“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”, Warren Buffett is known to have said suggesting why it is important to look for businesses which are fundamentally strong before evaluating management quality. The great Peter Lynch had a similar take – “Go for a business that any idiot can run – because sooner or later, any idiot probably will run it.” It generally tends to hold true but there are always exceptions, however rare they maybe. In this blog, Ian Cassel of Intelligent Fanatics fame, talks about the rare intelligent fanatic of a business operator who can make a bad business look good.
“…transformative business leaders excel in industries that most would consider low-margin, mundane, or outright disliked.
Take, for example, Herb Kelleher at Southwest Airlines, Ken Iverson at Nucor, Sol Price at FedMart, Les Schwab at his tire centers, Robert Kierlin at Fastenal, and Ingvar Kamprad at IKEA. I could rattle off another ten intelligent fanatics that created dominant businesses in unglamourous industries.
These leaders mastered the art of sweating the small stuff. Their relentless energy, commitment, and focus on doing small things at an exceptional level led to their success. They showed that even the most unglamorous fields are ripe with opportunity for those that push the boundaries of the status quo.”
Specifically, he talks about a mining company in his portfolio – Idaho Strategic Reserves (IDR) which has delivered exceptional returns (798%) in a little over a decade since its current CEO John Swallow took charge.
Few things he cites as what’s worked:
“Most miners work on 6-month contracts and are forced to work away from their families (even in Nevada). It leads to addictions, divorce, and broken families. Yes, going “home” at night is worth more. IDR miners go home to their families every night.
…Few people want to work where most mines are located. Many mining companies have to build a town in the middle of nowhere. Logistics are a nightmare. Yes, mining ounces in a beautiful location where people actually want to live is worth more. The infrastructure, industry, and communities are already in place. It was done naturally.
…IDR has a waiting list of miners wanting to work for them. They have six father/son combos. They have 20 additional miners from the same families (uncles, brothers, nephews, etc) working out of 50 miners. IDR has a unique incentive system that helps drive allignment. This is a huge advantage.”
As a result, IDR trades at a significant premium to peers in a commodity industry known for low multiples. He compares the premium to that of Costco’s:
“It’s all the little things Costco does right. It’s the culture, the values, the history of treating customers, employees, partners right and fair. It’s the $1.50 hot dogs. Costco members pay $60 per year for the right to spend money in Costco stores. The Costco strategy is well known. The competition knows what Costco is doing, even how they do it, and they still can’t duplicate it. It’s all the little things that taken together are big things that are insanely hard to duplicate unless a company was built on a certain bedrock of values.
Isn’t this the ultimate moat?
Especially in industries that are often viewed through an unfavorable lens like mining and resources. It’s all these little things that make an investor feel good about investing in these areas, instead of bad. This is how you gain a premium valuation for selling a commodity. You can find “cheaper” things that give you the same exposure, but they aren’t as valuable.”
Whilst Cassel has an eye for intelligent fanatics, they are not easy to come by. Rest of us should still look for wonderful businesses as advised by Messrs. Buffett and Lynch.
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