Peter Thiel and Warren Buffett Have Interestingly Similar Views

This weekend I finished reading Peter Thiel’s Zero to One: Notes on Startups, or How to Build the Future  which debuted this past week.  It was a great read utilizing interesting methods to deliver his message whether philosophical, Shakespearian or contrarian.  I would recommend folks reads it and consider the messages being delivered.  Interestingly, I found several of Thiel’s messages to be consistent with those espoused by value investors such as Warren Buffet and Charlie Munger which was quite fascinating given that value investors and venture capital guys are not considered to run in similar circles.

What became evident in my observations are the views and thoughts of Thiel are similar to Buffett/Munger while the delivery is far different between the sets of individuals.  What that tells me is that Thiel is right, there are not a lot of things most people do not know.  Those original discoveries are harder to harvest and require a lot of research and development.  However what is most fascinating and original is how Thiel delivered his messages in quite an intellectual and complex way that on the surface makes the views seem more unique and original.

Below are some comparisons I noticed which I think speaks to the universality of  the topics by two very different sets of individuals and their invest “styles”.

Topic Thiel Buffett/Munger
Monopolies Thiel suggests monopolies are good for businesses to gain earnings power. Perhaps good for society if earnings are reinvested to produce “zero to one” and therefore valuable products and services. Buffett suggests investing in companies with Wide-Moats, large Barriers to Entry, large Economies of Scale and where regulatory or government limits the licensing of businesses and therefore new entrants. These are analogous to what Thiel more blatantly calls monopolies.
Competition Competition is not good for businesses as companies in essence fight their way down to zero earnings. Management’s attention is removed from creating true differentiation and new categories of products and services. Growth is extremely hard to predict and therefore should not have much value when estimating a value of a business. The higher the growth in a sector the greater the possibility of new entrants which will increase competition and reduce earnings and margins. Therefore when valuing companies, little to no value should be placed on growth. At the end of the day, it is hard to know which companies will survive the competition.
Diversification Unlike other venture funds, Thiel focusing on selecting few venture investments and selecting only those that he believes have the potential to return 100% of the total fund investment (not just the single venture investment). The size of the position has to be significant enough that an outsized return will in fact have an outsized impact on the total fund. While diversification is known as a measure to reduce risk, Buffett has claimed if you were only given 20 investments to make in your entire life, you would be extremely selective of those investments through significant independent research and due diligence. Thiel suggests the same thing looking for zero to one businesses and not incremental businesses when making his selection.
Incrementalism The real value is creating something from nothing. Creating the Nth of something is really incrementalism.   Growth through globalization is incrementalism at its core. One of Munger’s great lines is “efficiency is lack of imagination”.   Efficiency and incrementalism I think go hand in hand and it is true that it is the lack of imagination of something new and not experienced previously.
Founder and Team Selection Selecting people you would enjoy working with and who have similar intellectual curiosity, mathematical skills, etc. will help to create a sustaining work environment filled with long hours. This really speaks to the culture at its core which is critical to the startup strategy. Buffett selects companies with good management in place and are well run.   While he has recently ventured into turnarounds via his partnership with 3G, generally speaking he is about good management and solid companies. By way of example, you can see his recent re-affirmations with Benjamin Mooring’s independent dealers as an example of his commitment to cultivating a strong culture that is collaborative and not antagonistic.
Long Term View According to Thiel, long-term planning is often undervalued by people’s indefinite short-term world. There are 10 references to long-term planning and thinking in his book. The longer term the view, the more focused individuals will be on long-term challenges and opportunities of a business. Buffet’s investment strategy is a long-term owner of businesses so market gyrations do not impact his decision.  As well, Buffett is a big proponent of allocating capital to its best and highest use.  Taking a long-term view of where to allocate capital evident via his purchase of Burlington Northern and NV Energy which were bought during down periods when others did not see the longer term prospects in these two sectors.

I think there are several ways to be success in business and I do not agree 100% with Thiel’s views on topics such as equity compensation, homogenous teams, etc.  However as he likes to say in his talks, there are nuances and I find that true when it comes to equity compensation and homogenous teams.  It’s those nuances that make the discussion interesting.

 

Internal Controls and Accountability – Corporate Culture Necessities

UBS Investment Bank's Offices at 299 Park Avenue
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This week another “what is going on” happened in the financial industry.  This time it is UBS and 31-year-old UBS trader Kweku Adoboli who is accused of rogue trading with estimated losses now closer to $2.3B.  The activity had been occurring for the last three years but according to UBS it just recently uncovered the activity.  Sadly, this comes just a few years after the financial crisis of 2008 and UBS’ commitment to improve risk-controls and management system after it had a $50B write-down.

