Mr. Taleb likes owner-operators

[giofranchi]

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives – something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors. I am concerned here with managers of businesses that are not owner-operated.

- Mr. Taleb, "Antifragile"

 

And he identifies the exact opposite of owner-operators in the banking industry:

 

Banks have lost more than they ever made in their history, with their managers being paid billions in compensation – taxpayers take the downside, bankers get the upside. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rosé de Provence brand of summer wine on their yachts in St. Tropez.

- Mr. Taleb, "Antifragile"

 

I guess that’s really my problem with the kind of BAC. I am interested only in owner-operators, and it is extremely hard for me to spend much time studying something that is as far from an owner-operator as it could be. In the short run (2012 and, most probably, 2013 too) I surely let some good opportunities go by, but in the long run I am confident my predilection for owner-operators will serve me well.

 

Here his another thought: of course, if you jump in and out of stocks, buying when they are extremely cheap and selling as soon as they approach your estimation of fair value, the banking industry should be a sort of amusement park for grown-ups! Especially big banks: in fact, you can predict with much confidence that once in a while they will go bust, so no reason at all to hold onto them when they approach fair value, and then they will be bailed out and won't be allowed to fail, so no real risk to buy them when they become extremely cheap. A sort of free lunch, isn’t it?!  ;)

 

giofranchi

 

[twacowfca]

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives – something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors. I am concerned here with managers of businesses that are not owner-operated.

- Mr. Taleb, "Antifragile"

 

And he identifies the exact opposite of owner-operators in the banking industry:

 

Banks have lost more than they ever made in their history, with their managers being paid billions in compensation – taxpayers take the downside, bankers get the upside. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rosé de Provence brand of summer wine on their yachts in St. Tropez.

- Mr. Taleb, "Antifragile"

 

I guess that’s really my problem with the kind of BAC. I am interested only in owner-operators, and it is extremely hard for me to spend much time studying something that is as far from an owner-operator as it could be. In the short run (2012 and, most probably, 2013 too) I surely let some good opportunities go by, but in the long run I am confident my predilection for owner-operators will serve me well.

 

Here his another thought: of course, if you jump in and out of stocks, buying when they are extremely cheap and selling as soon as they approach your estimation of fair value, the banking industry should be a sort of amusement park for grown-ups! Especially big banks: in fact, you can predict with much confidence that once in a while they will go bust, so no reason at all to hold onto them when they approach fair value, and then they will be bailed out and won't be allowed to fail, so no real risk to buy them when they become extremely cheap. A sort of free lunch, isn’t it?!  ;)

 

giofranchi

 

They are not better businesses through the credit cycle.  In fact, they are horrible, almost as bad as airlines, except that there may be a pittance left for a few TBTF banks at the bottom of the cycle.  However, as with Lord Keynes "credit cycle investing" before he became a value investor, it is possible to make money on them by getting in at the bottom of the cycle and getting out at the top. 

 

The institutional imperative makes it difficult for all but a few banks, usually owner operated,  to resist the allure of easy profits when there is a boom.  Cut rate loans or loans that are not well secured made by banks that are not conservative puts pressure on sound banks.  Then, better small banks are acquired by publicly traded banks that show good profits when times are good.  It's like Gresham's Law: bad banks drive out good. 

[frith2012]

It'd be interesting to put together a list of owner operators, similar to the good companies list from a few days ago.  Murray Stahl's writing it probably a good place to start but I'd throw in a couple more: Stryker, CR Bard, Rollins, Walmart.

[Guest hellsten]

It'd be interesting to put together a list of owner operators, similar to the good companies list from a few days ago.  Murray Stahl's writing it probably a good place to start but I'd throw in a couple more: Stryker, CR Bard, Rollins, Walmart.

 

"Let the wealthy work for you":

http://www.wealth-index.com/

 

http://www.wealth-index.com/wp-content/uploads/2012/10/Horizon-Kinetics-Wealth-Indexes-At-A-Glance.pdf

[giofranchi]

Thank you hellsten,

instead of an index approach, I also pay attention to the "nature" of a business. Specifically, I don’t like very fast changing businesses. I try to stick with businesses that will continue to stay almost the same for as long as possible. If I can find them, I am almost sure my return will depend only on the capital allocation abilities of “the wealthy”, and “the wealthy” are the best capital allocators out there (that’s the reason why they are “the wealthy”!!  ;) ). I stick with finance (insurance, real estate), with entertainment (I just don’t see entertainment go out of fashion any time soon!), with energy and infrastructure, and with the fast-food business. Vice versa, I tend to stay away from technology, retail, pharmaceuticals, fashion, etc.

