On the Hunt for Great Companies (eBook)

An Investor's Guide to Evaluating Business Quality and Durability

Simon Kold (Autor)

eBook Download: EPUB

2024
440 Seiten
Wiley (Verlag)
978-1-394-28575-4 (ISBN)

Infos

Essential investment guide to perform sophisticated practical analysis on long-term business quality

An unparalleled practical training tool for investment analysis, On the Hunt for Great Companies: An Investor's Guide to Evaluating Business Quality and Durability helps readers move beyond using rules of thumb for companies or investment hypotheses based on broad-level pattern recognition and instead start using a more thorough approach through sophisticated empirical analysis. Readers will learn how to assess all the essential traits of a good business, including passionate management, staying power, abnormal reinvestment options, low dependency risk, and to identify emerging quality. 

This book is supported by a wealth of real-world examples, both contemporary and historical, detailed original illustrations, and true business stories and anecdotes from investor and former comedian Simon Kold. In this book, readers will learn about:

• Elements of intense and durable competitive advantage such as scale economies, switching costs, network effects, brands, proprietary resources, and modest value extraction
• Methods to formulate falsifiable test statements and empirically test those predictions, rather than relying on heuristics or box-checking
• Incorporates memorable investment advice through Kold's trademark humorous style

Detailed, sophisticated, and highly actionable, On the Hunt for Great Companies is an essential for professional investors of all sizes, in all industries, in both public and private markets.

SIMON KOLD is the founder of Kold Investments, a Copenhagen-based investment firm. He was previously at Novo Holdings, one of the world's largest investment organizations, with assets worth ?149 billion. He is one of the few fund managers who also has a degree in theology and had a stint in stand-up comedy.

Textauszug

Chapter 1
Passion

Control of companies is placed with people spanning a panoply of passion:

• At one end are people for whom the job is a stepping-stone, something they do for a few years until a bigger company calls. They have a history of hopping from one job to another, spanning several sectors. They focus on meeting quarterly targets and maximizing results within a 2- to 4-year time frame and are not accountable for the aftermath.
• At the other end are people for whom the firm is their life’s work. They are emotionally enthralled by the enterprise. When the business suffers, they care for it as parents would for a sick child. They feel responsible to all stakeholders and seek a maximum in a further future.

Expecting these two types of people to run a company the same way is like asking the sun to shine at night. But why does such passion matter for investors? Intense emotional investment is indispensable for creating exceptional outcomes in all fields of human endeavor. As Steve Jobs once said, “The only way to do great work is to love what you do.” An absence of passion results in complacency, a focus on short-term profits at the expense of long-term value per share, a mindless unwillingness to deviate from peers, or an excessive concentration on a single stakeholder group at the expense of others. To achieve exceptional long-term outcomes, a firm must simultaneously delight its customers, offer superior products, maintain satisfied suppliers, nurture a loyal and contented workforce, and operate within societal norms. A passionate management and workforce is a necessary ingredient to achieve all of these at the same time. It is easy to boost profits in a 2- to 3-year time frame by cutting employee benefits, pressuring suppliers, reducing service quality, or hiking prices. While such measures can enhance short-term profits, they erode long-term value per share.

The longer the investment time horizon, the more management decisions affect the outcome. Over longer periods, the decisions made significantly shape business performance per share. Just as passion drives exceptional results in arts, sports, and science, it also propels success in business. Managers who lack passion also lack the recipe for exceptional results.

Galileo Galilei, famous for his contributions to astronomy and the laws of motion, represents the ultimate level of exceptional results while embodying characteristics quite opposite to those of most modern corporate managers. These characteristics include perseverance, internal motivation, and independence from prevailing norms. Galilei did not engage in a conflict with the Catholic Church over the heliocentric model because it was beneficial to his short-term incentive program or because it was a “hot trend” at the time. He did it because he was obsessed with the truth and with his scientific work. He was so extremely perseverant in supporting the heliocentric model proposed by Copernicus that he was ultimately sentenced by the Inquisition to spend the rest of his life under house arrest. To the contrary, most managers prioritize short-term gains and align their actions with current trends or the prevailing corporate culture. Unlike Galilei, whose dedication to scientific truth led him to challenge established norms, most in the corporate community shy away from such risks. They focus on strategies that promise immediate returns and favor adherence to established methodologies. This contrast highlights a fundamental difference in approach: whereas Galilei was driven by his devotion to his beliefs and the pursuit of knowledge, most managers are guided by trends, near-term targets, and the immediate expectations of analysts, media, and shareholders.

Figure 1.1 Effects of passion and its correlations.

Source: Simon Kold.

