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Be Ambitious
You may not know this, but I took a pay cut and moved my family to mid-Missouri from Washington, DC, to work for Permanent Equity. By any standard measure of success, that wasn’t a good career move. In fact, more than one person thought I was crazy. But I did it because I was pretty sure it was a great career move. I believed in myself, I believed in the organization, and I believed in what I might bring to the organization and what the organization might bring out of me.
People ask me, “How’s it going?” My answer? “Better than expected.”
Our friend David Perell recently wrote this about ambition: “Ambition isn't about climbing the career ladder faster than your peers — no, that's complacency. An inability to think for yourself. True ambition comes from conviction and the courage to see a grand vision through to completion.”
Before I say what I’m going to say I’m going to say this: Success is not a base state. Things are hard, and I begrudge no one for working hard to make linear progression.
But!
Linear progression is not interesting. It’s satisfying, but not interesting. What’s interesting is variance.
And look, I don’t have a grand vision; I just don’t want to be bored. I think of myself as being in the business of creating upside, both personally and professionally. The catch-22 of that is that the optionality of upside comes with the risk of downside. There’s a world where I got out here and Brent and I didn’t get along and I ended up jobless in Rocheport living in a van down by the river. Thankfully, that didn’t happen or at least hasn’t happened yet. And I think this is also more nuanced than Jeff Bezos’ regret minimization framework.
See, it’s not about doing things you might regret not doing. Rather, it’s about not doing things you wouldn’t regret doing.
We would have been fine in D.C. And the reason that’s sad is because we wouldn’t have known the difference between what we did and what we might have done.
Along the same lines, I had an interesting conversation with an entrepreneur we know who has ended up being quite wealthy. He took me aside at dinner and said, “Hey, I want you to know that I will never invest with you guys.”
I said, “Oh, why is that?”
He said, “I think what y’all are trying to do is great, but if I am going to give my money to other people then it means that I am out my own ideas, and I have plenty of ideas.”
On the one hand, I thought, “Hell yeah!” On the other hand, I thought, “That’s not a thoughtful approach to diversification.” But as David said, “True ambition comes from conviction and the courage to see a grand vision through to completion.”
We’ve offered people jobs and been turned down because someone didn’t want to move to Missouri or because the base salary we were offering wasn’t high enough. We’ve thought about going back to these people with different offers, but never did. Or at least never really did.
The reason? We’re ambitious. And I think that’s ok.
– By Tim Hanson
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The Value of Patient Capital
I’ve been thinking a lot about how Permanent Equity might find, invest alongside, and nurture consumer brands that might benefit from being aligned with unlevered, multi-decade ownership rather than risk brand impairment via oversaturation in the pursuit of short-term sales growth. So it was serendipitous that Tapestry, the fashion conglomerate behind Coach and Kate Spade, recently announced that it was acquiring Capri Holdings, the fashion conglomerate behind Michael Kors and Versace.
Analyzing the deal, The Wall Street Journal said this:
Crucially, there is one thing that scale won’t be able to bring for Tapestry: Patient capital. European giants such as LVMH, Kering, Hermes, and Richemont are all family controlled, which means they tend to be conservative on debt and have the luxury of making decisions that preserve brand cachet–even at the expense of slower near-term growth. By contrast, Tapestry’s executives are subject to the shorter-term whims of shareholders that place more importance on quarterly results.
That got me to thinking: How valuable is patient capital? So I ran the numbers…
For context, the broader stock market was +179% over the same time period. In other words, I would call this a victory for patient capital…and it’s not close!
Now is this a small sample size? Sure. And is stock market return the right way to measure success? Perhaps not. But it’s still an interesting A/B test of the results of different approaches to brand stewardship, and the results over the past decade speak for themselves.
In other words, I hope we find some brands to help steward.
– By Tim Hanson
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Unqualified Opinions Season 2
Permanent Equity’s Unqualified Opinions is back from summer vacation with Season 2 launching last Tuesday when my kids went back to school. In case you missed it, here’s what happened in week one…
Tuesday: I talked about what it means to love rebounds and set others up for success.
Wednesday: We shared Dan’s new take on our “No asshole” policy. (Spoiler: Never try to out-asshole an asshole.)
Thursday: I wrote about how weever fish and pine nuts conspired to spoil my family vacation.
Friday: Emily shared her 10 Deal Commandments.
If you’re not subscribed to receive Unqualified Opinions (do so by clicking here), you can expect a daily missive that aims to make you think and/or laugh and hopefully mostly succeeds (even my wife has only unsubscribed once). You’ll also learn a little bit about how Permanent Equity thinks about the world and what we’re talking about around the office. If you’ve ever wanted to make the pilgrimage to Columbia, Missouri, well, subscribing is the next best thing you can do other than actually getting on I-70.
