Six Month Sensations
Thoughts and Reflections
It has been just over six months since I started posting my research here on Substack. I’ve found that writing up your ideas, even if they aren’t something you’re going to invest in, is incredibly helpful. For example, I find myself learning more about the company as I write my analysis on it. I also frequently find some holes / unanswered questions, and go back to researching and trying to find answers. Out of the 7 companies I’ve analyzed so far (which is technically more than 7 since there were some I passed on quickly) I’ve only invested in two (Foot Locker and Kaspi) and currently only hold one (Kaspi). Foot Locker worked out really well.
I decided to start posting right after coming back from Berkshire’s AGM in Nebraska. Talking to people in Omaha like Guy Spier, Jonathan Brandt, Ron Olson, Andrew Coye, and Lawrence Cunningham, I’ve come to understand how much I still don’t know – both in investing and in life. This finding excited me. Six months later and I’m still miles away from these people, but – and this is the important part – I’m a tiny bit closer!
I’ve come to appreciate how hard truly good analysis is. I read maybe 4+ write-ups per day, both through newsletter subscriptions and daily VIC posts, and find that most are good but not at the depth or thoroughness required to reach that “A+” standard. Certainly, nothing I’ve written so far even comes close to that level of analysis and understanding. My “benchmark,” if you will, is the depth exemplified by the likes of Nick Sleep (and yes, certainly Buffett and Munger too). It is the ability to analyze information at a more granular, “secondary” level and then distill it in a childishly simple and succinct manner. Whenever I find an A+ analysis I really like, I put it into a separate folder to come back to. Over what is now several years of research, I think I’ve only found a handful of these.
Most just gloss over the facts and throw in their opinion on where they think the price is headed, accompanied by elaborate DCF and sensitivity models. I often see extrapolation of trends, short-term macro arguments, and an over-reliance on statistics when analyzing a business that, at the end of the day, is simply made up of human beings working towards a certain goal (which, hopefully, they share with one another). Very few try to really understand the company and its culture – its “identity” so to speak. Very few actually peel away the layers of the business and glance into what this unique machine is made up of. Even fewer, in my opinion, think as true business owners. I try to do my best (and still come short), but I also know that this skill cannot be taught – it only comes with experience. I enormously admire people that can think about and analyze companies like genuine business owners – and I’ve actually met some of them over these past few months!
“Thinking like a business owner” has become a sort of cliché as it’s been hammered into value investors by the likes of Buffett for decades. In college, I’m taking a required course called “Sensations” where we talk about the concept of estrangement (coined by Viktor Shkolvsky). Estrangement, in simple terms, is the idea that our perception of the world becomes automatized and dulled by habitualization and that art – in its many forms – can wake us up and force us to truly “see” the world as it is.
“This algebraic way of thinking takes in things by counting and spatializing them; we do not see [the objects] but recognize them by their initial features. A thing passes us as if packaged; we know of its existence by the space it takes up, but we only see its surface … And so this thing we call art exists in order to restore this sensation to life, in order to make us feel things, in order to make a stone stony. The goal of art is to create the sensation of seeing, and not merely recognizing, things. Art is the means to live through the making of a thing; what has been made does not matter in art.” – Viktor Shkolvksy, Art, as Device
“To make a stone stony.” How many of us truly pause and think about the everyday things surrounding us? We look at things, we can identify and describe them, but do we ever truly “see” them? I think estrangement is a fascinating concept, and also one that can be applied to the world of investing. What does it truly mean to think like a business owner? Why do we even think like a business owner – we are one! What does that entail? How should we act? What should we expect? I think these are just some of the questions we have to ask ourselves before beginning to quote the likes of Buffett and Munger.
Our goal when analyzing and thinking about a business should be to avoid this “algebraic way of thinking” where we condense a business into facts and numbers. Instead of simply seeing the company’s “surface,” we should see it for what it is – a business! It’s not just a mechanism for capital appreciation or a machine that spits out numbers quarterly.
I’ve come across investors who don’t know the name of their company’s CEO or can’t describe the culture of the enterprise. They can’t point to what makes the company “good” or why, other than their projections, will the company do well over the long-term. I’m not criticizing their approach or strategy – at the end of the day the risk-adjusted returns are all that matter – but I think there are right and wrong ways of thinking about a business. I personally often catch myself thinking about it in terms of whether the stock will go up or down. I also sometimes feel like I don’t dive deep enough or simply can’t reach the “second-level.” This is all OK – as long as you keep working and improving you’ll (hopefully) get there eventually.
I finished Howard Schultz’s Pour Your Heart Into It recently and once again was reminded of how unique each company is – how so many small, granular things make up what we know as a “business.” A good culture with strong management to uphold it can go a long way, and yet for most it is a waste of time to try and get a feel for the values of a company. A good example – I talked to a former employee of Humansoft a couple of days ago. I cannot buy Humansoft as my broker doesn’t have the Kuwait exchange, but what they said was completely eye-opening. Here are just a few quotes:
“If you want to buy a pen for the sports center, you have to ask permission from management. That manager needs to get approval first from their manager, who goes to their manager, and so on.”
“If I complain to student affairs about a student, they don’t care about what I have to say as a staff member, they will take the student’s side.”
“Most of us [colleagues] were not happy with a lot of things that happened at AUM. If you ask 100 teachers if they are happy working there, I think 95 will tell you that they are not.”
“No one feels valued at AUM.”
“If you work as hard as you can, no one will see that. You will not get a raise or a promotion.”
“If my manager wanted to promote me, he couldn’t because he needs approval from his own management, and so on.”
“It’s an American university and an American college but it doesn’t have anything American inside. The management is not American, I don’t know any American teachers, I don’t know any American staff – nothing.”
“Top management are Kuwaitis. I don’t think the AUM owner knows how bad things are inside AUM. Maybe he’s just worried about profit or something like that.”
“I never went to a university where the students have better cars than teachers. If you go to the parking lot you will see the best cars and the students never had to do anything to get them.”
“They don’t care about you, you're just a number.”
Although this doesn’t break the overall thesis for Humansoft (still an easy low-DD return in my opinion), it is something that we, as business owners, would never want in our company. These are the types of things we don’t get to see in the annual report, but I would argue that they are far more valuable than any number or guidance provided by management.
As Ben Graham said (I’ve noticed that this is my first time quoting him), “investing is most intelligent when it’s most businesslike.” Thank you to those who read what I write – there is so much out there that I am yet to discover and learn!
Thanks for the great 6 months!