This article is the final in a 6-part series examining how the drivers of value…
Our time to evolve has come. And we also believe the investment community’s time for evolution is not only long overdue, but has already begun. We fundamentally believe in an investment process that promotes transparency and collaboration amongst interested parties. We also find it hard to believe in a world where the managers’ interests are not completely aligned with the investor’s interests. How could they be anything but the same? Because of our sincere desire to bring transparency to the process of investing, we’ve long provided our investors with high quality and differentiated research on our investments. As perfectionists, with each new report we’ve written, we’ve tried to go more in-depth and provide even more insight. As a result, we’ve been told numerous times that our research provides some of the best analyses available on a specific company or industry. We’ve been truly flattered to receive the significant interest in our research over time, which continues to build.
Today, we’re throwing open the doors to anyone who wants to be a part of the process. We’ve started a research company to not only keep our efforts going, but to boost the frequency and depth significantly. What we’ve been working on so far has been accomplished by burning through what little savings were around, and it’s been done on a shoestring budget. We commit to all current and future GreenWood friends and investors to re-deploy all of the proceeds from this company back into differentiated and in-depth research. Our bottleneck so far hasn’t been a lack of opportunities to work on, as our pipeline flow has been dramatically increased over the years. It’s a lack of resources in which to properly investigate all of the great ideas our friends, screens and market irrationality bring us. At the same time, our deep analytical work has helped more than a few large multinational companies improve their strategy and underlying performance. Both sides of the trade can win when we bring truly unique and thorough observations to as broad an audience as possible.
In his wonderful book entitled Sapiens, author Yuval Noah Harari brilliantly talked about societal change through an anthropological lens. He explained,
“The ability to create an imagined reality out of words enabled large numbers of strangers to cooperate effectively. But it also did something more. Since large-scale human cooperation is based on myths, the way people operate can be altered by changing the myths – by telling different stories. Under the right circumstances myths can change rapidly. In 1789 the French population switched almost overnight from believing in the myth of the divine right of kings to believing in the myth of the sovereignty of the people. Consequently, ever since the Cognitive Revolution Homo sapiens has been able to revise its behaviour rapidly in accordance with changing needs. This opened a fast lane of cultural evolution, bypassing the traffic jams of genetic evolution. Speeding down this fast lane, Homo sapiens soon far outstripped all other human and animal species in its ability to cooperate.”
We believe the time has come to change the traditional “myth,” upon which investors interact. Buy-side institutional investors have convinced themselves that opaqueness helps their strategy. While we do agree that broadcasting near-term catalysts is counter-productive to the near-term performance of an investment, there’s zero evidence that keeping information hidden on a publicly-traded portfolio actually benefits the investors. In fact, opaqueness is one of the primary preconditions that was necessary for all financial crises in the past few decades. Companies that have provided more comprehensive information to investors in an effort to be more transparent have rarely been at a competitive disadvantage as a result of the information clarity. While some managers often hide information and claim it’s for “competitive,” reasons, numerous examples not only disprove this, but make it more obvious that management opaqueness comes because the strategy cannot withstand the scrutiny of outsiders. Similarly, investment managers that have shown a consistent ability to generate highly satisfactory returns have rarely done it by keeping their methods a secret. Rather, their alpha comes from their ability, like Steve Jobs, to “Think Different.”
During the last financial crisis, innumerable funds put up gates and locked investors in- investors who largely were unaware of what they were invested in. As a result of this scarring experience, large institutional investors have rationally scaled back investments in “black boxes,” the composition of which they have no real understanding. Since the crisis, co-investments of single-stock-specific funds have seen a secular bull market, as investors retake control of this investment process. We have always welcomed this.
Like any good product or service, we think the value proposition of a good investment should be self-evident. While we understand that secrecy and exclusiveness breed desire in potential customers, and has traditionally been a useful sales tactic, traditional marketing methods no longer work effectively. We’ve done zero outbound marketing because we’ve always believed that value creation potential should be obvious and not require any cajoling. Perhaps this is too idealistic, yet we let the ideas speak for themselves and as a result, we’ve experienced record low investor churn (in the top 99.9% percentile in New York) and counter-cyclical fund flows. While we’re still too small to make an example for the industry as a whole, the model clearly has its advantages.
Importantly, Harari demonstrates that the only reason our species is here today is because we were able to cooperate based on shared values, or myths as he calls them. We have long believed in a cooperative approach to investing and research. Our interactions with a vast array of global investors have helped us improve our process and the quality of our information. This collaborative and transparent approach has far greater implications. We believe it will also help shed greater light on sound corporate strategy and encourage our targeted companies to make timely and right decisions to improve their own prospects by actually creating value for all participants – customers first, employees and shareholders. Value creation at some of the best firms starts first and foremost with products and services whose value is self-evident to the customer. Success then allows for the hiring of better employees who, in turn, continue to improve the value proposition of the company. This virtuous circle should be rewarded by shareholders who lower the company’s cost and access to capital, and allow the company to make further value-enhancing investments at lower costs than peers. These are virtuous self-reinforcing circles.
We are instituting the same type of virtuous circle for our investment and research efforts. Thousands of funds and investors use our research on a monthly basis, and we have been humbled by everyone’s interest. By making tax-deductible contributions to this process, the entire ecosystem can support a continuous improvement and frequency of these reports, and also help lend a greater voice to encouraging targeted companies to implement better corporate strategy. In an age of increasing capital flowing to passive robotic investment funds, this capital is often getting misdirected. Robotic capital allocation is already having significant unintended consequences, and is perhaps worse than communist capital allocation. For at least then, humans were able to make decisions based on common sense – not financial engineering.
Geniuses, misfits and “crazy ones,” who push the human race forward do not live in computers. They do not financially-engineer every quarterly earnings report in order to ensure quantitive robots continue to prefer their company. It’s time for humans to take back the investment management process, and the only way for this to happen is to change the “myth,” upon which behavior is driven. Let’s make it transparent, cooperative, and completely aligned with value creation for all. The quicker we all agree to do this, the quicker we can de-fund irrational behavior and prevent future financial calamities that are always built on opaqueness and misunderstandings.
We resolve, from this day forth, to always promote transparency, an alignment of interests, soundness and patience of thought, intelligent corporate strategy, and collaboration. We will never put up gates and we will never close off our research to like-minded investors. In fact, we will use all proceeds from GreenWood Research to increase the frequency and depth of our analysis, and broaden the material we’re able to create for public education.
It’s very much 1789 in the world again today. Voters around the world are revolting against a status quo that no longer works. Pensions and endowments are pulling out of actively managed funds, and investors everywhere are taking back the capital allocation process. Corporations that continue to operate in traditional ways are losing shareholders and talent to their competitors who are innovating and thinking differently.
Join with us, and let’s change a broken myth.
GreenWood Research, Inc. and GreenWood Investors LLC