One of the most interesting way to invest is to bet on the jockey instead of on the horse.
Yes, we know this goes against the tenet revered Warren Buffett but sometimes it may just make sense.
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
We actually do adhere to the idea that it is the reputation of the business that stay intact and we usually stick with the good horse but sometimes a wonderful price will do as well.
The idea of investing in a business looks similar to a horse race that do not have a finishing line. We could imagine the race as the industry the company is participating in, the individual horses as companies with the jockeys as CEOs.
Other than having the horse as a constant, there is multiple ways for the jockey to get ahead in the never-ending race. He could bring in new business tools which may help the horse or weigh it down. He could lessen weight (selling off subsidiaries) or even change the race (move into a new industry) the horse is running in.
During the race, investors can assess the fluctuating odds and decide if this is a price to pay and decide when to exit it.
Since the horse attribute is more or less a constant, we should expect the Jockey to be also critical in assessing the odds.
Betting on the New Jockey:
One of the most interesting way to spot a Special Situation is when an executive with a certain pedigree within a specific industry comes in as the new CEO of an ailing company. We noticed that if a brilliant executive choose to take the helm of a company, he usually would have understood the horse well enough and has a plan to right the horse.
One recent example which we had deployed this line of thinking is when Mike Salvino took over the helm at DXC.
Mike Salvino came with a pedigree like no other. Salvino had previously ran Accenture’s outsourcing business and is very highly regarded in the industry.
Throughout his career, Salvino has been a committed and articulate voice for skills development in outsourcing, and for the need to create career paths for outsourcing professionals. In addition to supporting the IAOP’s Certified Outsourcing Professional (COP) program, he has championed award-winning employee engagement and talent development programs in Accenture
-Outsourcing Hall of Fame
You can see our recommendation in DXC here.
He had came in, retained customers and build a new culture within DXC within a short period of time. He is the type of jockey whom we would like to see leading a company.
Betting on the Old Jockey:
Another strategy that we also often employed is when we observed that the existing CEO had made some mistake in the past and had vowed to become better going forward. Somehow the market had discounted the CEO because of his past mistake and we think that the betting odds offered is in our favour.
One recent example which had deployed this line of thinking is when Bill Ackman’s fund Pershing Square is down in the doldrum and is trading at a huge discount to net asset value.
Bill Ackman’s disastrous flirt with Valeant Pharmaceuticals and Herbalife Nutrition cost him billions. He attributed that loss to disruption in his personal life as well as moving out of his circle of competence. He had since got his life back in order and had refocus his investment strategy.
We also recognise that together with Dan Loeb and David Einhorn, they are all brilliant investors of their era. We do not think that they are past their prime yet.
We were lucky to have bought Pershing Square just before the pandemic and had ride Bill’s strategy out of the pandemic.
Similar to how Charlie Munger put his faith with Warren Buffett, we are happy being partners with Bill Ackman. To be exact, we had put in a number of bets with legendary managers whom we like from John Malone, Prem Watsa to Warren Buffett during the March downturn. We may not think that these great investors need to become better and we are happy to be invested along with them.
You can see our list of recommended managers in our 20203Q report here.
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