2024年值得记住的轶事——[Business Breakdowns，第198期]

Matt Russell

Today we have a special year-end episode of Business Breakdowns, running through some of the best ideas that were featured on the podcast.

The goal of the podcast is to detail whatever business we’re covering that day. But when you think about the best investors and the best business builders, they’re constantly borrowing insights from the success stories happening around them. So I gathered some examples that I find myself constantly thinking about, and I think you will, too.

When we did a version of this over the summer, it produced 9 times the amount of feedback as a normal episode does. So I would encourage you again to reach out with follow-ups. I will answer. You asked me for more examples in each particular case, so I added some commentary here as to where else these ideas show up, whether it’s in the operational side of things or in the investing side of things that I’ve come across.

This episode does have structure to it, so we’re going to start out with a high-level theme and then go into the life cycle of a business: establishing a niche with Gartner, building a culture at Live Oak, and an example of refining the operations via the lens of Train. We go through the good and bad of business transformations, told through the stories of Rolls-Royce and D.R. Horton. Then we cover what a clean business model or financial model looks like through Intuit Text.

Lastly, we finish up with some management stories that are maybe less well-known or underappreciated, via Motorola and Winmark. To kick this off, we’ll start with my favorite theme from the year, which has stuck with me. That is my friend and former colleague Drew Cohen from Speedway Research laying out the hierarchy of consumer preferences as it relates to Coupang.

I’d argue that this is the most overlooked dynamic, whether you are investing in companies or building a company. So here is Drew laying this out.

Your question on why Coupang was able to be such a late entrant and still succeed so well ultimately comes down to the fact that, if you think about the consumer hierarchy of preferences—which is what a consumer really values—a lot of times when you’re making an e-commerce purchase, of course there’s price, selection, and delivery speed, but consumers also really care about reliability, consistency, and trust.

None of these players really were hitting on that because they’re third-party marketplaces. A lot of times, they don’t even have the inventory in stock before they go ahead and sell it. It’s going to be a very inconsistent delivery experience. So whenever you’re buying on one of these platforms, you’re always wondering in the back of your head if something’s going to go wrong. It creates hesitation and friction to purchase.

Whereas Coupang, by virtue of the fact that they actually own all of the logistics, took the first-party inventory route, and were very quick to accommodate anything that went wrong, including returns, built a lot of trust and consistency over time. So that creates a different sort of purchasing habit.

You have to spend all of this CapEx just to get to the top-of-mind positioning in a consumer’s head, where they’re no longer hesitating before they buy. If you go to an e-commerce site and you’re not sure if they’re going to be reliable, you’re in the back of your mind creating contingency plans and thinking of other places where you could potentially purchase this item.

If there are all these other places where you could potentially purchase this item, sometimes those alternatives are going to win out. Ultimately, Coupang built this relationship of reliance that no other player was able to do.

Matt Russell

We’ve seen this idea from Drew pop up on many different occasions. It is notable that we rarely host founders of businesses on the podcast, but in the 2 occasions we did this year, they both tapped into this idea.

When we talked to David Peacock, the founder of Filterbuy, he described pretty much the exact dynamic as it relates to delivery speed and how important that was to the customer, which came as a surprise to him in the air-filter business. Then Greg from Gregorys Coffee made it very clear that coffee shops have a surge of demand in the morning. So forget about thinking about cups of coffee in a day. The equation is cups of coffee in those morning hours and making sure you have the infrastructure to flow customers through.

I can remember my own days covering transportation and trying to assess the disruption from digital-first players. After talking to enough customers, or buyers of these systems, I started to appreciate that, yes, many of these new platforms had adoption, but no one was loading their software directly. It was happening through a much bigger transportation-management software system, like Oracle or SAP.

The first realization is that you need that compatibility. But then the next question is, do you really have the relationship with the customer? One of the most creative examples of getting around that, which I often go back to, is The Trade Desk.

