Sunday, March 10, 2019

Lesson from Bohemian Rhapsody - Part 2

*This post contains spoilers about Bohemian Rhapsody - the 2018 Hollywood movie about Freddie Mercury, pls stop reading if you intend to watch the movie. 

In the last post, we talked about never ever betraying your cadre and how if you did, your most trusted friends and family will forgive you once or twice. But, there is only a few times you can do this. There are people who keep betraying and in the end, they have no one to turn to. Sometimes we hear stories about lonely old men living in temples with no one to turn to. Wonder what they did to those who care about them? Did they turn everyone away? So in short, don’t betray the trust of the people who cared about you most. 

By never betraying our cadre, we stand to risk supporting the wrong people though. Warren Buffett made this mistake a couple of times. He supported John Gutfreund who subsequently brought down Salomon Brothers and he was stuck in supporting Coca Cola even when the firm’s culture had changed to one that is all about bonuses and incentives to company’s management and employees.

Right: John Gutfreund, King of Wall Street who brought down Salomon Brothers. 
Left: Warren Buffett testifying before Congress because he trusted John.
 
Having seen how some of these episodes played out, I think probably this is unavoidable especially when the ties are very close. For example, how far would you support your sons and daughters, even if they are wrong. The answer is - almost all the way. The father or mother of an alcoholic or drug abuser can never give up support. They must hope that the child will one day change his ways short of disowning him or her. But disowning is just a psychological choice. Kinship is a biological link that cannot be broken. 

However, for friends, teammates and colleagues, we can exercise our judgement call and support high integrity people. Although, we never know and people change. Unfortunately, sometimes, good people do support the wrong partners that they cannot betray only until public opinion turns bad enough such that it becomes reasonable for betrayal. This was probably what happened with Warren Buffett and John Gutfreund. 

So, coming back to investing, it sometimes pay to learn some of these dynamics that could happen in executive management. How close is the management cadre and can they work to create value for shareholders? Is the Chairman or the Board tied into supporting a poor performing CEO and shareholders are taken for a ride together? We must be mindful of these even though it’s not easy to learn such intricate details as retail investors. 

Next, we shall discuss the 2nd lesson: identify the right advisors and listen to them.

Freddie Mercury, Queen and Mary Austin - Freddie's wife

In Bohemian Rhapsody, Freddie Mercury had a great band, his wife and his friends but he turned all of them away and listened to one adviser who turned out to be an asshole. This person blocked everyone else off and tried to dominate Freddie’s life and he didn’t realise it. This is sad and we have to be careful that this could happen in both our lives and also in companies. 

 As an investor, I had also witnessed episodes as such. The CEO of the company had a weak cadre of advisors and was listening to the wrong advice. The company made missteps after missteps until the market cap between itself and its closest competitor became miles apart. It could happen to countries too. Prime Ministers listening to the wrong advisors. Emperors in past eons losing their dynasties because of a single eunuch or concubine giving bad advice. 

So, we need to be mindful about such things while we do our due diligence on companies. It can be hard to get such information via annual report and public sources. Sometimes we can get vibes or snippets if we pay close attention. In Singapore, we can get to hear stories if we dig enough. But, by and large, we have to assume that good companies that created good financials had strong CEOs and teams behind them. Then check around and look out for signs of bad advisors. 

On the topic of cadres and teams, we also come the the 3rd lesson from the movie: four heads are better than one. 

Queen was made up of four members, Freddie Mercury, an astrophysicist, a dentist and a mechanical engineer. They were so different and so not-artistically-inclined based on their choice of academic training. Yet they came together to create some of the most memorial music of the 1970s and the 1980s. This is the power of teams. 

In one memorial scene, Freddie lamented that he failed with his new venture because there was no one to tell him his rendition of a certain piano section was crap or his lyrics were uninspiring or simply this part of his music sucked. The team and the debate was what created epic music. 

Bill Gross - The Bond King

This is exactly the same as investing. One person’s view is never enough. In the recent weeks, various financial newspapers updated us the latest sad chapter in the story of Bill Gross, the Bond King of PIMCO. Bill Gross was the legendary investor in the world of bonds or fixed income. He was so good that his name became synonymous with PIMCO, the world’s largest bond fund. For decades, Bill Gross = PIMCO = good performance in fixed income world. A few years ago, he had a fallout with his team at PIMCO and went to Janus Henderson. But without his team, performance suffered and now he was retiring from his new firm as well. The mighty Bill Gross, the Bond King, can only be as good with his team. 

To be sharper investors, we will always need someone to debate stocks. Warren Buffett debated with Charlie Munger. Yes, two men is a team. Although the best investment teams usually had 3-4 core members who constantly debated and tear down one another’s investment ideas. This is the crux of good investing. The teammates also need to trust one another. It is not about ego. It is not about not being friends enough. Tearing down a stock idea is just about the stock. It is not personal. But being humans, we often think it’s personal. It takes years and chemistry to build enough trust in a team to bring out and crystalize the best ideas. 

Four heads are better than one. 

Next post, we discuss the last lesson! Huat Ah!

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