Stakeholders

Supported by Greenhaven Road Capital, finding value off the beaten path.

A reader sent along the following story about Robert Rodriguez who (partially) rose to prominence for making the film El Mariachi for seven thousand dollars in 1992. The movie has now grossed more than two million dollars. Rodriguez’s IMDB profile is incredible with double-digit citations (11 total) for Producer, Writer, Director, Editor, Soundtrack, Sound department, Visual effects, Actor, Composer, Cinematographer, and Camera and Electrical Department. For context, Judd Apatow has double-digit credits in 4 categories.

Part of the reason Rodriguez does so many jobs is to keep the cost of the movie down and the scope of the project small. He’s been offered larger projects, but with larger projects come more stakeholders, our subject for this week. Rodriguez said:

“When they offer it to you, it’s still their movie. They’re going to tell you how to cast it; they’re going to tell you how to make it; they’re going to tell you how to end it. They spend a lot of money and they want their money back. I’d rather nobody spent a lot of money.

“If it’s a lower budget and a minimum payout, I can do anything I want. I never wanted to leave that behind. It was just too big of a trade-off. It sounded too much like work.”

There’s an expression especially common within the small business community where someone can be working on their business or working in their business. The connotation, as I understand it, is that working on is better than working in.

On > In.

However, there’s a more important layer beyond this quip. Both On and In are superseded by the stakeholders Of a business.

Projects like films offer a tidy closed system for examination. Films have deadlines and budgets and the more time (longer deadline) or the more money (larger budget) a filmmaker needs, the more people that need to be involved. Or, inverted, the less time and less money a film needs the more people like Rodriguez, or Jason Blum a subject of recent weeks, can work independently.

In an ideal world, in a prosperous marriage, or on a sunny day, the importance of stakeholders matters less. Everyone wants to be your client in a bull market. However, it’s the scary situations when opportunities arise. Warren Buffett said to be greedy when others are fearful and fearful when others are greedy. That’s fine for people who can act like Warren Buffett, who has great stakeholders. In investing this is called permanent capital.

But Buffett hasn’t always been so blessed. From 1954-1969 Buffett ran the Buffett Partnership Ltd. and it was then that he started to write letters to his stakeholders. In 1961 Warren wrote:

“It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions but also down in the pit of your stomach.”

Warren knew that the best prices came at the worst times. “The pit of your stomach,” encouraged his investors to have the intestinal (and intellectual) fortitude for the bumpy ride to Earnings-ville.

Decades and many letters later Roger Lowenstein wrote about this lesson, “One purpose of his letters was to attract and knit together a shareholder group who would behave like his partners—in other words, who would stick with him.”

What Buffett wanted were stakeholders that would stick with him through thick and thin and not redeem their money when he was about to pounce on an opportunity. He wanted investors with the faith of Charlie Brown.

Last week we looked at the monkey see, monkey do nature of opportunities. Whenever a market mechanism is introduced for athletic skills, collectible items, or investing, prices inflate and risks rise. Mix in stakeholders with different incentives, time preferences, and expectations and the best action will be harder to take. Unless that is, a business cultivates its stakeholders. Buffett did it through letters and we’ll look at how to do it too.

Money and Time

No one embraces an expedition and expects to fail. I’d wager that it’s mostly smart, ambitious, hard-working people who even try. Yet projects fail all the time and stakeholders are part-of-the-reason why. When thinking about stakeholders this week, consider anything that draws on time (or indirectly via money) as a stakeholder.

Michael (a different one, I promise) wanted to be a writer. His job was as an editor and he’d submitted and sold some stories. He lived in New York City too, it doesn’t hurt to have that proximity.

During this pining-for-writing phase, Michael and his wife bought “a crummy house in Cornwall Connecticut.” The couple would go up on the weekends and as his wife painted Michael tinkered around in the garden. “I ran into problems immediately,” he said in one interview years later. It was like

“In order to conquer an animal, I have to think like an animal, and whenever possible, look like one.” — Carl Spackler

He looked for horticulture answers in books, tried and failed, and looked for more answers. Along the way, Michael wrote down what he was doing. From that came some stories. Then came a book.

