Four things every great company has in common
Why four pillars - people, power, purpose and profit - determine whether companies thrive or die
Many companies seem strong in the near term, boasting what appear to be highly defensible moats, but over time, what initially resembles an ocean of defence often reveals itself to be a small puddle, and what seems to be a mountainous growth opportunity may be no more than a transient blip.
Due to this, a significant part of our focus when analysing investments is on four key areas that we believe are critical in identifying which companies will not only successfully weather the storm, but will come out stronger.
These areas are what we call the 4 Pillars of success.
People
Purpose
Power
Profit
1. People
People are the backbone of any business, and having the right founder and team is paramount. When evaluating a company’s People capability, we look for:
Incentives: We prefer founder-led businesses where the founder, senior leadership, and board members have significant equity. Incentives are powerful determinants of behaviour, creating the right environment for maximising long-term value. As the late Charlie Munger famously quoted, “Show me the incentive, and I will show you the outcome.”
Leadership: We like companies helmed by visionary leaders with a “je ne sais quoi.” These leaders have the right combination of vision, resilience, and expertise and can inspire and drive those around them. Importantly, these leaders are highly ambitious and are doing their life’s work.
Culture of excellence: The best companies have a culture that attracts top talent, inspires loyalty, and consistently leads to the highest standards in their products and services. These teams are often highly experimental, with rapid iteration cycles, where collaboration is valued and people of all levels are empowered to provide real input. A great example of this is Disney in the 1930s, where Walt Disney cultivated an environment where creativity thrived and innovation flourished, leading to a golden age in animation.
“Whatever you do, do it well. Do it so well that when people see you do it, they will want to come back and see you do it again, and they will want to bring others and show them how well you do what you do.” - Walt Disney
2. Power
Capturing the lion’s share of industry growth through existing customer expansion and new customer acquisition is only possible from a position of strong and improving defensibility.
Due to this, the second element we look for is an enduring competitive advantage that consistently improves every year and is extremely hard to replicate.
To form a view of a company’s Power, we have adopted the framework created by Hamilton Helmer in his book 7 Powers. In this book, Helmer identifies seven distinct “powers” that allow companies to generate “persistent differential returns” compared to their competitors.
No single moat is impenetrable, so great companies typically combine two or more powers. They will also actively pursue strategies that add new powers or increase the strength of the ones they already possess.
“The key to investing … is determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” - Warren Buffet
3. Purpose
An essential trait of great companies is the ability to ignore noise from the outside - whether investment analysts, media, or the mob - which can steer focus away from what matters.
Underpinning this ability is typically a well-defined and compelling mission (what are we trying to achieve?), vision (what does the world look like when we’ve achieved it?) and strategy (what’s our plan to win?) ingrained into every company member’s ethos. This is what we refer to as Purpose.
A company’s purpose helps to connect the dots between current activities and future objectives, grounds decision-making and allows for greater business discipline. Ultimately, this means a business can grow faster because it is focused on the things that truly matter.
“We are not just a company that makes chips. We are a full-stack computing company, providing everything from hardware to software, enabling groundbreaking innovations in industries ranging from gaming to data centers to autonomous vehicles.” - Jensen Huang
4. Profit
To succeed in the long run, a company must be able to 1) grow sustainable, recurring revenue streams and 2) maximise the proportion of this revenue that ends up as profit.
Revenue opportunity: To maximise revenue growth, we believe a company needs to be a leader and key beneficiary in an industry with significant growth tailwinds. On top of this, we look for multiple growth levers and visible opportunities to expand on these over time (whether solving more problems for the same customer set or expanding into adjacent products or markets).
Good economics: Growth is important, but it must be supported by the right business model. We look for companies that generate high returns on capital, with strong unit economics and high incremental margins that drive operating leverage. This allows for healthy free cash flow generation, enabling re-investment to support growth without external capital.
“The individual investor should act consistently as an investor and not as a speculator. This means... that he should pay attention not to market prices but to intrinsic values, focusing on the cash flows and earning power of the assets he is investing in.” - Benjamin Graham
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