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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP766: Intelligent Fanatics: How Great Business Leaders Win w/ Clay Finck
01:01:33
Clay explores the concept of Intelligent Fanatics.
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- [00:01]
Host of We Study Billionaires
You're listening to tip the concept of.
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Clay Fink
Intelligent Fanatics has interested me for years. Intelligent fanatics are individuals who are obsessed with building a resilient business that's able to grow and create tremendous shareholder value for multiple decades. The term was first coined by Charlie Munger and later explored in depth by Ian Castle and Sean Eidings in their book Intelligent Fanatics. The author studied leaders across industries and eras who achieved remarkable success not through luck or industry tailwinds, but through strong cultures, unconventional thinking and long term vision. In this episode we'll explore what makes Intelligent Fanatics so unique, how their values and leadership styles allowed them to outperform for decades, and what lessons we as investors can draw from them. When evaluating management teams today, we'll dive into real world examples to see how these individuals built enduring moats rooted in people, culture and mission. So with that, I hope you enjoyed today's episode on Intelligent Fanatics by Ian Castle and SEAN IDENKS.
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Host of We Study Billionaires
Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host Play Fink.
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Clay Fink
Welcome to the Investors Podcast. I'm your host Clay Fink and today we're going to be chatting about Intelligent Fanatics. I recently picked up this book titled Intelligent Fanatics written by Ian Castle and Sean Eidings, which was written back in 2016 and is actually now out of print. Many of our listeners are going to be familiar with Ian as he's been a guest on the show several times. Ian's a full time microcap investor and the Chief Investment Officer of Intelligent Fanatics Capital Management. He's also the founder of microcapclub.com, which he started back in 2011. Intelligent Fanatics is certainly an interesting topic to cover here on the show. Companies that sustainably grow profits for decades do so with a strong moat that creates a barrier to competition stealing market share. And moats don't just come about by accident. Oftentimes they're built by intelligent fanatics who lead the organization to success. In the book, the authors share the stories of eight intelligent fanatics who would on average deliver a 24% average annualized return over more than 30 years. These fanatics operated in a wide array of industries during different time periods, in different geographies, and against different economic backdrops, but their leadership styles, strategies, corporate cultures and values turned out to be quite similar. The term Intelligent Fanatic is believed to have originated from Charlie Munger. We can define it as a business leader with the following attributes. It's a founder, CEO or management team with unconventional ideas and a fanatical drive to build a high performance organization. These managers are learning machines that can quickly adapt to change and are able to create a trust based culture that aligns everyone to think like owners. They focus on acquiring, training and motivating the best talent and they think in 10 year time horizons and invest in their business accordingly. Lastly, they're able to create an impenetrable moat that competitors initially cannot understand and eventually fear regardless of the industry they're in. A big part of investing is understanding the moat in the direction with which the moat is heading and oftentimes what underpins that moat is the managers running the business. Managers who can grow and increase the strength of a moat over decades are hard to come by. But in today's episode we'll walk through a few of the case studies outlined in this book. Charlie Munger described Intelligent Fanatics as a world class business builder. Without studying what a world class business builder is he how can you expect to identify one when you come across them? One of the things I've picked up about intelligent fanatics is that these types of personalities are simply wired much differently than your typical manager. For intelligent fanatics, their business is their life's work. They live and breathe their business. When they leave work, they're thinking about their business not necessarily because they have to, but because they want to. Reed Hastings, the founder of Netflix, once said, when some idea is shaking you so hard, you're willing to go into poverty to make it a reality. That's when you become an entrepreneur. Let's take someone like Jensen Huang for example as well. Jensen is worth over $150 billion. If you or myself ever became worth even a billion dollars, we would probably take our foot off the gas, you know, take an extra vacation or two and enjoy life more. But Jensen is simply not wired that way. He stated that he works from the moment he wakes up to the moment he goes to bed seven days a week. Even during his downtime, like watching a movie, he is mentally occupied with Nvidia and his work. If I were operating in the chip industry, I would be terrified to go head to head against someone like that. One of the other interesting things about intelligent fanatics is is how they're able to sustain greatness and dominate their industry for multiple decades. It's one thing to grow your business over say three or five years, but it's another thing to dominate for 30 years or more. Those are the investments that we'd prefer to find since they've built something that is more durable and proven and they tend to generate the best long term returns for shareholders. Charlie Munger studied a countless number of intelligent fanatics, but one that everyone will be familiar with is Sam Walton. Munger talked about how interesting it is that Sam Walton started with Walmart as a single store in Bentonville, Arkansas and was competing against massive retailers with a brand name, reputation and billions of dollars of capital at their disposal. But over time, Walmart blew right by all of them within Sam Walton's lifetime. Walton invented practically nothing in the retail industry, but he played the retail game harder and better than anyone else. One of the ways in which Walmart got off the ground was that they started out in small towns and went up against weak competition. He was essentially picking fights that he knew he could win. This gave Walmart the experience and the momentum to eventually start boxing against the heavyweights. For most entrepreneurs, the odds are stacked against them, yet they push forward anyway. First time entrepreneurs have a success rate of just 18% and a failed first time entrepreneur that goes for a second venture has a 20% chance of success. There's no doubt that success as an entrepreneur is difficult to achieve, and what's even more difficult is sustaining that success. Imagine if you were to invest in WALALMART in the 1960s when it just had a few stores. You wouldn't be investing in the concept of Walmart. You were really