Is Everyone Rowing in the Same Direction?

When the going gets tough, will those around you keep rowing in the same direction — or will they throw you overboard?

Being a value investor in the late 1990s was not easy.

Anyone who refused to bend the knee to the dot-com cult was labeled a dinosaur en route to extinction. A dust-covered relic laughably out of step with this brave new world in which business valuations no longer mattered.

Forget earnings and free cash flow. Everyone just wanted to spin the roulette wheel of pre-profit internet startups.

That kind of frenetic speculation never ends well. But try telling that to the blundering herd when everyone around them keeps getting richer and richer.

Those few who remained committed to a value-based ethos faced an immense amount of scrutiny and backlash. From clients. From employers. From the media. Heck, even from the public at large.

It’s in times like those that an investor’s mettle is truly tested. Will you crumble in the face of pressure or stick to your principles until you come out the other side?

But there’s another question that’s every bit as important: When the going gets tough, will those around you keep rowing in the same direction — or throw you overboard?

Investing is not just about being right. But also about making sure that you can stick around long enough to reap the rewards coming your way. If everyone is not on the same page — with the same objectives, benchmarks, and temperament — even one little bump in the road could prove fatal.

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✨ It seems like every value investor has a Cisco story.

Back before the dot-com bubble burst, Cisco was the stock. The company brought internet networking to the masses just as the entire world took its first tentative steps into cyberspace. If it happened online in the 1990s, Cisco had a hand in it. As such, the stock price soared and — for a brief moment — Cisco reigned as the most valuable company in the world.

If you, as an investment manager, did not have Cisco in your portfolio, you would hear about it from unhappy clients. They didn’t much care that the stock traded at 220x earnings — but only that their neighbors and friends were getting rich from Cisco’s rapid ascent and they weren’t.

Envy is a cruel mistress — and an even worse stock-picker.

In the late 1990s, as value investors languished far below the S&P 500’s results, one of Rich Pzena’s clients taunted him that, “My grandmother is a better investor than you!” All because Pzena was not a believer in Cisco at nose-bleed prices.

“Cisco has a $500 billion market cap,” explained Pzena. “Let’s say you’re going to buy the whole company. You’re rich and you’re going to write a check for $500 billion and you want to make a 15% return on your investment. That’s $75 billion. They have to make $75 billion every year. They’re making $1 billion [now]!”

His client was unfazed. “You just don’t get it.”

David Winters tells a similar story. At the height of the dot-com bubble, he received a handwritten letter from a lady who called him a dinosaur for not investing in Cisco. “There were relatively few of us who maintained the core belief in value investing at the bottom,” he said. “There was tremendous pressure from multiple directions to capitulate.”

Pzena and Winters did not capitulate — but countless others did.

There’s an important lesson in there about cultivating a client base that fully understands your particular investment philosophy and won’t demand a change in direction as soon as the water gets a little choppy.

✨ Clients who don’t get it are bad enough. But if you and your boss aren’t on the same page — you’re sunk. Likewise, the right boss can insulate and protect you from any storm.

Markel’s Tom Gayner realized the value of patient management when his own investment results struck a sour note in the late 1990s. “I went through the biggest period of professional underperformance that I ever had,” he told the Redefiners podcast. “The gap between what was happening in the markets at large versus our portfolio was widening out in a very non-flattering and unhappy way.”

The stereotypical, short-sighted Wall Street boss might have handed Gayner a pink slip and sent him packing. Steve Markel, though, never lost faith. “Steve — and I will forever be grateful to him — would look at me at the end of [our monthly] meeting and say, ‘I understand what you’re doing and why you’re doing it. And I understand what you’re not doing and why you’re not doing it. See ya next month.’”

For several years, Mr. Market huffed and puffed at the Markel stock portfolio — rewarding pre-profit startups at the expense of the steady growers that Gayner preferred — but Steve Markel had built a sturdy brick house around his investment manager. And, boy, has that paid off in the decades since.

“It is a tremendous gift to work under a leader who sticks to the long term,” said Gayner. “If the long term were easy, if there were never any ruts, [if] there were never any bad days — then everybody would do it.”

“Everybody sticks with it during the good times. It’s the tough times when you start to know [what kind of person you’re really dealing with].”

✨ I’m pretty much contractually obligated to mention Warren Buffett and Berkshire Hathaway at least once in every newsletter, so here goes.

One of the questions that Buffett has been answering forever is whether or not Berkshire will ever split its stock. He usually brushes it aside by saying that he already has exactly the group of shareholders that he wants — and any stock split could only upset the applecart in that regard.

We’ve all heard this same answer so many times that it probably sounds a little passé, but it’s actually a profound point. No player of the money game — not even Warren Buffett himself — can thrive when shareholders are breathing down his neck.

So Buffett methodically put in place certain policies — including a steadfast refusal to split the stock — that weeded out the malcontents and complainers. This “eugenics program” (as he jokingly called it) has paid big dividends over the years as Buffett has been left free to allocate capital as he sees fit.

What kind of shareholder does Buffett prefer to avoid?

Well, let’s check in with his son, Howard, who once worked the thankless job of investor relations at Archer Daniels Midland. One shareholder, in particular, called Howard over and over with complaints about ADM.

So Howard told him, “Look, just take today’s price and I’ll pay a 10% premium. Sell me your stock — I’ll buy it personally — and then go buy something that you [actually] like.”

Howard never heard from him again after that. “People sometimes expect things that aren’t reasonable,” he told Yahoo Finance’s Opening Bid last week. “Sometimes they just get mad over things. People complicate things just by the nature of how they behave.”

Berkshire Hathaway will roll out the welcome mat for well-behaved shareholders — but the complainers and complicators need not apply.