by Steve Visscher, Mawer Investment Management
I went to an estate sale this weekend. This wasnât something I planned to do, but simply a spontaneous decision after seeing a sign in my neighbourhood. I approached the front door feeling excited about the possibility of finding a unique piece of artwork or a rare collectible inside. That excitement soon dissipated, but my visit to this particular home offered some parallels to my experience as an investor.
As soon as I stepped into this home, I was overwhelmed by the clutter. In one corner stood a large box of old cassette tapes. Beside it was an even older box of 8-tracks. The price had been slashed from 50 to 25 cents an item, but the lack of interest from other shoppers had nothing to do with cost. These items were obsolete and had virtually no value. The living room featured a 27-inch television set, although it was unclear whether that was 27 inches wide or 27 inches deep. The antenna nearly touched the ceiling. My favourite items were the sporting goods: rusty hockey skates, cumbersome camping equipment, and a pair of tennis rackets fashioned out of wood. Despite appearing to be half the size of modern tennis rackets, they felt about twice as heavy.
Walking through this home of obsolete objects reminded me of why we spend so much time and effort interviewing management teams. Understanding what management has done in the past is useful, but weâre more interested in learning about their vision for the future. If they have been successful at making wooden tennis rackets, are we confident that they can adapt to changing consumer preferences and offer new innovations? Or will they inefficiently allocate capital to a larger wooden racket factory just as their competitors introduce new graphite or titanium alternatives? How well do they understand their market and their role within it? How disciplined is their process to allocate capital?
These answers cannot easily be gleaned from the past, but are best understood by speaking with management themselves. We often go one step further and interview a companyâs customers, suppliers, and competitors to gain even more insight into the abilities of the management team. This exercise is one way that we reduce the probability of being left behind and investing in wooden tennis rackets.
Speaking of tennisâŠIâm always looking for an opponent. If you donât have a racket, I can lend you a newly-acquired wooden classic.
Steven Visscher
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