This article by Fang Li is excerpted from a letter of Baleen Capital.

We’ve done a lot and learned a lot over our first five years at Baleen. One of the most important things we’ve learned is to start with the customer.

As investors, we naturally focus on revenue, profits, and returns – ergo “value” investors – but the customers are the ones actually paying the bills, and customers pay based on the value they receive from the company. In other words, customer value (the problems the company solves for them, how much their lives are improved) is what leads to economic value (the revenue, profits, and returns that we care about as investors). We need to understand the customer in order to really understand a company.

Further, when a company goes above and beyond for its customers – delivering “insanely awesome” experiences, products, and service – great things can happen. Examples include internet companies like Amazon, Apple, or Google, as well as offline businesses like Costco, Home Depot, or In-N-Out.

Over the years, we’ve seen this personally. We’ve seen our companies that deliver exceptional customer value keep growing and growing (e.g. Interactive Brokers). We’ve seen how things are harder for companies delivering good but not exceptional customer value (e.g. Atlas Financial). And we’ve seen how companies with mediocre customer value are left at the mercy of their markets (e.g. SMTC).

Through our investments in younger companies, we’ve seen firsthand how customers react to products that really make a difference vs. those that are just nice to have. We’ve seen what happens when management empathizes deeply with their customers and care about their well-being, and the impact that makes. And we’ve seen how changes in customer value affect business health and prospects over time.

We’ve become convinced that delivering outstanding customer value is the first step to building the rare, amazing company that keeps growing and growing, leading to sustainable long-term value creation.

Improving customer value over time is a way to build a business’s moat. Or, as Henry Ford wrote, “A business that makes nothing but money is a poor business… A business absolutely devoted to service will have only one worry about profits: They will be embarrassingly large.”

We’re looking for exceptionalism: companies that make a difference, that make their customers’ lives so much better that they wonder how they lived before it (to paraphrase the CEO of a recent investment).

As for Baleen, in addition to exceptional customer value, we’re also looking for high growth and profitability potential, as well as honest, capable, and customer-centric people. We’re also more and more looking for companies that can be leaders in their market or niche. When combined with a reasonable valuation, we think this is a recipe for long-term investment success. We’re looking for great companies that will grow to be many times bigger with time.

We’ve started paying higher headline prices for some of our investments. As value investors, this makes us shudder a little. However, the math works out that over the long-term, it’s better to buy a growing company at a higher price than a stale company at a cheap price. Our experience backs this up. Our worst mistakes have been buying companies that looked cheap at first but were mediocre underlying businesses. We have yet to regret buying a great company, because even if the stock has dropped, it’s been temporary (and often an opportunity to add).

Price is what you pay, value is what you get. Our goal at Baleen is to maximize long-term value for our investors. Decades, not years.

To sum, I think that we are starting to hit our stride. Of course, whenever I think this, I am reminded of the below whimsical chart that a friend sent me:

You may guess where on the chart we currently stand! Kidding aside, this chart has been surprisingly accurate in describing our experience at Baleen so far (and perhaps any environment that involves learning under uncertainty). My takeaway is that no matter what happens, we need to stay humble and hungry, and keep learning.

With that said, in the years to come, I would be surprised if we waver very far from our recipe of strong customer focus, great products, high profitability, big growth prospects, and good people. It is a good recipe.

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Disclaimer: This letter is for informational purposes only and shall not constitute an offer to sell, nor shall it constitute the solicitation of an offer to buy any interests in Baleen Capital Fund LP (the “Partnership”). Such an offer to sell or solicitation of an offer to buy interests may only be made via a confidential offering memorandum of the Partnership. No person should rely on any information in this letter, but instead should rely exclusively on the confidential offering memorandum in considering whether to invest in the Partnership. This letter is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express written consent of Baleen Capital Management, LLC (“Baleen Capital”). The information contained herein reflects the opinions and projections of Baleen Capital as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Baleen Capital does not represent that any opinion or projection will be realized. The description herein of the approach of Baleen Capital and the targeted characteristics of its strategies and investments is based on current expectations and should not be considered definitive or a guarantee that the approaches, strategies, and investment portfolio will, in fact, possess these characteristics. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable and has been obtained from public sources believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. All trade names, trademarks, and service marks herein are the property of their respective owners who retain all proprietary rights over their use. Positions reflected in this letter do not represent all the positions held, purchased, or sold, and in the aggregate, the information may represent a small percentage of activity of the Partnership. The information presented is intended to provide insight into the noteworthy events, in the sole opinion of Baleen Capital, affecting the Partnership. Performance figures are estimated. Past performance is not indicative of future results. Actual returns may differ from the returns presented. Each limited partner will receive individual returns from the Partnership’s administrator. Reference to an index does not imply that the Partnerships will achieve returns, volatility, or other results similar to the index. The total returns for the index do not reflect the deduction of any fees or expenses which would reduce returns. An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal.