This week, Jamie Ward rewatched an old interview with an investor whose style might be considered rogue in today’s professional investment landscape. He believes that the lessons espoused could be useful for private investors who consider whatever wealth they have accumulated to be precious and irreplaceable. He then suggests a few businesses that might form part of a long-term buy-and-forget portfolio.
Years ago, when Real Vision first started, I used to enjoy the content it produced. In the early days, it was effectively a platform for really high-quality interviews with various people involved in investment, geopolitics and markets. The best interviews were always conducted by Grant Williams, who has that tremendous interview technique where he just lets his guests talk rather than interject as many interviewers do. I state that I ‘used’ to enjoy the content because after a while, Grant Williams, who was a founder along with Raoul Pal, left the business. I’ve never been able to work out exactly what happened but there is a saying ‘If you don’t have something nice to say, don’t say anything at all’, and neither Pal nor Williams seem to mention one another anymore.
The split seemed to coincide with Pal becoming rather obsessed with crypto-currencies and Non-Fungible Tokens. I don’t particularly have a problem with crypto-bros but the thoughtful long-form interviews with interesting guests seem rarer now and, to me at least, the best interviewer is found elsewhere. One of the most interesting interviews was with a man called Anthony (Tony) Deden of Edelweiss Holdings (not to be confused with Edelweiss Asset Management). At the time of the interview being released in 2018, I was working as an equity fund manager in an institutional setting. Being a fund manager was and remains my dream job but it was not without its constraints. Constraints exist largely so that investment products can be pigeonholed into specific asset classes. That is because much professional investment is conducted from the top down through asset allocation. This is a process whereby the world of liquid assets are separated out into categories like Japanese Bonds or Latin American Equities. From there, products are chosen to fulfil each classification. By running a product within one specific class, there is a natural buyer in the form of asset allocators.
An Edelweiss in its natural habitat
Returning to Mr Deden. From the interview, we learn that he became an investment manager by accident when he was tasked to help a wealthy family ensure that their financial affairs were in order. Frequently you see the rather perplexing statement about ‘wealth’, stated by Mr Deden, that it is ‘easier to make money than to keep it’. I don’t think this means that an entrepreneur who makes it big is prone to losing it again, rather I believe it refers to legacy wealth that is passed through generations since each successive generation is two things. One; it is larger in number than the one that preceded it, meaning the wealth is shared amongst more people and thus diluting it. Two; successive generations are further from the work, ingenuity, graft, luck and sacrifices that went into building the wealth in the first place making them prone to taking the wealth for granted and potentially squandering it.
Understanding this problem, generationally wealthy families often outsource the management of their investment affairs to a third party whose job is to understand that the wealth is precious and irreplaceable, and needs to be thought of as such. This is a different mindset to buying cheap things with the hope that they become more valuable, which is how many people approach investment. This part of investment management is usually referred to as ‘family office’ since an entire investment firm can exist solely to focus on the needs of one or a small number of families rather than many hundreds or thousands of clients. Each family is very different and contains family members with different needs.
For Mr Deden asset allocation is approached in a much different way to the above because of the unique circumstances of each family and individual. Rather than determining the amount to be invested in each asset class, the approach is to look at individual investments on their own merit and build up a portfolio. That is to say, it is much more bottom-up rather than top-down. Indeed, it seems he even eschews the term portfolio and rather calls them a collection of investments. What decides whether an investment is appropriate is superficially simplistic but contains great sophistication, as is often the case for the best investors. That is, because the capital he is managing is multi-generational and with a time horizon longer even than a lifetime, the investments must be durable.
Durability is not the same as quality. For durability, balance sheet strength, longevity of product and continuity of management style are more important than earnings power and the acumen of the current management (see last week’s article for more on quality). Durability means the ability to weather different conditions; not just the occasional recession but entire changes in world order. For example, consider the world changes a 200-year-old company has endured compared to a 20-year-old company. In his book Antifragile by Nassim Nicholas Taleb, the author talks about a concept known as the Lindy Effect. In essence this an idea that the longer something has existed or been used, the longer it will continue to exist (assuming it is non-perishable) because it has demonstrated a resistance to competition and change. For example, St Paul’s Cathedral (completed in 1697) still stands, whilst Birmingham Central Library (finished in 1974) has been demolished (2016).
