A Massive Fundamental Investing Red Flag Uncovered – In The Last Place You Would Think, Davos by Dev J. Dasgupta
H/T Cara Goldenberg
Also see a curated list of top hedge fund letters
Hedge Funds: If your CEO is waxing philosophical at Davos, it might be time to drop them like it’s hot
By and large, many investors consume droves of material written by authors on a deadline. What’s more, this comes at the expense of reading books. Aware of this paradox, our remedy is to present three favorite authors Bill Thorndike2, Nassim Taleb and the late Barton Biggs along with a shared abhorrence – the World Economic Forum’s (WEF) annual meeting; Davos.
The common thread between Thorndike, Taleb & Biggs
Bill Thorndike – The Outsiders
[drizzle]Against a backdrop of stock price outperformance, is a canvass detailing3 with artful precision- personality traits, social mores and competencies of 8 exceptional CEOs. Thorndike pays homage to Charlie Munger’s inversion model (Invert, always invert!) by illuminating the anti-thesis of the “Outsider CEOs”-
“They did not typically relish the outward-facing part of the CEO role. They did not give chamber of commerce speeches, and they did not attend Davos. They rarely appeared on the covers of business publications and did not write books of management advice. They were not cheerleaders or marketers or backslappers, and they did not exude charisma.”
Nassim Taleb – Antifragile
The irrepressible Taleb, in his “latest and greatest” unleashes a tirade at those 1) lacking sufficient skin in the game and 2) empowered to make groundbreaking decisions that impact the livelihoods of entire populaces-
“We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of the I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price. At no point in history have so many non-risk- takers, that is, those with no personal exposure, exerted so much control.”
Barton Biggs – Diary Of A Hedgehog
Biggs proceeded one step further describing the Davos man as a full-on caricature-
“Savile Row suit, Hermes tie, erudite, philosophical. He did not initiate the conversation”
Make Davos Great Again : Support Kleinfeld 2017
Davos is many things. One author5 described the Forum as a place “where leaders who spend the year worrying about shareholder returns take a weekend off to worry about improving the world”. We aren’t so sure the CEOs that choose to attend Davos are all that concerned about shareholder returns, however. Said otherwise, we find Davos to be our bête- noire. We share a view that Davos is a fun, social event masquerading as hard work and also an unrepresentative selection of the actual talent pool of global economic leaders6. That is, as investors, we collect anecdotes and often find that a collection of narratives coincident with financial metrics coalesce to form insights.
When a CEO does the unthinkable (i.e. attends the venerated WEF annual meeting- especially egregious are first-timers), we’ve found the representative company’s best days are behind them. Take Klaus Kleinfeld of Alcoa, a fervent Davos attendee8 and relentless hobnobber (a hobnobber, according to Urban Dictionary, is “a person who is important solely because of their position within a given organization, and generally creates a fuss upon news of their impending arrival”). There isn’t a corporate/shareholder event of prestige Klaus often declines so as to put in more hours at the office (oh, which by the way, occupies the top floor of the Unilever Building, NYC’s most expensive offices, which by many accounts are worth a sizeable portion of Alcoa’s market capitalization; certainly not a bad upgrade from the steel mills of Pittsburgh). An investor would have fared best by avoiding Kleinfeld’s hijinks all-together from mid ’08- to the present by way of holding aluminum outright (which plummeted in pricing/ton from ~$3k to $1.4k in ’08) or better yet a S&P 500 index fund. It appears an activist investor, Elliott Management, is attempting to rectify the situation as they recently increased their stake to 7.4% stake (having first invested in November 2015) and continue to believe the company’s shares to be “dramatically undervalued”. Paul Singer, Elliott’s founder, says he has no specific plans but believes a wholesale change in management and operations may be needed. Bravo Davos, why not ask your posterchild Klaus to run an annual seminar on Disruptive Value Destruction?
In a rather ironic twist, Martin Winterkorn, the former CEO of Volkswagen AG, a perennial Davos fixture who presided over the worst car emission scandals in history (beginning in March ’15 and ongoing) oversaw market cap erosion of nearly ~€70Bn, which doesn’t begin to contemplate the consideration of permanent impairment of consumer trust, expensive DOJ and shareholder lawsuits, and their equivalents in Europe. It is our observation that, perhaps for the first time, Mr. Winterkorn might have something interesting to say at Davos. Must we all pretend to be world leaders incapable of error? Do our errors not make us wiser and more capable of imparting meaningful managerial advice? No surprise, Mr. Winterkorn was nowhere to be found on this years invitee list. We surmise it is reserved for future pariahs only.
