WHAT WE’RE THINKING ABOUT
With Friends Like These….
In the wake of the recent Berkshire Hathaway shareholder letter, we are reminded of an oft repeated quote from Mr. Buffet’s 1979 annual letter*
“In large part, companies obtain the shareholder constituency that they seek and deserve.”
He goes on to suggest that management teams who focus their communications on short-term results or are cynical and dismissive of investors, will typically attract shareholders that value these factors and display similar sentiments towards management.
Naturally it starts with communication. How management communicates their value proposition will influence what kind of investors are attracted to their company. Whether the story is one of growth, free cash flow, or even turnaround, it must be clear, consistent and relevant to the target audience. One wouldn’t walk into Mr. Buffet’s office and start talking about the upside to next quarters consensus estimates and expect that he would be at all interested.
Crafting a narrative that focuses on factors within management control, is long lived and (most importantly) honest, is the easiest way to ensure that the gap between expectations and reality is minimized. All frustration is born of missed expectations and telling the truth means never having to remember what you said.
The 1979 letter also highlights an excerpt from Phil Fisher’s excellent 1958 book, Common Stocks and Uncommon Profits, which equates a corporation’s efforts in attracting shareholders to that of a restaurant trying to attract a certain clientele. If a restauranteur were to change the menu and décor every month, it will be hard to maintain a committed group of satisfied customers. If you’ve had a bad experience at a restaurant, it’s unlikely that you will be eager to make a return visit.
The key takeaway here is straight forward. You can’t be all things to all people. It’s said that one of the hardest things in asset management is finding investors whose horizon and temperament match that of the strategy. Aligning a company’s characteristics with the appropriate shareholder base is no less valuable.
Private companies spend a lot of time and effort on making sure their capital partners understand and align with the business strategy. While public companies cannot explicitly control who trades in their stock, there are ways that management can influence what kind of investors own it.
A good question is to ask is “What kind of investor will be most willing to tolerate (inevitable) short-term missteps, in an otherwise strong and steady business strategy?”. Do what you can to find them and turn them into partners, because that’s what shareholders should be. Finally, don’t be afraid to tell a current or prospective shareholder that they might not be a good fit, because partners need to be chosen carefully.
*Warning, the letters from this era were much longer than those in more recent times.
