Sequoia Fund: A Great Value Investing Mindset Creates A Substainable AdvantageThe Acquirer's Multiple
One of the value investing firms that we follow closely here at The Acquirer’s Multiple is Ruane, Cunniff & Goldfarb (RCG), the investment adviser best known for managing the Sequoia Fund. RCG recently released its Q2 2018 Investor Letter. For the second quarter of 2018, Sequoia Fund generated a total return of 5.80%, net of fees, versus a 3.43% return for the Standard & Poor’s 500 Index. The Fund generated a 7.16% total return year-to-date through June 30, 2018 versus a 2.65% return for the Index.
During the Q218 Investor Day, one of the members of RCG’s investment committee, John Harris, explained how a great value investing mindset creates a sustainable advantage.
Here’s an excerpt from that letter:
Then there is the part that you cannot really see and feel, and I spent a lot of time talking about this last year and I don’t want to say all the same things over again, but I do want to spend a few minutes talking about culture and mindset, because in so many ways, this is really where the rubber meets the road, both for us and for you.
If you think about it, we are investors in companies and you are investors in investors, but we are doing the same thing in that we are trying to find people and organizations who have an edge: an advantage over their competition. And not just an advantage, but an advantage that is sustainable across long periods of time, across different generations of leadership, across the ups and downs of the economy and the stock market.
I cannot emphasize this point enough: if you want to get a result that is different and better than the next person’s, you have to be doing something that is different than what everybody else is doing. If you do the same thing everybody else does, you are going to get the same result that they get. So as an investor in our firm, the question you should always be asking is: what is different about what these people do? If there’s nothing different, then we should all just go home and buy index funds. There has to be something different.
So what makes Ruane Cunniff different? I hate to say this, because I have enormous respect for our team and I am so proud of our team, but it is not because we have smart people and it is not because we do great research and it is not because we watch what we pay and we’re disciplined about buying the stocks that we buy. All of that is important. All of that should not be minimized. But all of that is stuff that other firms do. Other firms do research. Other firms have smart people. I hate to say it, I wish it wasn’t true, but it just is, and that’s a fact.
So what is different about what we do? To me, to us, what is different here is the mindset, the way of thinking and the culture. Yes, we do research, but it’s not just that we do research. It’s that at Ruane Cunniff, research is and always should be its own reward. We don’t care if you put an idea in the Fund this year. We don’t care how your picks did last year.
Now, don’t get me wrong, we’re as ambitious and competitive as anybody, and we think we hold our team to an incredibly high standard. But it is our standard, and I think it is a very different standard, and as we hold people to that standard, we do not do it in the context of a pressure cooker. We are humble enough—and this is interesting, because I was sitting next to a really astute client last night, and she said to me, “People who are really humble don’t talk about how they are humble,” so I say this with the utmost humility—but I think we are humble enough to understand that even with all the effort we put into it, making good decisions and good judgements is just so difficult. I cannot emphasize that enough.
People who are incredibly talented get it wrong almost as often as they get it right. Predicting the future is not easy, and when you are having a good run of it, you are not as smart as you think you are, and when you are struggling with it, you are typically not as dumb as you look. The person over here who put the really great stock in the Fund last year may not find another good idea for two years, and the person over there who has not put a stock in the Fund for two years may be the person who finds us the next MasterCard, TJ Maxx or Idexx.
And then this is really interesting: what about the person who does incredibly great research on an incredibly creative idea that goes up 10x over the next five years. but we never bought it because the stock ran up a little too high while the great work was being done? Should that person earn less respect or compensation than the other person who found the one that we did buy? I think at a lot of firms the answer to that question would be yes. At our firm, the answer is very different because we do not eat what we kill. Our mindset is just the complete opposite of that. Our mindset is to focus on the process rather than the outcome. We believe that if you execute the process well enough for long enough, the outcomes take care of themselves. That is an unusual mindset.
Our mindset is also that the client comes first, and that is why we have always limited the size of our asset base to maximize the odds that we get the best investment results we can get, because how you do matters more than how we do. If you have a mercenary mindset, and if your goal in life is to eat what you kill and make the most money possible, then this is not the place for you. This is a place where everything about the environment is geared towards attracting and exciting people who love to learn, people who are fascinated by the challenge of understanding businesses and their prospects, and people whose goal in life is not to make the most money but to generate the best investment performance. We try to stand toe to toe with the absolute best in the world at what we do, whether they are at mutual funds, hedge funds, family offices or wherever they are. . .and to hopefully play a little role in helping to sustain one of the best investing records in the history of our industry
That is the kind of person that comes here and stays here and thrives here, and I can tell you that is why I came here.
Now, all of this may sound really simple, but I can just tell you, it is incredibly hard to build and sustain a culture that nurtures this incredibly important idea that what I learned this year may actually be more important than what I earned this year. Building that takes work. It takes intention. It takes time. And frankly it takes a little bit of luck. But that is what we have here, and that is not a mindset that is prevalent at other firms. That is a sustainable advantage.
You can download the entire Q218 Investor Day Transcript pdf here.
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Article by The Acquirer's Multiple