investing in Sam Walton. This idea helps illustrate how important it is to know the management team you're investing alongside and what they're setting out to build, especially if you're investing in smaller companies. We've covered many well known intelligent fanatics here on the podcast, including names like Jeff Bezos, Warren Buffett, Mark Leonard, Howard Schultz, Bernard Arnault and Jensen Huang to share a few examples, but this book covered some of the lesser known examples throughout history. The three intelligent fanatics we'll be covering today are Herb Kelleher from Southwest Airlines and Les Schwab from Les Schwab Tire Centers and Chester Kajo from Kwik Trip. Let's start here with Herb Kelleher, the co founder of Southwest Airlines. The game of business is already difficult and if you want to dial the lever to extreme difficulty, then I would recommend starting an airline company. The airline industry is notoriously brutal because it combines high fixed costs with razor thin profit margins, leaving little room for error. Demand for flights ebbs and flows with the economy. You're at the whims of fuel price changes daily, and intense price competition makes it hard for most airlines to stay consistently profitable. Airlines also face labor disputes, weather disruptions and heavy regulations. An intense number of headwinds to go up against, no matter how good of a business person you are. Since the aviation industry deregulated in 1978, 198 airline companies have declared bankruptcy and the US airline industry has lost $60 billion. No industry can match such staggering statistics, but Southwest Airlines bucked the trend of operating in such a brutal industry. After being founded in 1966, Southwest Airlines had 15 months of startup losses, and every single year since then, they've turned a profit, with the exception of COVID in 2020. Given such a track record, luck could not be the only factor. There were several intelligent fanatics in the Southwest story. The main one we'll cover here is Herb Kelleher. Southwest Airlines is who I personally most commonly fly with as they're a leader in offering basic economy flights. In my experience, they tend to offer the best prices, a good overall experience, and they have friendly staff. I don't know too many people that love flying, but I feel that Southwest makes the overall experience feel a bit more alive than your typical flight experience. However, Southwest doesn't always have the best options in terms of flight times and layovers, which leads me to occasionally use another airline. I also liked that Southwest has an open seating policy instead of assigned seats, meaning that you just grab whatever seats available when you get on the plane and they're actually getting rid of the open seating assignments in 2026. So some people are a bit annoyed by that. And with them also dropping their long standing two free checked bags policy for many customers starting this year, I think they're letting go of some of the things that made them unique in a highly commoditized and competitive industry. So turning back to Southwest here and Kelleher. Kelleher was born in New Jersey in 1931, and his mother taught him that every person in every job is worth as much as any other person or any other job. This value would live on and permeate in the culture at Southwest Airlines, which he co founded when he was 35 years old in 1966. While he was a lawyer, one of his clients was running an airline in California, which exposed them to the business and the industry, and the two partnered up in launching Southwest Airlines in Texas to provide flights between Houston, San Antonio and Dallas. After raising a half a million dollars, it would take them around five years of working with regulators before they were able to send their first flight. Incumbents in the industry benefited from a regulated monopoly established by the government. And competitors weren't too happy about Southwest wanting to enter the market as a discount airline. So they did everything in their power to prevent Southwest from getting off the ground. Since it took them longer than expected to start bringing in revenue, Kelleher offered to provide legal services for free to work through the trials with the incumbents that were making life difficult for them. Luckily, Kelleher was able to work through the trials and allow Southwest to send planes into the sky. And the recent recession also left a lot of talent available for them to pick up and take advantage of and bring on board. Southwest needed additional capital to continue to fend off the incumbents, so they filed for an IPO to give them greater access to the capital markets. And shares began trading publicly in June of 1971 as they raised $7 million. Southwest only had three airplanes in the early 1970s and was able to run a profitable organization. In the years leading up to 1973, they were facing some issues with filling their planes with paying customers. So to help stimulate more demand, Lamar Muse, then the CEO of Southwest, and Herb Kelleherd, they developed a strategy to lower the price of their flight from San Antonio to Dallas from $26 to $13 with no restrictions on the discount. The tactic worked to their favor, but unfortunately, one of the big competitors, Braniff, they were one of the largest airline operators in Texas. They decided that they didn't want a new player in town stealing market share. So they also lowered the price of some of their flights to $13 as well. This move meant little from a financial perspective to Braniff, but it was a huge deal to Southwest as it could have bankrupted them rather than fold. Muse and Kelleherd quickly developed a marketing strategy that not only allowed them to win, but also led Braniff to exit their route to Dallas two years later. So what Southwest did was they put a two page advertisement in the Houston and Dallas newspapers with the caption, nobody's going to shoot Southwest Airlines out of the sky for a lousy $13. Then the ad described how Southwest was giving customers a choice. They could pay the reduced fare of $13, or they could pay the nominal fare of $26 and receive a complimentary whiskey or vodka beverage. And non drinkers would receive a complimentary leather bucket, which was a classy bar accessory popular in the 1970s. When they ran this promotion, over 3/4 of passengers chose the normal fair price of $26 plus the gift. And Southwest was the largest liquor distributor in Texas for a few months. As you can imagine, business travelers absolutely loved the deal, and they would charge the expense on their business card. And it's a classic example of an intelligent fanatic outsmarting an established competitor and getting creative with the solution to a problem. The next problem they tackled was decreasing the turnaround time for the planes between when they landed in the airport and when they took off. This includes pulling the plane up to the gate, unloading the passengers, loading the new passengers, and pushing back from the gate. Major airlines had a turnaround time around 45 minutes to an hour. But Southwest's ground operations guru, Bill Franklin, he believed that a Boeing 737 could be turned around in just 10 minutes or less. And the workers at Southwest were too new to the industry and too inexperienced enough to