly at odds with the traits that have defined the great businesses we’ve reviewed in the past. Below I’ve called out some red flags and accompanying lessons from GE. Notwithstanding the accounting misconduct, most of the tell-tale signs of trouble are qualitative and behavioural in nature.

S&P500 [grey] vs General Electric [blue] Normalised - 2000 - 2021 [Source: Bloomberg]

Financials Above Purpose

In the superb book, ‘In Search of Excellence,’ Tom Peters noted, “We found that companies whose only articulated goals were financial did not do nearly as well financially as companies that had broader sets of values.”

“The Growth Playbook [was] a grueling annual examination of GE’s eight major business leaders. It was here that GE hammered out targets for sales and profits, setting the underlying assumptions for the financial estimates it would give investors. Under Immelt, the point of the exercise was determining how his executives would get to their financial targets - though not how they would determine what output the business would produce as a starting point. This practice had been ingrained at GE from the days of Welch.” Lights Out

“The problems stemmed not from any single action but from the practices of accountants on staff at the dozen or so plants in the division. They’d reported their numbers by working backward: starting with a profit target and then working out what their sales figures would have to show to get there, rather than simply running the business and reporting their results to headquarters every three months.” Lights Out

The best business leaders have long recognised a company’s share price is a function of long term business performance. Solve for the latter, and in time, the share price will look after itself. At GE the financials dictated strategy.

“Investors and executives need to realise that the creation of shareholder value is an outcome — not an objective.” Terry Smith

“Stock price is an outcome. You can’t manage the outcome. You manage the inputs.” James Gorman

“We want corporate management to solve for value creation, not security price.” Dan Loeb

“Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.” Morgan Housel

“When it comes to discussing a company’s strategy, it is alarming how frequently one finds confusion about what a strategy actually is. Often a CEO mistakes a short-term target, say an earnings per share target or a return on capital threshold, with a strategy.” Marathon Asset Management

“Some would claim that maximising profits is a business’s ultimate purpose. Yet it is often when companies become exclusively profit orientated – and explicitly define this as their objective - that things go wrong. The end result of what investors seek, good shareholder returns, is invariably better achieved obliquely.” Nick Train

“An annual report with a numbers obsession speaks volumes about what’s important.” Marianne Jennings

Jeff Immelt’s strategy was directed with reference to the share price; providing guidance, smoothing earnings, setting optimistic long term EPS targets, undertaking acquisitions and divestments to appease Wall Street, appealing to big investors and ‘making the numbers’ regardless of cost. All are misguided short cuts.

Focus on Share Price

Of all the books on great businesses I’ve read, I can’t recall one where a company’s share price featured so prominently. Great businesses are all about empowering people, innovating, delighting customers, tolerating mistakes, focusing on the long term, upholding values, embracing change and remaining humble, to name but a few - none of which rated barely a mention.

“The stock market didn’t appreciate what GE was really worth. And it was driving Jeff Immelt crazy. His handlers claimed that he didn’t watch the daily movement in the shares, but his actions betrayed him. The stock market was the ultimate scoreboard tracking his performance.” Lights Out

“‘The stock is currently trading at one of the lowest earnings multiples in a decade,’ Immelt wrote in his annual letter to investors in early 2006. ‘Investors decide the stock price, but we love the way GE is positioned. We know it is time to go big!’ he wrote.” Lights Out

“Always aware of the stock’s reflection on his leadership, Immelt was trapped in a waking nightmare.” Lights Out

“GE’s stock price and its miserable performance were a constant cloud over Immelt’s head.” Lights Out

A management’s obsession with their share price is often a tell for investors; as recognised by some of the world’s best.

“Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behaviour.” Charlie Munger

“[The managers we have owned] don’t have a screen in their office showing them the price of their stock. And lots of them do. Sometimes you find it in the lobby of a company and sometimes you find it on the CEO’s desk. That doesn’t interest us. Their focus is on the wrong thing, in our judgement.” Chuck Akre

“We’ve been suspicious of companies that place a whole lot of emphasis on the price of their stock. When we see the price of a stock posted in the lobby of the headquarters or something, things like that make us nervous.” Warren Buffett

“A worrying sign is a CEO with a subscription to Bloomberg as this may indicate an unhealthy interest in stock prices and short-term news flow to the detriment of long-term thinking.” Marathon Asset Management

Quarterly Earnings

The best investors have a long-term orientation, focused on where a business might be in three to five years or more, rather than next quarter’s result. GE spent their time trying to please short-term investors.

“We do not worry about the stock price in the short run, and we do not worry about quarterly earnings. Our mindset is that we consistently build the company — if you do the right things, the stock price will take care of itself.” Jamie Dimon

“The investor wanting maximum results should favour companies with a truly long-range outlook concerning profits.” Phil Fisher

“We really think that an undue focus on quarterly earnings, not only is probably a bad idea for investors, but we think it’s a terrible idea for managers. If I had told our managers that we would earn three dollars and 17 1/2 cents for the quarter, you know, they might do a little fudging in order to make sure that we actually came out at that number.” Warren Buffett

Business Results Aren’t Linear

Smart investors recognise the business environment and economy are not conducive to a perfect earnings trajectory. GE failed to understand this, deploying unethical and in some case illegal short cuts to deliver.

“GE executives have acknowledged that they worked to make sure earnings were growing in a nice smooth trajectory.” Lights Out

“When Fortune’s Carol Loomis once told Welch that the smoothing practice was terrible, he vehemently disagreed with her. ‘What investor would want to buy a conglomerate like GE unless its earnings were predictable?” Lights Out

“The concept of managing earnings, another wonderful numbers term that infiltrates the numbers-pressure culture that leads to ethical collapse. It’s not cooking the books, it is managing earnings. A numbers obsession finds employees and officers not managing strategically but manipulating numbers for results.” Marianne Jennings

“Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no surprise environment, and earnings simply don't advance smoothly. Charlie and I not only don't know today what our businesses will earn next year we don't even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets, Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.” Warren Buffett

“Businesses do not meet expectations quarter after quarter and year after year. It just isn’t in the nature of running businesses. And, in our view, people that predict precisely what the future will be are either kidding investors, or they’re kidding themselves, or they’re kidding both.” Warren Buffett

Promoting the Stock

“In the [2015] annual letter, Immelt wrapped up his lecture on the limitless superlatives of GE with an awkward plea to major institutional investors.. ‘We have delivered for you in the last five years. But we are still under-owned by big investors. In this time of uncertainty, why not GE?’ he wrote, like a heartbroken lover begging for reconciliation. ‘We have a ton of cash that can protect you,’ he added.” Lights Out

