First off, I am going to give credit where credit is due. I would not have seen this had it not been for the author’s work to transcribe this Annual Meeting of the Daily Journal. Peter Kaufman is a director alongside Charlie Munger at the Daily Journal. Apparently he also appears on television a lot (I don’t watch news about markets… or much else: Protect Your Priors )
I have not thought of myself as a money manager. I am an entrepreneur and CEO. I have managed my own money but that is different. Or is it? However, as we take in other business partners a degree of trust with their money is required. So, I suppose I am a money manager. As Charlie Munger says in this interview a few times, “This is weird.”
Summary of Peter Kaufman’s list (and my interpretation following.)
A Manager should be (or have):
- Completely trustworthy
- Deep fluency in what they say they are going to do.
- Fair fee structure
- In an uncrowded space
- A long runway
I am going to tell a story that would likely never be told if I was not passionate about writing. However, I think it honors everyone involved and is a fine example of trust in the handling of money. Neil also said this is the type of thing many people cannot see about me and I should find ways to weave it into communications. So, here goes.
When a business is purchased the buyer often asks for the working capital to be included. Many first time sellers find this confusing. The seller asks things like: “Why would they need this?” “Aren’t those sales mine?” And “I can pay my own bills.” The common reality is a buyer has to write two checks. One to the seller and a second to fund the working capital to meet their objectives post-closing. One common concern of the buyer: the employees of the business expect to be paid! In most businesses the working capital is also a substantial part of the value. And, in our case, Little Engine Ventures likes to take control of the payables immediately. This makes our introductory calls with the vendors much smoother. Anyways, I can write about working capital adjustments a different time. Back to the story.
I have been a seller as well as a buyer. During one particular sale the working capital was pegged and there was an adjustment period post closing. This true-up period allows for any unexpected bills to show up or invoices that were not entered at the time of closing. Some people’s books are very tight and essentially close each day. True ups are less important and easily accomplished. In other businesses there can be weeks or even months to close their books for a given date. The business I was selling was somewhere in between. Regardless, when we sold the working capital value was pegged at an exact number and then there was an adjustment after everything was known. I could owe them or they could owe me. During this phase both the buyer and the seller are tracking records and agreeing (or disagreeing) on what should be included or not. In almost every case things are very clear. An electric bill that shows up the day after closing was for services prior to the buyer. An invoice that a book-keeper enters the Monday after closing for work finished the week prior is included. This makes sense, right?
In my case we were off quite a bit. However, it was not in a bad way where either of us were upset. The buyer believed they owed me quite a bit more. Based on my calculations I owed them a small amount. Now the dilemma. Do I concede to their estimate or not? I did not. I outlined why I believed my calculations were correct and after a bit of study they agreed. Honorably, they still offered to pay the full amount of their estimate. I declined. I believed I still owed them and offered the proper amount. They declined. The deal was done. I believe we were both completely trustworthy. This among numerous other examples has gone a long, long way in helping me work with people time and again. Things do not always go as planned but it is better to retain integrity than squeeze every nickel out of a situation.
I studied the Spanish language for eight years. Four in high school, four in college. I was terrible. With a name like Daryl, blonde hair and blue eyes I think every professor I ever had believed me to be an imposter. Well, that, and I was always doing the minimum amount of work in Spanish courses in order to pass. In my final semester I went to my prof and asked what it would take on the final in order for me to pass. She said, “Do your best.” I countered with, “You cannot pronounce my name properly either.” That was a bit harsh. She looked at me strangely and then I asked again about the final exam requirement. I needed to do very well and I was not a great student the whole semester. I told her I would try my hardest if she tried to say my name. She did attempt it and it was not right. I felt a little better and she understood. I passed the course but just barely. My wife is still much more fluent in Spanish than me and she had something like 2.5 years back in high school. I’m ashamed.
However, I am a man of focus. I say no to lots of things. A foreign language probably would have been one of them if I was allowed. Where was the bulk of my time being spent during these years of agony? Entrepreneurship.
I have been starting or buying businesses since my young teenage years. I have a deep fluency in the emotional and financial roller coaster this asset class provides its guests. There are strange nuances between the founder and the employees. Clients and customers look to the owner differently. Although the owner has no boss, he also depends deeply on the customers. In some cases a few clients behave as bosses to that “owner.” The whole thing requires many judgement calls about not just the people but the landscape of the business. There is lots of room for slop, but also precariously deep crevices that poor management can fall into.
In small business the owner must be capable of swooping into the deepest levels of the company. They must have technical expertise on the product as well as financial chops to keep records and make bank presentations. They have to do customer service as well as sales. They have to hire and delegate but also discern who is allowed to delegate additional layers and who must not. They face regulation from government entities and legal concerns. They must make pricing decisions with limited help. Customer surveys must be crafted and interpreted. They must do all this and have a balanced home life.
