There are five important qualities that all great businesses share. David Gardner unpacks these traits and how both investors and entrepreneurs can use them to improve their results.
Rule Breaker Investing
The Businesses That Win
It's the Rule Breaker Investing Podcast with Motley Fool co-founder, David Gardner. And welcome back to Rule Breaker Investing. I'm so glad you're joining with me this week. Happy fall. It's a beautiful day outside here in Alexandria, Virginia, where a full global headquarters is based, where we've been for these low these 23 years, and the stock market has been beautiful in its own way the last few months. So, some nice bounce back recently, and we'll see what the market has in store for us. Usually, it's a good run October through March statistic show, but every year is different. So, it would be interesting to watch. Now, coming back from last week, where I asked you what you want to be to do this podcast, and I'm happy to say we got 47 votes, 31 for the businesses that win. And that's the title of this podcast, this week's podcast, the businesses that win. I'm very excited to present this 16 votes for Great Quotes Volume 1. So, Great Quotes Volume 1, fans, we'll get there one day. There'll be another time to talk about Great Quotes. I do love quotations, and I love whether they come from the world of investing, business, culture, life. Those are ways that help me invest better. So, we'll talk about that another day, but this week, we're going to go with the businesses that win. And this one in particular is for entrepreneurs. Now, we have a lot of small business owners, a lot of people working in businesses today, a lot of very entrepreneurial thinkers who listen to Rule Breaker Investing, and who, at the Motley Fool, might be a member of our Rule Breaker's Premium Service. We over-index at the Motley Fool with entrepreneurs. So, this is for you, and one of the great Buffett Quotes, I think I've had occasion to mention this before. I'm a better investor because I'm a businessman, Buffett said, and I'm a better businessman because I'm an investor. So, these five traits of businesses that win that I'll be presenting this week, yes, they work for stock picking, that's why I'm presenting them on Rule Breaker Investing, but if you're an entrepreneur, they work for you too with the business that you are crafting. Let's get right into it. Number one, trait number one of businesses that win are ones that manage for all stakeholders. This is a really important concept, and something that I would say is a relatively new concept. I first came across this thinking in the book Conscious Capitalism by John Mackie and Raj Sussodia, a full disclosure, John Mackie is a member of the Motley Fool's Board of Directors, so yes, we tend to read books if they're written by directors of our company, and I really like this book a lot. I recommend it, but John Mackie, who's the founder of Whole Foods, talks about four traits that make up what he would call conscious businesses. One of them is purpose-driven, and I'll talk about that maybe a little bit later or another time, but the second is companies, organizations that manage for the success of all stakeholders. Coming out of 20th century capitalism, one of the big messages, often right there in the Fortune 500 CEO letter, you'd read the annual report, read that CEO's letter of Fortune 500 companies, what's the purpose of this corporation, Corporation X, Y, Z, to maximize shareholder value? That was taught in business schools by economists, Milton Friedman, an amazing mind, and a great economist of the 20th century, this was one of his assumptions, that this is the purpose of business to maximize shareholder value. So that was the environment at least that I grew up in, and still the way a lot of businesses think, but once I came across Mackie's thinking and others, no doubt as well, and start to think about the other stakeholders. So let me give a few examples of stakeholders. So let's start with customers. Another good key stakeholder group, employees. This works for every organization for profit, not for profit customers, employees. How about partners and suppliers? Here's a fourth group, shareholders, and a fifth group, community. It might mean your online community, it might mean your local community, it might mean the global community community. Those are examples of stakeholder groups. Now the best business is the businesses that win trade number one this week are the organizations that create a win for all of their stakeholder groups. Picture if you will, each of the stakeholder groups together in a circle with their hands collapsed, circled around this thing in the middle, which is the company, and everyone in that circle should want that company to succeed. If you're a customer, you want them to be awesome. If you're an employee, you want them to be a best place to work. If you're a shareholder, you want it to be a great stock. The list goes on. If you're a partner and supplier, you absolutely want them to succeed dramatically, and certainly the community wants that. Now that's the right model for all organizations, and the for-profit companies that really get that are the businesses that win. I hope you have that in your business. But if you don't, now you know what to work on. So now imagine if you will, once again, going back to the past where just shareholders, CEOs were trying to maximize the value of the enterprise for just one stakeholder group. Imagine how that feels if you're another stakeholder group. Now you can see why a lot of the bad businesses or the greedy businesses or the crony businesses that didn't do so well over the long term, why they didn't do so well, because they were trying to maximize shareholder value. Shareholders want to make money right away. They want their stocks to triple. If you're hitting the age of 63, and you've just been named CEO of a company, you've finally risen through the ranks, you'll probably be there for three to five years before you're leaving. What's your goal? If it's to maximize shareholder value, short-term thinking, of course, you're going to be trying to make the best moves you can make to get that stock moving for those three to five years where you were the CEO. So these are the businesses that don't win overall. The ones that don't manage towards success for all stakeholders. Of the five that I've given, the five examples, the five groups, I think the customer is the single most important one, because I think that's why organizations exist ultimately to solve other people's problems, the customers, but all five count a whole bunch, and it's a creative decision to problem solve, to create a win for all of your stakeholders and those are the businesses that win. Two quick examples. Well, I