Morgans (Scone) held their first 'Value in the Vines' conference: a one day conference in the Hunter Valley Crowne Plaza where CEO's presented their companies. The format I most enjoyed was the 'fireside chat' with Grant Bourke (co-founder of Domino's Pizza (DMP)) and Richard Rijs (Patties Foods) hosted by Sam Paradice. This was held after dinner and a few red wines, so the atmosphere was quite relaxed. The focus wasn't valuations and going through slide decks or EBITDA margins, but personal stories about the highs and lows of building a business.
Both Domino's and Patties sell fairly commoditised products, yet both have had outstanding success. They cited a common thread for their success: for slightly different reasons, they both heavily emphasised the importance of people at all levels in the company. Grant Bourke gave the example of how he and Don Meij went and door knocked around a suburb to drum up business for a struggling store. That's commitment.
It helped cystallise some thoughts on management. I have at times both underestimated and overestimated management. Unlike balance sheet items, you can't just pigeonhole people so easily - everyone is different. And on top of that you can easily make the mistake of superimposing your own thoughts and biases and see people or situations for how you think they should be seen.
Management can be male or female, drive an expensive car or a cheap car, swear or not swear, be an introvert or extrovert, be funny or boring, educated or a school drop-out - the list goes on. But do these factors indicate whether they will be successful?
A good example of a bias is the car they drive. Value investors tend to tut-tut expensive cars, but to many there isn't anything wrong with driving a nice car - it's a symbol of wealth and success, after all. I've heard the same comment about the clothes a CEO wears - one particular CEO who we have done very well out of this year has been criticised for dressing like a slob. He does. But he's a great manager. In another example where we have more than doubled our money in the last 12 months the feedback about the Managing Director is that he is a poor presenter. That's true. But the guy is just itching to go and make money - and doesn't really care about how he presents.
Another mistake is to think managers will act in the best interest of their shareholders. This style of thinking is a big trap in turnarounds or bombed out situations. It is so easy to see value and think managers will get in there and realise that value. But what happens if they aren't incentivised to do that? What happens if they are on a big fat salary and downsizing the business actually works against their personal interest?
Underestimation can be particularly annoying. Some of the CEO's out there are really smart and can keep finding ways to squeeze value - even when you can't see it. Graham Turner at Flight Centre is a great case in point: he has kept driving profits from the bricks and mortar business even though many think online is the only way to go. I'd put Stuart Brown from Blackwall (BWR and BWF) in this category.
So it's easy to make superficial judgment calls about someone. It's easy to buy a stock when it is cheap and wonder why management doesn't do the 'obvious'. It's easy to pass on a stock because it looks fully valued but watch the price just keep going up anyway as the manager finds a new market, a new product or more costs to squeeze out. I've made both kinds of mistakes plenty of times.
Grant Bourke and Richard Rijs suggest placing a very large focus on people. Jim Collins in Good to Great found a similar trait among higher performing CEO's: look at the who before the what. One summary word that Venture Capitalist Fred Wilson has used is 'hustle'. You want someone with hustle - the person who is driven to make things happen. Similarly, Chris Sacca (also a VC) looks for someone with inevitability. He cites Travis Kalanick from uber as a prime example. The best example of inevitability I've seen this year is Emefcy (EMC): after meeting the management and board, it just seemed certain the company would be a success - even though at that time it had no revenue (it's since risen fourfold). A larger focus on people has helped me improve considerably. There are of course always other factors to consider - that's part of the art of weighing things up. Ideally you find outstanding management and a company with outstanding fundamentals. Unfortunately, it just doesn't happen that often. One stock I will be writing about soon had both - and the results have been spectacular.
Kristian
Disclosure - own BWR
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