We are strong proponents of picking an operating system and using it religiously. Establish a true north and incentivize and demand regular accountability. The key to a good map is focus. The cartographer eliminates the unnecessary.
One key element of our playbook is the use of objectives and key results (OKR’s) to establish partnership level, company level and individual level quarterly objectives, and weekly key results. As a diverse, decentralized holdco/investment partnership the use of OKR’s sometimes contrasts with their natural habitat –the hyper growth tech startup. However, we have found the tangible documentation of a few quarterly objectives to aide us in staying on-course with our investment thesis for the company. The emphasis remains on stretching, but not so much that we break proven processes. And, more importantly than in the rapidly changing tech startup, we enjoy the reminder that prevents energy dispersion and builds a cohesive culture around excellence.
One of our business units is a marketable security practice. This business unit appears even further afield from the OKR process than the cash flowing control company, since operating responsibilities are down within the companies we own… most of which don’t even know we are owners. Then, there is the whole leading indicator problem. How do you measure what matters before it is realized? A good OKR process doesn’t point out financial returns directly, but places operating and sales in tension with each other. Or one aspect of operations in tension with the other key aspect of operations. How does one develop OKR’s for a marketable security investment business unit?
First, some background. Our marketable security business unit is a key element of our strategic plan. We hold cash and marketable securities at the Fund level because it helps us negotiate control purchases from a position of strength. If the deal is a good one, we don’t have to fund raise. We have the capital to do what we say we will do. Period. It’s simple and it serves both sellers and our limited partners quite well. These two customers desire us to hold liquidity and deploy it wisely –generating hurdle beating returns in a predictable manner. So, punchline is, we have a key result that includes marketable securities at the highest level of our playbook every quarter… it’s that key.
As a business unit, akin to another control company, we also ask the business unit to develop its own OKR’s for the quarter. Since launch we have had various people involved with me (Daryl) and this process was more fluid and meeting-heavy. For the last 2+ years I’ve been running solo and getting along with myself better. However, Mikel still demands I prepare and update my OKR’s for this business unit. What a great business partner?
I generally set out my big objectives based upon the larger context of the partnership whole. Do we need to stay super liquid? Or might we be able to go into some very illiquid securities? Where should the emphasis be in the next quarter? Year or years? I have to take into consideration our operating cash flow, fund raising and capital gains. It’s a very inexact process where one could wet a finger and hold it to the wind and make some judgement calls. I believe individual business owners are comfortable with this aspect. However, it is very important to start with the highest things first. For us, liquidity is a big deal. We try to slosh back and forth and produce highest after-tax gains in the safest manner possible… regardless of where the deals will come from.
This go-where-the-deals-are generalist approach sometimes leads to confusion and/or lack of focus for many. Our focus is actually insanely tight. Our number one priority is to purchase control of wonderful local businesses, that generate strong cash dividends for decades, and can be held forever. Everything orients around this core objective. We are trying to create a next-best alternative to our LP’s single, private company (and I’m trying to beat their ROIC, MOIC and CAGR to a degree that we can comfortably make up 80% of their net worth after a few decades.) The marketable security business unit is a possible source of deal flow. We can use the old two-strings to the bow approach and simply keep buying shares of discounted businesses until the price corrects or we wind up in control. This method is so simple most people under appreciate it. However, it assumes one is okay being the dog that caught the car. We are okay with it. Our structure and partners not only prefer it, but expect it.
Alas, the above usually requires conviction. If you “catch the car” you are going for a very long ride with that investment. Are you okay with that? And what of the companies that are too large? You cannot take that approach can you? Yes, pretty closely, you can. For the generally attractive investment, you can simply plow in, buying more until the price corrects or you’ve got enough (or run out of cash.) This is the business owner’s way. We go into that business. And we want to pursue it with conviction.
So, back to OKR’s, the number one leading indicator for us, is conviction. Do we have conviction? If we have conviction, we will act. If we act, we will buy. If we buy we will be in this or that business. And if we are in this or that business, at a good price and a good business, we should enjoy a hurdle beating return within a reasonable time frame. So, how then ought we measure conviction? Statistics? Emotion? Yes and Yes. I personally believe it is logical to domesticate one’s emotions rather than remove them. Owning a company is inescapably emotional. Cold, without emotional decision-making is not the objective. You should enjoy owning it because this produces better work. You should love it and sacrifice for it because this produces endurance. And, endurance bears fruit in power-law distributions. Have logic rule the decision, but do not deport the emotion. Conviction captures both. But how does one measure what matters?
For me, I believe there is tension between depth of study and breadth of study. One must go deep and broad. These two dimensions are in conflict everywhere in business. One must stay within their area of competence and go deep, but one must also expand their area over time. Knowledge compounds. Wisdom begets decisive action. And where does wisdom come from? Experience and knowledge. And what is knowledge but learning from other’s experience? How do you get this? In what volume do you get this? How is your judgement changed?
Once again, for me, I obtain knowledge and experience most quickly, at most volume, by reading –and then writing. The old saying about teaching as the best way to learn? What better way to instruct yourself than to write? Re-read your own writing. Form coherent ideas and outline them in logical form. Or, just spew your guts out there in an emotional way. Come back to them later and rethink your journals. Either and both forms ultimately beget conviction. Whether or not the conviction is sound depends upon other factors –which you can improve over time.
