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Value Investor Interview: Brent Beshore

Note: This interview was originally published in the March 2017 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.



Brent Beshore - Value Investing AlmanackBrent Beshore is the Founder and CEO of adventur.es, a family of North American companies that invests in family-owned companies with unfair advantages. For the past nine years, Brent’s firm has started, funded, bought, and operated organizations across a wide range of industries.

The companies adventur.es owns have recruited doctors for the U.S. military, provided online public relations to some of the world’s largest organizations, manufactured cutting-edge home solutions, created software products for small businesses, curated the latest in women’s fashion to sell on the internet, and even helped make a couple of blockbuster movies.

Brent founded adventur.es in 2007 with the goal of creating an organization that allowed him to do what he loved, in places he enjoys, with people he admires. Since then, adventur.es has made over 50 investments, and was ranked #28 on the 2011 Inc. 500. Brent reads a lot, writes occasionally, dabbles in wine-making, and was nominated for a VH1 Do Something Award for helping his hometown of Joplin, Mo. recover from the devastating tornado.

As you would have understood from Brent’s profile, he isn’t a typical public markets investor like the ones I usually profile in this series, but an owner of private businesses. The thoughts Brent has shared in this interview, however, are equally valuable for a public market investor, as you would realize as you read forward.

So, over to Brent!

Safal Niveshak (SN): Could you tell us a little about your background, how you got interested in value investing and what you are doing now at Adventur.es as an investor in other businesses?

Brent Beshore (BB): I’ve been interested in investing since I was very young and have always had an idea of building a family of companies. Living near Omaha, I heard a lot about Berkshire Hathaway and was drawn towards their goals, performance, and ways of doing business. I’d call Warren Buffett my gateway drug into the value investing world.

From there, I studied the greatest investors in history, from Ben Graham and Henry Singleton, to Carl Icahn and Howard Marks. I tried to take note of their commonalities and differences. I found each shared a commitment to deep fluency in their chosen specialization and a commonality in how they assessed opportunity, while their styles diverged greatly. It gave me confidence to find my own path.

I assumed I would work in corporate America for 15-20 years before I built up enough capital to start executing on it. But, things accelerated unexpectedly when I founded a business while getting my law degree and MBA. While my first business was a failure, it allowed me to taste a variety of other industries and showed me other ways I could use my talents.

Fast forward to today and my organization, adventur.es, buys small, boring businesses and helps them be less boring. Our current portfolio includes five late-stage companies: a military and education recruitment firm, a construction company, two manufacturers, and a niche PR firm. We look for durable moats that are disconnected from the owners, which are rare in our size range.

Our customers are usually retiring business owners who want to preserve their legacy, ensure their employees and customers are well taken care of, and want to reap the financial benefits from building the business. We co-create a plan for them to gain liquidity, share in the upside post-close, and appropriately transition out of the business.

SN: That’s a pretty interesting and insightful journey and work you are doing, Brent. Anyways, how have you evolved as an investor and what’s your broad investment philosophy? Has your investment policy changed much through the years?

BB: As an investor, I’m searching for the largest and most inefficient markets in the world, where prices frequently dislocate from value. This provides fertile ground for hard work and skill to create consistent and meaningful outperformance.

As an operator, I’m looking for places of low competition that are unsexy, fragmented, and with little professionalism. These businesses are usually “blue collar,” or dirty jobs, while occasionally they’re highly specialized niches that operate below most peoples’ radars.

The intersection of these strategies is where we’re building adventur.es. We believe the lower end of the lower-middle market, companies with earnings between $1-10 million in pre-tax income, are frequently mis-priced and offer an opportunity to outcompete through operational improvements. Our goal is to have the highest investment opportunity costs in the world and to bring systems, skills, and strategies to our portfolio companies that allow them to prosper with less risk.

My understanding of moats and price continue to evolve. I’ve always been attracted to cheapness, because of the perceived margin of safety. But most assets are priced appropriately. In other words, they’re cheap for very good reasons. I’ve passed on some expensive opportunities only to watch them blossom. While my default is still to be attracted to inexpensive assets, I’m slowly learning that quality can justifiably warrant a much higher price.

Another area of evolution has been in my understanding of incentives. Incentives are outrageously important and I have learned humility around being able to pick the right combinations. We’re all messy and biased, and often don’t understand what we want, or want conflicting things. If it is challenging to consider proper incentives for yourself, how much more difficult is it to do so for others? This gives me pause when someone suggests “straightforward, simple, or easy” incentives.