not really know any different. When they were told that they were going to turn around much quicker than their competitors. Southwest was actually able to pull this off, and it became one of the hallmarks of the company. Southwest's management team was determined to bring air travel to the masses. Prior to 1971, air travel was restricted to the elite who could afford the high prices regulated by the government. In light of the deregulation that was to take place, Southwest wanted to capitalize on the demand that was coming in the decades ahead. In the company's early days, they hired Lamar Muse as a CEO who did a great job at growing the business before going off and starting his own airline. And Kelleher would become the new CEO in 1981 and would stay in that role until 2001. He led Southwest from $270 million in revenue to to 5.7 billion and was profitable every year. No other airline has been able to match that kind of record in the United States. The key to Kelleher's success was unconventional thinking. In Southwest's early days, he was told that the company wouldn't be able to survive without the six best practices that were used by other carriers. In an unconventional fashion, Kelleher would follow none of them. Kelleher wanted to provide lower fares and enable a greater number of Americans to fly. So really, Southwest would not be actually competing with many of the other airlines, but with other forms of transportation. To bring down the cost of air travel, Southwest did four things. First, they focused on the less costly and less congested airports, such as Dallas's Love Field and Hobby Airport in Houston. Direct flights between these small airports allowed the company to utilize its aircraft most efficiently and get passengers directly to where they needed to go. And these airports tend to be situated closer to downtown locations, making them more attractive to customers who are time sensitive, such as businessmen. I frequently fly out of Omaha, which would be right up Southwest's alley for their target customer base they described here. Omaha doesn't have an international airport, so it's quite small in comparison to an airport like o' Hare in Chicago. And Omaha's airport is just a six minute drive from downtown. If you look at many international airports, they tend to be not near as close to the downtown areas of the city. So second, Southwest focused on operating only one type of aircraft, the Boeing 737. This gave them bargaining power in new airplane purchases and the power to make suggestions in how these planes are designed. This also reduced the time needed to train pilots, mechanics and other workers. Third, Southwest understood that planes are only driving revenue if they're in the air. So they reduced the amount of times that planes were on the ground by 90%, just a 10 minute turnaround times. This allowed them to get more out of their planes and more out of their employees relative to their competitors. And finally, Southwest took good care of their employees. They're able to retain highly qualified, hardworking employees by providing an atmosphere that reinforces individual responsibility and offers opportunities for advancement. As a result, employee turnover is well below the industry average.
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Clay Fink
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And most importantly, Remarkable's mission is about helping you think better. That means no apps, social media or any other distractions. Just you and your thoughts. You can try the Remarkable Paper Pro move for 50 days for free and if it's not what you're looking for, you get your Money back. Visit remarkable.com to learn more and get your paper tablet today. That's remarkable.com alright, back to the show. Each employee at Southwest was treated the same and Kelleher created a culture of employees who think and act like owners. Each employee had the opportunity to participate in a profit sharing program and the company offered a hefty employer match in 401 retirement plans. Because Southwest had a culture of people who thought like owners, they weren't stuck in the corporate bureaucracy and red tape that held other airlines back. For example, in 1990, word got around that Midway Airlines was out of cash and would be closing its doors in Chicago, providing the opportunity for another airline to step in to take their place. Before Midway had even made the announcement, Southwest already had a team of lawyers negotiating with city officials and letting them know that they would invest $20 million into the airport and make use of the open gates. You know, it's one thing to say that you take care of your employees, and it's another thing for employees themselves to actually feel that way. And one thing that's important when it comes to making employees feel valued and cared for is job security. Southwest Airlines is the only airline in one of the few corporations in any industry that has been able to run for decades without ever imposing a furlough when necessary. They find cost reductions elsewhere, and that has promoted healthy employee morale within the organization. And one thing that some bigger, more bureaucratic companies get wrong is how they think about risk. At bigger companies, taking risks typically isn't encouraged, and thus innovation is stifled. Kelleher recognized that taking calculated risks is essential to improving the business, and with any risk comes failure. However, Southwest never took big financial risks. They grew conservatively and only expanded outside of Texas when it made financial sense to do so. Expansion was financed internally, Whereas other airlines would likely take on debt to grow market share rather than profits. They recognized the hidden dangers that were awaiting as an airline operator. For example, in 1990, Iraq invaded Kuwait, which led to a surge in jet fuel in an economic recession, which led to two major US Carriers filing for bankruptcy. Most carriers weren't prepared for such a downturn, but Southwest was, and they remained profitable both in 1990 and in 1991. One of the common themes that Sean and Ian found in the intelligent fanatics studied was simple and effective communication, both internally and externally. They shared a letter in the book. That was a note that they'd sent internally in 1995 that discussed how important every single customer is on the plane. It outlined how the finance department found that on average, they needed at least 75 customers on their flight for that single flight to become profitable. From an organizational standpoint, if you took the profit for the year and divided that by the total flights flown, Southwest had an average profit per flight of $287 in 1994. If you take that $287 of profit per flight and divide it by the average fare, that gave you the number of customers per flight that accounted for the profit generated for the year. It turned out that it was just five customers per flight accounted for all of the profits that Southwest generated. In other words, just 7% of their customers accounted for the difference between profit and loss. When the management team framed the business in this manner, it was clearly communicated just how valuable every customer is and to Southwest and to the employees. It also helped them understand