Plus, dots in hats.
– By Tim Hanson
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The 10 Deal Commandments
We recently hired a new Business Development Associate (Welcome, Holly!) onto the Investing team. In advance of that, Emily did some great work documenting a lot of our thinking and processes to make Holly’s transition as smooth as possible and set us up to scale the team in the future.
One of my favorite things that came out of that work were her 10 Deal Commandments, an abridged version of which is presented below. Enjoy!
Thou shalt protect and promote trust in every interaction.
Reputation is the hardest thing to build in investing (yes, harder than raising capital), and the easiest thing to lose. If sellers won’t trust us, we can’t win deals (or we’ll have to significantly overpay).Thou shalt be responsive.
Responsiveness is an expression of interest. And if we’re not interested, we should respectfully communicate that.Thou shalt be on the lookout.
Always be selling, right? Well, we don’t want to be obnoxiously pitching all the time, but we do want to be curious about companies and people, inviting questions in return. Encourage curiosity by being curious of others.Thou shalt be high empathy, low judgment.
There is no perfect business, so judge not lest thee be judged.Thou shalt not give answers prematurely or make promises you can’t keep.
As a potential investor, we always have less information than a business owner or operator. Don’t commit to anything, unless you know.Thou shalt avoid formality and promote practicality and authenticity.
Formality can be effective in intimidating others, establishing hierarchy, and keeping exchanges sterile. None of those things are helpful to anyone.Thou shalt be a helper in service to others.
If someone reaches out for advice or input on a situation, respond as best you can. Thoughtful requests deserve thoughtful replies.Thou shalt consider and communicate on all the pieces of a deal puzzle – people, situation, operations, market, and numbers.
When you are getting to know a company, do not lead with or purely focus on the quantitative attributes. Yes, financial performance and scale matters. But other elements matter just as much.Thou shalt not force us as the only answer, and should encourage broad understanding of marketplace options.
A great offering doesn’t have to be oversold. Permanent Equity offers a great solution for certain situations, but it’s dependent on the business model and owners being a good fit. Sometimes we’re a good fit, but not the best fit, and that’s fine.Thou shalt not hesitate to communicate.
Situations materialize and disappear all the time. Coordination is critical to ensuring our team is never the reason something goes MIA, so don’t hesitate to signal to the team when a deal may be on your radar. Investing is a team sport, and you won’t waste anyone’s time.
Have a great weekend.
– By Tim Hanson
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So This Was Terrifying
I love to travel and when my wife and I knew we were going to have our first child, we made it a goal of ours to leave the country at least once each year. Our reasoning was that the first time would be the hardest, but we were relatively young and could handle it, and that it would only get easier as our kid (now kids) got used to it. And we had a pretty impressive streak going until Covid intervened with our kiddos getting their passports stamped in places such as Switzerland and Nicaragua.
Travel is not without risk, though, and there was the one time in Norway a train left an isolated station in the mountains with my wife on it and my newborn son and I not. Or when we ended up in an emergency room in rural Catalonia thinking we were just going to a party to build some human pyramids.
That lesson was relearned (I both love and hate relearning things) again this year when we ventured back abroad to Ireland. The trip felt snakebit from the start. Our flight over was delayed hours because some dudes headed to Ibiza dropped acid before boarding the plane, started freaking out during taxi, and had to be escorted off (and their checked baggage too) by police. Then within minutes of driving a rental car on the “wrong side” (hastily because we were hours behind schedule) I rubbed a curb and had the “Check Tire” light go on (but it never went flat). And a few days after that my daughter got stung by a weever while boogie boarding and had to be carried up a steep cliff from the beach to have her foot soaked in near boiling water to avoid unconsciousness.
But the piece de resistance came on the last day. Driving back to Dublin from West Cork, we stopped at Avoca, a fantastic Irish woolen mill that also serves great food, for lunch and shopping. We parked and went in to eat and in the modern tradition, the restaurant listed the ingredients and allergens in each dish on its menu.
The important information here is that none of us are allergic to anything except for my son who is allergic to pine nuts. But because encountering pine nuts is relatively infrequent and we have no other allergies, we (or just me) are perhaps not as vigilant about this situation as we should be. That said, my son wanted to get the prosciutto and brie sandwich (don’t judge us) and as far as we could tell from the allergens listed, pine nuts were not an ingredient. Then we got the sandwich and looked at it and there was some red stuff on it that looked like sundried tomatoes. Again, all good. But then he took a few bites…
“Does this sandwich have pine nuts?” he asked forebodingly.
Again, we checked the menu. No pine nuts.
“My throat is closing.”