just mentioned them. Whole Foods. I think Whole Foods is a very good example. Whole Foods was founded on this concept, and then another company that I think at least gets the customer's centrism better than anybody else, since I just mentioned of the five groups I favor customers as the most important, and that's Amazon.com. Amazon has, as a customer of Amazon, I have been treated better by that company than almost any company that I can imagine having done business with over the last 20 years or so. Amazon did come under fire earlier this year for mistreating employees, and that certainly is always going to be a concern for every company. Steve Jobs, I think, probably mistreated some employees too, but in the end, it's the companies that really do please mass numbers of people that are the businesses that win. All right, number two. Number two, companies that solve real problems. When I first started investing, this is not how I was thinking. Especially on, at the age of 18, 19, 20, when I was picking my first stocks and buying them for real, I was looking for the fourth player, so the fourth or fifth player in a niche industry. Usually, I was hoping that that stock was off Wall Street's radar, and that within 18 months or so, I was hoping I thought it could maybe double. It worked a few times, but it didn't work well enough long enough that I kept that up. I changed my investment approach, something I've done a number of times over the last 30 years. Perhaps you have, too. Perhaps, Rule Breaker Investing is helping you shape or change your existing investment approach. What I found by following that strategy was that I was investing in companies that were not meaningful players, nationally, let alone globally. I was finding off the radar companies, usually without interesting or visionary managers that were doing something unremarkable as the third or fourth player, and I was just hoping that that stock was undervalued. Again, it worked some, but it didn't work enough. By contrast, let's think about companies that solve real problems. Let's talk about, for example, Apple. There's a company that really has solved the problem of making technology accessible to all, making the most important technology of our time. A couple decades ago, it was personal computers today. It's more like our phones. Those and more, Apple has consistently solved our problems and at an incredible scale. Hence, Apple's value is the single highest market cap American company today, the most valuable market capitalization out there. I think Chipotle is another good example of the company solving real world problems. Better fast food, fast food that's not just better for you, but that is also better produced. Chipotle has done to rework where it sources things. It's very profound and now much imitated by others. There's a nice local restaurant chain here in Washington, D.C., called "Kava Metsay Grill." Really love Kava a lot. They just announced their first non-Washington, D.C. restaurant opening in Los Angeles. If you're a Motley Fool member out in Los Angeles, keep an eye out for Kava Metsay Grill. Why am I giving them a plug? Well, it's not really a plug, although I am a big Kava fan. I'm just here to say they have clearly been highly influenced by Chipotle. One of the first things I thought about when I walked in that restaurant, I bet you have a few that you go to from time to time is wow, they're copying Chipotle. But real problems, real world problems. Another great example, I probably overused this company as an example, but I think Netflix clearly helped a lot of us solve the problem of late fees back in one day, 10 plus years ago, and today, finding really good quality content streaming online, again, big impact, big companies. The businesses that win are the companies that solve real world problems at scale. They're companies that you can't not notice, even if you don't want to buy from them because they're solving enough other people's problems that they are gaining great value. That's trait number two. Number three, by the way, as we talk about these, you're thinking about these both as a stock picker, as an investor, which companies do you want to invest in, but I hope you're also thinking about your own business and making sure that you're as oriented along these five traits as possible. Number three, number three is a long term orientation. It is one of the hardest things to do. We have a hard enough time doing it here at the Motley Fool, and we're a private company thinking long term. I know it certainly from working within my own business, but if you think about public companies, you think about the pressure that they're under to perform on a quarterly or annual basis. You can see how hard it is to orient yourself to the long term. That's why the businesses that win are winning because they're winning over the long term, the only term that counts, long term orientation. When I think about businesses that really operate over the long term and succeed, I think of Novo Nordisk, which is a relatively recent pick I made in Motley Fool's stock advisor. There's no substitute for actually having been in business for 90 years, which is indeed how long Novo Nordisk has been in business as a Danish company, the primary player, talk about solving real world problems, treating diabetes globally today, a really important company. Ironically, in the probably the most socialist of all of the European countries, Novo Nordisk has really created great success. If you go to its website, I looked at this a while back, linking to their most recent annual report. They referred to it as an account of "our financial, social, and environmental performance." Not just financial. If you flip it open, you'd see that right next to the financial information, which you would of course expect, financial information in an annual report, are reports on environmental performance with real metrics like the energy and water consumed by the company, carbon dioxide produced from energy consumption, and also comparisons against targets, along with social performance, which they measure through things like professional training, donations, and the percentage of employees who are trained in business ethics, again, including comparisons against their targets. No surprise to me, then, that this company is still around 90 years after it was formed and is having a big impact on anybody who has so many people who have diabetes today. No surprise, then, that this is a long-term success because it's long-term oriented. It's kind of how that company has grown up over time. Another quick example that comes to mind for me is Starbucks. Starbucks has been a beautiful long-term business. It's not been around nearly as long as Novo Nordisk, but it has indeed been