MOI: You have stated on your website that “since exceptional judgment is crucial to virtually all investment strategies, a critical element of our due diligence process is to evaluate historical decision points.” What are some examples of such decision points and how do you go about evaluating them?
Joel Cohen: I’ll give an example from a manager we recently underwrote. In the mid-2000s, he stumbled across a small, sleepy community bank that had earned high ROAs and ROEs for decades. He thought to himself, how on earth do they do that? As he explored further, he discovered that there were quite a few others as well, and eventually it became clear that these were gems of businesses if they had certain characteristics. Of course, banks at the time were very overvalued because it was a boom time for the financial industry. Nonetheless, he knew the industry was prone to the occasional crisis so he did his work and identified a handful he would love to own – at one-third the valuation, of course. Four years later the financial crisis hit, and these great banks were babies thrown out with the bathwater, so he got the chance to participate in their high rates of internal compounding at discounts to book.
Now, what does this tell us about the manager’s judgment? First, he correctly identified these banks as quality assets. Second, he had the discipline and patience to wait four years before touching them. Third, he had the stomach to buy them in the midst of a financial and economic panic. These things are all as unusual as they are impressive.
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MOI: What are the attributes of exceptional managers/firms?
Joel Cohen: We try to be humble about thinking that we can crack the code of what makes a firm exceptional, even though we will spend our whole working lives trying to do it. We have developed our own, constantly evolving, always imperfect view of what constitutes an exceptional investor based on many years of working at it. If you define an exceptional firm as one which achieves outstanding returns over a very long period of time, one trait they all seem to have is that they view investing less as a job and more as a vocation or a form of self-expression. There are a lot of nice side effects that you often see from people who come to investing this way. First, they tend not to take a cookie cutter approach to investing or try to cater to what they think allocators want, but instead spend more time tailoring their methods to their own personality and what works for them. For example, with the manager I mentioned earlier who studied small community banks, he realized that the intellectual engagement of identifying great assets regardless of price, adding them to his list of things to follow, and then waiting for a crisis felt natural to him, and leveraged the skills he has that are most uncommon. Second, if investing is someone’s passion, they are going to be thinking about it in the shower, on the subway to work, etc..
Most importantly, their efforts are going to be sustainable. Time spent working is not a sacrifice, but an indulgence. Those who pursue investing for intrinsic reasons seem to keep performing at a high level for long after those who were in it for the money.
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