Concentrate It Only Takes One As business analysts, we are wrestling with and trying to discern which businesses can create substantial long-term shareholder value. Fact: it is hard to determine long-term business value. This challenge motivates us and presents substantial opportunity. We remind ourselves of two business history lessons to articulate this point. Google tried to sell itself in its early days (for $1.5 million) and Intuit agreed to sell to Microsoft at a $1.5B valuation in 1994 (U.S. Government blocked the deal). Neither of these founders saw the ultimate potential of their businesses. Intuit’s market value is $192B today. Intuit has compounded shareholder value at a 16.3% cagr for the past 30 years! Intuit founder and CEO Scott Cook was a brilliant executive and with his front row seat, even he failed to see how much value Intuit could create.

This principle is about compounding and concentration. Compounding is powerful. We believe that owning a high-return, value-creating business with a long reinvestment runway can produce outsized returns. Compounding can be difficult to grasp. We like to remind ourselves that if a stock is up 10 times, the next time it doubles it drives a 20x return on the original investment and the double after that produces a 40x return! The best way to understand compounding is to own an investment that produces multiples on its original investment. This pursuit fires us up. We want our best businesses producing the strongest returns to matter – which is why we concentrate. Our mantra of It Only Takes One is rooted in a belief that there are only so many great investment opportunities. If we judge a business correctly, we want that investment to count!

Today, we will dive into our direct field research strategy and process - detailing the how and why we conduct “hands-on” research. Before we dive into this topic, we need to set the table. We still conduct in office research; copious amounts of it. We find that reading drives crucial base level learnings. We read and analyze source material from financial filings, company materials, industry research, interviews and many other scrappy ways to enhance our fundamental understanding of a business and industry. Upon completing a thorough base level of research, this is when we find it valuable to “hit the streets”. The Why: We want to uncover and eventually own businesses with qualitative differentiation. Understandable differentiation gives us conviction to invest. When we understand the deeper truths about a business, how it works and out competes peers, we are more likely to be correct in our business assessments. Qualitative “nuggets” of information and learning generated through a direct research process is the best way we’ve found to determine what is actually happening inside a company. It allows us to appreciate the nuances of how a business actually works. This is the key WHY behind our direct research process. We must “tease out” business model understandings and differentiations to build conviction. Another benefit of sourcing qualitative insights is that they can often be leveraged long-term. We are after finding deeper wells to drill where once we find a less than obvious truth, we can mine it for years to come! We want to find and own great businesses that are not yet appreciated by investors for their unique advantages. These advantages provide the potential for a business to post above-average returns on capital for longer than investors appreciate – thus providing kindling for outperformance. The best way we know how to find these differentiated businesses is by marrying in office work with intentional, thoughtful and directed field research.

The How: What exactly do we mean by direct field research? We want to conduct meaningful conversations with people who know the intricacies of a company, product and industry. Where do we conduct these conversations? In short, a myriad of places - trade shows, industry conferences, user conferences, site visits and one-on-one connections. Oftentimes the learnings and insights are subtle. They need to be “teased out” talking to those in the know. These “in the field” situations allow for such conversations and eventual learnings. What’s the Catch? Why doesn’t everyone do this work? For starters it is hard work. It involves lots of travel. Some of the research will be unproductive. As fundamentally driven investors we are in the judgement business. We don’t rely upon backward looking quantitative numbers to determine our investment decisions. We are looking to unlock truths about a business that are not yet known. We find the pursuit to be well worth the effort. Stay Tuned! Next week we will discuss a tenet of our investment philosophy; We Own High Potential, yet Undervalued Companies.