So, for my OKR’s for my marketable security business unit, I established some rough mile markers based upon my past performance. I looked back over my journals and discovered I acted wisely in key moments. I bought when prices were attractive, and I bought at size when prices were attractive. I had conviction and truth when others were fearful. This resulted in low risk, high return results for our partners over a period of many years. The decisions were not whimsical or fast. Sometimes the gains came fast. Other times it took years. It never took more than 3 years for the market to eventually, if not permanently agree with my assessment. The decisions were often slow to form but meaningful when secured. They were sometimes enacted very slowly (buying in dribs and drabs), or very fast (scooping up large amounts relative to our net worth in a few days.) The common limitation on intelligent action was the particular companies selected. I could go back and see how I could have or should have bought into a different situation at the moment that I made a good decision here or there. Basically, i picked a good situation but maybe could have picked an even better situation if I had studied in prior. It was worth rubbing my face in the errors of omission. They were knowable, they were just not known. I stayed in my circle of competence, but I could change that circle over time. What happened was, I would pursue with passion what I had studied in depth. There was a direct relationship to the words written about a particular company and the profit obtained from buying into that particular company. The more words the more conviction. The more words the better the decision and the better the result. Plus, there was also strong relationship to companies avoided based also on the words written about the misfits that were oh, so tempting. But, I had formed reasons for avoiding this or that company for logical reasons that fit our larger context. For example, I think about technology quite a bit but I don’t buy them within our marketable security business unit because I understand it well enough to know that huge changes can happen very fast. This is a good thing for some but hard for us within LEV because I don’t want huge operational changes from my marketable security business. I’d prefer that come from my private company, minority startup investments where I can simply hold them at cost and ignore/hide the price fluctuations from my partners until a realization event.
And, since launch, I’ve made only one really significant blunder in this marketable security business unit (i’ve lost money multiple times, but nothing of size and not for stupid reasons like this one.) This blunder was connected to a merger-arb deal where the statistics made it risk-wise but the depth of study was weak. I love stastictics and breezed through it in college. I could literally trade on stats alone and probably be comfortable. But, I don’t think i would be at my best. So, in this case, I was perfectly comfortable with the odds of loss because I was being purely logical. We lost and I was fine. No emotional break down. The apple cart spilled, but I knew it was a risk when we took off down the path toward the merger. The deal could bust and the price would tumble. It tumbled and we got out above what I was statistically expecting in a loss scenario. But, years later, reading back over my writing, I was completely absent of love. I did not emotionally bond with the company. I didn’t really like it. I wasn’t going to be sad because my business partners would have to find new jobs. Nope. I was cold and calculating. And it wasn’t right. It wasn’t my best. I messed up because my conviction was not fully formed. I cannot beat every single other investor if I take this calculating only means of conviction forming. I ought to use my domesticated emotional animal.
I make my biggest and best purchases when I know the company inside and out… even if it’s a dog. I can actually fall in love with an old broken down, fixer-upper. How? Why? Isn’t that sort of perverse? Well, I think what happens is I see through the ugly, muddy parking lot ahead of their annual meeting –of which no one attends– and I see past the crooked executives, and I enjoy visiting with the warmhearted plant manager who, despite being a woman in a sweat-laden welding shop, actually cares deeply about both the people and the productivity of her factory. She gets the men moved around to the highest and best use pretty well. She runs a decent gross profit. She’s just stuck inside a horrible overhead situation without vision. And I see through this and know the types of hiccups of good news that come along within this industry. And I can go into it big, because I know it won’t bust. And when the good news comes along, I can unload my stock to the hopeful and unrealistic dreamer. And I can retain my love for the nucleus that could be unlocked if the knuckleheads at the top would unencumber it. And, I’ll read and visit and write a lot. And I will (and have) profited from these situations.
My OKR’s for the marketable security business unit have changed over time. Today, a steady test for me is my written word count. Once a week, I copy/paste my words journaled into a word counter and post the results to my key results. If I hit 3,500 words written in the last week, I have spent adequate time reading new material and/or thinking deeply about old material. This is the number one, high level gauge for this business unit. This metric dictates whether or not smart things will be done in size when opportunity presents.
I then try to setup objectives around learning an industry or a particular company in great detail. I’m obviously completely maniacal and love to read long form books. I’ve also read every annual letter Buffett has ever written, at BRK and before. But, I didn’t just stop there. I went ahead and read every book he ever referenced in his writing. What this led to what a habit I had developed for reading books that authors reference within their books. And so, I did some more of that from those books. The result, after all of that, is that I have a pretty decent understanding of the big picture moving parts of insurance. This was a bit of a surprise for me. I didn’t set out to learn insurance, but it’s the stuff he teaches, under the surface of value investing –which I burned through in a couple of years. And they interrelate. So now, specifically, I have been reading at least one annual report from every single insurance company that is publicly traded. I have an OKR that tracks my progress. I’m 50% through now, which in OKR lingo is “caution/yellow” and not a complete fail. I’m pretty much loving it so I’m sure I’ll read 100% and then I’ll go back through some favorites and I will read every single annual report for the most likable companies I find. What will the result be?
I will likely wind up buying more of particular company when their prices become attractive.
I’ve done a similar thing in the past with Indiana banks. I just went deep. Persisted. Read. Journaled. Thought. And, what did we do? I found one bank that got priced how I liked and I loaded up when the price got low. Just one. I have a few others that I like but I bought big into a single one. And we owned it until the price got logical again. And then we road it back down. And I bought way more. And we owned it until the price got logical again. And then we sold it. And now I still read what they do every single day news comes out. I still emotionally consider myself in that business. I just don’t have shares right now. Because, frankly, the only way we clear our hurdle in banks, is by purchasing solid look-through earnings at attractive prices. The combination produces our >20% CAGR over 3-5 year periods. And that is why I don’t have to buy control companies. I have alternatives that withstand large amounts of reinvestment.
And, I have conviction in a process that drives more and more conviction around good ideas that are simple to execute at scale.