Investing Alongside Founders
“Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.” ― Nassim Taleb, Skin in the Game
This week I was interviewed by Dan Ferris on his podcast. The topic was founder-led companies. Dan wanted to know why we believe this is a special universe that improves the odds of long-term success.
You can listen to the podcast HERE. (My part begins at minute 24:15.)
In the interview, I make some of the following points: We want to invest alongside people who have a track record of success, have significant “skin in the game”, and have incentives closely aligned with our own (as shareholders). Founders Are Different The person who gave birth to a company is often best equipped to nurture, lead, and inspire the people who comprise the company. Founder CEOs are more likely to have the will and the power to make tough decisions that go against conventional wisdom. This can lead to bolder product innovations, more inspired team-members, happier customers, and even better capital allocation decisions. Some Good, Some Not Research shows that founder-led public firms have historically invested more in capital expenditures and generated more patents. They have also generated better long-term stock returns historically.* However, not all founders are created equally. Some are past their prime. Some don't have "skin in the game". Some run unprofitable businesses. Skin & Soul It is not just skin in the game that matters. Soul in the game matters too. Founder-CEO's are more likely to have it. They are often driven by a longer-term vision and sense of legacy. When a CEO has skin and soul in the game, we trust that their interests are better aligned with ours as shareholders. Values Investing in founder-led public companies also aligns with our personal values. We want to invest in businesses that are innovating - that are creating new and better technologies and services that make all of our lives longer, safer, easier, more efficient, and more enjoyable. Our Approach Fielder Capital has developed a proprietary strategy that invests in a diversified portfolio of founder-led companies. This is one of several strategies that we may employ within a client's portfolio (when appropriate). To receive our report on founder-led companies, including a list of the most notable research we've identified on the subject, simply reply to this email with "report please". To hear the podcast interview, just click HERE. (My part begins at minute 24:15.) Happy Fathers Day! Yours in the Field,
Frank Byrd, CFA *Two notable examples of research on founder-led stocks are:
Zook, Chris; Allen, James. The Founder’s Mentality. Harvard Business Review Press. 2016.
Fahlenbrach, Rüdiger. “Founder-CEOs, Investment Decisions, and Stock Market Performance.” 2007 (revised 2009).
For a list of other supporting research, you can download our full report HERE.
HISTORICAL RESULTS ARE HYPOTHETICAL. Past performance discussed in most of the above referenced research on founder-led companies is from back-tested hypothetical results. They do not reflect actual trading in real accounts. Future performance may be materially lower in actual client accounts. Since back-tested performance does not represent actual performance, it should not be interpreted as an indication of such performance. Actual future performance of the strategies referenced in the text and links above may be materially lower in actual client accounts. There are inherent limitations with such hypothetical back-tested results. For instance, such results do not reflect the impact of alternative market and economic scenarios. Nor do such hypothetical results reflect how an investment adviser's decision-making process managing actual client money might negatively impact actual results. Furthermore, back-tested performance has the advantage of the benefit of hindsight, which actual portfolio performance does not.
MAY BE RISKIER. A portfolio of founder-led stocks may invest in far fewer stocks than a traditional market index, such as the S&P 500 (“the market”). Further, such a portfolio may typically have a higher percentage allocation in smaller and/or higher risk stocks. Accordingly, a portfolio of founder-led stocks will likely experience substantially more price volatility than a traditional market benchmark. It may thus not be suitable for certain investors.
NOT A SPECIFIC RECOMMENDATION. The reference to any specific company or stock in the text or links above is for informational purposes only. It does not constitute a recommendation for investment in any individual stock. Fielder does not maintain an opinion on the merits of any particular stock mentioned and warns they could be very poor investments in the future. Fielder's employees or its clients may hold a position in some of the stocks mentioned herein. Please refer to Fielder’s Form ADV for more detailed disclosure.
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