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Now that I'm getting more involved in running our wealth management business, I agree wholeheartedly with Buffett's take that being a business owner made him a better investor and vice versa.
It should be mandatory training for PM's to try running a business.
It should be mandatory training for PM's to try running a business.
Having to wrestle with things like initial ROIC for a new business line vs. what ROIC could be if we executed, leveraged high fixed costs w/ very high incremental margins, determining TAM, growth prospects (ie is this even worth our time), our competitive advantage there etc.
Having an understanding of what makes a great company helps me filter opportunities in our own business much more effectively. But having to help run a business gives me a greater sense of the struggles but also opportunities facing the businesses we invest in.
As a concrete example, we're pursuing a new line of business at the moment. We were approached by a client and would get say $100k in revenue from them. To serve that new business we'd have to hire someone experienced for ~$100k a year + office space etc. 1/4
So from a going in ROIC perspective, that seems stupid. It takes attention away from our core business, low ROIC etc.
BUT, we know that there are 2 or 3 other clients out there that we deal with which would want this. That 1 person can serve those clients too, 2/4
BUT, we know that there are 2 or 3 other clients out there that we deal with which would want this. That 1 person can serve those clients too, 2/4
Our incremental margins on that $300k of new revenue are ~100%, $400k in rev on $150k in costs = 266% ROIC on our investment in salary + office space etc, if we get those. That's our upside.
Our downside is it doesn't work out and we're down maybe $100k after 2 years. 3/4
Our downside is it doesn't work out and we're down maybe $100k after 2 years. 3/4
So, risk/reward seems decent, we have high odds of success on clients 2-3 because we already deal with them, and our downside is very manageable in teh context of our existing business. Seems like we should take the opportunity. 4/4
From this point, it becomes a question of execution. We're pretty good at what we do, so I think we can do it, but it's a risk and you don't get paid without taking risk.
Flip this to a pubco: we're going to see earnings go down in year 1, probably. Sellside analysts are going to cut us to neutral because it's an "investment year" and EPS estimates go down. Our stock probably doesn't "work" for 12-18 months.
Meanwhile, we're working on 200% ROIC
Meanwhile, we're working on 200% ROIC
What's going to drive our success here? Executing well. Giving customers what they want. Having good relationships with our clients.
It's not a moat, it's just simple execution and grinding away day after day. But sometimes that's what success is. Recognizing need + executing.
It's not a moat, it's just simple execution and grinding away day after day. But sometimes that's what success is. Recognizing need + executing.
Think of where people fail. Lots of advisors in our business don't invest in a team because they don't want to take a $100k/year paycut. That's an advantage for us: in 10 years, if you don't have a team you're going to be dead, but we have to invest NOW to get that advantage.
This seems simple, right? There's an opportunity, we can define our TAM, we know our margins on incremental rev. are high, and the downside is limited.
YET, despite that, people won't pursue it because of a stupid reason. But sometimes that is what differentiates win from loss.
YET, despite that, people won't pursue it because of a stupid reason. But sometimes that is what differentiates win from loss.
What's our moat here as well? Well, in this line of business, switching costs are very high. It is banking, so they're not impossible, but banking is surprisingly sticky particularly if there's a relationship there. Our churn for our core business is under 3%/year.
There's also a service aspect. We have a team, we have expertise other teams don't, we can handle more complex situations, we integrate with the bank better etc.
So is this a wide moat business, no. Is it a narrow boat business, maybe? There's something that keeps customers tho
So is this a wide moat business, no. Is it a narrow boat business, maybe? There's something that keeps customers tho
So thinking of this holistically, we have a business opp. High ROIC if we execute. Low loss, relative to our business, if we fail. The business line addition makes logical sense and has some synergies with our business today. Our competitors are lazy/don't have the scale/tech.
I wouldn't have been able to write any of that without studying investing. But similarly, being able to write that about our own business gives me a deeper understanding of what the businesses we own are doing, and what we should look for in them (growth + ROIC + culture). - FIN
Also I'm very sorry for the terrible formatting of this thread. These are all raw thoughts with no planning on my part lol.