In the earliest days of digital programmatic advertising, new entrants were basically going around the incumbent agencies that had all this power. The Trade Desk worked hand in hand with the agencies, which opened up many doors and won them a lot of business. In the earliest days, that was a massive risk to investors. I can remember those conversations, and that’s a case study in and of itself to see how they’ve gotten around that.

Finally, I would just say it’s also important to cut through some of the nonsense. Don’t be too idealistic about what is going on with some of these sales. We haven’t had advertisers at our events, but I was exploring the idea. Advertisers will pay a lot for events, and I can remember having a conversation with a particular salesperson who was on the other side, trying to understand what they were really looking to get out of it.

Their answer was frank: “I get paid based on sales and high-quality interactions. If I’m in the room with those 20 people, that’s 20 high-quality interactions.” You can protest that idea or just appreciate the idea of incentives and how much that can matter.

The hierarchy of consumer preferences taps into the idea of early-stage businesses, those that are growing, and I love going back to see the creative ways that they’ve gained traction and established themselves. I mentioned some examples before, but one of my favorite examples from this past year is the behemoth that Gartner is today. Gartner started as a very niche business, and here is Alvise Pegion with a brief story.

Looking at the history of Gartner, it was founded in the late 1970s by Gideon Gartner, who was originally a consultant for IBM. During the first years of Gartner, it made sense for the company to really specialize in advising customers on what IBM products they should be buying and what the features were.

But over time, as the company started growing, they really branched out into other parts of the vendor ecosystem. They also branched into marketing and supply-chain research. So this is really the first phase of the company.

Matt Russell

In those days, nobody was getting fired for buying IBM, but you still had to know which IBM product to buy. That IBM economy was big enough to establish a niche.

The challenge is often how you evolve the business from those early days, break out of your niche, or just start to operate with more efficiency, gain share, and add complementary business lines or segments. I think this is where talent comes into play, and then the operational systems really come into play.

You likely know Toyota or Danaher. We’ve referenced these before, and there are operational systems that are put into place, with the entire organization revolving around them. They’re very, very streamlined.

One of my favorite examples from the episodes this year was Train, an HVAC business. You can hear Brett Larsen from NZS detail how management took the Toyota system and applied it inside Train, changing its approach.

I think it’s important to say that it wasn’t always the case for Train that it would actually be the share gainer. If you backtrack to when Trane was acquired by Ingersoll Rand, maybe due to a lack of cash available prior to being acquired, or a lack of focus when they were being acquired, they weren’t ready for one of those regulatory transitions on the residential side.

So they had to scramble to get ready. They ultimately did have the product, but then they missed a loophole that essentially let the old-generation product sell for a bit, and they lost a lot of share.

What happened was that Mike Lamach joined. Earlier in his career, he had run a business that was a supplier to Toyota, and he had really become an evangelist for the Toyota Production System. He joined Ingersoll Rand in 2004 and ultimately became CEO in 2010.

He really worked to instill not TPS itself, but their version of it, within Train. The first 3 years or so focused on getting the data, value-stream mapping, and just the blocking and tackling of quality, on-time delivery, and the like.

Culturally, that wasn't easy at all. I think, of the top 300 employees, more than half had to be replaced, largely externally, just to get engagement.

The next phase of that, which I think is really critical, was taking that value-stream mapping and using what they call product growth teams, or PGTs. Essentially, what these are is a cross-functional team with a person from engineering, a person from sales, and a person from operations. They're assigned to a specific product or customer segment within the different business units.

Their dual mandate is to take share and expand margins, and they are held accountable and compensated for it. Again, it's all about value-stream mapping and what the customer cares about. It could be a new product introduction. Train is religious about innovation, but it could also be tightening the cycle time between receiving an order and getting the equipment to the customer, or having inventory placed locally.

As they piloted that, they saw 2–3× the growth of their peers in the categories where they had PGTs. So they expanded that across the entire business. I think that's really a key differentiator—that piece of their operating system today.