Applying this concept to a collection of investments, aka a portfolio, companies that have been in operation for a very long time would be favoured over a more recent business. This is true even when the old business is rather plodding in its growth and the young business might be growing fast. Age is insufficient though; the company needs to be properly stewarded so that decisions are made by the investee company’s management as if they too are owners with a multi-generational stake in the company. This is a form of alignment that goes beyond having a proper incentive structure in place, to ensuring business decisions are made with a time horizon measured in decades not quarters.
Possibly the easiest way to do this is to invest in old companies ran by descendants of the founder, who continue to have considerable wealth tied to the business. However, this isn’t always useful because the third or fourth generation of a family are not the best people to run such an organisation. In these cases, their presence on a board and continued ownership of the business is sufficient to ensure an externally appointed CEO is right for the role.
Whatever the collection of investments an investor builds up this way, they will probably not seem too exciting (side note, if you are investing for the thrill, you are doing it wrong). However, by focusing on durability, the resultant portfolio ought not to be at risk of nasty market events – by which I mean that market shocks, whilst inevitable, do not threaten the existence of the investee companies. That in itself should lead to losing less in the bad times than others. A lot of long-term returns are driven by not losing rather than winning. Moreover, the long-term performance of these types of investments can be spectacular over long time horizons as they compound seemingly plodding numbers so consistently.
Some Suggestions
Below are the types of businesses that are interesting when viewed through the durability lens. I have deliberately chosen ones I do not hold so as not to influence investment in very illiquid businesses and make no judgment on the valuation. This is merely a suggestion of places to look.
- Shepherd Neame – a pub company and brewer based in the South East of England. It was founded in 1698. It does carry some debt as an owner of freehold property but is relatively under-geared for a pub company. It is still run by a Neame.
- James Halstead – a flooring company based in Manchester with a very strong balance sheet. It is still run by a Halstead and people with that surname own the largest part of the company. Appropriately, the company motto is ‘Beauty. Durability. Safety.’
- James Latham – a timber merchant founded in 1757. The board contains two members of the family, including the chairman, who is a part of the eighth generation to work for the firm. Lathams own a considerable share in the company still.
- Samuel Heath – ever fancied spending £174 on a toilet roll holder? Samuel Heath makes luxury bathroom furniture (amongst other things). 79% of the shares outstanding are described as not in public hands i.e., owned by Samuel Heath’s descendants. Very hard to buy equity but very cheap with a good balance sheet and decent dividend.
- Goodwin – a Staffordshire-based engineering group founded in 1883. A true family business insofar as most of the family still seem to work there. The six-person board contains four Goodwins. The family own well over half the equity.
- OENEO – international winemakers. During the interview with Mr Deden, he mentions owning a cooperage. I think he is referring to this company, which is 71% held by the founder’s family. It was established in 1838 and whilst it holds some debt, it is low.
- Investor AB – a Swedish company that is an amalgamation of the business holdings of the incredibly wealthy Wallenberg family. I rather like the motto of the family ‘To be, not to be seen’.
- Brown-Forman – a US alcoholic beverage maker known mainly for Jack Daniels and founded in 1870. There are three Browns on the board including the chairman – a fifth-generation member. It has two share classes with the Brown family having effective control because of a majority ownership of the voting shares. It is estimated that the Brown family own a 50% economic stake in the company.
This short list aims to give a flavour of the types of companies that might make up a portfolio that lets one sleep soundly – real risk management. Each business is unique and they probably number in the hundreds worldwide. Feel free to tweet me @JamieCDubya with the hashtag #DurableBusiness and the name of other companies for other examples so that we might create a more comprehensive list in time, that I will write up in a future article.
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Jamie Ward
Jamie doesn’t own any of the shares mentioned.
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