“Maybe we should ask.”
Long story short, the red stuff turned out to be red pepper pesto with pine nuts and my wife had to stab my son in the thigh with the epipen we were carrying to keep him from going into anaphylactic shock. Even better, we were just hours from boarding the flight home so had the stress and tension of trying to decide if we should even get on that flight over the Atlantic.
Everything worked out fine, but still!
The point is that risk is everywhere, but that one of the most dangerous risks is a false sense of security. What I told the restaurant is either put all of the ingredients on the menu or none because putting just some made the situation the worst it could possibly be. Absent any information, I think I would have scrutinized that red stuff more.
We had a similar situation at one of our businesses, which was performing poorly and running tight on cash. We had cash flow forecasts, but found that they were always wrong. But because we were deciding things based on inaccurate forecasts, we realized that we were making worse decisions than if we had no forecasts at all.
It’s terrifying to think that there are situations that are made better by having no information rather than some information, but I’m now terrified by incomplete information. I guess “All or nothing” is a saying for a reason.
– By Tim Hanson
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More on A@*holes
A sign that you’ve had a good idea is that other people take it for their own. So it’s been with our “No Asshole” policy. We hear from people all of the time that they’ve adopted it in their life and work and have also been introduced at meetings as the “No Asshole” people (hey, we’ll take it, anatomical discomfort be damned!).
One of the more flattering adaptations, however, was when we learned that Dan, the CEO of our commercial waterproofing contractor down in Dallas, was using it (as well as Aaron James’ Assholes: A Theory) as the inspiration for a “How to Manage an Asshole” helpercard that he was adding to his field manual.
If you’re not familiar with our policy, Permanent Equity takes a proactive, zero tolerance approach to unabashed assholism. We have no tolerance for consistently dishonest, manipulative, belittling, or megalomaniacal behavior. No tolerance for those who believe being rude and obnoxious is a strategy. No tolerance for employees or partners who play politics or cut-corners as well-honed techniques. No tolerance for those who focus on how to get the most, the quickest.
Dan’s twist was that a zero tolerance policy was great and all, but in the world of commercial construction, projects involve up to 40 different trades competing to be in the same place at the same time. Inevitably those circumstances can lead to someone (a vendor, bystander, customer, fellow employee, etc.) either being or acting like an asshole. What then?
Dan’s tips:
Do not engage an asshole if he/she is angry.
Do not try to out-asshole an asshole.
If you feel unsafe, leave the premises.
But his insight was that every now and then his people would find out someone is a real asshole. Yet when they did some digging, most of the time they would find out that they were to blame for the circumstances that created the asshole because they did not communicate, plan, or execute properly. So the first step in resolving an issue with someone who might be acting like an asshole, Dan says, is to look in the mirror.
Look, none of this excuses someone for being an asshole. But it’s one thing to call a person out for being an asshole and a better, more constructive thing to help them stop.
– By Tim Hanson
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Love Rebounds
I said we’d be back when the kids started school again and my kids started school today, so here we go…
I got the opportunity to coach my daughter’s soccer team at a recent tournament because none of the other more qualified coaches could make it. Yet I jumped at the opportunity to do so because it’s a good group and they had a chance to win it all.
The team’s core value, which they break their huddles with, is “Work Hard Have Fun” (comma intentionally omitted). I like this because it’s recognition of the idea that you need to work hard to succeed but that you also need to have fun while doing so in order to be able to sustainably work hard.
Yet as we prepared for the tournament together, we adopted two more:
Set others up for success.
Love rebounds.
“Set others up for success” came about because our shooters during drills were struggling to finish chances. As I watched, it occurred to me that this wasn’t happening because they were bad shooters (they finished the passes I played to them), but because our other players weren’t making great passes. The balls the shooters got were bouncing or inaccurate and so the outcome was not their best.
We stopped the drill and talked about how one of the most important things you can do in sports or anywhere really is to set someone else up to succeed. In this context, and even though this was ostensibly a shooting drill, this meant being thoughtful about your pass in order to make it as easy as possible on the shooter. In business, it means removing blockers for people so they are unimpeded in their ability to add value to an organization.
We adopted “Love rebounds” for a similar reason. When our players took shots, they seemed to assume they would either go in, get saved, or go out of bounds and therefore thought the shot was the conclusion of the opportunity. But the most frequent outcome was that shots bounced off of the keeper or the post.
In other words, rebounds!
Rebounds are great. They are a missed opportunity that immediately results in a new opportunity that’s likely even better than the original opportunity. So we talked about loving that and being in position to take advantage of that new and unexpected opportunity when it presented itself.
