“I like to invest in companies that are so simple to run, that even an idiot can run it, because sooner or later one will.” – Warren Buffett
A company is ultimately only as strong as the people who run it. Warren Buffett likes to say that when he’s evaluating companies, he looks for such a strong competitive advantage that even an idiot could manage it, because eventually, one will. While this is a comical idea and a good margin of safety to consider, I get the feeling that Buffett doesn’t suffer fools. In fact, Buffett is particularly notable for the way he expertly manages the CEOs that make up the Berkshire Hathaway conglomerate. In this article, we’re going to explore some of those trademark techniques, as well as some of the other qualities top value investors look for in management.
Look for the Artists
Canadian Value Investor François Rochon, is the Portfolio Manager of Giverny Capital. The name, “Giverny” is an homage to the hometown of one of François’ favorite artists, Claude Monet. Great art and the process of art collection has had a strong influence on François’ investing career. For example, the way he seeks great managers is very similar to the way he looks for talented contemporary artists.
And you want to look for managers that are in some way artists. They are creating a company, they are creating their market. They are creating a culture. So you want to look for same qualities that you look in art. And if you find managers that, just from the sound of the way they talk, they follow the crowd, they speak the wise word that hear all the time, well that’s very nice if they’ve got a good education and everything but they’re not creative.
It’s true. Some CEOs spend the entirety of their careers playing catchup to their competitor’s market share, while other CEOs spend their days building new markets. Creativity and conviction in that unrealized future are signs of strong leaders. One obvious example of a CEO like this is the late Steve Jobs of Apple, Inc. who created new markets for iPods, iPhones, and iPads. A name François throws out is Disney’s Bob Iger. Since taking over the CEO position at Disney in 2005, the stock price has increased approximately 400%.
What I want is someone that I feel has independence of thoughts, sees a new way of doing business, wants to build something for the very long run and wants to build it according to his vision of things. And the only way to identify it is to have judgment and ideally you’ve seen enough of good managers to recognize what makes a good manager. And it’s like art. If you look at lots of art, everyday you go to museums and galleries and you look at all those contemporary shows, after a while you’ll find artists that really are kind of defining new standards and creativity and those that are just doing the same as before, just with a different touch.
CEOs Who Are in it for the Long Term
It’s probably a good thing when investors and CEOs align in their thinking. Especially in the case of value investors, this means thinking like business owners who are committed to the company for the long run. Michael Shearn is the Managing Partner of the Compound Money Fund, out of Austin, TX. Finding CEOs who actively build long-term value for the business is one of Michael’s specialties.
In the interview above, Michael throws out names of two CEOs who fit this exact criteria: Marcus Ryu, of Guidewire and Robert Keane at Vistaprint. Particularly, in the case of Keane, Michael says that, “A CEO who’s willing to abandon a very profitable short-term business practice for one that builds more value over the long term is always a great sign.”
If this description brings any other names to mind, it certainly describes Amazon’s CEO, Jeff Bezos. Since its inception, Bezos has notoriously invested nearly all of Amazon’s profits back into the growth of his business, operating at just over break even. While some analysts and investors criticize this strategy, Bezos is convicted in the long-term prospects of Amazon, and the potential earning power of laying down the best infrastructure possible. While time will ultimately tell if Bezos’ investment pays off, all signs seem to suggest his strategy is working.
Invest and Leave Them Alone
This is a technique straight out of Buffett’s playbook. Berkshire Hathaway owns around 60 business units, each with their own CEOs. And, unlike many activist investors who buy up shares and try to take the company in a new direction, Warren buys businesses because the CEOs are already doing the right thing. When Berkshire takes control, Buffett just hands the CEO his personal phone number, and tells them to call him any time they have questions. Other than that, they’re free to continue business as usual.
This probably goes back to the idea of buying quality businesses in the first place. One of Buffett’s four criteria for picking companies, as noted in the 1978 Berkshire Letter to Shareholders, is to invest in businesses “operated by honest and competent people.” Tom Murphy, is one of the CEOs mentioned in William Thorndike Jr.’s book, The Outsiders. Along with receiving praise from Buffett, Murphy is credited with influencing Buffett’s hands off approach:
“We are both proponents of a decentralized management philosophy: of hiring key people carefully; of pushing decisions down the organization; and of setting overall principles and resisting temptation to be involved with details. In other words, don’t hire a dog and try to do the barking.”
CEOs have a huge impact on the potential success of a company. Under the wrong management, even good businesses can slowly become rotten. Which is why, value investors like Warren Buffett, François Rochon, and Michael Shearn, among others pay special attention to exceptional leadership.
At the end of the day, leaders must think like great artists, ahead of the current trends, and believing in the future. They should also think like owners of the business by refusing to cannibalize the long-term prospects for short-term profits. Finally, great CEOs should also be skilled allocators of time, money, and resources. In the wise words of Glenn Surowiec, “A good CEO would make a great money manager if they’d have chosen a different career.”
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike Jr.
Full Conversation with François Rochon