Samir Brikho: What Could Have Been
A deeper Davos betrayal for us is a former CEO we’ve admired for years. This former lieutenant of Jürgen Dormann9, unit CEO of ABB (an academy company) simply could not fester up the courage and avoid the siren calls and accompanying “need for social proof”. The mere reality that our one-time hero, Samir Brikho could not stand down a common vanity that preys upon ascendant CEOs was nothing short of demoralizing. Unfortunately, our agony is a deep pain that only the most fervent FIFA World Cup fans of Portugal (Cristiano Ronaldo), Argentina (Lionel Messi) and England (David Beckham) and other victims of serial athletic choke- artists could sympathize with10. We believe Brikho’s defining move – and the one that sets him apart from our investible universe – was his decision to first attend Davos. It’s difficult to arrest the inevitable, as a Davos-bitten victim will first dip his toes in the Davos waters, then drink from the confluence of largess, grandstanding and inflated self-regard and upon full emersion, devolve his decision-making calculus. Specifically, Brikho’s varied transgressions can be distilled into 3 phases (illustrated by the badge status levels).
- Pre-Davos (’06 –’09) – The once humble capital allocator whose first move as CEO of AMEC was to shed a capital intensive non-core division at a hefty price, and use the proceeds to repurchase his own shares in a large Dutch Tender, shrinking the share count but doubling value per share falls victim to the Davos seduction. Our former Davos virgin soon learns that “Big is Beautiful” and begins a long courtship process to merge with every oil services company in the UK. Davos of course seeks an encore11 in ’10 and Brikho’s self-worth and badge level grows with all newspapers speculating on a mega-merger on the horizon
- Davos-Incubation (’10 –’13) – Kissing every frog (big leaders > shrewd leaders), Brikho is in desperate deal mode and doubles down in pursuit of the elusive king-maker; anecdotally the deal breaker in his preferred transaction, Wood Group, was his own demand to lead the combined company. Sources say his hubris would have led to a major efflux of talent and Sir Ian Wood blocked any transaction
- Steering Committee SC – Davos (’14 –’16) – Fully aware of the badge hierarchy, Brikho obtains leadership positions on executive committees, lands that speculative ’merger12 and sets the stage for his eventual removal as CEO as the deal, within months of close, is nothing short of an unmitigated disaster, causing the cessation of dividends and a likely impending rights offering
The irony of Samir is that his Davos hobnobbing precipitated an early voyage to darkness13. That is, the once upstart Brikho who defiantly retired 15%+ of his company’s market cap in an earlier life, became enamored with a pursuit of social proof, (#KeepingUpWithJones), and an ego-serving pursuit of empire-building that resulted in a dilutive stock issuance, mis-timed debt issuance and a collision course with the price of oil. As one reporter disparages14, “No event manages to pander to such self-regard quite as effectively as Davos. Participants are not mere citizens of whichever country they hail from but global leaders, part of a sanctified circle of high-achievers unbound by borders and petty nationalistic concerns”.
But didn’t Marc Benioff/Jeff Bezos/i.e. Rockstar CEO attend Davos?
There are many exceptions15 but investing16 , as with many highly competitive endeavors, is not a single variable exercise but rather, one in which sometimes a collection of anecdotes fused with financial metrics culminates in a differentiated thesis. In terms of Davos, we believe prospective attendants (those in the CEO ranks) should leave the hobnobbing to the incompetents who are long on over-promises and short on accountability; central bankers and accompanying self-righteous mandarins. It’s also clear the non-attendees namely billionaires Ingvard Kamparg (Ikea Founder), David Cheriton (Stanford professor + early GOOG investor) and Mark Zuckerberg (FB CEO) along with visionaries such as Tim Cook (AAPL CEO), and Tony Hsieh (Zappos Co-Founder & Author) all share an uncommon work ethic twinned with a level of humility many could only aspire to.
Rule #4 – Don’t bull$–t a bull$–ttr
While conducting our primary investigative research, like any decent investor we sought disconfirming evidence. We reached out to the big boys themselves at WEF namely Business Development executives. One particular request for a list of invitees for the purpose of deducing which CEOs produced the unconventional yet sound sense to NOT ATTEND Davos was met with the following response –
Our takeway? Even Davos knows that the wisest managers say NFW to an invite
Onward
As we continue our voyage in seeking greater clarity on the commonalities behind great management teams and the underpinnings of less great management teams, we will encounter anomalies that will inevitably cause us to wise up and add to our list of red flags. Further, it is our belief that a differentiated investment process that is strictly adhered to and continuously improved will not only enable us to foresee the mistakes other investors will inevitably make but drive long-term outperformance. Please be on the lookout for forthcoming learnings that will hopefully serve as the necessary refinements that enhance our future decisions.
[/drizzle]