“[At the annual Electrical Products Group conference for industrial investors and executives] Immelt, as he had done before, argued that investors had GE all wrong and were mispricing a stock that should have been above $30 a share.” Lights Out

“We suspect that business leaders who are busy promoting themselves or their stock are not properly focused on running their companies. We go out of our way to look for management that cares about shareholder value but doesn't hype its stock.” Marathon Asset Management

“People who have a proclivity for announcing how valuable their stock is, are I think, people who you ought to be very cautious of.” Warren Buffett

Fancy Predictions

“As the [2016] year came to an end, Immelt planted a flag that would define the rest of his career: he declared that GE would produce at least $2 of profit per share in 2018. It was an unusually long-term projection, and its meaning was undeniable to Immelt.” Lights Out

“It was wishful thinking at best that GE could deliver the $2 of earnings Immelt had promised.” Lights Out

“Charlie and I tend to be leery of companies run by CEOs who woo investors with fancy predictions. A few of these managers will prove prophetic – but others will turn out to be congenital optimists, or even charlatans. Unfortunately, it’s not easy for investors to know in advance which species they are dealing with.” Warren Buffett

Candor and Bad News

“Faced with the prospect of telling their tempestuous CEO that the new product was a disaster, the managers chose another route. They massaged the numbers.” Lights Out

“There was no market for hard truths or bad news. Not as far as the guy at the top was concerned.” Lights Out

“It was better to figure out a better way to deliver the bad news, or make it go away somehow, than to present it to Immelt straight.” Lights Out

Great businesses are tolerant of mistakes. Great Leadership recognises businesses grow through trial and error. When problems aren’t addressed they fester and the eventual impact on a business can be disastrous.

“Almost every business has problems, and we’d just as soon the manager would tell us about them. We would like that in the businesses we run. In fact, one of the things, we give very little advice to our managers, but one thing we always do say is to tell us the bad news immediately. And I don’t see why that isn’t good advice for the manager of a public company. Over time, you know, I’m positive it’s the best policy.” Warren Buffett

“Bad news concealed over time doesn’t get any better. See those studies again: companies with the most candid disclosures in their financial statements perform better over the long term and have higher share prices.Companies that put their current positions and performance right out there for investors and analysts to study are the companies to put your money in.” Marianne Jennings

A Culture of Making the Numbers

“The pressure to perform inside GE is omnipresent, and missed goals can be fatal, a tradition true at all levels of the company.” Lights Out

“Management expectation about the sales growth and profit they should be able to hit didn’t reflect the dim reality of the market, team members told Steve Bolze [CEO GE Power] and Paul McElhinney, the head of the unit that administers the service contracts. Vocal complaints about management’s view diverging from the reality of the market, or from basic math, were common among lower level Power executives. When the concerns were raised to leaders like McElhinney, they were stopped cold... ‘Get on board,’ McElhinney said. ‘We have to make the numbers.’” Lights Out

“When Immelt took over the Plastics operation, the previous management hadn’t been playing it straight. Under pressure from Welch, the division had stretched to make the numbers, including misreporting inventory figures to reduce the cost of goods sold.” Lights Out

“Welch would argue that he pushed his underlings to produce results, not fraud. But even if the CEO didn’t bend the rules himself, Welch cultivated an environment of pressure that incentivised people to do just that.” Lights Out

“If you couldn’t do the job and hit your targets, they all knew, Jack Welch would get someone else who could.” Lights Out

“Jeff Immelt’s assignment was clear: keep the earnings machine of GE humming steadily along, as it had under Welch.” Lights Out

“GE regularly leaned on [GE Capital] to make sure that profits stayed steady.” Lights Out

“Few fates were worse than missing your numbers at GE. Executives assigned targets to underlings, rather than lower-rung workers passing information up the ladder, so projections were based on market realities.” Lights Out

“Salespeople relied on financing provided by the stub of GE capital to prop up customer demand.” Lights Out

Marianne Jennings wonderful book, ‘The Seven Signs of Ethical Collapse - How to Spot Moral Meltdowns in Companies... Before It's Too Late’ cites ‘Pressure to Maintain Those Numbers’ as the number one sign of ethical collapse; “All companies experience pressure to maintain solid performance. The tension between ethics and the bottom line will al-ways be present. Indeed, such pressure motivates us and keeps us working and striving. But in this first sign of a culture at risk for ethical collapse, there is not just a focus on numbers and results but an unreasonable and unrealistic obsession with meeting quantitative goals. ‘Meet those numbers!’ is the mantra.”

“Charlie and I have been around the culture, sometimes on the board, where the ego of the CEO became very involved in meeting predictions which were impossible and everybody in the organisation knew, because they were very public about it, what these predictions were and they knew that their CEO was going to look bad if they weren’t met. And that can lead to a lot of bad things. You get enough bad things, anyway, but setting up a system that either exerts financial or psychological pressure on the people around you to do things that they probably really don’t even want to do, in order to avoid disappointing you, that’s a terrible mistake. And, you know, we’ll try to avoid it.” Warren Buffett

“We really believe in the power of incentives. And there’s these hidden incentives that we try to avoid. One we have seen more than once, is when really decent people misbehave because they felt that there was a loyalty to their CEO to present certain numbers, to deliver certain numbers, because the CEO went out and made a lot of forecasts about what the company would earn. I’ve seen a lot of misbehaviour that actually doesn’t profit anybody financially, but it’s been done merely because they don’t want to make the CEO look bad, in terms of his forecast.” Warren Buffett

“You really have to be very careful in the messages you send as a CEO. If you tell your managers you never want to disappoint Wall Street, and you want to report X per share, you may find that they start fudging figures to protect your predictions. And we try to avoid all that kind of behaviour at Berkshire. We’ve just seen too much trouble with it.” Warren Buffett

If a culture is broken and toxic the best advice is to steer clear. It’s almost impossible to turn around a poor culture.

“You can’t buy a company that’s got a dishonest culture and turn it into an honest culture." Bradley Jacobs

Cost Cutting

“The Corporate cost cutting program [was'] called ‘Simplification.’ That program had zeroed in on worker pensions and retiree health insurance as a good place to tighten the company belt.” Lights Out

'Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are all about. Spurts don't work in this area. The really good manager does not wake up in the morning and say, 'This is the day I'm going to cut costs,' any more than he wakes up and decides to practice breathing.'' Warren Buffett 

“You can’t cut a company to greatness.” Charles Schwab

“Almost every firm engages in bouts of cost cutting. Exceptional firms, however are involved in a permanent revolution against unnecessary expenses.” Marathon Asset Management

Losing Your Competitive Position

“If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted. Take a look at the dilemmas of managers in the auto and airline industries today as they struggle with the huge problems handed them by their predecessors. Charlie is fond of quoting Ben Franklin’s ‘An ounce of prevention is worth a pound of cure.’ But sometimes no amount of cure will overcome the mistakes of the past.” Warren Buffett

“Companies which underinvest in their franchise in order to meet short term targets are not good candidates for compounding wealth.” Terry Smith

Accounting Irregularities

Pressure from the top to hit numbers coupled with an unwarranted focus on the share price, can tempt employees to fudge the numbers. Once again, Marianne Jennings observed, ‘A declining stock price can cause bizarre accounting behaviour. The drive for numbers, number, numbers can take us right to the slippery slope and into ethical collapse.”