Matt Russell

The idea of cross-functional teams feels so powerful to me, and I believe there should always be healthy tension between a sales force and a product management team, but not at the expense of communication between departments. If you could bring that communication out into customer interactions, it makes a drastic difference.

Again, this is another example of where there's the idealistic thought process around it, and then there's the realistic thought process. Sometimes people inside the organization who don't talk to customers don't appreciate what customers actually want. Hearing it from the salesperson, or from anyone else in the organization who is not the customer, isn't going to land the way it will from the customer.

I think there was something lost from the conglomerate era, when future executives were moved across divisions to ensure they appreciated the full business. I can speak to my own experience starting on a trading floor and dealing with investor clients through that role, then eventually transitioning into research. I just had so much more appreciation for what those clients actually cared about. It was a harsh reality, but it hammered home this point.

I think these systems ultimately drive a defensiveness in terms of understanding the customer and understanding the other functions within a business. I'll use the word moat here, because that's what it ultimately can build. When I put this in the context of physical, hard-asset businesses, it's very interesting to see the types of moats that can be created.

One of the most interesting and fascinating ones from this past year was Vulcan Materials. If you've ever asked me what my favorite episodes are, Vulcan is always on that list. I just find the business to be so interesting. Construction aggregates are such an interesting piece of the world—the foundation of the world, if I might say. Rob Hanson from Vontobel laid out what all of this focus on building out the platform did for the business.

This really brings the point home. Opening a new quarry is very time-intensive and very capital-intensive. You need to have maybe $50 million if you want one that's close in, and it's going to take you 10 to 20 years to get this permitted through the environmental process. It's very, very complex, and that is one of the major barriers to entry.

It's a scarce resource, too. I know I call it a commodity, but it is scarce. It's got to be close to a population center because this is $10 to $20 a ton, so it doesn't travel very far. Every 40 miles you travel by truck, the cost doubles, because it's about 25 cents per ton-mile.

You've got to have the logistics and the trucking there, and then you have to have relationships with some of these downstream contractors, too, because you need to have people to use your product. So it's a very hard industry to get into. As for greenfielding, Vulcan does maybe 1 or 2 greenfields a year, but some of those are really just distribution sites where they mine it and then put some rail tracks down.

What's interesting, though, is that the logistics piece is just so important. Part of that is because, if you're going to transport this stuff, as I mentioned, by truck, it's 25 cents per ton-mile. If you do it by barge, if you can have a quarry located close to an ocean, it's only 1 cent per ton-mile. Rail, meanwhile, I believe is about 8–10 cents per ton-mile.

Transportation of this material is hugely important. I think it's an overlooked piece of the business that is just hugely important. In general, the stats around it are that 80% is shipped by truck, and then the other 25% is shipped via barge or rail first and then uses trucks. You always have to use a truck, and it's highly expensive.

That's why, in certain markets, you want to have multiple quarries, and that's why you have this platform approach. There are a lot of different ways Vulcan adds value in terms of the operational piece, to really get the price down as much as they can for their customer.

Matt Russell

I think Rob captures a really interesting point there. Construction aggregates themselves are a commodity. Selling construction aggregate versus another supplier who sells construction aggregate isn't going to make a difference in terms of the product. How do you stay in business? How do you differentiate yourself?

There are 2 things. One is the cost dynamic: operating at a lower cost. The location, the platform—just the geographical platform focus—is what differentiates Vulcan in being able to deliver these. When you factor in the transportation cost and how large a percentage that is of the overall cost of the product, it makes a massive difference.

It's important to understand that, if your product is truly a commodity, you're going to need to figure out different ways to differentiate. Buyers will always try to commoditize what you are selling. If you're buying something, you want to have a proxy for what's a reasonable value for it, and you might price it relative to the competition. But you do want to try to differentiate your product.

