Videos – Seth Klarman On Leadership (#leadership)

The Harvard Business School presents Seth Klarman, founder and president of the Baupost Group

Major take-aways from the interview:

• I don’t think a lot about being a leader; our goal is to be “excellent” and to be proud of what we do
• Main principle for leadership or management-style: “Do unto others…”
• Big believer in leading by example; you can’t expect other people to do things you’re incapable of or unwilling to do yourself
• Sometimes organizations are stuck, people want to do more but they haven’t been asked the right way; don’t overlook the power of re-anchoring via leading by example
• Leadership stems from credibility — credibility stems from being “right” over time and from having knowledge — and from moral values
• Two important moral values for leaders:
  • Football field test; play the game from the center of the field, not near the sidelines, where it is easy to go out of bounds without intending to do so
  • WSJ test; live your life in a way that you would not be embarrassed to have it reported on the front page of the WSJ
• Every quarter, I sit down with the non-investment team members of the firm and explain the current investment strategy; the idea is to help the rest of the firm understand why the firm is doing well or poorly; this creates a culture where everyone is on the same page
• You want to create a culture where everyone is willing to stay late to finish a job if they have to, where people will spend time double-checking for mistakes; people paying attention to detail at every level of the firm is important
• Leaders don’t take credit, they give credit; be quick to give everyone around you credit, it is empowering to those people
• Turnover is a hidden cost of business; it can take so long to get someone up to speed, train them properly, get them to the point that they can contribute; treating employees properly and caring for them is a smart business decision
• If you have someone who is not getting the job done, other people are probably carrying their weight and working extra hard for them, and this isn’t fair; good leaders need to be fair
• Get a good mentor; find a place to work where they care about you, that will nurture you and be interested in your development; if you can find one it sets you on the road to success
• An experience SK feels good about as a leader: the time the leaders of the firm decided to buy the entire firm playoff tickets for the Red Sox game that ended up being a historic game– an order of magnitude different from handing over a $1000 bonus
• A mistake SK made as a leader: tolerating a “difficult person” for far too long, because they were a talented individual; it poisoned the well, tarnished the moral character of the firm, led to some financial losses; focused too much on the short-term pain rather than the long-term benefit of that decision
• A leader is not afraid to fail, is not afraid to be wrong or to lose money in the short-term; a leader always adheres to their principles and standards
• JP Morgan: “I can do the work of a year in 9 months, but not in 12″; it’s important to set time aside to refresh, relax, reflect
• Marathon, not a sprint; don’t focus on the short-term because it causes anxiety and makes you hyperactive in an effort to compensate for short-term poor performance
• You can’t be a leader if you burn out; find balance, seek a variety of interests
• Working a couple years at an intense pace (80hrs+/week) is okay if it’s for a specific purpose; ideally, if you are going to work that hard, do something entrepreneurial, then you’re doing it for yourself and the benefits, if any, accrue to you
• Understand that if you plan to compete by being willing to work 100 hours a week, you’ll be beat by people willing to work 110 hours

Review – Losing My Virginity (Richard Branson Autobiography) (@richardbranson, #entrepreneurship)

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way (buy on Amazon.com)

by Richard Branson, published 2011

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library.

I felt I had to put “(Richard Branson Autobiography)” in the title of this post lest I tittilate my audience too much. No, this is not the story of how I first had intercourse. This is an autobiographical work about parts of Richard Branson’s personal and business life. However, yes, there is quite a bit of sex and other raunchiness to it, as Branson was quite the stallion in his day and seems eager to share that fact with his readers.

Anyway, I read this book over a year ago, took a few notes on it and then never got to actually posting them until now, unfortunately. Spring cleaning in October, as it were. Which I think is appropriate as it seems we won’t be having a winter this year, where I live– so if the seasons want to do whatever they want than I’m going to do whatever I want and go through my old WordPress drafts right now in the middle of the fall.