 

giofranchi

[onyx1]

It'd be interesting to put together a list of owner operators, similar to the good companies list from a few days ago.  Murray Stahl's writing it probably a good place to start but I'd throw in a couple more: Stryker, CR Bard, Rollins, Walmart.

 

From a screen run last week for large insider ownership:

MANT, TTEC, NWLI, NPK, BTH, SYX, BBGI, ARDNA, UHAL

[Guest hellsten]

Thank you hellsten,

instead of an index approach, I also pay attention to the "nature" of a business. Specifically, I don’t like very fast changing businesses. I try to stick with businesses that will continue to stay almost the same for as long as possible. If I can find them, I am almost sure my return will depend only on the capital allocation abilities of “the wealthy”, and “the wealthy” are the best capital allocators out there (that’s the reason why they are “the wealthy”!!  ;) ). I stick with finance (insurance, real estate), with entertainment (I just don’t see entertainment go out of fashion any time soon!), with energy and infrastructure, and with the fast-food business. Vice versa, I tend to stay away from technology, retail, pharmaceuticals, fashion, etc.

 

giofranchi

 

Yes, I would use the Wealth Index from Horizon Kinetics as a basis for further research. The list includes names I know (Dell, Liberty Ventures, WR Berkley, Autozone, Sears, L, LUK, DISH, etc). It also includes companies that I should probably look at in more detail. For example, the 10-year charts for Ocwen and Altisource look interesting :)

http://www.google.com/finance?q=ocn

http://www.google.com/finance?q=asps

 

The list includes many smaller or mid-sized companies that could have lots of room to grow.

[giofranchi]

The list includes many smaller or mid-sized companies that could have lots of room to grow.

 

Yes, that’s another thing I look at: I generally don’t like companies that are already too big, because to grow something to the sky might be challenging also for the shrewdest of capital allocators. I pay a lot of attention to the age of “the wealthy”. I don’t want them to be too young, and therefore unproven, but I also don’t want them to be too old, and therefore most probably unable to compound capital for many years to come. Mr. Charles Ergen is exactly the kind of outstanding manager I look to partner with: at 59, he has already proven himself many times, but still might enjoy a two decades horizon to make his firm’s capital compound.

If you filter by the “nature” of the business, by its size, and by the age of its major owner / manager, you shrink the number of companies to concentrate on very much. twacowfca, for instance, shrank that number to only 3 companies!!  ;)

 

giofranchi

[Palantir]

Dell is run by an owner-operator as was Yahoo....as is Kingfisher in India. MSFT has been run by owner operators and they havent moved out of 24-30 trading range in ten years. All I can think of is that owner-operated companies will tend to be more conservative and fixed in their thinking. Furthermore, they may not be willing to pursue all capital allocation decisions equally - for example hesitant to pay dividends because their owners will get a huge tax hit.

 

Owner-operators can be good, but you are also subject to their whims and their egos, and the fact that they might not always be right. Personally, I think of owner operated as a neutral characteristic....but I could be totally mistaken.

[Palantir]

In my opinion, the real problem with banks, and something I don't believe Taleb quite addressed, is that their employees are the primary value creators. This is not the case with say Coca Cola or Google or Nike, where the overall system is what creates a profit, and you can have different employees and it will still be operationally sound. A bank on the other hand, especially an investment bank, the revenue is dependent upon star employees, and if they leave, the firm will be badly hit.

 

In a sense, an investment bank is more like a law firm or a medical clinic or a tutoring service (or even a brothel!)- revenue drivers are a set of skilled professionals who provide a commoditized service, and are housed inside that institution, and if these professionals can do better on their own, they will do so. This is not the case with JNJ or HP, where the product is a differentiated service resulting from the firm's institutional knowledge.

[giofranchi]

Dell is run by an owner-operator as was Yahoo....as is Kingfisher in India. MSFT has been run by owner operators and they havent moved out of 24-30 trading range in ten years. All I can think of is that owner-operated companies will tend to be more conservative and fixed in their thinking. Furthermore, they may not be willing to pursue all capital allocation decisions equally - for example hesitant to pay dividends because their owners will get a huge tax hit.

 

Owner-operators can be good, but you are also subject to their whims and their egos, and the fact that they might not always be right. Personally, I think of owner operated as a neutral characteristic....but I could be totally mistaken.

 

Dell and Yahoo are both in too fast changing industries. Even the best manager can get it wrong in the PC business or in the online search engine business. That’s why I tend to stay away from them, even if they are owner-operators. Microsoft, on the other hand, is an owner-operator no more. At least, not by the outstanding manager who built it from scratch. And that’s what counts: accept no substitute for it!  ;)

 

giofranchi

[Palantir]

I would disagree with your comment on Microsoft, Steve Ballmer is a major owner, and very much did play a crucial role in building Microsoft, furthermore BillG does wield considerable power given his stake and his role as Chairman, so he is still ultimately responsible for what goes on there.

