What is important, knowable, and overlooked by most investors?
People in business.
As I talked about with the John Hammond story:
Learning to identify super talented people before others is one the most underrated skills an investor can develop.
Let’s test the importance, knowability, and impercipience of people in business.
Are people important?
Let’s see what some of the top business leaders of the past 200 years say about people in business.
Peter Kiewit built Peter Kiewit & Sons’ Inc. (PKS) from a hole in the wall contractor in Omaha, Nebraska into Kiewit Corp. one of the largest and most profitable construction companies in the world.
Charlie Munger considers Kiewit Corp. to be one of the three top operating companies he knows of.
Peter often said, “People are PKS’ most important asset … equipment is second.”
John D. Rockefeller, widely considered the wealthiest American of all time, and the richest person in modern history, said:
Men, not machinery or plants, make an organization. The right kind of businessmen will build up an organization capable of producing a large volume of a good product at a low price, the three things essential to success. These men will introduce the right kind of appliances for the handling of their business; they will carefully conserve and utilize all byproducts so as to prevent waste; they will know how to market their products in the largest and most economical way. They will also be big enough to know how to handle workers successfully."
Mary Kay Ash turned a $5,000 investment into a multi-billion dollar direct selling organization. She cited Alfred Sloan, one of General Motors’ great former CEOs, as an influence. Specifically, Ash’s own philosophy was based on Sloan’s quote: “Take my assets - but leave me my organization (or people), and in five years, I’ll have it all back.”
Milliken & Co. is the only remaining multi-billion dollar textile manufacturer in the United States. Former president Dr. Thomas J. Malone called the company’s success “a people story”. Roger Milliken built a culture that allowed all of its associates to achieve their maximum potential.
Two of the largest and top rated automotive tire sellers agree.
Les Schwab stated,
Programs and people, that’s what build our business.”
Costco co-founder Jim Sinegal added,
We have always felt that if you go out and hire good people, provide good jobs with good wages, and good career opportunities, that something good will happen with your business.”
Roger Penske has dominated racing and business simultaneously for five decades. He said:
I think human capital is the whole game. It’s not how much money you have or how much you can get ahold of, it’s the organization. You’ve got to keep your people committed and focused.”
Is it a coincidence these business mavericks say virtually the same thing about the importance of people in business?
I do not think so.
If you simplify a business to its constituent parts, it becomes obvious.
Carl Braun, another favorite operator of Charlie Munger, reduced a business to “a social unit - a unit made up of people with interlocking skills and common interests.” A business leader is the head of that social unit. And the purpose of that leader is
to provide a good way of life in which its people can exercise their skills effectively, comfortably, and with enjoyment.”
Business wars may be fought by machines and technology, but they are won by people. A company cannot rise above its people.
Business intelligent fanatics prove, time and time again, that people are far and away the most important aspect in business.
Y Combinator is one of the top seed money startup accelerators.
As Y Combinator demonstrates, the founder(s) are the seed - the DNA. The leader establishes the tone for how others in the organization should act. They architect the programs, incentives, environment and culture their company will grow into.
It all starts with a super talented, wise leader.
Are people important in business? ☑️
Can You Evaluate People?
Aside from being important, all is for naught if it is not knowable. Now I didn’t say quantifiable, but I will get to that later.
Here is a question: did you, or do you anticipate meeting your future spouse before marriage?
Even with most arranged marriages, people meet potential future spouses before marriage. There is a reason. Humans want to and do evaluate compatibility.
Basic human nature is unchanging. You can observe people and their habits. We can’t forecast exactly what people will do in the future. But, their current habits, personality and temperament are unlikely to change much.
Don’t get me wrong, evaluating people is simple, but not easy.
Top investors demonstrate it is possible to identify people who are or have the potential to be “so talented that they can do things that other mortals can’t.”
Robert Vinall, of RV Capital, used the example of Warren Buffett’s track record for selecting super talented operators - it’s nearly 100%.
Buffett was naturally attracted to Ajit Jain. In Buffett’s biography Snowball:
Buffett saw himself in Ajit, who quickly rose in his esteem to share Mrs. B’s pinnacle. Warren said, ‘He had no background in insurance. I just liked the guy.’”
U2 is one of the world’s best-selling bands.
U2 manager Paul McGuinness told a then 25 year old Paul David Hewson, known today as Bono, “You have something that very few artists have…You see the whole equation.” McGuinness essentially saw himself in Bono.
McGuinness had always lived up to his management firm’s name Principle Management Ltd.
His highly principled nature attracted the top operators in the music industry. Paul said,
I have certainly done, very substantial agreements on the basis of a handshake. And the deal has started to operate before the lawyers caught up.”
This, of course, is highly uncommon in the music industry - known for shoddy business practices.
Softbank founder Masayoshi Son invested in Jack Ma in 1999.
He (Jack Ma) had no business plan and zero revenue, maybe 35, 40 employees, but his eyes were very strong. Strong eyes, strong shining eyes. I could tell from the way he talk, the way he look at me, he has a charisma, he has a leadership.”
