Focusing on What Matters

The art of being wise is the art of knowing what to overlook.

William James, The Principles of Psychology

Investors today are faced with a neverending stream of information that can quickly become overwhelming and distracting. There are not enough hours in the day to consume and process all available information – so where should we be focusing our attention? One critical aspect of successful longterm investing in the stock market is knowing what to ignore so that we can use our limited time to focus on what truly matters. Tuning out the noise – and finding the underlying signal— is a daily battle.

Information Overload

We have virtually all of the world’s information at our fingertips constantly, and there is no shortage of talking heads on television and social media offering opinions at all hours of the day. While this access to information can sometimes be valuable, it can also bog us down in irrelevant minutia. It is impossible to keep up with the deluge of information we are bombarded with daily, so we must find repeatable ways in our research process to tune out the distractions.

Our Simple Idea

One of our favorite quotes from Charlie Munger, the late Vice Chairman of Berkshire Hathaway, is, “Take a simple idea and take it seriously.” Our simple idea is to always make investments with the mindset of a long-term business owner. We are not stock traders or stock “pickers” – we are business analysts trying to identify companies and management teams we can forge a partnership with, often for a decade or longer. This is our simple idea, and we take it seriously by channeling all our time, energy and effort toward it. For our investment process, we believe time spent on anything else is time wasted. It is this simple framework that acts as our filter for the vast amount of information that inundates us constantly.

Fortunately, not all information is created equal. Nick Sleep, founder of Nomad Investment Partnership, used an easy-to-understand analogy to illustrate this concept. He said, “Information, like food, has a sell-by date.” What he means is that some information becomes outdated very quickly (and is highly perishable), while other information endures for years (and has a long shelf life).

As long-term business owners, our focus is on information that has a long shelf life. This is information that will drive long-term investment outcomes and help us achieve our investment objectives over time. Focusing on perishable information will only distract us from this goal. Because of this, we must filter the constant onslaught of information and sort it into two buckets – what matters and what doesn’t. However, this is easier said than done. It sounds simple, but in the heat of the moment most information feels critically important.

Tuning Out The Noise

Our information filter is built to quickly discard information that’s perishable. Charlie Munger taught us that the easiest way to get to the essence of what matters is often by first identifying what doesn’t matter. Instead of asking, “What should a business owner with a time horizon of 10 years or longer care the most about?”, we can invert the question to, “What should a long-term business owner care very little about?”

The following is a non-exhaustive list of information we believe to be highly perishable and therefore has very little impact on the success of a business franchise over the next decade or longer:

• Predictions concerning the Fed Funds rate
• Outcomes of political elections
• Company earnings in a single quarter (and any attempt to guess those earnings in advance)
• Much of the short-term-focused daily news flow found in the financial media
• Short-term stock price fluctuations
• Predictions of the economy or the stock market

These topics drive most of the daily discussion in our industry, yet they almost never ultimately drive the success of a business enterprise over the long term. While we certainly aren’t perfect, we strive to spend as little of our valuable time as possible on this kind of information. Therefore, our limited time can be redirected to consuming the information that truly matters – that with a long shelf life.

Finding The Signal

What kind of information has a long shelf life and helps us achieve our investment goals? We believe it is the information that a private business owner would care most about. Our equity investment process is centered on this idea through our strict focus on three investment criteria — business, management and price.

When evaluating a business, we seek information to help us answer questions like the ones below:

• Does the company have an identifiable advantage over its competition? What is the source of that advantage?
• Is its advantage getting stronger or weaker? Can the advantage endure for many years into the future?
• Can it be replicated by competitors?
• How does the company treat its customers, employees, suppliers and communities? Are any of these relationships eroding or strengthening? Why?
• Will this business be able to survive and thrive in a wide range of surprising and uncertain environments (political, economic, etc.)?
• Does the business produce attractive cash flow for its owners?
• Is that cash flow likely to grow materially over the next 5 and 10 years?

When evaluating a management team, we seek information to answer other questions, like the ones below

• Does the CEO think and act like a long-term business owner? Or does he make short-sighted decisions and care too much about pleasing Wall Street?
• How will the CEO allocate the company’s cash flow? Does she have a track record of intelligent capital allocation that will benefit the long-term owners (shareholders)?
• Does the management team cultivate a culture of honesty, integrity, humility and transparency?

Finally, on price, it comes down to one simple question: What price would we be happy to pay to acquire the entire business and still expect to generate an attractive return as its sole owner over time? Not from reselling the business but from the cash flow it is expected to generate for us, its owners.

These questions demonstrate our mindset when thinking about the companies we own or might hope to someday own. Every day is a constant battle as we sort through noisy information to find the signal hidden within it. We spend virtually all our time on this task and refer to it as “building our library of knowledge.” Our daily objective is to add more high-quality information to that library. We have done this day in and day out for over 30 years, and we believe continuing this disciplined approach is critical to our long-term investment success.

Ultimately, we aim to stay focused on our north star – the longterm compounding of our clients’ wealth. Everything we do is with this goal in mind. We are humbled and honored to be able to serve each of you and with the trust you place in our team.

Baird Trust Company (“Baird Trust”), a Kentucky state- chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker dealer and investment advisor), and other operating businesses owned by BFC. Past performance is not a predictor of future success. All investing involves the risk of loss and any security may decline in value. This is not intended as a recommendation to buy any security and views expressed may change without notice. This market commentary is not meant to be advice for all investors. Please consult with your Baird Financial Advisor about your own specific financial situation.