“GE Power had sold service guarantees to many of its customers that extended out for decades. By tweaking its estimate of the future cost of fulfilling those contracts, it could boost its profits as needed.” Lights Out

“These reviews [of GE’s service contracts] produced profits that GE could use to hit targets for Wall Street, but they were really future profits, produced by accounting adjustments alone. There was no actual cash coming in… [They] can be red flags to investors… To pad the hole, GE now began selling its receivables - bills its customers owed over time - to GE Capital in order to generate short-term cashflow, making it appear that those newfound profits were matched by cash flowing in the door.” Lights Out

“The SEC concluded its investigations into GE accounting practices, having found multiple instances of misbehaviour in the pursuit of financial targets. The company had overstated its earnings by hundreds of millions of dollars and stretched the accounting rules to their breaking point.” Lights Out

“The SEC described [GE as] a company that lied to investors in its regulatory filings and in its public statements, that ignored growing risks, and that worked to keep those risks hidden.” Lights Out

“Over the years, Charlie and I have seen all sorts of bad corporate behaviour, both accounting and operational, induced by the desire of management to meet Wall Street expectations.” Warren Buffett

Hitting Guidance

“What starts as an ‘innocent’ fudge in order to not disappoint “the Street” – say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a “cookie-jar” reserve – can become the first step toward full-fledged fraud. Playing with the numbers ‘just this once’ may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalise similar behaviour.” Warren Buffett

Acquisitions & Divestments

Immelt wanted to appease Wall Street and convince them to place a higher multiple on the stock. Historically GE had enjoyed a premium valuation providing the currency for accretive acquisitions. As GE Capital grew, a complex finance business within an industrial company, Wall Street applied a lower multiple. Immelt believed shrinking GE Capital would fix the problem.

“GE could use its unusually high price-to-earnings ratio for an industrial company as high-value currency to pay for deals. By acquiring companies with a lower price-to-earnings ratio, GE was getting an automatic earnings boost.” Lights Out

“Immelt needed to make moves that would finally impress upon Wall Street that he had found a way to lead the old GE into a new economic paradigm.” Lights Out

Capital Management

“GE had been sending cash out the door to repurchase its stock but wasn’t bringing in enough cash from its regular operations to cover its dividend.” Lights Out

“Buybacks were a regular fixture under Immelt, who spent more than $108 billion on them after 2004. At the end of 2018, GE’s entire market value was $67 billion.” Lights Out

Group Think

“The oversight role of the board was minimal.” Lights Out

“The board, made up of current and retired business executives and academics, as a group, liked Immelt and didn’t want to challenge him.” Lights Out

“Top GE executives, including Immelt, would say that they never heard any serious dissent about the Alstom deal.” Lights Out

“The absence of robust opposition [to the Alstom deal] also pointed to the broader problem, long cultivated and growing into a quiet crisis within the company of real candor and self-awareness. When it had come time for lower levels of management to stand up to the ultimate boss and tell him that his legacy play wasn’t going to work - and in fact, had been a clumsy mistake all along - no-one was willing to do so.” Lights Out

“Vice Chair John Krenecki, insiders said, had been forced out by Immelt, in part because he had already seemed a little too prone to disagreeing with the CEO or telling him no.” Lights Out

“GE’s board of directors was unquestionably weakened from having the CEO as the chairman of the Board.” Lights Out

“While Immelt said he encouraged debate, [Board] meetings often lacked critical questioning.” Lights Out

“The seventeen independent directors got a mix of cash, stock, and other perks worth more than $300,000 a year.” Lights Out

“[Board] directors rarely challenged Immelt.” Lights Out

“The [Board] directors had amassed impressive titles in their own career and in many cases undeniable achievement. They had resumes a yard long, most of them had personal fortunes, and they were presumed in all company to have unusually astute minds for business - not least because each one was a highly compensated director of GE. And yet, on their fiduciary watch, with whatever caveats about individual misjudgement and macroeconomic trends, they had done nothing to stop one of the world’s most solid industrial companies from lunging off a commercial cliff.” Lights Out

“Sycophants are the enablers of ethical collapse. Fear and silence are the enemies of an ethical culture.” Marianne Jennings

“If you arrange your organisation so that you basically have a bunch of sycophants who are cloaked in titles, you are going to leave your prior conclusions intact, and you’re going to get whatever you go in with your biases wanting. And the board is not going to be much of a check on that. I’ve seen very, very few boards that can stand up to the CEO on something that’s important to the CEO and just say, you know, ‘You’re not going to get it.’” Warren Buffett

Complexity

“Inside GE’s legendary management machine was a complex mechanism that used [GE Capital’s] deals to help the company meet its profit goals.” Lights Out

“GE Capital was always a problem. It was utterly complex and filled with risk, and its tentacles reached everywhere in the company.” Lights Out

“[The financial services] balance sheets were treacherously complex, and deep risks lurked there and were not always easily spotted in the quarterly profits and losses.” Lights Out

“[GE Capital was] essentially operating a high-powered hedge fund.” Lights Out

“Where you have complexity, by nature you can have fraud and mistakes.. This will always be true of financial companies. If you want accurate numbers from financial companies, you’re in the wrong world.” Charlie Munger

Cyclical Industries

GE ventured into the highly cyclical oil business with optimistic forecasts, little experience and no margin of safety.

“GE was going big into the oil business.” Lights Out

“Now GE became, in a series of high-dollar acquisitions, a player in the oil and gas equipment market virtually overnight.” Lights Out

“While Immelt heard, and was annoyed by, the chirping of some analysts who felt he’d paid a premium to leap into the oil and gas industry several years after his competitors, the company’s leadership was sure that the ensuing years would show the bet payoff.” Lights Out

“GE’s ‘base case’ assumption for all of the rosy pictures it was painting about its oil unit was $100 for a barrel of oil. Brent crude had closed out the previous month at more than $105 a barrel, only a little off its summer peak.” Lights Out

“Afloat on fracking profits during an oil boom, Lufkin had caught GE’s eye and been swallowed up at an expensive price, only to become a casualty when the conglomerate couldn’t abide the hit to earnings that a prolonged dip in the price of oil represented.” Lights Out

Insurance Tail Risks

“Everyone - reporters, analysts, investors - thought that the company had sold the insurance business long ago, significantly de-risking GE Capital. In often highlighting this point, Immelt and his top executives hadn’t minced words: GE was out of insurance.” Lights Out

“The core problem was that GE had made some bad decisions in reinsuring the long-term care policies.” Lights Out

“GE needed $15 billion to cover its liability.” Lights Out

"Virtually all surprises in insurance are unpleasant ones." Warren Buffett

“You can make big mistakes in insurance… You can make mistakes in something like insurance reserving, big time.” Warren Buffett

Bigger than Life CEO

Jeff Immelt almost personified the ‘bigger-than-life’ CEO. It’s a characterisation Marianne Jennings identified as another red flag for investors.

