Terrier's Value Investing Weekly: Control Your Destiny

by: Terrier Investing


"Quality" is a hard-to-pin-down term.

Here, I offer an alternative evaluation metric: does this company mostly control its own destiny?

You can avoid a lot of great-sounding but ultimately poor investments by focusing on businesses that don't need a lot of help to get to the playoffs.

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Perhaps, it's a little late in the football season to be talking about "destiny control." We are, after all, a week away from munching on discounted Chipotle (NYSE:CMG) burritos and becoming violently ill... from the annual GoDaddy (NYSE:GDDY) commercial. (What, did you think I was talking about Chipotle? I'm a value investor, of course, I'll chow down on discounted burritos!)

Destiny control, though, is a "metric" I think more investors should be focused on. You'll often hear the word "quality" thrown around - yes, this stock is cheap, but is it a high-quality business? Many investors have trouble identifying exactly what "quality" is.

Can You Get To The Playoffs On Your Own, Or Do You Need Help?

There are many, many dimensions to "quality," which is why I think it's a bit of a hard concept to wrap your mind around. Does it mean the business isn't cyclical? Not necessarily, there are plenty of cyclical businesses that nonetheless create tremendous value over time. Does it mean the business is well-managed? That would seem to be a separate issue from quality altogether - you can have a great business with bad management - like Six Flags (SIX) used to be under previous ownership - and a bad business with great management.

On the other hand, I think a much easier way of quickly weeding out potentially poor investment candidates is: does this company control its own destiny? Meaning, are the things that matter within the company's control? Back to the football analogy: is this a company that needs help to make it to the playoffs, or can they just win out and get in?

I'll use two opposite extremes to demonstrate the point. Hanesbrands (NYSE:HBI) is a company that seemingly has a high degree of control over its own destiny. (Please note, I'm not making any commentary on the stock - just the business.) Like any business, Hanesbrands is subject to plenty of competitive dynamics - but if management makes the right decisions and designs products that consumers want to buy, and manages an efficient supply chain that provides it with cost parity or advantage versus competitors, then the business will do well over time. Sure, it might do better in certain environments and worse in others - but at the end of the day, the company's success or lack thereof will really be within their hands.

On the other end of the spectrum, a company in the business of mining thermal coal (i.e. coal used for power generation rather than steelmaking) has absolutely no control over its destiny. That company could be the most efficient, lowest-cost thermal coal miner in the world, but it can't control whether coal is cheaper or more expensive than other potential fuel sources, and it can't control whether regulators in the U.S. and elsewhere adopt policies that sharply reduce the demand for thermal coal.

This is obviously two ends of the extreme, and it's usually a matter of degrees rather than absolutes. Still, it's pretty easy to tell whether a company is mostly in control of its own success or not.

More A Screen-Out Than A Screen-In

It's not always bad to invest in companies that don't have control of their own destiny - but for most individual investors, the majority of investments should probably be in companies that do. All other things equal, wouldn't you rather have control than not have control?

Thus, thinking about companies in terms of whether or not they control their own destiny is helpful for quickly assessing whether investment ideas are really as good as they sound. Not all companies that control their own destiny are good investment candidates, but few that don't control their own destiny make for good long-term compounding of wealth.

In fact, many a great investment thesis has been undone because it was based on a lot of things happening that the specific company didn't have control over. These things, unfortunately, are often "unknowable" in advance (but obvious in hindsight). Horsehead Holding (NASDAQ:ZINC), an erstwhile favorite of Mohnish Pabrai, is in this category.

How could you incorporate destiny control in your investment process? Well, one of the great comments from last week was this one:

The seminal book on checklists is surgeon Atul Gawande's "The Checklist Manifesto" detailing how checklists can be useful in many different fields - flying aircraft, performing complex medical procedures, and last but not least, investing. Hewitt Heiserman, a member of the Seeking Alpha community, is also working on a book on checklists that will be published by Columbia University Press, so keep an eye out for that too.

Please weigh in with comments. Do you agree or disagree? How often and to what extent would you be willing to invest in companies with limited control of their own destiny?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.