Issue #67: What Drives Investment Results

NOTE: this was a past issue of my weekly newsletter, Timeless Gems. Join my free mailing list so you don’t miss out on future issues.

Today’s gem is a chart that depicts which elements drive investment returns over a single quarter to 10+ years. And some commentary around an underrated aspect of long-term investing.

Great visual, the only adjustment I would make is multiple change should be longer than just 1 year, perhaps grouped with cycle/industry and cover 2-5 years.

I think people/culture is a highly underrated aspect of long-term investing. It’s hard to objectively assess people/culture, requires a degree of judgment that comes with experience. But, as per the chart above, people/culture is critically important for driving long-term returns.

On people/culture

I’ve had the privilege of speaking directly with owners & management of several successful privately held businesses, analyzing their operations and culture. I’ve noticed many “cultural” commonalities among owner-operated bootstrapped businesses that are 20+ years old, and have made the owner wealthy. Some of these commonalities include:

• Conservatism: very rarely do these businesses have debt. They usually have very clean balance sheets, large cash balances, and pay all vendors punctually. Also tend to understate any forecast or forward-looking analysis of the business (think polar opposite of SPAC forecasts).
• Resilience: possess the grit, creativity, and determination to survive challenges (and have a history of doing so)… or else they wouldn’t be here 20+ years later, duh!
• Humility: admits mistakes they’ve made, transparent about shortcomings of the business, and forth-coming about problems/risks it faces. Lack of arrogance despite their tremendous success.
• Longevity: willingness to sacrifice speed in order to optimize for the long run and to “get it right”. Culture of continual improvement.
• Obsessed: deeply passionate about the customer and the industry they’re in. Owner + management can talk about the history of their customers/business/industry like Bill Belicheck can talk about the history of long-snapping

You generally find high levels of both customer and employee retention in these types of businesses (not to mention, a high level of consistent owner earnings). At Atlasview, we love these businesses and greatly appreciate the culture built by the owners. And personally, I’m always trying to learn and improve my ability to analyze people and culture. I think that’s far more important than the ability to analyze numbers.