“Immelt knew the power of his influence, and he wasn’t above calling these subordinates [below the divisional heads] to make sure they knew the stakes and urge them to hit their targets.” Lights Out

“The structural component that fuels fear and silence and numbers pressure is the presence of an iconic CEO who is adored by the community, media, and just about anyone at a distance.” Marianne Jennings

Humility & Tone from the Top

“Immelt was required by the board to use only the company’s planes and was barred from flying commercial.” Lights Out

“Immelt, his good cheer notwithstanding, was not interested in hearing his judgement questioned. ‘My job is to make the company perform,’ Immelt told a newspaper reporter, ‘and my job is to make sure that nobody defines this company other than me.” Lights Out

“[Owning GE Capital meant] Immelt enjoyed having the accompanying seat at the table with Wall Street power players.” Lights Out

“Owning NBC gave Immelt and Welch access to red carpets.” Lights Out

“It had taken two corporate jets to take Jeff Immelt around the world. For much of his career [Immelt] often had an empty jet follow his GE-owned Bombardier or Gulfstream to far-flung destinations, just in case there was a mechanical issue that could lead to delays.” Lights Out

“No effort was spared by the staff to ensure that meeting venues were cooled to meat-locker temperatures to accommodate Immelt’s preference, irrespective of whether anyone had ever heard him make such a demand out loud.” Lights Out

“Was a CEO supposed to object that the temperature was not to his liking, or demand that elevators were always open and waiting for him? Or that the cold diet sodas he liked were always present on a sideboard when he entered a room, no matter how far-flung the visit or conference room he walked into?” Lights Out

“But GE has stood for well-bred hubris as well. Under Immelt, the company believed that the will to hit a target could supersede the math, even when hundred of thousands of livelihoods - those of investors, customers, and suppliers, to say nothing of workers, retirees, and their families - hung in the balance." Lights Out

Smart Investors

The emergence of a smart investor on the register is no panacea for investment success. Activist investor Nelson Peltz’s fund emerged with a $2.5 billion stake in 2015. Even the great investors make mistakes.

“Trian’s endorsement was the stamp of approval that Immelt thought would help others realise the full legitimacy of GE’s expected turnaround.” Lights Out

“In every great stock market disaster or fraud, there is always one or two great investors invested in the thing all the way down. Enron, dot-com, banks, always ‘smart guys’ involved all the way down.” Jim Chanos

Summary

The ‘pressure to maintain those numbers’, a culture of ‘fear and silence’, a bigger-than-life CEO, and a weak board conspired against the investors of General Electric; red flags that stand firmly in the qualitative camp, not to be found in a spreadsheet.

These misdeeds aren’t unique or new to investing. After more than two decades of research and observation, Marianne Jennings identified each of them in her book, ‘The Seven Signs of Ethical Collapse.’ They didn’t go amiss at Berkshire either, given Munger and Buffett’s astute understanding of human behaviour.

History is littered with similar corporate disasters to GE. They serve as a warning for analysts, investors, portfolio managers, boards and CEO’s alike; Forewarned is forearmed. Understanding those qualitative tools that may suggest not all’s right with a company might help you ‘keep the lights on,’ when the next GE turns up.

“I think that many CEOs get carried away into folly. They haven’t studied the past models of disaster enough and they’re not risk-averse enough.” Charlie Munger

Source:
“Lights Out - Pride, Delusion and the Fall of General Electric,” by Ted Mann and Thomas Gryta, Mariner Books, 2020.

Further Suggested Reading:
“The Ten Commandments of Business Failure,” Investment Masters Class, 2016.
“The Seven Signs of Ethical Collapse - How to Spot Moral Meltdowns in Companies... Before It's Too Late,” Marianne Jennings, MacMillan, 2006.
“Avoiding Group Think,” Investment Masters Class, 2016.

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The Beauty of Stock Markets

Step right up, step right up! Welcome to the Stock Market Circus, an unruly bazaar that is absolutely chock full of brazen salespeople, fortune tellers, sham wealth remedies, high-frequency pirates, fallen angels, pigs with lipstick and much, much more. This is a place where crazy things can happen; stocks can take exponential leaps only to then crash and burn, companies that are here today can be gone by tomorrow, and perceived good news that usually brings higher prices might actually trigger shock selling. Its not a place for the faint-hearted; this Circus abounds with metaphors like death spirals, squeezes, collapses and crashes, none of which engenders feelings of security. And if you want to leave, the exits aren’t always big enough. For the uninitiated, this can be a truly scary place.

If you take a step back however, there is beauty to be found in this madness. You just need the right perspective. A few home truths, a grasp of history and an ability to filter out the noise can go a long way to help investors in this respect. Let’s dive in…

Silly Prices

"The beauty of stocks is that they do sell at silly prices from time to time. That's how Charlie and I have gotten rich." Warren Buffett

Buffett likes to remind us that on occasion you will get silly prices in the stock market. That’s the beauty of it. Silly prices are often the result of emotionally charged behaviour rather than anything fundamental. The market’s ease of access and low cost of transacting encourages quick action, hence turning the psychological short cuts that saved our ancestors on the savannah into an impediment to investment success.

When we’re fearful, we look to other people for guidance. Yet, the truth of the matter is they’re just as likely to be acting on their own fears; reacting emotionally rather than rationally.

When you throw in the dominant quantitative and passive funds of today, who’ve no idea what they own and are triggered by price movements, you’ve got a recipe for significant mis-pricing - stock prices become untethered from business value. For those who are able to keep their cool during these situations, opportunity abounds.

"The stock market will offer you opportunities for profit, percentage-wise, that you’ll never see, in terms of negotiated purchase of business." Warren Buffett

“Research has shown that over the last century, U.S. stock prices have been three times more volatile than fundamentals.” Frank Martin

“We believe that shares spend relatively little time at ‘fair value’. Rather, lengthy periods of overvaluation are followed by lengthy periods of undervaluation… Extreme valuation spreads in the equity market aren’t necessarily rare or short-lived.” Marathon AM

Nick Sleep of Nomad Partners recognised that over time, all businesses can be meaningfully mis-priced.

