Brian Bares: Uncover Great Investments Using Encore Performances And Razorblade Models

Johnny HopkinsBrian BaresLeave a Comment

There’s some great interviews in the latest edition of the Graham & Doddsville Newsletter which include Brian Bares, Sean Stannard-Stockton, and Dan Rasmussen. Bares founded Bares Capital Management and manages $5.6 billion across two concentrated, qualitatively oriented strategies: Mid/LargeCap and Small-Cap. During the interview he discussed how he uses pattern recognition strategies to make his investment process more successful. Here’s an excerpt from the interview:

All good investment analysis in my view is pattern recognition. And so that’s why the reps are so important, because you see emergent patterns for success, and the more you do it, the better you get at it. We obviously prefer certain types of patterns that intrigue us and allow us to have some confidence that we’re not spinning our wheels on a company.

Some interesting patterns that have come out of our work are what we call encore performances, which are essentially successful managers moving from one company to another, and typically following those successes has been a fairly good recipe for success for us.

Another very simple pattern that’s kind of counterintuitive is when one of our analysts comes back from the field and starts a sentence with, “Brian, you’d never believe what is happening at the company I just visited…” It’s almost like market inefficiency coming alive.

It’s something that you can’t get from a Yahoo profile or a Bloomberg snapshot. The comment might be indicative of a new level of energy infused into a company as a result of some new people taking the helm or a new effort that they have internally, which could create large tangential growth opportunities.

And oftentimes, when we happen upon this pattern, it’s not an intentional search. It might be because our analysts are in a city visiting with every public company over the course of two weeks. And they’re looking at something we may have looked at a couple years ago, and a new pattern has emerged at a stagnant idea that’s in our qualitative database.

And so when we find patterns that might indicate future success, like encore performances, or razorblade models, or build once sell many times dynamics of software information services companies, these are indications that it’s worth spending some time to dig a little bit more deeply to see if there’s something there.

You can find the entire interview here:

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