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Founder-Led Business - Part 3
Invest like a founder mental model : a simple and subtle mindset shift
So far in this series, we've covered the following topics:
The Appeal of Founder-Led Businesses - Part 1
50 Founder-Led Small Caps on the ASX - Part 2
The Mental Model of Investing like a Founder - Part 3 (this post)
I'd like to thank those who reached out after the previous week's article. Many of you helped correct instances where I had mistakenly attributed the founder, while others contributed additional names to the list.
You can access the updated founder-led list here, and I intend to refresh it annually.
In today's post, we'll wrap up the series by exploring the founder mindset, and how it can help investors. This is a concise piece where I share my thoughts.
I hope you find it valuable.
Think Like a Founder Mindset
I had this post in my drafts for a long time, not entirely sure how to go about it. Until two months ago I landed on an interview with Monish Pabrai. Whilst he’s not typically an investor I would follow, a friend suggested I might find the back end of the episode relevant.
Towards the end of the interview, Monish articulated what I had been wanting to write about so well.
I’ll paste here the transcript, which I have edited to make it easier to read:
“Consider the Walton family, the custodians of Walmart since 1970. They continued to hold onto the company even after Sam Walton was no longer at the helm. While they may have limited control today, with perhaps a single Walton on the board, they've maintained their ownership.
So, why should an investor approach this differently from an entrepreneur?
Frequently, we witness entrepreneurs with 99% of their wealth tied to the business they created. They sleep soundly at night, even without complete control. This highlights that control is often overrated; it can’t be the defining factor.
The framework we should adopt is to view ourselves as operators or partners in the company. Picture it as a partnership in a private enterprise.
Once you shift your perspective to see yourself as a significant owner without being the founder, the roles of the investor and the entrepreneur start to blend.
Take the example of the IKEA founder, who established a foundation while virtually all his net worth remained tied to IKEA. Similarly, the Google co-founders stepped aside from day-to-day operations but retained their significant stake.
This shift in mindset allows investors to embrace the founder's spirit and understand the business intimately, just like an entrepreneur does.
It's a powerful approach that can lead to meaningful and successful investments.
Source: Mohnish Pabrai on Cloning & Compounding - Link here
The drawbacks of this approach
Just like all suggestions that sound very smart and punchy when you first hear them, they are obvious downsides to this approach.
One might be that you might accumulate too large a portfolio. Good businesses will continue to appear, and you’ll want to take part in them, so you’ll add. But if you embrace this founder’s mental model of investing, then you’ll be thoughtful on removing the lesser performers, accepting that businesses are hard and naturally go through cycles of good performances and others of underperformance. This is a hard dynamic, and I’m afraid I still haven’t found a perfect answer for this one.
Secondly, If you accept that ups and downs will be unavoidable parts of running a business, you’ll find yourself wondering when exactly your thesis becomes truly broken. As Ian Cassel likes to remind us, the most likely thing to accompany a bad quarter, is another bad one right after.
I think part of the lesson I learned here it to not fall prey of over-analysing the business when stocks go down (fear) and under-analysing the business when stocks go up (greed). Stock performance shouldn’t impact your due diligence effort.
Founders get up everyday, put it a hard day’s work day in and day out. Not just when the sun is shining.
Conclusion : Remember the Power Law
To wrap things up, I thought we could soak in to one more good story from Monish:
One of the most remarkable examples of this approach is the story of Shelby Davis.
The Davis Dynasty was an early adopter of investing in international insurance companies. They placed numerous bets, all of which were relatively small, often less than one percent of their total assets under management.
Almost nothing worked.
But, the Davis Dynasty end up with a very large net worth because one worked. They were very early in AIG.
Regardless of whether a bet was considered excellent or subpar, he held onto them, never selling.
In the case of AIG, which initially represented less than 2% of their total investment, it eventually grew to make up 80% to 90% of their overall wealth.
The key principle here is that when evaluating a business, you form a vision of what it will look like in the future—five, ten, or fifteen years down the line. More often than not, those initial visions prove to be incorrect. That's just the real candid answer.
But on occasion, your projections align with reality.
To truly reap the rewards of your insights, you must hold onto both the investments that went awry and the ones that bore fruit for an extended period.
Where many investors fail is in their tendency to go in and out of stocks all the time. In contrast, the index does so well because it's too dumb to know that it owns Microsoft. It’s too dumb to sell Microsoft, and too dumb to sell Google and Facebook.
The only time the S&P 500 throws a company out of the portfolio is when it's so long in the tooth that it's obvious.
As always, thanks for reading folks.
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