SN: You’ve raised a very pertinent point about incentives and how they drive us and our decision making. Anyways, as I understand from your site, you started your current business (Adventur.es) in 2008 i.e., during the times the financial markets were going through a great turmoil and the incentives in the financial services industry had raised their ugliest heads. What caused you to begin then?

BB: Yes, I went into business at an inconvenient time. I didn’t know any better. I was frustrated with my JD/MBA program and wanted to test my abilities in the market, as opposed to talking about concepts and taking tests. I irrationally partnered on a terrible business and learned ten times more in that first year than I had in all my schooling combined.

SN: And what was that business about?

BB: It was an event marketing company, which was the popular, “new” marketing technique around that time. While it was an attractive business from the outside looking in, it was also low-margin, with a small number of potential clients. It didn’t scale easily and had a low perceived value. I now joke that it’s one of the worst business models in the world.

SN: So, what was the biggest lesson you learned from this mis-adventure, if I may call it so?

BB: You see, failure is instructive and those early years felt like stumbling around in the dark, constantly falling on my face, while occasionally getting hit in the head.

But those experiences led me to start another company, then buy a company, start another company, and buy more companies. The difficulties forced me to learn quickly, made me appreciate when things went better, and certainly gave me a heaping dose of much needed humility.

The last five years have gone uncomfortably well, so I’m currently experiencing the best of times. But, I always maintain a healthy amount of paranoia about what can go wrong.

While we’ve worked very hard and learned a lot along the way, we’ve also gotten lucky. We know it is highly unlikely that we’ll sustain our current level of returns, but we’re happy to ride this wave as long as we can.

SN: You mentioned a very important point about maintaining a healthy amount of paranoia about what can go wrong. How do you bring that into your investment process?

BB: We start from a default of “no.” We’ve learned that while everything looks easy at 30,000 ft., anything worth doing is brutally difficult. The only people who think it’s easy are fools, or those who got lucky. Every organization is challenged in numerous ways and comes with complexity, politics, and disorder. Thinking otherwise is folly.

We’re looking for companies that pull us to “yes.” These companies have something unusual about them that we find particularly attractive. It can be market position, customer entrenchment, brand, or a rare type of expertise. And of course, the purchase price matters.

In practice, we spend considerably more time analyzing what could go wrong than what we think might go right. If we take care of the losers, the winners take care of themselves.

We frequently debate the merits of the situation, spend time getting to know the company’s leadership, and try to understand the weaknesses. We also use checklists and always seek outside counsel to give us a fresh perspective.

SN: Your Twitter profile tells me that you are in the profession of “cultivating a disaster-resistant compound interest machine.” Can you please elaborate more on that?

BB: There are two challenges almost all successful organizations experience: unsustainable risk and poor capital deployment. As the company becomes successful, the environment breeds over-confidence. Numbers must be hit and steel is taken out of the bridge. Debt is used liberally. “Moonshot” projects are green-lighted and heady acquisitions are made. The culture transitions from supportive and open to closed and transactional.

We try to avoid these pitfalls through maintaining humility, a long-time horizon, disciplined reinvestment strategies, aligned incentives, and high opportunity costs. We’re alert to risk and are constantly trying to mitigate it. We centralize capital deployment and set a high bar for re-investment.

Our goal is to steadily compound returns over a very long period while maintaining a diversified portfolio and cash balances that let us operate comfortably, and be a buyer, during challenging times. We don’t think this happens overnight, nor is the process ever complete, which is why we use the term “cultivate.”

SN: That’s a nice elaboration. Thanks! What are some of the characteristics you look for in businesses you are looking to own that can help you build such a machine? A checklist of points would be useful here.

BB: As for characteristics that we look for, it all comes down to the quality and durability of the moat compared to price. We evaluate family-owned companies with consistent annual pre-tax net earnings between $1 million and $10 million, and two or more of the following characteristics:

  • Stable and diversified client base
  • Healthy layer of non-owner management
  • Closely held ownership looking to retire
  • Quality brand name/strong reputation
  • Established niche expertise

SN: How do you think about valuations? Is your practice of valuations different when you are investing in companies for your personal portfolio vis-à-vis when you are buying them entirely through Adventur.es?

BB: Because of our structure and having not raised outside capital, there is no difference between my personal portfolio and adventur.es’. It’s all the same pool of resources and it’s 100% in private investments, or cash. I/we hold no public investments, because we’re able to generate far larger returns, with greater control, in the private markets.

