Humility required

My daughter plays for her high school varsity soccer team. At about this time last year, they went to the state championship and won. It was an exciting time for the school and for the team, but my daughter couldn’t help but be a little disappointed. She was not a starter and in that championship game, she didn’t get to play. After that experience, my daughter resolved to do better. She trained in the off-season. She played for a club team in the fall. When high school soccer started this spring, she was ready and her efforts paid off. Not only did her team win a second straight state championship, but my daughter was a starter for the team and the coach honored her as the most improved player. To say this season was more satisfying for her is an understatement. She is already looking ahead to next season, working on a plan to improve again.

Improving at anything—whether it’s at sports or business—can be humbling. It’s hard enough to address the things we struggle with, but it’s even harder to take a critical eye to the things we think we do well. As investment managers, we challenge our assumptions. We know that owning quality companies is a strategy that has benefitted generations of investors. We also know that our process for finding quality companies has delivered solid results. But we deconstruct our strategy anyway, looking for ways to improve. In the past, this has led us to refine our approach. At one time, it was enough for us to own a company if they were one of the biggest in their industry, and the stock was trading at a good price. Today, we know it’s better for a company to also have a catalyst for growth, and we have ways of quantifying how profitable and financially stable they are. These metrics don’t help us make perfect decisions, but they help us make more informed decisions and that’s a benefit to our clients.

Just as we look for ways to improve our investment process, many of the companies we own also look for ways to improve what they do—in fact, that’s a hallmark of a quality business. In some cases, this means not just refining the business, but rethinking it altogether and dismantling it if necessary. Johnson & Johnson (JNJ) is a good example of this. For years, the company has operated two segments; a healthcare business that produces pharmaceuticals and medical devices, and a consumer business that produces personal and baby care products. While both segments are strong, management has decided to spin off the consumer business as a separate company. Johnson & Johnson, the medical company, will still be a world class developer of pharmaceuticals and medical devices. The new company, Kenvue (KVUE), will be a top competitor to other consumer product companies like Procter & Gamble (PG). And each company will be able to focus on what they do best, a change management believes will be an improvement for shareholders.

My daughter improved her soccer skills to benefit her team. We improve our investment process to benefit our clients. Johnson & Johnson is improving their operations to benefit shareholders. None of these things would be possible without the desire to achieve something better, a little humility and a willingness to work and change if necessary. But often, the results are worth the effort.

~ Travis Raish, CFA