“We can all observe that stock prices, set in an auction market, are more volatile than business values. Several studies and casual observation reveal that individual prices oscillate widely around a central price year in year out, and for no apparent reason. Certainly, business values don’t do this. Over time, this offers the prospect that any business, indeed all businesses, will be meaningfully mis-priced.” Nick Sleep

An analysis by John Huber at Saber Capital highlights this point. Mr Huber shows the average intra-year difference between the high and low of the ten largest stocks in the S&P500 in 2019 was a staggering 44%! [and people talk of an efficient market?]

“Stock prices move much more than true values do even in the largest stocks, which by definition causes mis-pricing at times. This isn’t due to a lack of information, it’s simply good old-fashioned human nature, and unlike the price of semiconductors or the value of information, human behaviour is not going to change. The biggest edge is in understanding this simple concept, and then being prepared to capitalise on it when it’s appropriate.” John Huber

Source: Saber Capital Letter Q3 2019.

The opportunity conferred by extreme price volatility isn’t lost on the Investment Masters. In many ways, the great investors are arbitrageurs of human nature.

Stock Markets Compound

The long-term history of the US stock market is one of rising prices. A key contributing factor to a rising stock market has been the earnings retained by corporates that are re-invested for the benefit of shareholders.

“Equities can compound in value in a way that investments in other asset classes, such as bonds and real estate, cannot. The reason for this is quite simple: companies retain a portion of the profits they generate to re-invest in the business.” Terry Smith

“To report what Edgar Lawrence Smith discovered, I will quote a legendary thinker - John Maynard Keynes, who in 1925 reviewed the book, ‘Common Stocks for Long-Term Investment’, thereby putting it on the map. In his review, Keynes described ‘perhaps Mr. Smith's most important point ... and certainly his most novel point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest operating in favour of a sound industrial investment.’ It was that simple. It wasn't even news. People certainly knew that companies were not paying out 100% of their earnings. But investors hadn't thought through the implications of the point. Here, though, was this guy Smith saying, ‘Why do stocks typically outperform bonds? A major reason is that businesses retain earnings, with these going on to generate still more earnings--and dividends, too.’" Warren Buffett

“In the 1920’s, a brilliant and important book by Edgar Smith, ‘Common Stocks for Long-Term Investment’, became a prime market influence. It was still popular in the fall of 1929, but most people read it too late. Mr. Smith advocated the benefit to corporate growth of the application of retained earnings and depreciation. Thus capital appreciates. The book may have been influential in changing accepted multiples of 10 x earnings to higher multiples of 20 to 30 x earnings.” Roy Neuberger

“Retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.” Warren Buffett

While markets can be volatile, the returns achieved by corporate America have remained remarkably consistent. Free trade, an entrepreneurial spirit and continuous innovation have been the hallmarks of America’s success.

“Historically, US companies increase their profits by about 6-7% per year and pay a dividend of around 2%. This generates an annual return of 8-9% from simply owning a solid group of companies.” Francois Rochon

“Anyone who examines the aggregate returns that have been earned by companies during the postwar years will discover something extraordinary: the returns on equity have in fact not varied much at all.” Warren Buffett

“The S&P 500 produces 12% or 13% returns on capital and it retains and reinvests about half of its earnings, and so that should generate 6% or 7% earnings growth over the long run. Then the rest of the earnings can be returned to you as dividends and share repurchases. If you can get 6% earnings growth in the long run, plus a couple percent from dividends and buybacks, then you're going to achieve a high single digit rate of return by owning that asset class in the long run. Obviously, it's going to be very lumpy, but if you have a long term, 10-year plus time horizon, that is the rate of internal compounding that I think American business will continue to achieve over time.” John Huber

Attractive Long Term Returns

Over the long haul the stock market has delivered attractive returns. While the Saber Capital table above makes clear the potential for short-term volatility, the potential for loss diminishes with time. Certainly that’s been the case in history.

The chart below highlights that over the last c150 years, investors who’ve taken a twenty year view have earned positive returns 100% of the time.

“The historical odds of making money in U.S. markets are c50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20 year periods.” Morgan Housel

Source: Collaborativefund.com - Morgan Housel.

Not only have investors been blessed with positive returns a good majority of the time, those returns have ordinarily been pretty solid. For context, in the last one hundred years the worst 25-year return in the market was four times capital. More generally, it’s been twelve times or more.

“You want to remind people that the worst 25-year period in the past 100 years was a 4-times return on their capital. Typically, a 25-year investor gets 12 times return or more. So, to me, being able to share that message with our younger analysts, with our shareholders and potential shareholders helps me keep it together when stocks are behaving differently than we anticipate they would.” Bill Nygren

Even stock market crashes fade over time. The worst percentage fall in stock market history, the 1987 crash, is a blip on the long term chart [see below]. What a wonderful friend compounding has been for the long term investor.

Dow Jones Industrial Average - 1987 Crash [Source; Bloomberg].

Asymmetric

It’s been found that humans find symmetrical patterns more attractive than asymmetrical ones. When it comes to the stock market however, it’s the asymmetry that beautiful. When you invest, the most you can lose is 100% of your capital yet the opportunity exists to make multiples of your investment.

“The asymmetric payoff structure (you can make far more if you’re right about a stock than you can lose if you’re wrong) is the fundamental attraction of investing in equity markets.” James Anderson

“One of the interesting dynamics of buying stock in a company is that our downside is known. In the worst case, we can lose 100% of our investment. In the best case, we can make many multiples of our original investment.” Scott Miller

Long Term Gains

To harness the market’s beauty you need to be invested. Sitting on the sidelines won’t earn returns. While short term market moves can be volatile, history has shown investing in high quality businesses has been a winning strategy over the long term.

“I think that this time would be as good as any other time or as bad as any other time. I have been at this business for 40 years now, so I have been through all kinds of times. That’s a long time to be at one trade, and I have done it every day. I couldn’t tell you that I knew any particular day, whether it was today or 10, 15, 20 or 40 years ago that actually would have been the right day for someone to invest. The right thing to do is to enter the investment scene, whether you are just an individual investor, someone who might be approaching it on a career basis, or a professional investor already working to hone your skill set.” David Polen

“All I can tell you as an increasingly experienced investor, is that I have never known a time when people weren’t worried about the sort of issues that you adduce and those people that spent too much time worrying about those issues, didn’t get invested and missed out on a opportunity to protect their wealth against inflation and indeed, to growth their wealth in real terms. So the rational way to deal with these sports of concerns, it may not be the correct thing, but the rational thing is to ignore them and be invested in fine businesses.” Nick Train

“The stock market goes up over time. Developed markets should increase by around 6% p.a. over long periods of time, implying a double every 12 years, a quadruple every 24 years, and so on. If you have a 40 year plus time horizon and an investment opportunity that will go up 8-fold, how much is there to think about? The smart money is invested, not on the side-lines fretting about what to do.” Robert Vinall

Get Rich Slowly

Compounding’s power reveals itself over time. While short term gains may look small, with time they mushroom. You don’t need to hit the ball out the park every year to build long term wealth. In fact, doing so, may increase the risk of losing capital. And losing capital is what impedes compounding. While everyone wants it all today, the world’s best recognise the beauty in getting rich slowly.

