Hoffmann: One of the most important things process can do is to help eliminate some of the typical sources of bad decision-making, like pro-cyclical emotional bias. If you do everything ad hoc, you’ll find that it’s hard to replicate what you do well and also difficult to keep yourself from doing stupid things repeatedly. Basically, everything you do, as well as how you do it, should be undergirded by process. And I think that every investor needs to come up with a process that suits its style and discipline. We’re really protective of capital, so we have conservatism built into our process in myriad overlapping ways. We’re happy to hold cash, and that gives us the freedom to uncouple buy decisions from sell decisions. We never consider them together. This works for us but might not work for a growth manager who has to stay fully invested at all times. And while we’re willing to tweak our process—and honestly, we’re pretty ruthlessly self-critical—there’s a pretty high burden of proof to meet before we do that.
I’m not advocating rigidity, though. You need to stay flexible in your thinking and opportunistic in your actions. I’m just saying that you should have “guardrails” that guide you and keep you from running off the road. For example, we’ve developed a couple of checklists to make sure we don’t forget critical components of our analysis. It’s easier to forget stuff like that than you think. Adhering to these principles is especially critical when the world turns scary. There’s no place for impulsive behavior in investing, least of all when the world looks super uncertain. While it might work out from time to time, emotion is an unreliable ally. So when the tails get fat, and bad things look like they’re just around the corner, that’s when the rubber really meets the road and your guardrails can keep you from going over the cliff.
Hortz: What have you found are the characteristics of the kind of singular “lone wolf” companies you look for? Do they tend to have more innovative managements and company culture?
Hoffmann: One of the ways we strive to be different from the market is to avoid the kinds of consensus stocks that everyone else owns. And to those who say you can’t beat the market unless you own Apple or something, I say that’s just flat-out wrong. Your best chance to beat the market is to own singular stocks that represent good businesses and have good management and culture—but that the market isn’t celebrating with champagne and roses. While Apple may be singular, it sure seems to be priced for perfection.
We like companies that have an internal compass that steers them and that are not constantly looking over their shoulder at what everyone else is doing. They tend to be willing to think independently and not care about what the analyst community wants to see. We love it when a company refuses to provide guidance or doesn’t have earnings calls. Lone wolves tend to really know their customers and be able to provide the value those customers want. Since they’re not burdened with a business design cobbled together from the blueprints of others, they also tend to have the kind of resilience that allows them to respond well when the inevitable curve ball comes. This sometimes means that these companies are more innovative and it sometimes means that they were just dealt a better hand when they began so they don’t struggle with the kinds of lock-in that their competitors might have. Maybe another way to put it is that the management of a lone wolf tends to have the courage of its convictions and the support of its culture and employees—and so they’re better able to execute on their strategies. You may have to wait awhile for the market to understand and reward these companies, but that just means you can buy them all day long while the market’s looking the other way.
Hortz: What is your best advice to advisors concerned about investing for their clients in a business environment of accelerating change and growing uncertainty?
Hoffmann: In our experience, bad things will happen. Just count on it. Not always the particular bad things you think are going to happen, though. You have to be ready for the bad stuff but you can’t get too scenario-dependent in your planning. Stay nimble, own companies that themselves are resilient and able to do well across a variety of environments, and that have a management and culture that allow them to be resourceful and tough. And prepare for volatility in advance by having cash and a shopping list. You’ll get through it and, with any luck, you’ll come out the other end with a better portfolio than you started with.
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