Supported by Greenhaven Road Capital, finding value off the beaten path.
Larry Kochard joined Ted Seides @TSeides on the Capital Allocator’s podcast. My one big takeaway was this – – good decisions are the result of good ideas and good actions.
Throughout the episode, Kochard points out (e.g. a long-term orientation, good people) that what he’s doing isn’t new. These ideas are actually so well known we have a name for them, best practices. What matters is if you actually do the things that are good for you.
Okay, into the notes and quotes from Kochard.
“If you’re managing someone else’s money you have to have an understanding that there’s some level of absolute loss or relative loss that you can’t go beyond.”
An idea we’ve seen before is aligning stakeholders with your direction. Kochard has that, to a point, in managing a university endowment. Others like Seth Klarman and Wesley Gray (try to) only embark stakeholders of a certain disposition.
Influential stakeholders exist outside of finance. Louis C.K. said he made Horace and Pete a certain way in response to the advertising stakeholders. For Phil Knight it was the bankers who were stakeholders as he ordered more inventory each cycle.
Everyone answers to someone – sometimes many someones – and that type of person can matter a great deal.
Kochard has five core principles that he builds ideas around. This is a theme I’ve noticed, everyone starts thinking from somewhere.
1/ “Everyone is a long-term investor but can you build a decision-making framework, a governance framework, and a team that will enable you to do that? Knowing there are so many impediments whether they are behavioral biases, organizational constraints, or market constraints to cause you to not behave that way.”
As we noted in the opening, there are obstacles to best practices. This was Sam Hinkie‘s problem in Philadelphia. His process for long-term success was to acquire talented young players on cheap contracts. The best way to do this is draft high. The best way to draft high is to lose a lot of games the preceding year. Hinkie had a good process, but there were “impediments” that changed the behavior (and the person in the job).
2/ “Value added managers tend to be bottom up, company specific and actively involved in shaping the future of those companies.”
It’s important to play games you can win, or at least games you won’t lose. We saw this in the 2017 NBA Finals. Top-down macro is too damn hard. Peter Lynch said that twelve minutes reading macro forecasts is ten minutes too long. Patrick O’Shaughnessy said about this type of investing, “I’ve always felt that macro investing is so hard because you need to get two things right; accurately forecast what’s going to happen, but more importantly, you need to position your portfolio in a way that will actually benefit if your forecast come true.”
Kochard added at the end of the episode:
“Everything I’ve tried to develop in our culture is to play to our strengths. If we’re good at something let’s do more of it. If we’re really bad at something let’s not do it, or, try to figure out what we can do to get better. But not force an allocation so we can look like our peers.”
3/ “Again, everyone says this. These are not unique core principles. Price matters.” Kochard clarifies that this doesn’t mean a low number that shows up on Yahoo! Finance but something distinct.
This requires two things; knowledge and time. If a purchaser – of stocks, homes, groceries – doesn’t have the option to wait they’ll likely pay an above average rate. Additionally, if they lack the knowledge to know what is a good price they’ll pay too much too.
4/ “The more experience I’ve had, you just realize it’s all about the quality of people.” David Salem had a nice framework for finding good people – ethical and intellectual integrity. Ethical integrity means things like loyalty, honesty, and how you treat other people. Intellectual integrity means curiosity, reading, and changing your mind.
5/ Kochard tries to diversify his investments and team, “and having a team that’s very diversified in their backgrounds and the way they view the world. If everyone is in complete unison you’re going to be making awful decisions.” Kochard wants an organization that argues well. Michael Lombardi said that it matters who you let in the room. Phil Jackson found out that good arguments mean leaving aside egos.
Thanks for reading,
This idea of starting your thinking from somewhere is salient because you can change where that somewhere is. Rory Sutherland uses psychology to reframe situations, similarly, we can reframe our starting position to test different lines of thought. More to come on this…