I think we face this oftentimes where we will have blanket opportunities from advertising agencies, and everything they want to do is commoditize the inventory. Let us make it the simplest system ever, where everything is an impression. But guess what? All listeners are not created equal. All impressions are not equal, and you are the most valuable audience in the world. It's not something I like to talk about frequently, but it is the truth.

These are just interesting dynamics in terms of differentiating the product. The other thing that Rob touches on in that conversation is what else Vulcan has done to improve the operational experience. This gets into enforcing the culture throughout an organization in order to serve the client.

I think it's one of these ideas that I've come to appreciate more over time. Culture is one of these things that you attach yourself to early on, then you start to move away, particularly as an investor, and focus very heavily on the quantitative things. But what really makes the differentiation is oftentimes hard to measure and hard to quantify. That's where culture comes into play.

One of the best examples of this came from an early episode in the year with my friend Steven Vegh, who talked about Live Oak Bank, which is a fascinating case study in and of itself in terms of how they built a bank around a very specific niche. One of the things that really stood out from the conversation was the high-touch customer experience and everything that goes into it.

What I enjoyed most about this was the feedback after the episode. Not only were people complimenting Live Oak as customers, but they were calling out their individual bankers. That's just not something that I've ever seen related to any other episode. It hammers home Steven's point. He may have been an N of 1 in this particular anecdote, but I certainly got much more appreciation after seeing the feedback to the episode.

I want to talk about culture and how it differentiates. If you think about most neobanks or most branchless banks, customer service is lacking. If you think about a high-interest savings account, you don't generally have a great experience, but you're earning more money on your capital.

Live Oak takes a very high-touch approach. Every borrower, they will actually fly to meet face-to-face, belly-to-belly, look at them, go over the business plan, see if they have the eye of the tiger, and see if they have a plan for success. On the deposit side, they have this well-trained and well-staffed call center.

A few months ago, I was expecting a wire into my Live Oak account. I was traveling that day, and the wire hadn't hit, even though the sender said they had sent it. So now I'm going through all of this anxiety. In the early afternoon, I call Live Oak. Within 10 seconds, I get a gentleman named Ryan on the phone.

I explained to Ryan what happened, and he said, "That's interesting. How much was the wire for?" I told him, and I said, "Who was the sending institution?" He said, "Hang tight. I'll be back in a few minutes."

Two minutes later, he gets back on the line and says, "Look, I just worked with my wire staff to go through every single transaction that hit the bank today, and nothing was for that amount. Do you mind reaching back out to the sender and just making sure that it went through?"

I did that, and of course it turned out that the sending institution, even though they said it was confirmed, had flagged it at the last minute because that account had never sent money to this account. All was resolved, but then a few hours later, right before 5:00, I got a call back from Ryan.

And he said, “Hey, Mr. Vegh, Ryan here. I know you’re traveling today. I didn’t want this to hang over your head overnight, so I just wanted to give you an update: The funds have hit your account. They’re readily available. Is there anything else I can help you with today?” And I said, “No.”

Matt Russell

But that is an amazing customer experience.

Again, that experience from Steven seemed to be shared, or there were similar stories coming from other people who had dealt with Live Oak. It definitely gave me the impression that there is a real culture there in terms of high-touch experiences. And what I would say is, AI chatbots are becoming more and more useful. We’re likely to see that transition happen more and more.

It’s going to make high-touch experiences more of a differentiator, more of a scarce resource. They come with a cost, but think about it within a business and how important that can be. Now, we’re going to transition a little bit to the idea that a business can be humming in many ways. The business model is working well, but it doesn’t always connect to the financial model. There are efficiency opportunities or ways that you can shift the financial model and unlock a tremendous amount of value through a variety of different steps.

The first one we’re going to talk about is one of my favorite conversations, mostly because I’m a massive fan of Ed Wachenheim. I’ve said it many times. His book that was released in 2016 has one of the best descriptions of just how to approach general markets and valuations, along with so many great case studies. And he lived up to all of my highest expectations.

