During their recent episode, Taylor, Carlisle, and Bares discussed The Art of Identifying Leadership Qualities in Potential Investments, here’s an excerpt from the episode:
Brian: Yeah, very difficult, obviously. So, we do the table stakes work that everybody does in terms of analyzing alignment of incentives through– We prefer as outside passive minority shareholders for a founder, owner, operator dynamic, or a great alignment of incentives in the proxy with the right types of return on capital-based incentives. Look at the history of the actions of the people. Do they map to the incentives? Do they map to what we expect? We don’t always get this part right.
A lot of people will say, and I read a bunch of research from Paul Meehl from the University of Minnesota that basically says that, “A computer can read a radiological scan better than anyone radiologist.” And so, you’re better off just not even trying, because all of your biases and misjudgments as a human, when you’re trying to assess these soft things are just going to lead you astray.
I actually don’t believe that at all. I think if you meet one manager, you might be super impressed by the meeting, you walk away. Then you meet 10, and then you might go back and say, “Well, that first one wasn’t quite as exceptional as I thought they were.” And then you meet 100, you can start to tease out little patterns. Life, and especially our business is very much about pattern recognition. It’s about discovering these deep patterns.
You start to see things in people’s backgrounds, the way they behave, the way they talk, the way they interact with employees that start to give you an idea for what a person is all about and whether they can be trusted with the capital that they have within the business.
Jake: You get intuition now for that, Brian? Like, so much pattern matching now where maybe it’s almost a subconscious thing?
Brian: I think so. I think pattern recognition develops into intuition. So, I think that that is correct. I love it when one of our research analysts comes back to the office and is like, “Brian, you have to meet this guy, or you have to meet this woman. They’re amazing.” That’s happened a number of times. Typically, it’s a pretty–
Jake: What’s the hit rate after that?
Brian: Yeah, it’s a pretty good sign. And so, some people just jump off the page. I tell people that you don’t get to the top of a business without having a silver tongue and being very persuasive. A lot of the people come up through sales, and so you end up being snowed by the people’s personality and the elements of their character that made them successful.
Jake: The rizz now is what the kids would say.
Brian: The rizz. Yeah, absolutely. A great example of this is there’s a guy named Selim Bassoul, who’s one of our favorite CEOs of all time that ran a company called Middleby, which is a metal bending, the maker of the hot side of equipment for restaurants. And so, they own brands like TurboChef and Viking and things like that.
I saw his very first investor presentation when the company was like $250, $300 million in market cap. I don’t know, today I’ve lost track, but it’s $8 billion, $9 billion or $10 billion, something like that. So, he gave his presentation and I was just completely wowed. I was like, “I just saw a combination of Thomas Edison and Steve Jobs give a speech.” I was like, “I got to just step away from this situation because I’m completely under this guy’s spell.”
Jake: Yeah.
[laughter]
Brian: So, I just sat there sucking my thumb until it went to $800 million in market cap. We finally wisened up and bought it, I think it was a three or four bagger for us. He was just unbelievable talent.
If he were in the room with us, you would all walk away with a brand-new pizza oven and have spent 8 grand on it or something.
[laughter]
He’s just an amazing CEO. One of our favorites that would be in our Outsider’s book, which we could write on the small cap space, he’d be chapter one. And so, the degree to which he would stand out is really, really amazing and indicative of our ability to spot exceptionalism from average.
Now, Madoff stood out and a lot of these other people stood out. And so, you have to be very, very careful and you have to check all these, the enthusiasm with the data and you have to make sure what they’re doing is rational and stuff. We have a portfolio of positions. If you get, say, 10 to 12 Selim’s, I don’t care what business they’re in, if they’re running hot dog stands, you’re probably going to have a great result. So, yeah, it’s tough to underwrite these soft elements of culture and things like that.
Yeah, I found your Maslow discussion really interesting. To port that on Bares Capital, I been working long beyond where it makes rational sense for me to keep working. I worry about in our business, the younger generations are saying, “Well, I just want to hit the lottery, not pay taxes, buy some crypto, move to Costa Rica, just get out of my community, because America is awful,” blah, blah.” And it’s like, “No, no, what creates meaning in your life is actually engagement. It is the building of community.” It is, for me, especially the duty that I have to our investors, the duty I have to my fellow employees, to my wife, to my kids, to the community at large.
By voluntary acceptance of increasing amounts of responsibility, actually provides you much more meaning than the feckless pursuit of freedom which I fell into that trap. It was like, “Why was I an entrepreneur starting Bares Capital?” It’s like, I wanted to get to the financial finish line quickly so no one could ever tell me what to do again. I could do whatever I wanted with my days. But that thinking will land you on therapist couch. It just will. It’s not the end all be all.
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