Take the High Road

Before producing Michael Jackson’s Thriller and prior to earning 28 Grammy Awards, Quincy Jones tirelessly pursued opportunities and gleaned wisdom from the industry’s finest. 

For example, Count Basie’s band couldn’t perform a gig in Hartford, Connecticut in the mid 1950s. Basie offered Quincy Jones’s band the chance to substitute. Jones leapt at the chance.

The concert, however, fell short of expectations, with only 700 attendees instead of the anticipated 1,800. After the performance, Jones collected his due payment and prepared to leave town when Basie unexpectedly showed up.

Basie, in his wisdom, said, “Give the promoter half of his money back. He put your name out front, and people didn’t show up. That’s not his fault.”

Jones was taken aback and asked, “Are you serious?” 

Basie replied, “Your name was on the poster. You didn’t draw. That ain’t his fault. You may have to meet this promoter down the road again. Give him half the money back.”

Young Quincy Jones begrudgingly gave the promoter half his money back. Jones later added, “It was my money, plain and simple. And here came Basie to tell me what I couldn’t do with it. Man, you bet I was mad, but I wouldn’t dare talk back. I respected him too much.”

In hindsight, Quincy Jones recognized the profound impact of that encounter. He stated, “I realize what he (Count Basie) did. Through that one encounter, he taught me the importance of becoming a man of integrity because only then could I be a good businessman and musician. I could have walked away with the money since it was contractually mine, but because my name didn’t deliver what it was expected to, acting in the best interest of the promoter was the right thing to do. Basie made sure that I treated people fairly, even if it meant getting the short end of the stick.”

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A number of years ago Costco was in a dilemma. The company had one of the richest healthcare and benefit plans in the retail industry. However, each year, over the previous decade, health care costs increased at double-digit rates. Costs were rising so fast that Costco had to tell employees the company would only be able to pay 90% of their health care costs instead of 95%. At the end of the year, Costco reviewed the actual cost and over estimated the increases by several millions of dollars. 

What was Costco to do with all that extra money?

The easier, more profitable, choice would have been for Costco management to tell no one and pocket the money. Jim Sinegal – Co-founder and former CEO of Costco – did the opposite. He distributed the excess to employees’ 401k based on their contribution. Sinegal said, “We felt that our word to our employees was much more important than the money that was involved in this. And it was significant to them relative to their life.”

It’s Not Altruism, It’s Good Business

Quincy Jones and Costco did the right thing. They took the high road despite challenges, conflicts and temptations. 

The morally upright path isn’t always easy. Quincy Jones probably could have eaten better after that concert if he hadn’t made that promoter whole. Costco could have reported more profit that year if they didn’t give money back to their employees.

Instead, taking the high road has led them to phenomenal reputations and magnificent long-term gains. Today Quincy Jones is one of a handful of individuals in the music industry with a net worth above $500 million. Similarly, Costco is one of the rare companies to graduate from being a microcap in the 1980s to a mega cap company today.

Taking the high road is not altruism. It’s good business. Doing the right thing leads to deeper relationships and saves a person/business from future headaches or Battle Scars.

Many microcap companies don’t follow the morally or ethically upright path. Instead, they choose the path of least short-term resistance. Misleading investors, exaggerating company prospects and in some cases manipulating stock prices pads the pocket book faster than taking the high road. With these companies short-term profits and personal enrichment take priority over long-term viability and business success. Investors should exercise extreme caution when dealing with these companies, as the odds are severely against them. 

Many other microcap companies operate in a moral gray area. They don’t bite the hand that feeds them or intentionally deceive investors, but they still choose the path of least resistance. 

For instance, when faced with product defects and customer complaints, they may fail to fully honor warranties, leaving customers dissatisfied. They might make canceling a subscription service needlessly difficult, or treat employees, suppliers, or the community in subtly unfair ways. Had Quincy Jones not made the promoter whole and had Costco not given back money to employees would be further examples.

The danger of operating in a moral gray area is that sin feeds on itself. Small moral compromises on Wednesday make you more likely to commit other bigger moral compromises on Thursday. Relationships don’t deepen, customers get fed up, employees seek other employment and business growth slows.

But every once in a while you come across a CEO leading a microcap that does take the high road. When faced with challenges or temptations, they do what is right. It doesn’t matter if the right thing hurts them in the short run, it is the right thing to do.

CEOs that take the high road are like lighthouses that stand tall and steadfast, guiding ships safely through stormy seas. They provide moral guidance and serve as beacons of truth and fairness. Just as a lighthouse illuminates the darkness and guides others towards safety, they illuminate the path of righteousness and inspire others to do the same. Their unwavering integrity and honesty serve as a guiding light, earning respect and trust from those around them. 

Take for instance Ryan Pape’s entrance as CEO of Xpel in February 2009. At that time Xpel was nearly bankrupt. The company couldn’t pay its bills and faced a $250,000 unpaid sponsorship fee. Most CEOs would have left the sponsorship fee unpaid. Instead, Ryan Pape called to settle the payment and said, “Look, I’m the CEO. I’m new to this job. I don’t own any of the company and there is very little I can do for you. But I have a credit card and if you will take a $25,000 settlement (which is the limit of the card), we’ll call it a day.” The person accepted the settlement. 

What signal did that send to that event organizer and Xpel employees? Xpel takes the high road. 

So when 3M launched the phony lawsuit on 12/31/2015 was Xpel going to go the low road and drag it out or back down? No, they took the high road. They mutually agreed to drop the lawsuit with no damage to Xpel’s business. 

When supply disruptions (caused by Xpel’s supplier) in Q4 of 2016 through Q2 of 2017 caused quality issues in Xpel’s PPF (paint protection film), was Xpel going to throw their supplier and customers under a bus? No. Xpel did the right thing and honored their warranties with a product recall while absorbing costs. 

What if issues arose with employees or other counterparties? Would Xpel treat those individuals unfairly? No, Xpel takes the high road. That is how they operate.

Taking the high road is the surest route to a great reputation and going From Hustle to Scale. Everyone wants to do business with them, over and over, and their companies just grow. In 2009, Xpel generated $3.8 million in revenue. In 2022, Xpel generated $324 million in revenue. Shareholders have been treated well over the long term too. Xpel’s shareholder returns have been 20,473% since being profiled on MicroCapClub.

“Take the high road. It’s far less crowded.” – Charlie Munger

The future is inherently uncertain. But as investors, we need to gain an advantage that increases our chances of success. We need something that gives us house odds, a favorable position that tilts the probabilities in our favor. Investing in microcaps that take the high road is one way of investing with house odds. It is far less crowded. 

Don’t just look for those on the high road, live it. When you choose to live life on the high road, you will also encounter others who have made the same decision.

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