1.1 Perseverance and Internal Motivations

Perseverance through setbacks is a manifestation of passion. An anecdote featuring Jensen Huang of NVIDIA during the company’s existential crisis in 1997 showcases attributes such as resilience, determination, adaptability, and boundless optimism. The company prepared to release the RIVA 128, one of the first consumer graphical processing units to integrate 3D acceleration, essential for rendering 3D graphics on computers. However, the company was running low on cash, with only enough to sustain operations for about 6 months. At this point, most people would have given up. But Jensen and his team decided to take an unconventional and risky decision.

My will to survive exceeds almost everybody else’s will to kill me.

—Jensen Huang (NVIDIA), 2003 presentation at Stanford eCorner.1

Instead of following the conventional course of receiving physical prototypes for testing, NVIDIA chose to conduct the entire testing in simulation, then committed the rest of the company’s financial resources to commissioning the production of the RIVA 128 without ever inspecting a physical prototype. NVIDIA bet the house, the silicon ranch, and the transistor tent on a product they had never tested in the real world. Not surprisingly, the product did not work as intended. The RIVA 128 supported only 8 of the 38 so-called DirectX image blending modes for which it had been designed. The team attempted to convince software developers to use only those eight supported modes in computer games and software. Despite the setbacks, the product surprisingly achieved commercial success. NVIDIA was lucky that the product performance, well, worked, despite the lack of prototype testing, and entered the market just as personal computer gaming began to bloom. Although luck contributed to the outcome, without passion, to bankruptcy, the company would have succumb. Still led by Jensen Huang, NVIDIA today is one of the world’s most valuable companies.

Figure 1.2 Jensen Huang, the passionate CEO of NVIDIA, has a tattoo of his company’s logo on his shoulder.

Source: Reuters/Robert Galbraith

In a passage from her 1985 autobiography, the then-79-year-old founder of her self-named cosmetics firm, Estée Lauder, answered her own rhetorical question, about what is the most important determinant of business success. According to Lauder, who herself was an exceptionally passionate businesswoman, the single most important trait is persistence.

What makes a successful businesswoman? Is it talent? Well, perhaps, although I’ve known many enormously successful people who were not gifted in any outstanding way, not blessed with a particular talent. Is it then intelligence? Certainly, intelligence helps, but it’s not necessarily education or the kind of intellectual reasoning needed to graduate from the Wharton School of Business that are essential. How many of your grandfathers came here from one or another “old country” and made a mark in America without the language, money or contacts? What, then, is the mystical ingredient? It’s persistence. It’s that certain little spirit that compels you to stick it out just when you’re at your most tired. It’s that quality that forces you to persevere, find the route around the stone wall. It’s the immovable stubbornness that will not allow you to cave in when everyone says give up.

—Estée Lauder in Estée: A Success Story.2

Investors often focus on figuring out whether executives exhibit the ideal incentive structure rather than investigating the intensity of their passion. While it’s vital to weigh financial incentives, the power of passion as a motivator should not be overlooked. Exemplary executives equate their personal success with the continued prosperity of the company and not solely the lining of their own pockets.

The same year as the launch of the RIVA 128, following Apple’s acquisition of NeXT, Steve Jobs returned to the firm he had cofounded and from which he had been fired a decade earlier. Jobs likely rejoined Apple more out of an emotional opportunity to revive his struggling brainchild than out of a financial motive. Ironically, it ended up also paying off financially, as Jobs successfully revived Apple and made it one of the world’s most successful companies ever.

Howard Schultz’s return as Starbucks’ CEO is another well-known anecdote. Schultz joined Starbucks in 1982 when it was a small coffee bean retailer in Seattle. He acquired the business in 1987 and rapidly expanded it until he stepped down as chief executive officer (CEO) in 2000, though he remained as chairman. Schultz returned as CEO in January 2008, during a challenging period for Starbucks, characterized by overexpansion, declining sales, and a diluted brand experience. Similarly, Morris Chang, the iconic founder of TSMC, made a comparable comeback. After retiring as CEO in 2005, Chang resumed his role in 2009 amidst the global economic downturn and production issues.

 Let’s Sniff Around

Analyze perseverance and internal motivation:

• Study responses to prior crises: history of confronting difficult challenges directly and persistence in the face of setbacks.
• Evaluate product enthusiasm, detailed product knowledge, and personal product use.
• Review interviews, conversations, and media appearances to decide whether management identifies personal success with the success of the business.
• Assess the management’s lifestyle and appearance. A modest lifestyle can...

Produkt-Details

• Erscheint lt. Verlag: 22.10.2024
• Sprache: englisch
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management
• Schlagworte: analyze business investment • business characteristics • business quality • Business theory • investment guide • investment indicators • investment research • Investment risk • Investment Strategy • investment theory • Stock Market
• ISBN-10: 1-394-28575-2 / 1394285752
• ISBN-13: 978-1-394-28575-4 / 9781394285754