This all paid off in the championship when a midfielder played a nice pass to a forward who got a good shot on goal. The other team’s keeper saved it, but it deflected to the far post where a wing ran onto the ball to score. “Love rebounds!” the bench yelled.
The world is an interesting place because it is full of opportunities, but opportunities come in all shapes and sizes. There are those you create for yourself, while others fall at your feet. What’s ironic, though, is that taking advantage of the first type requires structured planning, while the latter requires being unstructured so you can react fast.
So plan but don’t, work hard have fun, set others up for success, and love rebounds.
Welcome to Season 2.
– By Tim Hanson
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Base Rates and You
It’s summer, but that doesn’t mean that I have stopped working altogether. In fact, our bankers invited me to lunch the other day and so I went on their dime to have tacos and talk about the world (relationship banking!).
It was at the end of the meal that the topic of the stock market, and more specifically NVIDIA, and the recent gains in both came up. They know my background as a public equities guy and were curious what I thought about the whole thing.
I told them the same thing I tell everyone who asks about investing in public stocks. Personally, I put a little in at the beginning of each month sometimes in specific names but mostly in indexes, knowing I can’t time the market, but that entrepreneurship will ultimately carry the day.
That said, when it comes to NVIDIA (the stock is up a lot), it’s hard not to think that maybe this AI hype cycle has gotten a little out of hand. After all, base rates, but also base rates.
If you don’t bother to click through to the links the learning is that the vast majority of companies don’t grow that fast and end up justifying high valuations and also that almost no projects, let alone complicated ones, come in on time, at budget, and with the projected benefits.
And that’s fine. Just keep it in mind.
Have a great weekend.
– By Tim Hanson
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The Best Opinions
Since I told everyone about “My Worst Opinion,” I thought it might be fun while we’re on summer break to look back at some of the better ones. These were four that got some of the best feedback from readers, so in case you weren’t subscribed when they were published, I hope you enjoy. And if you were, well, read them again!
In February, we wondered “Why is Insurance Legal?”
Then explained how and “Why We Negotiate for Worthless Terms.”
Eventually opining on “The Cause of and Solution to Life’s Problems.”
Before exploring what we could learn from “James Joyce and Joey Ramone.”
If there are things you want to hear about when we light this candle back up in the fall, please don’t be shy about replying or sending in ideas. And thanks for being a subscriber; we’re working on hats!
– By Tim Hanson
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Have an Unqualified Summer
If you’ve enjoyed reading Unqualified Opinions, the person you have to thank is Nikki Galloway. That’s because it was only as a result of her joining Permanent Equity as CFO that I was able to shed some of the hats I was wearing and loved to wear (underqualified as I was to wear them) as CFO and think about other interesting and potentially valuable ways to spend my time as whatever it is I do now (CIO).
When I thought about that, I remembered a time I listened to John Mackey, the founder of Whole Foods, speak. He said something then along the lines of “Keep giving up the things you love to do because the reason you love them is you’re good at them. Instead, always find something different to do that’s valuable to you and the business.” This was specifically in reference to an anecdote he told about the day he stopped selecting store locations, and his point was that other people need to know how to do things and you need to know how to do other things.
Point taken.
We have a lot of interesting conversations at Permanent Equity. In fact, at the risk of sounding egotistical, I think we’re way undervalued based on our influence to interestingness ratio (i.e., we are significantly less influential than we are interesting). I think that should change, and I wanted to do something about it, and I thought that would be valuable to me and the business, and so here we are.
Unqualified Opinions was born out of a challenge I gave myself. Could I/we (and yes I have appropriated a lot of material from others) have something interesting to say every day (well, every weekday, except that bonus Opinion where I owned Mark for questioning how I spend my time)?
Mostly, I think that’s been achieved.
But more gratifying has been the conversations these emails have kicked off. You may not know this but every Unqualified Opinion goes out internally to Permanent Equity before it ever goes public. And those guys are not shy about giving feedback (we wouldn’t have it any other way). While the point of doing that was to make sure I didn’t send out publicly anything that made us look stupid, the real value has been in sending everyone at our firm an email every morning. The learning is communicate with people. It turns out we’re social creatures.
Now extend that learning to the dozens of subscribers Unqualified Opinions now has (I appropriated that joke from Chris Hill). It’s exciting to get responses. It feels like I get to have a conversation with the world. It turns out we’re social creatures.
Where am I going with this?
If you’ve followed the programming of this daily email, then you know I like to send our four solid Opinions per week and then something flippant on Friday. This is this Friday’s flippant Opinion. It doesn’t really have a point other than to explain what we’ve been doing and thank you for participating.
Also, we’re past Memorial Day. Summer has begun, and I expect readership to drop off and may also be running low on ideas. So call this the end of Season One of Unqualified Opinions.