Accountability and risk management were areas of opportunity for UBS back in 2008 and part of the commitment Oswald Grübel, CEO made when he joined in 2009 to improve the risk management.  Fast-forward to September 2011, and apparently the culture is deeply rooted with folks who are working against the mantra of improved operations and risk management or so it seems.

UBS’ story is too familiar to those following the market, corporate culture and the financial industry.  In fact UBS’s story is eerily similar to Société Générale SA and Jérôme Kerviel, who racked up a $7.2B loss doing the EXACT same thing.  Kerviel was accused of making fake trades to hide his losses and repeatedly deleted those trades just before inspections, re-entering them afterward.

If you read Kerviel’s and the Soc Gen story, Kerviel will tell you that his leadership knew what was going on and he alleges even helped circumvent the system controls to allow him to make incredibly large trades given his previous successes.  Others were also involved, knew what was going on and in fact left the business shortly after the discovery.  Regulators on the Soc Gen case, The Bank of France, made 17 routine on-site investigations of Soc Gen in the two years prior to Kerviel’s capture and did not detect the matter.

So what is the answer to protect business owners, investors, customers and employees?  First off businesses today are operating in a much more complex environment and with a weaker economy.  When knowledge and money are scarce, we see the true ethical fabric of people and corporate cultures.

Knowing that we have complex and fast-paced environments, and financially weaker economics, we have to acknowledge that financial controls, IT security, risk management and a “do the right thing” culture are critical to ensuring protection of economic value.

As leaders, I would recommend the following to help create a culture of accountability and oversight:

1)  Automation of controls is good but it alone will not do it.  Human observation is critical to catch activity when systems do not.  In the cases I have been involved in; it was the person who has a funny feeling that triggered the review.

2)  Instill in all levels of management the understanding and expectation of risk management as part of their core responsibilities.

3)  View new processes, systems, people selection all with the eye of risk avoidance.  How can we ensure our data is protected, our systems are secure, our people support a culture of taking care of each other, the investors, the customers and the broader economic community?

4)  If you find a flaw, promote it, tell others so they know how it happened, how it was fixed, and that leadership is always on the lookout for other errors.

  1. If it is a system error, do a full sweep of the systems to inventory and determine if others are out there.
  2. If personnel related, investigate how rooted the infraction is on the culture.  Usually people cannot commit a crime alone…typically there are others who at least know about it if not participated in the act.  Determine the depth and breadth of the web of knowledge.

UBS, the world’s largest private wealth manager said no client’s positions were compromised.  However its reputation has been seriously harmed and with their letter to clients this weekend they attempt to provide some assurances “We fully understand this incident has caused you concern.  We too are very disappointed, and we assure you that UBS is taking the matter extremely seriously.”

Well, what about the letter to its shareholders that lost $2B in operating income, or the 3,500 employee force reduction announced in August with a value of $2B which will appear to cover the loss or the broader market that is teetering in its confidence of the financial industry and market in general?

This was not a single person acting alone in a cone.  Several people either activity or passively through lack of controls and accountability played a role in the situation.

We as leaders of companies must understand we are all connected…when we create an environment of strength, values, sustainability and corporate citizenry then we create our own destiny of greatness.  Looking away is not an option for us.  If internal controls and accountability are not on your short list as a leader….this is your wake up call to make some changes.  Too many people are counting on us.

 

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Learn from History: Transparency in Corporate Culture is Essential

Enron Complex in Houston Texas
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I am watching a rerun of “Enron: Smartest Guys in the Room“.  Had the Stockholders had transparency into the company, the corporate culture and the legacy of leadership decisions, things would have been different.  A sad story of how so many people on the inside knew or sensed much but said little until it was too late.

If you own a business, share your culture, your decisions and your stories with your employees, your clients and your stockholders.  If you want a legacy and long term success, this is the only way to go…like any relationship…Trust is Essential.

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Corporate Culture and Steve Jobs. It is a Company Valuation Discussion.

Image representing Steve Jobs as depicted in C...
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Steve Jobs announced his resignation and CEO replacement this week.  The market flurried on the news, articles and cable segments were plentiful on Job’s revolution of the world, his greatness, his attention to detail, how round two leadership differed from round one and whether Tim Cook could sustain the innovation and therefore the stock profitability.  Because of the news, and the market’s speculation of the future, the stock price fluctuated.