As for valuation, it’s all based on opportunity costs. We’ve spent well in excess of $2 million over the past eight years building a pipeline of investment opportunities and it has been the best investment we could have ever made. We like to choose between very good opportunities and excellent ones.

Right now, we don’t explore any opportunity where there’s not a clear path to at least a 30% cash IRR over five years.

We don’t do fancy financial models because we believe if you need those tools to evaluate an opportunity, it should go into the “too hard pile.” We try to ask simple questions – Will the industry be around in its current form 10 years from now? Is it susceptible to disruption? What are the sources of their competitive advantage and how durable are they? What relationships matter? What can go wrong and still have this work out?

SN: Simple processes often work out better than complex one. I can vouch for that from my personal experience as an investor. Anyways, while you own private businesses, do you have a laid-out exit strategy?

BB: Our default is permanence. We buy with no intention of ever selling and operate the companies to maximize long-term value. We believe this gives us a tremendous competitive advantage over a traditional private equity strategy. Where they slash and burn to maximize short-term cash flow with hopes of flipping the company quickly, we make high ROI reinvestments they can’t make, because they may not pay off for 5-10 years.

SN: ‘Permanence’ is such a potent word in investing. Anyways, how do you think about position sizing? Which side are you on – concentration or diversification?

BB: We never want to risk all our chips and start over, but we often invest 60%+ of our cash in a single investment. We construct the portfolio so that income streams are subject to different macro trends and aren’t strongly correlated. Plus, we maintain plenty of cash to weather a storm, or two.

SN: When you look back at your investment mistakes, were there any common elements of themes? A real-life example would be helpful.

BB: All my biggest investment mistakes have a common theme – people. We’re all messy and that messiness gets multiplied by mis-communication. I’ve experienced significant mismatches in expectations where relationships were badly bruised and I’ve pulled out of deals due to personality. Almost all losses we’ve experienced have been self-inflicted and due to challenges with people.

It’s easy to distil a company down into financial statements and competitive analysis, but that never provides a clear picture of reality. Businesses are collections of people and it’s crucial to understand how those people interact. Through some painful experiences, we’ve become inflexible on shared values. We insist on partnering with leadership that is high-integrity, kind, and long-term oriented.

SN: Do you look at some numbers while assessing people you want to partner with?

BB: Absolutely. I don’t want to give the impression that the numbers don’t matter. In fact, there are plenty of terrible businesses run by wonderful people. But I’ve never seen an investment work out well in the hands of l0w-integrity, short-term oriented operators. There are ten thousand ways leadership can harm owners, and it only takes a couple to inflict real damage. Plus, the time commitment necessary to watch someone closely is enormous. We’ve found the best strategy is to partner with kind, hard-working, honest people on a business that has a durable competitive advantage.

SN: How can an investor improve the quality of his/her decision making? How have you done it?

BB: My biggest gains in decision-making have come from absorbing the mental models that carry the heavy freight, learning from my mistakes, and surrounding myself with smart, intellectually curious people who will speak truth. All three are simple, but never easy.

The big ideas, like probability, opportunity cost, and margin of safety are inescapably important. If you don’t understand them, or are not able to apply them regularly and appropriately, then you’ll be at a major disadvantage.

Learning from your own mistakes is probably the hardest, because it’s an acquired taste. Most people try to cover up their mistakes, explain them away, or blame others. Those are defense mechanisms that allow us to look in the mirror and sleep at night. The problem is that they dramatically distort reality and lead to a form of self-induced blindness. Reality is what it is, and no amount of wishing will change it. I’ve learned to be brutal with myself.

Surrounding yourself with top-notch people is the most important. We are an average of our ten closest relationships. If you think about it that way, it will change your life. Choose wisely.

SN: Wonderful! What about ‘risk’? How do you think about it, and employ it in your investing?

BB: I think about risk all the time and far more than returns. If you take care of risk, the returns will take care of themselves. Here’s an excerpt of what I wrote for Forbes on the subject:

Risk is tricky. It’s always in the background and underneath the surface, lurking and waiting. Ignore it and you’ll probably be fine – until you’re not. And when that happens, watch out, you’re likely in a world of trouble. Embrace risk mitigation and your upside will necessarily suffer. Eliminate risk and you will get between almost nothing and literally nothing, especially in today’s low-inflation, low-rate environment.

Risk is not uncertainty. It is not volatility. At its core, risk is the likelihood and magnitude of permanent loss. It is the probability of a collision between a detrimental event and a lack of planning, resulting in a permanently negative outcome of some potential size. Howard Marks said, ‘Loss is what happens when risk meets adversity.’

