Josh Tarasoff is general partner of Greenlea Lane Capital Partners LP. He is a fund manager I’ve always looked up to ever since member Chip Maloney told me about him. Tarasoff only invests in compounding machines, and often times this means identifying them when they are misunderstood. The way he articulates his strategy is very thought provoking. Earlier this year he made a presentation at the Ivey Business School. I would encourage everyone to watch the presentation below, [SLIDE PRESENTATION], and here is the [FULL TRANSCRIPT].
Here is a snippet from the presentation were Josh talks about his two biggest lessons learned over the last ten years:
There are two key lessons I’ve learned in my first 10 years. So, the map is not the territory is, I think, a very famous dictum. What it means to me is that, the frameworks that we use to make decisions are always just the frameworks in our head, and they’re not reality itself. Reality is infinitely more complex and dynamic than whatever tools, mental models we use to do our analysis and make our judgements. So we can’t be trapped in our mental models, although it’s very, very easy to be trapped in our mental models. We have to be committed to changing our mental models, which means somehow stepping outside of them, or discarding them altogether.
So I’ll give you an example from my experience. Let’s just talk about a common mental model of a brand franchise versus a commodity. I think this will probably be familiar, where a brand franchise is a product that has a consumer preference that affords it pricing power. Well known examples of that would be Coco-Cola and Sees Candy, you know from Berkshire’s portfolio. Buffett talks about them a lot. A commodity is something that does not have any consumer preference whatsoever, so the company that sells the commodity is a price taker. Examples would be a pure commodity like oil, or insurance is often cited as a commodity business, by Buffett in fact.
A long time ago, I was visiting an insurance company and the people kept talking about how their brand was helping them, and they said this one thing that for some reason stuck with me. “Our brand is winning ties.” This didn’t fit my mental model. I knew that insurance is a commodity business, and that brands aren’t supposed to be valuable. So at best, what they were saying would be a fleeting, ephemeral effect that they have that would go away. So I just dismissed this claim that they were making, which in retrospect seems ridiculous that I thought I knew I knew better than these people did about their own business.
But that was my reaction at the time, and then over time, just by paying attention to what I was seeing by studying dozens and dozens of businesses over the years, and luckily having a more open mind than I did during that episode, I realized that the mental model of brand franchise versus commodity is incomplete, and that trust is super important in business. It’s so important that we take it for granted, and it’s just easy to overlook and under-appreciate. So I came up with a new mental model, at least for me it was a new mental model, that I call tiebreaker brand.
If there’s a high stakes purchase decision, so that trust is critical, and there’s a limited number of companies in an industry that stand out as the most familiar or widely-used or respected, than all else equal, it’s a no-brainer to go with those companies as opposed to a less-trusted company. This is familiar, we know intuitively about this. No one ever got fired for buying IBM, is sort of a representative notion. Other examples would be the name brand accounting and audit firms, I think they win a lot of business just because of their brand.
Fidelity and Vanguard just because of their size and their mindshare, win a lot of business just because of that. Amazon Web Services is the defacto industry standard in cloud computing. So what a tiebreaker brand is, is it’s a middle ground, I think, between a brand franchise and a commodity, where the tiebreaker brands don’t necessarily have pricing power, although sometimes they do. So they’re not like a brand franchise in that respect, but they do enjoy, they can enjoy very strong consumer preference if they offer a market-leading value proposition independent of their brand.
I don’t view this as a mental model that I would invest in if the only advantage a company had is a tiebreaker brand, but I think it’s a really important dynamic to appreciate, and if there are other advantages that the company has, then a tiebreaker brand can be a really powerful buttressing effect to the other competitive advantages.
So the lesson is, when reality conflicts with your mental model, keep an open mind. That’s harder than it seems because the mind, if you pay attention to the way your mind works, you’ll realize that it immediately judges everything, even things that you just have no idea what they are, they’re completely new, immediately analysis, judgment, criticism, good and bad, what have you. When that happens, the only thing the mind can do when it’s doing this immediately judgment, is use existing mental models, and so if you never make any space, then you’re trapped. So quieting the analytical mind to make room for clear observation is really key for learning.
My second key lesson is what does long term mean? When I first started, I thought that long term was a decision. It was like, you decide to be a long term investor instead of a day trader like you decide to be a lawyer instead of a doctor, and then that’s what you are because you made the decision. I realized pretty quickly that it’s not a decision, it’s more like a discipline. It’s something you have to recommit to, because you are constantly facing pressure from your own nature, and then externally to behave in a short term way.
Then I realized that even that is not the best, most effective way, to think about what it means to be long term, because this idea of effortfully being long term every day in the face of these pressures, is just very hard. It takes a lot of energy, and it’s actually impossible, because you can’t perceive and respond to their pressures. They’re so fundamental, you can’t perceive and respond to them completely. So what long term is, is not something you do, it’s something that you are. And becoming long term is really a matter of personal transformation rather than a skill or even a discipline. So I think of it as being calibrated in a certain way. You can be calibrated in this way such that you don’t even experience those pressures, so you transcend them.
Going even further, we’re calibrated to care a lot about very, very short term experience. If you just try to sit and do nothing for a few minutes, or even 10 seconds, you’ll realize that you care a lot about what’s happening second to second, literally. Business is on a different timescale. You can’t accomplish anything in less than a few years. You can’t accomplish anything big in less than a decade, right? Most of the time. There is, like Facebook would be maybe an exception, but it’s a pretty good rule of thumb.
Long term investors have somehow calibrated themselves to that time scale. Going a step further, I think that certain companies adopt a perpetual viewpoint which is, strangely very immediate and eternal at the same time. It’s very difficult to explain and articulate. Amazon does it by saying, “It’s still day one.” Markel articulates it by saying, “Forever and right now.” This perpetual viewpoint is my aspiration for Greenlea Lane. The lesson is that thinking of long-termism as being something that you become or are, rather than something that you do, is really powerful and it can be the most important competitive advantage that a value investor can have.
MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States, Canadian, UK, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Investors can join our community by applying to become a member or subscribing to gain instant view only access. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena. If you enjoy the search for the next great company, Join Us.