A friend of mine, Richard Lewis, runs a very interesting blog called Latticework Investing. Richard is a huge Charlie Munger fan and provides a great service to the whole value investing community by attending events such as the Daily Journal (ticker: DJCO) annual meeting and posting the associated transcripts. If you have not read any of the notes from the 2018 DJCO meeting, I highly recommend perusing Richard’s transcript.

More recently, Richard attended an event hosted by the Cal Poly Pomona Economics Clubs in which Peter Kaufman was the featured speaker. I am sad to say that I only came across Peter a few years ago but I always enjoy hearing his thoughts on being successful in business and in life. Peter is the Chairman and CEO of Glenair, an interconnect product company located in Glendale, CA. He is also on the Board of DJCO with Charlie Munger.

You can find the link to the transcript here but I thought I would highlight my three favorite sections. First, Kaufman discusses the hierarchy of cognitive prowess as explained by Albert Einstein:

Albert Einstein once listed what he said were the five ascending levels of cognitive prowess. No there’s nobody in this room that doesn’t want to be level number one. Right? That’s why we’re here. You don’t want to be level number five. You want to be level number one. Wait until you hear what these levels are, it’s going to blow your mind. So number 5 he said, at the very bottom, was smart. OK. That’s the lowest level of cognitive prowess is being smart. The next level up, level 4, is intelligent. Level 3, next up, is brilliant. Next level up, level 2 he said is genius. What? What’s higher than genius? He must have that backward. No he doesn’t. Wait until you hear what number one is according to Albert Einstein. We just demonstrated it. Number one is simple. Simple transcends genius.

I think this concept has a number of applications when it comes to investing. Many of the best investments are just that: simple. Value investors are often uniquely attracted to complexity under the assumption that complex situations are more likely to be misunderstood—and thus mispriced. And when you combine that with a great Powerpoint presentation and a management team with an unmatched pedigree, what could possibly go wrong? History has proven time and time again that when very intelligent—even genius-like—people try to slay the business equivalent of a dragon, the dragon often wins. Personally, I would rather invest in an easy to understand business that doesn’t have to be run by a rocket scientist.

Next, Peter offers up some easy to follow advice regarding how to build successful relationships. In his mind, it all starts with going first:

All you have to do, if you want everything in life from everybody else, is first pay attention, listen to them, show them respect, give them meaning, satisfaction, and fulfillment. Convey to them that they matter to you. And show you love them. But you have to go first. And what are you going to get back. Mirrored reciprocation. Right? See how we tie this all together? The world so damn simple. It’s not complicated at all! Every single person on this planet is looking for the same thing. Now why is that we don’t act on these very simple things?

His point is that you get the most out of life when you proactively treat people well and show them respect—because others will inevitably reciprocate.

Lastly, Peter reminded the audience that not all business relationships or transactions have to have a clearly defined winner and loser:

The three hallmarks of a great investment are superior returns, low risk, and long duration. The whole world concentrates on Category 1. But if you’re a leader of any merit at all, you should be treating these three as what? Co-priorities. How do you get low risk and long duration? Win-Win. This is the biggest blind spot in the business. People are actually proud of a win-lose relationship. ‘Yeah we really beat the crap out of our suppliers.’ You know, ‘We’ve got these employees for…you know, we’ve got them on an HB1 visa, they can’t work anywhere else for three years.’ They’re proud of it! Total Win-Lose. You take game theory and you insert the word lose in any scenario in game theory and what do you have? A suboptimal outcome.

In other words, if you think long-term and consider all of your stakeholders to be partners, you get much better outcomes. What a novel concept! At Cove Street, we actively seek out management teams that consciously balance short-term priorities with long-term goals and plan for what the business should look like in 20 years. A person thinking that many years out will likely value the relationships with his or her suppliers, customers, employees and communities much more highly–making this year’s margin or next year’s growth rate less important. And within our research process we specifically ask the question, “what does this business look like in 7 years?” so that we don’t get bogged down in the short-run noise that leads to suboptimal decision making.

– Ben Claremon
Principal, Portfolio Manager, Research Analyst