Back in early 2014 we published our 4Q13 management report containing a special, 10-page text discussing Proxy Advisory Firms. It was motivated by further research following a June 2013 post on Buysiders.com called “Proxy Advisory firms: use with caution”. In the original post I highlighted “the dangers of “outsourcing research” – be it in Corporate Governance, people, financials, business models, competition, whatever – and the temptation of trying to systematize/quantify an investigation that is, by nature, subjective and case by case.” In the excerpt (inside) we addressed this part in detail but also mentioned “the fundamental choices we should make in terms of capital allocation (be it financial or human).”
We can choose how we do our research and in what processes we rely on, and we should choose wisely. For us the choice is clear.
A very important event that took place after we wrote our text: Institutional Shareholder Services, Inc. (“ISS”) was sold by MSCI to Vestar Capital Partners. Please keep that in mind when we discuss potential conflicts of interest in the text.
Another article to foster even more anticipation – as if we needed any more reasons to read the letter.
We’d love to guarantee that we will read it with the normal independence and skepticism, but we’d probably be lying – it is too big a landmark for the world’s most interesting company.
There isn’t one foreign friend of ours – from inside or outside the investment community – that hasn’t asked us “the Petrobras question(s)”.
We are sorry to say that we don’t have an answer and probably never will. Call us superstitious, but state-owned companies have a knack for causing the occasional investment disaster. We put them in the “too conflicted” box and move on.
It doesn’t mean we don’t spend time looking at governance and incentive structures – much to the contrary, that’s a significant use of our time. The Petrobras case, if taken solely in this regard, is very interesting – if unsurprising – and will be taught in business schools around the world for the next 10-20 years.
In the meantime, we point to Prof. Aswath Damodaran’s musings on Petrobras. It should be very clear that, by linking to the article, we imply neither agreement nor disagreement with his valuation exercise.
Interesting article on McKinsey’s website called “Confronting corruption” – it seems tailor made for the current Brazilian news cycle.
How about avoiding corruption? It is impossible for a huge company to control every worker everywhere and all the time, right? Even Warren Buffett has said that “Berkshire has 300,000 employees and someone, somewhere is doing something wrong” (H/T: Mason Myers Blog).
I don’t disagree, but any company can mitigate the risk by avoiding incentive systems and a corporate culture that favors “shortcuts”. I had posted twice about an interesting framework for managing corporate risks by HBS professor Robert Kaplan (here and here), until I finally decided to attend his superb course at Harvard Business School called Risk Management for Corporate Leaders. This one-week course is absolutely great and I highly recommend it for investors – but it is even better for corporate executives. It goes into the subject of fraud and corruption with great detail. I’ll highlight a few other sources for discussing this kind of preventable risk inside (click on Read More), and I definitely intend to write a deeper story into this – someday…
Having said all this, back to the “investor-only” hat: always remember that you can choose the types of companies you buy for the long term. If they look shady, are in shady sectors where political influence is a large part of the value generation drivers, or if this analysis is almost impossible to get right at any given time: be careful. Or, even better, choose to stay out. Read more »
I apologize for getting repetitive at times, but this is the number one issue at my mind at any given time: how do I know if and when I know something? How to distinguish superficial from deep knowledge – and what to do to get from one to the other? Yes, I have posted this before and allude to it every now and then, and so does the brilliant Shane Parrish at uber-source Farnam Street Blog (in our Blogroll for ages). His post on Richard Feynman’s famous TV special focuses on the part of truly knowing something. In an older post about the multidisciplinary approach, I posted the entire 50-minute special from which this clip was extracted – very, very much worth the time.
The name of the TV special? “The Pleasure of Finding Things Out”.
I couldn’t think of a better name.
A Financial Times story today highlights what is certainly a top-3 item on value investors’ wishlists (up there with “temporary availability of cheap, great companies only I know enough about”): raising permanent capital. The compliance, corporate governance and incentives challenges are immense, but every investor thinks at some point that they could make it work for them and their clients – as the potential benefits of a truly long-term investment horizon could outweigh the risks/ unintended consequences incurred. Even so, the Berkshire Hathaway comparison is as unfair as it is potentially dangerous for less-humble managers and for unprepared companies.
This LEX piece on sell-side research reflects several old, recurring and ever more vital themes I try to address at Buysiders.com: conflict of interests, incentive systems, the power of brands, halo effects and whatnots – and ultimately how hard it is to actually KNOW something when it is so hard to filter out the noise.
All this is more evidence that trustworthy, independent analysis is growing in value by the second.
And yet, other recurring themes comes to mind when you notice the last time I posted something here: time management, shifting priorities, long-term goals.
All point towards a better year for this site next year. I hope you will stick with this blog, and I will strive to make it worth your time.
Happy New Year!
Interesting post by the CEO of RBC’s US Wealth Management unit on LinkedIn’s Pulse – an interesting and improving source, by the way. Mr. Taft highlights the power of Buffett’s punch card analogy for investments, which by itself would be an useful reminder when we are in “dayly grind” mode. I’ve posted directly and indirectly about “waiting for the fat pitch” in other occasions, as you can see here, here and here .
Then he takes it to another, more personal level, and reminds us that the analogy applies to (even) bigger life decisions as well: you will probably make 10-20 life-changing / -defining decisions in your lifetime, so make sure you have the resources/ processes/ mental models to make the best possible decision at each time.
Morningstar has just held its huge 2014 Conference and it has tons of videos in its website. Chris Davis of Davis Selected Advisers reacts to ages-old questions (for instance, of separating “growth” and “value”) in elegant yet decisively “let’s cut through the common notion” way. Beware of “boxes”, “filters” in general, but especially of those that are too narrow or inadequate. Video and my highlights inside, but the above link has a transcript as well. Read more »
It may seem like a strange topic to get Buysiders.com rolling again, but it feels good to start writing and this subject really caught my attention as an analyst attending several events every year.
Two articles highlighted by the folks at Abnormal Returns (here – Scientific American and here - Vox.com) discuss a recent, preliminary study on the benefits (for learning purposes) of taking notes on paper vs on a laptop. It turns out we tend to write extensive notes, almost a transcript of the lecture, when using a laptop, while noting down the insights on paper (simplifying things a bit).
Well, count me guilty as charged. I use an iPad Mini with a keyboard, and even though I have been aware of this problem – even wrote about it here on March 2011, at least in terms of really paying attention vs tweeting blurbs out of context – I tend to make extensive notes in the hope that I will later, with time, reflect on all I’ve heard that day and create a “sharp, concise and actionable” synthesis… 90% of the time I just can’t find the time to do it afterwards. I am trying to change that, but old habits die hard.
That said, the articles and the study seem to focus on lectures – the near-monologue exposition of a topic by a professor in front of a classroom with several students, with usually little or no room for discussion/interaction. However, my experience with case discussions in class, moderated by a professor (the usual business school method), is that even an anxious note-taker like me just can’t do it – he’s either participating or following the discussion. In fact there’s not that much to write down except for insights or other points and even disagreements to discuss later with the professor or, more usually and more usefully, with your classmates.
Anyway: we’re back. Hopefully for good.