Disclosure:
I am a portfolio manager at Boyles Asset
Management, LLC ("Boyles") and the fund managed by Boyles may in
the future buy or sell shares of the stocks mentioned below and we are under no
obligation to update our activities. This is for information purposes only and
is not a recommendation to buy or sell a security. Please do your own research
before making an investment decision.
***
Resisting Change and Searching for
New Ideas
“Out of every hundred new ideas
ninety-nine or more will probably be inferior to the traditional responses
which they propose to replace.... It is good that new ideas should be heard,
for the sake of the few that can be used; but it is also good that new ideas be
compelled to go through the mill of objection, opposition, and contumely; this
is the trial heat which innovations must survive before being allowed to enter
the human race.” - Will and Ariel Durant, The Lessons of History
We
are often asked how we find new ideas. While
we discussed the specifics in detail in our Q1 2014 letter, the short summary
is that we read a lot, run both quantitative and qualitative screens, and
continually try to develop a network of philosophically like-minded investors with
whom we can discuss ideas and learn. Basically,
we turn over a lot of “rocks” in our search for worthy investment ideas. And of those many rocks, we deem only a select
few worthy of being attractive enough to dive deeply into, and fewer still worthy
of actual investment.
There’s
a certain attraction to new things, especially when it comes to investing,
where the prospect for profits often comes attached with a management team that
can tell a good story. But most of the
time, when new potential investments turn up, the right course of action is to
do nothing at all, as far as putting capital to work is concerned. Investing is a field in which knowledge is
cumulative, so objective work properly done doesn’t get wasted. It builds a base for potential future
investment, even if nothing gets done when that knowledge is gained.
Overall,
we’ve been managing a fund for just about ten years, mostly focused on finding
small companies, so we’ve gotten to know quite a few businesses we’d like to
own, should they ever get down to the price at which we’d like to own them. When we do decide to swing the investment bat,
it may occur after years of following and getting to know those companies and
management teams well, as was the case with two of our larger holdings in
BrainJuicer and Cambria Automobiles.
“People say that you should change
your mind when the data changes; but I change my mind even when the data doesn’t
change, because I reanalyze the situation every day and sometimes I just come
to a better analysis. And I think
actually what I said yesterday I don’t believe anymore.” - Jeff Bezos, CEO,
Amazon.com
We’re
fans of reading good business biographies, and one of the books we recently read
was the story of a company called Linamar in Canada. One thing that stood out in the story was a
mistake the company made when it entered a new line of business that was not as
good as the company’s core business. This
particular venture took a lot of time and energy of the management team and,
ultimately, didn’t work out. When
discussing the venture, Frank Hasenfratz (founder of Linamar) said, “How do you
measure the aggravation and the time it took me and some of our other people
away from doing more productive things?”
Investing
is often the same way. It is easy to
spend time and attention on ideas that look cheap but that maybe aren’t ideal,
and even if something may be undervalued, there is an opportunity cost of spending
too much time thinking about an idea and industry that might not be worth the
effort required to understand and keep up with. For us, we decided that Richardson Electronics, which we discussed in
our Q3 2015 letter, was one of those ideas, and have since sold the shares we
held.
Richardson
was trading for what appeared to be a deep value price, though the cash balance
does deserve a footnote because much of it is overseas and not necessarily
quickly available to be put to work in the U.S. But the negative aspects of the company—lack of profitability, high
management compensation, a dual class share structure, questionable capital
allocation, etc.—made us decide that even though it still looked undervalued,
it was no longer worth it to continue holding and spending the time staying
up-to-date on the company and industry for an investment to which we’d never allocate
a large amount of capital. So we sold,
moved on, and wish them luck on accomplishing the things they hope to
accomplish as they continue to transition their business to what they hope is a
more profitable future.
Our
experience with this investment, and the quote from Jeff Bezos above, also
remind us of a story told by personal finance author Jason Zweig about Daniel
Kahneman. Kahneman, one of the pioneers
of behavioral economics, is known by those who have worked with him to be
completely willing to change his mind and throw away all of his, and his collaborators’,
previous hard work in an instant if he suddenly realizes it is incorrect. This is something that is often hard to do
psychologically, as the more one works on something, the more committed one
tends to get—wanting that work to mean something and to lead to action. But if one can get over the mental hurdle,
developing the skill to remain completely objective at all times is one of the
more valuable skills one can have in any field, especially investing, where
significant time is spent learning and preparing for a climax that may never
come.
Zweig,
in his first taste of witnessing this trait in Kahneman, asked him how he had
started afresh on the research that he and his colleagues had been working on,
as if all the previous work had never happened. Kahneman replied with words that Zweig said
he’s never forgotten, and that we as investors should also never forget: “I
have no sunk costs.”