 

Furthermore, even in non "fast changing" industries, there is always the risk of empire building, poor strategic decisions (that no one can question), and ego-fuelled misadventures, along with poor capital allocation.

[giofranchi]

I would disagree with your comment on Microsoft, Steve Ballmer is a major owner, and very much did play a crucial role in building Microsoft, furthermore BillG does wield considerable power given his stake and his role as Chairman, so he is still ultimately responsible for what goes on there.

 

Furthermore, even in non "fast changing" industries, there is always the risk of empire building, poor strategic decisions (that no one can question), and ego-fuelled misadventures, along with poor capital allocation.

 

Well, my idea of an owner-operator follows: a person who is a real workaholic, a person who thinks only about his firm 14 hours a day, 7 days a week, and derives immense pleasure from doing so. I don’t think Mr. Gates is that person anymore.

I don’t know Mr. Ballmer well enough to judge if he resembles my description of an owner-operator. Even if he did, I would stay away from MSFT: technology, in my opinion, is fraught with too many dangers, and I just don’t see why I should run those risks.

 

giofranchi

[netnet]

Palantir,

 

Might I suggest that just because it is run by an owner-operator does not mean it is a good business or that the owner-operator is any good.

 

You probably do not want to invest in a corner liquor store run by a corrupt alcoholic who is drinking all of the (other) owners profits!

 

Microsoft had a hell of a run from the 80's to 2000, but tech evolves and a 'lock' on the Wintel market, won't save you in mobile or search.

 

 

[augustabound]

It'd be interesting to put together a list of owner operators, similar to the good companies list from a few days ago.  Murray Stahl's writing it probably a good place to start but I'd throw in a couple more: Stryker, CR Bard, Rollins, Walmart.

 

There was a good thread on younger owner managers last year here.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/who-are-the-owner-managers-to-own-for-the-next-20-years

 

We could expand on that list perhaps.

 

[constructive]

Anyone follow Universal Insurance Holdings (UVE), an equity-heavy P&C insurer concentrated in Florida? The CEO and COO are in their 40s and own 34% of the company.

 

Yoshikazu Tanaka owns around 30% of GREE (3632.JP) and is a self made billionaire at age 35. I think I'd rather invest alongside him than Zuckerberg.

[Sportgamma]

Anyone follow Universal Insurance Holdings (UVE), an equity-heavy P&C insurer concentrated in Florida? The CEO and COO are in their 40s and own 34% of the company.

 

Yoshikazu Tanaka owns around 30% of GREE (3632.JP) and is a self made billionaire at age 35. I think I'd rather invest alongside him than Zuckerberg.

 

I had some UVE for a while, but it didn't but found that holding it was causing to much discomfort for me. Their risk is very concentrated (or was...think they expanded their operations to other state(s)).

[ERICOPOLY]

I guess that’s really my problem with the kind of BAC. I am interested only in owner-operators, and it is extremely hard for me to spend much time studying something that is as far from an owner-operator as it could be. In the short run (2012 and, most probably, 2013 too) I surely let some good opportunities go by, but in the long run I am confident my predilection for owner-operators will serve me well.

 

I never took you for a Mafioso  ;)

 

You don't like blood on your hands, so your hired gun (FFH) invests in such banks (WFC -- a non-owner operator bank) on your behalf. 

 

You have no direct knowledge of any such crimes.

[ericd1]

Anyone follow Universal Insurance Holdings (UVE), an equity-heavy P&C insurer concentrated in Florida? The CEO and COO are in their 40s and own 34% of the company.

 

Yoshikazu Tanaka owns around 30% of GREE (3632.JP) and is a self made billionaire at age 35. I think I'd rather invest alongside him than Zuckerberg.

 

I had some UVE for a while, but it didn't but found that holding it was causing to much discomfort for me. Their risk is very concentrated (or was...think they expanded their operations to other state(s)).

 

I held UVE a few years ago too. Haven't looked at it for awhile. The growth was there and decent dividends, but the earnings were very lumpy resulting in that uncomfortable feeling!!!  Perhaps time to revisit. 

 

 

[giofranchi]

I guess that’s really my problem with the kind of BAC. I am interested only in owner-operators, and it is extremely hard for me to spend much time studying something that is as far from an owner-operator as it could be. In the short run (2012 and, most probably, 2013 too) I surely let some good opportunities go by, but in the long run I am confident my predilection for owner-operators will serve me well.