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Viriginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

• the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
• the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
• the group focused on serving customers but equally saw treating its employees with concern as an important value
• the group consciously created a brand that could be applied to diverse businesses (see point #1)
• the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle first brought to my attention in a book I had reviewed on the blog awhile back, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

Learning From My Mistakes (#success, #failure, #selfimprovement)

In light of my most recent mea culpa, which involved admitting I had made some of the same behavioural errors that I did in a previous trade of identical nature, I find the following song by The Black Keys to carry with it a special kind of bittersweet irony with which I can easily identify at the moment, but hopefully no longer in the future!

(I tremble wondering what my “next girl” will be like, and hope that in my dance with her I avoid stepping on my toes.)

Lyrics:

Well, the look of the cake, it ain’t
It ain’t always the taste
My ex girl, she had such a
Such a beautiful face

I wanted love
But not for myself
But for the girl, so she could
So she could love herself

Oh, my next girl
Will be nothing like my ex girl
I made mistakes back then
I’ll never do it again

Oh, my next girl
She’ll be nothing like my ex girl
It was a painful death
Now, I got a second chance

Oh, her beautiful face and her
And her wicked ways
And I’m praying for
Her beautiful face everyday

All that work, over
Over so much time
If I, if I think too hard
I might lose my mind

Oh, my next girl, yeah
Will be nothing like my ex girl
I made mistakes back then
I’ll never do it again

Yeah, my next girl
She’ll be nothing like my ex girl
That was a painful death and I
I got a second chance, yeah

Next girl, yeah
My next girl

Review – Free Capital (#investing, @guy_thomas, #millionaires)

Free Capital: How 12 Private Investors Made Millions In The Stock Market (buy on Amazon.com)

by Guy Thomas, published 2011

A “valueprax” review always serves two purposes: to inform the reader, and to remind the writer. Find more reviews by visiting the Virtual Library. Please note, I received a copy of this book for review from the publisher, Harriman House, on a complimentary basis.

A methodical review of investors and their strategies

The greatest strength of “Free Capital” is its organization and layout– it’s truly like visiting an expertly-designed website in that the author has organized his investor interviews by four major descriptive categories:

• geographers; top-down investors who begin with a macro thesis then look for companies and financial instruments which will benefit from that trend
• surveyors; bottoms-up investors who start looking at individual companies and then sometimes check to see what kind of macro conditions might affect them
• activists; investors who tend to get personally involved with their investments, taking large stakes and developing a close relationship with management
• eclectics; people who don’t really fit any mold, but might be day-traders, value investors, sometimes activists, etc.

Within each categorical section are profiles of 12 (in total) investors that Guy Thomas spoke with, many of whom are anonymous, most of whom he came into contact with via investor message boards he participates on, and all of whom are UK-based and have managed to grow their capital into millions even over the last decade or less.

Though many were once employed by others and some came from financial backgrounds, all are now independent, full-time investors who live off of their investment returns and it is this kind of self-directed lifestyle and the resources which are needed to finance it that primarily lend themselves to the book’s title.

What’s really great is that in each chapter, Guy Thomas begins with a quick “tearsheet” profile of the investor’s strategy, key phrases, holding period, etc., then neatly organizes the interview material into background on the investor’s life and development as a financial person, outlines their strategy, experiences and any particularly demonstrative coups or failures they’ve enjoyed (or sufferred) and finally and extremely helpfully, summarizes all the material again in a table at the end with the major themes or ideas explored for quick reference.

As if this weren’t enough, Guy Thomas has written a lengthy (and for once, interesting) introduction to the book that serves as a combination summary of the main themes of the book as well as a how-to manual for those looking to get the most out of their reading. Thomas is correct in suggesting that the book can be read all the way through as a complete work, or explored at random based on what, if anything, sounds interesting to the reader.

It’s touches like this that show a thoughtfulness on the part of the author that leave the reader painfully aware of their absence in comparison to many other books in the genre. Frankly, it’d be nice if authors and publishers took Thomas’s lead on this point!

My favorite part: inspiration

I was excited to dig into the book in part because a friend had mentioned it to me and had commented favorably on it. He said a lot of the material covered wouldn’t be original but that I might find it inspirational to read other people’s stories of how they got where they are.