Now, Ed comes with a very unique perspective here because he has been looking at the homebuilders for 40 years, since before I was alive. And he has seen the evolution of the business model. I think the way that he describes it is ideal because it captures the business itself and how to frame the business, and then the financial implications on the back end.

So, if you look at the industry at that time, many players tended to have ROEs below 10% because they had large investments in land. When you think about it, land is not a good investment. Land might appreciate in value 3% or 4% per year. The homebuilders need to keep 5, 6, or 7 years of land supply relative to the number of houses they’re selling in order to have an adequate supply, to have time to get the land permitted and developed, and then ready to build on.

So, they had these large investments in land. They were real estate companies that happened to build houses, and that’s the way it looked. Their cash flows mainly went to buy more land and were not available for the shareholders. So, it was not a good business. We called them stick builders, which is not a favorable name, and they probably deserved to sell at low multiples. I mean, highly leveraged with debt, low ROEs, and not very good cash flows.

The turnaround, on the optimistic side, was that they were growing rapidly. So, they were good investments because their earnings per share were growing double digits at the time because of the gains in market share. The best way to look at it, if you go back to D.R. Horton, for example, 10 years ago, in 2013, for every dollar of sales, they had more than $1 invested in inventory.

That inventory could be divided into houses under construction and land, and close to 2/3 of that would be land. So, they had a very large percentage of their invested capital tied up in land. Now, we started thinking, and occasionally we get proactive—not against managements, but in terms of ideas.

As early as 2005, I was in a meeting with Centex. Tim Eller was the CEO of Centex, and I brought Jim Grosfeld, my professor, in on the meeting. We started talking about the nature of the business. My argument and Jim Grosfeld’s argument were, “Why do you need all this land on the books? Why don’t you option the land? You’re optioning some already. Make this an asset-light business. Take down the land just before you need it.”

“And it’ll completely change the nature of the business. One, it’ll be much less capital-intensive. Therefore, a large percentage of the earnings will come to the shareholder in terms of free cash flow. You will not need much debt on the balance sheet. Your ROEs will increase dramatically because building homes was a good business, but owning land—5 years’ supply of land—when land appreciated 3% or 4%, and you had to finance that land, was a bad business.”

And Tim Eller fought us: “You don’t understand the business. We’ve been very successful. Don’t criticize us.” We had a little bit of an argument, which I actually wrote about in the book you referred to that I wrote in 2016.

But what happened was there was one homebuilder, NVR, that was always land-light, had an excellent balance sheet and high ROEs, bought back stock, and typically sold at 16 times earnings. As a matter of fact, the average P/E ratio of NVR from 2015 to 2019—we go to the pre-COVID period because it was a more normal period—was 16 times earnings. In the meanwhile, D.R. Horton was selling at 12 times earnings. The NVR model was a much, much better model.

And what has happened is—and frankly, we were a little proactive in speaking to the managements to do this—the managements have, I would say, gotten religion, and they have gone to the asset-light, don’t-own-a-lot-of-land model. So, at D.R. Horton today, its optioned land is 75% of the total land it controls. It was about the opposite of that 10 years ago. It was 25%.

And that has completely changed the balance sheet. If you go back 10 years ago, to 2013, they had $2.3 billion of net debt in their homebuilding business. Today—I would say that was September 30, which was today because that’s the end of that fiscal year—they had $600 million more cash than debt in the homebuilding business. Completely different business.

If you go back 10 years ago, their ROE was about 10%. Last year, it was 22%. So, the business has transitioned really from being a real estate business to being a manufacturing business. D.R. Horton today is a high-volume manufacturer of homes. It’s a completely different business than it was in the 1990s.

Matt Russell

Now, business transformations are tough. You heard the Trane evolution earlier in the episode and how much turnover there was in the business and the employee base. And I think it’s one of the most difficult exercises for investors as well. Not only do you have to appreciate the change in business model and see it in the numbers, but you also need the rest of the market to understand and appreciate that change as well, because the thesis behind so many of these transformations typically includes some element of multiple expansion.