It’s harder to become fluent. But, once there, it’s a language you share with a few grunts, nods and gestures. You can see fellow members adhere to the code, and you know you are part of something that is helping millions of people.
Fair Fee Structure
I don’t want to dive too deep in this subject on the world wide web just yet. However, I will say that one of my favorite sayings is “fair is a four letter word.” It simply does not mean anything beyond wanting and compromising. In my experience it is better to approach situations creatively and look for the best fit. This can change over time.
At launch, I knew fees would be an important part of any fund. We are providing a service at LEV Capital Management to our limited partners. Since I didn’t know much about fees and didn’t care much about doing what everyone else does, I figured a split test was in order. Partners are able to pick their poison. I cut the cake, they pick the piece. Want no management fees? It is available. Want lower carry? It is available. Want a hurdle? It is available. Which one do you want more? You make the compromise.
As we approach another annual meeting and continue to enjoy meeting new people I am grateful to be playing a very long game. I am in love with Little Engine Ventures and the impact we get to make. I am not shoveling buckets of money into my bank account. At present, there is quite a bit of back-stopping I am doing for the firm. This is typical startup phase and in my experience in small business (which is what we are), it’s better for me to bankroll this phase than anyone else. I hold the steering wheel, and face the challenge personally. If we crash, I feel the burn pretty bad. I think this helps people trust me, too.
Long term I am exploring ideas about how to true-up things with partners. Ideally the longest held partners should be most aligned with me. We are not capital raising professionals. This is not our fluency. We are much more like a small business ourselves. If you like it, here is how we are compensated. If you can do it without us, we’ll meet in the market.
In an Uncrowded Space
At some point I will stop writing about how uncrowded this space is. It’s somewhat stupid of me to tell people I found a backwoods pond with lots fish and no other fishermen. But the funny thing about these fish thus far, is that they scatter when someone else shows up.
When you are fluent at fishing a particular spot it almost seems unfair. This is probably the best case of business advice in Kaufman’s things to look for. It’s also why most would-be partners run for the hills. They are not fluent and cannot see how obvious it is. They have never visited our pond.
Last week we closed on a business where the prior owners were living at their office building. This is not the first company we have purchased that have performed this level of commitment. My dad used to walk to work because he lived so close. His bed was beside a window that he could look out at 3am and tell if things were okay. These fish are quirky.
They don’t wear pinstripes suits… ever. They don’t drive flashy cars. They rarely redecorate their office… and if they do, it’s with pictures and trophies from their families or employees. Yet, they own things. Lots of things. Lots and lots of things do they own. Some of them make money, others are useful for camping, boating, hosting family reunions or simply admiring. They don’t flaunt them, they share them.
These are my people. They are our kinds of people. We get each other. They think I’m a little crazy, but they admire it. I’m glad to help them out and take care of one of their things. We’ll make them proud.
A Long Runway
People ask me when I started. My brain double clutches. Little Engine Ventures officially launched August 1, 2016 with seven partners. I started legal in January of 2016. I started pondering the structure in August 2015. I started gaining experience that is useful today in the summer of 1993.
Today I am 37 years young. At a church event on Tuesday of this week I walked into a room. Two circle tables had men at them. One was the old crowd. One was the young crowd. Both tables laughed at me because I paused. “Where should I sit? Am I young or old?” They laughed and I joined the young group.
Our structure is formed atop a foundation that can work for 30 years or more. When I meet with prospective partners they both like this and dislike it. Some even say things like, “In 10 years, I’ll be 70!” I never have anything clever to say. I think, “is that a problem?”
The honest truth is that a long runway is extremely important for a money manager. If they must hit a target in the next quarter or the next two years in order to get a promotion, buy the house they want (let alone make their mortgage payment) it will be hard for them to think about the capital being used as a partner and not just a means for their own goals. (for clarity sake, I cannot be promoted, only demoted, and I own a home we love, that is probably too big for my family of five, and we have no mortgage… I am fat and happy.)
The plain truth is that I love what I do. The runway in my mind is beyond my grandchildren. I don’t bring them up because I expect them to be wealthy. I think about their character, their faith and the way they treat others. I want to provide them an example of a life lived to max… despite blessings that allow for less than stellar effort. By the way, my kids are in grade school.
Anyways, I believe we should live according to an infinite runway. We often trim or compromise the most massive growth possible for safety. But, because we are a compounding machine at our nucleus, whether we hit our absolute peak five, ten or fifty years matters only to me if we have done it wisely. I am to put my talents to work, and grow my talents over time.
The great thing about investing with someone with a long runway is that their skill can improve with time.
Thanks to Peter Kaufman and the author for transcribing his notes from the annual meeting. This was a fun exercise for me and well worth the hour an half of writing. Hopefully you read through it faster than that. Cheers.