I. Harness The Miracle
of Compounding

The partners associated in this Principle covers a broad range of types – including partners in our projects and investments, vendors to our firm and our investments, as well as investors who we look at as our partners as myself and my family have a significant amount of our net worth invested alongside our shareholders.

Whether it’s our deal terms with our co-investors in deals or projects, our agreements with our vendors or the bylaws of our corporation, we strive to to align interests and promote value creation over the long term.

One of the hardest things for me to learn and truly internalize has been to see the public and private markets as a pari-mutuel system, much like betting on horses or sports. At the races, it’s not that hard to identify the fastest horse that will most likely win the race on any given day. However, that horse is unlikely to be the best bet, since the probability of its winning will typically already be factored into the odds offered by the bookmakers. The same goes for betting sports against the Las Vegas lines. The real skill is to find the mispriced bet – the horse whose chances of winning are much greater than the odds suggest. This is much harder, and the opportunities to place such bets are much rarer than most people think. The good news is if we maintain our discipline to i) make these bets selectively; and ii) find markets where the odds are mispriced more often than not.

As mentioned before, I spent the beginning of my career in the epicenter of the world of finance – Wall Street in New York City. From there I went to Charlottesville which is very far both geographically and metaphorically. However, over my three years there I found the Charlottesville location was part of our firm’s competitive advantage which seems counter-intuitive, but let me explain.

Charlottesville and, now Coppell, TX (a suburb of Dallas), provides environment for someone like me to think and invest rationally. Coppell is a small town with limited distractions and brokers and dealers shopping deals or investments. Furthermore, the city of Coppell provides excellent realworld intel on businesses and consumers both. Being detached from Wall Street makes it easier to maintain my independence and go against the crowd to find those mispriced bets so critical to investment success.

The right environment isn’t just the office location compared to NY; it’s also the office itself. It helps me to work in an environment that is serene and even slightly boring. My immediate work surroundings encourage me to think, read, act calmly, instead of reacting impulsively to the short-term movements of the public markets. We don’t have a Bloomberg and we don’t watch the financial news networks in our office. It’s quiet and that’s the way I like it. Remember, I was an only child so spending time alone reading and thinking is my second nature and I am very comfortable in that space.

In addition to creating the right physical environment I’ve come to realize that it’s even more important to nurture the right relationships as a means of constructing a stable emotional environment. Nothing matters more than having a happy relationship with my wife, my kids, my parents, my closest friends and colleagues. They play a crucial role in supporting me during difficult times, and Penny in particular helps me logically think through problems as they inevitably arise in the business world. I constantly look to improve my own personal governance by ensuring I keep the right people in my environment. Nurturing these relationships is a vital component of building a successful business and successful life.

Adversity in investing, as in life, is a certainty. As I learned studying liberal arts at Columbia, the real question is how one handles adversity. Amid the turmoil of the financial crisis, my training, education and athletic career were constant companions, reminding me that until adversity comes along, our virtues are theoretical. It’s only when we actually have to act courageously and honorably that we get to prove that we have those virtues in reality, instead of merely aspiring to have them. We would all prefer not to deal with adversity. But if and when it comes, it’s an important opportunity. As much as possible, I enjoy embracing it. As I tell my kids – you have
to prepared to eat obstacles for breakfast because they will be served often.

It helps to have powerful role models and examples. There’s too many from the sports world to cite here. In the world of inventing and business, Thomas Edison is a great example. He clearly made a virtue of his setbacks, famously stating: “I have not failed 700 times. I’ve succeeded in proving 700 ways how not to build a lightbulb.” Nobody likes to fail, any more than they like to be tested by adversity. But people who learn their lessons, who pick themselves up and keep going, have earned the right to consider themselves truly successful. This a lifelong pursuit of embracing adversity is something I enjoy participating in.

Many people in business and finance in particular approach life as a kind of gladiatorial fight to the death, convinced that there must always be a winner and a loser. The assumption that his model is the most viable strategy for success was reinforced in our school years: students were graded on a curve, and there was intense pressure to scramble to the top so we could win one of a limited number of places at an elite university and could then land the most desirable job.

There’s no question that the business world is fiercely competitive. But that doesn’t mean that we should approach business as a zero-sum game in which everyone else must be vanquished or trodden on for us to succeed. On the contrary, the greatest success tends to come from being part of a team that seek to help one another. Many of the world’s most successful and admirable businesses got that way by creating win-win situations for all of their stakeholders. This is how my family did and continues to do business. This is how Warren Buffett does business. This is how VFGH does business.

The constant movement of asset prices can provide a seductive call to action. The brain also experiences an emotional storm when we see that assets or markets are falling. I try to detach myself as much as possible from the market’s short-term gyrations, so that I can invest in a more rational, measured and patient way, buy assets that we can hold for years to let the power of compounding take hold.

As Buffett teaches, investors need to make the market or servant, not our master. That means using it to our advantage by buying bargains when pessimism reaches extreme levels by reducing our risk exposure when the crowd is overly exuberant. The key is not to be swept up in the crowd’s bipolar mood swings.