operating off of a global vision pretty much from the get-go and look at what Howard Schultz and his company are achieving today. These are long-term oriented people that drive long-term oriented enterprises that drive long-term value. If I haven't said the phrase long-term enough, I'll say it one more time, long-term. It's really hard for a lot of businesses, but the businesses that win have that orientation built into their fabric, usually starting with the CEO. Trade number four. Companies, institutions that evolve. We talked about this a few weeks ago. In fact, I think it was podcast number 15, the title Netflix, Amazon, and the future, just a few weeks back, if you're new to the podcast, I recommend you go back and listen to that one where I'm talking about how technology is accelerating. I told the story of Ray Kurzweil's view of history and where we are today, and I highly recommend that you acquaint yourself with that material because it's so relevant, especially for rule breaking. Warren Benes, the author of the book on becoming a leader, he said the number one trait that he looks for in leaders, the most important single trait he believes that we as leaders need to have is what he calls "adaptive capacity." You need to be able to roll with the punches, you need to have your eyes out, you need to see how the world's changing, you need to be ready. You don't want to have your eyes closed or your head buried in the sand. There are those organizations too, some of them are for-profit companies that don't do so well over the long term, but companies that can evolve, just such a critical trait. The businesses that win are ready sometimes to shoot their own business model in the foot, to turn on a diamond to do something different when circumstances call for it, and it's like most of these other traits, it's hard to do. When I think of a couple examples of companies that are clearly evolving, I think about Tesla and I think about Alphabet. Now, Tesla, a lot of us have heard of, it's Tesla Motors today, I wouldn't be surprised though, as things continue to evolve if Tesla drops the word motors from its corporate name. Alphabet is a name less well known to people, but of course it is how Google chose to rename itself the holding company overseeing Google, among other things, and the other enterprises, the other startups and things that are all part of that overall company today. It's called Alphabet, still has the same ticker symbol, G-O-O-G or G-O-O-G-L. I don't like the companies that are doing this, splitting their stocks and creating new classes and new ticker symbols. It adds a lot of confusion to my life personally, but such as it is, and these companies, Tesla and Alphabet are very much ready about and creating, frankly, evolution in the world at large. I just saw a headline the other day, I was thinking about that Kurzweil podcast from a few weeks ago, so I headlined the other day, "Genetically Engineered Virus Improves Efficiency of Solar Cells." Now I can't exactly tell you what's even happening there. I did read the first few paragraphs, it does come out of MIT, it sounds impressive, but this is a sign clearly to me that technology is in fact, preceding a pace, and evolution is happening. When we're starting to genetically engineer viruses to improve the efficiency of solar cells, the world is getting a little bit of crazy weird, I think, in a good way, and again, it's the businesses that win that are making that happen, the ones that evolve. And then finally this week, number five, what else characterizes the businesses that win for me, the ones that create, one of my favorite words, three letter word, fun, the businesses that create fun, who doesn't want more fun in our lives, and whether you're for profit or not for profit, whether you're looking at a stock or you're an entrepreneur, I think having more fun, creating fun, putting fun in your product or service, surprising people, lots of people like pleasant surprises, that equals fun for me, the companies that really are about fun, it's really hard not to win if you do that well over long periods of time. Two quick examples that come to mind, these are completely different businesses, but how could I not lead off with Disney, which I think has a better sense of fun and has created more fun for more people living today than any other company, possibly by far. This is a great example of the businesses that win, but then a completely different company, much, much smaller, and really just a restaurant company at heart, but Texas Roadhouse, for those who know at a recent pick of mine in the last year in Motley, full stock advisor, this is just a steakhouse for the most part, but two things I want you to know about it. First of all, there'll be spontaneous line dancing that occurs when you're there on a given night, led by the servers. And so for me, that's something you wouldn't expect normally, you know, you could have gone to any steakhouse chain, but that's just kind of happening there. And the second thing about Texas Roadhouse and one of the reasons I also like the stock harkening back to an earlier point made this podcast is they treat their employees really well. For the most part, there's a strong esprit de corps among the staffs at individual Texas Roadhouse restaurants. So yeah, it's just a steakhouse in one way, but it's actually the fun one, and that's kind of my point. So there we have five traits of the businesses that win just to summarize them really quickly. Ones that manage for all their stakeholders. Number two, ones that solve real world problems. Number three, long term orientation. Did I say it enough? Long term. Number four, companies that can evolve organizations that have that adaptive capacity. And finally, number five, ones that create fun. Speaking of fun, we're going to have some fun next week. Next week, I'm going to talk much more about investing and how to invest. I'm going to look at seven ways that typically characterize successful investing. So we've spent some time in recent weeks looking at companies thinking about the world, thinking about leadership, thinking about technology. Next week, we're going to go a little bit more hardcore, straight up, how to invest. I'm not talking about opening up an account. I hope you already know how to do that. We can talk some about that if you like. But mostly I'm going to be thinking about how to think about making the right choices as we invest. I'm David Gardner. Thank you so much for joining us this week on Rule Breaker Investing. We'll see you online. A lot of fun to see all that activity on Twitter. As always, people on this program may have interest in the stocks they talk about, and Molly Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com. [MUSIC] [BLANK_AUDIO]