that each employee did make a real difference in such an organization with over 15,000 employees at the time and this data is quite interesting to learn if you are working at the company. Intelligent fanatics care about their business and the well being of their employees, so they feel an obligation to serve as a teacher to every shareholder. Kelleher's efforts at Southwest certainly paid off for shareholders as well. Investing in Southwest airlines at the IPO in June of 1971 and holding shares until Kelleher stepped down in 2001 would have generated a 25% compounded annual growth rate relative to the S&P 500's return of 8.5% over that same time period. A true sign of an Intelligent Fanatic led organization is that the business continues to outperform even after the Intelligent Fanatic has fully exited the business. Shares of Southwest Airlines did quite well from 2001 until this book was released in the 20152016 timeframe, and the stock performance has been quite lackluster since then as they've struggled with increased costs of labor and fuel, which is part of the reason that margins have fallen drastically. Another Intelligent fanatic that Munger spoke highly of is Les Schwab, the founder of Les Schwab Tire Centers. Schwab was born in 1917 in Bend, Oregon and had a rough upbringing as both of his parents passed away in his teens. Schwab worked his tail off for as long as he could remember and fought in World War II for his country and received his education in business in the newspaper industry. It was in the newspaper business where he started testing out different incentive programs with employees. The book writes here, the success of any business is directly correlated to its ability to motivate its people through clever systems and incentives. Les Schwab understood this like no other and was constantly tinkering through trial and error to get the most out of his people. End quote. One hugely successful system Schwab created was the Honor Carrier Program, which helped increase the newspaper circulation significantly. The program incentivized newspaper carriers to acquire new customers, provide impeccable service, and collect and keep financial records about their routes. There were three levels that each carrier could achieve and the Reward was both intrinsic and extrinsic. Top newspaper carriers would get their picture and story in the paper and receive a $25 bond. The beauty of this incentive structure was that the cost of the incentive to the newspaper was small, but it provided a large return on investment. And the carriers were challenged and pleased that their hard work actually would pay off. I feel pretty lucky to work for a company that takes a similar approach to compensating employees. And I'm incentivized to increase the top line revenue for the company I work for without significantly increasing the level of costs. And I earn a financial reward just one month after that revenue is generated. It's nice that I don't have to wait a year or even multiple years to see the fruits of my labor. I've worked at jobs in the past where they throw out these vague ideas like profit sharing and the potential for a promotion without giving the employees anything concrete or giving them an idea of what the potential payoffs or rewards will be down the line. So there was just much less transparency around it, which I believe led to employees that were less motivated. The other thing I appreciate about my current incentive structure is how concrete it is. I don't have to necessarily guess what my compensation will be or will I have to negotiate after the fact when it's all said and done. And lastly, just like the owners, I share in both the upside and the downside of the business. Too often incentive structures benefit someone on the upside, but they don't share in the downside risk if things go wrong. For example, if I were incentivized to double revenue of the business but didn't share any of the risk, if revenue ended up going down, then I might do some risky things that simply aren't sustainable or have the potential to actually decrease revenue. It would be like a baseball player trying to hit a home run every time he steps up to the plate, even when the odds of his team winning would be much better if he just stepped up and instead tried to go for a single or double each at Batman. In starting Les Schwab Tire Center, Schwab was working to unlock the superpower of incentives and generate success both for his business and his employees. Schwab's first employees, Bill Welch and Frank Kennedy, originally were part of an informal profit sharing agreement when the business started in the 1950s. Profits were split 5050 with the employees, which was an unusual and unconventional arrangement for any company during that time. But quality incentives are only worthwhile if the growth opportunity for the company is present and Significant. If I put myself in the shoes of the employees, there really isn't much to be excited about. If I get half the profits of a company that isn't addressing, you know, a sizable need in the market. Schwab used Les Schwab Tire center as an avenue to empower young, ambitious men who wanted to become successful. So we opened up a chain of stores for others to manage. He would take half the profits and use that capital to open new stores where he felt there was good opportunities to grow. As the conglomerate and the stores themselves grew, the incentive structure needed to adapt, and Schwab recognized that. So he asked his managers to appoint their best worker to assistant manager and to give them 10% of the store's profits. With both Schwab and the manager giving up 5%, some managers weren't too keen on giving up equity. And Schwab was blunt in sharing that if there's a hardworking employee who has done well for the company and shown loyalty, then it's selfish not to give him the opportunity to advance further in his career. Due to the pushback from some, he even went as far as incentivizing managers to change. A new rule was put in place stating that if managers did not have an assistant manager by the end of the year, Schwab would end up taking 55% of the profits and leave the manager with only 45%. In the book, they shared a great quote from Schwab. He said, problems create opportunity. The solution to a problem is common sense, open communication, complete honesty, and the desire to help your fellow man become a successful person. End quote. And Schwab was a master at helping others succeed. He always encouraged his managers to treat their employees well because he believed that the way a company treated their employees would directly affect how employees would treat the customer. Schwab also believed that the more he shared with the employees, the more the business would succeed and the more resources that would eventually be available to give others opportunities to also become successful. Once employees were in these programs, it would be hard for them and the company as a whole not to become successful because the incentives were just so powerful. Schwab also wanted to offer incentives to the employees who had worked with the business the longest, which increased employee loyalty. The entire playbook was laid out for employees, and they were told in simple terms all of the details of their profit sharing