 

I never took you for a Mafioso  ;)

 

You don't like blood on your hands, so your hired gun (FFH) invests in such banks (WFC -- a non-owner operator bank) on your behalf. 

 

You have no direct knowledge of any such crimes.

 

Hi Eric,

I was the first to say that big banks might very well be an amusement park for grown-ups, or a sort of free lunch! And, if Mr. Watsa likes to play that game, that’s perfectly fine with me! It is also the game you are now playing with great success!

It just isn’t MY game, or better, it isn’t what I enjoy to spend my time doing.

My game, instead, is:

1) Extract as much free cash as possible from the businesses I manage,

2) Use it to partner with outstanding managers who own outstanding businesses, always paying great attention to price,

3) Trust them and let them do what they do best.

Of course, my game might be less profitable than yours. But, when you get to be financially independent, I think it is much more important to enjoy what you are doing than to add one or even two zeros to you bank account!  :)

 

giofranchi

[Sportgamma]

Anyone follow Universal Insurance Holdings (UVE), an equity-heavy P&C insurer concentrated in Florida? The CEO and COO are in their 40s and own 34% of the company.

 

Yoshikazu Tanaka owns around 30% of GREE (3632.JP) and is a self made billionaire at age 35. I think I'd rather invest alongside him than Zuckerberg.

 

I had some UVE for a while, but it didn't but found that holding it was causing to much discomfort for me. Their risk is very concentrated (or was...think they expanded their operations to other state(s)).

 

I held UVE a few years ago too. Haven't looked at it for awhile. The growth was there and decent dividends, but the earnings were very lumpy resulting in that uncomfortable feeling!!!  Perhaps time to revisit.

 

And then couple that with some history of under reserving...

[WhoIsWarren]

Gio thanks for posting these quotes -- I’m sure I’ll be using them again somewhere.  The idea of siding up with owner-operators really appeals to me, a powerful concept that I only begun to fully appreciate in the last couple of years.  Even in those businesses that 'your idiot uncle could run', agent managements can do a tremendous amount of damage due to goals and aims not being aligned with shareholders.

 

Hellsten thanks for posting the wealth-index material, I hadn't seen it before and I certainly think it’s a good initial screen for looking at good owner-operators in good industries.

 

Funny though, I sent the wealth-index website around to some colleagues, thinking they might find it useful, if not interesting.  One guy replied (tongue-in-cheek) that for choice he would short these wealth indices!  Why is it inevitable that the culture these men built over a career will continue to drive outperformance when scale, mortality and succession all conspire against them?  Warren Buffett, Carlos Slim, John Malone, Amancio Ortega, Paul Desmarais, Sheldon Aldelson etc. are all getting on in years and it is debatable whether their drive and culture will survive the transition to the next generation.  Moreover he said, all of these guys, paraphrasing an argument made about Steve Jobs & Edwin Land of Polaroid, "shared a creative gift that gave the world products it had to have. Call it genius or call it magic. You can't replace that."

I still don't fully agree with him, but there’s some truth in his argument.  Interesting.

 

Ericopoly, like Gio, I also am invested in Fairfax.  To be honest, I don't really like that Watsa has invested in WFC, but context is needed -- it's small (around $60m).  If it goes to zero Fairfax will be fine.  Meanwhile I’m as confident as I can be that Watsa is smart, motivated and will always do his best to grow the intrinsic value of the company.

 

I'm also in Leucadia, who as you know recently agreed to merge with investment bank Jefferies.  Would I have bought Jefferies stand-alone?  Unlikely.  What gives me a lot of confidence is that Steinberg and Cummings have known and worked with Jefferies management for around a decade.  They’ve been on the board for around 4 or 5 years.  They’ve seen the inside of the bank, like what they see and are prepared to put an enormous chunk of their personal wealth on the line.  Theirs is an insight that is very different from what a OPMI (Outside Passive Minority Interest) sees, which in the case of many banks is a complicated, undecipherable mess.

 

Each to their own, but this is the way I feel best suits my thought process and personality.

[Sportgamma]

If you tried to replicate that exercise, you would look at the S&P 500, look at all the holdings since the day it began in 1957, extract all the positions in which there were owner-operators that you could identify, and then recalculate the S&P as if there never were any owner-operators. In every time period, there would be a different number of owner-operators but, for ease of illustration, let’s just make believe that there were an average of 50 companies of this type. You’d be calculating, on average, the S&P 450 instead of the S&P 500.

 

I absolutely promise you, if you did that calculation, you would never buy the S&P. What I’m telling you is that the bulk of the return of the indices—and not just in the United States, but in all nations, the bulk of the return was earned by these owner-operators.

