Stories of High-Quality Management
Introduction
A business is just a structure. It is the passion and energy of its management and people that fill up the space. Otherwise, it is just a vacuum. Who forms the management is the #1 priority in my stock selection.
If you were to strip investment to its core structure, it is buying a good quality business with good quality management at a reasonable price. Aim to buy top-notch, nothing else.
As an investor with 6 – 7 years of experience, I have compiled various investment stories over the years. I keep them because they remind me of the quality of management that I demand.
I want to place my money with people that I trust.
I really do not know of anyone that could succeed or develop huge conviction in the companies they invest without knowing the management and their personal “WHY”.
It is tough to decipher the quality of management. Since it is qualitative, you cannot figure it using formulas. However, stories help to provide us with some insight.
- Ability to say NO so that you can build something long-term
- Immigrant background
- All-in into the company, massive ownership
Stories are moments of truth. They reveal everything about management.
#1 Facebook
source: thepurposeisprofit.com
At SXSW Tuesday afternoon, Peter Thiel, the entrepreneur, venture capitalist, and contrarian thinker, told the story of the day Mark Zuckerberg decided to turn down Yahoo’s $1 billion offer to buy Facebook.
“The most important moment in my mind in the history of Facebook occurred in July 2006,” he began.
At the time, Facebook was just two years old. It was a college site with roughly eight or nine million people on it. And, though it was making $30 million in revenue, it was not profitable. “And we received an acquisition offer from Yahoo for $1 billion,” Thiel said.
The three-person Facebook board at the time–Zuckerberg, Thiel, and venture capitalist Jim Breyer–met on a Monday morning.
“Both Breyer and myself on balance thought we probably should take the money,” recalled Thiel. “But Zuckerberg started the meeting like, ‘This is kind of a formality, just a quick board meeting, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here’.”
At the time, Zuckerberg was 22 years old.
Thiel said he remembered saying, “We should probably talk about this. A billion dollars is a lot of money.” They hashed out the conversation. Thiel said he and Breyer pointed out: “You own 25 percent. There’s so much you could do with the money.”
Thiel recalled Zuckerberg said, in a nutshell: “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”
Thiel described the argument Zuckerberg finally came down on like this: “[Yahoo] had no definitive idea about the future. They did not properly value things that did not yet exist so they were therefore undervaluing the business.”
My Take:
From a very young age, Mark Zuckerberg fell in love with the notion of bringing people closer using the internet. I do not know of any 22 years old who could turn down a $1 billion offer — adding the fact that Facebook was not profitable. He wanted to own it because he wanted to shape how Facebook could be used as a valuable social tool for society’s good. Despite the controversies about privacy, Mark has proven himself true to his core mission. If Facebook was all about profits, Mark would not have made the decisions to slow down growth and increase expenses to ensure the platform’s appeal and safety.
I think Mark was misunderstood and people underestimated his capabilities. Today, he runs a sprawling empire with a set of heavy responsibilities. He is not God but I believe he is doing his best.
#2 Fastenal
There was a story about Bob Kierlin, the former CEO of Fastenal (NASDAQ:FAST), who used to buy suits not just at a mark-down suit store, but suits already used by the manager at the mark-down suit store. He said, “Luckily, we’re the same size. I picked up six of those suits for 60 bucks each.”
Another time, Kierlin and current CEO Dan Florness had to get to Chicago for a meeting. Since the meeting wasn’t until the next day, they decided to scrap the one-hour flight and drive instead – saving the company 78% in costs and eating at A&W because they had the cheapest hamburger on the route.
But it wasn’t just frugality that Kierlin built into corporate DNA. Fairness was another. When a recession hurt Fastenal growth in 2001, management were the first to cut their pay. Variable pay for management declined 30%. Kierlin’s salary was hit the hardest. His $121,000 pay was cut almost in half to $63,500. For other employees, variable pay increased 4%.
My Take:
Culture starts from the top. I think no one would appreciate the value of saving $0.10. After all, what is $0.10? Almost nothing!
Bob Kierlin thought differently about $0.10. He chose to forgo his own comfort by eating A&W burgers to save more money for his firm. His frugality certainly puts many Wall Street’s executives to shame.
All of us want others to be perceive us better, so we will behave better when we know there are eyes looking at us. At his age, Bob Kierlin is not in need of any more money. More money would not make him any happier. To him, it is a principle of not wasting resources. In this case, imagine how would the staff of Fastenal behave when they get to know this story above?
Those extravagant ones would definitely rein back on their corporate spending unless they have no conscience. The few dollars saved throughout the years could amount to something significant and it increases the earnings of the company.