agreement. Talking about incentives sounds great on paper, but in many cases, it can be difficult to effectively align the incentives. For example, if I were an assistant manager at a tire shop, it would Be much easier for me to eventually replace the manager at my store who's nearing retirement than to apply to open a new store of my own. This was one of the many puzzles that Les was able to crack. He ensured that the new managers at top stores would be reserved for applicants who either had pioneered a new store themselves or turned around a poor performing store. This ensured that managers truly had to earn their keep and weren't simply looking for profit sharing handouts. After the new system was in place, quality managers were eager to turn around some of the poorer performing stores or take over new stores in their quest to get the top spot at a top store. Another problem that Schwab faced was the rising cost of opening new stores. In the 1950s and 60s, the cost to open stores was minimal relative to the 70s, which made it difficult for a new store to reach profitability. Since rent was paid on the value of the building. The older, larger stores were paying a smaller percentage of their sales and rent. So new stores were paying a much higher percentage of sales relative to older stores. So to solve this problem, Schwab required every store to pay the same amount of rent as a percentage of sales. This allowed new stores to pay a much lower amount in the earlier years when they were just started and getting off the ground. And the older stores were on board with this because it aligned with the company's mission and their values of giving the newcomers opportunities to succeed. As opening up a new store became more and more difficult, Schwab put programs in place to support these new owners and give them a path to profitability in their first year of business. Like other intelligent fanatics, Schwab clearly had an unconventional business acumen. Conventional wisdom was to give corporate executives large pay packages and pay the grunt workers much lower wages. At Lech Schwab Tire Centers, the highest overall pay packages were not to LE Schwab or to these executives, but to the people who really mattered, which were the store managers. As profits are being distributed around the company, people can be tempted to try and negotiate their way to get a greater share of the pie. Schwab had a falling out with a couple of employees who wanted larger equity stakes, contrary to their original agreement. And Schwab wasn't interested in working with greedy people who don't keep their word. Like many intelligent fanatics that we've covered here on the show, Schwab ran his business in a decentralized fashion and preferred that the people running the tire shop had the autonomy to run the business as if it was their own. The authors write here, authority and autonomy promote a feeling of control and self worth that is intrinsically valuable to employees. To operate with such a model is difficult without the right amount of communication among separate businesses, the hiring of quality individuals, or clear corporate values for employees to abide by. End quote When Les Schwab acquired tire stores In Idaho in 1966, this was what he told the new store managers he expected of them. The big thing that's going to hit you right between the eyes is that we expect you to run the store. You're on your own and you will sink or swim according to your abilities. It takes quite a man to be a store manager. End quote Schwab believed that decision making is best executed at the lowest level. Store employees are oftentimes the individuals with perfect information and knowledge of the situation at hand, and once manuals are created, these manuals tend to only grow and soon enough your company is just another big corporation. To Schwab, the main job of the head office was to provide motivation to create programs that make it possible for employees to be successful and to track and communicate how well stores are doing. He also implemented an open book policy so employees could get practically any information they wanted about the business, including company profits, employee salaries, and so forth. He even put together a report that showed the net profit of each store and distributed it to employees. Les Schwab Tire Centers has been a private company during its entire corporate existence, so there are few records on the profitability and revenue of the company. But regardless of the lack of data, we do know that they grew from one store to hundreds of stores in operations today and billions of dollars in revenue, generating tremendous value for shareholders. The third intelligent fanatic I wanted to be sure to cover on the show today is Chester Kajo, who's the founder of kwiktrip. For those in the audience who aren't familiar, kwiktrip is a chain of convenience stores and gas stations known for its clean facilities, friendly service, and made to order food and drinks. From 1962 to 2015, Kwiktrip grew its revenue base from $1 million to to 11 billion. Whenever my friends and I would drive down to Kansas City, one of the highlights of our trip was always swinging by a quick trip to grab a steak and cheese taquito or one of their other convenient snacks that they have hot and ready to eat. Buc EE's is actually probably my favorite convenience store here in the US but unfortunately there aren't really any in my general area, so Kwik Trip would have to take the crown as the top convenience store that I'm able to visit. Warren Buffett once tried his hand at the convenience store business. In 1951, him and his friend from the National Guard, they purchased the Sinclair service station. In those days a service station consisted of a few pumps out front, an on site repair garage and limited offerings, if any, inside. Buffett was only 21 years old at the time and there was a Texaco station right across the street and that taught him the hard way the importance of having a competitive advantage in business. It was seven years later in 1958 that Chester could Joe was looking to get into the gas retail business himself and like Buffett, he had no clue what he was getting himself into. But unlike Buffett, he was eventually able to go head to head and really compete with the other players. Instead of exiting the industry like Buffett did in the 1960s and 70s, there was little competition in the convenience industry. Since these businesses provided longer hours of operation than supermarkets, customers were willing to pay higher prices. In the beginning, Kwiktrip did about everything wrong. They opened their first store in Tulsa, Oklahoma, but paid little attention to where the most attractive location would be and the merchandise was poorly chosen. After the first three years the company was on the verge of bankruptcy, but they managed to scrape by with a few lucky breaks. Kudjo's success was highly influenced by his long term mindset, his ability to adapt and his willingness to continuously learn. For example, Kwiktrip started installing gas pumps in 1972 once self service became legal in two states and had built up financial and intellectual capital to prepare for such a move.
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Let's take a quick break and hear from today's sponsors.
