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1/ A thread on Sidecar Investing, or “free riding on the superior capability of others” -Richard Zeckhauser
2/ For passive shareholders, Sidecar Investing has been one of the only strategies that creates the possibility (though far from an assurance) of obtaining fantastic wealth. Not just retiring comfortably, but earning life changing returns.
3/ The common thread is partnering with exceptional people that eat their own cooking. Not smart people, or class valedictorians, but 10-100x people that are just wired differently than most.
4/ Buffett is the best known example. But there are hundreds of others - Cumming/Steinberg, Al Nahmad, Bill Foley, Mark Leonard, Jay Hennick, Norm Asbjornson, Rales brothers, Brian Jellison, the Markel family - who quietly built tremendous value for shareholders over time.
5/ But the investor has to be as committed as a private business partner would. Maybe moreso. There will be times where management makes real mistakes and challenges your patience. You could sell with the push of a button, but have to ignore your liquidity.
6/ There will also be times when the stock is demonstrably expensive. Be willing/able to hold through these. Doing the right thing will feel like the wrong thing. These investment opportunities are rare and selling the stock to buy back later takes you out of the game.
7/ The business itself will also change over time - providing another reason to sell - but it has to to stay relevant. Danaher is a great example. They shed their skin multiple times but the focus on long-term value creation has not waivered.
8/ The goal is to align yourself with a factor that, like a great wine, will get better with time: the quality of the people. If you get this and the business right forecasting is unnecessary.
9/ How to identify these people? Buffett provides some guidance:
“People give themselves away… When someone comes to me with a business, the very things they talk about, what they regard as important – there are a lot of clues that come as to subsequent behavior”
“People give themselves away… When someone comes to me with a business, the very things they talk about, what they regard as important – there are a lot of clues that come as to subsequent behavior”
10/ Do they focus on quarterly earnings or long-term strategy? Obsess over competitors or customers? Brush mistakes under the rug or address head-on? Discuss size of the company or per-share value? Are they flashy or humble? Use technical jargon or are they plain-spoken?
11/ So if it’s so simple why doesn’t the “smart money” use this approach?
B/c of incentives and ego. Institutional investors are compelled to justify their compensation, to bring something to the table - insights, fancy math, proprietary information - that adds value.
B/c of incentives and ego. Institutional investors are compelled to justify their compensation, to bring something to the table - insights, fancy math, proprietary information - that adds value.
12/ They can’t go to clients and say “this is an extraordinary business run by unusually talented people and I’m going to ride their coattails for decades” and go golfing, although it may be the clearly rational thing to do. Clients would also think they could do it themselves.
13/ doesn’t “the market” know these are exceptional people and price it in? That’s the beauty - skilled capital allocation is systematically mispriced (hypothesis). An unknown, yet positively skewed future can’t be predicted or modeled - undervaluing and hiding it in plain sight.
14/ An investor pursuing this strategy will also invest in duds from time to time, and that’s okay. The goal is not to make money on every position but to maximize the return on the portfolio. Getting too cute is tempting and will likely lead to unforced errors.
15/ All that said, there is no guarantee of success. The best an investor can do is put themselves in a position where compounding their money at a high rate for a long period of time is at least on the table. Sidecar investing may be the most accessible approach that does so.
16/ end
p.s. aliens would be thoroughly confused by all the activity in the investment industry. With the advantages of not being constrained by the institutional imperative, the Sidecar approach would probably make a lot of sense to them.