While the SEC, the Accounting Standards Board and the public expect greater transparency on the financials, this is a perfect example of where further modernization of transparent data is needed.  The data I am talking about is Corporate Culture.  What is the real corporate culture of a company?  Behind the curtains in the offices, cubicles, conference rooms and break rooms, what do we see and feel if we were employed?  Does the executive leadership down to middle managers think about creating unanticipated needs?  Do employees each feel their job has meaning, and they are curators for society creating imaginative and innovative items that will simplify people’s lives?  Are people rewarded because of not only successes but also the advice/counsel of failures through offering lessons learned?  Has leadership not only established its values but live them every day?

We are talking simple yet life altering values that make sense to everyone on the team; the words/phrase that are heartfelt and have a real connection to the team (exclusion of canned/stock words).  Corporate Culture includes leadership that shares his/her intelligence and understands its greatest creation is the team that can then imagine, create, care for and give back.  The daily belief that teams that works and plays together stays together.  Moreover, the practice of creating and sustaining relationships are key both inside and outside the company.

The stock market this week speculated whether the rein of Apple was coming to an end.  Sure, they have items in the pipeline so they still have the tail they could ride for a while.  The question that writers and business news broadcasters were asking indirectly and some directly…Was Steve Jobs the only creative sustaining genius in the room?  Were others mere followers of his vision?  I sure hope not.  That would mean the weight of the company rested solely on him.  Given the depth and breadth of Apple’s presence in the world, that would be awfully herculean of Steve Jobs and would have been an unsustainable tenure.  To ask such a question would underestimate the power of team…the Apple team.

Instead, the question the market should be asking is what is the culture of Apple?  How deeply ingrained is the culture?  How deep is their bench of employees technically, creatively and aesthetically on and off the court?  Is Tim Cook the right person to nurture the culture to not only sustain it but also grow it to a better version of itself?

The biggest question of all we should be asking ourselves is why do we not know the answer to these questions?  Why have we not broken into the thick steel vault of Corporate Culture?  Why do we not include in company and market valuation the corporate culture aspect more directly? We look at current leaders, financials, pipeline, past performance, changes in market conditions, ratios, strategy, etc for valuation.  I would propose that these elements are important in valuation; however, corporate culture is the thread that runs through them all.  It is hard to measure, because it is enigmatic…hard to define and for many hard to create, grow and transform.

When people figure out Corporate Culture is the only transformative value creator, then valuing a company will come down to those that have a good culture versus those that do not.  When looking at good cultures, then it will be which ones do shareholders believe in and more align with their values.  After all, shareholders are a part of the team.  Their contribution is not time, energy or creativity…they are contributing their hard earned dollars and trust into the team and the culture.

Want to value a company whether as a shareholder, partner or sole owner for buying or selling purposes?  Top of mind in your valuation calculation…corporate culture.  Companies that develop an amazing culture and then proudly let others know about it, will create, hold and grow more value.

As for Apple, I don’t have firsthand knowledge of their culture but I can think of 356 Billion reasons why we should know in great detail.

Your voice matters and I would love to hear what you think.

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Corporate Culture: The Sleeper in a Company’s Valuation Equation

MATH ON TV
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I recently heard a story of a woman who bought a CPA firm.  In essence, she believed she was paying for the client list of the seller.  She had the seller sign a non-compete agreement to protect the customers.  She also agreed to keep the two tenured employees onboard as part of the seller’s request.  For the buyer, life was good for about six months.

Soon thereafter the first employee decides to leave the business and informs the clients she will be starting her own bookkeeping practice.  The clients move with the employee.  The other employee sees this and soon follows the same plan leaving the buyer short $100K a year in fees.

Litigation later, the buyer loses the cases and is required to pay the defendants’ fees.  Oh by the way, did I tell you one of the employees was wife to the seller?

There are so many life lessons here, so let’s focus on the overarching one.

When you are thinking of buying an existing business, be very clear in your own mind that you are not buying the revenue, assets and profits.  You are buying the culture and the relationships.

The culture tells you if there are good financial controls in place, leadership is honorable and respected, employees are valued and motivated to stay, customers feel a sense of loyalty to a company that has given them more than they paid for.  Culture tells you if you are buying a transactional versus transformational business.

When buying a business, you are also buying the relationships.  There is no certainty the customers will return post close.  Frankly, there is no certainty the customer list even represents repeat customers to the seller.  While it is not possible to know the relationship with every customer, it is necessary when establishing a good price to know the relationship with the top customers and a sampling of the mid-size and smaller customers.

Want to know the price you should pay for a business, find out the company culture.  It is the sleeper element in the valuation equation.

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