During his recent interview with Tobias. Joseph Calandro Jnr provides some great insights into the difficulty associated with companies trying to adopt a corporate value investing strategy. Here’s an excerpt from the interview:
Tobias Carlisle: Your practice area and your area of interest in research has been the application of value investment principles in a corporate context. What’s the difference when managers in a company try to apply these principles versus someone in a firm who probably has a freer hand with where they can go?
Joseph Calandro: Yeah, so the … it’s interesting because I’m asked this a lot when I guest speak at colleges or universities. And I begin my response by saying there is a reason why all of the value investors we know have started their own firms. And so Warren Buffett started Berkshire Hathaway, Mario Gabelli started GAMCO, and you can go down the list, I mean, they in some form or fashion were involved in starting a firm.
Joseph Calandro: Because it’s very, very difficult to take a contrary view in a firm that’s not organized that way. So as you know, given your background, organizational momentum has a certain logic to it. So there’s a way of doing business in firms, there’s a way of doing business in industries. Each function that’s involved in a firm has a certain way of doing what it is that they do going about their work.
Joseph Calandro: And at many times, it involves doing what pretty much everybody else is doing, buying what pretty much everyone else is buying, and paying what everybody else is paying; it’s far easier to do that. If you want to go off the beaten path and take a completely contrarian view, and you don’t have a company wired that way, at best you’re going to get shot down; at worst, you’re going to have to find another job.
Joseph Calandro: I had a Chief Innovation Officer describe it this way, “Firms are created to suppress innovation. The innovation was involved in creating them and then delivering on it, and then it ends.” He goes, “That’s just what happens and you’ve got to find a way to work it into the organization.” If you can’t do that, again, at best you’re going to just basically go flat and your career; at worse, you’re gonna have to find another job, so it is very, very difficult
Joseph Calandro: In many social distribution probability functions, there are fat tails. When it comes to management expertise, it really isn’t normal distribution, I mean there are a variety of managers who are average, and there’s a very select few like Warren Buffett who outperform. And there’s a very select few grossly underperform like the Enron folks did or, the too big to fail banks that did go into the crisis; fortunately.
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