We are going to keep publishing and try some interesting stuff (and let’s face it, very few people read the first two months so we may republish a few of those with some value adds), but it may not be a daily new written piece again until the kids are back in school. That said, I hope you’ll stick around for Season Two. And if you have anything you think there should be an Opinion on, send it in. Again, I/we are not shy about appropriating ideas.
Have an Unqualified summer.
– By Tim Hanson
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Investing, Not Masochism
I ended yesterday by promising to tell you how to become an investor without becoming a masochist. And I will, but before I do, I am going to yield the floor…
The Milwaukee Bucks were the number one seed in the NBA Playoffs this year but got knocked out in the first round by the Miami Heat. After that defeat their star player Giannis Antetokounmpo faced the press and was asked if that made their season a failure. He was visibly frustrated when he responded (in a video that has since gone viral), “Michael Jordan played 15 years…won 6 championships. The other 9 years were failure?”
“It’s the wrong question,” he continued. “There’s no failure in sports. There’s good days and bad days…some days it’s your turn, some days it’s not your turn…it is steps to it.”
By “it,” he meant success.
Back to masochism…
My dad’s a scientist so compares a lot of things to real world laws. The law of conservation of energy states that energy cannot be created or destroyed, but can be changed from one form to another i.e., potential (the energy of an object due to its position) and kinetic (the energy of an object due to its motion). This is a very interesting way to think about the value of putting effort into a trade with nonlinear outcomes such as sports or investing.
I said yesterday that when it comes to becoming a successful investor, there will be many days where you make no visible progress towards achieving your goals. And that’s true. But if you have good habits, put in the effort, and get reps and feedback you are making progress, even if it’s not visible.
I’ve started calling these days “potential energy days.” In other words, these are days when the work you put in improves your position, even if it doesn’t manifest itself in motion. And recognizing that you are going to have a lot of those days and celebrate them too in addition to your visible successes is how you can become an investor without becoming a masochist.
— By Tim Hanson
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Sledgehammers and Railroad Ties
Before I was an investor, I was a landscaper, and I loved that job. It felt great every day to do a bunch of hard work and see at the end that it had made the world a more beautiful place.
Investing is nothing like that. In investing, effort does not equal outcomes and you spend most of your time thinking about how much better you could be doing. What’s more, investing done well is a game of magnitude, not frequency. The feedback loops are long and the payoffs, while potentially significant, are unpredictable and nonlinear. In other words, even if you’re a great investor you can spend most of your days making no visible progress.
Running a business can feel a lot like that too, but it has the benefit of being a bit more tangible.
None of this is meant to turn this into a woe is me piece. I have an incredible job and I love what I do as well as the people I get to do it with. Rather, it’s to say that if you want to become an investor, you have to become a person who can tolerate long periods where it seems like you are making no progress and be okay with that.
My high school baseball coach was a crazy dude. As part of our mandatory offseason conditioning he erected five railroad ties near the field and gave us five sledgehammers. He said we wouldn’t start practice in the spring until we’d hammered through all five railroad ties.
Have you ever tried to cut a railroad tie in half using a sledgehammer?
It sucked, but we did it. We were out there before school, after school, during lunch hammering away. But I kid you not that until those ties actually buckled, it didn’t seem like we were ever getting any closer to completing the task.
That’s investing. You analyze hundreds of opportunities to find one. It’s not clear that you’re right until you are. And until you actually bank a win, it can seem like nothing good ever happens. Because when it comes to upside and capital and risk, it can always be better.
So how do you become that person without becoming a masochist? More on that tomorrow…
— By Tim Hanson
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Your Stock Price Matters and You Don’t Know It
Stock market volatility gets a bad rap.
Hear me out. It’s a feature, not a bug, that public stock prices move up and down every day. While that’s not because those movements are any reliable indicator of a businesses’ long-term value, it is because they are useful real-time indicators of how well millions of people (and admittedly some number of computer algorithms) perceive a business to be performing.
Alas, this is not a luxury available to most small private companies. They have no public stock. They have no stock price.
But free from the tyranny of short-term market swings are these companies liberated to make decisions that optimize for the long-term? Perhaps…
People want to work for a business whose value is going up, not down. If you can’t show people that together you are creating value, good luck holding onto them…the good ones anyway. In that sense a stock price can function like a scoreboard. It can help employees understand if you all are winning together or not and that can be an important detail to know.
The title of this Opinion is a deliberate double entendre. If you own or work at a business that is not a listed public company you probably (1) don’t know your stock price and (2) don’t realize that it matters. But you should and it does.
Our experience is that most business owners punt on trying to value their own business. Given that this is likely their biggest asset, that seems crazy, but valuation is esoteric and hard so we get it.
