Friday, November 08, 2019

People, Management and Networking - Part 1

Investing is fascinating because it touches so many facets of life. We need to know finance, we need to understand business models. But that is not enough, we have to look out for trends and what are the new innovations in life and in society. Finally, we also need to look at people and culture.

People, or rather relationships, play complex roles in both business and life. We can read a book and learn a few lessons, but most of them are just being understood at a very surface level. When the same lesson is shared via someone's life story, it gets reinforced. Often, if the same lesson is shared by a mentor, a guru or someone we highly respect, then we tend to absorb and follow the instructions given or are in the much better state to avoid the mistakes altogether.

That's the power of relationships and understanding people.

In analyzing companies, we need to look at the people running them ie the management. The same relationship rules apply and we need to understand some of these dynamics at play. Who is in charge? Is it a dictator or does he has a team? Who are the top lieutenants and what are their backgrounds? How do these senior executive present themselves? Do they even bother to meet investors? Is the company culture healthy or toxic? These are people questions that shrewd investors have to ask.

Having said that, Warren Buffett made the famous saying about people and business model:

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

This is obviously very true. While people is important, what's more important is the business model and the business moat. Nucor comes to mind. Nucor is in the steelmaking business. It is a very bad business because there is a lot of competition and steel is a commodity. Nucor's management is known for brilliance and has relentlessly improved the company's competitiveness and created good shareholder return.

As shown above, it's share price has compounded nicely from $12.45 to $54.85 over 20 years. Part of it was helped by the commodity super cycle during 2005-2009 when China drove up most of the world's demand for steel, copper and other hard commodities. Without which, Nucor's performance would have undoubtedly suffered. So, while Nucor's performance is great, it's only in the same ballpark as the S&P500 which grew from 1,100 to 3,050 over the same time frame.

In a nutshell, analysis of the business model always takes priority. Once we figured out it's a good business, it's more than 50% of the work done. A good business generates strong cashflow and strong returns for investors. Then we think about people and management. As discussed in previous posts, the first thing about management is integrity. If management cannot be trusted, then we cannot do any more analysis right?

So assuming management is trustworthy, we can then look at the team dynamics, the board composition, succession planning, track record and all the other stuff. For young companies, it might also be worthwhile to look at who's in their circles. Who are their mentors? Are they looking up to the right people and getting the right advice? What do the past teammates say about them? Who else are in their networks? These are all part of the analysis.

By analyzing networks, we can gleam insights into companies.

The internet age has not reduced the power of networks. We can have 1,000 friends on Facebook, some celebrities have millions of followers and some posts can have 10,000 likes but we still go back to people we trust. We still rely on the word of mouth. Networking continues to be an important part of investing and life.

So while we analyze the companies' networks, we also need to build our own network. Who are the fellow investors that we are talking to? How many investing networks do we have? By having the right people in our network, we stand to gain so much more. This is a very tedious process. Networks are hard to build. It takes years to build the trust and friendship. It is also important never to break that trust.

Human relationships are probably one of the most complex and least understood fields in life. In the next post, we shall try to breakdown networking into its most basic building blocks and understand how that can help us become better investors and also better people.

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