The Ultimate Edge in Investing

In 1982, Warren Buffett was 52 years old with a net worth of $900 million. He crushed the market for 26 years. If he would have quit or died suddenly, I’m sure plenty of books would still be written about him. Rod MacIver would feel slightly better about passing on Berkshire at $97 per share.

But Buffett didn’t quit. He kept compounding. Buffett found what Juan Ponce de Leon couldn’t –the fountain of youth in a daily intake of Coke’s and See’s Candies. He now has a public track record dating back 68-years since he first established his partnership.

It's Buffett’s longevity and those few extra decades of compounding that puts the exclamation point at the end of GOAT! (GOAT = Greatest Of All Time). He is the greatest investor ever because he started young, outperformed, and has lived a long time. 

If you were to ask Buffett, “What is your edge?”, he would probably say it’s his ability to do rational things during irrational times. I would argue his edge quickly evolved from rationality and intellect to one of reputation.   

Buffett has been compounding his reputation for 70 years with investors, operators, financiers, world leaders, everyone. The result is people desire his opinion and approval. Business owners are willing to sell to him for less. Financiers are willing to give him a better deal to have him involved. When the markets are in free fall investors look to him to put in the floor and tell us it’s going to be okay. Reputation means influence. 

Reputations take time to develop and can only be earned. They normally start from humble beginnings. Most of the people you admire today weren’t known by anyone the first 10 years of their career. They kept their heads down. They weren’t seen. They worked in unglamorous positions, but they started building a reputation that they could be relied upon. 

If you're an investor looking to build your reputation - find a great company early before institutions. Do the work. Be public about it. Be the axe in the name (axe = no one knows the company better than you). Be right. Then do it again and again. If you can do this, it won’t matter whether you went to Harvard or flunked out of the 4^th grade. Investors, employers, money will find you. 

15-20 years ago, I would pound the table on stocks when I liked them. I wanted people to know I was the axe in the stock. I would post on public message boards and on my blog about my convictions. Not all the ideas worked but some did. Business/investing reputations are first built on the back of great track records. Fund managers and larger private investors would reach out and want to talk about my ideas. The seeds of many great relationships started 20 years ago.

My best advice to young people is work hard. Be positive. Be intense. A positive attitude and extreme intensity produces a gravitational force that pulls great people into your orbit. Winners want to be around winners. They want to be around that positive energy.

As you mature as a stock picker/business picker, relationships become your greatest assets – those relationships with investors, CEO’s, industry experts you’ve built over years and decades through reciprocity. It’s the gold plating on your reputation. 

A great reputation manifests itself in three ways:

1. Opportunities find you. Investors and operators bring you opportunities. You’re the first call.
2. Companies listen to you. They respect you. 
3. Decisiveness. You can get to the truth quicker than other investors because you know the people that have the answers. 

Let me provide a little nuance into what reputation means to me.

My investment approach in public markets is like that of a venture capital or private equity firm in private markets. VC and PE firms view themselves as partners with their portfolio companies. They buy controlling/preferred stakes through direct placements and advise their investee companies over time. I also view myself as a partner. 

The key difference is I’m a minority shareholder. I try to keep my ownership at or below 5% so I don’t have to file and “show my hand” publicly. I’m not forcing companies to listen to me through majority control or a preferred class of stock or even sitting on the board. Companies don’t have to listen to me. They choose to listen to me because of my reputation. 

I wrote about this in a past article, but all too often there is a critical lack of capital markets expertise even among high-quality businesses and operators in the microcap space. Sometimes CEOs have just been given bad advice. Most small microcaps take advice from service providers or banks that are often misaligned in creating long-term shareholder value. This is where I like to step in to fill the gap. The fact I’m normally one of the first calls is proof of the trust I’ve earned. My reputation is my moat. 

Andrew Brenton of Turtle Creek Asset Management mentions this in his presentations. They might be the 11^thlargest institutional holder in a company, but they are often the first call the CEO makes. Reputation means influence. 

What I’ve realized over the years is I need management to listen to me. It is a crucial part of my strategy. I’m not interested in being a passive shareholder. At IFCM we’ve passed on new positions and sold existing positions when we’ve felt we couldn’t develop the relationship we require. 

As you develop your reputation you will see its power more and more. Then it’s up to you to protect the reputation you’ve built. Work every day to make your name, your word, your handshake, your counsel, worth more than the day before. Reputation means influence.  

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