What Matters Most

I realized early in my investment career that I neither had the mental horsepower nor the will power to apply complex mental models and robust 300-line item investment checklists, while also assessing whether I’ve fallen prey to a myriad of behavioral biases. Instead I’ve tried my best to replace complexity with simplicity. One of the ways has been to apply simple qualifying statements in a way that focuses me on what matters most.

In the articles, Don’t Be A Chicken and How Can I Hurt You?, I mentioned two such statements or questions that I use to assess the quality of a business. In this article, I’ll give you a third statement that you can apply to assess what new information, data, news is material to your investments.

Over a lifetime you will likely own 10-20 big winners and hundreds of failed impostors. Finding and buying potentially great companies isn’t the hard part. Holding your winners and identifying and selling your losers quickly is hard. In The Art of Holding, I concluded: If you’re invested in great businesses that continue to grow and earn more money, don’t let lulls in stock price and boredom scare you out of them.

Successful long-term investors have the ability to disconnect the business from the stock price. It’s why it’s important to focus on being a great business analyst, not a stock analyst. Active patience is the hardest skill-set to develop.

Active patience = diligently verifying your thesis and doing nothing until there is something to do.

As investors, we are under constant attack of information overload. Most of it is self-inflicted. On average, people spend 8.5 hours each day consuming some sort of media (Television, Internet, Radio, etc). What percentage of this actually makes you a better person let alone a better investor? Correct, very little. This deluge of information can make it difficult to focus and remain disciplined.

I’m not going to bore you with 1,000 more words on why you need to turn off the financial media outlets, stop watching stock prices, today’s politics, interest rates, currencies, jobs data, etc. You know what you need to do. Now do it. Clear your mind of distractions so you can focus on the long-term.

“Absorb what is useful, Discard what is not, Add what is uniquely your own.” – Bruce Lee

One of the negative side effects of constant exposure to short-term distractions is it causes you to overthink and overanalyze. You start believing everything is important, when in reality very little of it is important. A butterfly farts in Spain and investors are analyzing its effects. Stop looking for every and any excuse …..to act.

So how do you easily qualify what new information or data is material to your investment thesis? First and foremost, you need know your positions better than most so you can quickly assess a situation. Negative events, speed bumps, and glancing blows will occur even during the maturation of great companies. It’s your job to know the difference between a glancing blow vs knockout punch to your investment thesis.

Here is a simple yet powerful question that you can use to qualify new information:

Does any of this new information make a material impact on the relationship or bond the business has with its customers?

I recently saw a similar question by another investor and thought it was brilliant. The most important determinant of long-term business success is the bond businesses have with their customers. Investors that know their investments better than most, and specifically, understand what drives the relationship with their customers will ultimately be successful.

Don’t be lazy and make lackadaisical assumptions about this bond or relationship. “Well, their product is cheaper, better customer service, blah blah, done! I understand the bond.” No, no no. Talk to customers and ask them. Get the differential insights that will bring the relationship to life.

A few years ago, I was conducting scuttlebutt research into an investment of mine. I spoke to four customers representing the four customer categories the company sold its products-services into. These customers were in the agriculture industry. One customer was a ranch owner. I asked several open-ended questions. He communicated that he’d been using the company’s service for several years. He used it because it made him more money. When I asked about switching to a competitor he quickly said, “No, I’d probably never do that. The other company hasn’t been around very long. This company has been around a while now, and I know and like their people. I trust them.”

I then spoke to another customer and he mentioned the “Trust” word again. I pushed him, “I’m not really understanding what you mean by Trust?” and he quickly replied, “Let me explain it for you. If someone shows up on my property (he owned 60,000 acres) and we don’t know you, we shoot at you. If we know you, we invite you in for dinner.” I remember thinking to myself, “Well that explains the company’s 99% customer retention rate lol.”

This differential insight allowed me to tune my information filter toward anything that could disrupt trust within the company’s ecosystem. Such an occurrence could be disastrous. But even more importantly, prior to talking to customers I thought certain things were very important, and after talking to customers, my assumptions were wrong. Don’t be lazy. Do the work. No assumptions.

The relationship and bond that your businesses have with their customers is what matters most. Understand the bond so you know what drives them. Everything else is just noise.

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