As you know, we value investors spend a tremendous amount of time trying to thoroughly understand the businesses we put money into. This has a number of aspects, including:
Business or managers?
A question frequently asked of value investors is “When you’re evaluating a company for a potential investment, what do you place the most emphasis on — the business or the management?
Here is Charlie Munger, “We like the business great first. Then, second, we want a great manager. But we have not made a huge success by investing in great managers who take over lousy businesses. That is not the way we rose. If you’re a lousy manager, you really need a great business.”
He added ““Don’t bail away in a sinking boat if you can swim to one that is seaworthy.”
Can a great business be run by a lousy manager?
Warren and Charlie invested over $1.3bn in Coca-Cola shares over the seven years to 1994 via Berkshire Hathaway. Those shares are now worth $25bn. The dividend received by Berkshire in 2022 alone was $704m.
Because it was such a great economic franchise with terrific competitive advantages which could be sustained through periods of poor management Munger concludes that great businesses can be run by lousy managers and still thrive in the long run.
He recalls: “Sometimes. Coca-Cola was run for years by a man with very severe mental impairment. The directors just assumed he was drunk and let him stay there year after year. Now, that’s my idea of a wonderful business — you can be mentally defective and run it pretty well. That was Coca-Cola in its heyday.”
That is quite some test for the shares in your portfolio: could the company be run by someone who is mentally defective and still retain its franchise?
This hurdle is too high because you would end up with too few companies to be sufficiently diversified, but it’s nice if you can find a few of these amazing companies in an investing lifetime to put into a portfolio – but only if you can buy at the right price, so a lot of patience is required.
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
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