Supported by Greenhaven Road Capital, finding value off the beaten path.
William Thorndike joined Patrick O’Shaughnessy on the Invest Like the Best podcast to talk about his book and his investments. Thorndike’s book The Outsiders is great and we’ve covered it before – The Outsiders. In that post we introduced the decentralized command stool.
The recent post on Intelligent Fanatics, and accompanying book is another source of these ideas. In that book, Sean Iddings writes that people and the culture they sew, may be one of the best competitive advantages a company can create.
Thorndike’s interview with O’Shaugnessy touched on the book but not excessively. Instead we’ll look at Thorndike’s experiences and advice for decision making. Ready?
1/ Lightbulb. “I read it (The Money Masters by John Train ) and immediately realized this was something I wanted to learn more about and eventually do.” This book started a “process” and Thorndike sent away for the Berkshire Hathaway annual letters.
“Lightbulb moments” doesn’t mean flip of the switch results. It’s more akin to “overnight success.” Naval Ravikant, Haralabob Voulgaris and Jim O’Shaughnessy all had these moments that inspired some digging. They were moments that turned them quizzical. It was a feeling of, ‘that’s interesting’ rather than AHA!
2/ Pattern seeing. Thorndike’s book came out of his pattern recognition skills. He researched companies and started to see that great companies had great capital allocators in charge of them.
Building pattern recognition takes time. Judith Elsea said, “How do you evaluate founding teams? You do that by a process of triangulation, some pattern recognition skills that have been developed over multiple observations. You spend a lot of time talking to the partners.”
Patterns are good first filters to find ideas that trip our ‘that’s interesting switch.’ At her VC firm, Elsea has a model that does this. Others like Ian Cassel told Patrick in his episode that he builds his from “qualitative and quantitative nuggets.”
But remember that constellations are patterns too. We see stars and connect them with imaginary lines based to create things our culture values.
3/ Productivity. Beyond allocating capital, the outsider CEOs were productive too. This tended to manifest in two ways. They hired strong COOs and they had limited investor relations.
The best managers hire people who do some job better than them. If you can’t do this, says Jocko Willink, maybe you better check your ego. Jim O’Shaughnessy agrees.
Once The Outsiders got great people in those jobs, they limited who was at the table. Wesley Grey told Barry Ritholtz:
“We know multiple multi-billion dollar hedge fund managers with heavy value focus that are literally out of business because the back half of 2015, because deep value got destroyed and redemptions overwhelmed their ability to convince capital to stay.”
In his book about Charlie Munger, Tren Griffin wrote: “Graham value investor Marty Whitman has even said he does not what people in his fund who do not understand Graham value investing system because he must sell shares when they redeem their ownership interest.”
To put it another way, limit the people who can force a decision.
4/ Writing as thinking. “It’s interesting to write when you are trying to figure something out. It’s fun to try to solve an interesting problem and write about it.”
On the podcast, I talked about how checklists relate to this. If you write down your mistakes and successes, you can create a checklist for avoiding the bad and pursuing the good. Or, you can use what others have learned.
Charley Ellis told Ted Seides what the checklist looks like to be like David Swensen at Yale:
- “A chief investment officer who is brilliant.”
- Someone who is “exceedingly modest.”
- Rationality. As Peter Lynch said, “You can’t treat it like your grandchildren. If the fundamentals slip you have to say goodbye to it. Remember, the stock does not know you own it.”
- Experience. “He’s been doing it for more than thirty years.” This has led to a terrific network. “If I could ever do something that David found useful I would do it immediately.”
- Governance structure. (see #3 above) Ellis said the Yale committee could “play well with others” and were prepared for the meetings. “All of us on the committee scared ourselves into being fully prepared.”
Following a checklist won’t create success. “Take all the different comparative advantages,” said Ellis, “and it’s virtually impossible to replicate.” But, like Thorndike says, writing is a way to solve your problems.
5/ From structured checklists to adaptive questions. One theme of late has been the idea that good decision makers use a rigid structure to filter ideas and from a smaller set of options become more flexible in their inquiry.
Thorndike appears to do this. His initial filter is companies with recurring revenues and growing markets in non-capital intensive industries.
Royce Yudkoff gave similar advice for ‘search funds,’ noting that you won’t get everything you want but filters help you narrow things down.
Whether it’s a formula, ‘black box’, algorithm, filter, philosophy, or checklist, good decision makers start with structure and finish with finesse.
Thanks for reading,
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