And personally, I think it’s one of the most difficult things to get right. It could just be particularly bad for this particular exercise or strategy, but I think it is incredibly challenging, though it does offer fruitful opportunities when done right. It brings us to another great example here with Rolls-Royce.

I will point out again, as I did on the episode, this is the aircraft engine manufacturer, no longer the car business, but they shifted their business model to price contracts to include a service element along with the equipment sale. That service contract, you can think of essentially as insurance.

And while we all admire Buffett’s usage of the insurance float to be his investment vehicle, I think we often overlook that it’s really hard to underwrite insurance. The Rolls-Royce stock chart tells a story of a company that was trying to transform into a better model, but the execution took time. It seems like they’re on the right track now.

Here is Graham Foster from Orbis detailing the most important factors in this shift and some of the dynamics that go into it.

You could say it’s just your pricing. Your assessment of the risk should go into the pricing itself. Now, in the past, I think Rolls-Royce have fallen over both on the pricing and on their own cost discipline after the pricing is set.

When it comes to pricing, it’s just really about getting the value that you should be getting, given the service you’re providing. I mean, the service they’re providing is extraordinary. If they can keep those airplanes in the sky, flying around for their customers, then the airlines are super happy. That’s their whole business and that’s what they want.

And if they can minimize the time when they’re doing the overhauls and do that as efficiently as possible, and then get the plane back in the air, that’s hugely valuable for customers. They should be paid for the value that they bring. Historically, because I think of their culture going right back to the early days, 1906, with Henry Royce, their culture is on engineering quality and engineering excellence, and not so much on the commercial side.

And I do wonder sometimes, if you go way back to those early days, it was Charles Rolls who was running the business side. Tragically, he died at only 32 years old, 6 years after the business started, in an air show. He was doing all sorts of air stunts in what I think was one of the Wright brothers’ planes. Something went wrong with it.

And then, of course, there were lots of other people in the business thinking about the commercial side, but it really became Henry Royce’s show. And so, he drove the culture of that business, and it was all about the engineering. And that’s a wonderful thing. That’s how they got them to where they are today in terms of that position in the industry and the great products they make.

But they’ve never really had that culture on the commercial side to drive the value that they deserve for the product that they’re building. Whereas, if you look at GE in the U.S., it’s a bit more commercially minded. They’ve managed to generate more profit and more margin from that business, both on the cost side and on the revenue side.

Under new management that they have now, that’s the direction they’re aiming to go, but I would say that pricing that insurance is absolutely critical.

Matt Russell

Staying on the point of the business model, tying it into the financial model is something that’s not easy to appreciate unless you’re doing it over and over and over again.

And I can say I don't build models daily anymore, so it's not something that I completely appreciate. You really need to go through the numbers often to understand the reality of this business in terms of what it is producing. This is where modeling can really come into play.

In our episode on Inditex, it was a fascinating conversation for so many different reasons. I think Alister tied the numbers to the narrative in one of the most effective ways that I've ever seen. But his point on the actual financial model, I thought, was particularly enlightening because of its simplicity.

And I think the cash conversion of earnings is something that really can't be overstated, particularly for a business over a long period of time. Is it meaningful in the short term? You could see swings. But once you have that type of visibility and you have an appreciation for what that looks like over the long term, that is where the big C word, compounding, comes into play. Here Alister lays it out in terms of Inditex.

It's a free cash flow machine. It's a brilliant free cash flow business. Almost all of the profit is converted into free cash flow.

The payout ratio, which is probably the best measure of that, is just under 90%. That's a very important number because your payout ratio is what you are pretty confident that you're going to be able to pay out. Cutting a dividend is a no-no in financial markets. You'll be crucified if you cut your dividend.

So you tend to pitch your payout ratio at a level which means that you are guaranteed to pay your dividend. And they're pitching it at 90%, which is a pretty strong demonstration of how confident they are that they can generate cash flow from those earnings.