Maybe it’s where I am in my life right now, maybe it’s the subtle suggestion my friend made planted in my mind, or maybe it’s the shining spot for the book but the inspiration was one of the most important things I took away from the book. Some of the profiles were admittedly unhelpful (such as the day-trader, an investment style I can’t see any point in) or just not interesting to me (a few of the investors followed research processes I don’t have the time or motivation to emulate), but there were a couple I identified with, which made me feel empowered and hopeful about myself as I read them.

I particularly liked the two named investors, John Lee (who is a dividend-oriented value investor of sorts) and Peter Gyllenhammar (who bankrupted himself twice before hitting his stride and amassing his current fortune). I believe all of the investors lives and experiences illustrated this point well, but these two in particular were examples of the phrase “Patience is a virtue.” If a man can dust himself off after two bankruptcies and still make something of himself he can probably do just about anything given the time and the patience. Seeing as how I haven’t suffered personal bankruptcy (yet) I felt greatly advantaged to learn from this example of perseverance and triumph over failure.

Wise aphorisms

Another theme oft explored in “Free Capital” is the role simplicity plays in good investing. To that effect, I found a lot of great investing ideas captured in brief, simple aphorisms that made them both easily digestible and sufficiently memorable to make use of them myself in my own deliberations. Some examples include:

• Good investing “requires only a few good decisions” (a helpful reminder given the way many seem to imply that a true investor is marked by the numerousness and hyperactivity of his ideas)
• An activist is an investor who goes looking for trouble
• “Quiet freedom is itself exotic” (in this way, independent investors lead quite adventuresome and even exciting lives!)
• Exposure to some chances can only arise through deliberate and possibly unpopular and eccentric choices
• Investment skill consists in not knowing everything, but in judicious neglect: making wise choices about what to overlook
• Freedom is like income that cannot be taxed
• To make good decisions, you need to look actively for reasons not to buy a company. And then invest only in those where you can live with the reasons
• Time is a limited resource with strongly diminishing returns. The first hour you spend researching a company is much more important than the tenth hour
• If an investment decision requires detailed calculations, you should pass, because it’s probably too close
• The sun shines even on the poor man

Also of note is the author’s book-companion blog, which goes into a bit more detail on some of the investment themes captured in the book and which I’ve found to be a good supplement to the reading seeing that I was still interested to learn more even after I put it down.

Conclusion

“Free Capital” is a unique offering. It has a styling and organization that many books in its genre lack and I hope this effort is continued in any future titles from the author. And it treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.

It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. This probably could be a worthwhile book in itself, as there is a growing literature on “failure studies” and as the first lesson every investor must learn is “don’t lose what you’ve got”, learning of common mistakes to avoid could be helpful. Additionally, as an avid deep value (Benjamin Graham) guy myself, I could’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.

But those are minor quibbles and things that Guy Thomas could easily rectify by simply writing us more great books to read! Overall, “Free Capital” was entertaining, at times enlightening and best of all, extremely gracious with my free time as I read the entire thing in just three or four hours. Given the focus on the value of time in the book, I appreciated the fact that I could digest the meat of the book and walk away with some great insights to help my own investing… and still have time left in the day to get other things done!

How Businesses Grow: “The LEGO Story” (#entrepreneurialism)

I found this video on the Laissez-Faire Books blog after Jeff Tucker posted it recently.

It’s an entertaining and educational video that provides anecdotes about how and why small businesses grow. In the case of LEGO, because they had to– the owner-operator of the company had no golden parachute to fall back on if he failed. This kept him thinking creatively about how to solve the many challenges he and his business faced. It was “find a way” or else he and his children would starve.

It’s a story of entrepreneurialism, the essence of which is experimentation, vision and constant change.

As you watch the video, it’s hard to imagine a story like this being told about anything other than an initially small, local, privately-owned business. It perfectly captures the idea of the “benevolent dictatorship” style of business and capital management. We also get a look at the innovative process that leads to the creation of a whole new industry (or sub-industry, much like the iPhone was an emergent sub-industry within the industry of smartphones).