- [38:35]
Clay Fink
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Turn your big business idea into reality with Shopify on your side and thank me later. Sign up for your $1 per month trial and start selling today at shopify.com WSB that's shopify.com WSB all right, back to the show. Kajou's competitive advantage over his larger rivals was his focus on employees and innovation. He would spend a large part of his time roughly two months out of the year in direct communication with Quick Trip employees. He had stated without fail Each year we learn something important from a question or comment voiced by a single employee. Kudjo believes in treating employees well and incentivizing them properly and employees then provide exceptional service to the customers. So very similar to what Les Schwab was talking about. Amazing customer service will lead to customer loyalty which is difficult to replicate, especially by competitors who don't value their employees, the authors write here. Exceptional employees and a quality corporate culture have allowed kwiktrip to stay ahead of the competition from convenience stores, gas retailers, quick service restaurants, cafes and hypermarkets. Similar to Schwab, Kadjoo's main objective was always about employees and giving them opportunities to grow and succeed. On leadership, Kudjo stated, leaders are not necessarily born with the highest IQs or the most drive to succeed or the greatest people skills. Instead, the best leaders are adaptive. They understand the necessity of pulling bright, energetic people into their world and tapping their determination and drive. True leaders never feel comfortable staying in the same course for too long or following conventional wisdom. They inherently understand the importance of constantly breaking out routines and in order to recognize the changing needs of their customers and employees. End quote. I think many people view leaders as someone with these naturally born talents or personality traits, but I like how could Joe? He really prioritizes more of these soft traits like adaptability and the desire for continuous learning. At kwiktrip, this mindset translated into a culture where employees were really encouraged to take the initiative, learn from experiences and grow into leadership roles over time. Kudjo understood that by investing in people and giving them room to develop, he was not just building stronger employees but future leaders who would carry the company's values forward and showcase loyalty to the company. Couldjo preferred to pay new entry level employees higher wages relative to the competitors. This led to a higher number of applicants for positions which allowed Kwiktrip to be highly selective in who would be able to join the organization. Kwiktrip was in the privileged position of interviewing roughly three out of every 100 applicants they received and due to their culture of excellence, the applicants that made it through the hiring process were also self selective as only 70% of new hires would make it out of training and around 50% would last in the job for six months. But for employees who stuck around for that long, they tended to stick around for a very long time. According to the book here, Kwiktrip's turnover rate was roughly 13% compared to the industry average of 59%. Quiktrip was also a pioneer in paying employees a bonus based on their store's operating profit and allowing employees to own a large stake in QuikTrip through the company's employee stock ownership program. Kudjo's main motivation wasn't to make the most money for himself, but to develop the best people and to provide the best service to customers. He once said, it just so happens that by making our employees successful, we made our shareholders successful and we make our customers happy. So it's clear that these intelligent fanatics were able to build cultures that really empower their people at every level of the organization. Kudjo's approach at kwiktrip mirrors the same core principles seen in other great companies where adaptability, a strong culture and investment in people become the foundation for long term success. These qualities form the essence of what's described as the Intelligent Fanatic model, a framework for how exceptional leaders turn human potential into a lasting competitive advantage. In the 2010 Berkshire Hathaway shareholder letter, Buffett stated, our final advantage is the hard to duplicate culture that permeates Berkshire and in businesses, culture counts. Companies that can harness the full potential of human capital can build nimble, sustainable organizations that are hard to replicate. In covering many types of companies here on the show, it's clear that a strong and adaptable culture is a key theme that separates an industry's top performers from their peers. Traits of a strong culture include the quality of the leadership, the maintenance of an entrepreneurial environment, prudent risk taking, innovation, flexibility, and open communication through the organization from top to bottom. Top performing companies maintain a small company feel and have long time horizons. The intelligent fanatics outlined here displayed all of these traits and their businesses put together exceptional performance for multiple decades. At the end of the day, intelligent fanatics are effective leaders. The authors write here. Leadership is one of the most important aspects of a successful organization. A corporation is comprised of people who, whether consciously or unconsciously, are essentially working for primarily selfish reasons. Great leaders can attract and most importantly retain high quality individuals by convincing them to work hard for the good of the company. Intelligent fanatics create a higher cause that all employees have the chance to become invested in, and they provide an environment in which it's natural for employees to become heavily invested in the company's mission. End quote. This is really such a critical insight. Intelligent fanatics have a knack for for getting people bought into the company's mission. I'm reminded of my days playing high school basketball and football. I had an amazing coach that actually coached both sports and he knew that some people were on the team for very selfish reasons. But if you're going to win the state championship of a team sport like basketball. You need everyone bought into the mission of the team and that's to win. Not to have the big highlight reel or getting the attention from college coaches or making our parents proud or whatever selfish reason players have in playing. I recently did an episode on Tesla whose mission is to accelerate the world's transition to sustainable energy. There are plenty of cases of engineers choosing to work with Tesla for less money because they believe in Tesla's mission and they wanted to be a part of something bigger than themselves. Southwest Airlines mission was about connecting people through friendly, reliable and low cost travel. Employees take pride in creating joyful travel experiences and are treated as the key to the company's success. And they've been successful in getting employees to buy into that mission and vision. Leadership is critical when it comes to developing a culture because senior leaders will create these systems and structures and everyone looks to the leader's behavior for guidance on how to behave themselves. In a lot of companies, managers will say one thing and do another thing which creates this misalignment. But someone like Herb Kelleher was the perfect role model for those values. He expressed sincere appreciation for employees and remembered their names. Colleen Barrett, vice president of Southwest, said, herb is Southwest Airlines. He exemplifies everything the company stands for. So I've personally worked at both types of companies myself. Those that prioritize the importance of culture and those that don't. All companies likely talk about culture in some form or fashion. One company I worked for in the past really had a culture as a box that they sort of needed to check for formality purposes. They'd have a, you know, the year end holiday parties that felt a bit inauthentic. And they talked about work life balance without actually living it. And it made