Dealing with information overload and complexity is becoming more and more of an issue in the modern world. Atul Gawande eloquently describes how these issues impact different industries and jobs in his 2009 book, The Checklist Manifesto. The basic premise is that too much information and growing complexity can result in competent individuals repeatedly making simple mistakes. In my view, this is as true in surgery and piloting a plane (examples from the book) as it is in investment.
Turning to the current investment environment in Europe, you could feasibly make the argument that information overload, even from the political arena alone, is running at an all-time high. Predictions about the potential outcome and ramifications of the ongoing Brexit negotiations dominate conversation, nuances of the Italian budget negotiations seem to determine the daily share price direction of Europe’s banks and a mere 280-character tweet from President Trump can lead to days of debate and reams of analysis. But does any of this really matter over any serious investment horizon?
What information is important?
We are certainly not immune from getting caught up in the myriad of distractions we are faced with. But by sticking to a simple investment process, predominantly focusing on consistently high return businesses, we try to emulate Atul Gawande in simplifying a complex world.
Recently, this investment approach has led us to make investments in several high quality European-based companies across a range of different industries.
One that we would highlight is Swedish lock maker Assa Abloy. An attractive feature of this business is the strong pricing power that comes with selling branded locks. Home security is extremely important to customers and, in addition, the individual paying for the lock (the end user) is often not the person choosing the lock (the architect or installer). For these reasons quality, brand and access to the product is often more important than price. In addition, around two-thirds of revenue is generated from replacement demand, which tends to be more predictable and less economically sensitive than demand derived from new construction; this also appeals to us. Finally, efficient, outsourced production keeps the invested capital base low and thus returns high; another attractive feature to the business model.
Another recent investment worth noting is Irish, but London listed, distribution company DCC. This is a business that has managed to generate sustainably high returns going back at least as far as the early 1990s. At its core, DCC is an exceptionally well-run distribution business with exposure to various end markets, from heating fuel and petrol stations, to healthcare products and electrical goods. The company generates high returns from a combination of low margins with very limited invested capital (negative net working capital and low fixed capital needs). Management has a very strong track record of deploying capital at high incremental returns, whether through organic or inorganic investments.
Assa Abloy and DCC are just two examples of companies with characteristics we look for in a prospective investment, with good management, well-placed products/services and a sound financial strategy underpinning their long-term growth prospects. Information is a valuable commodity in the modern investment world, but there is much to admire in a simple, effective business model that cuts through the noise.