Now, why is it so strong? It's so strong, I think, for a couple of reasons. The first is there's no financial trickery. This is a company where what they tell you on the P&L is what you get in cash. I love these sorts of businesses.

They don't make adjustments. It's probably the easiest company I've ever had to model because I'm not having to restate numbers from the year before. I'm not having to make adjustments for stock-based compensation, intangibles, or whatever it might be. It's a very straightforward P&L, and they don't play around with it.

So that's one of the reasons: there's no financial trickery. The other reason is working capital, and it's quite interesting because most clothing retailers don't have this position. They have a strongly negative working capital position.

In other words, they receive money from their customers much faster than they have to pay their suppliers or absorb the cost of holding on to stock. And I want to zoom into one of those lines, which is the inventory line, the stock that they're holding on to.

This is a real problem for companies where, if you have long inventory days, if you're having to hold on to inventory for a very long time, it just absorbs cash and it can be quite a drag on free cash flow generation. In the case of Inditex, they typically hold 80 days, plus or minus, of stock. So they're holding, let's say, 2–3 months of stock.

Now, if I compare that to just one other major retailer, H&M, H&M is holding over 100 days of stock. So they're holding, let's say, 50% more stock relative to the size of their business than Inditex is. At least they're holding it for 50% longer than Inditex is.

That means that, relative to peers, Inditex is much more cash generative thanks to this low stock level. And why does it have a low stock level? It comes back to everything we talked about before. They're buying in their stock at the last minute. They're making sure their stock is going to the right store and is being sold quickly. So that is really feeding through to the financials.

Better cash conversion does unlock multiple expansion. In very simple terms, if you convert 100% of your earnings into cash flow, that is worth more than a business that only converts 50% of its earnings into cash flow. It might be because it's tied up in inventory or something else, but you can understand why a P/E multiple is going to be different if that E is converting into cash flow.

Matt Russell

I got this very wrong with the railroads 10 years ago, and I will tell you there is nothing less fun than both underestimating earnings growth and getting multiple expansion right in your face.

To close out the episode, I am going to share 2 management anecdotes that I found particularly interesting. And I would say, if I'm entering a business, whether it's as an investor or to work in that business, the one thing that matters to me more and more is that the management team, and the quality of the management team, is strong. It's hard to overstate how meaningful that can be.

And I know there's a famous quote that we want to find businesses that are so great an idiot could operate them. That is great, but there aren't that many great businesses out there. And great management teams make a massive difference.

To start, I just want to share one of the more fascinating stories that I had never heard before the episode on Motorola. And that is the story of Greg Brown, who is the CEO and who has survived some of the most challenging things that you could possibly throw at a CEO. And that is activist campaigns. By working with those activists, he has produced quite stellar returns at Motorola.

Major shout-out to Greg. I think there could be a book written about his approach to working with the investor base, and particularly the activist investor base. Here is Joe Shaposchnik telling that story of Greg and his success taking over the business.

Greg has been at Motorola for 20-plus years and had run, I believe, 2 out of the 3 major divisions—the networks and the land mobile radio business—prior to becoming chief operating officer and CEO of this new Motorola, or what they now call Motorola Solutions.

One of the keys to his success was focusing this business on this undiscovered crown jewel that most couldn't see because it was buried within a segment of a segment. Just as Carl Icahn was ramping down his pressure on the company, interestingly, a new activist emerged, and Greg had to grapple with a second activist.

The new activist, which came into the story in, I think, 2011 or 2012, was focused on optimizing Motorola's cash-rich balance sheet. They had a ton of cash and very little debt at the time. They were also focused on improving the company's cost structure, so it was clear that they were probably 1,000 basis points or so bloated relative to where they should be.

And so what Greg did was sell off the second business, which was the cable set-top box and networks business. That took place early in the 2012 timeframe or so. He managed to get Motorola focused on this single business, the land mobile radio business, which is the most attractive of all the assets that they had back then.

