How entrepreneurs – and smart investors – really succeed

Late 2008 and early 2009, financial markets were in crisis and the world was in deep economic recession.

The prevailing wisdom was to invest in ‘obvious survivors’. Food, pharmas and other non-discretionary goods that penny pinching consumers couldn’t live without.

Good strategy.  But as investors stampeded into those stocks, the relative upside became less attractive.

One person who looked elsewhere was Tye Bousada-– an independent thinking money manager and partner at Edgepoint Investment Group Inc. He also manages global equities for us at Newport Partners and shared his thinking during a recent visit.

Growth even if global GDP is zero percent

Bousada went looking for ‘non-obvious survivors’. “Businesses that can double in size in five years even if global GDP is zero percent,” he told us.

He found plenty. Across industries, geographies, across all market capitalizations. One example: Harman International (NYSE:HAR), the number one producer of audio and infotainment systems for the automotive sector.

“Remember when everyone thought no one would ever buy another car?”, Bousada joked. “The market was valuing the company at just 3 times earnings despite the fact they were adding new platforms all the time, they owned the majority of top audio brands, and they had the technological lead in automobile infotainment systems.”

Bousada invested and made it one of his largest holdings. Today it is trading at roughly 12 times earnings and Bousada is still very excited about its prospects going forward.

How entrepreneurs really succeed

Listening to Bousada talk reminded me of Malcolm Gladwell’s recent piece in the New Yorker entitled, The Sure Thing: how entrepreneurs really succeed A great read if you missed it.

Two key findings:

• Gladwell posits that the entrepreneur is anything but a risk taker. Rather, “the entrepreneur’s advantage is analytical”. He or she just does more work than the rest of us.
• Gladwell also cites the work of French scholars Michel Villette and Catherine Vuillermot who found that the entrepreneur mindset is to “look for partners to a transaction who do not have the same definition of value as he of the goods being exchanged, that is they undervalue what they sell or overvalue what they buy from him in comparison to his own evaluation.”

Bousada’s stated investment philosophy is to buy value based on “an idea about the business that is not widely shared by others.” He confirms his view through exhaustive research and knowledge about a company. He can speak about the operations, strategy and financials of the companies he owns in as much detail and with as much ease as I’ve heard from CEOs or CFOs speaking of their own corporations.

No wonder then that Bousada has one of the best track records in the business. And the doubling and tripling of the investments made in the downturn of last year seem obvious today — if non obvious a year ago.

But that of course is the genius of the entrepreneur.