But do it. It’s worth it.
If you want help doing it, Permanent Equity has a calculator online called Instant Appraisal. You could also hire an independent investment bank or accounting firm. Or see if some business school nerds at your local university might take on the project for fun.
Neither our nor their answers will be precise, but they should all provide a roughly right range. From there, if you keep the methodology consistent, you can at least figure out how much incremental value your business gains going forward by updating your valuation and comparing it to the previous version.
This exercise should also help identify the factors that drive valuation gains – and it’s not always top or bottom line growth. For example, being more efficient with working capital can free up cash and cause a business to increase in value.
Then once you know what your business is worth and how much more it is worth now than it was worth before, you can start allocating to the sources of that value creation whether they be people, processes, or assets, which hopefully becomes a virtuous cycle. And then you can compensate people based on how much value they are creating, which is hugely aligning. This is why your stock price matters and you should know it. We are all just looking for a way to know if we’re succeeding and then share in that success.
— By Tim Hanson
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Where Returns Come From
When it comes to making an investment, there are three ways to earn your return:
What you pay for it;
How well you operate it;
How big you scale it.
But not all three of these areas are applicable to every investment.
For example, if you’re not an activist investor with a lot of capital behind you, you’re likely not going to be able to influence a public company as to how it operates or how it scales. So your return almost entirely depends on what you pay. This, I think, explains why “value investing,” where you buy stocks for cheap, has historically been the best-performing approach in this area even as venture investing, where investors seemingly overpay for growth but have lots of influence on the companies they fund, has done so well in the private space.
But if you’re outside of the asset allocation world and doing something tangible in the operating world like buying a new piece of production equipment or making a hire, you should arguably always overpay…particularly when it comes to people. That’s because paying more generally correlates with quality and quality tools typically last longer, perform better, and, in the case of people, level up over time. After all, isn’t the best free advice that you get what you pay for?
This is important because rarely is the payback period on any investment less than a year or two (if it is, do it!). This means that your returns are going to be generated well out in the future and then compound…the longer the better. As Einstein apocryphally pointed out, compounding is the most powerful force in the universe.
This is also why I will never purchase IKEA outdoor furniture again (and because of the allen wrenches and instructions that mock you by having no words).
So if it’s a passive investment like a stock, buy it cheap and ignore it. That’s the best route there for a good, tax-efficient return. But if you’re buying a business or expanding your production line or bringing on a teammate, pay up for quality and give it lots of TLC because the return there will not be generated by what you pay today but by how significantly that asset can improve your operations and scale into the future.
— By Tim Hanson
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To the Nerds!
When I catch myself droning on for too long following a short question I’ll stop and say “Sorry, that’s a long winded way of saying…” and then try to give my more succinct answer. But sometimes I can’t help it because I’m a nerd.
We meet a lot of nerds in our line of work. These are people who all have a “thing” – the topic you can go on and on about for days. But like me most people will stop themselves after a few minutes and apologize for going on for too long or getting too into the weeds.
The truth is no one should apologize for being a nerd. For example, Joe, who runs Ad Advance, got his start selling chemistry sets on Amazon. Of course that makes him nerdy on its face, but what’s even nerdier is that he started Ad Advance because he couldn’t find a digital marketing firm that could explain how to market on Amazon better than anything he had figured out himself through relentless tinkering. And if you ask him today about what’s going on on the platform, well, take a seat because you are going to be there for a while.
We love founders like Joe. His business is his passion and his passion is his business and that shows up both in the numbers and in Ad Advance’s culture, which is precisely what needs to be the case if you are going to be in partnership with someone for 27 years. But founders aren’t the only nerds in the business world.
Our CFO Nikki was working on her computer late one night looking at spreadsheets when her husband Jon saw her and said, “Sorry you have to work late.” Her answer? “I’m not. This is fun for me.” She’s a nerd and nerds make great employees when you hire and empower them to do what they nerd out on.
And if you want to encounter some other nerds, just check out the Warhammer community on reddit. These people are incredibly passionate and detail-oriented when it comes to painting miniature orcs and elves, which is why publicly-traded Games Workshop has been such a successful business. The lesson? Nerds also make good customers!
So what do you nerd out about? And do you get to do it every day in service of others and ideally for a profit? If so, double down. If not, how might you? Have a great weekend.
– By Tim Hanson
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Don’t Exceed Expectations
“Exceeds expectations” sounds pretty positive (and it’s certainly better than getting a “Not your best”). After all, we’ve been conditioned, through years of school and performance reviews, to think of exceeding expectations as a marker of success, something to be celebrated. And many of us have transferred that view over to the companies we run and the business we do. The public company that beats its earnings guidance, for example. Or the project that comes in early and under budget. While these seem like successes on their face, the fact of the matter is that errors are errors, even if they result in upside rather than downside.
