TRENDS & TAIL RISKS

A bi-weekly publication dedicated to the principle that deeper and broader knowledge drives superior investment results

Old Dog, New Tricks?

By Lewis Johnson | May 17, 2018

Chief Conclusion

The world’s best investors are constantly learning, constantly trying to expand their circle of competence to make better decisions.  Today I explain a recent revelation I had when I discovered that my entrepreneurial journey had taught this old dog some new tricks.  Namely, that the right people are everything. 


Six years ago, I began my third career as an entrepreneur.  My first career was a lobbyist for the textile industry, helping the South that had birthed and raised me to cope with pressures from intensifying international competition.  Investing was my hobby, which led me to Wharton, and afterwards into my second career in investment research.  As an analyst, my job was to identify the best investments among a cacophony of noise, and back them aggressively.  I did this for some of the world’s largest well respected investment firms.  So, my third career, building an investment business with my partners, seemed like a natural progression, right?

I thought to myself, Hell I eat risk for breakfast!  I had risked billions and made billions for my clients.  Terrifying lows, amazing highs.  I had seen them all.  If anyone on the planet could take and manage risks, I thought to myself, it had to be me.  This whole entrepreneurial thing was just the next step.  How different could it really be?  How wrong I was!

Today’s “Trends and Tail Risks” is about the many lessons I have learned over the past handful of years of entrepreneurship, building with my partners what I believe to be one of the fastest growing financial advisory companies in the country.  While I learned these lessons along the way, the full power of them hit me when I read the memoirs of Phil Knight, the co-founder of Nike.

Shoe Dog: How Nike was Built

Shoe Dog” by Phil Knight is a remarkable book.  It’s extremely well-written, brutally honest, authentic, and emotionally raw.  It’s one of the best books I have read in years.  You must read this book, especially if you are an entrepreneur or aspire to be one.

His remarkable story begins with his “Crazy Idea” that he dreamed up during a graduate seminar at Stanford’s School of Business.  There he wrote a case study about building a shoe company by breaking into the track and field shoe industry!  Isn’t that amazing?

When his first shipment of twelve shoes arrived, he sent a pair to his former track coach, who would become a co-founder of his company.  From twelve shoes to billions in revenue.  From such humble beginnings to such an amazing success.  I think often about a quote Knight attributes to Confucius, “The man who moves a mountain begins by carrying away very small stones.”  Small stones indeed!

Perhaps his memoir’s most fascinating aspect is that probably 95% covers his entrepreneurial journey from start-up to the company’s initial public offering in 1980.  After that…silence.  The whole period from 1980 to now, from a split-adjusted offering price of $.18 per share to today’s $69.50.  That’s a return of 19.4% per year with dividends reinvested, for a total return of 75,620%.  Not a word about it.

So, the more than $100 billion in market capitalization his team at Nike created, the $35 billion in sales…almost no mention whatsoever.  What was so distinctive in his mind about those early days of building what would become the Nike we know today that he would totally ignore the period from 1980 to now?

As I pondered this question, one answer seemed apparent: he loved the act of creation.  He remembered the early resource-starved days of struggling together with his team to solve problems of ever-increasing complexity to bring into being something which had never existed before.  He describes amazing highs, soul-searching lows, and everything in between as the team of misfits and iconoclasts that he had assembled battled its way through one problem after another.  Even though you know the end is victorious, sometimes you wonder how he will ever make it.

Looking down from his current pinnacle of success, he thought about this incredible journey and its toil, heartache, and doubt – and – wanted to do it all over again!  In his own words, “….my secret regret – that I can’t do it [his entrepreneurial journey] all over again.  God, how I wish I could relive the whole thing.”

I have never read a book that so captures the majesty and the struggles of the entrepreneur.  Through his eyes and his experience, I learned that the problems will literally never stop coming.  The price of success is that the problems keep getting bigger and more complex.  That is the entrepreneur’s joy and curse.  Your only tools to combat these problems, and to create the solutions that make companies successful, is to have the right people on your team.

Phil Knight got this.  He named the streets at Nike’s global campus headquarters after members of his early team.  Others have buildings named after them.  New employees get to hear the old war stories and come to appreciate and respect the history of the firm – and its culture.  So, this is what reading “Shoe Dog” helped me crystalize from my own experience: the importance of the right people on the team.

What I Learned from My Entrepreneurial Journey: People are Everything

While our firm is no Nike (not yet anyway!), Capital Wealth Advisors still has grown its way to number 515 on the list of Inc 5000’s fastest growing American private companies in 2017.  That growth was also recognized by FA Magazine, which named Capital Wealth Advisors the fastest growing advisor in 2015, number 22 in 2016, and number 2 in 2017.  Together I believe this makes our company one of the country’s fastest-growing registered investment advisors.

Our combined family of companies crossed over one billion dollars in assets under management less than five years into our shared entrepreneurial adventure.  And we did it organically, without acquiring other firms.  If you asked me how we did this, I would answer with one word: People.  I don’t mean to downplay the importance of the right strategy, or its execution, of course they are important – but it’s still the right people that make things happen.  Our new firm video, available at the link below, succinctly describes the essence of our firm.