 

Why am I even studying this? I’m studying it because I have to somehow respond to the idea of indexation in a business sense. There are currents in the marketplace that are overwhelming the efforts of active managers. I began to look at the position of the owner-operators in indices, when they are included in indices, and I learned a very interesting fact, which I’ll share with you.

 

The indices are computed differently than in the past when the market value of a company was compared to that of other companies in the index to determine its weight. It might surprise you to learn that they are now computed using what’s called a float-adjusted mechanism. Let’s define float as the number of shares not owned by the insiders of a company—these are the shares that you could theoretically buy. For the purposes of deciding a company’s weight in a given index— whether it is 1%, 2%, 3%, or another weight—the originators of the index determine the weight by comparing its float to that of the other companies in the index.

 

To illustrate the consequences, let’s take an extreme case. It doesn’t really happen this way in real life; this is merely for illustration. Let’s say that the management members of an imaginary company are buying a lot of the company’s stock with their own money. You, the shareholder, might take comfort in that but, for the purposes of calculating the company’s weight in an index, the float would be diminishing. When the float diminishes, all things being equal (ceteris paribus, as they say in Latin) the company’s weight in the index declines proportionately.

 

Let’s take the reverse. Let’s say the management took all their stock and sold it in the marketplace. You might take umbrage at that as a shareholder. But, from the point of view of the index, all things being equal, the company’s weight in the index goes up.

 

What’s happening in the index? It has developed an algorithm for doing the opposite of what everyone knows is the sensible action to take. The index will buy more of a company’s stock— i.e., it will have a higher weight—when the management sells stock. The more the management sells, the higher the company’s weight, at the margin. All these events happen at the margin. Conversely, the more aggressively the management buys the stock, all things being equal, the lower its weight in the index. It’s actually astonishing. There are many more aspects of indexation that I wish I had time to cover. I could give you a very nice lecture about indexation, but I’m covering only one feature, because it’s relevant to what we’re talking about here.

 

While studying the many facets of indexation, it occurred to me that one could create investment products that use the opposite strategy of the float-adjusted indexation trend. At Horizon Kinetics, we created an index that we call the Wealth Index (Ticker: RCH). It’s comprised of owner-operators; that is, members of the company’s management who have a very substantial portion of their own wealth invested in the company. They have freedom of action by dint of the fact that they own a lot of stock, and they have a great amount of their own capital at risk.

 

- Murray Stahl

[giofranchi]

Funny though, I sent the wealth-index website around to some colleagues, thinking they might find it useful, if not interesting.  One guy replied (tongue-in-cheek) that for choice he would short these wealth indices!  Why is it inevitable that the culture these men built over a career will continue to drive outperformance when scale, mortality and succession all conspire against them?  Warren Buffett, Carlos Slim, John Malone, Amancio Ortega, Paul Desmarais, Sheldon Aldelson etc. are all getting on in years and it is debatable whether their drive and culture will survive the transition to the next generation.  Moreover he said, all of these guys, paraphrasing an argument made about Steve Jobs & Edwin Land of Polaroid, "shared a creative gift that gave the world products it had to have. Call it genius or call it magic. You can't replace that."

I still don't fully agree with him, but there’s some truth in his argument.  Interesting.

 

WhoIsWarren,

thank you very much. You don’t write often, but anytime you post something, it is always very interesting, very well thought out, and very well written (which is at least as important as the first two).

I agree with your friend that the list of companies in the wealth-index is just fertile ground for further investigation… well, actually he thinks it is fertile ground to find short candidates, while I think it is fertile ground to find long candidates!  ;D

Anyway, I look for owner-managers in their 40s, 50s, or early 60s, with a time horizon of at least 2 decades left to go on compounding capital. I also look for some sort of value investing philosophy underlying their past deeds, I look for them to have shown strategic thinking and opportunism in the past. I look for someone who is in the business of buying $1 bills for 50 cents, is very good at it (no, an outlier is better!  ;) ), and has the possibility to go on doing that business for the next 20 years. The sole exception in my firm’s portfolio is Mr. Malone, who is in his early 70s. With Liberty Media I was forced to compress my time horizon to “just” 10 years.

Please, ask your friend if he would short the company run by the kind of manager I have just described. I really would like to know his answer, because all I know about business screams to go long, not short!

 

giofranchi

[Sportgamma]

Hey Gio,

 

Here´s another owner-operator who writes all the check herself:

 

Gert Boyle of Columbia Sportswear (also found on the Wealth Index)

 

http://www.youtube.com/watch?v=E4u_VPAMiRY