While it’s fine (fun?) to exceed expectations every once in a while, if you’re doing it consistently, it means you have a problem. Because if you’re repeatedly exceeding expectations, you need to raise them.
Back before we were Permanent Equity, we ran several marketing agencies, one of which was an early adopter of a breakthrough digital film technology called Red One. This technology allowed us to shoot high quality, high resolution video at a fraction of the cost of competing technologies. Buoyed by our confidence in what this technology would allow us to do, we bid on a big contract with the city of Chicago to do tourism advertising. We were extremely confident in our bid. We thought it was a compelling treatment at a great price.
But when we heard back from Chicago, we were told we were out. The reason? Our bid (~$300k) was orders of magnitude lower than any of the other bids. What we thought was a feature and strength was, in the eyes of the customer, a bug and a weakness. We had so far exceeded their expectations of what was possible that they didn’t believe it was possible to produce a high-quality product at the price we were proposing. And while we offered to raise our price, it was too late. We had lost credibility in the eyes of the customer and were booted from the process. We should have been confident in our value proposition and priced our product in line with that.
In other words, if you’re a business that’s consistently exceeding expectations, it may be the case that:
You’re not setting its prices high enough; or
You’re not articulating your value proposition to customers on the front end; or
You’re sandbagging on goals; or
You haven’t yet appropriately defined “success.”
Whichever it is, stop doing that…
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Get a Good Lawyer
A close friend called me the other day and said that his dad had gotten an offer for his construction business and that they were interested in taking it because it sounded credible and mom and dad were getting ready to retire. “What,” he wanted to know, “are the logical next steps?”
The first thing I said was, “Do you have a lawyer yet?”
They didn’t and didn’t know how to go about finding one that would do a great job and also be cost effective relative to the size of the potential transaction. So I asked Taylor (our CLO and in charge of Compliance!) and Taylor knew someone in their area so we made the connection (be a helper, right?).
The reason the most important detail here was to hire great representation has to do with information asymmetry. In this case my friend’s dad had spent 40 years running construction businesses and zero years selling construction businesses. The potential buyer on the other hand had spent a decade-plus running construction businesses and also a decade-plus buying construction businesses. Ergo the seller had no experience selling construction businesses while the buyer had lots of experience buying them. That’s an unlevel playing field!
That’s problematic because deals are complicated and all of the details you negotiate in diligence are real things you have to live with post-close. Not only is there money, but there’s also time, risk, liability, etc. If you’ve never dealt with any of that before, then you may not know what to ask for or what’s typical and may therefore end up agreeing to accept a term that you never in a million years should.
This is why having good representation matters. This person ideally will have also spent a decade-plus buying and selling construction businesses and therefore level the playing field in the transaction, making it much more likely that a fair outcome will be achieved for both sides.
And yet in our line of work, we often see sellers engage representation too late (when many terms have already been agreed upon) or engage attorneys who are perfectly good lawyers in other matters but have scant deal experience. This defeats the purpose. The point of hiring a lawyer on your deal is not only to have someone on your side who knows the law, but also someone who knows the law and has applied it many times to deals.
Why does this happen? I think a couple of factors are at play…
First, lawyers are expensive and you can save money by waiting until the last minute to hire one. But if you do that, you also limit the impact one can have. Look, no one skimps on planning for their wedding because (one hopes) it’s something you’ll only do once. For most, that’s also true about selling a business. So do it once and do it right.
Second, overconfidence and association fallacy are real things. This is the idea that many people get that if they are good at one thing, then of course they will be good at others. For example, if someone has been very good at running a construction business for 40 years it is very common for that person to think that they will also be good at selling a construction business. Not true! They are different tasks!
So if you’re buying or selling a business, make sure you engage a good and experienced attorney early (but not Taylor, he’s ours). But more broadly, if you’re doing something for the first time, don’t be afraid or too proud to pay up for help. You may not think you need it, but I guarantee you’ll end up with a better outcome that you would have otherwise.
– By Tim Hanson
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Seriously, Read Your Own Emails
One of the reasons we publish content at Permanent Equity is to scale conversations. What this means is that anyone can read about what and how we think before they talk to us and therefore know what we are going to say before we say it. Then when we finally meet, everything tends to be much more efficient.
So I wasn’t surprised when Joe, the CEO of our portfolio company Ad Advance, responded to Mark after he read It’s High Risk to Be Low Risk with a very good question.