#3 Wal-Mart
Despite being America’s richest man, Sam Walton flew first class only once in his life on a flight from South America to Africa. Wal-Mart did not have a corporate jet until the retailing giant was approaching $40 billion in sales. Walton’s “corporate car” consisted of a red pick-up truck. Bernie Marcus, the co-founder of Home Depot, once recalled having lunch with Sam Walton, “I hopped into Sam’s red pick-up truck. No air-conditioning. Seats stained by coffee. And by the time I go to the restaurant, my shirt was soaked through and through. And that was Sam Walton—no airs, no pomposity.”
source: http://www.talkativeman.com/sam-walton-frugality-wal-mart/
My Take:
I really like how normal folks like Sam Walton just try to do their best to provide the best variety of groceries at the best prices. To him, it was about bringing satisfaction and ensuring his customers got a good deal.
It was never about him getting wealthier.
#4 Middleby
A $10,000 amount invested in 2001 would become $1,860,000 by 2019.
If that is not incredible, I really do not know what is.
source: consciouscapitalism
Bassoul was aware of Middleby’s struggles but thought the company had significant potential. “It was a great brand,” he says. “They had done a wonderful job developing the revolving oven and automating the pizza business, but they had lost focus.
They were no longer dealing with core competency. This was a huge challenge. Nobody lied to me. From the beginning, they told me, ‘Selim, we can’t guarantee where we’re going’, because they were struggling and they wanted me to be part of the turnaround.”
Soon after joining Middleby, Selim sold his house which he had just built to buy a large stake in Middleby Corporation’s stock.
Selim bought shares and became the second largest stockholder of the company “when nobody was willing to invest in the company.”
My Take:
All of know that a property probably represents a big portion of someone’s net worth.
Selling your own property to buy into an uncertain company? That’s crazy! But that was what Bassoul did.
Either he was a lunatic or someone who believed in the impossible. True enough, he made the impossible possible. He turned an ailing company into a powerhouse. When someone puts (almost) his entire net worth into his company, I would be all-ears and all-hands to understand about the company. To know of this information, and and not analyse this company at all would be the silliest move ever. It could be one of the biggest wealth creation opportunities available. Selim Bassoul created many millionaires who trusted in his ability to execute.
A man’s worth is no greater than his ambitions. – Marcus Aurelius
#5 Intel
Andrew S. Grove was born Andras Grof on Sept. 2, 1936, into a Jewish household in Budapest. His father owned a small dairy business, and his mother helped keep the books. As a child, Mr. Grove was afflicted with scarlet fever and an ear infection that left him almost deaf. His father was rounded up by German troops occupying Hungary during World War II and sent to a labor camp, where he survived typhoid and pneumonia.
Liberation from the Nazis was followed by Communist rule in Hungary, and then by the Hungarian uprising of 1956 that was put down by Russian troops. Mr. Grove, who was studying chemistry, decided to flee the country after a number of his fellow students were arrested. He and a friend crossed the border into Austria after a night spent evading Soviet troops.
In 1968, he co-founded Intel and helped Intel become a billion dollar company.
source:https://www.nytimes.com/2016/03/22/technology/andrew-grove-intel-obituary.html
My Take:
I enjoy investing in companies which were founded by immigrants.
Some examples include Selim Bassoul of Middleby, Nick Scali of Nick Scali, Jerry Yang of Yahoo and Sergey Brin of Google.
All of us probably had gone through tough times in our lives. Certain events leave indelible impressions on us and shaped us for better or worse. Amplify the pain by 10x – that was what the immigrants felt.
Some immigrants were so broke that they have no choice but to start a business to ensure they are able to survive in a dangerous world. Why did I use this world “dangerous”? Every day, there are people dying around the world due to war or conflicts. But we don’t see them because some of us are lucky to live in safe countries. Imagine, in a war setting – life can be so fragile because you will never know who is going to leave the next moment.
Previously, I visited the War Remnants Museum in Ho Chi Minh City. That experience broke my heart.
SMr Andrew endured war as part of his growing years.
People who had gone through a phase of desperation and brokenness tend to thrive and excel subsequently.
I also observed they tend to take the calculated risk because they have “nothing” to lose. Or rather, they were trained since young to take calculated risks to ensure their survival. These entrepreneurs are generally paranoid too.
Putting that into a listed company’s context, I believe the net effect is a big positive to have an immigrant as a CEO/founder.
Conclusion
Finding the best management is not difficult. But I often see investors neglecting this aspect of their research process. As an investor, you want to have someone who is intrinsically motivated, passionate and long-term. You want to be able to trust this person and trust in his/her approach to building the business and generating wealth.