Son’s answer sounded almost exactly like what the CEO of Joshin Denki saw in Masayoshi Son in 1981.
John Malone has had over 40 partnerships in his career. Malone stated, “The bottom line is you delegate authority to people you trust.”
In other words, John Malone delegated authority to people with the same level of doggedness, and willingness to keep the budget down and grow the business as himself.
His partnership with Bob Johnson and Black Entertainment Television is a perfect example.
A key additional component is the pupil has to have the potential to be groomed. The master apprentice model is so important. Ajit Jain was on the phone with Warren Buffett every night.
In Bono’s words, “Paul McGuinness mentored us in principles that proved to be the best there were.”
Masayoshi Son was groomed by Tadashi “Rocket” Sasaki, a former Sharp executive. Son would guide Jack Ma, too.
And John Malone was always there to help his partners with capital allocation decisions.
The whole premise of Y Combinator is mentorship. Through unlimited “office hours” YC mentors directly guide their startup founders.
How can we start to evaluate people and what should one look for?
Warren Buffett often gives a hypothetical offer to students. He asks them to consider which classmate they would invest in to receive 10% of their future earnings.
And it gets down to a bunch of qualities that, interestingly enough, are self-made. I mean it’s not how tall you are. It’s not whether you can kick a football 60 yards. It’s not whether you can run the 100 yard dash in 10 seconds. It’s not whether you’re the best looking person in the room. It’s a whole bunch of qualities that really come out of Ben Franklin, or the Boy Scout codes, or whatever it may be. I mean, it’s integrity, it’s honesty, it’s generosity, it’s being willing to do more than your share, it’s just all those qualities that are self-selected.”
So you want to look for integrity, intelligence and energy.
What are some questions to ask while meeting management?
Sam Altman described one question YC considers when deciding who to fund: “Will these founders develop into ‘forces of nature’?”
As most people say, it’s hard to make money unless you invest in great founders. Defining what that means is usually left as an exercise to the reader. Here are some questions I ask myself: Are these founders relentlessly determined? Are they original thinkers? Are they smart, and especially do they have new insights I haven’t heard before? Are they good communicators (and so will they be able to hire, sell, raise money, talk to the press, etc)? Are they focused and intense? Do they always seem to find a way around obstacles? Would I work for them?”
A sure fire way to spot these qualities in another person is to have those qualities embedded into your subconscious.
Sam Altman, Paul Graham, Warren Buffett, and all others mentioned above, embody those qualities at the highest level! Not only that, all sought and partnered with those most similar to them.
And, as Warren Buffett said above, those qualities are self-made. If you want to partner with intelligent fanatics, you need to become one too.
It takes one to know one. You need to rise to their level. You need to live and breathe the qualities you seek in managers to the highest degree. This takes a ridiculous amount of time and effort.
But, by doing so, you can leverage your natural bias towards being attracted to those similar to you. Yes, the Halo Effect Can Be Good For You.
Beware of imposters. Consider Charlie Munger’s story of Max Planck’s chauffeur. The story goes:
I frequently tell the story of Max Planck, after he won the Nobel Prize, and went around Germany giving lectures on quantum mechanics. And the chauffeur memorized the lecture and said, ‘Would you mind, Professor Planck, because it’s so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur’s hat?’ Planck said, ‘Sure.’ And the chauffeur gave this long lecture on quantum mechanics. After which a physics professor stood up in the rear and asked a perfectly ghastly question. The chauffeur said, ‘Well I’m surprised that in an advanced city like Munich I get such an elementary question. I’m going to ask my chauffeur to reply.’”
There are plenty of leaders who say the right things. However, these imposters do not have true deep fluency; they don’t walk the talk. They fail to execute.
With the right preparation and lens, you can spot imposters. Simply observe the person improvise in the moment.
An example I like is of an 11 year old guitarist. He copies Eddie Van Halen perfectly. But when the singer tries to improvise with him, in the moment, the kid is like a deer in headlights!
Are super talented people identifiable? ☑️
Do Investors Overlook People?
This is pretty simple. How often do you hear public investors (retail or institution) talk about people, culture and leadership?
Little to never.
Quality leadership is increasingly more important the earlier a company is in their growth.
Mature companies have already established cultures and leadership has a track record. By then everyone knows whether the leader and their people are super talented or not. Here, one is already late to the game.
Public investors tend to shy away from smaller companies, so they force themselves into being always late to the party.
Furthermore, people, relationships, talent, culture and integrity are hard to quantify. Investors tend to focus on the quantifiable. Yet, “Not everything that can be counted counts, and not everything that counts can be counted.”
People “assets” and other intangibles are future based. Accounting figures, on the other hand, are backward looking. Numbers tell the story, but they don’t build the business. People build businesses.
Investors tend to overestimate their ability to forecast the quantifiable and underestimate the qualifiable - people - of business.
Are people are overlooked? ☑️
Learning to identify super talented people before others is one the most underrated skills an investor an investor can develop.
The people component in business is important, knowable and overlooked.
The most underrated skill to develop, however, is to become a super talented person yourself.
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