That book sold well enough that Michael got a contract to write a second book, and an advance. Yet, despite the book advance money (which quickly ran out) there were too many stakeholders on his time. Michael and his wife had a kid and a fixer-upper in Connecticut. They lived in New York City and paid New York City prices.

Michael had a choice, he could pay back his advance and cancel his contract and keep his job in the city. Or give up the job, the health insurance, and the city. He moved and reflected years later, “The key to being a successful freelancer is having a low monthly nut.”

Michael Pollan made it. His books win awards and some stories even make it to television. Michael Pollan made it because he aligned his stakeholders. His wife and his lifestyle supported this path to becoming this kind of writer.

Like writing, comedy takes time. It’s months (years even) on the road figuring out what makes people laugh. Jay Leno put it this way when he talked to Judd Apatow, “I didn’t have a lifestyle to maintain.” Spending his days working as a mechanic for Mercedes and his nights driving hundreds of miles for a few minutes on stage meant that Leno had the time to develop jokes.

Even years later, Leno tries to test his material in awful places. “Like, I was in New Mexico a while ago at an Indian Reservation, just a very strange setup. Nice people, but—and they laughed. So I said, ‘Okay, this stuff is gonna work on the show.”

Pollan had a wife, a kid, and two residences. Leno had himself and his other interest to comedy was cars, something he got to at least interact with at his paying job.

Without the right stakeholders, ventures get less time and/or money than they need. Without the right incentives, things crumble too and here we have “the most profound problem in investing.”

Principal Agent

Have you ever been in an elementary school? Third-grade classroom lines provide an excellent metaphor for aligned stakeholders.

If you haven’t recently, things are much like you remember. Some kids want to get to lunch, or recess, or art immediately so they can maximize their time and some kids want to talk with friends, look about, or get the attention of the teacher. When a class is lined up straight, paying attention, and “eyes forward, lips zipped” they can move efficiently through the school. When they aren’t, they can’t.

That’s how businesses exist too and that profound problem exists when the principal and the agent aren’t in the same line going to the same place.

It was ‘super LP’, Chris Douvos who called this “the most profound problem in investing. People with money – the principals – act differently than the agents – those who are entrusted with the money.”

This problem exists under the expression, no one got fired for buying IBM too. It’s also hidden in the acronym, CYA.

Let’s look at the Warren Buffett situation we already noted. Buffett wrote letters to align and filter (we’ll get to this point) his stakeholders so that he could buy out of favor stocks. Buffett wanted superficially not fundamentally, ugly businesses.

However, Buffett had it easy. He’s the quintessential goofy ‘uncle’ or fun ‘aunt’ that every family has (though none are quite as wealthy). Buffett’s communications were the chief source of financial information for his stakeholders. I wonder what he’d do in 2019 when Twitter, cable news, and conspicuous consumption are so dominant. CNBC didn’t even start until 1989! Buffett still writes his letters and they reinforce the Buffett brand and that influences the stakeholders who are shareholders.

Remember, except in the limited-laws-of-physics world, people only look stupid relative to something else. So one solution for individuals is to cover-your-ass and purchase IBM. But the second solution is to change the relative comparison. This is what it means to align stakeholders, to frame the comparison in a different way.

Investors have an expression that makes this conveyance easier, ‘you can’t be the market and beat the market.’ The implication is that they have to be different, they have to look different. So if a limited partner thinks they’re stupid, they have to find a different metric. It can’t just be, ‘they’re not doing what everyone else is.’

In the monkey-see-monkey-do world where edges erode, businesses must act opportunistically. It must be fast, with force. That ability comes with good stakeholders, and there’s a certain time to find them.

