This post is authored by Henrik Andersson, MOI Global instructor and fund manager at Didner & Gerge. Replay his session at Wide-Moat Investing Summit 2017.
“So what do you believe in?”
The question completely caught me off-guard. After a couple of hour-long seconds, I mumbled something along the lines of “investing in well run companies and keeping my cool when performance is bad”.
“That’s a game-plan, not a belief. The most important thing in this job is to acquire a set of well-founded beliefs, stick by them with real discipline, and hope you are skilled enough to attract both luck and Father God himself [roaring laugh].”
The place is Omaha, Nebraska in May 2011. The previous day I had attended the annual BRK-meeting, but now I stood before the real highlight of this pilgrimage to my alma mater Nebraska: the annual Markel brunch in a non-descript ball room of a downtown Omaha hotel. I made my way into a good seat when I saw Tom Gayner just a few feet away. Gathering my nerve, I had asked for an autograph in the Markel annual report, adding that “I am a shareholder since many years and a great fan of what you and the team have created with Markel and the strong set of beliefs in the ‘Markel Style’ document”.
No time for letting thoughts wander off, I got into my seat again and started listening to the Q&A session. But later that afternoon, I sat down at Starbucks and thought about what Mr. Gayner had said. And the more I thought about it, the more obvious it seemed that he was absolutely right. Since then, coinciding with the launch of D&G Global Equity Fund, we have had John Mellencamp´s line “if you don´t believe in something you will fall for anything” early on in our fund pitch book.
So what do we believe in then?
We believe in sticking to one investment philosophy come high or come low. Especially when low shows up.
We believe in time arbitrage (a.k.a. long-termism) being the only (?) remaining edge to best the market over time. Other ”methods” seem to have lost their luster. Insider information is nowadays illegal and thus somewhat inappropriate. Analytical ability – i.e. to outsmart others given a finite amount of available information – is of course an advantage and great to have a sliver of. But there are always somebody else working harder, more hours and with better tools at their disposal. In an era where hedge funds buy satellite capacity to gain an edge on the number of cars rolling out of Tesla´s Fremont factory, or co-operate with Israeli cyber-outfits to chase sales-leading phrases on the Internet, the competition for information driving short term share prices is just at nose-bleed levels. However, the field is not as crowded in the quest for evaluating information driving long term corporate value creation. We wish someone would have handed us a dollar each time analysts ask about “next quarters ´s margin outlook” in conference calls. But don´t put all the blame on financial analysts, they just reflect the massive emphasis currently on our short-term memories. The average person checks their iPhone every four minutes (true). It is invading all aspects of society. But that is the topic of another column… So: invert, always invert.
We believe in keeping fund costs low. The simplest road there is via minimal portfolio activity.
Hence, we believe in companies we can own for a long time, with clear, outstanding and long-duration reinvestment opportunities at an above average IRR. As a wise man once said: value is not a still picture here and now, it is a movie being played over time.
We believe in strong owners of a business, preferably families , as a guarantor for long-termism in how the company acts. All families are by no means great owners and not all civil servant companies are lesser beings, but the better odds sit with the former. Who washes a rental car before returning it?
We believe in investing in strong corporate cultures. We really believe in this. Perhaps to an even greater extent than Peter Drucker, the man behind “corporate culture eats strategy for breakfast”. A corporate culture that makes a difference start from the top. So, it is imperative that the company has a management with equal measures of ability and integrity who set good habits and a way of behaving.
We believe in the importance of investing in these attributes at a low to reasonable valuation. The quality of the company determines if you are eventually served beef tenderloin or topside chumps, but the starting valuation determines whether you´ll get a small bite or a full plate.
We believe in a high degree of contrarianship. Especially when it comes to perceived competitive edges and their duration (often the market´s lack of belief serves up opportunities).
We believe in focus investing. A too diversified portfolio creates a too diversified mind and breeds activity. Be humble but not insecure.
We believe in being stock picking nerds, answering the question “How will the market do” with a proud “No idea”!
We believe in being rational pessimistic analysts, but loving and caring owners. For the ones wanting to dig deeper on this topic we point you towards the The Stockdale Paradox in Jim Collin´s ”Good To Great”.
We believe in owning companies with proven business models who can last through tough times. Our motto when launching the Global Fund was “kites fly better facing headwinds”.
We believe in sustainability and sustainable business models as our time´s most important investment theme.
We believe in twosomeness in managing the fund. This improves trust in tougher times but prevents egos developing. Shared joy is twice the joy. But only if there are two fund managers.
We believe in the maxim ”investing is simple but not easy”. Hence, we try hard to stick to a simple company analysis framework, use simple investment principles and to ask simple but open-ended questions in meetings with management.
We believe in and accept the ”Pareto principle”. 20% of the holdings will deliver at least 80% of the return.
We believe in cash. The most basic reason is that cash really is like oxygen – nothing you think of daily but the only thing that occupies your mind when it is lacking in supply. The other aspect we like is that it provides us with an offensive mind, looking for new opportunities to invest in. Whether to sell a holding should not be based on a new investment taking place – that decision is to be taken on its own merits, without time-pressure. Cash gives you time to think.
We believe in pride as a success factor. To be proud of the companies we invest in on behalf of our fund investors. Instead of having to mumble and stumble when describing our holdings’ line of business and how they make money.
But more than anything else, we believe in having a belief. A roadmap. An identity. A “Tom Gayner”.