the company to employee relationship much more transactional. Instead of each party asking what can I give in this relationship? They're prioritizing what can, you know, I get out of it. A good culture is really difficult to fake. I really think of culture almost as a company's second product. Each company has the product they sell to customers and then they also have the product that they sell to employees, which is the culture. For a company to succeed long term, it really needs a culture that attracts the right employees and is able to promote loyalty. Another interesting angle when looking at intelligent fanatics is their views on frugality and expense control. This is an aspect of the business where both employees and leaders have 100% control. And frugality is another important value for a Performance Driven Culture Intelligent fanatics often demonstrate their values of thrift by setting a good example. When Sam Walton, the founder of Walmart, became the richest man in the world, he still drove an old beat up 1979 Ford F150. Jeff Bezos was living in a small apartment and driving a Honda when Amazon went public. And of course, Warren Buffett still lives in the house he purchased in 1958 for $31,000. The authors right here Offices of intelligent fanatics are rarely fancy due to their belief in conserving money for things that matter. Frugality sends a powerful message. It shows that leaders care more about substance than appearances, and by avoiding the excess, these leaders reinforce a culture where every dollar is valued highly and is directed towards creating long term shareholder value. And this mindset builds trust among employees and shareholders because people see that leadership isn't asking others to make sacrifices that they themselves wouldn't make. Intelligent fanatics have integrity and always do the right thing, even when it's hard to do so. To them, uncompromising integrity of character is invaluable. Integrity isn't something that can be taught, so great companies look to hire individuals who already have it to help determine what the right decision is. One filter you can use is Buffett's Newspaper Test. The Warren Buffett Newspaper Test is a simple ethical guideline that prompts decision makers to consider how they would feel if their actions were reported in the local newspaper by a smart but unfriendly reporter. If you would be uncomfortable with your friends, family and neighbors reading about the decision, then it's a bad decision. The test is designed to evaluate decisions not just for legality, but for but for long term reputation and integrity as it highlights the potential for reputational damage and consequences beyond immediate profits. One of the other common themes with the intelligent fanatics studied was their style of unconventional thinking and how they were able to take on an established industry from a different vantage point. Industries are full of unwritten truths and established ways of thinking, and industry veterans often get accustomed to a certain way of doing or thinking about things and have trouble approaching problems from a different viewpoint. This is the commitment and consistency bias at play as popularized in the Charlie Munger speech the Psychology of Human Misjudgment. All of the intelligent fanatics covered in the book were either absolute beginners with no industry experience or they had minimal experience. Their inexperience allowed them to be open to trying something new and to challenge the old guard. These new ways of operating led to business models that the established companies simply couldn't compete with Herb. Kelleher was told that his business model would be impossible to operate profitably, but being new to the industry, he wasn't afraid to attack a problem from a different angle. Intelligent fanatics not only led by example, but they're also excellent teachers John Patterson from National Cash Register, who was outlined in Chapter one, said the following Business is only a form of teaching. You teach people to desire your product, that is Selling. You teach workmen to make the right product, that is Manufacturing. You teach others to cooperate with you, that is organization. To succeed in business, it is necessary to make the other man see things as you see them. I say as you see them, which means that you yourself must first see and believe before you can tell another Saul Price, who was Costco founder Jim Senegal's protege, stated, if you're not spending 90% of your time teaching, you're not doing your job. So focusing on teaching not only helps develop talent, but it's also the best way to reinforce your knowledge on the subject. And of course, the intelligent fanatics also owned a meaningful piece of the businesses they led. Their ownership position combined with execution gave them ultimate control over the long term direction of the company and the only way to succeed in dominating a market for decades is to have that long term focus. They built the infrastructure to support a larger business which normally takes significant upfront investment that will lower profitability in the short term. As Nucor's Ken Iverson stated, every decision we make as managers is rooted in long term perspective. In quick trips. Chester Cajou stated, most everything we spend money on in any given day is important. 10, 15, 20 years from now, a good majority of convenience stores in the US tend to be old, run down and not well taken care of. Kwiktrip, on the other hand, continues to reinvest and renovate their stores every few years to keep them in pristine shape. It's one example that can be difficult to justify in a spreadsheet given how capital intensive the business model is. But sometimes intelligent fanatics simply go with their gut instinct. The bottom line is that the stronger a company's culture, the more likely they can stand the test of time. The book also gets into the power of focus. Over the years working on different business pursuits, this is a takeaway I've learned from my own personal experience as well. Whenever my attention gets too spread out on too many things, meaningful progress in any of these things is difficult. When you want to get ahead in life and succeed, it can be tempting to say yes to a lot of things. It reminds me of something I learned from Steve Jobs. Joni I've, who was the Chief Design Officer at Apple, said that Steve was the most remarkably focused person he had ever met in his life. While Steve was maniacally focused on the task at hand or on his vision, he would ask people he worked with how many things have you said no to? This is a powerful question because every time you say yes to one thing, we're saying no to a thousand other things. So I think intelligent fanatics are really good at understanding what they can do well and what sort of advantage they have in a fiercely competitive marketplace. And stick with those one, two or three things. In business, it can be tempting to chase the next shiny object while underestimating the power of focusing on one or two things for a decade or more. The podcast you're listening to right now I think is a good example of that. We study Billionaires was started all the way back in 2014, and I frequently bump into listeners who have tuned into our show for five, six, seven to eight years or more. That sort of loyalty is hard for other podcasts to replicate. While we're by no means perfect by any means in terms of focusing on just one or two things, we've consistently published content week after week to continue to build that sort of loyalty with our listeners over time. Costco is another great example of this kind of discipline. They've built their entire business around doing just a few things exceptionally well, selling a limited selection of high quality goods at unbeatable prices, treating employees well, and running stores with efficiency. Instead of chasing every retail trend, they've stuck to their core model for decades, proving that long term focus and simplicity can outperform complexity and constant reinvention. The bottom line is that in most cases, to be very successful at something, you need to be highly focused on that one thing. Sol Price was maniacally focused on selling things as cheaply as he could. Les Schwab