People Businesses

Does management matter? I’ve been around the block. I’ve met with perhaps a hundred management teams 1x1 and and many more if you include calls and group meetings. Historically, my view was that management didn’t matter. They will eventually leave or die. Analyse the businesses, maybe look at incentives, but putting more management scrutiny beyond that is a fool’s game. This point of view seemed to be validated by Buffett who has said on multiple occasions:

Per Warren Buffet

"You should invest in a business that even a fool can run, because someday a fool will."

But when I reflect on losers, the majority of times, it has something to do with the people. I would guess that in 75% of my mistakes, something felt off with the people. Perhaps they were arrogant, perhaps a CEO was demeaning to a subordinate, perhaps the CEO was never a true owner, or perhaps a CFO kept correcting or massaging a CFO’s statements.

Similarly, when I analyse my errors of omissions, more often than not, I have that “tingly feeling” when I meet a management team or when I listen to a transcript but I pass. Normally, they clearly articulate a vision, a strategy, operating principles, and a vision I am excited by and have a long-term ownership mindset, but I pass for one reason or another, normally valuation.

The best example is HEICO. I met them in the summer of 2017. Larry Mendelson and his two sons, Victor and Eric, walked into a group presentation. He passed around a small bag of rubber plugs and asked everyone to guess how much those plugs cost. They looked like they’d cost $25 at Home Depot, so I gave an outrageous answer and said $2,500. It turns out they cost freaking $50,000. Heico then went on to outline their strategy in PMA parts, explained why this business was difficult to enter, talked about the importance of shareholder value creation and free cash flow, talked about their approach to M&A, and took questions. You could immediately tell this management team was different, that they acted with integrity, and that they had skin in the game. I got that tingly feeling. The shares have since 10x’d. At the time, I was extremely impressed but took a quick look at the PE ratio and decided to work on it another day.

As I’ve come to learn that management and in turn, the culture they set matters. Every business, even small businesses, have hundreds of tiny decisions that need to get made in a given day and its up to the leadership to set a culture where decisions get made in service of the businesses’ goals rather than made to maximize an individual’s bonus or cover their ass.

Why invest in people businesses? An age old adage is that in people businesses, your assets can walk out the door, the implication being that you are better off investing in companies with a “harder” moat like a low cost factory, a network effect, or an iconic brand. While this argument holds truth, there are a few things that stand out about people businesses.

First, most people businesses are capital light meaning if you do have some flywheel allowing you to grow 20% cagr, the incremental ROIC might be infinite. Being capital light is a major tailwind. In fact, if you simply avoided all capital intensive businesses, period, similar to just avoiding any company with leverage, period, you’ll probably be better off longer-term. It reminds me of this Munger quote.

Munger at the 2017 DJCO Meeting

"Al Gore has come into you fellow's business and he has made $300 or $400 million in your business and he's not very smart, he drank a lot, he smoked a lot of pot as he cruised through Harvard with a gentleman's C. But he had one obsessive idea that global warming was a terrible thing and he understand he'd protect the world from it. So his idea when he went into investment counselling is he was not going to put any CO2 in the air. So he found some partner to go into investment counselling with and he says we're not going to have any CO2. But the partner was a value investor and a good one so what they did is he had his staff find businesses who didn't use put CO2 in the air and of course that put him into services. And all these service companies were just ideally located and this value investor picked the best service company so all of a sudden the clients are making hundreds of millions of dollars and they're paying part of it to Gore."

Second, people are harder to analyse. The skill of analysing a company’s management, their culture, and trying to find that “tingly feeling” is probably not going to get disrupted by pod shops, quant funds, or AI. In fact, most junior analysts are too sheepish to recommend a stock because of their amazing moat which happens to be great people or a great culture, and therein lies an opportunity for investors like me. We all know the quote that culture eats strategy for lunch and the fact is, its true. To understand culture, you have to be qualitative, you have to talk to people, and you also have to be aware of your biases.

2021 Interview of Steve Mandel

Interviewer: What are the key things you look at when you're following a company?

Mandel: There are a number of things of course but as one goes longer and longer in this business, we spend more and more time thinking about people, thinking about the characteristics of the people running the business. Not only how smart they are but what their ethics are…how they set a culture at the company. So obviously we spend time on a companies competitive positioning what their financials look like, what kind of sustainable moat they have around the business but more and more we spend a lot of time really trying to understand the people, how they think, what kind of culture they've created, how they motivate their people, and what kind of people work there.

A quotes from Kelly Granat, Co-CIO at Lone Pine which also rings true.

Kelly Granat, Co-CIO of Lone Pine, Invest like the Best Podcast in 2025

“A lot of our process revolves around people. It’s the people who are running the businesses. And I think that companies are in some ways like families, there's a very distinct culture that characterizes and underpins companies and that matters immensely for how a company operates, functions, hires, retains, grows, invests….all of the things that drive ultimately how they perform and execute.

So getting to know the people….What motivates them? Are they looking around corners and thinking about the thing that can disrupt them? Are they trying to disrupt themselves? Are they attracting and empowering people that they are hiring into their companies and retaining them by giving them a lot of responsibility and a lot of autonomy and a lot of voice and decision-making? I think that's where it starts for us.”

Finally, evaluating people is an art, not science, so you’re trying to avoid mistakes and make a few calculated bets but nobody can do this accurately. Sometimes, you catch a management team after a long day of meetings and jet lag, and you get a bad impression, or other times, you get a super salesy CEO that reads off your cues and tells you what you want to hear. But if you really make people and culture the core focus of your analysis rather than say the margin trajectory, with enough reps, I believe there’s a way to gain an edge.

The Visions of Neil Mehta - Colossus

“This is controversial,” Mehta replied, when asked if the Greenoaks machine has identified an ideal type, “but I do believe there’s an archetype for a great founder. And I think that once you see it and learn it, it’s a repeatable process. We’re looking for remarkable intellect, extreme focus, an obsession with the customer, unreasonable determination, especially in the face of adversity, clear and credible ambition, and usually a bit of divergence—people who don’t feel the need to be liked by everybody.”

Old habits die hard but I’m trying to change my emphasis. Over the years, I’ve been building more mental models around people businesses and trying to identify exceptional leadership teams or companies with an exceptional culture.