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Intelligent Fanatics Project by Sean Iddings and Ian Cassel, MicroCapClub Publishing (2016)
The seductively simple premise of Intelligent Fanatics Project, a book written by two US investors, is that all great companies started out small.
Their vision is "…to find Reed Hastings in 2002, when Netflix (NFLX) was a $150 million market cap microcap". Hastings is the internet TV company's co-founder. By 2016, when the book was published, Netflix was worth $38 billion (today its market capitalisation is $70 billion).
The Intelligent Fanatics Project is a study of eight "intelligent fanatics" that shaped great businesses. The term was coined by Charlie Munger, one half of probably the most famous investment partnership (the other half of the partnership is Warren Buffett).
By distilling the common characteristics shared by the eight leaders the authors hope to identify new generations of leaders still establishing businesses, some of which will become great firms of the future.
This is a book, therefore, about profiting from successful moonshots by profiling the mission directors.
The term 'Intelligent Fanatic' is defined on the cover page of the book, and elaborated in the final chapter, which teases out the common characteristics of the eight intelligent fanatics and incorporates them into a checklist the authors dub the Intelligent Fanatics model. Here's the definition, split into its components to make it easier to scan:
1. A CEO or management team with large ideas and fanatical drive to build their moat.
2. Willing and able to think and act unconventionally.
3. A learning machine that adapts to constant change.
4. Focused on acquiring the best talent.
5. Able to create a sustainable corporate culture and incentivise their operations for continual progress.
6. Their time horizon is in five or ten year increments, not quarterly, and they invest in their businesses accordingly.
7. They own large portions of their business.
8. Regardless of the industry, they are able to create a moat that competitors fear.
The word 'moat', used twice in the definition, is a Buffetism that describes businesses with strong defences against competition. Highly profitable firms attract competition. To remain competitive for decades, enough time for a firm to achieve greatness, it must have strong defences.
The authors believe the ultimate defence is leadership and culture. Products and services can be copied or bettered, but the ideas, systems, attitudes and values that enable companies to produce compelling products and services are deeply embedded and much harder to replicate.
Each case study unrolls in a similar pattern. It provides biographical details of an intelligent fanatic and the firm he or they built. It teases out the particular characteristics the authors believe drove success. And it tots up returns of one kind or another over multiple decades, to demonstrate the potency of fanatic's strategy.
The shortest record examined is the 30 years in which "Low cost airline wizard" Herb Kelleher established Southwest airlines (LUV) as the USA's dominant low-cost airline.
The longest, 47 years, is the period "King of clever systems" Les Schwab ran Les Schwab Tire Centres. From the investor's point of view, the least profitable fanatic was probably "Retail Maverick" Simon Marks, who from 1927 and 1964, a period of 37 years, grew shareholder returns an estimated 16% a year.
Marks was the son of Marks and Spencer's (MKS) founder, and the man who ran the company as it first developed and then rolled out the superstore concept in the UK. "Original Warehouse Pioneer" Sol Price was, perhaps, the most successful fanatic.
He grew returns 40% a year, first at FedMart and then at Price Club between 1954 and 1993 (a period of 38 years). FedMart and Price Mart subsequently inspired the intelligent fanatic that founded Costco (COST).
The estimated returns range from the fantastic to the completely unimaginable. A thousand pounds compounding at 16% over 37 years turns into over £240,000. A thousand pounds compounding for 38 years, turns into £3.5 million!
"Father of sales and innovation" John H Patterson of National Cash Register is probably the granddaddy of intelligent fanatics. He introduced cash registers towards the end of the nineteenth century. In typical Intelligent Fanatic style NCR focused on one discrete market, saloons, before it took on other businesses taking cash transactions.
Patterson wrote a prototypical version of the Intelligent Fanatics Model in a briefing for sales agents in The Hustler, NCR's corporate newsletter.
The Hustler, which disseminated sales techniques, was itself a ground-breaking strategy. In it, Patterson exhorted continuous improvement by keeping one step ahead of customers.
The new technology was expensive and intimidating, so his policy was to educate them gradually, increasing the sophistication of the product only as the market's willingness to accept it increased.
NCR was an early adopter of direct mail, and rewarded its salesmen with lavish salaries against the prevailing belief that to keep them keen, you had to treat them mean.
He bought them fine clothes, and also their wives, not only to impress customers, but to give them a taste for the high life. Like all the Intelligent Fanatics after him, Patterson looked after his workforce improving factory conditions, providing cheap meals, and ensuring the entire workforce received a share in the firm's profits.
He used competitive strategies that would today be deemed excessive or unlawful too, his Competition Department vandalised rival machines and cloned competitors' registers, so cheaply the competitors went out of business.
By and large though, it was his more high minded strategies that lived on, not least in his protege Thomas J Watson's Computing-Tabulating-Recording Company known today as IBM (IBM).
The authors describe a path leading from Patterson to one of the later intelligent fanatics, Herb Kelleher, via Watson that illustrates at least two intelligent fanatic characteristics: employee empowerment and a willingness to experiment and take calculated risks.
In describing the way Southwest operates to an interviewer, Kelleher invoked a story about Watson.
One of Watson's vice presidents had lost $10 million on a failed project and offered his resignation. Faced with the letter, Watson replied "Hell, no! I just spent ten million on your education. I ain't gonna let you leave." That, Kelleher said, "is what we do at Southwest Airlines".
The book contains many inspirational stories, but eight companies is a small sample from which to draw conclusions. A scientific or comprehensive study of the intangible qualities that make a company's culture is unimaginable, at least to me, but I think it is self evident that characteristics like these are desirable.
Making use of them is more tricky. Firms' cultures are often opaque to outsiders, and the book doesn't tell you how to get inside. They're easily misunderstood too. Ryanair (RYA) has thrived, though its culture, often lampooned, is, to many, off putting. Interpreting culture is easier in retrospect, once you know it has been successful.
Just knowing what to look for helps. Since I read Intelligent Fanatics, I've been more alive to the possibilities that intelligent fanatics might be running some of the businesses I follow.
When I read annual reports and visit companies I look for signs. Firms, like Trifast (TRI) that name their staff and boast of how long they've employed them may have strong cultures that encourage loyalty.
Firms like Motorpoint (MOTR) that link executive pay to measures of staff and customer satisfaction, are reaching beyond the routine accounting measures that define success. I check to see whether profits are shared with staff, as they are at Howdens, or hoarded by executives.
And I give System1 the benefit of the doubt as it experiments with yet another product or service. It's blazing a trail in behavioural market research, and it needs to find out what works. I gain confidence at companies like Treatt (TET), which go out of their way to introduce shareholders to staff, and gain even more confidence from their positive attitudes.
I imagine whether I would like to work for companies, and I try to link my superficial knowledge of their cultures to more mundane measures of profitability and cashflow to get an impression of the width of the moats they're digging.
There's a risk I'm imagining greatness, and sometimes I will, but I may also be predicting greatness. You don't need many moonshots in your portfolio, to do very well.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
|COSTCO WHOLESALE CORP||$158.81||-0.65%|
|INTERNATIONAL BUSINESS MACH...||$147.00||0.00%|
|MARKS & SPENCER GROUP||346.70p||-1.17%|
|SOUTHWEST AIRLINES CO||$58.88||-0.41%|
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