Investing Journal—May, 2022: Constellation Software, Patagonia, The Less I Know, New Trades...
Hello!
Here is the inaugural Investing Journal newsletter. It’s the second part of the OMD Journal series. It took a few months but we’re here. In case you don’t remember, let me remind you…The OMD Journal has evolved to encompass the Powerlifting Journal and Investing Journal. The goal is to reflect on my investing and powerlifting every month and this is the investing component.
What’s investing training? Well, powerlifting training includes training at the gym, the nutrition to fuel me, and recovery to ensure growth. Training for investing is akin to all that I learn and think about. That includes all the trades I don’t make and the decisions I make to not do anything as much as the decisions I make to buy or sell a business.
Investing training will encompass deeper thinking about books and articles I’ve read to the basic fundamental research on companies and listening to management speak and how the many facets of life translate to investing insights for myself. I should reiterate the last part. The training is focused on around becoming the best investor I can be, tailored around my specific goals and how that translates to the philosophy that’s developed over the near decade of learning and practicing.
I don’t intend for anyone to follow what I did to the letter. I don’t think they can or should. But maybe what I write can be one modicum of thinking that otehrs can think to apply to their own development as investors. After all, I think investing, how ever it’s done for each individual, is a basic life skill just as much as powerlifting (i.e. strength training) is.
Patagonia
Last week, I published my book review and notes on Let My People Go Surfing, a book about Patagonia by its Founder, Yvon Chouinard. While the book notes covered the full gambit of takeaways, a few ideas sparked deeper thought to apply through an investing lens.
Mission-driven Companies
This isn’t absolutism. But be on the lookout for businesses that use commerce as a way for effecting the change they want to see in the world. I think there’s something powerful in that focus of seeing business as a means in itself, not the end goal.
It’s about finding leaders who aren’t creating a business as a product to sell off—as is the case with most VC-funded companies today. It’s about finding companies that are “accidentally” private, companies that didn’t IPO with this obsession to sell out stock ASAP. Find leaders who can nurture this mission-driven culture with their own actions and business decisions.
The focus is on leaders who want to build an operating company where the capital can be reinvested to develop the business further so it can impact the world the way it wants in a more positive light—“growth” isn’t an obsession but a necessity and by-product of what they’re trying to achieve. Patagonia let their customers dictate their growth and that allowed it to have sustainable organic growth instead of the business imploding when the growth wasn’t always 40%—that’s a fragile business if it NEEDs high rates of growth at all times. Such requirements on the business will lead to poor unit economics in the name of growth.
All about leading with intrinsic scorecards.
“We never had to make a break from the traditional corporate culture that makes businesses hidebound and inhibits creativity…..we simply made the effort to hold to our own particular tradition.”—Yvon Chouinard
Purpose leads to Weird Cultures
Consider the architectural principle of “Form Follows Function." Not only can this apply to the products but the organizational culture and structure of the business itself. A self-aware business knows why it exists and that function should dictate the form it takes.
By that definition, weird and unusual cultures just appear so because most businesses don’t know why they exist. The few who know their purpose and adhere to it have no choice but to have a form that appears to make sense when the fcuntion is understood.
Self-disruption
Look at companies that evolve without needing to. Does the company make radical changes to its product or organization when no one else is doing it? They’ll be seen as silly or foolish by competitors and pundits. But take note of these first-movers. They aren’t reacting to competitors but operating from an internal compass.
It’s about how a company got to where it is, not where it is. The result isn’t as important as the intention. If the business lucked into success or used questionable means to get to its current position as a market leader, then its long-term future is suspect.
Simplified Businesses
Great companies know the importance of simplifying. They focus on reducing the operations to the simplest form and that can mean decentralizing completely or centralizing the manufacturing so that the magic of the creative or product teams can shine out.
Complexity means the functional needs of the business haven’t been solved. Simple products serve a purpose, have fewer parts, and have fewer headaches in construction
Concentration
Patagonia learned to concentrate its suppliers and dealers/distributors. The idea of concentrating one's supply is often seen as a risk (i.e. avoid single-points of failure, need for backups, diversifying).
But Patagonia makes the argument for the strength of concentration. Concentration leads to stronger relationships with their suppliers as their mutually assured destruction and success allows each other to perform to their best. This alignment is one form of advantage for both companies to not only remain loyal with each other but to actually help each other succeed. For this to work, concentration needs to be a shared value. Not only is each supplier crucial to Patagonia, but Patagonia also makes up 10-20% of the supplier’s sales as a major customer too.