“At the beginning of the AGM of the Berkshire Hathaway Company they show this little video and each year Buffett is asked what’s the main difference between himself and the average investor, and he answers patience. And there is so little of it these days. Has anyone heard of getting rich slowly?” Nick Sleep

“The biggest thing about making money is time. You don’t have to be particularly smart you just have to be patient.” Warren Buffett

"The desire to get rich fast is pretty dangerous.” Charlie Munger

“People would rather be promised a (presumably) winning lottery ticket next week than an opportunity to get rich slowly.” Warren Buffett

“Ninety-nine percent of investors shouldn’t try to get rich too quickly; it’s too risky. Try to get rich slowly.” Sir John Templeton

“Small investors who get into trouble, I think, are those who try to get rich quick. They are in and out of the market in a flash and don’t take the time to learn. That’s a dangerous game.” Roy Neuberger

"In investing, time is your friend. The people who make a lot of money in investing are those that buy great businesses, in our case with expanding moats, and they give them time to work for them over 5, 10 and 15 year pulls. All the people that have created a lot of wealth for themselves didn't do it in a week, or 3 months or 6 months. They did it over a generation." Paul Black

“A good summary of investing history is that stocks pay a fortune in the long run but seek punitive damages when you try to be paid sooner. Virtually all investing mistakes are rooted in people looking at long-term market returns and saying, “That’s nice, but can I have it all faster?” Morgan Housel

Summary

On any given day it’s pretty much a coin toss what markets will do, and because of it you must be able to brace yourself for volatility. It’s a function of human nature and that’s not going to change anytime soon. Discard the received dogma that volatility is risk. While most business schools trumpet this notion, the great investors have recognised the beauty in volatile prices - they can present attractive entry points which ordinarily don’t surface in most markets. Little wonder these Investment Masters consider volatility as the friend of the long-term investor.

While there’s little sense to be made in the daily sound bites and market gyrations, as time expands, the markets longer term beauty reveals itself. Companies values compound and together cause markets to rise. You just have to lengthen your perspective to see it.

Whilst we’ve covered some of the attractive features of the stock market, I’m sure you can think of plenty of others; accessing the world’s best management teams, the ability to work from remote locations, not having a boss - there’s plenty more. Successful investing requires the right attitude, perspective and planning; manage your emotions, recognise and respect the power of compounding and exercise patience.

The market has a history of attractive long term returns; all you need to do is step back to see it’s beauty.

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Beyond Investing

In 2014, the Nomad Investment Partnership was it, and their last few years of returns were nothing short of astonishing. A 2012 return of 39.8% trumped the MSCI’s 15.8%, and a year later, Nomad clocked up a staggering 62.2% return, decimating the MSCI’s 26.7%. Indeed, in four of their last five years Nomad delivered returns of 40% or more. Without a doubt the partnership founders, Nick Sleep and Qais Zakaria were at the top of their game. Still young, in their mid-40’s, they possessed a magnet for capital via their track record of 20%+ annualised returns. The opportunity to raise billions of capital was there for the taking. Yet, after two decades of investing and fourteen years running Nomad, Sleep and Zakaria decided it was time to hang up their boots. They’d achieved their ‘X-amount’. For them, it was time to move beyond investing.

From the early days, Sleep and Zakaria had mused over a concept they referred to as the ‘X-amount’. This was an amount of money they deemed necessary to pay the bills and have a nice lifestyle. Beyond which, they felt the surplus funds could be an anchor, stripping meaning from their lives by distorting relationships with friends and family and encouraging an indulgent existence.

Like many of the Investment Masters, Sleep and Zakaria recognised the good fortune afforded to successful investors, and took it upon themselves to direct their excess gains towards charitable causes. Both established foundations which continue to benefit from their investing prowess; almost six years on from closing Nomad to external capital, the fund has achieved an average twenty percent return for twenty years.

There is certainly more to life than investing. Caring for the environment, supporting society and helping others less fortunate helps make the world a better place. The rewards of investing are often non-linear, rarely are they commensurate with the commitment, dedication and work required to achieve them. They are unique to the world of investing and with thoughtful application they can support the foundations of a better world.

“My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mis-pricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious.” Warren Buffett

“Investors can think their way to success without seeming to work in the traditional sense and the payoff in capitalism from stock picking can be extraordinary.” Nick Sleep

One of my favourite sayings is, ‘You can’t take a pin with you.’ Money won’t deliver happiness. Meaning will, however, and many of the world's greatest investors have recognised this. Below are some of the random musings I’ve collected over the years.

Giving Pledge

In 2010, Bill and Melinda Gates and Warren Buffett created the Giving Pledge, a movement of philanthropists who’ve committed to giving the majority of their wealth to philanthropy or charitable causes, either during their lifetimes or in their wills. In addition to Buffett, many of the Investment Masters have also signed the pledge, including Ray Dalio, Paul Singer, Paul Tudor Jones, Chris Hohn, Bill Ackman, Jim Simons, Mario Gabelli, Seth Klarman, Jeremy Grantham, Ken Langone, David Rubenstein, Tom Steyer, T. Boone Pickens and Julian Robertson.

It’s quite possible Warren Buffett will be remembered more by his philanthropic endeavours than his investing acumen.

“Gifting to Bill Gates his wealth to take on, that was the greatest achievement of Warren Buffett. He’s respected as an investor, but he should be more respected as a philanthropist.” Chris Hohn

Life Lessons

Studying the world’s greatest investors offers not just lessons in investment but lessons for living a successful and fulfilling life. While Buffett is beyond rich, he chooses to reside in a house purchased in 1958 for $31,500, whose value today reflects less than 0.001% of his wealth. Buffett’s favourite restaurant is the low-key local Omaha steak diner, Gorat’s, while his favorite meal remains a burger washed down with a can of Coke.