We look at buckets of risk for each investment and try to mitigate them to the level that makes sense based on the probability of expression and the magnitude of the potential result. Here are the types of risk we frequently explore:

  • Culture Risk: How the company treats people and how people treat one another.
  • Technology Risk: What could disrupt us and what would cause our technology stack to fail?
  • Systems Risk: What information bubbles up, to whom, and what is done with it?
  • Expectations Risk: What unspoken and unwritten promises have been made?
  • Leadership Risk: How stable is leadership and how do they make decisions?
  • Concentration Risk: Do a handful of clients, or suppliers, represent an abnormally large volume?
  • Competition Risk: Does the industry attract skilled and well-funded competition?
  • Financial Risk: How levered is the business in terms of long-term debt, working capital, and cash flows?

SN: What’s you two-minute advice to someone wanting to get into value investing? What are the most important thing he/she must practice, and the pitfalls he/she must be aware of?

BB: Study great investors and try to understand why they behaved the way they did. Wade in slowly and be cautious. If it seems easy, you’re not getting it. When you make mistakes, pay close attention and learn. If you experience immediate success, chalk almost all of it up to luck.

SN: Which unconventional books/resources do you recommend to a budding investor for learning investing and multidisciplinary thinking? If you were to give away all your books but one, which one would it be and why?

BB: I’d immediately say the Berkshire letters, but those aren’t unconventional anymore. Howard Marks’ letters are packed with wisdom, and about 60% is distilled into his book The Most Important Thing. Poor Charlie’s Almanack by Peter Kaufman is expensive and worth every penny. A Short History of Financial Euphoria by Galbraith was highly impactful for me. The Lessons of History by Will and Ariel Durant is an incredible summary of life’s repeated themes. Seeking Wisdom by Peter Bevelin is excellent.

SN: I think that should cover a lifetime of an investor’s readings. Anyways, which investor/investment thinker(s)/business owner you hold in high esteem? And why?

BB: Buffett/Munger: Their durability and adaptability have created an unparalleled track record.

Henry Singleton: His hyper-rationality lead to eye-popping results.

Peter Kaufman: Munger has said Peter’s organization, Glenair, has the best culture he’s ever seen, and that’s no mistake. Peter’s way of doing business is honorable and unfortunately unusual.

Howard Marks: His pursuit of inefficient markets and unconventional methods are pioneering.

Chuck Feeney: He made his fortune in Duty Free Shoppes, then spent most of his life anonymously giving it all away. The way he invested his wealth is something to admire.

Bill Gates: It’s hard to argue someone else been more positively impactful over the past hundred years.

SN: Hypothetical question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day?

BB: Here’s what I will write in that letter –

Brent,

You lost your memory. It may not seem fair, but it’s part of God’s plan. Roll with it. Here’s what you need to know:

You have a wonderful family. Treasure and prioritize them. You’re blessed with amazing colleagues. Trust their judgement. You had gotten pretty good at evaluating small companies, but it’s not going to come back overnight. Spend the next two years looking at a lot of pitches and start reading the books/letters in your office. Take it slowly. Knowledge compounds.

By the time you get up to speed professionally, circumstances likely will have evolved. Always be willing to change your mind when the facts change. What got you here won’t get you there.

Here are a few things you had learned: Avoid sugar and processed carbs. Get plenty of sleep. Go on long walks. Be kind and humble. Learn constantly. Nothing is ever as good, or bad, as it seems. Everything meaningful is hard.

Brent

SN: Lovely! Especially the part about family. So, what other things do you do apart from investing?

BB: I spend time with my family, love traveling, and play tennis. I focus on one non-profit organization and work through it to give back.

SN: That was brilliant, Brent. Thank you so much for sharing your insights with Safal Niveshak readers. I wish you all the best for your work and life.

BB: Thanks a lot for asking and letting me do this Vishal. I hope your readers find this useful in some way.



Note: This interview was originally published in the March 2017 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Naveen Sananguly says:

    Excellent stuff Vishal . A quick question from my side

    Vishal , Brent mentioned the following
    (Right now, we don’t explore any opportunity where there’s not a clear path to at least a 30% cash IRR over five years.)
    My question : Did he mean a 30% IRR yoy for the cash deployed ?

  2. Vishal Sir, thanks for such splendid interviews. Reading such interviews, really helps in aligning our inputs towards value investing. I totally agree that “Warren Buffett is really a gateway drug into the value investing world”.

    Thanks

    Regards
    Amaltas Dwivedi

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