Inbound and communication

The best time to align stakeholders is before they’re stakeholders. This was something John Wooden did while he was the coach of the UCLA basketball team. In a book that covers his playing time for Wooden, Kareem Abdul-Jabbar wrote:

“As I learned later, our first meeting was perfectly representative of his philosophy of recruiting: ‘I wanted young men who wanted to play for UCLA, and not one that I had to talk into playing for UCLA. I always believed that the way to build a great team is to find the kind of people you want to work with and tell them the truth.’”

Kareem writes that he was a bit taken aback that while Wooden was respectful, he wasn’t effusive.

Brent Beshore wrote a book and created a network because he said, “We eat on proprietary deals.” The book, the podcast, the letters, are all ways to create an inbound network for the stakeholders. Beshore told Ted Seides:

“We like to get in situations where people have educated themselves on us, people know who we are, there’s already trust built through our writings, through what we’ve talked about and they want us to buy the business. They’re coming out and seeking us.”

Jim Mattis writes about the importance of this in his new book, Call Sign Chaos. During the Vietnam War, felons, parolees, and petty criminals were offered chances to serve in the war instead of serving time. That seemed like a good deal to the judges who assigned the punishment but not to Mattis and the Marines fighting in the war. Soldiers are stakeholders too.

This brings up the question of balancing perfect clients with available ones, about employees and the unemployable. Stakeholders widen and shrink the opportunity zone of a collective. Great people expand what’s possible, unaligned ones collapse what’s possible.

Success with stakeholders seems to be like success in dating, share who you are and see if they like it.

A business should sell their strength. John Wooden’s strength was focusing on the process. Kareem wrote that Coach Wooden didn’t like sports movies because after the lesson of the movie the team won anyway. Kareem wrote, “His point was that the life lesson is the success. The traveling is the reward, not reaching the destination.”

Wooden wanted learning first because like day follows night, long-term winners are learners. Beshore wants to filter out people who won’t jive with adventur.es mid-west vibe of hard work, humility, and honesty. Mattis wanted men who wanted to be “the few, the proud.”

Investor Wes Gray puts it this way, “The edge is not in building a better mousetrap. The edge is in coupling educated capital that understands why your mousetrap works and pairing the two together.”

Assistant GM for the Boston Celtic, Mike Zarren said much the same thing, “The communication of the information is as important, if not more important, than the actual quantitative work that you do.”

So what Zarren, Gray, Mattis, Beshore, Wooden, Buffett and all the others have done is communicate well. Each is and was upfront about what they’re trying to do and they find people who buy into that. How do they communicate? Easily.

Here are a few specific suggestions for general implications.

Visual or literal One advance for sports analytics was making it visual and the advice for filmmakers is just as true for sabermetricians, show don’t tell.

Entertain or Inform In the modern cacophony an easy dichotomy is to separate these two. Phillip Tetlock has studied decision making and noted, “The more accurate forecasters tend to bore people.”

Understanding is not agreement “It’s important to make people feel heard when they are giving notes about the show, make them know you are actually listening. But then it’s important that we only take the notes that will make the show better,” said Brian Koppelman.

Wrap up

In his book, Jim Mattis writes, “I aggressively delegated tasks to the lowest possible level.” It’s important to “leave the ‘how’ to your subordinates.” A decentralized command works great with stakeholder alignment. Like Mattis saw fighting in Vietnam and recruiting Marines after, people are everything.

So how much do your stakeholders “delegate tasks to the lowest possible level”?

Ultimately it comes down to two possible paths.

• Smaller projects (in time and money) require fewer stakeholders. Fewer people, fewer complications but that requires some like Robert Rodriguez who can do more, with less. As filmmaker Steven Soderbergh said, it doesn’t matter what camera a filmmaker uses if they don’t know where to put it.
• Coordinated projects (via communication) create aligned stakeholders. Sometimes this is done ‘at the top of the funnel’ for inbound clients. Sometimes it’s done after the fact to educate people on what you do what. Sometimes it’s homestyle letters (Buffett), sometimes it’s visual arrays (Moneyball), and sometimes it’s regular content (podcasts, emails, etc.).

So, Do your stakeholders believe this? Thanks for reading.