Ad Advance, you may not know, is the investment where we negotiated for a worthless preferential term. The basics of the term are that if Ad Advance distributes more than a certain amount of money, then we split the amount pro rata with Joe and Matt (our partners). But if Ad Advance distributes less than that amount, then Permanent Equity gets all of it (which was a structure we put in place in order to confidently pay up for the company’s projected growth).
So Joe read my email and said to Mark something along the lines of “Hey, I got this email from Tim and it’s timely because we recently stumbled across a great potential hire that would help us grow, but if we bring on that salary this year, we may come up short of the preference threshold, which obviously we don’t want to do because then you guys get all of the money. Without this term, we’d definitely make this hire, so would you guys be willing to waive your preference this year so we can make a better long-term decision.”
Mark forwarded Joe’s note to me and I said “Darnit. He’s throwing my email back at me. We need him to unsubscribe.”
“Alternatively,” Mark said, “you could read your own emails.”
But the facts of the matter are that:
Joe’s request made absolute sense.
We want to be great long-term partners with all of our portfolio companies.
We did have a business deal that facilitated our initial investment.
So after talking about it we replied to Joe and said, “Make the hire. If we come up short of the preference threshold because of this investment, we’ll reduce the threshold by the amount in question but only if we can add that same amount to next year’s threshold. This way you’re protected to make the investment now and we’re protected if the investment doesn’t pay off.”
Joe agreed and we’re moving forward. The learning is just because something made sense at one time, doesn’t mean it will make sense in the future and when opportunities present themselves, be pragmatic about taking advantage of them. And if things are going well, remember, don’t be afraid to take more risk. Advantages are rare in this world, so when one shows itself to you, press it as far as you can.
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Read These Always
I admitted to Clayton recently that I was running out of ideas for daily emails and he said something along the lines of why don’t you just make more recommendations? Everybody does that and I’d be interested in yours…
As flattered as I am/was by Clayton’s interest, the internet seems like it has turned into a lot of people recommending other people’s stuff (and monetizing it to ridiculous gain without creating real value) and so I am reluctant to do that, but I am running out of ideas and it appears effective and so be it (and maybe I can get some advertising dollars?).
Recommendations!
For what it’s worth, I made my regular reading recommendations earlier in this season, so these are my canonical picks:
Flesch, The Classic Guide to Better Writing. If you can’t write well on a fourth grade level, you can’t write. And worse, others probably can’t also read you. This one was recommended to me by Karl Rove when I worked at The White House. Say what you will about me and him and when, but that lesson coming from him in that context resonated.
Gonzalez, Deep Survival. A lot of people ask me about investing books, but my opinion is that investing books get outdated fast. I mean, there are no more cigar butts like The Intelligent Investor imagined them (still a good read though). What’s constant is risk management and life or death situations are all about that.
Stead, A Sick Day for Amos McGee. Nostalgia matters. Thoughtfulness matters. Be kind. Be caring. Don’t be cynical. There’s a reason why kids’ books teach what they do to our kids, so don’t forget them even if you age out of reading them.
Those are my reads. You can read a lot more, but those are mine. Have a great weekend.
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Five Ways to Do Something
There are five ways to do something:
Trust someone else to do it.
Trust someone else to do it and verify that they did it.
Do it together.
Do it yourself.
Not do it.
And just because you did something one way once, doesn’t mean you have to do it that way ever again. In fact, the way to do most things should be evolving over time. Take, for example, the task of my son getting dressed. We couldn’t not do it, so first, when he was a baby, my wife and I did it. Then, as he grew up and had opinions, we did it together. Now that he’s almost a teenager, he does it himself but we check to make sure he makes appropriate choices. Then someday he’ll do it all himself (though I still need to teach him to tie a tie.)
So that’s one effective use of this paradigm. How is what am I doing getting done and is it the best right way? If my wife and I were still dressing my son, for example, that’d be a big red flag.
But thinking about the world this way can also be an effective way to organize action items at the end of any collaboration. Because if you have a list of ideas it’s important to know who’s doing what and, sometimes more importantly, what you’re not going to do. Further, decide what can and should be outsourced, what needs further collaboration, and what an independent contributor can do on his or her own.
Lastly, this framework can help identify processes that are not working, which is what’s happening when a task is getting done in more than one of these ways. For example, if there is something you don’t think should be done, but someone else is doing it, that's a problem. Or if someone thinks you’re trusting them to do it, but you’re also actually doing it, that’s confusing. Or worse if someone thinks you’re trusting them to do something, but you’re verifying, that might be undermining.
The point isn’t that there is an optimal way to do anything (and it can get more complicated than this), but rather that when you do or don’t do something you should be explicit with everyone involved about which one of the five ways you are choosing to do it and why. Otherwise you’re inviting inefficiency into your organization and creating the potential for conflict on your team.
– By Tim Hanson