“I think it’s also probably surprising to people that the money doesn’t matter to him. He made the money sort of by accident because he was really good at doing what he loved, and when you do that particular thing really well, you end up with a whole bunch of money. But it’s really true that he does not care about having a bunch of money.” Susie Buffett [Warren’s daughter]

“When I look at a bunch of stock certificates in a safe deposit box that were put there 50 years ago or so, they have absolutely no utility to me; zero. They can’t do anything for me in life. I mean they can’t let me consume 7,000 calories a day instead of 3,000. There’s nothing they can do. I’ve got everything in the world I want, and I’ve had it for decades. If I wanted something additionally, I’d go buy it.” Warren Buffett

“I could have 10 houses, but, you know, I could buy a hotel to live in, you know. But would I be happier? It would be crazy. Charlie and I both like fairly simple lives.” Warren Buffett

Purpose

People need purpose and meaning in life. One of my favourite books, ‘Man’s Search For Meaning’ was written by Viktor Frankl, a survivor of the Nazi concentration camps. His experience at Auschwitz reinforced a key idea: life is not a quest for pleasure, but a quest for meaning. The greatest task for any person is to find meaning in his or her life.

Frankl’s insights are echoed in the empowering stories of James Stockdale and Eddie Jaku. Stockdale was a vice admiral in the US Navy who endured seven and a half years as a Prisoner of War - tortured, isolated in solitary confinement and restrained in leg irons - after being shot down above North Vietnam. Eddie Jaku, also a holocaust survivor, endured seven years of unimaginable horrors across Nazi concentration camps in World War II.

While each of their stories was forged in the extremes of terrible suffering, they highlight a common theme - mankind’s need of purpose.

Inheritance

Without purpose, one’s life lacks meaning. Most people cherish the idea of inheriting a fortune, yet there can be a ‘dark side of wealth’. Another favourite book is ‘Fortune’s Children - the Fall of the House of Vanderbilt.’ In 1877, Cornelius Vanderbilt was the richest man in the world. Fifty years after his death, one of his direct descendants died penniless, and no Vanderbilt was counted among the world’s richest people. The story recounts an extravagant lifestyle of spending by his heirs but also the misery, burden and loneliness that inherited wealth can inflict. By his early sixties, Vanderbilt’s son confessed to his family..

“The care of $200,000,000 is too great a load for my brain or back to bear. It is enough to kill a man. I have no son whom I am willing to afflict with the terrible burden. There is no pleasure to be got out of it as an offset - no good of any kind. I have no real gratification or enjoyments of any sort more than my neighbour on the next block who is worth only half a million. So when I lay down this heavy responsibility, I want my sons to divide it, and share the worry which it will cost to keep it.”

This hasn’t gone unrecognised by many of the world’s most successful investors and business owners.

“I think Kay Graham was quoting her father at the time but — some years back as saying, ‘If you’re quite rich, probably the idea of leaving your children enough so they can do anything, but not enough so they can do nothing, is not a bad formula.’” Warren Buffett

“If you have a lot of money, giving all your money to your kids is a mistake which will deprive them of self-achievement. I’ve given my kids a reasonable sum of money. One made it all on his own, one needed it because he’s a scientist, didn’t make a lot of money, but I wouldn’t give all my money to my kids, it’s just so damaging.” Leon Cooperman

“You can always give all your money to your children, but usually people who inherit great sums may not be as productive citizens as people who don’t inherit as much.” David Rubenstein

“I’m not a big fan of inherited wealth. It generally does more harm than good.” T. Boone Pickens

"My children are in a privileged position. I am willing to give them enough help to do something, but I am not willing to give them enough help to do nothing. Because it would destroy them." Terry Smith

“Do you really want your children to be like those who thought themselves your betters while you struggled? Letting them have too much money is really a lot worse than letting them have too little. I've watched family after family destroyed by excessive distributions to descendants, and by family patriarchs' and matriarchs' attempts to be able to control others' behavior from the grave. With wealth comes power. With power comes the ability to damage. Gifts and inheritances influence those you love most. Inheriting too much money at one time destroys initiative, distorts reality, and breeds arrogance. When the money runs out - as it always does - those left bereft of cash can't cope.” Michael Bloomberg

“We will make sure we’ve given most of our money away by the time we die, with the exception of what we leave to our kids. We want to pass along enough for them to live reasonably well, but not so much that they can do anything foolish with it. We want them to have a roof over their heads, but we also want them to have the meaning in their lives that comes from having to make their own way.” Ken Langone

“Why should men leave great fortunes to their children? If this is done from affection, is it not misguided affection? Observation teaches that, generally speaking, it is not well for the children that they should be so burdened.” Andrew Carnegie

“It is every man’s duty to strive to give his children the best possible equipment for life. But to leave millions to young sons is dangerous.” A.P Giannini

“Inherited wealth is as certain a death to ambition as cocaine is to morality.” William Vanderbilt

“It was in my father's planning for his children that they become self-reliant. Many times I heard him say, ‘If I had ten boys and a million dollars, I wouldn't give them a dime.’ He was not a mean man and he was not a cruel one. He simply understood, beyond all question, that self-discipline can make the difference between an effective life and a wasted one. He wanted self-reliance for his children in the way that the long, straight furrow needs a good plowman.” J.C. Penney

Possessions

We live in a society that encourages consumption and materialism. Keeping up with the Jones’ has been a long held ambition of many. The sad truth of this matter is that it’s impossible to keep up; when everyone is striving for more, there is no finish line and the race is eternal. Personal possessions will only keep accumulating over time.

“Possession’s don’t bring anybody happiness and most people don’t believe it until you experience it. Your possessions in many ways can become burdens.” James Dinan 

“Money is a wonderful commodity to have, but the more one possesses, the more involved and complicated become his dealings and relationships with people.” John P Getty

“We should have guys like Sir John Templeton, Warren Buffett, Charlie Munger as examples to all of us. The legacy of these men should be the focal point of our lives because it doesn’t take long to realize that money buys nothing of value. Everything that is truly worthy is free. That lesson comes hard to some people, but the sooner it comes, the better.” Frank Martin

“Some material things make my life more enjoyable; many, however, would not… Too often, a vast collection of possessions ends up possessing its owner.” Warren Buffett

“No man actually owns a fortune. It owns him.” A.P Giannini

“The first thing you could do [with money] is you could pleasure yourself. You could buy a plane, you could buy cars, you could buy homes, you could buy art. If you’re an art collector you never have enough money because you can spend $100 million on one canvas. I don’t collect art and I happen to have a view that material possessions brings with it aggravation. I’m a less is more kind of guy.” Leon Cooperman

Health

This one speaks for itself. There’s no such thing as the richest man in a graveyard, so you better ensure you look after yourself while you’re alive.

