Supported by Greenhaven Road Capital, finding value off the beaten path.
When addressing the social science replicability crisis, Rory Sutherland said something to the effect, for me it doesn’t matter that it doesn’t repeat in the lab, all that matters is that it might work on the street. In his Talk at Google, investor Chuck Akre noted that “There is no correct way, this is just the way it works for us.”
Any of our notes might work and none are universal. Let’s see what Akre’s advantages have been.
One traffic light. Akre’s offices are in Middleburg Virginia.
“We work in a town with one traffic light and that makes the decision process much simpler, (in other places) we’d be surrounded by hundreds of people who are very bright and very interesting. The reason we’re in a town with one traffic light is that their stuff would be intellectually appealing to us and distract us from what we do well.”
Another one-light researcher is Ken Burns who said the “tiny village in New Hampshire (allows) us to do the necessary research.” Ed Catmull said George Lucas moved from Hollywood to San Francisco for this reason.
Business models. ‘Who offers what and why’ might be a good question for figuring out an incentive system.
“They (morning finance television) have a different business model, and it’s mostly supported by financial and consumer institutions who want your eyeballs. If it’s a brokerage firm they want to create transactions. “
Stakeholders. If you want to go fast, go alone. If you want to go far, go together. But that only works with people going the same direction.
“We tell our clients and our prospective clients that our goal is to compound their capital at an above-average rate while incurring a below-average level of risk.”
In his talks Akre’s clear about how they find that kind of risk. This kind of clarity prepares participants. One financial advisor put it this way, “The easiest clients to work with are the ones that know the most.”
Pricing power. Akre told Patrick O’Shaughnessy:
“I used to joke about the dominatrix business model. She could price however she wanted to price. My example of pricing power is as follows: It’s a big holiday weekend. Your wife is having a hundred people to a party in two hours and the toilets are stopped. You will pay that plumber whatever he asks as long as he can get there before the party.”
Brothels have pricing power too. Sometimes brands build pricing power. Pat Dorsey has spoken a lot about this. Sometimes brands think they build pricing power. In the 1950’s Budweiser thought they did but their $.15 per case increase allowed Schiltz to become the market leader. That’s only $1.45 today. Wisely the company reversed course, lowered prices, and changed their advertising.
Market mechanism. Good for consumers, bad for producers, depending on your perspective.
“Mastercard and Visa are earning returns on capital that, as we say, you could cut in half twice and still be above average for an American business. Something extraordinary is going on there. The company does not talk about what that is. We don’t talk about it, but we spend a lot of time thinking about it, trying to understand what it is.”
When asked ‘Why not share?’ Akre said, “I don’t think we’re giving away anything but I want to make sure we’re not.”
Argue well. In a 2019 talk, Akre appears with John Neff who recalled his pitch to Chuck. It was a decade early and Neff thought Moody’s Corporation was a good investment. He thought that the banks misrepresented the credit-default-swaps and “the problem was upstream, with the banks who securitized these products.”
This was a special situation, an ugly duck. Akre disagreed, but kept an open mind. Later, after Neff was hired, the duo went and visited the company. Akre believes in good companies run by good people with good opportunities and after meeting with management they invested.
Neff reflected that this was, “A wonderful lesson that I would never forget. He could have said, ‘I am Chuck Akre, I’ve been doing this a long time, the answer is ‘No’. But when he was presented with a good case he changed his mind.”
That’s how to argue well.
Books. Akre said he reads a lot of business biographies, “because they inform me about human behavior.” Additionally, The Money Masters was “a very important book for me.” 100 to 1 In the Stock Market, “really made me come around and focus on the idea of compound return.”
“There’s a book out called Dear Chairman and it’s about activists and companies, and trying to change the behavior of companies, typically because of their reinvestment histories.”
Thanks for reading.