They repurchased about a third of the company's market cap over the first 5-year period, at a multiple that was very low because, after the split, the story was pretty misunderstood. I think the stock traded at a low-teens earnings multiple. They were buying back stock at very attractive valuations at the time.

They focused on optimizing the real estate footprint of the company and getting this business slimmed down. He was pretty successful in executing on either his ideas or the ideas that the investors brought to him. And I think that really helped him gain a lot of confidence with investors.

Eventually, the challenges from the investor base quieted down, and the activists left the story in 2016 and sold their shares. He was left to continue to build this business. Then the next leg of the story was the entrance of Silver Lake, who came in in 2016–2017 and helped them grow into adjacent areas. Those adjacent areas were video surveillance and command center software.

There's not much more that needs to be said on Greg Brown, but it's a very interesting example of both focusing operationally on a new segment of the business—really zeroing in on something that the market doesn't understand—and, at the same time, listening to investors who want to see shareholder value unlocked. I think it's a very interesting story that I would love to know more about, just in terms of managing those things. Greg has given a few interviews, but I would love to learn more from him.

The last thing I'll leave you with is just this idea of operating differently. One of the conversations that we had earlier this year was with Brett Heffes, the CEO of Winmark. What really stood out about the opportunity to talk to Brett was that Winmark really does not do investor relations. They are very focused on the operational side of the business.

This one has been a long-term compounder, and over many years they have grown an interesting franchise model that is built differently from many of the other franchise relationships. You don't see massive franchisees that are growing significantly and own a ton of these stores. Brett got into that throughout our conversation.

But I did want to understand the approach to investor relations and dealing with shareholders. I think Brett gave a very fair answer here. What I would say is, when you operate differently, you're going to get a lot of pushback. But I always admire those that do it.

And I think consistent throughout the conversation was that everything that Brett thinks about, and that Winmark thinks about, is long-term. Here's Brett:

We're a very unique company. One of the characteristics from a shareholder perspective and an investor-relations perspective is that 20 shareholders own 74% of the company. So it doesn't take us a lot to really understand.

We wouldn't have to spend $40 million like Disney did, or Pelz did, to try to organize that. We would call up 2 of the top 20 who work for the company. So we'd pick up the phone and call 18. Maybe there are 3 or 4 index funds that wouldn't return the call, but we'd get to everybody else.

So, I think that makes the decision to do it the way we do it effective. I just really believe that if you're a shareholder, where do you want me spending my time? Do you want me on a conference call with analysts, trying to pitch our stock, or at an analyst day? Or do you want me worried about finding the next market, being with a franchisee, and helping them out?

I've never met a shareholder that doesn't want me spending my time on the core operations. We talk a lot about capital allocation in these formats because people are interested in it. It doesn't take up any time in my day. We have the policy in place, and we move forward.

So, I think for us, we're easy to get a hold of. If someone wants to call us, a shareholder or prospective shareholder, they call Tony or me. We talk to them. So, it's just worked for us that way. And I just like keeping it simple.

I've learned from someone who is really talented at this. I listened very carefully in terms of how he did it. It works, and I'm not going to change it. There's just no reason to change it because it's not as though we suffered from a low valuation. I think we can have a different argument if that were the case.

Matt Russell

Thank you for listening. I hope you enjoyed these highlights from some of the episodes this year and how they all tied together. Again, please send feedback. matt@joincolossus.com is my email. There's plenty of links in the show notes for other ways to reach us. We love ideas. We love feedback. We're going to be testing out new formats. So, everything is welcome. And if you have more examples of things that I discussed in this episode, I love hearing about those. We can find ways to feature them whether they're guests on the podcast or just talking about them more. That's always something we're looking to do. There's more to come in 2025, so stay tuned. To find more episodes of breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary, check out joincolossus.com. That's j o i n c o l o s s u s dot com.