“A healthy man wants a thousand things, a sick man only wants one.” Confucius

“Stay fit. You don’t want to get old and feel bad. You’ll also get a lot more accomplished and feel better about yourself if you stay fit. I didn’t make it to 91 by neglecting my health.” T Boone Pickens

"You get exactly one mind & body in this world & you can't start taking care of it when you're 50. By that time you'll have rusted out if you haven't done anything. You should really remember you've got just one mind & body to get through life with & do the most with it." Warren Buffett

Time is Money

Time is one of those rare finite resources. We only get so much of it, and regardless of how much money we have, we can’t buy more. So it becomes infinitely more valuable than any possession or trinket.

“If you asked me to trade away a very significant percentage of my net worth, either for some extra years in life, or being able to do, during those years, what I want to do, you know, I’d do it in a second.” Warren Buffett

“Many times over the years, I was fortunate enough to speak at student commencement ceremonies, and that gave me the chance to look out into a sea of the future and share some of these thoughts with young minds. My favourite of these speeches included my grandchildren in the audience. What I would tell them was this Depression-era baby from tiny Holdenville, Oklahoma — that wide expanse where the pavement ends, the West begins, and the Rock Island crosses the Frisco — lived a pretty good life. In those speeches, I’d always offer these future leaders a deal: I would trade them my wealth and success, my 68,000-acre ranch and private jet, in exchange for their seat in the audience. That way, I told them, I’d get the opportunity to start over, experience every opportunity America has to offer.” T. Boone Pickens

Last year, I was saddened by the loss of Jon Boorman, who died of cancer. I didn’t know Jon but I enjoyed his financial posts on twitter. He seemed to have his priorities right. He wrote this before he was diagnosed with cancer. He was a real stoic.

“When you’re young, you have so much time but never enough money. When you’re old you have money but never enough time. How you perceive and value time and money will change many times throughout your life, but at the end there’s only one you’ll want more of, would give anything for, but it won’t be available at any price. Cherish it while you can.” Jon Boorman

Pleasure

Many of the Investment Masters have chosen to give away their money while they are alive. Helping others gives pleasure and investors can direct the funds where they feel they’re most needed.

I enjoyed a recent Forbes article, ‘The Billionaire Who Wanted To Die Broke . . . Is Now Officially Broke’ which recounts the story of Chuck Feeney, the former billionaire co-founder of retail giant Duty Free Shoppers, who pioneered the ‘Giving While Living’ approach while donating over $8 billion to worthwhile causes.

“I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes. Besides, it’s a lot more fun to give while you live than give while you're dead.” Chuck Feeney

Many of the Investment Masters have chosen a route similar to Chuck Feeney.

“You know, I get a lot of pleasure out of doing these things and if I didn’t do them and I died with more money, would I be a happier person? I don’t think so.” David Rubenstein

“Hopefully, we would live long enough to also see the consequences of our [charitable] actions; we would have to eat our own cooking, as it were. Previous generations that retired in old age and died soon after, have not always had that opportunity.” Nick Sleep

“Over the years, the emotional and psychological returns I have earned from charitable giving have been enormous. The more I do for others, the happier I am. The happiness and optimism I have obtained from helping others are a big part of what keeps me sane.. I get tremendous pleasure from helping others. It's what makes my life worth living.” Bill Ackman

“Philanthropy has had a huge role in my life. It’s brought me great joy. I give money away because I love the joy of watching lives change and being able to shape things. I don’t feel guilty about the money I made but I do think it’s strange that I’ve gotten the financial remuneration I have versus a doctor. If I can take that money and raise the the prospects for the American Dream in underserved neighbourhoods, provide scholarships or work on the environment it just brings great joy.” Stanley Druckenmiller

“When we make charitable gifts, we almost always feel richer, not poorer, for having been given the opportunity to help.” Seth Klarman

“We find the execution of our philanthropic work to be both challenging and deeply satisfying.” Jim Simons

“We think it is true that, once past X-amount, real meaning comes with reinvesting in society through charitable giving, which can also be a thoughtful, challenging, wonderful adventure, but with the added bonus that it feels like the world working properly.” Nick Sleep

A desire to donate through their lifetimes is the recognition that problems can sometimes compound faster than capital.

“Our current expectation is that within the constraints of the vagaries of fate, we will spend down most of our philanthropic assets in our lifetimes. One key observation is that society’s problems seem to be compounding as fast as or faster than wealth can compound, suggesting a greater urgency to current funding.” Seth Klarman

After Life

“I realised how rich I had become and I asked myself, ‘Do I really want to be the richest person in the cemetery?’” David Rubenstein

“There’s no Forbes 400, you know, in the graveyard.” Warren Buffett

Summary

The exponential pay-off unique to the investment industry can afford it’s most successful practitioners the capability to make a difference in the world. While every successful investor takes their own approach, there are lessons that can be drawn that relate to not just investing, but leading a more fulfilling life.

Investing is only a small piece of the pie.

Charlie Munger, with his 97 years of accumulated wisdom, teaches us in his characteristically shrewd way that a successful life requires stretching beyond investing.

“If all you succeed in doing in your life is to get early rich from passive holding of little bits of paper, and you get better and better at only that for all your life, it’s a failed life. Life is more than being shrewd at passive wealth accumulation.” Charlie Munger

“If you’re good at just investing your own money, I hope you’ll morph into doing something more.” Charlie Munger

Leon Cooperman encapsulated this nicely in his letter to the Giving pledge:

“I feel it is our moral imperative to give others the opportunity to pursue the American Dream by sharing our financial success. The case for philanthropy has been stated by others in a most articulate way and in words that have impressed me: In the early 1900's Andrew Carnegie said "He who dies rich, dies disgraced." In the 1930's, Sir Winston Churchill observed that "We make a living by what we get, but we make a life by what we give." In 1961, President John F. Kennedy in his inaugural address stated "Ask not what your country can do for you, ask what you can do for your country." Well before all these gentlemen expressed their thoughts, it was written in the Talmud that "A man's net worth is measured not by what he earns but rather what he gives away." Leon Cooperman

The idea of being able to answer the question of, ‘What’s enough?’ remains anathema to many. But not to these few altruistic investors who like Sleep and Zakaria, have determined their X-amount and chosen to pursue more meaningful lives beyond investing.

Sources/Further Reading:
‘X-Amount’ - The I.G.Y Foundation. Nick Sleep & Qais Zakaria. 2021.
‘The Giving Pledge - A Commitment to Philanthropy.’
‘The Billionaire Who Wanted To Die Broke . . . Is Now Officially Broke.’ Steven Bertoni, Forbes. 2020.
‘The Billionaire Who Wasn’t - How Chuck Feeney Made and Gave Away a Fortune Without Anyone Knowing,’ Conor O’Clery, 2007.

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