told his managers, sell tires, give service, keep expenses low, communicate with employees and you'll come out alright. Intelligent fanatics often run their businesses without an extensive and detailed business plan. Anyone can make great projections, but few can develop a simple yet effective and unconventional business model and work very hard to put it in motion. We already talked quite a bit about incentives, but it's hard to overestimate their importance. A good incentive system includes both intrinsic and extrinsic factors, so it's not only just about the financial incentive. Extrinsic factors include things like money or status, and intrinsic factors include things like Personal growth, purpose and meaning having the opportunity to overcome a challenge, helping people, or simply just making the world a better place. A talented individual who's going to work with both powerful intrinsic and extrinsic forces at play is likely going to beat the talented individual with the best financial incentives in place. Les Schwab wasn't just about enriching himself. He created his company to provide opportunities for young people to succeed. Similarly, Chester Kajo stated, if we've hired the right people with consistent aligned values, and then you go and try and make them successful, or at least give them an opportunity to become successful, you are going to become a successful organization. While many publicly traded companies have a shareholder first mentality, intelligent fanatics seem to have an employee first mentality that created positive feedback loops. When employees are treated well, they treat customers well. Customers tell their friends and their friends might become customers too. And this is to the benefit of shareholders. This is in contrast to a shareholder first mentality of most corporations. Focusing purely on shareholders with little regard for employees or customers leads to companies to try to cater to the whims of the market. Intelligent fanatics had a way of getting their employees to think and act like owners. This was done with financial incentives that aligned their financial interests with that of the actual owners, and employees received intrinsic motivation to think like owners. The other aspect of an employee first culture is hiring great people. If you're a manager with a shareholder first mentality, then it's likely tempting to offer lower wages for your employees or perhaps a subpar benefits package. That can work wonders from a financial perspective in the short term, but that can be detrimental in the long term. On the other hand, paying high salaries will do the opposite. It can attract a large pool of applicants for you to select from and with the right incentives, you can empower these people to create tremendous long term value for their organization. And if you have a great culture, then these employees will stick with you for a long time. As Richard Branson stated, train people well enough so they can leave. Treat them well enough so they don't want to end quote. I think that employee turnover can be an important metric to consider when analyzing the quality of an organization's culture. So you look at Costco, employee turnover at Costco is just 6% while retail overall has turnover of 60 to 70%. And chick fil a is another really good example. They have some of the lowest employee turnover in the fast food industry. The last two concepts I wanted to touch on as it relates to intelligent fanatics are experimentation and productive paranoia. Experimentation and innovation are necessary for a company to keep up with the ever changing environment. And as a business grows, it becomes more and more difficult for them to compete with smaller, more nimble competitors. Jeff Bezos and Amazon understood the exponential payoffs that well thought out experiments provide. And he knew that not every idea will work out as planned. Bezos stated a few big successes compensate for dozens and dozens of things that did not work. This approach to business led them, of course, to launching aws. While many companies punished failure, Bezos found it to be necessary for innovation. For these experiments to be successful, employees need to be encouraged to take calculated risks. And the company has to be as supportive with that. If employees risk being fired for taking a calculated risk, then they really have no incentive to do so. We always hear about the success stories and those that made it to the top, but we don't know about, you know, many of the failures or the personal sacrifices that intelligent fanatics had to make. Almost all successful people went through incredible hardship, obstacles and challenges. So if you look at Charlie Munger, for example, you know, when he was around age 30 or 31, he went through a divorce. He had to financially start from zero. He lost his nine year old son due to leukemia, and he became blind in one eye as a result of a failed cataract surgery. Or take Herb Kelleher, who had to fight four years of legal battles to get the first Southwest Airlines flight off the ground. Intelligent fanatics persevere through adversity, for they see courage the way Winston Churchill did, who stated, courage is going from failure to failure with enthusiasm. Lastly, let's talk about productive paranoia. Jim Collins describes successful leaders as being paranoid, neurotic freaks. Intelligent fanatics recognize the competitive nature of capitalism and how someone is always out there trying to figure out how to eat their lunch. It's no wonder all retailers fear Jeff Bezos. As he stated, your margin is my opportunity. Productive paranoia isn't just about worrying about the competition, but actually doing something about it. Intelligent fanatics are always looking for ways to make their businesses better. They want to disrupt themselves before somebody else disrupts them. Sam Walton, for example, was never satisfied and content with his business. He stated that the lines were too long at the cash registers and his people weren't being helpful enough. But if you ask some CEOs of other retailers, they would possibly brag to you and tell you about how great their business is. The world truly belongs to the discontent. There's no doubt that the intelligent fanatics covered today shared many traits and they provide a high level blueprint for Building a Dominant, sustainable business if you're an investor looking to invest early in these great companies that are led by intelligent fanatics, then seeking out these types of characteristics will be useful to you. To conclude the book, the authors discuss how the only truly sustainable competitive advantage is the company's human capital. Eventually, companies can and will copy products, but it's extremely difficult to copy a strong culture. All the capital in the world cannot buy and transform a poor culture into a great one. Deeply rooted cultures are built up over years, one hire at a time, and leadership and culture are as strong as their weakest link. And intelligent fanatics inevitably will need to leave their companies at some point, and for that reason they build their companies to thrive long after they're gone. They take care of their employees, and in turn the employees take care of them and their companies. All companies run into some sort of problems, and when employees feel like partners, the success of the organization is very important to them. Sean and Ian close out the book with the following line Whether you're an investor or an entrepreneur, invest in the best human capital you can find. That wraps up today's episode on Intelligent Fanatics. I'd like to extend a special thank you to Ian Castle and Sean Eidings for allowing me to chat about this book today. Since it is out of print, I think it's a very important subject that's definitely worth studying, and I appreciate Ian and Sean sharing the common findings they found in studying these exceptional managers for us to use as a blueprint in assessing management teams ourselves. So with that, thank you so much for tuning in to today's episode and I hope to see you again next week.
- [65:20]
Host of We Study Billionaires
Thank you for listening to tip. Make sure to follow we study billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.