January 2024 Commentary

The Nobel laureate Daniel Kahneman’s favorite formula
relates to luck and skill: “My favorite formula was about
success, and I wrote success equals talent plus luck and
great success equals talent plus a lot of luck.”
The reality is that luck plays an enormous role in our lives
– both good and bad – just as luck plays an enormous
role in many specific endeavors, from baseball to
investing to poker to winning a Nobel Prize to producing
chart-topping hit records, as the Beatles did so many
years ago.

Investing talent plays a pivotal role in increasing the
odds of success over relying solely on luck. While luck
can occasionally play a role in short-term outcomes, a
skilled investor can effectively analyze financial
statements, and evaluate the skills of company
management and competitive advantage to navigate
the complexities of investing successfully. Talent in this
context refers to research: a combination of knowledge,
analytical skills, and the ability to make informed
decisions based on a comprehensive understanding of a
specific investment.

For our team, investment research is conducted
globally. We are able to compare business models and
continually learn as much as possible about
management thinking and patterns of success that
ultimately reward the business with consistent longterm growth. Persistent success in a corporation is the
most important aspect to our investment process
because, as long-term investors, we want to be sure the
business model will not be impaired during our
investment horizon.

Impairment to a business model can occur in various
ways. Management change is obvious – those with the
initial vision and capability retire or exit, leaving the
business without a north star. “Transformative
acquisitions” is another – the integration of disparate
organizational cultures and systems can be a formidable
task. Merging two companies with distinct corporate
cultures, processes, and structures often leads to
complexities that can hinder efficiency and productivity.
Acquisitions are normally applauded by investors as, in
the short term, they are seen as providing greater
market share and competitive advantages. Through
acquisitions, it’s expected that a company can expand its
product or service offerings, access new customer
segments, or gain a foothold in a different geographic
region. All of which may be true.

What is less understood is the impact on the
sustainability of the existing business model. In our
experience, large acquisitions involve significant
immeasurable strain to the existing team: cultural
integration including disparate values and
communication styles; leadership change including
reporting lines and people integration; communication
challenges which can lead to internal rumours, anxiety,
and decreased morale inevitably resulting in turnover;
and operational disruption, including financial pressure,
customer dislocations, and impugned service quality or
product delivery.

In-depth analysis of small businesses is a unique
capability, one that needs to focus on the constructs of
what makes a good idea a great business, especially
when understanding and evaluating top management –
their skill is even more critical to the success of a small
business than it is to a large one.

The basic measure of a quality company is its propensity
to organically build market share. A company with
better products or services and better execution should
strengthen its reach among existing consumers in its
industry. Owning great businesses that understand and
manage change – that skews luck in your favour.