Our “Crazy Idea”

Phil Knight said that Nike started with a “Crazy Idea.”  We have one too.  Ours is to bring to the high net worth markets the same research and investment management skills that we believe have typically only been available to billionaires and some of the world’s largest investment organizations.  Our dream was to construct portfolios of individual stocks and bonds, chosen by our research team, tailored specifically to each client’s risk tolerance and financial goals.  Clients would pay for this with one simple advisory fee, rather than face the additional layer of costs when investing in mutual funds or exchange-traded funds. Furthermore, with the arc of the world trending toward transparency, wouldn’t it be great if, when we made changes to our investments, that our clients could see every trade almost in real-time?  Even better, because we do our own research in-house, we can explain to clients what we are doing and why.

Of course, managing money for clients is only part of what we do to help simplify their financial lives.  Just like Nike had more complex problems and grew to solve those problems, we have experienced much the same and have grown to add financial planning and family office services for the families that we serve.    Learning from Nike’s experience, we have continued to reinvest in the business and grow our team to more than forty individuals.  This expanded team makes it possible for us to keep solving more complex problems for our clients and drive the next wave of our growth.

In Conclusion

This entrepreneurial journey has taught me the importance of people.  I am still an old-school “value guy.”  This means my first thought is about the price I am paying for a business.  But I have learned through being on a team growing a flourishing business that there is so much more when it comes to the successful growth of a business.  I know that now.  My circle of competence, as Warren Buffett and his partner Charlie Munger call it, is expanding.

I believe successful investing is about lifelong learning.  I am grateful for the experience of these past few years, working shoulder to shoulder with our team to solve problems, and by doing so, to create something that didn’t exist before.   All the while, I am learning. 

My hopeful expectation is that the next few years will be as thrilling as the last few have been.  I have Phil Knight to thank for helping me to understand that successful businesses never stop solving problems.  That one of life’s great joys is solving them with people you trust all working side by side.   I get his perspective now: these are the good old days.•



Important Note Regarding Third Party Recognitions and Rankings:
From time to time, Capital Wealth Advisors (“CWA”) may be recognized or ranked by independent third party rating services or publications, summaries of which may be included on our website.  Such recognitions or rankings are generally based on information prepared or submitted by the recognized advisory firm, and are usually limited only to those advisory firms who choose to participate in such surveys.  Any third party recognition or ranking that may be included on our website should not be construed as a guarantee that any client or prospective client will experience any specific level of investment performance or receive any specific level of customer service, as a result of such recognition or ranking.  Furthermore, any such recognition or ranking should not be construed as an endorsement by any of CWA’s clients.  As such, clients and prospective clients should not put undue reliance on any of these statements.

 

CWA Asset Management Group, LLC is an SEC-registered investment adviser, doing business as Capital Wealth Advisors and as blueharbor wealth advisors.  Fundamental Global Investors, LLC is a SEC-registered investment adviser that is affiliated with CWA Asset Management Group, LLC. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed. Nothing herein should be interpreted as investment advice. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Specific companies or securities described in this report are meant to be illustrative of investment style. Such case studies are not meant to be, and may not be, representative of any portfolio or holdings of CWA Asset Management Group, LLC, or Fundamental Global Investors, LLC.

Please note that past performance is not indicative of future results.
 
This material is solely for informational purposes and is intended only for the named recipient. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
Lewis Johnson
Co-Chief Investment Officer

Author of Trends & Tail Risks

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"Is it (a prospective investment) in my circle of competence?  The first test is: is it something that is in my sweet spot, something I can understand.  I try to enlarge my circle of competence over the years, but the important thing is to be in the circle.  The second step is I have to like management.  Finally, I have to like the price.  It’s not very complicated."
- Warren Buffett

""…we’re good at lifelong learning. Warren is better in his 70s and 80s, in many ways, than he was when he was younger.  If you keep learning all the time, you have a wonderful advantage."
- Charlie Munger

"…I had a thought (his Crazy Idea).  People might start wearing this thing, (Nike running shoes) to class.  And the office.  And the grocery store.  And throughout their daily lives.  It was rather a grandiose idea."
- Phil Knight, Founder of Nike, in “Shoe Dog”

"Let everyone else call your idea crazy…just keep going.  Whatever comes, just don’t stop...I believe it’s the best advice  - maybe the only advice – any of us should ever give."
- Phil Knight

"It takes a group of people to build something."
- Phil Knight

"It seems wrong to call it “business.” It seems wrong to throw all those hectic days and sleepless nights, all those magnificent triumphs and desperate struggles, under that bland, generic banner: business…. We wanted, as all great businesses do, to create, to contribute, and we dared to say so aloud.  When you make something, when you improve something, when you deliver something, when you add some new thing or service to the lives of strangers, making them happier, or healthier, or safer, or better, and when you did it all crisply and efficiently, smartly, the way everything should be done but so seldom is – you’re participating more fully in the whole grand human drama.  More than simply alive, you’re helping others to live more fully, and if that’s business, all right, call me a businessman."
- Phil Knight

"The man who moves a mountain begins by carrying away very small stones."
- Confucius as quoted in “Shoe Dog”

"I wanted my work to be play."
- Phil Knight

"My little shoe company was a living, breathing thing, I said, which I’d created from nothing.  I’d breathed it into life, nurtured it through illness, brought it back several times from the dead, and now I wanted, needed, to see it stand on its own feet and go out into the world."
- Phil Knight

"….my secret regret – that I can’t do it (his entrepreneurial journey) all over again.  God, how I wish I could relive the whole thing."
- Phil Knight

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